<PAGE>
As filed with the Securities and Exchange Commission on June 22, 1998.
CONFIDENTIAL, FOR USE OF THE COMMISSION ONLY
FILED PURSUANT TO RULE 14a-6(e)
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the
Securities Exchange Act of 1934
Filed by the Registrant /X/
Filed by a party other than the Registrant / /
Check the appropriate box:
/ / Preliminary Proxy Statement
/ / Confidential, For Use of the Commission Only (as permitted by Rule
14a-6(e)(2))
/X/ Definitive Proxy Statement
/ / Definitive Additional Materials
/ / Soliciting Material Pursuant to Rule 14a-11(c) or Rule 14a-12
INNOVATIVE TECH SYSTEMS, INC.
- --------------------------------------------------------------------------------
(Name of Registrant as Specified In Its Charter)
- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than Registrant)
Payment of Filing Fee (Check the appropriate box):
/ / No fee required.
/ / Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.
(1) Title of each class of securities to which transaction applies:
Peregrine Systems, Inc., Common Stock, $0.001 par value
-----------------------------------------------------------------------
(2) Aggregate number of securities to which transaction applies:
3,469,961 shares
-----------------------------------------------------------------------
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11: The amount on which the filing fee
of $13,988.31 was calculated was determined pursuant to Rule 0-11(c)
and (a)(4) of the Exchange Act by (i) multiplying 1/50th of 1% by the
product of (A) $20.1563, the average of the reported high and low sales
prices of a share of Peregrine Systems, Inc. Common Stock on the Nasdaq
National Market on June 2, 1998, and (B) 3,469,961, the estimated
number of shares of Peregrine Systems, Inc. Common Stock to be issued
in the transaction.
(4) Proposed maximum aggregate value of transaction:
$69,941,575
-----------------------------------------------------------------------
(5) Total fee paid:
$13,988.31
-----------------------------------------------------------------------
/X/ Fee paid previously with preliminary materials.
/ / Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number,
or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
-----------------------------------------------------------------------
(2) Form, Schedule or Registration Statement No.:
-----------------------------------------------------------------------
(3) Filing Party:
-----------------------------------------------------------------------
(4) Date Filed:
-----------------------------------------------------------------------
<PAGE>
[INNOVATIVE TECH SYSTEMS, INC. LOGO]
444 JACKSONVILLE ROAD
WARMINSTER, PENNSYLVANIA 18974
JUNE 24, 1998
Dear Shareholder:
A Special Meeting of the Shareholders (the "Innovative Special Meeting") of
Innovative Tech Systems, Inc., an Illinois corporation ("Innovative"), will be
held at 10:00 a.m., local time, on Monday, July 27, 1998, at The Courtyard by
Marriott, 2350 Easton Road, Willow Grove, Pennsylvania 19090.
At the Innovative Special Meeting, you will be asked to consider and vote
upon a proposal to approve and adopt the Agreement and Plan of Reorganization,
dated as of May 7, 1998 (the "Merger Agreement"), by and among Innovative,
Peregrine Systems, Inc., a Delaware corporation ("Peregrine"), and Homer
Acquisition Corporation, a Delaware corporation and wholly-owned subsidiary of
Peregrine ("Merger Sub"), and the transactions contemplated thereunder,
including a merger pursuant to which Merger Sub will be merged with and into
Innovative (the "Merger"), whereby, among other things, Innovative will survive
the Merger and become a wholly-owned subsidiary of Peregrine.
In connection with the Merger, each share of Innovative's common stock, par
value $0.0185 per share ("Innovative Common Stock"), issued and outstanding at
the time the Merger becomes effective (the "Effective Time"), will be converted
into 0.2341 of a share (the "Exchange Ratio") of Peregrine's common stock, par
value $0.001 per share ("Peregrine Common Stock"). In addition, as a result of
the Merger, each outstanding option to purchase shares of Innovative Common
Stock (each, an "Innovative Option") will be assumed by Peregrine and become an
option to acquire such number of shares of Peregrine Common Stock (rounded down
to the nearest whole number) as the holder of such Innovative Option would have
been entitled to receive pursuant to the Merger had such holder exercised such
Innovative Option in full, including as to unvested shares, immediately prior to
the Effective Time (each, a "Peregrine Option"). The exercise price per share of
the Peregrine Option (rounded up to the nearest whole cent) will equal (i) the
aggregate exercise price for the shares of Innovative Common Stock purchasable
pursuant to the Innovative Option divided by (ii) the number of shares of
Peregrine Common Stock purchasable pursuant to the Peregrine Option. Based upon
the number of Innovative Options outstanding as of June 18, 1998, approximately
512,523 additional shares of Peregrine Common Stock would be reserved for
issuance to holders of Innovative Options in connection with Peregrine's
assumption of such options.
In addition, simultaneously with the solicitation of proxies from
shareholders of Innovative seeking approval of the Merger and the Merger
Agreement, Innovative is soliciting the consent of holders of certain
outstanding redeemable warrants to acquire Innovative Common Stock (the
"Innovative Warrants") with respect to certain amendments to the terms of the
Innovative Warrants and the terms of the Warrant Agreement, dated as of July 26,
1994 as amended through the date hereof (the "Warrant Agreement"), between
Innovative and Continental Stock Transfer & Trust Company (the "Warrant
Amendment"). The Warrant Agreement governs the Innovative Warrants, and the
Innovative Warrants are subject to its terms. If holders representing the
requisite percentage interest of Innovative Warrants consent to the Warrant
Amendment, at the Effective Time, each Innovative Warrant will be exchanged for
and converted into the right to receive that number of shares of Peregrine
Common Stock, based on the Exchange Ratio, as would have been the case if such
Innovative Warrant had been exercised for Innovative Common Stock immediately
prior to the Effective Time on a net issuance basis, based on the average of the
last reported sale prices of Peregrine Common Stock as reported on the Nasdaq
National Market on the five most recent trading days ending on the trading day
immediately prior to the Effective Time.
<PAGE>
In the event holders representing the requisite percentage interest of
Innovative Warrants do not consent to the Warrant Amendment prior to the
Effective Time, each outstanding Innovative Warrant will be assumed by Peregrine
and become a warrant to acquire, on substantially the same terms and conditions
as were applicable under such Innovative Warrant, that number of shares of
Peregrine Common Stock (rounded down to the nearest whole number) that the
holder of the Innovative Warrant would have been entitled to receive pursuant to
the Merger had such holder exercised such Innovative Warrant immediately prior
to the Effective Time (the "Peregrine Warrant"). The exercise price per share of
the Peregrine Warrant (rounded up to the nearest whole cent) will equal (i) the
aggregate exercise price for the shares of Innovative Common Stock purchasable
pursuant to the Innovative Warrant divided by (ii) the number of shares of
Peregrine Common Stock purchasable pursuant to the Peregrine Warrant. In the
event the requisite number of consents is not obtained and Peregrine is required
to assume the Innovative Warrants in connection with the Merger, Peregrine will,
promptly after the Effective Time, effect a redemption of the then-outstanding
Peregrine Warrants in accordance with their terms. Peregrine, Innovative, and
the holders of certain additional outstanding warrants to acquire Innovative
Common Stock originally issued to A.S. Goldmen & Co., Inc., the underwriter of
Innovative's 1994 public offering (the "Underwriter Warrants"), have previously
entered an agreement providing for an amendment to the Underwriter Warrants on
substantially the same terms as proposed for the Innovative Warrants pursuant to
the Warrant Amendment. In addition, the terms of the Warrant Agreement require
the consent of A.S. Goldmen & Co., Inc. in connection with the Warrant
Amendment, which consent has already been obtained. In the event the Merger is
terminated in accordance with the Merger Agreement, the Warrant Amendment and
the amendment to the Underwriter Warrants will cease to be effective.
Based upon the number of shares of Peregrine Common Stock, Innovative Common
Stock, Innovative Warrants, and Underwriter Warrants outstanding as of June 18,
1998, an aggregate of approximately 2,959,164 shares of Peregrine Common Stock
would be issued in connection with the Merger (including approximately 78,556
shares issuable upon exchange and conversion of the Underwriter Warrants and
approximately 202,030 shares issuable upon exchange and conversion of the
Innovative Warrants, assuming approval of the Warrant Amendment and, for
purposes of the net issuance conversion feature, a price of $24.188 per share of
Peregrine Common Stock), representing approximately 13.3% of the total number of
shares of Peregrine Common Stock outstanding after giving effect to such
issuance. Based on the last reported sale price of Peregrine Common Stock on the
Nasdaq National Market on June 19, 1998, the Exchange Ratio would result in a
per share purchase price of $6.06 for Innovative Common Stock. To receive
certificates representing their Peregrine Common Stock, shareholders of
Innovative holding certificated shares must, after the Merger, deliver the
certificates representing their Innovative Common Stock (or a bond in respect
thereof) in the manner described in the attached Innovative Tech Systems, Inc.
Proxy Statement and Information Statement/Peregrine Systems, Inc. Prospectus
(the "Proxy Statement/ Prospectus"). INNOVATIVE SHAREHOLDERS SHOULD NOT SEND
STOCK CERTIFICATES AT THIS TIME.
CONSUMMATION OF THE MERGER REQUIRES THAT THE SHAREHOLDERS OF INNOVATIVE
APPROVE THE MERGER AGREEMENT. THE BOARD OF DIRECTORS OF INNOVATIVE HAS
UNANIMOUSLY APPROVED THE MERGER AGREEMENT AND THE MERGER AND BELIEVES THAT THE
TERMS OF THE MERGER AGREEMENT ARE FAIR TO, AND THAT THE MERGER IS IN THE BEST
INTERESTS OF, INNOVATIVE AND ITS SHAREHOLDERS AND, THEREFORE, UNANIMOUSLY
RECOMMENDS THAT THE HOLDERS OF INNOVATIVE COMMON STOCK VOTE FOR APPROVAL AND
ADOPTION OF THE MERGER AGREEMENT.
At the May 5, 1998 meeting of the Innovative Board, NationsBanc Montgomery
Securities LLC delivered its opinion that the consideration to be paid by
Peregrine to the shareholders of Innovative in the Merger is fair to such
shareholders, from a financial point of view, as of the date of such opinion. A
complete copy of such opinion is attached to the accompanying Proxy
Statement/Prospectus as Annex C.
2
<PAGE>
In the material accompanying this letter, you will find a Notice of Special
Meeting of Shareholders, a proxy card, and a Proxy Statement/Prospectus relating
to the actions to be taken by shareholders at the Innovative Special Meeting and
by holders of the Innovative Warrants in connection with the Warrant Amendment.
The Proxy Statement/Prospectus, which you should read carefully, more fully
describes the terms of the Merger Agreement, the Merger, and includes
information about Peregrine and Innovative. The Merger Agreement is attached as
Annex A to the Proxy Statement/Prospectus.
Certain shareholders of Innovative beneficially owning approximately 30.9%
of the outstanding shares of Innovative Common Stock (24.7% excluding certain
shares of Innovative Common Stock currently subject to separate voting
agreements between certain registered shareholders of Innovative and certain
executive officers of Innovative that are terminable upon a resale of such
shares by the registered shareholder) have entered into shareholder voting
agreements pursuant to which they have agreed to vote their shares of Innovative
Common Stock at the Innovative Special Meeting in favor of the Merger Agreement.
Notwithstanding these shareholder voting agreements, the vote of each
shareholder of Innovative is important, and all shareholders are encouraged to
vote. All shareholders are cordially invited to attend the Innovative Special
Meeting in person. If you attend the Innovative Special Meeting, you may vote in
person if you wish, even though you have previously returned your proxy card.
Sincerely,
/s/ William M. Thompson
William M. Thompson
Chairman of the Board of Directors
YOUR VOTE IS IMPORTANT. WHETHER OR NOT YOU PLAN TO ATTEND THE INNOVATIVE SPECIAL
MEETING, PLEASE COMPLETE, SIGN AND DATE YOUR PROXY CARD AND RETURN IT PROMPTLY
IN THE ENCLOSED POSTAGE-PREPAID ENVELOPE. YOUR PROXY MAY BE WITHDRAWN BY YOU AT
ANY TIME BEFORE IT IS VOTED. EXECUTED BUT UNMARKED PROXIES WILL BE VOTED FOR
APPROVAL AND ADOPTION OF THE MERGER AGREEMENT AND THE MERGER. PLEASE DO NOT SEND
ANY INNOVATIVE STOCK CERTIFICATES IN YOUR PROXY ENVELOPE.
3
<PAGE>
[INNOVATIVE TECH SYSTEMS, INC. LOGO]
444 JACKSONVILLE ROAD
WARMINSTER, PENNSYLVANIA 18974
------------------------
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
---------------------
NOTICE IS HEREBY GIVEN that a Special Meeting of Shareholders (the
"Innovative Special Meeting") of Innovative Tech Systems, Inc., an Illinois
corporation ("Innovative"), will be held at 10:00 a.m., local time, on Monday,
July 27, 1998, at The Courtyard by Marriott, 2350 Easton Road, Willow Grove,
Pennsylvania 19090 for the following purposes:
1. To consider and vote upon a proposal to approve and adopt an Agreement
and Plan of Reorganization (the "Merger Agreement"), dated as of May 7, 1998, by
and among Peregrine Systems, Inc., a Delaware corporation ("Peregrine"), Homer
Acquisition Corporation, a Delaware corporation and wholly-owned subsidiary of
Peregrine ("Merger Sub"), and Innovative, pursuant to which, among other things,
(a) Merger Sub will be merged with and into Innovative, whereby Innovative will
be the surviving corporation and will become a wholly-owned subsidiary of
Peregrine (the "Merger") and (b) each outstanding share of common stock, par
value $0.0185 per share, of Innovative ("Innovative Common Stock") will be
converted into the right to receive 0.2341 of a share of common stock, par value
$0.001 per share, of Peregrine ("Peregrine Common Stock"); and
2. To transact such other business as may properly come before the
Innovative Special Meeting, including any motion to adjourn to a later date to
permit further solicitation of proxies, if necessary, or to obtain additional
votes in favor of the Merger, or any postponements or adjournments thereof.
The Merger and related transactions are more fully described in the
Innovative Tech Systems, Inc. Proxy Statement and Information
Statement/Peregrine Systems, Inc. Prospectus and the annexes thereto, including
the Merger Agreement, accompanying this Notice. Any action may be taken on any
of the foregoing proposals at the Innovative Special Meeting on the date
specified above or on any date to which the Innovative Special Meeting may be
properly postponed or adjourned. Shareholders of record at the close of business
on June 18, 1998, are entitled to notice of and to vote at the Innovative
Special Meeting and any adjournment or postponement thereof. Approval of the
Merger Agreement requires the affirmative vote of the holders of a majority of
the outstanding shares of Innovative Common Stock. Certain shareholders of
Innovative beneficially owning approximately 30.9% of the outstanding shares of
Innovative Common Stock (24.7% excluding certain shares of Innovative Common
Stock currently subject to separate voting agreements between certain registered
shareholders of Innovative and certain executive officers of Innovative that are
terminable upon a resale of such shares by the registered shareholder) have
entered into voting agreements pursuant to which they have agreed to vote their
shares of Innovative Common Stock at the Innovative Special Meeting in favor of
the Merger Agreement and the Merger. The list of shareholders entitled to vote
at the Innovative Special Meeting will be available for examination ten days
prior to the Innovative Special Meeting at the principal executive offices of
Innovative, 444 Jacksonville Road, Warminster, Pennsylvania 18974.
ALL SHAREHOLDERS ARE CORDIALLY INVITED TO ATTEND THE MEETING IN PERSON.
HOWEVER, TO ENSURE YOUR REPRESENTATION AT THE MEETING, YOU ARE URGED TO COMPLETE
AND SIGN THE ENCLOSED PROXY CARD AND RETURN IT AS PROMPTLY AS POSSIBLE IN THE
ENCLOSED POSTAGE-PREPAID ENVELOPE.
BY ORDER OF THE BOARD OF DIRECTORS
/s/ William M. Thompson
WILLIAM M. THOMPSON
CHAIRMAN
Warminster, Pennsylvania
June 24, 1998
YOUR VOTE IS IMPORTANT. WHETHER OR NOT YOU PLAN TO ATTEND THE INNOVATIVE
SPECIAL MEETING, PLEASE COMPLETE, SIGN AND DATE YOUR PROXY CARD AND RETURN IT
PROMPTLY IN THE ENCLOSED POSTAGE-PREPAID ENVELOPE. YOUR PROXY MAY BE WITHDRAWN
BY YOU AT ANY TIME BEFORE IT IS VOTED. EXECUTED BUT UNMARKED PROXIES WILL BE
VOTED FOR APPROVAL AND ADOPTION OF THE MERGER AGREEMENT AND THE MERGER. PLEASE
DO NOT SEND ANY INNOVATIVE STOCK CERTIFICATES IN YOUR PROXY ENVELOPE.
<PAGE>
[INNOVATIVE TECH SYSTEMS, INC. LOGO]
444 JACKSONVILLE ROAD
WARMINSTER, PENNSYLVANIA 18974
JUNE 24, 1998
Dear Warrant Holder:
Innovative Tech Systems, Inc., an Illinois corporation ("Innovative"), has
entered into an Agreement and Plan of Reorganization, dated as of May 7, 1998
(the "Merger Agreement"), by and among Innovative, Peregrine Systems, Inc., a
Delaware corporation ("Peregrine"), and Homer Acquisition Corporation, a
Delaware corporation ("Merger Sub"). Pursuant to the Merger Agreement, Merger
Sub will be merged with and into Innovative (the "Merger"), and Innovative will
survive the Merger and become a wholly-owned subsidiary of Peregrine.
In connection with the Merger, each share of Innovative's common stock, par
value $0.0185 per share ("Innovative Common Stock"), issued and outstanding at
the time the Merger becomes effective (the "Effective Time"), will be converted
into 0.2341 of a share (the "Exchange Ratio") of Peregrine's common stock, par
value $0.001 per share ("Peregrine Common Stock"). In addition, as a result of
the Merger, each outstanding option to purchase shares of Innovative Common
Stock (each, an "Innovative Option") will be assumed by Peregrine and become an
option to acquire such number of shares of Peregrine Common Stock (rounded down
to the nearest whole number) as the holder of such Innovative Option would have
been entitled to receive pursuant to the Merger had such holder exercised such
Innovative Option in full, including as to unvested shares, immediately prior to
the Effective Time (each, a "Peregrine Option"). The exercise price per share of
the Peregrine Option (rounded up to the nearest whole cent) will equal (i) the
aggregate exercise price for the shares of Innovative Common Stock purchasable
pursuant to the Innovative Option divided by (ii) the number of shares of
Peregrine Common Stock purchasable pursuant to the Peregrine Option.
Consummation of the Merger will require the approval of holders of a
majority of the outstanding shares of Innovative Common Stock, and a special
meeting of shareholders of Innovative will be held at 10:00 a.m., local time, on
Monday, July 27, 1998 (the "Innovative Special Meeting"), at The Courtyard by
Marriott, 2350 Easton Road, Willow Grove, Pennsylvania 19090 for the purpose of
approving the Merger. Innovative currently anticipates that the Merger will
become effective immediately following shareholder approval at the Innovative
Special Meeting. Certain shareholders of Innovative beneficially owning
approximately 30.9% of the outstanding shares of Innovative Common Stock (24.7%
excluding certain shares of Innovative Common Stock currently subject to
separate voting agreements between certain registered shareholders of Innovative
and certain executive officers of Innovative that are terminable upon a resale
of such shares by the registered shareholder) have entered into shareholder
voting agreements pursuant to which they have agreed to vote their shares of
Innovative Common Stock at the Innovative Special Meeting in favor of the Merger
Agreement.
Simultaneously with the solicitation of proxies from shareholders of
Innovative seeking approval of the Merger and the Merger Agreement, Innovative
is soliciting your consent as a holder of outstanding redeemable warrants to
acquire Innovative Common Stock (the "Innovative Warrants") to certain
amendments to the terms of the Innovative Warrants and the Warrant Agreement,
dated as of July 26, 1994, as amended through the date hereof (the "Warrant
Agreement"), between Innovative and Continental Stock Transfer & Trust Company
(collectively, the "Warrant Amendment"). The Warrant Agreement governs the
Innovative Warrants, and the Innovative Warrants are subject to its terms. The
Warrant Amendment will become effective at 5:00 p.m. (Eastern Time) on the date
on which Innovative has received properly executed Warrant Consents approving
the Warrant Amendment, and such Warrant Consents have not
<PAGE>
been revoked or otherwise withdrawn, from holders of 66 2/3% in interest of the
Innovative Warrants (based on the number of shares of Innovative Common Stock
issuable upon exercise of the Innovative Warrants) (the "Warrant Effective
Time"). In the event that the Merger is terminated in accordance with the Merger
Agreement after the Warrant Effective Time, the Warrant Amendment, and the
amendment to the Underwriter Warrants discussed below, will cease to be
effective. The Warrant Amendment is attached to the accompanying Innovative Tech
Systems, Inc. Proxy Statement and Information Statement/Peregrine Systems, Inc.
Prospectus (the "Proxy Statement/Prospectus") as Annex B and is described in
specific detail in the section of the Proxy Statement/Prospectus captioned "The
Warrant Amendment."
If holders representing the requisite percentage interest of Innovative
Warrants consent to the Warrant Amendment, at the Effective Time, each
Innovative Warrant will be exchanged for and converted into the right to receive
that number of shares of Peregrine Common Stock, based on the Exchange Ratio, as
would have been the case if the Innovative Warrants had been exercised for
Innovative Common Stock immediately prior to the Effective Time on a net
issuance basis, based on the average of the last reported sale prices of
Peregrine Common Stock as reported by the Nasdaq National Market on the five
most recent trading days ending on the trading day immediately prior to the
Effective Time. In the event holders representing the requisite percentage
interest of holders of Innovative Warrants have not consented to the Warrant
Amendment prior to the Effective Time, then at the Effective Time, each
outstanding Innovative Warrant will be assumed by Peregrine and become a warrant
to acquire, on substantially the same terms and conditions as were applicable
under such Innovative Warrants, that number of shares of Peregrine Common Stock
(rounded down to the nearest whole number) that the holder of the Innovative
Warrant would have been entitled to receive pursuant to the Merger had such
holder exercised such Innovative Warrant immediately prior to the Effective Time
(the "Peregrine Warrant"). The exercise price per share of the Peregrine Warrant
(rounded up to the nearest whole cent) will equal (i) the aggregate exercise
price for the shares of Innovative Common Stock purchasable pursuant to the
Innovative Warrant divided by (ii) the number of shares of Peregrine Common
Stock purchasable pursuant to the Peregrine Warrant.
IN THE EVENT THE REQUISITE NUMBER OF WARRANT CONSENTS IS NOT OBTAINED AND
PEREGRINE IS REQUIRED TO ASSUME THE INNOVATIVE WARRANTS IN CONNECTION WITH THE
MERGER, PEREGRINE WILL, PROMPTLY AFTER THE EFFECTIVE TIME, EFFECT A REDEMPTION
OF THE THEN-OUTSTANDING PEREGRINE WARRANTS IN ACCORDANCE WITH THEIR TERMS.
Peregrine, Innovative, and the holders of certain additional outstanding
warrants to acquire Innovative Common Stock originally issued to A.S. Goldmen &
Co., Inc., the underwriter of Innovative's 1994 public offering (the
"Underwriter Warrants"), have previously entered an agreement providing for an
amendment to the Underwriter Warrants on substantially the same terms as
proposed for the Innovative Warrants pursuant to the Warrant Amendment. In
addition, the terms of the Warrant Agreement require the consent of A.S. Goldmen
& Co., Inc. in connection with the Warrant Amendment, which consent has been
previously obtained.
THE BOARD OF DIRECTORS OF INNOVATIVE HAS UNANIMOUSLY APPROVED THE MERGER
AGREEMENT, THE MERGER, AND THE WARRANT AMENDMENT AND BELIEVES THAT THE TERMS OF
THE MERGER AGREEMENT ARE FAIR TO, AND THAT THE MERGER IS IN THE BEST INTERESTS
OF, INNOVATIVE, ITS SHAREHOLDERS, AND THE HOLDERS OF THE INNOVATIVE WARRANTS
AND, THEREFORE, UNANIMOUSLY RECOMMENDS THAT THE HOLDERS OF INNOVATIVE WARRANTS
APPROVE THE WARRANT AMENDMENT IN CONNECTION WITH THE MERGER.
At the May 5, 1998 meeting of the Innovative Board, NationsBanc Montgomery
Securities LLC delivered its opinion that the consideration to be paid by
Peregrine to the shareholders of Innovative in the Merger is fair to such
shareholders, from a financial point of view, as of the date of such opinion. A
complete copy of such opinion is attached to the accompanying Proxy
Statement/Prospectus as Annex C.
In the material accompanying this letter, you will find a Notice of Proposed
Warrant Amendment, the Proxy Statement/Prospectus relating to the proposed
Warrant Amendment and also to the actions to be
2
<PAGE>
taken by shareholders at the Innovative Special Meeting, and a Warrant Consent
to be executed by you. The Proxy Statement/Prospectus, which you should read
carefully, more fully describes the terms of the Merger Agreement, the Merger,
and the Warrant Amendment and includes information about Peregrine and
Innovative. The Merger Agreement is attached as Annex A to the Proxy
Statement/Prospectus.
Sincerely,
/s/ William M. Thompson
William M. Thompson
Chairman of the Board of Directors
YOUR WARRANT CONSENT IS IMPORTANT. PLEASE COMPLETE, SIGN AND DATE YOUR WARRANT
CONSENT AND RETURN IT PROMPTLY IN THE ENCLOSED POSTAGE-PREPAID
ENVELOPE. YOUR WARRANT CONSENT MAY BE WITHDRAWN BY YOU ON WRITTEN NOTICE TO
INNOVATIVE AT ANY TIME BEFORE THE WARRANT AMENDMENT HAS BECOME EFFECTIVE.
PLEASE DO NOT SEND ANY INNOVATIVE STOCK CERTIFICATES OR WARRANT CERTIFICATES
IN YOUR ENVELOPE.
3
<PAGE>
[INNOVATIVE TECH SYSTEMS, INC. LOGO]
444 JACKSONVILLE ROAD
WARMINSTER, PENNSYLVANIA 18974
---------------------
NOTICE OF REQUEST FOR WRITTEN CONSENT TO WARRANT AMENDMENT
---------------------
NOTICE IS HEREBY GIVEN that the Board of Directors of Innovative Tech
Systems, Inc., an Illinois corporation ("Innovative"), seeks the written consent
(each, a "Warrant Consent") of holders of certain outstanding redeemable
warrants (the "Innovative Warrants") to purchase Innovative's common stock, par
value $0.0185 per share (the "Innovative Common Stock"), issued pursuant to, and
governed by, the terms and provisions of the Warrant Agreement, dated as of July
26, 1994 as amended through the date hereof, between Innovative and Continental
Stock Transfer & Trust Company (the "Warrant Agreement"), with respect to a
proposed amendment of the Innovative Warrants and the Warrant Agreement (the
"Warrant Amendment"). Innovative is soliciting consents to the Warrant Amendment
in connection with the Agreement and Plan of Reorganization, dated as of May 7,
1998 (the "Merger Agreement"), by and among Peregrine Systems, Inc., a Delaware
corporation ("Peregrine"), Homer Acquisition Corporation, a Delaware corporation
and wholly-owned subsidiary of Peregrine ("Merger Sub"), and Innovative,
pursuant to which, among other things, (a) Merger Sub will be merged with and
into Innovative, whereby Innovative will be the surviving corporation and will
become a wholly-owned subsidiary of Peregrine (the "Merger") and (b) each
outstanding share of Innovative Common Stock issued and outstanding at the time
the Merger becomes effective (the "Effective Time") will be converted into the
right to receive 0.2341 of a share (the "Exchange Ratio") of Peregrine's common
stock, par value $0.001 per share ("Peregrine Common Stock").
If the holders of 66 2/3% in interest of the Innovative Warrants consent to
the Warrant Amendment, at the Effective Time, each Innovative Warrant will be
exchanged for and converted into the right to receive that number of shares of
Peregrine Common Stock, based on the Exchange Ratio, as would have been the case
if the Innovative Warrants had been exercised for Innovative Common Stock
immediately prior to the Effective Time on a net issuance basis, based on the
average of the last reported sale prices of Peregrine Common Stock as reported
by the Nasdaq National Market on the five most recent trading days ending on the
trading day immediately prior to the Effective Time. In the event holders of the
requisite percentage interest of Innovative Warrants do not consent to the
Warrant Amendment prior to the Effective Time, each outstanding Innovative
Warrant will be assumed by Peregrine and become a warrant to acquire, on
substantially the same terms and conditions as were applicable under such
Innovative Warrant that number of shares of Peregrine Common Stock (rounded down
to the nearest whole number) that the holder of the Innovative Warrant would
have been entitled to receive pursuant to the Merger had such holder exercised
such Innovative Warrant immediately prior to the Effective Time (the "Peregrine
Warrant"). The exercise price per share of the Peregrine Warrant (rounded up to
the nearest whole cent) will equal (i) the aggregate exercise price for the
shares of Innovative Common Stock purchasable pursuant to the Innovative Warrant
divided by (ii) the number of shares of Peregrine Common Stock purchasable
pursuant to the Peregrine Warrant. The Warrant Amendment will become effective
at 5:00 p.m. (Eastern Time) on the date on which Innovative has received
properly executed Warrant Consents approving the Warrant Amendment, and such
Warrant Consents have not been revoked or otherwise withdrawn, from holders of
66 2/3% in interest of the Innovative Warrants (based on the number of shares of
Innovative Common Stock issuable upon exercise of the Innovative Warrants) (the
"Warrant Effective Time"). In the event the Merger is terminated in accordance
with the Merger Agreement after the Warrant Effective Time, the Warrant
Amendment, and the amendment to the Underwriter Warrants discussed below, will
cease to be
<PAGE>
effective. IN THE EVENT THE REQUISITE NUMBER OF CONSENTS IS NOT OBTAINED AND
PEREGRINE IS REQUIRED TO ASSUME THE INNOVATIVE WARRANTS IN CONNECTION WITH THE
MERGER, PEREGRINE WILL, PROMPTLY AFTER THE EFFECTIVE TIME, EFFECT A REDEMPTION
OF THE THEN-OUTSTANDING PEREGRINE WARRANTS IN ACCORDANCE WITH THEIR TERMS.
Peregrine, Innovative, and the holders of certain additional outstanding
warrants to acquire Innovative Common Stock originally issued to A.S. Goldmen &
Co., Inc., the underwriter of Innovative's 1994 public offering (the
"Underwriter Warrants"), have previously entered into an agreement providing for
an amendment to the Underwriter Warrants on substantially the same terms as
proposed for the Innovative Warrants pursuant to the Warrant Amendment. In
addition, the terms of the Warrant Agreement require the consent of A.S. Goldmen
& Co., Inc., in connection with the Warrant Amendment, which consent has been
previously obtained.
The Merger, the Warrant Amendment, and certain related transactions are more
fully described in the Innovative Tech Systems, Inc. Proxy Statement and
Information Statement/Peregrine Systems, Inc. Prospectus (the "Proxy
Statement/Prospectus") and the annexes thereto, including the Merger Agreement
and the Warrant Amendment, accompanying this Notice.
Holders of record of Innovative Warrants at the close of business on June
18, 1998 are entitled to consent to the Warrant Amendment.
The Warrant Consent accompanying the Proxy Statement/Prospectus is solicited
on behalf of the Innovative Board for use in obtaining approval of the Warrant
Amendment. Approval of the Warrant Amendment will require that Innovative
receive Warrant Consents approving the Warrant Amendment from (i) A.S. Goldmen &
Co., Inc. and (ii) the holders of 66 2/3% in interest of the Innovative Warrants
(based on the number of shares of Innovative Common Stock issuable upon exercise
of Innovative Warrants). The Warrant Consent of A.S. Goldmen & Co., Inc. has
already been obtained. Any Warrant Consent given pursuant to this solicitation
may be revoked at any time prior to the Warrant Effective Time by a writing
delivered to Innovative at its principal executive offices identified above and
addressed to the attention of John M. Thompson, President. No written revocation
received after the Warrant Effective Time will be effective.
By Order of the Board of Directors
/s/ William M. Thompson
William M. Thompson
Chairman
Warminster, Pennsylvania
June 24, 1998
YOUR WARRANT CONSENT IS IMPORTANT. PLEASE COMPLETE, SIGN AND DATE YOUR WARRANT
CONSENT AND RETURN IT PROMPTLY IN THE ENCLOSED POSTAGE-PREPAID ENVELOPE. YOUR
WARRANT CONSENT MAY BE WITHDRAWN BY YOU ON WRITTEN NOTICE TO INNOVATIVE AT ANY
TIME BEFORE THE WARRANT AMENDMENT HAS BECOME EFFECTIVE. PLEASE DO NOT SEND ANY
INNOVATIVE STOCK CERTIFICATES OR INNOVATIVE WARRANT CERTIFICATES IN YOUR
ENVELOPE.
2
<PAGE>
INNOVATIVE TECH SYSTEMS, INC.
SHAREHOLDER PROXY STATEMENT
WARRANT HOLDER INFORMATION STATEMENT
------------------------
PEREGRINE SYSTEMS, INC. PROSPECTUS
------------------------
This Innovative Tech Systems, Inc. Shareholder Proxy Statement and Warrant
Holder Information Statement/Peregrine Systems, Inc. Prospectus (the "Proxy
Statement/Prospectus") is furnished in connection with (i) the solicitation by
the Board of Directors (the "Innovative Board") of Innovative Tech Systems,
Inc., an Illinois corporation ("Innovative"), of proxies from holders of its
common stock, par value $0.0185 per share ("Innovative Common Stock"), for use
at a special meeting of shareholders to be held at 10:00 a.m., local time, on
Monday, July 27, 1998, at The Courtyard by Marriott, 2350 Easton Road, Willow
Grove, Pennsylvania 19090 (together with any adjournment or postponement
thereof, the "Innovative Special Meeting") and (ii) the solicitation by the
Innovative Board of written consents (the "Warrant Consents") from the holders
of certain outstanding redeemable warrants to acquire Innovative Common Stock
(the "Innovative Warrants") to amend the Innovative Warrants and the Warrant
Agreement, dated as of July 26, 1994 as amended through the date hereof (the
"Warrant Agreement") between the Company and Continental Stock Transfer & Trust
Company. The Warrant Agreement governs the Innovative Warrants, and the
Innovative Warrants are subject to its terms.
This Proxy Statement/Prospectus and the accompanying forms of proxy and/or
Warrant Consent are first being mailed to shareholders of Innovative and to
holders of the Innovative Warrants on or about June 24, 1998.
At the Innovative Special Meeting, the holders of Innovative Common Stock
will be asked (i) to approve and adopt the Agreement and Plan of Reorganization,
dated as of May 7, 1998 (the "Merger Agreement"), by and among Innovative,
Peregrine Systems, Inc., a Delaware corporation ("Peregrine"), and Homer
Acquisition Corporation, a Delaware corporation and wholly-owned subsidiary of
Peregrine ("Merger Sub"), and (ii) to transact such other business as may
properly come before the Innovative Special Meeting. Pursuant to the Warrant
Consents, Innovative is requesting that the holders of the Innovative Warrants
approve certain amendments to the Innovative Warrants and the Warrant Agreement,
such that as of the Effective Time (as defined below), the Innovative Warrants
shall, to the extent not previously exercised, be deemed automatically exchanged
for and converted into the right to receive that number of shares of Peregrine
Common Stock, based on the Exchange Ratio (as defined below), as would be the
case if the Innovative Warrant had been exercised for Innovative Common Stock
immediately prior to the Effective Time on a net issuance basis, based on the
average of the last reported sale prices of Peregrine Common Stock (as defined
below) as reported by the Nasdaq National Market on the five most recent trading
days ending on the trading day immediately preceding the Effective Time, subject
to surrender of the certificates representing the Innovative Warrants (or a bond
in respect thereof). The Warrant Amendment will become effective at 5:00 p.m.
(Eastern Time) on the date on which Innovative has received properly executed
Warrant Consents approving the Warrant Amendment, and such Warrant Consents have
not been revoked or otherwise withdrawn, from holders of 66 2/3% in interest of
the Innovative Warrants (based on the number of shares of Innovative Common
Stock issuable upon exercise of the Innovative Warrants).
Peregrine and Innovative are referred to collectively herein as the
"Companies." Peregrine and Innovative are sometimes referred to, after the
consummation of the Merger and the transactions contemplated thereby, as the
"Combined Company." The proposed amendments to the Innovative Warrants and the
Warrant Agreement are referred to herein as the "Warrant Amendment." All
information contained in this Proxy Statement/Prospectus relating to Peregrine
has been supplied by Peregrine,
<PAGE>
and all information contained in this Proxy Statement/Prospectus relating to
Innovative has been supplied by Innovative.
This Proxy Statement/Prospectus also constitutes the prospectus of Peregrine
for use in connection with the offer and issuance of shares of Peregrine Common
Stock pursuant to the Merger (including in connection with the Warrant
Amendment) and, if the Warrant Amendment is not approved, the Peregrine Warrants
(as defined below). Upon the consummation of the Merger, which will occur upon
the filing of required documentation with the Secretaries of State of the States
of Delaware and Illinois (the "Effective Time"), each outstanding share of
Innovative Common Stock (other than treasury shares and shares owned by
Peregrine or its subsidiaries) will be converted into the right to receive
0.2341 of a share (the "Exchange Ratio") of Peregrine common stock, par value
$0.001 per share ("Peregrine Common Stock"). At the Effective Time, each
outstanding option to purchase shares of Innovative Common Stock (each, an
"Innovative Option") will be assumed by Peregrine and become an option (a
"Peregrine Option") to acquire on the same terms and conditions as were
applicable under such Innovative Option, such number of shares of Peregrine
Common Stock (rounded down to the nearest whole number) as the holder of such
Innovative Option would have been entitled to receive pursuant to the Merger had
such holder exercised such Innovative Option in full, including as to unvested
shares, immediately prior to the Effective Time. The exercise price per share of
the Peregrine Option (rounded up to the nearest whole cent) will equal (i) the
aggregate exercise price for the shares of Innovative Common Stock purchasable
pursuant to the Innovative Option divided by (ii) the number of shares of
Peregrine Common Stock purchasable pursuant to the Peregrine Option.
In the event the Warrant Amendment is not approved prior to the Effective
Time, then at the Effective Time, each outstanding Innovative Warrant will be
assumed by Peregrine and become a warrant to acquire on substantially the same
terms and conditions as were applicable under such Innovative Warrant, that
number of shares of Peregrine Common Stock (rounded down to the nearest whole
number) that the holder of the Innovative Warrant would have been entitled to
receive pursuant to the Merger had such holder exercised such Innovative Warrant
immediately prior to the Effective Time (each, a "Peregrine Warrant"). The
exercise price per share of the Peregrine Warrant (rounded up to the nearest
whole cent) will equal (i) the aggregate exercise price for the shares of
Innovative Common Stock purchasable pursuant to the Innovative Warrant divided
by (ii) the number of shares of Peregrine Common Stock purchasable pursuant to
the Peregrine Warrant. In the event Peregrine is required to assume the
Innovative Warrants in connection with the Merger, Peregrine will, promptly
after the Effective Time, effect a redemption of the then-outstanding Peregrine
Warrants in accordance with their terms. Peregrine, Innovative, and the holders
of certain additional outstanding warrants (the "Underwriter Warrants")
originally issued to A. S. Goldmen & Co., Inc. ("Goldmen"), the underwriter of
Innovative's 1994 public offering, have previously entered an agreement
providing for an amendment to the Underwriter Warrants on substantially the same
terms as proposed for the Innovative Warrants pursuant to the Warrant Amendment.
In addition, the terms of the Warrant Agreement require the consent of Goldmen
in connection with the Warrant Amendment, which consent has been previously
obtained. In the event the Merger is terminated in accordance with the Merger
Agreement, the Warrant Amendment and the amendment to the Underwriter Warrants
will cease to be effective.
Based upon the number of shares of Peregrine Common Stock, Innovative Common
Stock, Innovative Warrants, and Underwriter Warrants outstanding as of June 18,
1998, an aggregate of approximately 2,959,164 shares of Peregrine Common Stock
would be issued in connection with the Merger (including approximately 78,556
shares issuable upon exchange and conversion of the Underwriter Warrants and
approximately 202,030 shares issuable upon exchange and conversion of the
Innovative Warrants, assuming approval of the Warrant Amendment and, for
purposes of the net issuance conversion feature, a price of $24.188 per share of
Peregrine Common Stock), representing approximately 13.3% of the total number of
shares of Peregrine Common Stock outstanding after giving effect to such
issuance. Based upon the number of Innovative Options outstanding as of June 18,
1998, approximately 512,523 additional shares of Peregrine Common Stock would be
reserved for issuance to holders of Innovative Options in connection with
Peregrine's assumption of such Innovative Options.
2
<PAGE>
The outstanding shares of Peregrine Common Stock are listed on the Nasdaq
National Market under the symbol "PRGN," and it is a condition to the
obligations of Peregrine and Innovative to consummate the Merger that the shares
of Peregrine Common Stock to be issued in the Merger be approved for listing on
the Nasdaq National Market, upon official notice of issuance. The last reported
sale price of Peregrine Common Stock on the Nasdaq National Market on June 19,
1998, the last practicable trading date prior to the printing of this Proxy
Statement/Prospectus, was $25.875 per share. Based on such last reported sale
price, the Exchange Ratio would equal a purchase price for the Innovative Common
Stock of $6.06 per share and, assuming approval of the Warrant Amendment, a
purchase price for each Innovative Warrant of $6.04 per warrant (using such last
sale price of Peregrine Common Stock for purposes of computing the number of
shares of Innovative Common Stock that would have been issuable upon a net
issuance of the Innovative Warrant). Because the Exchange Ratio is fixed, a
change in the market price of Peregrine Common Stock before the Merger will
affect the market value of the Peregrine Common Stock to be received by the
shareholders of Innovative in the Merger as well as the number of shares and
market value of Peregrine Common Stock to be received by holders of Innovative
Warrants (assuming approval of the Warrant Amendment). The trading price of
Peregrine Common Stock is subject to substantial volatility, and shareholders of
Innovative and holders of the Innovative Warrants are encouraged to obtain
current market quotations. Neither Innovative nor Peregrine is entitled to
terminate the Merger Agreement based on changes in the per share trading price
of Peregrine Common Stock or Innovative Common Stock or the per warrant trading
price of the Innovative Warrants. See "Risk Factors--Risks Related to the
Merger-- Fixed Exchange Ratio" and "--Volatility of Trading Prices."
------------------------
SEE "RISK FACTORS," BEGINNING ON PAGE 17, FOR CERTAIN INFORMATION THAT
SHOULD BE CONSIDERED BY SHAREHOLDERS OF INNOVATIVE AND HOLDERS OF THE INNOVATIVE
WARRANTS.
------------------------
THE SECURITIES TO BE ISSUED PURSUANT TO THIS PROXY STATEMENT/PROSPECTUS HAVE
NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR
ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION
OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROXY STATEMENT/PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
------------------------
NO PERSON HAS BEEN AUTHORIZED BY PEREGRINE OR INNOVATIVE TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS PROXY
STATEMENT/PROSPECTUS IN CONNECTION WITH THE SOLICITATION OF PROXIES OR THE
WARRANT CONSENTS OR THE OFFERING OF SECURITIES MADE HEREBY AND, IF GIVEN OR
MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY PEREGRINE OR INNOVATIVE. THIS PROXY STATEMENT/PROSPECTUS DOES NOT
CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY THE SECURITIES
OFFERED BY THIS PROXY STATEMENT/ PROSPECTUS OR A SOLICITATION OF A PROXY OR
WARRANT CONSENT IN ANY JURISDICTION WHERE, OR TO ANY PERSON TO WHOM, IT WOULD BE
UNLAWFUL TO MAKE SUCH AN OFFER OR SOLICITATION.
NEITHER THE DELIVERY OF THIS PROXY STATEMENT/PROSPECTUS NOR ANY DISTRIBUTION
OF THE SECURITIES TO WHICH THIS PROXY STATEMENT/PROSPECTUS RELATES SHALL, UNDER
ANY CIRCUMSTANCES, CREATE AN IMPLICATION THAT THERE HAS NOT BEEN ANY CHANGE IN
THE INFORMATION CONTAINED HEREIN SINCE THE DATE HEREOF.
------------------------
THE DATE OF THIS PROXY STATEMENT/PROSPECTUS IS JUNE 23, 1998.
3
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
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<S> <C>
AVAILABLE INFORMATION...................................................................................... 1
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE............................................................ 1
TRADEMARKS................................................................................................. 2
FORWARD LOOKING STATEMENTS................................................................................. 2
SUMMARY.................................................................................................... 3
Introduction............................................................................................. 3
The Companies............................................................................................ 3
The Proposed Merger...................................................................................... 4
The Innovative Special Meeting........................................................................... 5
The Warrant Consent and The Warrant Amendment............................................................ 6
Recommendations of Innovative Board...................................................................... 7
Reasons for the Merger................................................................................... 7
Opinion of Innovative's Financial Advisor................................................................ 8
Interests of Certain Persons in the Merger............................................................... 9
No Solicitation.......................................................................................... 10
Representations and Warranties; Covenants................................................................ 10
Conditions to the Merger................................................................................. 10
Amendment................................................................................................ 11
Termination.............................................................................................. 11
Break Up Fees............................................................................................ 12
Form S-3 or Form S-8 Registration Statement.............................................................. 13
Transfer of Certificates Representing Innovative Common Stock............................................ 13
Transfer of Certificates Representing Innovative Warrants................................................ 13
Dissenters' Rights....................................................................................... 13
Certain Federal Income Tax Consequences of the Merger.................................................... 13
Certain Federal Income Tax Consequences of the Warrant Amendment......................................... 14
Accounting Treatment..................................................................................... 14
Governmental and Regulatory Matters...................................................................... 15
Restrictions on Resale of Peregrine Common Stock and Peregrine Warrants.................................. 15
Comparison of Stockholder Rights......................................................................... 15
Market and Price Data.................................................................................... 15
Risk Factors............................................................................................. 16
RISK FACTORS............................................................................................... 17
Risks Relating to the Merger............................................................................. 17
Risks Relating to Peregrine.............................................................................. 20
Risks Relating to Innovative............................................................................. 25
Risks Relating to Both Peregrine and Innovative.......................................................... 28
SELECTED HISTORICAL AND UNAUDITED PRO FORMA COMBINED FINANCIAL DATA........................................ 32
COMPARATIVE PER SHARE DATA................................................................................. 34
MARKET PRICE AND DIVIDEND INFORMATION...................................................................... 35
Peregrine................................................................................................ 35
Innovative............................................................................................... 35
Recent Share and Warrant Prices.......................................................................... 36
Shareholders and Warrant Holders......................................................................... 36
Dividends................................................................................................ 37
</TABLE>
i
<PAGE>
<TABLE>
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<S> <C>
THE INNOVATIVE SPECIAL MEETING............................................................................. 38
General.................................................................................................. 38
Record Date and Outstanding Shares....................................................................... 38
Voting of Proxies........................................................................................ 39
Vote Required............................................................................................ 39
Abstentions; Broker Non-Votes............................................................................ 40
Solicitation of Proxies and Expenses..................................................................... 40
Availability of Independent Accountants.................................................................. 40
Dissenters' Rights....................................................................................... 40
THE PLAN OF MERGER AND RELATED TRANSACTIONS................................................................ 43
Background of the Merger................................................................................. 43
Reasons for the Merger................................................................................... 44
Innovative Board Recommendation.......................................................................... 47
Opinion of NationsBanc Montgomery Securities LLC......................................................... 47
Interests of Certain Persons in the Merger............................................................... 51
Accounting Treatment..................................................................................... 53
Innovative Voting Agreements............................................................................. 53
Certain Federal Income Tax Consequences.................................................................. 53
Governmental and Regulatory Matters...................................................................... 55
Restrictions on Resale of Peregrine Common Stock and Peregrine Warrants.................................. 55
Nasdaq National Market Quotation......................................................................... 55
Dissenters' Rights....................................................................................... 55
THE MERGER AGREEMENT....................................................................................... 56
The Merger............................................................................................... 56
Effective Time........................................................................................... 56
Conversion of Securities................................................................................. 56
Conduct Following the Merger............................................................................. 58
Conduct of Innovative's Business Prior to the Merger..................................................... 58
Representations and Warranties........................................................................... 61
Form S-3 or Form S-8 Registration Statement.............................................................. 61
No Solicitation.......................................................................................... 62
Conditions to the Merger................................................................................. 63
Termination of the Merger Agreement...................................................................... 64
Break Up Fees............................................................................................ 64
Related Agreements....................................................................................... 65
THE WARRANT AMENDMENT...................................................................................... 67
General.................................................................................................. 67
Record Date and Outstanding Warrants..................................................................... 68
Warrant Consents......................................................................................... 68
Vote Required............................................................................................ 68
Abstentions; Broker Non-Votes............................................................................ 68
Innovative Board Recommendation.......................................................................... 69
Terms of Warrant Amendment............................................................................... 69
Effect of Warrant Amendment.............................................................................. 69
Peregrine Redemption..................................................................................... 70
Transfer of Innovative Warrant Certificates.............................................................. 71
Certain Federal Income Tax Consequences of the Warrant Amendment......................................... 71
BUSINESS OF PEREGRINE...................................................................................... 73
Overview................................................................................................. 73
Products................................................................................................. 74
Product Development; Product Authorship Model............................................................ 76
</TABLE>
ii
<PAGE>
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
Technology............................................................................................... 77
Sales and Marketing...................................................................................... 78
Professional Services and Customer Support............................................................... 79
Competition.............................................................................................. 79
Intellectual Property.................................................................................... 80
Employees................................................................................................ 81
Properties............................................................................................... 81
PEREGRINE MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS............ 82
Overview................................................................................................. 82
Results of Operations.................................................................................... 84
Fiscal Years Ended March 31, 1996, 1997, and 1998........................................................ 84
Impact of Inflation...................................................................................... 86
Liquidity and Capital Resources.......................................................................... 86
Year 2000 Risks.......................................................................................... 87
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS................................................ 88
PEREGRINE MANAGEMENT....................................................................................... 91
Executive Officers and Directors......................................................................... 91
Director Compensation.................................................................................... 93
Compensation Committee Interlocks and Insider Participation.............................................. 94
Executive Compensation................................................................................... 95
Employment Agreements and Change of Control Arrangements................................................. 98
PEREGRINE CERTAIN TRANSACTIONS............................................................................. 100
PEREGRINE STOCK OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT...................................... 102
DESCRIPTION OF PEREGRINE CAPITAL STOCK..................................................................... 104
General.................................................................................................. 104
Common Stock............................................................................................. 104
Preferred Stock.......................................................................................... 104
Peregrine Warrants....................................................................................... 104
Registration Rights...................................................................................... 105
Antitakeover Effects of Provisions of Certificate of Incorporation and Bylaws............................ 105
Effect of Delaware Antitakeover Statute.................................................................. 106
Transfer Agent........................................................................................... 106
BUSINESS OF INNOVATIVE..................................................................................... 107
Overview................................................................................................. 107
The Facilities Automation Industry....................................................................... 108
Innovative Products/Services--The Innovative Solution.................................................... 108
Competition.............................................................................................. 109
Intellectual Property Rights............................................................................. 109
Product Development...................................................................................... 110
Marketing and Distribution--The Innovative Strategy...................................................... 110
Significant Customers.................................................................................... 111
Employees................................................................................................ 111
Properties............................................................................................... 112
Legal Proceedings........................................................................................ 112
INNOVATIVE MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS........... 113
Overview and Significant Events.......................................................................... 113
</TABLE>
iii
<PAGE>
<TABLE>
<CAPTION>
PAGE
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<S> <C>
Results of Operations.................................................................................... 114
Liquidity and Capital Resources.......................................................................... 115
Impact of Inflation...................................................................................... 116
Recent Accounting Pronouncements......................................................................... 116
Year 2000 Risks.......................................................................................... 117
INNOVATIVE DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE........................... 118
INNOVATIVE MANAGEMENT...................................................................................... 120
Executive Officers and Directors......................................................................... 120
Director Compensation.................................................................................... 121
Compensation Committee Interlocks and Insider Participation.............................................. 121
Executive Compensation................................................................................... 122
INNOVATIVE CERTAIN TRANSACTIONS............................................................................ 124
INNOVATIVE STOCK OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT..................................... 125
DESCRIPTION OF INNOVATIVE CAPITAL STOCK.................................................................... 126
General.................................................................................................. 126
Common Stock............................................................................................. 126
Preferred Stock.......................................................................................... 127
Warrants................................................................................................. 127
Registration Rights...................................................................................... 130
Transfer Agent........................................................................................... 130
COMPARATIVE RIGHTS OF SHAREHOLDERS OF INNOVATIVE AND STOCKHOLDERS OF PEREGRINE............................. 131
General.................................................................................................. 131
Authorized Capital....................................................................................... 131
Dissenters' or Appraisal Rights.......................................................................... 132
Vote on Fundamental Issues............................................................................... 132
Cumulative Voting........................................................................................ 132
Special Meetings of Shareholders......................................................................... 132
Shareholder Action by Written Consent.................................................................... 133
Amendment of Articles or Certificate of Incorporation.................................................... 133
Anti-Takeover Provisions................................................................................. 133
Limitations on Liability and Indemnification of Directors................................................ 134
INNOVATIVE SHAREHOLDER PROPOSALS .......................................................................... 135
ADJOURNMENT OF INNOVATIVE SPECIAL MEETING.................................................................. 135
LEGAL MATTERS.............................................................................................. 135
EXPERTS.................................................................................................... 135
</TABLE>
iv
<PAGE>
<TABLE>
<CAPTION>
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<S> <C>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS................................................................. F-1
Peregrine Systems, Inc. Consolidated Financial Statements................................................ F-2
United Software, Inc. Consolidated Financial Statements.................................................. F-22
Innovative Tech Systems, Inc. Consolidated Financial Statements.......................................... F-35
</TABLE>
<TABLE>
<S> <C> <C>
ANNEX A -- AGREEMENT AND PLAN OF REORGANIZATION, DATED AS OF MAY 7, 1998, AMONG PEREGRINE
SYSTEMS, INC., HOMER ACQUISITION CORPORATION AND INNOVATIVE TECH SYSTEMS, INC.
ANNEX B -- WARRANT AMENDMENT
ANNEX C -- OPINION DATED MAY 5, 1998 OF NATIONSBANC MONTGOMERY SECURITIES LLC
ANNEX D -- SECTIONS 11.65 AND 11.70 OF THE ILLINOIS BUSINESS CORPORATION ACT OF 1983, AS
AMENDED
</TABLE>
v
<PAGE>
AVAILABLE INFORMATION
Peregrine and Innovative are each subject to the informational requirements
of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and in
accordance therewith, file reports, proxy statements, and other information with
the Securities and Exchange Commission (the "Commission"). The Registration
Statement (as defined below), the exhibits and schedules forming a part thereof,
and the additional reports, proxy statements, and other information filed by
Peregrine and Innovative with the Commission can be inspected and copied at the
public reference facilities maintained by the Commission at Room 1024, Judiciary
Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, and at the Commission's
regional offices located at 7 World Trade Center, Suite 1300, New York, New York
10048 and Northwestern Atrium Center, 500 West Madison Street, Suite 1400,
Chicago, Illinois 60661. Copies of such material may also be obtained from the
Commission at prescribed rates by writing to Public Reference Section, 450 Fifth
Street, N.W., Washington, D.C. 20549. The Peregrine Common Stock is presently
traded on the Nasdaq National Market, and the Innovative Common Stock is
presently traded on The Nasdaq SmallCap Market. Reports and other information
concerning Peregrine and Innovative can also be inspected at the offices of the
National Association of Securities Dealers, Inc., Market Listing Section, 1735 K
Street, N.W., Washington, D.C. 20006. In addition, certain of the documents
filed by Peregrine and Innovative with the Commission are available through the
Commission's Electronic Data Gathering and Retrieval System ("EDGAR") on the
Commission's world wide web site at http://www.sec.gov. After the consummation
of the Merger, Innovative will no longer file reports, proxy statements, or
other information with the Commission, the Nasdaq SmallCap Market, or the
National Association of Securities Dealers, Inc. The information provided in
such filings will be contained, to the extent required under the rules and
regulations of the Commission, in filings made by Peregrine.
Peregrine has filed with the Commission a Registration Statement on Form S-4
(together with any amendments thereto, the "Registration Statement") under the
Securities Act of 1933, as amended (the "Securities Act"), with respect to the
shares of Peregrine Common Stock to be issued in connection with the
transactions contemplated by the Merger Agreement and, if the Warrant Amendment
is not approved, the Peregrine Warrants. This Proxy Statement/Prospectus does
not contain all the information set forth in the Registration Statement. Certain
portions of the Registration Statement are omitted from this Proxy
Statement/Prospectus in accordance with the rules and regulations of the
Commission. Copies of the Registration Statement, including the exhibits to the
Registration Statement and other material that is not included herein, may be
inspected without charge at the regional offices of the Commission referred to
above, or obtained at prescribed rates from the Public Reference Section of the
Commission set forth above. The omitted portions of the Proxy
Statement/Prospectus may also be obtained through EDGAR at http://www.sec.gov.
Statements contained in this Proxy Statement/Prospectus or in any document
incorporated by reference in this Proxy Statement/Prospectus as to the contents
of any contract or other document referred to herein or therein are not
necessarily complete, and in each instance reference is made to the copy of such
contract or other document filed as an exhibit to the Registration Statement or
such other document, each such statement being qualified in all respects by such
reference.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
All documents and reports subsequently filed by Peregrine and Innovative
pursuant to Sections 13(a), 13(c), 14 or 15(d) of the Exchange Act after the
date of this Proxy Statement/Prospectus and prior to the termination of the
offering under this Proxy Statement/Prospectus shall be deemed to be
incorporated by reference in this Proxy Statement/Prospectus and to be part
hereof from the date of filing of such documents or reports. Any statement
contained in a document deemed to be incorporated by reference herein shall be
deemed to be modified or superseded for purposes of this Proxy
Statement/Prospectus to the extent that a statement contained herein or in any
other subsequently filed document which also is deemed to be incorporated by
reference herein modifies or supersedes such statement. Any such statement so
modified or superseded shall not be deemed, except as so modified or superseded,
to constitute a part of this Proxy Statement/Prospectus.
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TRADEMARKS
PEREGRINE SYSTEMS, SERVICECENTER, STATIONVIEW and OPEN SNA are registered
United States trademarks of Peregrine. ASSETCENTER, PNMS, SERVERVIEW, PEREGRINE
SYSTEMS SERVICECENTER, and IREXPERT are also trademarks of Peregrine.
SPAN SPACE ANALYSIS, SPAN MAINTENANCE MANAGER, SPAN LEASE MANAGEMENT, SPAN
CONSTRUCTION BUDGETING, SPAN CAD INTEGRATOR, SPAN CABLE MANAGEMENT, SPAN ASSET
MANAGEMENT, TOURWATCH, and FIREPROOF are registered United States trademarks of
Innovative. SPAN-FM is also a trademark of Innovative.
This Proxy Statement/Prospectus also includes other trademarks and trade
names, which are the property of their respective owners.
FORWARD LOOKING STATEMENTS
OTHER THAN STATEMENTS OF HISTORICAL FACT, STATEMENTS MADE IN OR INCORPORATED
BY REFERENCE INTO THIS PROXY STATEMENT/PROSPECTUS, INCLUDING STATEMENTS AS TO
THE BENEFITS EXPECTED TO RESULT FROM THE MERGER AND AS TO FUTURE FINANCIAL
PERFORMANCE AND THE ANALYSES PERFORMED BY THE FINANCIAL ADVISOR TO INNOVATIVE
AND THE PROJECTIONS RELIED UPON BY SUCH FINANCIAL ADVISOR, ARE FORWARD-LOOKING
STATEMENTS WITHIN THE MEANING OF SECTION 27A OF THE SECURITIES ACT AND SECTION
21E OF THE EXCHANGE ACT. ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE
ANTICIPATED IN SUCH FORWARD-LOOKING STATEMENTS AS A RESULT OF CERTAIN FACTORS,
INCLUDING THOSE SET FORTH IN "RISK FACTORS" BEGINNING ON PAGE 17 HEREIN, WHICH
SHAREHOLDERS OF INNOVATIVE AND HOLDERS OF THE INNOVATIVE WARRANTS SHOULD
CAREFULLY REVIEW.
Neither Peregrine nor Innovative makes any express or implied representation
or warranty as to the attainability of the projected or estimated financial
information referenced or set forth herein under "The Plan of Merger and Related
Transactions--Opinion of NationsBanc Montgomery Securities LLC" or elsewhere
herein or as to the accuracy or completeness of the assumptions from which such
projected or estimated information is derived. Projections or estimations of
Peregrine and Innovative's future performance are necessarily subject to a high
degree of uncertainty and may vary materially from actual results. Reference is
made to the particular discussions set forth under "Risk Factors," "Peregrine
Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Innovative Management's Discussion and Analysis of Financial
Condition and Results of Operations."
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SUMMARY
THE FOLLOWING IS A SUMMARY OF CERTAIN INFORMATION CONTAINED ELSEWHERE IN
THIS PROXY STATEMENT/PROSPECTUS. THIS SUMMARY DOES NOT CONTAIN A COMPLETE
DESCRIPTION OF THE MERGER AGREEMENT, A COPY OF WHICH IS ATTACHED HERETO AS ANNEX
A, OR THE WARRANT AMENDMENT, A COPY OF WHICH IS ATTACHED HERETO AS ANNEX B.
REFERENCE IS MADE TO, AND THIS SUMMARY IS QUALIFIED IN ITS ENTIRETY BY, THE MORE
DETAILED INFORMATION CONTAINED IN THIS PROXY STATEMENT/PROSPECTUS AND THE
ANNEXES HERETO. UNLESS OTHERWISE DEFINED HEREIN, CAPITALIZED TERMS USED IN THIS
SUMMARY HAVE THE RESPECTIVE MEANINGS ASCRIBED TO THEM ELSEWHERE IN THIS PROXY
STATEMENT/PROSPECTUS. SHAREHOLDERS OF INNOVATIVE AND HOLDERS OF THE INNOVATIVE
WARRANTS ARE URGED TO READ CAREFULLY THIS PROXY STATEMENT/PROSPECTUS AND THE
ANNEXES IN THEIR ENTIRETY.
INFORMATION CONTAINED IN OR INCORPORATED BY REFERENCE INTO THIS PROXY
STATEMENT/PROSPECTUS CONTAINS "FORWARD-LOOKING STATEMENTS" WITHIN THE MEANING OF
SECTION 27A OF THE SECURITIES ACT AND SECTION 21E OF THE EXCHANGE ACT, WHICH CAN
BE IDENTIFIED BY THE USE OF FORWARD-LOOKING TERMINOLOGY, SUCH AS "MAY," "WILL,"
"EXPECT," "ANTICIPATE," "ESTIMATE," "PROJECT," "CONTINUE," "POTENTIAL" OR
"OPPORTUNITY" OR THE NEGATIVE THEREOF OR OTHER VARIATIONS THEREON OR COMPARABLE
TERMINOLOGY. SEE "FORWARD LOOKING STATEMENTS." THE MATTERS SET FORTH UNDER THE
CAPTION "RISK FACTORS" IN THIS PROXY STATEMENT/PROSPECTUS CONSTITUTE CAUTIONARY
STATEMENTS IDENTIFYING IMPORTANT FACTORS WITH RESPECT TO SUCH FORWARD-LOOKING
STATEMENTS, INCLUDING CERTAIN RISKS AND UNCERTAINTIES THAT COULD CAUSE ACTUAL
RESULTS TO DIFFER MATERIALLY FROM THOSE ANTICIPATED IN SUCH FORWARD-LOOKING
STATEMENTS.
WITH RESPECT TO PEREGRINE, REFERENCES TO ANY FISCAL YEAR REFER TO
PEREGRINE'S FISCAL YEAR ENDED MARCH 31. WITH RESPECT TO INNOVATIVE, REFERENCES
TO ANY FISCAL YEAR REFER TO INNOVATIVE'S FISCAL YEAR ENDED JANUARY 31.
INTRODUCTION
This Proxy Statement/Prospectus is furnished in connection with the
solicitation by the Innovative Board of (i) proxies from holders of Innovative
Common Stock for use at the Innovative Special Meeting and (ii) the Warrant
Consents providing for approval of the Warrant Amendment from holders of the
Innovative Warrants. At the Innovative Special Meeting, the holders of
Innovative Common Stock will be asked to approve and adopt the Merger Agreement
by and among Peregrine, Innovative, and Merger Sub and to approve the Merger.
The Warrant Amendment, if approved, will result in the exchange and conversion
of the Innovative Warrants for and into Peregrine Common Stock upon the
effectiveness of the Merger. As a result of the Merger, Innovative will become a
wholly-owned subsidiary of Peregrine.
THE COMPANIES
PEREGRINE. Peregrine provides enterprise infrastructure management
application software. The objective of Peregrine's infrastructure management
strategy is to provide organizations control over their infrastructure assets
and related information throughout the asset life cycle based on maximizing the
availability of assets, minimizing investments and expenses, consolidating
enterprise data, and interfacing to enterprise applications. Peregrine develops,
markets, and supports, an integrated suite of applications that automates the
management of complex, enterprise-wide information and infrastructure assets.
SERVICECENTER and ASSETCENTER are designed to address the Consolidated Service
Desk and asset management requirements of large organizations and can be
deployed across all major hardware platforms and network operating systems and
protocols. Each utilizes advanced client/server and intelligent agent
technologies and a modular architecture. The SERVICECENTER and ASSETCENTER
product suites are intended to provide organizations a single view of all
elements of their infrastructure, in order to optimize performance and minimize
costs.
Peregrine was incorporated in California in 1981 and reincorporated in
Delaware in 1994. Unless the context otherwise requires, references in this
Proxy Statement/Prospectus to "Peregrine" refer to Peregrine Systems, Inc., a
Delaware corporation, its predecessor, Peregrine Systems, Inc., a California
corporation, and its subsidiaries. Peregrine's principal executive offices are
located at 12670 High Bluff Drive, San Diego, California 92130, and its
telephone number at that address is (619) 481-5000.
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INNOVATIVE. Innovative designs, develops, and markets enterprise facility
automation software and remote data collection systems to automate the tracking
and management of physical plant and facilities and related assets, and the
maintenance and operation of space design, security, and life safety systems.
Innovative was incorporated in Illinois in 1986 as Windy City Capital
Corporation ("Windy City"). Prior to January 1990, Windy City was a publicly
held corporation engaged in the business of acquiring existing businesses in
exchange for the issuance of securities and the payment of small amounts of
cash. In January 1990, Windy City acquired substantially all of the assets of
Innovative Tech Systems, Inc., a Pennsylvania corporation, and changed its name
to Innovative Tech Systems, Inc. Innovative's principal executive offices are
located at 444 Jacksonville Road, Warminster, Pennsylvania 18974, and its
telephone number at that address is (215) 441-5600.
MERGER SUB. Merger Sub, a Delaware corporation, is a newly-formed,
wholly-owned subsidiary of Peregrine formed solely for the purpose of the
Merger. Merger Sub has no material assets or liabilities and has not engaged in
any material operations since its incorporation. Merger Sub's principal
executive offices are located at Peregrine, 12670 High Bluff Drive, San Diego,
California 92130. Peregrine's telephone number at that address is (619)
481-5000.
THE PROPOSED MERGER
At the Effective Time, pursuant to the Merger Agreement, (i) Merger Sub will
be merged with and into Innovative, whereupon Innovative will be the surviving
corporation and will become a wholly-owned subsidiary of Peregrine, and (ii)
each issued and outstanding share of Innovative Common Stock will be converted
into the right to receive 0.2341 of a share of Peregrine Common Stock (the
"Exchange Ratio"). Fractional shares of Peregrine Common Stock will not be
issued in connection with the Merger. Cash will be paid to shareholders of
Innovative in lieu of fractional shares in an amount equal to such fraction
multiplied by the average of the last reported sale prices of Peregrine Common
Stock for the five most recent days the Peregrine Common Stock has traded,
ending on the trading day immediately prior to the Effective Time, as reported
on the Nasdaq National Market. See "The Merger Agreement--The Merger" and
"--Conversion of Securities."
At the Effective Time, each outstanding Innovative Option will be assumed by
Peregrine and become a Peregrine Option to acquire, on the same terms and
conditions as were applicable under such Innovative Option, such number of
shares of Peregrine Common Stock (rounded down to the nearest whole number) as
the holder of such Innovative Option would have been entitled to receive
pursuant to the Merger had such holder exercised such Innovative Option in full,
including as to unvested shares, immediately prior to the Effective Time. The
exercise price per share of the Peregrine Option (rounded up to the nearest
whole cent) will equal (i) the aggregate exercise price for the shares of
Innovative Common Stock purchasable pursuant to the Innovative Option divided by
(ii) the number of shares of Peregrine Common Stock purchasable pursuant to the
Peregrine Option. See "The Merger Agreement--Conversion of Securities."
If the Warrant Amendment is approved by the holders of the Innovative
Warrants, immediately prior to the Effective Time, each outstanding Innovative
Warrant will be exchanged for and converted into the right to receive that
number of shares of Peregrine Common Stock, based on the Exchange Ratio, as
would have been the case if such Innovative Warrant had been exercised for
Innovative Common Stock immediately prior to the Effective Time on a net
issuance basis, based on the average of the last reported sale prices of
Peregrine Common Stock as reported on the Nasdaq National Market on the five
most recent trading days ending on the trading day immediately prior to the
Effective Time, subject to the surrender of the certificates representing the
Innovative Warrants (or a bond in respect thereof). The Warrant Amendment will
become effective at 5:00 p.m. (Eastern Time) on the date on which Innovative has
received properly executed Warrant Consents approving the Warrant Amendment, and
such Warrant Consents have not been revoked or otherwise withdrawn, from holders
of 66 2/3% in interest of the Innovative Warrants (based on the number of shares
of Innovative Common Stock issuable upon exercise of the Innovative Warrants)
(the "Warrant Effective Time").
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In the event the Warrant Amendment is not approved prior to the Effective
Time, then at the Effective Time, each outstanding Innovative Warrant will be
assumed by Peregrine and become a warrant to acquire, on substantially the same
terms and conditions as were applicable under such Innovative Warrant, that
number of shares of Peregrine Common Stock (rounded down to the nearest whole
number) that the holder of the Innovative Warrant would have been entitled to
receive pursuant to the Merger had such holder exercised such Innovative Warrant
immediately prior to the Effective Time. The exercise price per share of the
Peregrine Warrant (rounded up to the nearest whole cent) will equal (i) the
aggregate exercise price for the shares of Innovative Common Stock purchasable
pursuant to the Innovative Warrant divided by (ii) the number of shares of
Peregrine Common Stock purchasable pursuant to the Peregrine Warrant. In the
event Peregrine is required to assume the Innovative Warrants in connection with
the Merger, Peregrine will, promptly after the Effective Time, effect a
redemption of the then-outstanding Peregrine Warrants in accordance with their
terms. See "The Warrant Amendment--Peregrine Redemption," "--Effect of Warrant
Amendment," and "Description of Innovative Capital Stock--Innovative Warrants."
Peregrine, Innovative, and the holders of the Underwriter Warrants have
previously entered an agreement providing that, to the extent not exercised
prior to the Effective Time, each Underwriter Warrant will be exchanged for and
converted into the right to receive that number of shares of Peregrine Common
Stock, based on the Exchange Ratio, as would have been the case if the
Underwriter Warrants had been exercised for Innovative Common Stock immediately
prior to the Effective Time on a net issuance basis, based on the average of the
last reported sale prices of Peregrine Common Stock as reported on the Nasdaq
National Market on the five most recent trading days ending on the trading day
immediately prior to the Effective Time, subject to the surrender of the
certificates representing the Underwriter Warrants (or a bond in respect
thereof). In the event the Merger is terminated in accordance with the Merger
Agreement after the Warrant Effective Time, the Warrant Amendment and the
amendment to the Underwriter Warrants will cease to be effective.
Based upon the number of shares of Peregrine Common Stock, Innovative Common
Stock, Innovative Warrants, and Underwriter Warrants outstanding as of June 18,
1998, approximately 2,959,164 shares of Peregrine Common Stock would be issued
in connection with the Merger (including approximately 78,556 shares issuable
upon exchange and conversion of the Underwriter Warrants and approximately
202,030 shares issuable upon exchange and conversion of the Innovative Warrants,
assuming approval of the Warrant Amendment and, for purposes of the net issuance
conversion feature, a price of $24.188 per share of Peregrine Common Stock),
representing approximately 13.3% of the total number of shares of Peregrine
Common Stock outstanding after giving effect to such issuance. Based upon the
number of Innovative Options outstanding as of June 18, 1998, approximately
512,523 additional shares of Peregrine Common Stock would be reserved for
issuance to holders of Innovative Options in connection with Peregrine's
assumption of such Innovative Options.
It is anticipated that the Merger will become effective as promptly as
practicable after the requisite approval of Innovative's shareholders has been
obtained and all other conditions to the Merger have been satisfied or waived.
If the Merger is not consummated on or before October 31, 1998, Innovative and
Peregrine each has the right (subject to certain limitations) to terminate the
Merger Agreement. See "The Merger Agreement--Conditions to the Merger" and
"--Termination of the Merger Agreement."
THE INNOVATIVE SPECIAL MEETING
PURPOSE. The purpose of the Innovative Special Meeting is for holders of
Innovative Common Stock to consider and vote upon (i) a proposal to approve and
adopt the Merger Agreement and the Merger and the transactions contemplated
thereby and (ii) such other matters as may properly be brought before the
Innovative Special Meeting, including any motion to adjourn to a later date to
permit further solicitation of proxies, if necessary, or any adjournments or
postponements thereof. See "The Innovative Special Meeting."
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DATE, TIME, AND PLACE. The Innovative Special Meeting will be held
commencing at 10:00 a.m., local time, on Monday, July 27, 1998 at The Courtyard
by Marriott, 2350 Easton Road, Willow Grove, Pennsylvania 19090.
RECORD DATE; SHARES ENTITLED TO VOTE. Holders of record of shares of
Innovative Common Stock at the close of business on June 18, 1998 (the
"Innovative Record Date") are entitled to notice of and to vote at the
Innovative Special Meeting. At such date, there were 11,442,029 shares of
Innovative Common Stock outstanding, each of which will be entitled to one vote
on each matter to be acted upon or which may properly come before the Innovative
Special Meeting.
VOTE REQUIRED; VOTING AGREEMENTS. The approval and adoption of the Merger
Agreement and the Merger by shareholders of Innovative will require the
affirmative vote of the holders of a majority of the outstanding shares of
Innovative Common Stock entitled to vote. In accordance with the terms of the
Merger Agreement, certain directors and executive officers of Innovative have
executed and delivered voting agreements and irrevocable proxies to Peregrine,
obligating them, among other things, to vote their shares of Innovative Common
Stock in favor of approval and adoption of the Merger Agreement and the Merger
(the "Innovative Voting Agreements"). As a result, 3,534,296 shares of
Innovative Common Stock (excluding 849,998 shares subject to Innovative Options)
beneficially owned by such directors and executive officers of Innovative and
their respective affiliates as of the Innovative Record Date (representing
approximately 30.9% of the total number of shares of Innovative Common Stock
outstanding at such date) will be voted for approval of and adoption of the
Merger Agreement and the Merger. Of such shares, 713,460 are subject to separate
voting agreements, entered in 1994 in connection with a private placement
transaction, granting William M. Thompson and John M. Thompson authority to vote
such shares on all issues presented for a vote to shareholders of Innovative
(the "Thompson Voting Agreements"), including the Merger and other matters that
may be presented at the Innovative Special Meeting. The Thompson Voting
Agreements terminate upon a sale or transfer of the shares by the registered
holder and impose no restrictions on such holders' ability to sell or otherwise
transfer such shares at any time. Excluding the shares subject to the Thompson
Voting Agreements, the number of shares of Innovative Common Stock subject to
the Innovative Voting Agreements represented approximately 24.7% of the total
number of shares of Innovative Common Stock outstanding as of the Innovative
Record Date. As of the Innovative Record Date, directors and executive officers
of Peregrine and their respective affiliates beneficially owned less than one
percent of the outstanding shares of Innovative Common Stock, and Peregrine
owned no shares of Innovative Common Stock. See "The Innovative Special
Meeting."
THE WARRANT CONSENT AND THE WARRANT AMENDMENT
PURPOSE. The purpose of the Warrant Consent is for the holders of the
Innovative Warrants to approve and consider the Warrant Amendment. The purpose
of the Warrant Amendment is to permit holders of Innovative Warrants to exchange
such warrants for Peregrine Common Stock in connection with the Merger by
providing holders of the Innovative Warrants with essentially the same
consideration being delivered to shareholders of Innovative, subject to
adjustments necessary to reflect the economic terms of the Innovative Warrants.
If approved, the Warrant Amendment will result, at the Effective Time, in the
conversion and exchange of the Innovative Warrants into and for shares of
Peregrine Common Stock, based on the Exchange Ratio, less such number of shares
of Peregrine Common Stock having a fair market value equal to the applicable
aggregate exercise price, such that the holders of Innovative Warrants will
hold, after consummation of the Merger, shares of Peregrine Common Stock.
Peregrine has indicated that, in the event it is required to assume the
Innovative Warrants in connection with the Merger, it will, promptly after the
Effective Time, effect a redemption of the assumed Peregrine Warrants in
accordance with their terms. See "The Warrant Amendment--Peregrine Redemption"
and "Description of Innovative Capital Stock--Innovative Warrants."
ELIGIBILITY TO CONSENT; REQUIREMENTS OF CONSENT. Holders of record of
Innovative Warrants on the Innovative Record Date are entitled to notice of and
to consent to the Warrant Amendment. As of the
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Innovative Record Date, there were 885,875 Innovative Warrants outstanding and
entitled to consent, held of record by 42 holders. With respect to the Warrant
Consents, each holder of an outstanding Innovative Warrant will be entitled to a
number of votes equal to the aggregate number of shares of Innovative Common
Stock issuable upon exercise of the Innovative Warrants held by such holder. The
approval of the Warrant Amendment will require that Innovative receive executed
Warrant Consents approving the Warrant Amendment from (i) Goldmen and (ii) the
holders of 66 2/3% in interest of the Innovative Warrants (based on the number
of shares of Innovative Common Stock issuable upon exercise of Innovative
Warrants). The Warrant Consent of Goldmen has been previously obtained. As of
the Innovative Record Date, no executive officer or director of Innovative or
Peregrine, or any of their respective affiliates, held any Innovative Warrants.
The Warrant Amendment will become effective at 5:00 p.m. (Eastern Time) on the
date on which Innovative has received properly executed Warrant Consents
approving the Warrant Amendment, and such Warrant Consents have not been
withdrawn, from holders of the requisite number of Innovative Warrants. In the
event the Merger is terminated in accordance with the Merger Agreement, the
Warrant Amendment will cease to be effective.
RECOMMENDATIONS OF INNOVATIVE BOARD
The Innovative Board has unanimously approved the Merger Agreement and the
Merger and believes that the terms of the Merger Agreement are fair to, and that
the Merger is in the best interests of, Innovative and its shareholders and,
therefore, unanimously recommends that the holders of Innovative Common Stock
vote FOR approval and adoption of the Merger Agreement and the Merger. See "The
Plan of Merger and Related Transactions--Reasons for the Merger" and
"--Innovative Board Recommendation."
The Innovative Board has unanimously approved the Warrant Amendment and
believes that its terms are fair to, and in the best interests of, the holders
of the Innovative Warrants and, therefore, unanimously recommends that the
holders of Innovative Warrants execute the Warrant Consent indicating their
approval of the Warrant Amendment. See "The Warrant Amendment--Innovative Board
Recommendation."
REASONS FOR THE MERGER
CERTAIN STATEMENTS MADE IN THE FOLLOWING PARAGRAPHS REGARDING THE POTENTIAL
BENEFITS THAT COULD RESULT FROM THE MERGER ARE FORWARD-LOOKING STATEMENTS BASED
ON CURRENT EXPECTATIONS AND ENTAIL VARIOUS RISKS AND UNCERTAINTIES THAT COULD
CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE EXPRESSED IN SUCH
FORWARD-LOOKING STATEMENTS. SUCH RISKS AND UNCERTAINTIES ARE SET FORTH UNDER
"RISK FACTORS" AND ELSEWHERE IN THIS PROXY STATEMENT/ PROSPECTUS.
JOINT REASONS FOR THE MERGER
In reaching their decisions to approve the Merger Agreement, the Merger, and
the transactions contemplated by the Merger Agreement, the Board of Directors of
Peregrine (the "Peregrine Board") and the Innovative Board consulted with their
respective management teams and advisors and independently considered the
proposed Merger Agreement and the transactions contemplated thereunder. Based on
their respective reviews of the proposed transaction and the business and
operations of the other party, the Peregrine Board and the Innovative Board each
approved the Merger Agreement and the Merger. Each Board concluded that (i) the
goals and philosophies of the Companies are compatible and consistent; (ii) the
products of the Companies are complementary; (iii) the Combined Company has the
potential to offer customers a more comprehensive software solution than either
could offer independently; (iv) the Merger would be positively received by
customers of each of the Companies; and (v) the Companies' respective security
holders would benefit from the enhanced ability of the Combined Company to
compete in the rapidly evolving software industry.
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PEREGRINE'S REASONS FOR THE MERGER
In addition to the reasons described above, the Peregrine Board believes the
Merger will couple Peregrine's concentration in IT infrastructure management
software with Innovative's focus on facilities management software, thus
providing a comprehensive and integrated set of products to potential customers
seeking a single source for infrastructure management automation solutions as
opposed to distinct solutions from multiple vendors for each aspect of the
enterprise infrastructure. In addition, the Peregrine Board expects that the
combination of the Companies' product lines, sales forces, and distribution
channels would immediately enhance Peregrine's ability to compete in the
facilities management software solution market. Finally, it is anticipated that
the combination would leverage Peregrine's more extensive customer base and
channels of distribution in connection with the sale and marketing of
Innovative's products.
INNOVATIVE'S REASONS FOR THE MERGER
The Innovative Board's decision to approve the Merger Agreement and the
Merger was based in significant part upon its assessment of developing trends in
the enterprise application software industry and the changes which may come
about in such market as a result of increasing competition, consolidation of
product offerings, and changing customer requirements. The Innovative Board
believes that companies which are able to provide customers with a complete
infrastructure management software solution, integrating facilities management
applications with help desk, asset management, and other infrastructure
management applications, will be better positioned to compete in such an
environment in the long term. In particular, the Innovative Board believes that
software providers like Innovative, focusing on a specific category of
enterprise management software, will be at a competitive disadvantage as
industry consolidation continues and larger enterprise software and system
management companies begin to offer products with facilities management
functionality. A merger with Peregrine is considered to complement Innovative's
long-term objectives and to provide an opportunity to offer a more complete
infrastructure management solution through the combination of the respective
Companies' product offerings.
Innovative also identified several other potential strategic benefits of the
Merger that Innovative believes will contribute to the success of the Combined
Company, including (i) the enhanced opportunity to realize Innovative's
strategic objective of achieving greater scale and presence in the facilities
management software market; (ii) the opportunity to leverage Peregrine's larger
sales force and more extensive distribution channels, particularly
internationally, where Innovative currently has a very limited presence; (iii)
the opportunity to expand distribution of Innovative's products to Peregrine's
larger installed customer base; and (iv) access to Peregrine's broader and
deeper management expertise and resources.
The Innovative Board also took into consideration the fact that the
Peregrine Common Stock represents a more liquid investment followed by a greater
number of stock analysts. The Innovative Board also considered the opinion of
its financial advisor and other potential benefits and synergies that may result
from the Merger. A more complete description of the primary factors considered
and relied upon by the Innovative Board in reaching its recommendation are
discussed in "The Plan of Merger and Related Transactions--Background of the
Merger," "--Reasons for the Merger," and "--Innovative Board Recommendation."
OPINION OF INNOVATIVE'S FINANCIAL ADVISOR
At the May 5, 1998 meeting of the Innovative Board, NationsBanc Montgomery
Securities LLC ("NMS") delivered its opinion (the "NMS Opinion") that the
consideration to be paid by Peregrine to the shareholders of Innovative in the
Merger is fair to such shareholders from a financial point of view, as of the
date of such opinion. The full text of the NMS Opinion, which sets forth the
assumptions made, matters considered, and limitations on the review undertaken
in connection with the NMS Opinion, is attached as Annex C to this Proxy
Statement/Prospectus and is incorporated herein by reference. SHAREHOLDERS OF
INNOVATIVE AND HOLDERS OF THE INNOVATIVE WARRANTS ARE URGED TO READ, AND SHOULD
READ, THE
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NMS OPINION IN ITS ENTIRETY. See "The Plan of Merger and Related
Transactions--Opinion of NationsBanc Montgomery Securities LLC."
INTERESTS OF CERTAIN PERSONS IN THE MERGER
INTEREST IN INNOVATIVE COMMON STOCK AND INNOVATIVE OPTIONS. As of the
Innovative Record Date, the executive officers and directors of Innovative
beneficially owned an aggregate of 3,674,473 shares of Innovative Common Stock
(including 849,998 shares of Innovative Common Stock subject to Innovative
Options exercisable within 60 days of the Innovative Record Date and excluding
the 713,460 shares of Innovative Common Stock subject to the Thompson Voting
Agreements). Based upon the closing sale price of Peregrine Common Stock on June
19, 1998 of $25.875, and assuming the exercise of outstanding Innovative Options
exercisable within 60 days of the Innovative Record Date, the aggregate dollar
value of Peregrine Common Stock to be received in the Merger by the executive
officers and directors of Innovative is approximately $17,086,756.
EMPLOYMENT AGREEMENTS WITH JOHN M. THOMPSON AND WILLIAM M.
THOMPSON. Effective upon the consummation of the Merger, Peregrine has made
offers of employment, on behalf of Peregrine Systems Facilities Management,
Inc., as the surviving corporation in the Merger (the "Surviving Corporation"),
to each of William M. Thompson and John M. Thompson. William M. Thompson is
Innovative's Chief Executive Officer and Chairman of the Innovative Board. John
M. Thompson is Innovative's President, Chief Operating Officer, Chief Financial
Officer and Treasurer, and a member of the Innovative Board. Pursuant to their
respective employment agreements, William M. Thompson will become President of
the Surviving Corporation, and John M. Thompson will become Vice President,
Operations, of the Surviving Corporation. William M. Thompson and John M.
Thompson are brothers.
The employment agreements provide that each of the Thompsons will receive a
base annual salary of $175,000 with an annual bonus of up to $75,000, subject to
satisfaction of certain performance objectives. In addition, upon the
effectiveness of the Merger, Peregrine will grant each of the Thompsons an
option to acquire up to 275,000 shares of Peregrine Common Stock under
Peregrine's 1994 Stock Option Plan with an exercise price per share equal to the
fair market value of the Peregrine Common Stock on the date of grant. Each
option will vest over four years, with 25% of the shares subject to option
becoming exercisable on the first anniversary of the effectiveness of the
Merger, and the remaining shares becoming exercisable in quarterly installments
thereafter. In the event Peregrine or the Surviving Corporation terminates the
employment of one or both of the Thompsons without cause (as defined in their
respective employment agreements) prior to the third anniversary of the Merger,
the terminated Thompson will continue to receive his base annual salary and
maximum annual bonus, and his options will continue to vest and remain
exercisable, through such anniversary.
The employment agreements also require Peregrine to maintain, through the
earlier of the third anniversary of the Merger or a voluntary termination of
employment, two life insurance policies covering each of the Thompsons, each in
the amount of $10 million, benefits to be paid one-half to a beneficiary
designated by the insured Thompson and one-half to Peregrine. In the event
Peregrine terminates the employment of either Thompson without cause prior to
the third anniversary of the Merger, it is required to maintain his insurance
until such anniversary.
NONCOMPETITION PAYMENTS. In connection with the Merger, each of William M.
Thompson and John M. Thompson entered an agreement with Peregrine pursuant to
which he agreed not to engage in activities that are competitive with those of
Peregrine for a period of six years after the effectiveness of the Merger. In
consideration of the Thompsons' entering such noncompetition agreements, upon
the effectiveness of the Merger, Peregrine will make a cash payment of $2.0
million to each of the Thompsons.
LEASE ARRANGEMENTS. Innovative currently leases its headquarters facility,
consisting of 20,000 square feet of office space in Warminster, Pennsylvania,
from Thompson Enterprises, L.P. ("Thompson L.P."). The Thompsons and Karen A.
Thompson, their sister and an executive officer of Innovative, are limited
partners of Thompson L.P. and the sole shareholders of Thompson Capital
Corporation, a Pennsylvania
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corporation and the general partner of Thompson L.P. During fiscal 1998, 1997,
and 1996, Innovative paid $259,500, $162,500, and $96,500, respectively, to
Thompson L.P. in connection with such lease arrangements. Under the terms of the
lease, Innovative is scheduled to pay Thompson L.P. $288,334 for such lease in
fiscal 1999 and $285,833 in fiscal 2000. In addition, Innovative incurred costs
of approximately $284,000, $23,000, and $155,000 in fiscal 1998, 1997, and 1996,
respectively, in connection with leasehold improvements to the property subject
to the lease. In addition, during the first four months of fiscal 1999,
Innovative incurred costs of $88,861 in connection with leasehold improvements
to the Warminster facility and anticipates incurring additional leasehold
improvement costs of approximately $50,000 during the balance of fiscal 1999.
Pursuant to the Merger Agreement, it is a condition to closing that Innovative
enter into an amendment to such lease providing for certain provisions requested
by Peregrine to comport with Peregrine's planned future use of the Warminster
facility.
INDEMNIFICATION ARRANGEMENTS. Peregrine has agreed to maintain, with
certain limitations for a period of six years from the Effective Time, the
policies of directors' and officers' liability insurance maintained by
Innovative or to provide comparable coverage. In addition, Peregrine is
obligated to fulfill and honor Innovative's obligations under the
indemnification provisions of Innovative's charter documents.
The foregoing interests in the Merger of the directors and certain members
of management of Innovative may mean that such persons have personal interests
in the Merger which may not be identical to the interests of other shareholders
of Innovative or holders of the Innovative Warrants. See "The Merger and Related
Transactions--Interests of Certain Persons in the Merger."
NO SOLICITATION
Under the terms of the Merger Agreement, Innovative has agreed that it will
not engage in certain activities relating to, or which could result in, a
proposal to be acquired by a third party except under certain limited
circumstances related to the performance by the Innovative Board of its
fiduciary obligations under Illinois law. See "The Merger Agreement--No
Solicitation."
REPRESENTATIONS AND WARRANTIES; COVENANTS
Under the Merger Agreement, Peregrine and Innovative each made a number of
representations regarding their respective capital structures, operations,
financial condition and other matters. Innovative agreed as to itself and its
subsidiaries that, until consummation of the Merger or the earlier termination
of the Merger Agreement, it will, among other things, maintain its business and
conduct its operations in the ordinary course, provide Peregrine with reasonable
access to its financial, operating and other information, and use all reasonable
efforts to consummate the Merger. See "The Merger Agreement--Representations and
Warranties" and "--Conduct of Innovative's Business Prior to the Merger."
CONDITIONS TO THE MERGER
The respective obligations of Peregrine, Merger Sub, and Innovative to
effect the Merger are subject to the following conditions, among others: (a) the
Merger Agreement shall have been approved and adopted by the shareholders of
Innovative; (b) the Registration Statement shall have become effective under the
Securities Act and shall not be the subject of a stop order or proceedings
seeking a stop order; (c) no governmental entity shall have enacted, issued,
promulgated, enforced, or entered any statute, rule, regulation, executive
order, decree, injunction, or other order (whether temporary, preliminary, or
permanent) which is in effect and which has the effect of making the Merger
illegal or otherwise prohibits the consummation of the Merger and any foreign
antitrust approval required to be obtained prior to the Merger shall have been
obtained; (d) receipt by Peregrine of a written opinion from Wilson Sonsini
Goodrich & Rosati, Professional Corporation, counsel to Peregrine ("WSGR"), and
receipt by Innovative of a written opinion of Archer & Greiner, A Professional
Corporation, counsel to Innovative ("A&G"), each to the effect that the Merger
will be treated for federal income tax purposes as a tax-free reorganization
within the meaning of Section 368(a) of the Internal Revenue Code of 1986, as
amended
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(the "Code") (see "The Plan of Merger and Related Transactions--Certain Federal
Income Tax Consequences"); (e) the representations and warranties of the other
party set forth in the Merger Agreement shall be true and correct both on the
date of the Merger Agreement and the date of closing of the Merger, except for
changes contemplated by the Merger Agreement or where failure to be true and
correct would not be reasonably likely to have a Material Adverse Effect (as
defined in the Merger Agreement) on Peregrine or Innovative, as the case may be;
(f) the performance by the other party in all material respects of all
obligations required to be performed by such party under the Merger Agreement;
and (g) no Material Adverse Effect with respect to the other party shall have
occurred since the date of the Merger Agreement. In addition, it is a condition
to the obligations of Peregrine and Merger Sub that (A) Affiliate Agreements in
the form attached to the Merger Agreement as Exhibit C shall have been executed
and delivered to Peregrine by each director, executive officer and applicable
affiliate of Innovative, and that each Affiliate Agreement shall be in full
force and effect; (B) that Innovative shall have obtained all consents, waivers,
and approvals required in connection with the consummation of the Merger; and
(C) that Innovative shall have entered into an amendment to the lease with
Thompson L.P. governing its headquarters facility providing for certain
provisions requested by Peregrine to comport with Peregrine's planned future use
of the Warminster facility. See "The Merger Agreement--Conditions to the
Merger."
AMENDMENT
The Merger Agreement may only be amended by an instrument in writing signed
on behalf of each of the parties thereto. The Merger Agreement may be amended by
the parties thereto, by action taken or authorized by their respective Boards of
Directors, at any time before or after approval of the matters presented in
connection with the Merger by the shareholders of Innovative, but, after any
such approval, no amendment shall be made which by law requires further approval
by such shareholders without such further approval. See "The Merger
Agreement--Amendment."
TERMINATION
The Merger Agreement is subject to termination by mutual written consent of
the Companies, authorized by each of the Peregrine Board and the Innovative
Board, and, at the option of either Peregrine or Innovative, if the Merger is
not consummated before October 31, 1998, provided that such option to terminate
shall not be available to any party whose failure to act has been a principal
cause of or resulted in the failure of the Merger to occur before such date and
such failure constitutes a breach of the Merger Agreement. The Merger Agreement
is also subject to termination by Peregrine or Innovative upon the occurrence of
any of the following: (a) a governmental entity issues a final and nonappealable
order, decree, or ruling or takes any other action in any case, having the
effect of permanently restraining, enjoining or otherwise prohibiting the
Merger; (b) Innovative fails to obtain shareholder approval, provided that
Innovative shall not have such right to terminate if the failure of Innovative's
shareholders to approve the Merger is caused by Innovative's failure to act and
such failure constitutes a breach of the Merger Agreement; or under certain
circumstances; (c) a party breaches a representation, warranty, covenant, or
agreement of that party contained in the Merger Agreement. See "The Merger
Agreement-- Termination of the Merger Agreement."
In addition, Peregrine may terminate the Merger Agreement if any of the
following occurs (each, a "Peregrine Termination Condition"): (i) the Innovative
Board withdraws or adversely modifies its recommendation of the Merger
Agreement; (ii) the Innovative Board fails to reconfirm such recommendation
within 10 business days after receiving a written request to do so at any time
following the announcement of one of the following transactions not involving
Peregrine (each, an "Acquisition Transaction" with a proposal relating to an
Acquisition Transaction being referred to herein as an "Acquisition Proposal"):
(A) a transaction whereby a third party (including a group) would acquire more
than a ten percent (10%) in interest of the total outstanding voting securities
of Innovative or any subsidiary of Innovative, or a merger, consolidation,
business combination, or similar transaction involving Innovative whereby the
shareholders of Innovative preceding the transaction would hold less than 90% of
the equity interests in
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the surviving or resulting entity of such transaction, (B) any sale, lease,
exchange, transfer, license, acquisition, or disposition of more than 50% of the
assets of Innovative, or (C) any liquidation or dissolution of Innovative; (iii)
the Innovative Board accepts an Acquisition Proposal or recommends an
Acquisition Proposal to the Innovative shareholders; (iv) Innovative enters into
any letter of intent or similar document or any agreement, contract, or
commitment accepting any Acquisition Proposal; or (v) the Innovative Board
resolves to do any the foregoing.
Innovative may terminate the Merger Agreement at any time prior to the
approval of the Merger by the shareholders of Innovative if the Innovative Board
recommends a Superior Offer (as defined below) to the shareholders of Innovative
(an "Innovative Termination Condition"), provided that in the event such a
recommendation occurs after the mailing date of this Proxy Statement/Prospectus,
the right of Innovative to terminate shall not be exercisable until the sooner
to occur of (A) September 4, 1998 or (B) the date the shareholders of Innovative
fail to approve the Merger Agreement at the Innovative Special Meeting or at any
adjournment thereof. The Merger Agreement defines a "Superior Offer" as an
unsolicited BONA FIDE written offer made by a third party to consummate one of
the following transactions on terms which, in the reasonable judgment of the
Innovative Board, after consultation with its financial advisor, are deemed to
be more favorable to the shareholders of Innovative than the terms of the
Merger: (i) a merger, consolidation, business combination, recapitalization,
liquidation, dissolution, or similar transaction involving Innovative pursuant
to which the shareholders of Innovative immediately preceding such transaction
hold less than 50% of the equity interest in the surviving or resulting entity
of such transaction; (ii) a sale or other disposition by Innovative of assets
representing in excess of 50% of the fair market value of Innovative's business
immediately prior to such sale; or (iii) the acquisition by any person or group,
directly or indirectly, of beneficial ownership or a right to acquire beneficial
ownership of shares representing in excess of 50% of the voting power of the
then-outstanding shares of capital stock of Innovative. Any such offer shall not
be deemed a Superior Offer if any financing required to consummate the
transaction contemplated by such offer is not committed or is unlikely, in the
reasonable judgment of the Innovative Board, to be obtained on a timely basis.
See "The Merger Agreement--Termination of the Merger Agreement."
BREAK UP FEES
The Merger Agreement provides that upon the occurrence of a Peregrine
Termination Condition, Innovative may be required to pay Peregrine a termination
fee of $1.7 million in immediately available funds (the "Initial Fee") within
one business day following the earlier to occur of (A) the decision of Peregrine
to terminate the Merger Agreement as a result of the occurrence of a Peregrine
Termination Condition; (B) the decision of Innovative to terminate the Merger
Agreement as a result of the occurrence of an Innovative Termination Condition;
or (C) the date the shareholders of Innovative fail to approve the Merger
Agreement at a meeting duly convened therefor or at any adjournment thereof. If
Innovative consummates a "Company Acquisition" within 12 months after the
Initial Fee becomes due and payable, Innovative is obligated to pay Peregrine an
additional $2.5 million in immediately payable funds within one business day
following such consummation. The Merger Agreement defines a "Company
Acquisition" as any of the following transactions or series of related
transactions: (i) a merger, consolidation, business combination,
recapitalization, liquidation, dissolution, or similar transaction involving
Innovative pursuant to which the shareholders of Innovative immediately
preceding such transaction or series of related transactions hold less than 60%
of the equity interests in the surviving or resulting entity of such transaction
or series of transactions; (ii) a sale and issuance by Innovative of shares of
its capital stock which would, upon issuance, represent more than 40% of the
outstanding shares of capital stock of Innovative; (iii) a sale or other
disposition by Innovative of assets representing in excess of 40% of the fair
market value of Innovative's business immediately prior to such sale; or (iv)
the acquisition by any person or group, directly or indirectly, of beneficial
ownership or a right to acquire beneficial ownership of 40% or more of the
then-outstanding shares of capital stock of Innovative. See "The Merger
Agreement-- Termination of the Merger Agreement" and "--Break Up Fees."
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FORM S-3 OR FORM S-8 REGISTRATION STATEMENT
Within five (5) days after the closing of the Merger, Peregrine will file a
registration statement on Form S-3 or Form S-8, as the case may be, or other
appropriate form for the Peregrine Common Stock issuable with respect to the
Innovative Options assumed by Peregrine pursuant to the Merger Agreement. See
"The Merger Agreement--Form S-3 or Form S-8 Registration Statement."
TRANSFER OF CERTIFICATES REPRESENTING INNOVATIVE COMMON STOCK
If the Merger becomes effective, Peregrine, acting through ChaseMellon
Shareholder Services LLP as its exchange agent (the "Exchange Agent"), will as
soon as reasonably practicable deliver a letter of transmittal with instructions
to all holders of record of Innovative Common Stock immediately prior to the
Effective Time for use in surrendering their stock certificates (or providing a
bond in respect thereof) in exchange for certificates representing shares of
Peregrine Common Stock and a cash payment in lieu of fractional shares, if any.
CERTIFICATES SHOULD NOT BE SURRENDERED BY THE HOLDERS OF INNOVATIVE COMMON STOCK
UNTIL SUCH HOLDERS RECEIVE THE LETTER OF TRANSMITTAL FROM THE EXCHANGE AGENT.
OPTION AGREEMENTS NEED NOT BE SURRENDERED. See "The Merger Agreement--Conversion
of Securities."
TRANSFER OF CERTIFICATES REPRESENTING INNOVATIVE WARRANTS
If the Merger becomes effective and the Warrant Amendment has been approved,
Peregrine, acting through the Exchange Agent, will as soon as reasonably
practicable deliver a letter of transmittal with instructions to all holders of
record of Innovative Warrants immediately prior to the Effective Time for use in
surrendering their warrant certificates (or providing a bond in respect thereof)
in exchange for certificates representing shares of Peregrine Common Stock. If
the Merger becomes effective and the Warrant Amendment has not been approved,
Peregrine does not intend to issue new certificates evidencing the Peregrine
Warrants; rather, certificates representing Innovative Warrants will be deemed
to represent Peregrine Warrants (subject to adjustment of the number of shares,
exercise price, and redemption price to reflect the Merger), pending the
redemption by Peregrine of the Peregrine Warrants. CERTIFICATES SHOULD NOT BE
SURRENDERED BY HOLDERS OF INNOVATIVE WARRANTS UNLESS AND UNTIL SUCH HOLDERS
RECEIVE THE LETTER OF TRANSMITTAL FROM THE EXCHANGE AGENT. See "The Merger
Agreement--Conversion of Securities," "The Warrant Amendment--Transfer of
Innovative Warrant Certificates," and "--Peregrine Redemption."
DISSENTERS' RIGHTS
Under the Illinois Business Corporation Act of 1983, as amended ("Illinois
Law"), a shareholder of Innovative who does not vote in favor of the Merger may,
under certain circumstances and by following the procedures prescribed by the
Illinois Law, exercise dissenters' rights and obtain payment in cash of the fair
value (as defined in the Illinois Law) of their shares of Innovative Common
Stock. Stockholders of Peregrine will not have dissenters' rights in connection
with the Merger. For a more detailed discussion of dissenters' rights under the
Illinois Law and the procedure for exercising such rights, see "The Innovative
Special Meeting--Dissenters' Rights."
CERTAIN FEDERAL INCOME TAX CONSEQUENCES OF THE MERGER
The Merger is intended to be a tax-free reorganization for federal income
tax purposes, such that no gain or loss would generally be recognized by
Peregrine or Innovative and no gain or loss would generally be recognized by
shareholders of Innovative, except with respect to cash received in lieu of
fractional shares. Innovative shareholders are urged to consult their own tax
advisors as to the specific tax consequences of the Merger to the individual
shareholder. It is a condition to the Merger that Peregrine and Innovative shall
have each received an opinion of their respective counsel to the effect that the
Merger will constitute a reorganization within the meaning of Section 368(a) of
the Code. For a further discussion of federal income tax consequences of the
Merger, see "The Plan of Merger and Related Transactions--
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Certain Federal Income Tax Consequences." See also "The Merger
Agreement--Conditions to the Merger."
CERTAIN FEDERAL INCOME TAX CONSEQUENCES OF THE WARRANT AMENDMENT
Assuming the Merger qualifies as a reorganization under the Code, under
recently promulgated Internal Revenue Service ("IRS") regulations and except to
the extent of cash received in lieu of fractional shares, no gain or loss should
be recognized by the holders of Innovative Warrants (other than the holders of
the Underwriter Warrants, the tax consequences of which are not discussed
herein) upon either the receipt of Peregrine Common Stock or, alternatively,
Peregrine Warrants if the Warrant Amendment is not approved, solely in exchange
for the Innovative Warrants. The aggregate tax basis of the Peregrine Common
Stock (or the Peregrine Warrants) will be the same as the aggregate tax basis of
the Innovative Warrant surrendered in exchange therefor by the holders of the
Innovative Warrants (other than the holders of the Underwriter Warrants).
However, the law is not entirely clear whether the holding period of the
Peregrine Common Stock to be received by each holder of an Innovative Warrant
should include the period for which the Innovative Warrant surrendered in
exchange therefore was considered to be held. ACCORDINGLY, HOLDERS OF INNOVATIVE
WARRANTS ARE URGED TO CONSULT THEIR OWN TAX ADVISORS AS TO THE SPECIFIC TAX
CONSEQUENCES TO THEM OF THE WARRANT AMENDMENT AND EXCHANGE OF THE INNOVATIVE
WARRANTS IN CONNECTION WITH THE MERGER. See "The Plan of Merger and Related
Transactions--Certain Federal Income Tax Consequences" and "The Warrant
Amendment--Certain Federal Income Tax Consequences of Warrant Amendment."
In the event the Warrant Amendment is not approved and Peregrine is required
to assume the Innovative Warrants in connection with the Merger, Peregrine will,
promptly after the Effective Time, effect a redemption of the then-outstanding
Peregrine Warrants in accordance with their terms. The Innovative Warrants are
currently redeemable at a redemption price of $0.67 per Innovative Warrant. As a
result of the redemption, holders of the Peregrine Warrants will be required
either (i) to exercise their Peregrine Warrants by delivering to Peregrine a
notice of exercise together with payment in cash of the aggregate exercise price
therefor or (ii) to permit Peregrine to redeem their Peregrine Warrants for a
redemption price of $2.86 per Peregrine Warrant, which reflects adjustments to
the number of shares, exercise price, and redemption price of the Innovative
Warrants in connection with their assumption by Peregrine in the Merger. Under
such circumstances and assuming exercise of the Peregrine Warrants, the
aggregate tax basis of the Peregrine Common Stock issued upon exercise of the
Peregrine Warrants will equal the holder's aggregate tax basis in the Innovative
Warrants plus the exercise price, and the holding period for the Peregrine
Common Stock will commence on the date of exercise. See "The Warrant
Amendment--Peregrine Redemption."
ACCOUNTING TREATMENT
The Merger will be treated as a purchase for accounting and financial
reporting purposes. In connection with the Merger, Peregrine will issue
approximately 3.19 million shares of Peregrine Common Stock, valued for purposes
of the transaction, at approximately $73 million. Additionally, Peregrine
expects to incur costs of approximately $9.75 million associated with the
transaction.
In connection with the purchase price allocation, Peregrine has received a
preliminary appraisal of the intangible assets of Innovative which indicated
that approximately $73 million of the acquired intangible assets consisted of
in-process research and development. Because there can be no assurance that
Peregrine will be able to successfully complete the development and integration
of such Innovative products or that the acquired technology has any alternative
future use, substantially all of the acquisition price will be charged to
expense as acquired in-process research and development by Peregrine in the
quarter in which the Merger closes. See "The Plan of Merger and Related
Transactions--Accounting Treatment."
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GOVERNMENTAL AND REGULATORY MATTERS
The Merger must satisfy the requirements of federal and certain state
securities laws. See "The Plan of Merger and Related Transactions--Governmental
and Regulatory Matters."
RESTRICTIONS ON RESALE OF PEREGRINE COMMON STOCK AND PEREGRINE WARRANTS
The shares of Peregrine Common Stock issuable to shareholders of Innovative
upon consummation of the Merger and, if the Warrant Amendment is not approved,
the Peregrine Warrants issuable upon assumption of the Innovative Warrants, have
been registered under the Securities Act. Such shares and warrants (if issued)
may be freely traded without restriction by those former shareholders and
warrant holders of Innovative who are not deemed to be "affiliates" of Peregrine
or Innovative, as that term is defined under the Securities Act.
Shares of Peregrine Common Stock or Peregrine Warrants received by those
shareholders of Innovative or holders of the Innovative Warrants, as the case
may be, who are deemed to be affiliates of Innovative may be resold without
registration under the Securities Act only as permitted by Rule 145 under the
Securities Act or as otherwise permitted under the Securities Act. Each person
deemed to be an affiliate of Innovative has agreed not to offer, sell, pledge,
transfer or otherwise dispose of any shares of Peregrine Common Stock or the
Peregrine Warrants distributed to them pursuant to the Merger, except in
compliance with Rule 145 under the Securities Act, or in a transaction that is
otherwise exempt from the registration requirements of the Securities Act and
provided that an opinion of counsel, satisfactory to Peregrine, has been
provided to Peregrine to the effect that no such registration is required in
connection with the proposed transaction, or in an offering that is registered
under the Securities Act. In general, Rule 145, as currently in effect, imposes
restrictions on the manner in which affiliates of Innovative may resell
Peregrine Common Stock received in the Merger and the amount of Peregrine Common
Stock that such affiliates (including persons with whom the affiliates act in
concert) may sell within any three-month period. These restrictions will
generally apply for at least one year after the Merger (assuming such person is
not then an affiliate of Peregrine). See "The Plan of Merger and Related
Transactions--Restrictions on Resale of Peregrine Common Stock and Peregrine
Warrants."
COMPARISON OF STOCKHOLDER RIGHTS
See "Comparison of Rights of Shareholders of Innovative and Stockholders of
Peregrine" for a summary of the material differences between the rights of
holders of Innovative Common Stock and Peregrine Common Stock.
MARKET AND PRICE DATA
The Peregrine Common Stock is traded on the Nasdaq National Market under the
symbol "PRGN." On May 7, 1998, the date of the Merger Agreement, the per share
closing sales price of a share of Peregrine Common Stock, as reported on the
Nasdaq National Market, was $22.875 per share, and on June 19, 1998, the last
practicable trading date prior to the printing of this Proxy
Statement/Prospectus, the closing price of a share of Peregrine Common Stock as
reported on the Nasdaq National Market was $25.875. There can be no assurance as
to the actual price of a share of Peregrine Common Stock prior to, at or any
time following the Effective Time. See "Market Price and Dividend Information."
The Innovative Common Stock is traded on The Nasdaq SmallCap Market under
the symbol "ITSY." On May 7, 1998, the per share closing sales price of
Innovative Common Stock, as reported on The Nasdaq SmallCap Market was $4.75,
and on June 19, 1998, the per share closing sales price of Innovative Common
Stock as reported on The Nasdaq SmallCap Market was $5.0313. The Innovative
Warrants are traded on The Nasdaq SmallCap Market under the symbol "ITSYW." On
May 7, 1998, the per warrant closing sales price of the Innovative Warrants was
$4.62, and on June 19, 1998, the per warrant closing sale price of the
Innovative Warrants was $4.75. Following the Merger, neither the Innovative
Common Stock nor the Innovative Warrants will be publicly traded. In the event
the Warrant Amendment is not approved and
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Peregrine is required to assume the Innovative Warrants, Peregrine anticipates
that it will list the Peregrine Warrants for trading on the Nasdaq National
Market until they are redeemed in accordance with their terms. See "Market Price
and Dividend Information" and "The Warrant Amendment--Peregrine Redemption."
Shareholders of Innovative and holders of the Innovative Warrants are
strongly encouraged to obtain current market prices for shares of Peregrine
Common Stock, shares of Innovative Common Stock, and the Innovative Warrants.
See "Risk Factors--Risks Related to the Merger--Fixed Exchange Ratio,"
"--Volatility of Trading Prices," and "Comparison of Rights of Shareholders of
Innovative and Stockholders of Peregrine."
RISK FACTORS
See "Risk Factors" for a discussion of certain factors pertaining to the
Merger and the businesses of Peregrine and Innovative. Risks related to the
Merger include (i) risks associated with the integration of Innovative into
Peregrine's business; (ii) risks associated with the fixed Exchange Ratio; (iii)
the dependence of the success of the Merger on market acceptance of
infrastructure management software solutions; (iv) the dependence on key
personnel of Innovative; (v) uncertainty associated with the effect of the
Merger on customers and existing agreements; (vi) risks associated with other
Peregrine acquisitions; (vii) the risks associated with large numbers of shares
of Peregrine Common Stock that will become available for sale in the public
market following consummation of the Merger; (viii) differences between the
rights of shareholders of Innovative under Illinois law as compared to the
rights of stockholders of Peregrine under Delaware law; and (ix) risks related
to the volatility of the trading price of Peregrine Common Stock, Innovative
Common Stock, and the Innovative Warrants.
Risks associated with Peregrine's business include (i) Peregrine's history
of operating losses prior to fiscal 1997; (ii) potential fluctuations in
Peregrine's quarterly results and associated seasonality; (iii) Peregrine's
dependance on its SERVICECENTER and ASSETCENTER product lines; (iv) competition
in the markets for Peregrine products; (v) risks associated with Peregrine's
ability to manage growth; (vi) risks associated with expanding distribution
channels; (vii) risks associated with international business operations and
associated currency exchange rate fluctuations; (viii) risks associated with the
European monetary conversion; (ix) risks arising from the control of Peregrine's
outstanding voting stock by its current officers and directors; and (x) risks
associated with certain provisions within Peregrine's charter documents and the
antitakeover effects of Delaware law.
Risks associated with Innovative's business include (i) Innovative's history
of operating losses prior to fiscal 1998; (ii) Innovative's dependence on a
limited number of key customers for new revenues; (iii) Innovative's dependence
on its SPAN-FM product line; (iv) risks associated with expansion of
Innovative's sales force and distribution channels; (v) potential fluctuations
in Innovative's quarterly results; (vi) risks associated with Innovative's
ability to manage growth; (vii) Innovative's need to expand and develop an
effective professional services organization; (viii) competition in the markets
for Innovative products; and (ix) risks associated with Innovative's reliance on
certain relationships with third-party technology providers.
Risks associated with both Peregrine and Innovative include (i) each
Company's dependence on skilled personnel, its ability to recruit personnel, and
risks associated with federal immigration laws; (ii) lengthy sales cycles
associated with sales of each Company's products; (iii) risks associated with
rapid technological change and new product development; (iv) each Company's
dependence on proprietary technology and associated infringement risks; (v)
risks associated with the failure of internal operating systems or either
Company's products to be Year 2000 compliant; and (vi) risks associated with
product liability.
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RISK FACTORS
THE FOLLOWING FACTORS SHOULD BE CONSIDERED CAREFULLY BY (I) EACH SHAREHOLDER
OF INNOVATIVE IN CONNECTION WITH VOTING UPON THE MERGER AND THE MERGER AGREEMENT
AND THE TRANSACTIONS CONTEMPLATED THEREBY AND (II) EACH HOLDER OF INNOVATIVE
WARRANTS IN CONNECTION WITH CONSENTING TO THE WARRANT AMENDMENT. THE FOLLOWING
DISCUSSION CONTAINS "FORWARD-LOOKING STATEMENTS" WITHIN THE MEANING OF SECTION
27A OF THE SECURITIES ACT AND SECTION 21E OF THE EXCHANGE ACT, WHICH CAN BE
IDENTIFIED BY THE USE OF FORWARD-LOOKING TERMINOLOGY, SUCH AS "MAY," "WILL,"
"EXPECT," "ANTICIPATE," "ESTIMATE," "PROJECT" OR "CONTINUE," "POTENTIAL" OR
"OPPORTUNITY" OR THE NEGATIVE THEREOF OR OTHER VARIATIONS THEREON OR COMPARABLE
TERMINOLOGY. SEE "FORWARD LOOKING STATEMENTS." THE MATTERS SET FORTH BELOW
CONSTITUTE CAUTIONARY STATEMENTS IDENTIFYING IMPORTANT FACTORS WITH RESPECT TO
SUCH FORWARD-LOOKING STATEMENTS, INCLUDING CERTAIN RISKS AND UNCERTAINTIES THAT
COULD CAUSE ACTUAL RESULTS OF PEREGRINE, INNOVATIVE, OR THE COMBINED COMPANY TO
DIFFER MATERIALLY FROM ANTICIPATED RESULTS.
RISKS RELATING TO THE MERGER
INTEGRATION OF INNOVATIVE INTO PEREGRINE'S BUSINESS. The Merger will
require integration of two geographically separated companies that have
previously operated independently. Among the factors considered by the
Innovative Board and the Peregrine Board in connection with their respective
approvals of the Merger and the Merger Agreement were the perceived
opportunities for broadened product offerings, the joint completion,
development, and commercialization of new product offerings, and marketing and
operational efficiencies that could result from the Merger. Specifically, and
among other things, the Peregrine Board believes that the Merger will further
Peregrine's strategy to provide customers with a complete infrastructure
management software solution, and the Innovative Board believes that the Merger
will offer Innovative access to Peregrine's larger installed customer base, more
developed distribution channels, and internal development resources. No
assurance can be given that difficulties will not be encountered in integrating
the product offerings and operations of Peregrine and Innovative, that the
Combined Company will successfully complete and commercialize new products
currently in development or develop any new products, that the marketing,
distribution, or other operational benefits and efficiencies anticipated from
integration of the respective businesses and products of Innovative and
Peregrine will be achieved, or that Innovative employee morale will not be
adversely affected as a result of the Merger and the resulting integration. Such
integration could result in a diversion of management's time and attention,
which could have a material adverse effect on revenues and results of operations
at either or both of Peregrine or Innovative. The difficulties of integration
may be increased by the necessity of coordinating geographically separated
organizations or of integrating personnel with disparate business backgrounds
and different corporate cultures. There can be no assurance that either Company
will retain its key personnel, that the engineering teams of Peregrine and
Innovative will successfully cooperate and realize any technological benefits,
that Innovative will benefit from the broader distribution and marketing
opportunities available through Peregrine or that Peregrine will benefit from
the broader product offerings available through Innovative, or that the Combined
Company will realize any of the other anticipated benefits of the Merger. Any
failure to integrate the businesses and technologies of Peregrine and Innovative
successfully or any failure to realize the anticipated benefits of the Merger
could have a material adverse effect on the business, results of operations, and
financial condition of the Combined Company.
In addition, the public announcement of the Merger and consummation of the
Merger could result in the cancellation, termination, or nonrenewal of
arrangements with Innovative by suppliers, distributors, or customers of
Innovative, or the loss of certain key Innovative employees, or the termination
of negotiations or delays in ordering by prospective customers of Innovative as
a result of uncertainties that may be perceived to result from the Merger. For
example, customers or potential customers of Innovative who utilize enterprise
service desk, asset management, or other infrastructure management software,
including help desk software, marketed by competitors of Peregrine could
terminate or delay orders with Innovative due to perceived uncertainties over
Innovative's continued commitment to provide products and enhancements or
support services for Innovative products used in conjunction with such competing
enterprise software. Any significant amount of cancellations, terminations,
delays, or nonrenewals of arrangements
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with Innovative or loss of key employees or termination of negotiations or
delays in ordering could have a material adverse effect on the business, results
of operations, and financial condition of Innovative or the Combined Company,
particularly in the quarter ending July 31, 1998 and other near-term quarters.
FIXED EXCHANGE RATIO. As a result of the Merger, each outstanding share of
Innovative Common Stock will be converted into the right to receive 0.2341 of a
share of Peregrine Common Stock. If approved, the Warrant Amendment will result,
at the Effective Time, in the conversion and exchange of the Innovative Warrants
into and for shares of Peregrine Common Stock, based on the Exchange Ratio less
such number of shares of Peregrine Common Stock having a fair market value equal
to the applicable exercise price, such that holders of Innovative Warrants will
hold, after consummation of the Merger, shares of Peregrine Common Stock.
Neither the Merger Agreement nor the Warrant Amendment provides for adjustment
of the Exchange Ratio based on fluctuations in the price of Peregrine Common
Stock, and neither agreement is subject to termination as a result of such
fluctuations. Because the Exchange Ratio is fixed and will not increase or
decrease due to fluctuations in the market price of either Peregrine Common
Stock or Innovative Common Stock, shareholders of Innovative and holders of the
Innovative Warrants will not be compensated for decreases in the market price of
Peregrine Common Stock which could occur before the Effective Time. In the event
that the market price of Peregrine Common Stock decreases or increases prior to
the Effective Time, the market value at the Effective Time of the Peregrine
Common Stock to be received by shareholders of Innovative and, assuming approval
of the Warrant Amendment, holders of the Innovative Warrants would
correspondingly decrease or increase. The closing sales price for Peregrine
Common Stock on May 7, 1998, the last trading day prior to the public
announcement of the Merger, was $22.875, and on June 19, 1998, the latest
practicable trading day before the printing of this Proxy Statement/Prospectus,
the closing sale price for Peregrine Common Stock was $25.875. Shareholders of
Innovative and holders of the Innovative Warrants are advised to obtain recent
market quotations for Peregrine Common Stock, Innovative Common Stock, and the
Innovative Warrants. The trading prices of the Peregrine Common Stock, the
Innovative Common Stock, and the Innovative Warrants have historically each been
subject to substantial volatility. No assurance can be given as to the market
prices of Peregrine Common Stock, Innovative Common Stock, or the Innovative
Warrants at any time prior to the Effective Time or as to the market price of
the Peregrine Common Stock or, assuming the Warrant Amendment is not approved,
the Peregrine Warrants at any time thereafter. See "--Volatility of Trading
Prices" and "Market Price and Dividend Information."
DEPENDENCE ON MARKET ACCEPTANCE OF INFRASTRUCTURE MANAGEMENT SOFTWARE
SOLUTIONS. Until recently, Peregrine's product strategy focused principally on
integrating an array of IT management applications with traditional internal
"help desk" applications to create an "Enterprise Service Desk" capable of
managing multiple aspects of an enterprise's IT infrastructure. In recent years,
Peregrine's license revenues have derived principally from sales of its
SERVICECENTER suite of IT management applications. In September 1997, the
Company broadened its IT infrastructure management product suite by acquiring
ASSETCENTER, an asset management product line, through the acquisition (the
"Apsylog Acquisition") of United Software, Inc., including its wholly-owned
subsidiary Apsylog S.A. (collectively, "Apsylog"). In addition, Peregrine has
increased the functionality of SERVICECENTER to manage aspects of the enterprise
infrastructure not necessarily related to IT. Innovative's product strategy has
focused on providing building and facilities management software applications,
and its license revenues have consisted entirely of sales of its SPAN-FM
application suite. In acquiring Innovative, Peregrine seeks to further broaden
its product line beyond traditional IT infrastructure management to offer a more
comprehensive product suite capable of managing a business enterprise's IT
infrastructure, its physical plant and facilities, its communications
infrastructure, and its distribution systems.
In recent years, the market for enterprise software solutions has been
characterized by rapid technological change, frequent new product announcements
and introductions, and evolving industry standards. In response to advances in
technology, customer requirements have become increasingly complex, resulting in
industry consolidation of product lines offering similar or related
functionality. In particular, Peregrine and Innovative believe that a market for
integrated enterprise-wide infrastructure management solutions, including
applications for IT management, asset management, building and
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facilities management, communications resource management, and distribution
systems management, is evolving from existing requirements for specific IT
management solutions. Nevertheless, the existence of such a market is unproven.
If consummated, the Merger would represent a significant expansion of
Peregrine's product line beyond traditional IT management to include
Innovative's facility management products. The future financial performance of
the Combined Company will depend in large part on its success in developing an
integrated product line of software applications to manage all aspects of the
enterprise infrastructure, including management of IT, plant and facilities,
communications resources, and distribution systems, and in creating
organizational awareness of the benefits to be obtained from an integrated
approach to infrastructure management. Any failure of such a market to develop
would have a material adverse effect on the Combined Company's business, results
of operations, or financial condition. Regardless of the development of a market
for integrated infrastructure management solutions, factors adversely affecting
the pricing of, demand for, or market acceptance of one or more of
SERVICECENTER, ASSETCENTER, or SPAN-FM could have a material adverse effect on
the Combined Company's business, results of operations, and financial condition.
DEPENDENCE ON KEY INNOVATIVE PERSONNEL. Innovative's success depends to a
significant extent upon a limited number of Innovative's senior management.
Innovative's future performance, and its contribution to the Combined Company's
future performance, will depend in significant part upon the continued service
of its key technical, sales, and senior management personnel. Of Innovative's
employees, only William M. Thompson, currently Chairman of the Innovative Board
and Innovative's Chief Executive Officer, and John M. Thompson, currently
Innovative's President and Chief Operating Officer, will be bound by employment
agreements following the Merger, and the terms of such employment agreements
will be nonetheless at-will. In addition, only the Thompsons will be bound by
noncompetition agreements. The loss of the services of one or more of
Innovative's executive officers or key employees or the decision of one or more
of such officers or key employees to join a competitor or otherwise compete
directly or indirectly with the Combined Company could have a material adverse
effect on the Combined Company's business, results of operations, and financial
condition. See "The Plan of Merger and Related Transactions--Interests of
Certain Persons in the Merger" and "Innovative Management."
EFFECT OF THE MERGER ON CUSTOMERS AND EXISTING AGREEMENTS. The Merger will
require the consent of certain parties who have entered into contracts with
Innovative, including Autodesk, Inc. ("Autodesk"), a supplier of computer-aided
design (CAD) products. Innovative and AutoDesk are parties to a third party
development agreement pursuant to which, among other things, Innovative licenses
certain CAD products of AutoDesk for use in connection with Innovative's
products. There can be no assurance that such consent(s) will be given and, if
not given, that such contracts will not terminate, which could have an adverse
effect on Innovative's business and results of operations.
RISKS ASSOCIATED WITH OTHER PEREGRINE ACQUISITIONS. In addition to the
Apsylog Acquisition and the Merger, Peregrine and, following consummation of the
Merger, the Combined Company, may make acquisitions of, or significant
investments in, businesses that offer complementary products, services, and
technologies and that further Peregrine's strategy of providing an integrated
infrastructure management software solution. There can be no assurances,
however, that either Peregrine or the Combined Company will make any additional
acquisitions in the future. Any such future acquisitions or investments would
present risks commonly encountered in acquisitions of businesses. Such risks
include, among others, the difficulty of assimilating the technology,
operations, or personnel of the acquired business, the potential disruption of
the Combined Company's on-going businesses, the inability of management to
maximize the financial and strategic position of the Combined Company through
the successful incorporation of acquired personnel, clients, or technologies,
the maintenance of uniform standards, controls, procedures, and policies, and
the impairment of relationships with employees and clients as a result of any
integration of new businesses and management personnel. Peregrine expects that
future acquisitions, if any, could provide for consideration to be paid in cash,
shares of Peregrine Common Stock, or a combination of cash and Peregrine Common
Stock. In the event of such an acquisition or investment, the factors described
herein could have a material adverse effect on the Combined Company's business,
results of operation, and financial condition.
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SHARES ELIGIBLE FOR FUTURE SALE. If the Merger is consummated, Peregrine
will issue to security holders of Innovative an aggregate of approximately
2,959,164 shares of Peregrine Common Stock based on the number of shares of
Innovative Common Stock and number of Innovative Warrants outstanding as of June
18, 1998 (including approximately 78,556 shares of Peregrine Common Stock
issuable upon exchange and conversion of the Underwriter Warrants and
approximately 202,030 shares of Peregrine Common Stock issuable upon exchange
and conversion of the Innovative Warrants, assuming approval of the Warrant
Amendment and, for purposes of the net issuance conversion feature, a price of
$24.188 per share of Peregrine Common Stock). Immediately upon consummation of
the Merger, up to approximately 2,296,229 of such shares will be freely
tradeable. As a result, substantial sales of Peregrine Common Stock could occur
after the Merger. Approximately 661,209 additional shares of Peregrine Common
Stock issued in connection with the Merger will be subject to certain volume and
manner of sale limitations under Rule 145 under the Securities Act. In addition,
based on the number of Innovative Options outstanding on June 18, 1998,
approximately 512,523 additional shares of Peregrine Common Stock will be
reserved for issuance to holders of Innovative Options to be assumed by
Peregrine in the Merger. Future sales of a substantial number of shares of
Peregrine Common Stock could adversely affect or cause substantial fluctuations
in the market price of Peregrine Common Stock.
RIGHTS OF HOLDERS OF INNOVATIVE COMMON STOCK FOLLOWING THE MERGER. As a
result of the Merger, shareholders of Innovative will become stockholders of
Peregrine, and their rights will be governed by Delaware law and the Restated
Certificate of Incorporation and Bylaws of Peregrine, which differ in certain
material respects from the Amended and Restated Articles of Incorporation and
Bylaws of Innovative. See "--Effect of Certain Peregrine Charter Provisions;
Limitation of Liability of Directors; Antitakeover Effects of Delaware Law,"
"Description of Peregrine Capital Stock," "Description of Innovative Capital
Stock," and "Comparison of Rights of Shareholders of Innovative and Stockholders
of Peregrine."
VOLATILITY OF TRADING PRICES. Peregrine completed its initial public
offering of Common Stock in April 1997, prior to which time no public market
existed for the Peregrine Common Stock. The Innovative Common Stock and the
Innovative Warrants have been traded on The Nasdaq SmallCap Market since July
1994. Each of the Peregrine Common Stock, the Innovative Common Stock, and the
Innovative Warrants have in the past been subject to significant price and
volume fluctuations and are expected to continue to be subject to significant
price and volume fluctuations pending the Merger. In addition, following the
Merger, the Peregrine Common Stock can be expected to be subject to significant
price and volume fluctuations. A number of factors could affect the market price
of the respective Companies' securities before the Merger and the market price
of Peregrine Common Stock after the Merger. These factors include any shortfall
in revenues or net income from revenues or net income expected by securities
analysts; announcements of new products by one of the Companies or its
competitors; quarterly fluctuations in financial results or the results of other
software companies, including those of direct competitors of Peregrine or
Innovative; changes in analysts' estimates of Peregrine's or Innovative's
financial performance, the financial performance of competitors, or the
financial performance of software companies in general; general conditions in
the software industry; changes in prices for products of Peregrine or Innovative
or products of competitors; changes in revenue growth rates for Peregrine,
Innovative, or their competitors; sales of large blocks of Innovative Common
Stock or Peregrine Common Stock; and conditions in the financial markets in
general. In addition, the stock market may from time to time experience extreme
price and volume fluctuations, which particularly affect the market price for
the securities of many technology companies and which have often been unrelated
to the operating performance of the specific companies. There can be no
assurance that market prices of the Peregrine Common Stock, the Innovative
Common Stock, or the Innovative Warrants will not experience significant
fluctuations in the future. See "--Fixed Exchange Ratio."
RISKS RELATING TO PEREGRINE
HISTORY OF OPERATING LOSSES. Through March 31, 1998, Peregrine has recorded
cumulative net losses of approximately $41.5 million, including approximately
$34.8 million related to the write-off of acquired
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in-process research and development in connection with the Apsylog Acquisition.
In recent years, the product lines of both Peregrine and Apsylog have changed
substantially. Peregrine's SERVICECENTER product, from which Peregrine derived
substantially all of its license revenues until the acquisition of ASSETCENTER,
only began shipping in mid-1995. Apsylog's ASSETCENTER product only began
shipping in mid-1996. As a result, prediction of Peregrine's future operating
results is difficult, if not impossible. Although Peregrine achieved
profitability during the years ended March 31, 1997 and 1998 (excluding the
impact of the $34.8 million charge related to acquired in-process research and
development in connection with the Apsylog Acquisition), there can be no
assurance that Peregrine will be able to remain profitable on a quarterly or
annual basis. In addition, Peregrine does not believe that the growth in
revenues it has experienced in recent years is indicative of future revenue
growth or future operating results.
POTENTIAL FLUCTUATIONS IN QUARTERLY RESULTS; SEASONALITY. Peregrine's
quarterly operating results have varied significantly in the past and may vary
significantly in the future depending upon a number of factors, many of which
are beyond Peregrine's control. These factors include, among others, (i) the
ability of Peregrine to develop, introduce, and market new and enhanced versions
of its software on a timely basis; (ii) market demand for Peregrine's software;
(iii) the size, timing, and contractual terms of significant orders; (iv) the
timing and significance of new software product announcements or releases by
Peregrine or its competitors; (v) changes in pricing policies by Peregrine or
its competitors; (vi) changes in Peregrine's business strategies; (vii)
budgeting cycles of its potential customers; (viii) changes in the mix of
software products and services sold; (ix) changes in the mix of revenues
attributable to domestic and international sales; (x) the impact of acquisitions
of competitors; (xi) the impact of acquisitions by Peregrine, including the
Apsylog Acquisition and the Merger; (xii) seasonal trends; (xiii) the
cancellations of licenses or maintenance agreements; (xiv) product life cycles;
(xv) software defects and other product quality problems; and (xvi) personnel
changes. Peregrine has historically operated with little or no backlog and has
often recognized a substantial portion of its revenues in the last month or
weeks of a quarter. As a result, license revenues in any quarter are
substantially dependent on orders booked and shipped in the last month or weeks
of that quarter. Due to the foregoing factors, quarterly revenues and operating
results are not predictable with any significant degree of accuracy. In
particular, the timing of revenue recognition can be affected by many factors,
including the timing of contract execution and delivery. The timing between
initial customer contact and fulfillment of criteria for revenue recognition can
be lengthy and unpredictable, and revenues in any given quarter can be adversely
affected as a result of such unpredictability. In the event of any downturn in
potential customers' businesses, or the domestic economy in general, or in
international economies in which Peregrine derives substantial revenues, planned
purchases of Peregrine's products may be deferred or canceled, which could have
a material adverse effect on Peregrine's business, results of operations, and
financial condition. See "--Lengthy Sales Cycle."
Peregrine's business has experienced and is expected to continue to
experience seasonality. Peregrine's revenues and operating results in its
December quarter typically benefit from purchase decisions made by the large
concentration of customers with calendar year-end budgeting requirements, while
revenues and operating results in the March quarter typically benefit from the
efforts of Peregrine's sales force to meet fiscal year-end sales quotas. In
addition, Peregrine is currently attempting to expand its presence in
international markets, including Europe, the Pacific Rim, and Latin America.
International revenues comprise a significant percentage of Peregrine's total
revenues, and Peregrine may experience additional variability in demand
associated with seasonal buying patterns and economic conditions in such foreign
markets. In particular, the quarter ended September 30 tends to reflect the
effects of summer slowing of international business activity, particularly in
Europe. See "--International Operations; Currency Fluctuations."
PRODUCT CONCENTRATION. Peregrine currently derives substantially all of its
license revenues from the sale of its SERVICECENTER and ASSETCENTER suites of
applications and expects them to account for a significant portion of
Peregrine's revenues for the foreseeable future. Peregrine's future operating
results are dependent upon continued market acceptance of SERVICECENTER and
ASSETCENTER, including future enhancements. Factors adversely affecting the
pricing of, demand for, or market acceptance of SERVICECENTER or ASSETCENTER,
such as competition or technological change, could have a material adverse
effect on
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Peregrine's business, results of operations, and financial condition. See
"--Dependence on Market Acceptance of Infrastructure Management Software
Solutions," "--Potential Fluctuations in Quarterly Results; Seasonality,"
"--Competition," "--Expansion of Distribution Channels," and "--Rapid
Technological Change and Product Development Risks."
COMPETITION. The market for Peregrine's products is highly competitive,
fragmented, and subject to rapid technological change and frequent new product
introductions and enhancements. Competitors vary in size and in the scope and
breadth of the products and services offered. Peregrine encounters competition
from a number of sources, including (i) providers of internal help desk software
applications such as Remedy Corporation and Software Artistry, Inc. (now a
division of Tivoli Systems, Inc. ("Tivoli")); (ii) customer interaction software
companies such as Clarify Inc. and The Vantive Corporation, whose products
include internal help desk applications; (iii) information technology and
systems management companies such as International Business Machines Corporation
("IBM"), Computer Associates International, Inc. ("Computer Associates"),
Network Associates, Inc. (recently formed as a result of the business
combination of McAfee Associates, Inc. and Network General Corporation), and
Hewlett-Packard Company ("Hewlett-Packard") through its recent acquisition of
PROLIN; (iv) providers of asset management software; and (v) the internal
information technology departments of those companies with help desk
requirements. Because barriers to entry in the software market are relatively
low, Peregrine anticipates additional competition from other established and
emerging companies as the market for enterprise infrastructure management
applications expands. In addition, current and potential competitors have
established or may in the future establish cooperative relationships among
themselves or with third parties, or large software companies could acquire or
establish alliances with smaller competitors of Peregrine. Peregrine expects
software industry consolidation to continue in the future, and it is possible
that new competitors or alliances among competitors may emerge and rapidly
acquire significant market share. For example, Peregrine's ability to sell its
products depends in part on their compatibility with and support by providers of
system management products, including Tivoli, Computer Associates, and
Hewlett-Packard. Both Tivoli and Hewlett-Packard have recently acquired
providers of help desk software products. The decision of one or more providers
of system management products to close their systems to competing vendors like
Peregrine, or to bundle their infrastructure management and/or help desk
software products with other products for enterprise licenses for promotional
purposes or as part of a long-term pricing strategy, could have an adverse
effect on Peregrine's ability to sell its products. Increased competition,
including increased competition as a result of acquisitions of help desk and
other infrastructure management software vendors by systems management
companies, is likely to result in price reductions, reduced gross margins, and
loss of market share, any of which could have a material adverse effect on
Peregrine's business, results of operations, and financial condition. Some of
Peregrine's current and many of its potential competitors have significantly
greater financial, technical, marketing and other resources than Peregrine. As a
result, they may be able to respond more quickly to new or emerging technologies
and changes in customer requirements or to devote greater resources to the
development, promotion, and sale of their products than Peregrine. There can be
no assurance that Peregrine will be able to compete successfully against current
and future competitors or that competitive pressures faced by Peregrine will not
have a material adverse effect on Peregrine's business, results of operations,
and financial condition. See "Business of Peregrine--Competition."
MANAGEMENT OF GROWTH. Peregrine's business has grown substantially in
recent periods, with total revenues increasing from $19.6 million in fiscal
1995, to $23.8 million in fiscal 1996, to $35.0 million in fiscal 1997, and to
$61.9 million in fiscal 1998. If Peregrine is successful in achieving its growth
plans, including the integration of Apsylog and Innovative, such growth is
likely to place a significant burden on Peregrine's operating and financial
systems, resulting in increased responsibility for senior management and other
personnel within Peregrine. Peregrine's ability to compete effectively and to
manage future growth, if any, and its future operating results will depend in
part on the ability of its officers and other key employees to implement and
expand operational, customer support and financial control systems and to
expand, train, and manage its employee base. In particular, in connection with
the Merger, Peregrine will be required to integrate additional personnel and to
augment or replace Innovative's existing financial and
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management systems. Such integration could result in a disruption of operations
of Peregrine or Innovative and could adversely affect the financial results of
the Combined Company. There can be no assurance that Peregrine's existing
management or any new members of management will be able to augment or improve
existing systems and controls or implement new systems and controls in response
to future growth, if any. Peregrine's failure to do so could have a material
adverse effect on Peregrine's business, results of operations, and financial
condition. See "--Dependence on Skilled Personnel; Ability to Recruit Personnel;
Risks Associated with Federal Immigration Laws."
EXPANSION OF DISTRIBUTION CHANNELS. Peregrine has historically sold its
products through its direct sales force and a limited number of distributors and
has provided maintenance and support services through its technical and customer
support staff. In addition to continuing to invest in its direct sales force,
particularly in North America where it has recently opened several new sales
offices, Peregrine is currently investing and intends to continue to invest
significant resources in developing additional sales and marketing channels
through system integrators, original equipment manufacturers ("OEMs"), and other
channel partners. There can be no assurance that Peregrine will be able to
attract channel partners that will be able to market Peregrine's products
effectively and will be qualified to provide timely and cost-effective customer
support and service. To the extent Peregrine establishes distribution through
such indirect channels, its agreement with channel partners may not be exclusive
and such channel partners may also carry competing product lines. Any failure by
Peregrine to establish and maintain such distribution relationships could have a
material adverse effect on Peregrine's business, results of operations, and
financial condition. See "--Management of Growth" and "--International
Operations; Currency Fluctuations."
INTERNATIONAL OPERATIONS; CURRENCY FLUCTUATIONS. International sales
represented approximately 29% and 36% of Peregrine's total revenues in fiscal
1997 and fiscal 1998, respectively. Peregrine currently has international sales
offices in London, Paris, Frankfurt, Munich, Amsterdam, and Copenhagen.
Peregrine believes that its continued growth and profitability will require
continued expansion of its international operations, particularly in Europe,
Latin America and the Pacific Rim. Accordingly, Peregrine intends to expand its
international operations and enter additional international markets, which will
require significant management attention and financial resources. In addition,
Peregrine's international operations are subject to a variety of risks
associated with conducting business internationally, including fluctuations in
currency exchange rates, longer payment cycles, difficulties in staffing and
managing international operations, problems in collecting accounts receivable,
seasonal reductions in business activity during the summer months in Europe and
certain other parts of the world, increases in tariffs, duties, price controls
or other restrictions on foreign currencies, and trade barriers imposed by
foreign countries, any of which could have a material adverse effect on
Peregrine's business, operating results, and financial condition. In particular,
recent instability in the Asian-Pacific economies and financial markets, could
have an adverse effect on Peregrine's operating results in future quarters.
Peregrine has only limited experience in developing localized versions of its
products and marketing and distributing its products internationally, and there
can be no assurance that Peregrine will be able to successfully localize,
market, sell and deliver its products internationally. The inability of
Peregrine to expand its international operations successfully and in a timely
manner could have a material adverse effect on Peregrine's business, results of
operations, and financial condition.
A significant portion of Peregrine's business is conducted in currencies
other than the U.S. dollar. Foreign currency transaction gains and losses
arising from normal business operations are credited to or charged against
earnings in the period incurred. As a result, fluctuations in the value of the
currencies in which Peregrine conducts its business relative to the U.S. dollar
have caused and will continue to cause currency transaction gains and losses.
Due to the substantial volatility of currency exchange rates, among other
factors, Peregrine cannot predict the effect of exchange rate fluctuations upon
future operating results. There can be no assurance that Peregrine will not
experience currency losses in the future. Peregrine has recently implemented a
foreign exchange hedging program, consisting principally of purchases of one
month forward-rate currency contracts. Notwithstanding such a program, there can
be no
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assurances that Peregrine's hedging activities will adequately protect Peregrine
against the risks associated with foreign currency fluctuations. See
"--Management of Growth."
ISSUES RELATED TO THE EUROPEAN MONETARY CONVERSION. On January 1, 1999,
certain member states of the European Economic Community (the "EEC") will fix
their respective currencies to a new currency, the euro. On that day, the euro
will become a functional legal currency within these countries. During the next
three years, business in these EEC member states will be conducted in both the
existing national currency, such as the French Franc or Deutsche Mark, and the
euro. As a result, companies operating in or conducting business in EEC member
states will need to ensure that their financial and other software systems are
capable of processing transactions and properly handling these currencies,
including the euro. Peregrine's ASSETCENTER product was originally developed for
the European market and is capable of managing currency data measured in euros.
Peregrine is still assessing the impact that the euro will have on its internal
systems and the other products it sells, however. Peregrine will take
appropriate corrective actions based on the results of such assessment.
Peregrine has not yet determined the costs related to addressing this issue, and
there can be no assurance that this issue and its related costs will not have a
material adverse affect on Peregrine's business, results of operations, and
financial condition.
CONTROL BY EXISTING STOCKHOLDERS. Based on shares outstanding as of May 31,
1998, the Company's officers, directors and their affiliates together
beneficially own approximately 58.6% of the outstanding shares of Peregrine
Common Stock. In particular, John J. Moores, Chairman of the Peregrine Board,
owns approximately 49.4% of the outstanding shares of Peregrine Common Stock. As
a result, these stockholders will be able to control most matters requiring
stockholder approval, including the election of directors and the approval of
mergers, consolidations and sales of all or substantially all of the assets of
Peregrine. This may prevent or discourage potential bids to acquire Peregrine
unless the terms of acquisition are approved by such stockholders. See
"Peregrine Stock Ownership of Certain Beneficial Owners and Management."
EFFECT OF CERTAIN PEREGRINE CHARTER PROVISIONS; LIMITATION OF LIABILITY OF
DIRECTORS; ANTITAKEOVER EFFECTS OF DELAWARE LAW. Peregrine is authorized to
issue 5,000,000 shares of undesignated Peregrine Preferred Stock. The Peregrine
Board has the authority to issue the Peregrine Preferred Stock in one or more
series and to fix the price, rights, preferences, privileges and restrictions
thereof, including dividend rights, dividend rates, conversion rights, voting
rights, terms of redemption, redemption prices, liquidation preferences and the
number of shares constituting a series or the designation of such series,
without any further vote or action by Peregrine's stockholders. The issuance of
Peregrine Preferred Stock, while providing desirable flexibility in connection
with possible acquisitions and other corporate purposes, could have the effect
of delaying, deferring, or preventing a change in control of Peregrine without
further action by the stockholders and may adversely affect the market price of
the Peregrine Common Stock and the voting and other rights of the holders of
Peregrine Common Stock. The issuance of Peregrine Preferred Stock with voting
and conversion rights may adversely affect the voting power of the holders of
Peregrine Common Stock, including the loss of voting control to others.
Peregrine has no current plans to issue any shares of Peregrine Preferred Stock.
Certain provisions of Peregrine's Amended and Restated Certificate of
Incorporation and Bylaws eliminate the right of stockholders to act by written
consent without a meeting and specify certain procedures for nominating
directors and submitting proposals for consideration at stockholder meetings.
Such provisions are intended to enhance the likelihood of continuity and
stability in the composition of the Peregrine Board and in the policies
formulated by the Peregrine Board and to discourage certain types of
transactions which may involve an actual or threatened change of control of
Peregrine. Such provisions are designed to reduce the vulnerability of Peregrine
to an unsolicited acquisition proposal and, accordingly, could discourage
potential acquisition proposals and could delay or prevent a change in control
of Peregrine. Such provisions are also intended to discourage certain tactics
that may be used in proxy fights but could, however, have the effect of
discouraging others from making tender offers for Peregrine's shares and,
consequently, may also inhibit fluctuations in the market price of Peregrine's
Common Stock that could result from actual or rumored takeover attempts. These
provisions may also have the effect of preventing changes in the management of
Peregrine.
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Peregrine is subject to Section 203 of the Delaware General Corporation Law
(the "Antitakeover Law"), which regulates corporate acquisitions. The
Antitakeover Law prevents certain Delaware corporations, including those whose
securities are listed for trading on the Nasdaq National Market, from engaging,
under certain circumstances, in a "business combination" with any "interested
stockholder" for three years following the date that such stockholder became an
interested stockholder. For purposes of the Antitakeover Law, a "business
combination" includes, among other things, a merger or consolidation involving
Peregrine and the interested stockholder and the sale of more than 10% of
Peregrine's assets. In general, the Antitakeover Law defines an "interested
stockholder" as any entity or person beneficially owning 15% or more of the
outstanding voting stock of Peregrine and any entity or person affiliated with
or controlling or controlled by such entity or person. A Delaware corporation
may "opt out" of the Antitakeover Law with an express provision in its original
certificate of incorporation or an express provision in its certificate of
incorporation or bylaws resulting from amendments approved by the holders of at
least a majority of the company's outstanding voting shares. Peregrine has not
"opted out" of the provisions of the Antitakeover Law. See "Description of
Peregrine Capital Stock."
RISKS RELATING TO INNOVATIVE
LIMITED PROFITABILITY; HISTORY OF OPERATING LOSSES. Through April 30, 1998,
Innovative has recorded cumulative net losses of approximately $1.38 million.
Although Innovative achieved profitability during its fiscal year ended January
31, 1998, there can be no assurance that Innovative will be able to remain
profitable on a quarterly or annual basis. Innovative has experienced
substantial revenue growth in recent years, but its profitability, as a
percentage of net revenues, has varied substantially on a quarterly and annual
basis, and Innovative incurred net operating losses in both fiscal 1997 and
1996. Due to the rate of growth of Innovative's business and the variability of
operating results in past periods, there can be no assurance that Innovative's
revenues will continue at the current level, that they will grow, or that
Innovative will be able to sustain profitability on a quarterly or annual basis.
Innovative does not believe that the growth in revenues it has experienced in
recent periods is indicative of future revenue growth or future operating
results.
CUSTOMER CONCENTRATION. License and service revenues generated from sales
of Innovative's software products and services has traditionally been highly
concentrated. License revenues from sales to The Boeing Company, Southwestern
Bell Telephone Company, First Union Corporation, and Hewlett-Packard accounted
for 17%, 11%, 6%, and 4% of total revenues for fiscal 1998, respectively.
License revenues derived from sales to Intergraph Corporation, Elecktrowatt Ltd
Landis and Staefa Division (Europe), and the United States Department of Defense
accounted for 6%, 6%, and 6% of total revenues for fiscal 1997, respectively.
License revenues derived from sales to the United States Department of Defense,
Canadian Imperial Bank of Commerce, and Intergraph Corporation accounted for
25%, 16%, and 11% of total revenues for fiscal 1996, respectively. For the three
month period ended April 30, 1998, revenue derived from sales to Intergraph
Corporation, AT&T Corp., Trammell Crow Company, and Hewlett-Packard accounted
for 23%, 7%, 7%, and 5% of revenue, respectively. Innovative expects that a
small number of customers will continue to account for a substantial portion of
its license revenues for the foreseeable future. As a result, the decision of a
single customer to discontinue use of Innovative's products could have a
material adverse effect on Innovative's business, results of operations, and
financial condition. See "--Product Concentration; Product Development Risks"
and "--Potential Fluctuations in Quarterly Results."
PRODUCT CONCENTRATION; PRODUCT DEVELOPMENT RISKS. Innovative derives
substantially all of its revenues from the licensing and support of the SPAN-FM
suite of applications. Innovative's future operating results are dependant upon
continued market acceptance of SPAN-FM, including future enhancements. Factors
adversely affecting the pricing of, demand for, or market acceptance of SPAN-FM,
such as competition or technological change, could have a material adverse
effect on Innovative's business, results of operations, and financial condition.
See "Innovative Business--Products."
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EXPANSION OF SALES FORCE AND DISTRIBUTION CHANNELS. To date, Innovative has
sold its products primarily through its direct sales organization and has
supported its customers with its technical and customer support staff.
Innovative currently employs only 22 sales personnel, and Innovative's ability
to achieve revenue growth in the future will depend in large part on its success
in recruiting and training sufficient direct sales, technical and customer
support personnel and establishing and maintaining relationships with its
strategic partners. In fiscal 1998, Innovative opened its first direct sales
office outside the United States in Canada. Innovative's ability to achieve
revenue growth in the future will depend on the establishment of relationships
with distributors in Europe and the Pacific Rim. To date, the Company has
entered into one non-exclusive distribution arrangement with a European
distributor, Elektrowatt AG Landis & Staefa. The competition for qualified
international distributors is intense, and there can be no assurance that
Innovative can attract and retain qualified distributors. Although Innovative is
currently investing, and plans to continue to invest, significant resources to
expand its North American direct sales force and its technical and customer
support staff and to develop international distribution relationships with
strategic partners, Innovative has at times experienced and continues to
experience difficulty in recruiting qualified personnel and in establishing
necessary third-party relationships. There can be no assurance that Innovative
will be able to expand successfully its direct sales force or other distribution
channels or that any such expansion will result in an increase in revenues.
Innovative believes the complexity of its products and the large-scale
deployments anticipated by its customers will require a number of highly trained
consultants and customer support personnel. There can be no assurance that
Innovative will successfully expand its technical and customer support staff to
meet customer demands. Any failure by Innovative to expand its direct sales
force or other distribution channels, or to expand its technical and customer
support staff, could materially and adversely affect Innovative's business,
operating results and financial condition. See "Business of
Innovative--Marketing and Distribution--The Innovative Strategy."
POTENTIAL FLUCTUATIONS IN QUARTERLY RESULTS. Innovative's quarterly and
annual operating results have varied significantly in the past and may vary
significantly in the future depending upon a number of factors. In particular,
Innovative's dependence on a relatively small number of customers could result
in substantial period-to-period fluctuations in revenues and results of
operations in the event of a delay, postponement, or termination of a large
license, maintenance, and/or service contract. Innovative has historically
operated with little or no backlog and has often recognized a substantial
portion of its revenues in the last month or weeks of a quarter. As a result,
license revenues in any quarter are substantially dependent on orders booked and
shipped in the last month or weeks of that quarter. Due to the foregoing
factors, annual and quarterly revenues and operating results are not predictable
with any significant degree of accuracy. In particular, the timing of revenue
recognition can be affected by many factors, including the timing of contract
execution and delivery. The timing between initial customer contact and
fulfillment of criteria for revenue recognition can be lengthy and
unpredictable, and revenues in any given quarter can be adversely affected as a
result of such unpredictability. Because Innovative's results of operations in a
given period are typically dependent on its ability to license its products to a
small number of customers and the sales cycle is lengthy, any failure to
complete an anticipated transaction, or a delay in completing such a
transaction, could have a material adverse effect on Innovative's business,
results of operations, and financial condition. In addition, in the event of any
downturn in potential customers' businesses, or the domestic economy in general,
planned purchases of Innovative's products may be deferred or canceled, which
would have a material adverse effect on Innovative's business, results of
operations, and financial condition. See "--Customer Concentration," "Product
Concentration," and "Lengthy Sales Cycle."
MANAGEMENT OF GROWTH. Innovative has grown rapidly in the last three years.
The growth of Innovative's business and the expansion of Innovative's customer
base has placed a significant strain on Innovative's management and operations.
Innovative's recent growth and expansion has resulted in substantial increases
in the number of its employees and scope of its operations. Innovative's ability
to support the growth of its operations will be substantially dependent upon
having in place highly trained internal resources to conduct pre-sales activity,
product implementation, training and other customer
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support services as well as effective administration processes. To accommodate
its growth, Innovative's officers and other key employees will be required to
improve and implement a variety of operational and financial systems and
procedures, to expand, train and manage its employee base and to engage and work
effectively with third party implementation providers. There can be no assurance
that Innovative will be able to manage its recent or any future expansion
successfully. Any inability to successfully manage growth will likely have a
material adverse effect on Innovative's business, results of operations, and
financial condition.
NEED TO EXPAND AND DEVELOP AN EFFECTIVE PROFESSIONAL SERVICES
ORGANIZATION. As Innovative's products become more complex, customers will
increasingly require greater professional assistance in the design,
installation, configuration and implementation of Innovative's products. To more
effectively service its customers' evolving needs, Innovative intends to
significantly expand and develop its professional service organization. There
can be no assurance that Innovative will be successful in its efforts to expand
and develop an effective professional services organization. This will require
that Innovative hire and train additional service professionals who must
continually be trained and educated to ensure that they possess sufficient
technical skills and product knowledge. In particular, the market for qualified
professionals is intensely competitive, making hiring and retention difficult.
Innovative expects significant competition in this market from existing
providers of professional services and future entrants. Innovative must also
properly price its services to attract customers, while maintaining sufficient
margins for its services. Profit margins on Innovative's service revenues may
decrease as Innovative continues to develop and expand its professional services
organization. The failure to develop an effective professional services
organization could have a material adverse effect on Innovative's business,
results of operations, and financial condition. See "--Dependence on Skilled
Personnel; Ability to Recruit Personnel; Risks Associated with Federal
Immigration Laws."
INTENSE COMPETITION. The facilities automation industry is intensely
competitive, highly fragmented and subject to rapid change. Competitors vary in
size and in the scope and breadth of the products and services offered.
Innovative encounters competition from a number of sources, including: (i) other
software companies, (ii) third party professional services organizations that
develop custom software, and (iii) management information systems departments of
potential customers that develop custom internal software. In addition, because
there are relatively low barriers to entry in the market, Innovative expects
additional competition from other established and emerging companies as the
facilities automation software industry continues to develop and expand.
Increased competition could result in price reductions, reduced gross margins
and loss of market share, any of which would have a material adverse effect on
Innovative's business, results of operations, and financial condition.
Innovative's principal competitors include AEC Data Systems, Inc., PSDI, Inc.,
Datastream Systems, Inc. and Archibus, Inc. Some of Innovative's current
competitors, and many of Innovative's potential competitors, have significantly
greater financial, technical, product development, marketing and other resources
than Innovative. As a result, competitors may be able to respond more quickly to
new or emerging technologies and changes in customer requirements, or to devote
greater resources to the development, promotion and sale of their products than
Innovative.
In addition, many competitors and potential competitors have significant
established distribution networks and large customer installed bases. Innovative
also expects that competition will increase as a result of continuing
consolidation in the software industry. In addition, current and potential
competitors have established or may establish cooperative relationships among
themselves or with third parties to increase the ability of their products to
address the needs of Innovative's prospective customers. Accordingly, it is
possible that these competitors will rapidly acquire significant market share.
Furthermore, companies with greater technical, marketing and other resources
than Innovative could compete directly with Innovative either as a result of
acquisition or by direct entry into the market for Innovative's products. There
can be no assurance that Innovative will be able to compete successfully against
current or future
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competitors or that competitive pressures faced by Innovative will not have a
material adverse effect on its business, results of operations, and financial
condition.
RISKS RELATING TO BOTH PEREGRINE AND INNOVATIVE
DEPENDENCE ON SKILLED PERSONNEL; ABILITY TO RECRUIT PERSONNEL; RISKS
ASSOCIATED WITH FEDERAL IMMIGRATION LAWS. The ability of both Peregrine and
Innovative to achieve revenue growth is, and following the Merger the ability of
the Combined Company will be, substantially dependent on their ability to
attract and retain skilled personnel, especially sales, service and
implementation personnel. Other than certain employees of Apsylog and as
contemplated in the Merger, none of Peregrine's employees, including its senior
management, is bound by an employment or noncompetition agreement, and Peregrine
does not maintain key man life insurance on any employee. The loss of the
services of one or more of Peregrine's executive officers or key employees or
the decision of one or more of such officers or employees to join a competitor
or otherwise compete directly or indirectly with Peregrine could have a material
adverse effect on Peregrine's business, results of operations, and financial
condition. None of Innovative's senior management is currently bound to
Innovative by an employment agreement. While Innovative does maintain key man
life insurance on William Thompson, its Chief Executive Officer and Chairman of
the Innovative Board, and John Thompson, its President, Chief Operating Officer,
Chief Financial Officer and Treasurer, and a member of the Innovative Board,
these are the only members of the Company's senior management team for whom such
insurance policies are maintained. The loss of the services of one or more of
Innovative's executive officers or key employees could have a material adverse
effect on Innovative's business, results of operations, and financial condition.
In addition, each of the Companies believes that its future success,
independently or as a combined entity, will depend in large part on its ability
to attract and retain additional highly skilled technical, sales, management and
marketing personnel. Competition for such personnel in the computer software
industry is intense, and each of the Companies has at times in the past
experienced difficulty in recruiting qualified personnel. New employees hired by
Peregrine require substantial training in the use and implementation of
Peregrine's products. In particular, a number of Peregrine's and Innovative's
sales and marketing personnel have been with their respective Companies for only
a limited period of time. New employees hired by Innovative also require
substantial training in the use and implementation of Innovative's products,
particularly in sales and marketing professional services, product development,
and technical support. There can be no assurance that either Company will be
successful in attracting, training and retaining qualified personnel, and the
failure to do so could have a material adverse effect on the business, operating
results, and financial condition of Innovative, Peregrine, and the Combined
Company.
The Companies' ability to achieve anticipated revenues is also dependent in
part upon their ability to recruit and employ skilled technical professionals
from other countries. Any future shortage of qualified technical personnel who
are either United States citizens or otherwise eligible to work in the United
States could increase their reliance on foreign professionals. Many technology
companies have already begun to experience shortages of such personnel. Any
failure to attract and retain qualified personnel as necessary, including as a
result of limitations imposed by federal immigration laws and the availability
of visas issued thereunder, could have a material adverse effect on the business
and results of operations of Peregrine, Innovative, or the Combined Company.
In particular, foreign computer professionals such as the type utilized by
Peregrine and Innovative typically become eligible for employment by obtaining a
nonimmigrant visa commonly known as an H-1B. The Immigration Act of 1990 limits
the number of available H-1B visas to 65,000 per year. This limitation was
reached for the first time approximately one month prior to the federal
government's fiscal year ending September 30, 1997. In a notice published on May
11, 1998, the Immigration and Naturalization Service announced that the 65,000
annual limitation on H-1B visas had already been reached for the federal
government's fiscal year ending September 30, 1998. As a result, computer
professionals from other countries who need an H-1B visa in order to be eligible
for employment will not be eligible for
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employment in the United States until after October 1, 1998 at the earliest.
Currently, legislation is pending in the United States Congress which, if passed
in its present form, would increase the number of H-1B visas available. It is
impossible to predict whether such legislation will ultimately become law.
Likewise, it is impossible to predict what effect any future changes in the
federal immigration laws will have on the business, results of operations, or
financial condition of Peregrine, Innovative, or the Combined Company.
LENGTHY SALES CYCLES. The license of software by both Peregrine and
Innovative generally requires the Companies to engage in a sales cycle that
typically takes approximately six to nine months to complete. The length of the
sales cycle may vary depending on a number of factors over which the Companies'
may have little or no control, including the size of the transaction and the
level of competition encountered in their selling activities. In addition,
Peregrine's sales cycle is typically extended 90 days for product sales through
indirect channels. During the sales cycle, the Companies typically provide a
significant level of education to prospective customers regarding the use and
benefits of their products. Any delays in the sales cycles of a large license or
a number of smaller licenses could have a material adverse effect on the
business, results of operations, and financial condition of Peregrine,
Innovative, or the Combined Company. Because Innovative's results of operations
in a given period are particularly dependent on its ability to license its
products to a small number of customers, any such delays are very likely to have
a material adverse effect in Innovative's results of operations for the period.
See "--Potential Fluctuations in Quarterly Results; Seasonality."
RAPID TECHNOLOGICAL CHANGE AND PRODUCT DEVELOPMENT RISKS. The markets for
the Companies' products are subject to rapid technological change, changing
customer needs, frequent new product introductions, and evolving industry
standards that may render existing products and services obsolete. As a result,
the Companies' position in their existing markets or other markets that they may
enter could be eroded rapidly by product advances. The life cycles of the
Companies' products are difficult to estimate. The Companies' growth and future
financial performance will depend in part upon their ability to enhance existing
applications, develop and introduce new applications that keep pace with
technological advances, meet changing customer requirements and respond to
competitive products. The Companies' product development efforts are expected to
continue to require substantial investments. There can be no assurance that
either Peregrine or Innovative, independently, or the Combined Company will have
sufficient resources to make the necessary investments. Each of the Companies
has in the past experienced development delays, and there can be no assurance
that either Peregrine or Innovative, independently, or the Combined Company will
not experience such delays in the future. There can be no assurance that either
Peregrine or Innovative, independently, or the Combined Company will not
experience difficulties that could delay or prevent the successful development,
introduction or marketing of new or enhanced products. In addition, there can be
no assurance that such products will achieve market acceptance, or that the
Companies' current or future products will conform to industry requirements. The
inability of either Peregrine or Innovative, independently, or the Combined
Company, for technological or other reasons, to develop and introduce new and
enhanced products in a timely manner could have a material adverse effect on
business, results of operations, and financial condition of Peregrine,
Innovative, or the Combined Company, as the case may be.
Software products as complex as those offered by the Companies may contain
errors that may be detected at any point in a product's life cycle. Each of the
Companies has in the past discovered software errors in certain of its products
and has experienced delays in shipment of products during the period required to
correct these errors. There can be no assurance that, despite testing by either
Peregrine or Innovative, independently, or the Combined Company and by current
and potential customers, errors will not be found, resulting in loss of, or
delay in, market acceptance and sales, diversion of development resources,
injury to their reputation, or increased service and warranty costs, any of
which could have a material adverse effect on the business, results of
operations, and financial condition of Peregrine, Innovative, or the Combined
Company, as the case may be.
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DEPENDENCE ON PROPRIETARY TECHNOLOGY; RISKS OF INFRINGEMENT. The success of
Peregrine and Innovative is, and the success of the Combined Company will be,
heavily dependent upon proprietary technology. Each Company relies primarily on
a combination of copyright and trademark laws, trade secrets, confidentiality
procedures and contractual provisions to protect its proprietary rights. In
addition, Innovative has obtained patent protection for certain technology. Each
Company seeks to protect its software, documentation and other written materials
under trade secret and copyright laws, which provide only limited protection.
Despite precautions taken by the Companies, it may be possible for unauthorized
third parties to copy aspects of its current or future products or to obtain and
use information that either regards as proprietary. In particular, each of the
Companies may provide its respective licensees with access to its data model and
other proprietary information underlying its licensed applications. There can be
no assurance that such means of protecting their proprietary rights will be
adequate or that their competitors will not independently develop similar or
superior technology. Policing unauthorized use of software is difficult and,
while neither Company is able to determine the extent to which piracy of its
software products exists, software piracy can be expected to be a persistent
problem. In addition, the laws of some foreign countries do not protect the
proprietary rights of the Companies to the same extent as do the laws of the
United States. Litigation may be necessary in the future to enforce their
intellectual property rights, to protect trade secrets or to determine the
validity and scope of the proprietary rights of others. Such litigation could
result in substantial costs and diversion of resources and could have a material
adverse effect on the business, results of operations, and financial condition
of any or all of Peregrine, Innovative, or the Combined Company.
Neither Peregrine nor Innovative is aware that any of its software product
offerings infringes the proprietary rights of third parties. There can be no
assurance, however, that third parties will not claim infringement with respect
to current or future products of Peregrine, Innovative, or the Combined Company.
Each of the Companies expects that software product developers will increasingly
be subject to infringement claims as the number of products and competitors in
their industry segment grows and the functionality of products in different
industry segments overlaps. Any such claims, with or without merit, could be
time consuming, result in costly litigation, cause product shipment delays, or
require Peregrine, Innovative, or the Combined Company to enter into royalty or
licensing agreements. Such royalty or licensing agreements, if required, may not
be available on acceptable terms or at all, which could have a material adverse
effect on the business, results of operations, and financial condition of
Peregrine, Innovative or the Combined Company.
YEAR 2000 ISSUES. Many currently installed computer systems and software
products are coded to accept only two digit entries in the date code field.
These date code fields will need to accept four digit entries to distinguish
21st century dates from 20th century dates. As a result, many companies'
software and computer systems may need to be upgraded or replaced in order to
comply with such Year 2000 requirements. Significant uncertainty exists in the
software industry concerning the potential effects associated with such
compliance.
Both Peregrine and Innovative utilize third party equipment and software
that may not be Year 2000 compliant. Each Company is conducting an internal
audit of products provided by outside vendors to determine if such third party
products are Year 2000 compliant. Although such audits are not yet completed,
Peregrine has received assurances from suppliers of all third party software
that Peregrine deems material to its business that such software is Year 2000
compliant. Failure of such third party equipment or software to operate properly
with regard to the Year 2000 and thereafter could require either Peregrine,
Innovative, or the Combined Company to incur unanticipated expenses to remedy
any problems, which could have a material adverse effect on their respective
businesses, results of operations and financial condition. If key systems, or a
significant number of systems, were to fail as a result of Year 2000 problems or
either of Peregrine, Innovative, or the Combined Company were to experience
delays implementing Year 2000 compliant software products, Peregrine,
Innovative, or the Combined Company could incur substantial costs and disruption
of their businesses, which would potentially have a material adverse effect on
their results of operations and financial conditions.
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Peregrine and Innovative are still assessing the impact the Year 2000 issue
will have on their proprietary software products and internal information
systems and will take appropriate corrective actions based on the results of
such analyses. Management of the Companies has not yet determined the costs
related to achieving Year 2000 compliance but does not believe such costs will
be material. To the extent the costs of achieving Year 2000 compliance are
material, such costs will have a material adverse effect on their respective
businesses, results of operations, and financial condition.
In the ordinary course of their businesses, Peregrine and Innovative each
test and evaluate their own software products. Each believes that its software
products are generally Year 2000 compliant, meaning that the use or occurrence
of dates on or after January 1, 2000 will not materially affect the performance
of such software products with respect to four digit date dependent data or the
ability of such products to correctly create, store, process and output
information related to such data. There can be no assurances, however, that one
or both of the Companies will not subsequently learn that certain of its
software products do not contain all necessary software routines and codes
necessary for the accurate calculation, display, storage and manipulation of
data involving dates. In addition, in certain circumstances, each Company has
warranted that the use or occurrence of dates on or after January 1, 2000 will
not adversely affect the performance of its products with respect to four digit
date dependent data or the ability to create, store, process and output
information related to such data. If any licensees experience Year 2000
problems, such licensees could assert claims for damages.
In addition, the purchasing patterns of customers and potential customers
may be affected by Year 2000 issues. Many companies are expending significant
resources to correct their current software systems for Year 2000 compliance.
These expenditures may result in reduced funds available to purchase software
products such as those offered by the Companies, which could have an adverse
effect on the business, results of operations, and financial condition of either
Peregrine, Innovative, or the Combined Company.
PRODUCT LIABILITY. The license agreements which Peregrine and Innovative
enter with their customers typically contain provisions designed to limit
exposure to potential product liability claims. It is possible, however, that
the limitation of liability provisions contained in such license agreements may
not be effective under the laws of certain jurisdictions. Although neither
Peregrine nor Innovative has experienced any product liability claims to date,
the sale and support of their products may entail the risk of such claims, and
there can be no assurance that either Peregrine, Innovative, or the Combined
Company will not be subject to such claims in the future. A product liability
claim brought against either Peregrine, Innovative, or the Combined Company
could have a material adverse effect on their respective businesses, results of
operations, and financial condition.
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SELECTED HISTORICAL AND UNAUDITED
PRO FORMA COMBINED FINANCIAL DATA
The following selected historical financial information of Peregrine and
Innovative has been derived from their respective historical consolidated
financial statements and should be read in conjunction with such consolidated
financial statements and the notes thereto, which are included elsewhere in this
Proxy Statement/Prospectus. The selected pro forma combined financial
information is derived from the unaudited pro forma combined condensed financial
statements, which give effect to the Merger as a purchase, and should be read in
conjunction with such unaudited pro forma combined condensed financial
statements and the notes thereto included elsewhere in this Proxy
Statement/Prospectus. For pro forma purposes, Peregrine's consolidated statement
of operations for the fiscal year ended March 31, 1998 has been combined with
Innovative's consolidated statement of operations for the fiscal year ended
January 31, 1998, giving effect to the Merger as if it had occurred on April 1,
1997. For pro forma purposes, Peregrine's consolidated balance sheet as of March
31, 1998 has been combined with the consolidated balance sheet of Innovative as
of January 31, 1998, giving effect to the Merger as if it had occurred on March
31, 1998. No cash dividends have been declared or paid on Peregrine Common Stock
or Innovative Common Stock. The pro forma information is presented for
illustrative purposes only and is not necessarily indicative of the results of
operations or financial condition that would have been reported if the Merger
had been consummated as of the date or at the beginning of the earliest period
indicated or that Peregrine or the Combined Company may report in the future.
PEREGRINE SELECTED CONSOLIDATED HISTORICAL FINANCIAL INFORMATION
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
------------------------------------------------------
1994 1995 1996 1997 1998
--------- --------- --------- --------- ----------
<S> <C> <C> <C> <C> <C>
HISTORICAL CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Total revenues............................................ $ 15,760 $ 19,628 $ 23,766 $ 35,035 $ 61,877
Acquired in-process research and development.............. -- 606 -- -- 34,775
Operating income (loss)................................... (705) (3,919) (4,266) 4,688 (21,135)
Net income (loss)......................................... (735) 51 (6,411) 5,802 (25,654)
Net income (loss) from continuing operations per
share--diluted........................................... $ (0.37) $ 0.39 $ (1.48)
Shares used in per share computation...................... 12,331 14,964 17,380
<CAPTION>
AS OF MARCH 31,
------------------------------------------------------
1994 1995 1996 1997 1998
--------- --------- --------- --------- ----------
<S> <C> <C> <C> <C> <C>
HISTORICAL CONSOLIDATED BALANCE SHEET DATA:
Cash, cash equivalents, and short term investments........ $ 587 $ 57 $ 437 $ 305 $ 21,977
Working capital (deficit)................................. (3,045) (4,118) (9,697) (4,065) 25,572
Total assets.............................................. 6,689 9,787 13,817 19,738 56,737
Total debt................................................ 1,319 1,540 5,208 3,866 1,117
Stockholders' equity (deficit)............................ (2,859) (2,197) (8,450) (2,849) 30,601
</TABLE>
32
<PAGE>
INNOVATIVE SELECTED CONSOLIDATED HISTORICAL FINANCIAL INFORMATION
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED JANUARY 31, APRIL 30,
--------------------------------------------------------- --------------------
1994 1995 1996 1997 1998 1997 1998
--------- ------------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
HISTORICAL CONSOLIDATED STATEMENT OF OPERATIONS
DATA(3):
Revenue.......................................... $ 1,686 $ 1,326 $ 2,785 $ 8,904 $ 15,083 $ 3,220 $ 4,582
Operating income (loss).......................... 170 (903) (1,226) (461) 952 65 282
Net income (loss)................................ 139 (1,089)(2) (858) (364) 911 75 196
Net income (loss) per share--basic(1)............ $ 0.02 $ (0.13)(2) $ (0.08) $ (0.03) $ 0.08 $ 0.01 $ 0.02
Shares used in per share computation (basic)..... 5,821 7,990 10,228 10,569 11,583 10,888 11,079
Net income (loss) per share--diluted(1).......... $ 0.02 $ (0.13)(2) $ (0.08) $ (0.03) $ 0.08 $ 0.01 $ 0.01
Shares used in per share computation (diluted)... 5,821 7,990 10,228 10,569 11,583 10,939 13,687
</TABLE>
<TABLE>
<CAPTION>
AS OF JANUARY 31, AS OF
----------------------------------------------------- APRIL 30,
1994 1995 1996 1997 1998 1998
--------- --------- --------- --------- --------- -------------
<S> <C> <C> <C> <C> <C> <C>
HISTORICAL CONSOLIDATED BALANCE
SHEET DATA(3):
Cash and cash equivalents......................... $ 226 $ 5,336 $ 2,816 $ 1,788 $ 3,438 $ 1,948
Working capital................................... 302 5,368 3,709 4,100 4,941 4,817
Total assets...................................... 724 6,506 5,854 7,766 11,101 11,677
Long-term obligations............................. -- -- -- 257 620 581
Shareholders' equity.............................. 465 6,089 5,390 5,854 6,885 7,229
</TABLE>
- ------------------------------
(1) See Note 15 to Innovative's financial statements.
(2) Includes an extraordinary loss on extinguishment of debt in 1995 of $262,392
or $.03 per common share.
(3) Statement of operations data for fiscal 1997 includes the results of
operations of Facility Management Systems, Inc., a wholly-owned subsidiary
of Innovative, from the date of acquisition, and includes a $485,000
write-off of in process research and development related to the acquisition.
Balance sheet data for 1997 includes the accounts of Facility Management
Systems, Inc. as of January 31, 1997.
SELECTED PRO FORMA COMBINED FINANCIAL INFORMATION
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
(A)
----------
<S> <C>
PRO FORMA COMBINED CONDENSED STATEMENT OF OPERATIONS DATA:
Total revenues........................................................................................ $ 76,960
Acquired in-process research and development.......................................................... 34,775
Operating income (loss)............................................................................... (20,954)
Net income (loss)..................................................................................... (25,514)
Net income (loss) per share--diluted.................................................................. $ (1.28)
Shares used in per share computation.................................................................. 19,930
</TABLE>
- ------------------------
(A) Year ended March 31, 1998 and January 31, 1998 for Peregrine and Innovative,
respectively.
<TABLE>
<CAPTION>
AS OF MARCH
31, 1998
-----------
<S> <C>
PRO FORMA COMBINED CONDENSED BALANCE SHEET DATA:
Cash and cash equivalents.............................................................................. $ 18,388
Working capital........................................................................................ 20,763
Total assets........................................................................................... 70,552
Total debt............................................................................................. 1,892
Stockholders' equity................................................................................... 30,451
</TABLE>
33
<PAGE>
COMPARATIVE PER SHARE DATA
The following table sets forth certain historical per share data of
Peregrine and Innovative and selected unaudited pro forma combined per share
data after giving effect to the Merger as a purchase transaction. The following
data should be read in conjunction with the Selected Historical and Unaudited
Pro Forma Combined Financial Information and Unaudited Pro Forma Combined
Condensed Financial Statements of Peregrine and Innovative and notes thereto,
included elsewhere in this Proxy Statement/ Prospectus. The unaudited pro forma
combined per share data are not necessarily indicative of the results of
operations or financial condition that would have been reported if the Merger
had been consummated as of the date or at the beginning of the earliest period
presented and should not be construed as representative of future results of
operations or financial condition of Peregrine or the Combined Company.
<TABLE>
<CAPTION>
YEAR ENDED
MARCH 31, 1998
---------------
<S> <C>
HISTORICAL--PEREGRINE(1):
Net (loss) per diluted share.................................................................... $ (1.48)
Net (loss) per basic share...................................................................... $ (1.48)
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED
JANUARY 31, 1998
-----------------
<S> <C>
HISTORICAL--INNOVATIVE:
Net income per diluted share................................................................... $ 0.08
Net income per basic share..................................................................... $ 0.08
PRO FORMA COMBINED NET INCOME (LOSS)(2):
Per Peregrine share--diluted................................................................... $ (1.28)
Per Peregrine share--basic..................................................................... $ (1.28)
Equivalent per Innovative share--diluted(3).................................................... $ (0.30)
Equivalent per Innovative share--basic(3)...................................................... $ (0.30)
</TABLE>
<TABLE>
<CAPTION>
MARCH 31, 1998
-----------------
<S> <C>
PRO FORMA COMBINED BOOK VALUE PER SHARE(4):
Historical--Peregrine........................................................................... $ 1.64
Historical--Innovative.......................................................................... $ 0.63
Pro forma combined per Peregrine share.......................................................... $ 1.43
Equivalent pro forma per Innovative share....................................................... $ 0.34
</TABLE>
- ------------------------------
(1) The historical book value per share is computed by dividing stockholders'
equity by the number of shares of common stock outstanding at the end of
each period.
(2) 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.
(3) The Innovative equivalent pro forma combined per share amounts are
calculated by multiplying the Peregrine combined pro forma share amounts by
the Exchange Ratio of 0.2341 of a share of Peregrine Common Stock for each
share of Innovative Common Stock.
(4) The pro forma combined book value per share is computed by dividing pro
forma stockholders' equity by the pro forma number of shares of common stock
outstanding at the end of each period.
34
<PAGE>
MARKET PRICE AND DIVIDEND INFORMATION
PEREGRINE
The Peregrine Common Stock has been traded on the Nasdaq National Market
under the symbol "PRGN" since April 1997. The following table sets forth for the
periods indicated the quarterly high and low closing sales prices reported on
the Nasdaq National Market. Prior to such dates, there was no established public
trading market for the Peregrine Common Stock.
<TABLE>
<CAPTION>
HIGH LOW
--------- ---------
<S> <C> <C>
Fiscal Year Ended March 31, 1999:
First Quarter (through June 19, 1998)..................................................... $ 26.000 $ 18.250
Fiscal Year Ended March 31, 1998:
Fourth Quarter............................................................................ $ 19.125 $ 12.500
Third Quarter............................................................................. 17.500 12.000
Second Quarter............................................................................ 20.250 14.000
First Quarter............................................................................. 15.625 8.500
</TABLE>
INNOVATIVE
The Innovative Common Stock and the Innovative Warrants have each been
traded on The Nasdaq SmallCap Market under the symbols "ITSY" and "ITSYW,"
respectively, since July 1994. The following table sets forth for the periods
indicated the range of high and low closing sales prices reported on The Nasdaq
SmallCap Market. Data relating to the Innovative Warrants are based on
information provided by recognized reporting services, which such services have
adjusted to reflect a one-for-eight reverse split, in the number of shares of
Innovative Common Stock issuable upon exercise of the Innovative Warrants. The
reverse split was effected in September 1997. Simultaneously with such reverse
split, holders of the Innovative Warrants approved a reduction in the applicable
exercise price per Innovative Warrant from $2.33 to $0.08, which is not
reflected in the information available from such reporting services. As a
result, for periods prior to September 1997, Innovative does not believe that
the closing sales prices for the Innovative Warrants, as reported by such
services, reflect the prices at which the Innovative Warrants would have traded
if the reverse split and reduction in exercise price had been effected prior to
the period indicated.
<TABLE>
<CAPTION>
COMMON STOCK WARRANTS
-------------------- --------------------
HIGH LOW HIGH LOW
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Fiscal Year Ending January 31, 1999:
Second Quarter (through June 19, 1998)................................... $ 5.031 $ 4.188 $ 4.875 $ 3.875
First Quarter............................................................ 5.188 3.156 4.813 2.875
Fiscal Year Ended January 31, 1998:
Fourth Quarter........................................................... $ 3.219 $ 1.531 $ 3.250 $ 1.438
Third Quarter............................................................ 2.688 1.156 2.313 0.125
Second Quarter........................................................... 1.438 1.031 2.500 0.750
First Quarter............................................................ 1.938 1.219 3.00 1.000
Fiscal Year Ended January 31, 1997:
Fourth Quarter........................................................... $ 2.125 $ 1.250 $ 5.000 $ 2.125
Third Quarter............................................................ 3.125 1.813 7.000 2.375
Second Quarter........................................................... 3.250 2.000 9.500 8.750
First Quarter............................................................ 4.375 3.000 15.500 8.000
</TABLE>
35
<PAGE>
RECENT SHARE AND WARRANT PRICES
The following table sets forth the closing sales prices per share of
Peregrine Common Stock on the Nasdaq National Market, the closing sales price
per share of the Innovative Common Stock on The Nasdaq SmallCap Market, and the
closing sales price per warrant of the Innovative Warrants on The Nasdaq
SmallCap Market, each on (i) May 7, 1998, the date of the Merger Agreement and
the public announcement thereof and (ii) June 19, 1998, the latest practicable
trading day before the printing of this Proxy Statement/Prospectus. The table
also sets forth the equivalent per share prices for Innovative Common Stock as
of such dates based on the Peregrine Common Stock prices multiplied by the
Exchange Ratio and the Innovative Warrants, assuming approval of the Warrant
Amendment and, for purposes of the net issuance conversion feature, the closing
sales price of Peregrine Common Stock on such date. See "The Warrant
Amendment--Effect of Warrant Amendment."
<TABLE>
<CAPTION>
INNOVATIVE
PEREGRINE INNOVATIVE COMMON INNOVATIVE
COMMON COMMON INNOVATIVE STOCK WARRANT
STOCK STOCK WARRANTS EQUIVALENT EQUIVALENT*
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
May 7, 1998.......................................... $ 22.875 $ 4.750 $ 4.625 $ 5.355 $ 5.336
June 19, 1998........................................ 25.875 5.031 4.750 6.057 6.039
</TABLE>
- ------------------------
* Assumes approval of the Warrant Amendment and, for purposes of computing the
number of shares of Innovative Common Stock that would have been issuable
upon a net issuance of the Innovative Warrants, a price per share of
Peregrine Common Stock equal to the closing sales price as of the date
indicated.
No assurance can be given as to the market prices of Peregrine Common Stock,
Innovative Common Stock, or the Innovative Warrants at any time before the
Effective Time or as to the market price of Peregrine Common Stock or, assuming
the Warrant Amendment is not approved, the Peregrine Warrants, at any time
thereafter. The Exchange Ratio is fixed and will not be adjusted to compensate
shareholders of Innovative or holders of the Innovative Warrants for decreases
in the market price of Peregrine Common Stock which could occur before the
Merger becomes effective. In the event the market price of Peregrine Common
Stock decreases or increases prior to the Effective Time, the market value at
the Effective Time of the Peregrine Common Stock to be received in the Merger in
exchange for Innovative Common Stock would correspondingly decrease or increase.
SHAREHOLDERS OF INNOVATIVE AND HOLDERS OF THE INNOVATIVE WARRANTS ARE URGED TO
OBTAIN CURRENT MARKET QUOTATIONS FOR THE INNOVATIVE COMMON STOCK, THE INNOVATIVE
WARRANTS, AND THE PEREGRINE COMMON STOCK.
Following the Merger, Innovative Common Stock will no longer be listed on
The Nasdaq SmallCap Market. In the event the Warrant Amendment is not approved
and Peregrine is required to assume the Innovative Warrants, Peregrine
anticipates that it will list the Peregrine Warrants for trading on the Nasdaq
National Market until they are exercised or redeemed in accordance with their
terms. See "The Warrant Amendment--Peregrine Redemption."
SHAREHOLDERS AND WARRANT HOLDERS
As of the Innovative Record Date, Innovative had issued and outstanding
11,442,020 shares of Innovative Common Stock held by 271 shareholders of record
and Innovative Warrants to acquire 865,872 shares of Innovative Common Stock
held by 42 warrant holders of record. In addition, Innovative had issued and
outstanding the Underwriters Warrants, held by six holders of record, to acquire
(i) 370,500 shares of Innovative Common Stock and (ii) additional warrants to
acquire an additional 3,375 shares of Innovative Common Stock.
36
<PAGE>
DIVIDENDS
Neither Peregrine nor Innovative has ever declared or paid cash dividends on
its capital stock. Peregrine currently expects to retain future earnings, if
any, for use in the operation and expansion of its business and does not
anticipate paying any cash dividends in the foreseeable future. Pursuant to the
Merger Agreement, Innovative has agreed not to pay cash dividends pending the
consummation of the Merger.
37
<PAGE>
THE INNOVATIVE SPECIAL MEETING
GENERAL
This Proxy Statement/Prospectus is being furnished to the holders of
Innovative Common Stock in connection with the solicitation of proxies by the
Innovative Board for use at the Innovative Special Meeting to be held on Monday,
July 27, 1998 at 10:00 a.m., local time, at The Courtyard by Marriott, 2350
Easton Road, Willow Grove, Pennsylvania 19090 and at any adjournments or
postponements thereof. This Proxy Statement/Prospectus, and the accompanying
Proxy Card, are first being mailed on or about June 24, 1998 to holders of
record of Innovative Common Stock on the Innovative Record Date.
The purpose of the Innovative Special Meeting is to consider and vote upon a
proposal to approve and adopt the Merger Agreement, which sets forth the terms
and conditions of the Merger and the transactions contemplated thereby. Upon
consummation of the Merger, each outstanding share of Innovative Common Stock
will be converted into the right to receive the Exchange Ratio of 0.2341 of a
share of Peregrine Common Stock, with cash paid in lieu of fractional shares. In
addition, as a result of the Merger, each outstanding Innovative Option will be
assumed by Peregrine and converted into an option to acquire such number of
shares of Peregrine Common Stock (rounded down to the nearest whole number) as
the holder would have been entitled to receive had such holder exercised such
Innovative Option in full, including as to unvested shares, immediately prior to
the Effective Time. If the Warrant Amendment is approved on or prior to the
Effective Time, each Innovative Warrant will be exchanged for and converted into
the right to receive that number of shares of Peregrine Common Stock, based on
the Exchange Ratio, as would have been the case if the Innovative Warrants had
been exercised for Innovative Common Stock immediately prior to the Effective
Time on a net issuance basis, based on the average of the last reported sale
prices of Peregrine Common Stock as reported on the Nasdaq National Market on
the five most recent trading days ending on the trading day immediately prior to
the Effective Time. In the event the Warrant Amendment is not approved on or
prior to the Effective Time, each outstanding Innovative Warrant will be assumed
by Peregrine and converted into a Peregrine Warrant to acquire such number of
shares of Peregrine Common Stock (rounded down to the nearest whole number) as
the holder would have been entitled to receive had such holder exercised such
Innovative Warrant in full immediately prior to the Effective Time. See "The
Merger Agreement--Conversion of Securities."
Based on the closing sale price of Peregrine Common Stock on the Nasdaq
National Market on June 19, 1998, the Exchange Ratio would result in a per share
purchase price for Innovative Common Stock of $6.06. Shareholders of Innovative
are strongly encouraged to obtain current market quotations for the Peregrine
Common Stock and the Innovative Common Stock. If the Merger is completed,
shareholders of Innovative will no longer hold any interest in Innovative other
than through their interest in shares of Peregrine Common Stock. Consummation of
the Merger is subject to a number of conditions, including approval of the
shareholders of Innovative.
The Innovative Board has unanimously approved the Merger Agreement and the
Merger and believes that the terms of the Merger Agreement are fair to, and that
the Merger is in the best interests of, Innovative and its shareholders and,
therefore, unanimously recommends that holders of Innovative Common Stock vote
FOR approval and adoption of the Merger Agreement.
RECORD DATE AND OUTSTANDING SHARES
Only holders of record of Innovative Common Stock at the close of business
on the Innovative Record Date are entitled to notice of and to vote at the
Innovative Special Meeting. At the close of business on the Innovative Record
Date, there were 11,442,029 shares of Innovative Common Stock outstanding and
entitled to vote, held of record by 271 shareholders. Each shareholder of
Innovative is entitled to one vote for each share of Innovative Common Stock
held as of the Innovative Record Date.
38
<PAGE>
VOTING OF PROXIES
The Innovative Proxy Card accompanying this Proxy Statement/Prospectus is
solicited on behalf of the Innovative Board for use at the Innovative Special
Meeting. Shareholders are requested to complete, date, and sign the accompanying
proxy and promptly return it in the accompanying envelope or otherwise mail it
to Innovative. All proxies that are properly executed and returned, and that are
not revoked, will be voted at the Innovative Special Meeting in accordance with
the instructions indicated thereon. EXECUTED BUT UNMARKED PROXIES WILL BE VOTED
FOR APPROVAL AND ADOPTION OF THE MERGER AGREEMENT. The Innovative Board does not
presently intend to bring any other business before the Innovative Special
Meeting other than the specific proposals referred to in this Proxy
Statement/Prospectus and specified in the Notice of the Innovative Special
Meeting. So far as is known to the Innovative Board, no other matters are to be
brought before the Innovative Special Meeting. As to any business that may
properly come before the Innovative Special Meeting, including, among other
things, consideration of any motion made for adjournment of the Innovative
Special Meeting (including, without limitation, for purposes of soliciting
additional votes for approval and adoption of the Merger Agreement), it is
intended that proxies, in the form enclosed, will be voted in respect thereof in
accordance with the judgment of the persons voting such proxies. A shareholder
of Innovative who has given a proxy may revoke it at any time before it is
exercised at the Innovative Special Meeting, by (i) filing a written notice of
revocation with, or delivering a duly executed proxy bearing a later date to,
John M. Thompson, President, Innovative Tech Systems, Inc., 444 Jacksonville
Road, Warminster, Pennsylvania 18974 or (ii) attending the Innovative Special
Meeting and voting in person (although attendance at the Innovative Special
Meeting will not, by itself, revoke a proxy). Please note, however, that if a
shareholder's shares are held of record by a broker, bank, or other nominee and
that shareholder wishes to vote at the Innovative Special Meeting, the
shareholder must bring to the Innovative Special Meeting a letter from the
broker, bank, or other nominee confirming that shareholder's beneficial
ownership of such shares as of the Record Date.
VOTE REQUIRED
Pursuant to the Illinois Law and the Articles of Incorporation and the
Bylaws of Innovative, approval and adoption of the Merger Agreement requires the
affirmative vote of the holders of at least a majority of the outstanding shares
of Innovative Common Stock entitled to vote at the Innovative Special Meeting.
SINCE THE REQUIRED VOTE OF THE SHAREHOLDERS OF INNOVATIVE IS BASED UPON THE
NUMBER OF OUTSTANDING SHARES OF INNOVATIVE COMMON STOCK, RATHER THAN UPON THE
SHARES ACTUALLY VOTED IN PERSON OR BY PROXY AT THE INNOVATIVE SPECIAL MEETING,
THE FAILURE BY THE HOLDER OF ANY SUCH SHARES TO SUBMIT A PROXY OR TO VOTE IN
PERSON AT THE INNOVATIVE SPECIAL MEETING (INCLUDING ABSTENTIONS AND "BROKER
NON-VOTES") WILL HAVE THE SAME EFFECT AS A VOTE AGAINST APPROVAL AND ADOPTION OF
THE MERGER AGREEMENT.
THE MATTERS TO BE CONSIDERED AT THE INNOVATIVE SPECIAL MEETING ARE OF GREAT
IMPORTANCE TO THE SHAREHOLDERS OF INNOVATIVE. ACCORDINGLY, SHAREHOLDERS ARE
URGED TO READ AND CAREFULLY CONSIDER THE INFORMATION PRESENTED IN THIS PROXY
STATEMENT/PROSPECTUS AND TO COMPLETE, DATE, SIGN, AND PROMPTLY RETURN THE
ENCLOSED PROXY IN THE ENCLOSED POSTAGE PREPAID ENVELOPE.
Certain shareholders of Innovative beneficially owning 3,534,296 shares of
Innovative Common Stock, or 30.9% of the Innovative Common Stock outstanding as
of the Innovative Record Date have entered into the Innovative Voting Agreements
to vote their shares of Innovative Common Stock in favor of the Merger Agreement
and the Merger at the Innovative Special Meeting. Of such 3,534,296 shares,
713,460 are subject to the Thompson Voting Agreements, granting William M.
Thompson and John M. Thompson the authority to vote such shares on all issues
presented for a vote to shareholders of Innovative, including the Merger and
other matters to be presented at the Innovative Special Meeting. The Thompson
Voting Agreements terminate upon a sale of the shares by the registered holder
and impose no restrictions on such holders' ability to sell or otherwise
transfer such shares at any time. Excluding such shares, the number of shares of
Innovative Common Stock subject to the Innovative Voting Agreements represented
39
<PAGE>
approximately 24.7% of the total number of shares of Innovative Common Stock
outstanding as of the Innovative Record Date. Notwithstanding the Innovative
Voting Agreements, the vote of each shareholder of Innovative is important, and
all shareholders are encouraged to vote. See "The Plan of Merger and Related
Transactions--Related Agreements--Innovative Voting Agreements."
ABSTENTIONS; BROKER NON-VOTES
If an executed Innovative proxy is returned and the shareholder has
specifically abstained from voting on any matter, the shares represented by such
proxy will be considered present at the Innovative Special Meeting for purposes
of determining a quorum. If an executed proxy is returned by a broker holding
shares in street name which indicates that the broker does not have
discretionary authority as to certain shares to vote on one or more matters,
such shares will be considered present at the meeting for purposes of
determining a quorum. Since the required vote of the shareholders of Innovative
is based on the number of outstanding shares of Innovative Common Stock,
abstentions and broker non-votes will have the same effect as a vote against
approval and adoption of the Merger Agreement.
SOLICITATION OF PROXIES AND EXPENSES
Innovative will bear the cost of the solicitation of proxies in the enclosed
form from its shareholders. In addition to solicitation by mail, the directors,
officers, and employees of Innovative may solicit proxies from shareholders by
telephone, telegram, letter, facsimile, or in person. Directors, officers, and
employees will not receive any additional compensation in connection with such
solicitation. Following the original mailing of the proxies and other soliciting
materials, Innovative will request that brokers, custodians, nominees, and other
record holders forward copies of the proxy and other soliciting materials to
persons for whom they hold shares of Innovative Common Stock and request
authority for the exercise of proxies. In such cases, Innovative, upon the
request of the record holders, will reimburse such record holders for their
reasonable expenses. Innovative has retained Shareholder Communications
Corporation to assist in solicitation of proxies at an estimated cost of $10,000
plus customary expenses.
AVAILABILITY OF INDEPENDENT ACCOUNTANTS
Representatives of Price Waterhouse LLP, independent accountants to
Innovative, are expected to be present at the Innovative Special Meeting. Such
representatives will have the opportunity to make a statement if they desire to
do so and are expected to be available to respond to appropriate questions.
DISSENTERS' RIGHTS
Under Section 11.65 of the Illinois Law, a shareholder of Innovative who
does not vote in favor of the Merger may, under certain circumstances and by
following the procedures prescribed by Section 11.70 of the Illinois Law, have
the statutory right to dissent from the Merger and demand payment in cash of the
fair value (as defined under the Illinois Law) of his or her shares of
Innovative Common Stock. Stockholders of Peregrine will not have dissenters'
rights in connection with the Merger. This Proxy Statement/Prospectus is being
sent by personal delivery or by United States mail to all holders of record of
shares of Innovative Common Stock on the Innovative Record Date and constitutes
notice of the dissenters' rights available to such holders under Section 11.65
of the Illinois Law.
If a holder of Innovative Common Stock exercises dissenters' rights in
connection with the Merger under the Illinois Law, any shares of Innovative
Common Stock in respect of which such rights have been exercised and perfected
will not be converted into the applicable consideration as determined by the
Merger Agreement but will instead be converted into the right to receive payment
in cash of the fair value of such shares, which will be the value of such shares
immediately before the consummation of the Merger, excluding any appreciation or
depreciation in anticipation of the Merger (unless such exclusion would be
inequitable).
40
<PAGE>
The following summary of the provisions of Illinois Law is not intended to
be a complete statement of such provisions and is qualified in its entirety by
reference to the full text of Sections 11.65 and 11.70 of the Illinois Law,
copies of which are attached as Annex D to this Proxy Statement/Prospectus and
incorporated herein by reference.
A shareholder of Innovative electing to exercise dissenter's rights must
perfect such shareholder's right to dissent by delivering to Innovative, prior
to the taking of the vote concerning the Merger at the Innovative Special
Meeting, a written demand for payment for his or her shares, and such
shareholder must not vote in favor of adopting the Merger Agreement and the
Merger. A vote against the adoption of the Merger Agreement and the Merger, or
the delivery by a shareholder of a proxy with instructions to vote against
adoption of the Merger Agreement and the Merger, will not by themselves satisfy
the requirement of a written demand. A holder of Innovative Common Stock who
elects to exercise dissenters' rights should mail or deliver such shareholder's
written demand for payment to Innovative at 444 Jacksonville Road, Warminster,
Pennsylvania 18974, ATTN: John M. Thompson, President. The demand should specify
the holder's name and mailing address, the number of shares of Innovative Common
Stock owned by such holder, and that such holder is demanding payment for his or
her shares. The demand must be executed by or for the holder of record of
Innovative Common Stock, as such holder's name appears on the certificate(s)
representing such Innovative Common Stock.
A record owner of shares of Innovative Common Stock may assert dissenters'
rights as to fewer than all of the shares recorded in such person's name only if
such person dissents with respect to all shares beneficially owned by any one
person and notifies Innovative in writing of the name and address of each person
on whose behalf the record owner is asserting dissenters' rights. The rights of
a partial dissenter are determined as if the shares as to which dissent is made
and the other shares held by such holder of record are recorded in the names of
different Innovative shareholders. A beneficial owner of Innovative Common Stock
who is not the record owner may assert dissenters' rights as to shares held on
such owner's behalf only if the beneficial owner submits to Innovative the
record owner's written consent to dissent before or at the time the beneficial
owner asserts dissenters' rights.
Within ten days after the Effective Time (or 30 days after delivery of
notice, whichever is later), Innovative must send to each shareholder who has
delivered a written demand for payment a statement setting forth Innovative's
opinion as to the estimated fair value of the shares of Innovative Common Stock,
Innovative's balance sheet at January 31, 1998 and statement of operations for
the year ending January 31, 1998, Innovative's latest available interim
financial statements, and a commitment to pay for the shares of the dissenting
shareholder at the estimated fair value thereof upon transmittal to Innovative
of the certificate representing such shares. Upon consummation of the Merger and
demand for payment by a dissenting shareholder, Innovative shall, upon receipt
of the certificate representing the dissenting shareholder's shares of
Innovative Common Stock, pay the amount Innovative estimates to be the fair
market value thereof, plus accrued interest thereon, if any, accompanied by a
written explanation of how such interest was calculated. Alternatively,
Innovative may instruct the dissenting shareholder to sell his or her shares of
Peregrine Common Stock within ten days after delivery of Innovative's statement
to the shareholder. If the shareholder fails to sell the shares of Peregrine
Common Stock within the ten day period after being so instructed by Innovative,
he or she will be deemed to have sold his or her shares at the average bid and
asked price thereof during such ten day period.
If a dissenting shareholder does not agree with Innovative's opinion as to
the estimated fair value of the shares or the amount of any interest due the
shareholder, within thirty days from delivery of Innovative's statement of
value, such shareholder must notify Innovative in writing of his or her
determination of the estimated fair value and amount of interest due and demand
payment for the difference between the shareholder's estimate of fair value and
interest due and the amount of the payment by Innovative or the proceeds of the
sale of Peregrine Common Stock by such shareholder, whichever is applicable. If,
within sixty days after delivery of such written notification, Innovative and
the dissenting shareholder are unable to agree in writing upon the fair value of
the shares, Innovative will either pay the
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difference in the value demanded by the dissenting shareholder, with interest,
or file a petition in the Circuit Court of Cook County, Illinois, requesting
that such court determine the fair value of such shares and the interest due.
All dissenting shareholders of Innovative who have perfected their dissenters'
rights and who have not settled with Innovative will be made parties to this
proceeding. The costs of the proceeding may be assessed against one or more
parties to the proceedings as the court may consider applicable. Any failure by
Innovative to commence an action will not limit or affect the rights of a
dissenting shareholder to otherwise commence an action as permitted by law.
IN VIEW OF THE COMPLEXITIES OF THE FOREGOING PROVISIONS OF THE ILLINOIS LAW,
SHAREHOLDERS OF INNOVATIVE WHO ARE CONSIDERING PURSUING DISSENTERS' RIGHTS MAY
WISH TO CONSULT LEGAL COUNSEL BEFORE ELECTING TO EXERCISE SUCH RIGHTS.
------------------------
INNOVATIVE SHAREHOLDERS SHOULD NOT SEND ANY STOCK
CERTIFICATES WITH THEIR PROXY CARDS.
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THE PLAN OF MERGER AND RELATED TRANSACTIONS
THIS SECTION OF THE PROXY STATEMENT/PROSPECTUS DESCRIBES CERTAIN ASPECTS OF
THE PROPOSED MERGER. THE FOLLOWING DESCRIPTION DOES NOT PURPORT TO BE COMPLETE.
THE DISCUSSION OF THE MERGER IN THIS PROXY STATEMENT/ PROSPECTUS AND THE
DESCRIPTION OF THE PRINCIPAL TERMS OF THE MERGER AGREEMENT ARE SUBJECT TO AND
QUALIFIED IN THEIR ENTIRETY BY REFERENCE TO THE MERGER AGREEMENT, A COPY OF
WHICH IS ATTACHED TO THIS PROXY STATEMENT/ PROSPECTUS AS ANNEX A. ALL HOLDERS OF
INNOVATIVE COMMON STOCK AND INNOVATIVE WARRANTS ARE ENCOURAGED TO READ THE
MERGER AGREEMENT AND THE OTHER ANNEXES IN THEIR ENTIRETY.
BACKGROUND OF THE MERGER
Historically, Peregrine developed and marketed products for managing and
monitoring network computer environments. This legacy led Peregrine to develop
and market a traditional internal help desk product in the early 1990's. In
1995, Peregrine introduced SERVICECENTER, a product suite integrating
traditional "help desk" problem management and tracking applications with a
number of additional IT management applications to create an Enterprise Service
Desk capable of managing multiple aspects of the IT infrastructure. In 1997, in
the course of evaluating its strategic direction, Peregrine determined that
businesses were increasingly looking for integrated solutions to manage the
various aspects of an enterprise infrastructure, including not only the IT
infrastructure but also other infrastructure assets, including physical plant
and facilities, communications resources, and distribution systems. In September
1997 and in furtherance of its strategy to provide a comprehensive
infrastructure management solution, Peregrine acquired United Software, Inc.,
including its wholly-owned subsidiary Apsylog S.A., a leading provider of asset
management software.
Beginning in May 1997, Peregrine undertook a preliminary assessment of the
facilities management application software market. At the time, Peregrine sought
a potential marketing alliance with one or more companies in the facilities
management application software ("FMAS") market to complement its strategy to
manage all aspects of infrastructure in large organizations. A potential
investment in or acquisition of one or more companies in the FMAS market was
considered to be a possible outcome of such a marketing relationship. During
this time, Peregrine contacted a variety of companies in the FMAS market to
solicit marketing information. In June 1997, Innovative provided Peregrine a
standard marketing package of information relating to Innovative and its SPAN-FM
product suite.
Between July 1997 and November 1997, Stephen P. Gardner, then Peregrine's
Vice President, Strategic Acquisitions and its current President and Chief
Executive Officer, and William M. Thompson, Chairman of the Innovative Board and
Innovative's Chief Executive Officer, had various informal discussions
concerning a potential marketing alliance between the Companies.
In November 1997, William Thompson met with Mr. Gardner and other
representatives of Peregrine at Peregrine's executive offices in San Diego,
California to discuss a potential business alliance. Mr. Thompson provided an
overview of Innovative and discussed the general business outlook for Innovative
and the FMAS market in general. During those meetings, Mr. Thompson was asked if
he would consider a proposal to have Peregrine acquire Innovative. Mr. Thompson
acknowledged certain benefits of such a combination but indicated that he would
need to consult with other members of the Innovative Board. Following such
meeting, William Thompson and John M. Thompson, Innovative's President and Chief
Operating Officer, contacted representatives of NMS to ascertain their
experience in similar transactions and to consider having NMS represent
Innovative in connection with a possible acquisition.
In December 1997, William Thompson and John Thompson had preliminary
discussions with NMS about general business and financial issues relating to an
acquisition of Innovative.
Between December 1997 and late March 1998, Mr. Gardner continued to have
informal telephonic discussions with William Thompson and John Thompson
concerning a co-marketing or similar business arrangement between the Companies.
In early April 1998, William Thompson and Mr. Gardner spoke by telephone.
Mr. Gardner informed Mr. Thompson that Peregrine had determined not to proceed
with a co-marketing or similar business
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arrangement with Innovative and that Peregrine had made the strategic decision
to acquire one or more companies in the FMAS market. Mr. Gardner asked Mr.
Thompson to consider a meeting with representatives of BT Alex. Brown ("Alex.
Brown"), an investment banking firm representing Peregrine, to reopen
discussions concerning a sale of Innovative to Peregrine.
In early April 1998, representatives of Alex. Brown met with William
Thompson and John Thompson at Mr. Gardner's request. Discussions focused on the
possible strategic value of a combination of Peregrine and Innovative and the
long term interests of shareholders of each of the Companies. Subsequent to this
meeting, William Thompson telephoned Mr. Gardner and indicated that Innovative
was receptive to discussing a potential acquisition.
On April 16, 1998, the Peregrine Board reviewed the status of discussions
with Innovative at a regularly scheduled meeting and directed management to
proceed with due diligence and preliminary negotiation of an acquisition
agreement.
During the weekend of April 18, 1998, Mr. Gardner had a number of telephone
conversations with representatives of Innovative concerning the proposed terms
of a potential transaction. On that same weekend, Innovative also had a number
of discussions with NMS concerning a potential transaction.
On April 20, 1998, Innovative officially engaged NMS to act as Innovative's
financial advisor in connection with a potential transaction with Peregrine.
During the weeks of April 20 and April 27, Richard T. Nelson, Peregrine's
Vice President and General Counsel, Gilles Queru, Peregrine's Vice President of
Corporate Development, other members of Peregrine's Corporate Development team,
and representatives of Alex. Brown, NMS, and WSGR, counsel to Peregrine,
conducted business and legal due diligence.
On April 24, 1998, the Innovative Board met to review and discuss the
proposed business combination with Peregrine. The Innovative Board instructed
William Thompson and members of his senior management team, and legal and
financial advisors, to proceed with negotiations with Peregrine.
On May 1, 1998, the Peregrine Board met telephonically to discuss the status
of the negotiations with Innovative. Mr. Gardner, Mr. Nelson, and
representatives of Alex. Brown and WSGR reviewed with the Peregrine Board the
results of their due diligence investigation and outstanding issues to be
resolved between Peregrine and Innovative.
On May 5, 1998, the Peregrine Board met telephonically to discuss the Merger
Agreement. Representatives of Alex. Brown and WSGR assisted Mr. Gardner and Mr.
Nelson in presenting the terms of the agreement to the Peregrine Board.
Following a discussion of the business and financial terms of the Merger and the
results of Peregrine's diligence review of Innovative, the Peregrine Board voted
unanimously to approve the Merger Agreement and the Merger.
On May 5, 1998, the Innovative Board met to consider the Merger Agreement.
Representatives of NMS and A&G assisted William Thompson and John Thompson in
presenting the terms of the Merger Agreement to the Innovative Board. Following
a discussion of the business and financial terms of the Merger, NMS delivered
the NMS Opinion. The Innovative Board then voted unanimously to approve the
Merger Agreement and the Merger.
On May 7, 1998, Peregrine and Innovative executed the Merger Agreement and
certain related agreements, and Peregrine issued a press release announcing the
Merger.
REASONS FOR THE MERGER
CERTAIN STATEMENTS MADE IN THE FOLLOWING PARAGRAPHS REGARDING THE POTENTIAL
BENEFITS THAT COULD RESULT FROM THE MERGER ARE FORWARD-LOOKING STATEMENTS BASED
ON CURRENT EXPECTATIONS AND ENTAIL VARIOUS RISKS AND UNCERTAINTIES THAT COULD
CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE EXPRESSED IN SUCH
FORWARD-LOOKING STATEMENTS. THE ANTICIPATED POTENTIAL BENEFITS OF THE MERGER MAY
NOT BE REALIZED. SUCH RISKS AND UNCERTAINTIES ARE SET FORTH UNDER "RISK FACTORS"
AND ELSEWHERE IN THIS PROXY STATEMENT/PROSPECTUS.
JOINT REASONS FOR THE MERGER
In reaching their decisions to approve the Merger Agreement, the Merger, and
the transactions contemplated by the Merger Agreement, each of the Peregrine
Board and the Innovative Board consulted
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with their respective management teams and advisors and independently considered
the proposed Merger Agreement and the transactions contemplated thereunder.
Based on their respective reviews of the proposed transaction and the business
and operations of the other party, the Peregrine Board and the Innovative Board
each approved the Merger Agreement and the Merger. Each Board concluded that (i)
the goals and philosophies of the Companies are compatible and consistent, (ii)
the products of the Companies are complementary, (iii) the Combined Company has
the potential to offer customers a more comprehensive infrastructure management
software solution than either could offer independently, (iv) the Merger would
be positively received by customers of each of the Companies, and (v) the
Companies' respective security holders would benefit by the enhanced ability of
the Combined Company to compete in the rapidly evolving software industry.
In particular, the potential benefits of the Merger to the Combined Company
identified by the Peregrine Board and the Innovative Board included principally
the following:
- The combination of the Companies' product lines and expertise would
potentially allow the Combined Company to address a broader range of
customer needs and offer a comprehensive and integrated infrastructure
management software solution;
- The broadening and integration of the Companies' product lines would
provide the Companies with the opportunity to cross-market their
respective products to a larger combined customer base;
- The combined experience, financial resources, size and breadth of product
offerings of the Combined Company would potentially enable it to respond
more quickly and effectively to technological change, increased
competition, and market demands in an industry experiencing rapid
innovation, technological change, and consolidation;
- Combined technological resources may allow the Combined Company to compete
more effectively against larger competitors by providing the Combined
Company with an enhanced ability to develop new products and extend the
functionality of existing products; and
- The creation of a combined customer service and technical support system
may permit the Combined Company to provide more efficient support coverage
to its customers.
PEREGRINE'S REASONS FOR THE MERGER
The Peregrine Board has unanimously approved the Merger Agreement and the
Merger and has identified several potential benefits of the Merger to Peregrine.
In particular, the Peregrine Board believes the Merger will couple Peregrine's
concentration in IT infrastructure management software with Innovative's focus
on facilities management software, thus providing a comprehensive and integrated
set of products to potential customers seeking a single source for enterprise
infrastructure management automation solutions. In addition, the combination of
the Companies' product lines, sales forces, and distribution channels would
immediately enhance Peregrine's ability to compete in the facilities management
software solution market. Finally, the combination would leverage Peregrine's
more extensive customer base and channels of distribution in connection with the
sales and marketing of Innovative's products.
INNOVATIVE'S REASONS FOR THE MERGER
The Innovative Board has unanimously approved the Merger Agreement, has
unanimously determined that the Merger is fair to, and in the best interests of
Innovative and its shareholders, and unanimously recommends that holders of
shares of Innovative Common Stock vote FOR approval and adoption of the Merger
Agreement and the Merger.
The Innovative Board's decision to approve the Merger Agreement and the
Merger was based in significant part upon its assessment of the trends
developing in the enterprise application software industry, and the changes
which may come about in such market as a result of increasing competition,
consolidation of products offerings, and changing customer requirements. The
Innovative Board believes
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that companies which are able to provide customers with a complete
infrastructure management software solution, integrating facilities management
applications with help desk, asset management, and other infrastructure
management applications, will be better positioned to compete in such an
environment in the long term. In particular, the Innovative Board believes that
software providers like Innovative, focusing on a specific category of
enterprise management software, will be at a competitive disadvantage as
industry consolidation continues and larger enterprise software and system
management companies begin to offer products with facilities management
functionality. A merger with Peregrine was considered to be complementary with
Innovative's long-term objectives and to provide an opportunity to offer a
complete infrastructure management solution through the combination of the
respective Companies' product offerings.
In addition to the foregoing, Innovative identified several other potential
benefits of the Merger that Innovative believes will contribute to the success
of the Merger. These potential benefits include the following:
- Given the complementary nature of the product lines of Peregrine and
Innovative, the Merger would potentially enhance the opportunity for
realization of Innovative's strategic objective of achieving greater scale
and presence in the facilities management software market;
- The Merger potentially offers Innovative an opportunity to leverage
Peregrine's larger sales force and more extensive distribution channels to
market its products. In particular, other than a limited presence in
Canada, Innovative has no established international distribution channels,
whereas Peregrine has an extensive sales and distribution presence in
Europe and the Pacific Rim;
- The combination with Peregrine would provide an opportunity for expanded
distribution of Innovative's products to Peregrine's larger installed
customer base;
- The Merger potentially offers Innovative broader and deeper management
expertise and resources as the business of Innovative and the Combined
Company expands; and
- Shareholders of Innovative would have the opportunity to participate in
the potential for growth of the Combined Company following the Merger.
Innovative further evaluated the merits of an investment in the Peregrine
Common Stock and concluded that the Peregrine Common Stock has appreciation
potential in the long term, represents a more liquid investment than the
Innovative Common Stock, is traded on the Nasdaq National Market as opposed to
the Nasdaq SmallCap Market, and is followed by a much greater number of stock
analysts.
In the course of its deliberations, the Innovative Board reviewed with
Innovative's management a number of other factors relevant to the Merger. In
particular, the Innovative Board considered, among other things, the following
factors:
(i) Its knowledge of the business, operations, properties, assets,
financial condition, and results of operation of Innovative;
(ii) The reports and opinions of Innovative's management and NMS, including
the results of their due diligence investigations concerning the
business, technology, products, operations, financial condition and
prospects of Peregrine;
(iii) Innovative's future prospects and that such prospects were likely to
be enhanced as a result of the Merger;
(iv) The detailed financial analyses, pro forma and other information with
respect to Innovative and Peregrine presented by NMS in its oral and
written presentations, including the NMS Opinion (see "--Opinion of
NationsBanc Montgomery Securities LLC");
(v) The effect on shareholder value of Innovative continuing as an
independent entity, compared to the effect of a combination with
Peregrine;
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(vi) With the assistance of Innovative's financial advisors, the
comparative stock prices of Innovative and Peregrine as well as
comparative volatility and trading volumes;
(vii) The compatibility of the management and business philosophies of
Innovative and Peregrine;
(viii) The terms and conditions of the Merger Agreement and the related
agreements;
(ix) The opportunity for shareholders of Innovative to participate, as
holders of Peregrine Common Stock, in a larger company of which former
Innovative shareholders would hold approximately 13.3% of the equity
of the Combined Company following the Merger, and to do so by means of
a transaction which would be designed to be tax-free to shareholders
of Innovative; and
(x) The impact of the Merger on the interests of Innovative's customers,
suppliers, employees, and the communities in which Innovative has
operated.
The Innovative Board also identified and considered a variety of potentially
negative factors in its deliberations concerning the Merger, including, but not
limited to, (i) the risk to shareholders of Innovative that the value to be
received in the Merger could be significantly reduced in the event of a decline
in Peregrine's stock price due to the fixed Exchange Ratio; (ii) the impact of
the loss of Innovative's status as an independent company on shareholders,
employees, and customers of Innovative; (iii) the risk that the potential
benefits sought in the Merger might not be fully realized; and (iv) the
possibility that the Merger might not be consummated and the potential adverse
effect of a public announcement of the Merger on Innovative's sales and
operating results and overall competitive position. After due consideration, the
Innovative Board concluded that the risks associated with the proposed Merger
were outweighed by the potential benefits of the Merger.
The foregoing discussion of the information and factors considered by the
Innovative Board is not intended to be exhaustive but is believed to include all
material factors considered by the Innovative Board. In view of the complexity
and variety of factors, both positive and negative, considered by the Innovative
Board, the Innovative Board did not consider it practical to quantify or
otherwise attempt to assign any relative or specific weights to the factors
considered, and individual directors may have given differing weights to
different factors. In the course of its deliberations, the Innovative Board did
not establish a range of value for Innovative; however, based on the factors
outlined above and on the advice of its financial advisor, NMS, the Innovative
Board determined that the Merger is advisable and fair and in the best interests
of Innovative and its shareholders. The Innovative Board voted unanimously to
recommend to the shareholders of Innovative that the Merger Agreement be
approved. For a discussion of the interests of certain members of Innovative's
management and the Innovative Board in the Merger, see "--Interests of Certain
Persons in the Merger."
INNOVATIVE BOARD RECOMMENDATION
THE INNOVATIVE BOARD HAS UNANIMOUSLY APPROVED THE MERGER AGREEMENT AND THE
MERGER AND BELIEVES THAT THE TERMS OF THE MERGER AGREEMENT ARE FAIR TO, AND THAT
THE MERGER IS IN THE BEST INTERESTS OF, INNOVATIVE AND ITS SHAREHOLDERS AND
THEREFORE RECOMMENDS THAT THE HOLDERS OF INNOVATIVE COMMON STOCK VOTE FOR
APPROVAL AND ADOPTION OF THE MERGER AGREEMENT.
OPINION OF NATIONSBANC MONTGOMERY SECURITIES LLC
Pursuant to an engagement letter dated April 20, 1998, Innovative engaged
NMS to act as its exclusive representative and financial advisor in connection
with the evaluation of an offer by Peregrine to acquire Innovative and to render
to the Innovative Board NMS's opinion with respect to the fairness from a
financial point of view to the shareholders of Innovative of the consideration
to be received by such shareholders in connection with the acquisition of
Innovative. NMS is a nationally recognized firm and, as part of its investment
banking activities, is regularly engaged in the valuation of businesses and
their securities in connection with merger transactions and other types of
acquisitions, negotiated underwritings,
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secondary distributions of listed and unlisted securities, private placements
and valuations for corporate and other purposes. Innovative selected NMS as its
financial advisor on the basis of its experience and expertise in transactions
similar to the Merger and its reputation as an investment banker in transactions
involving technology companies.
At the May 5, 1998 meeting of the Innovative Board, NMS delivered its
opinion that the consideration to be paid by Peregrine to the shareholders of
Innovative in the Merger is fair to such shareholders, from a financial point of
view, as of the date of such opinion. The amount of such consideration was
determined pursuant to negotiations between Innovative and Peregrine with advice
from NMS and Alex. Brown, respectively. No limitations were imposed by
Innovative on NMS with respect to the investigations made or procedures followed
in rendering its opinion. The full text of NMS's written opinion to the
Innovative Board, which sets forth the assumptions made, matters considered and
limitations of review by NMS, is attached hereto as Annex C, and is incorporated
herein by reference and should be read carefully in its entirety. The following
summary of NMS's opinion is qualified in its entirety by reference to the full
text of the opinion, attached as Annex C. Innovative shareholders are urged to
read the opinion carefully in its entirety.
NMS has informed Innovative that in arriving at its opinion it: (i) reviewed
certain publicly available financial and other data with respect to Innovative
and Peregrine, including the consolidated financial statements for recent years
and interim periods to March 31, 1998 and certain other relevant financial and
operating data relating to Innovative and Peregrine made available to NMS from
published sources and from the internal records of Innovative and Peregrine;
(ii) reviewed the financial terms and conditions of the Merger Agreement; (iii)
reviewed certain publicly available information concerning the trading of, and
the trading market for, Innovative Common Stock and Peregrine Common Stock; (iv)
compared Innovative and Peregrine from a financial point of view with certain
other companies in the software industry which NMS deemed to be relevant; (v)
considered the financial terms, to the extent publicly available, of selected
recent business combinations of companies in the software industry which NMS
deemed to be comparable, in whole or in part, to the Merger; (vi) reviewed the
premiums paid of selected recent mergers which NMS deemed to be comparable in
whole or in part, to the Merger; (vii) reviewed the financial contribution each
Company is making to the Combined Company and compared that contribution to the
percentage ownership each Company's shareholders will hold in the Combined
Company after the Merger closes; (viii) reviewed and discussed with
representatives of the management of Innovative and Peregrine certain
information of a business and financial nature regarding Innovative and
Peregrine, furnished to NMS by them, including financial forecasts and related
assumptions of Innovative and Peregrine; and (ix) performed such other analyses
and examinations as NMS may have deemed appropriate.
In connection with its review, NMS did not independently verify the
foregoing information and relied on its being accurate and complete in all
material respects. With respect to the financial forecasts for Innovative and
Peregrine provided to NMS by their respective managements, NMS assumed for
purposes of its opinion that the forecasts were reasonably prepared on bases
reflecting the best available estimates and judgments of their respective
managements at the time of preparation as to the future financial performance of
Innovative and Peregrine and that they provided a reasonable basis upon which
NMS could form its opinion. NMS also assumed that there had been no material
changes in the assets, financial condition, results of operations, business or
prospects of either Company since the respective dates of their last financial
statements made available to it. In addition, NMS did not assume responsibility
for making an independent evaluation, appraisal or physical inspection of any of
the assets or liabilities (contingent or otherwise) of Innovative or Peregrine,
nor was it furnished with any such appraisals. Innovative informed NMS, and NMS
assumed, that the Merger will be recorded as a purchase under generally accepted
accounting principles and that it will be a tax-free reorganization. NMS also
assumed the Merger will be consummated in accordance with the terms described in
the Merger Agreement, without any further amendments thereto, and without waiver
by Innovative of any of the conditions to its obligations thereunder.
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The following is a summary of certain analyses performed by NMS to arrive at
its opinion. NMS performed certain procedures, including each of the analyses
described below, and reviewed with the management of Innovative and the
Innovative Board the assumptions on which such analyses were based and other
factors.
COMPARABLE PUBLIC COMPANY ANALYSIS. Using public and other available
information, NMS determined a range of implied equity values for Innovative
based on the multiples of latest actual quarter annualized ("LQA") revenues and
estimated calendar year 1998 earnings at which the following asset and project
management companies traded on May 4, 1998: Best Software, Inc.; Datastream
Systems, Inc.; Deltek Systems, Inc.; Indus International, Inc.; Project Software
& Development, Inc.; Walker Interactive Systems, Inc. (together, the "Comparable
Companies"). The May 4, 1998 stock prices of the Comparable Companies reflected
a range of valuations of between 3x and 4x LQA revenues and between 25x and 30x
estimated calendar year 1998 earnings. NMS applied the foregoing multiples to
the applicable estimates for Innovative. This analysis indicated a range of
implied equity values for Innovative of between $58 million and $76 million
(after adjustment for debt, cash and cash equivalents), or between $4.00 and
$5.00 per share, based on revenues and a range of implied equity values of
between $47 million and $57 million (after adjustment for debt, cash and cash
equivalents), or between $3.00 and $4.00 per share, based on estimated calendar
year 1998 earnings.
PREMIUM PAID ANALYSIS. NMS examined the consideration paid in a number of
acquisitions of publicly-traded technology companies. The transactions reviewed
for this analysis included 184 transactions completed or announced since June
1990. NMS compared, among other matters, the range of percentage premiums
represented by the consideration paid in such business combination transactions
over the market price for the target company's stock at 30 trading days, and one
week, prior to announcement of the transaction. This analysis yielded a range of
premiums of approximately 40% to 50% for the 30 trading-day time period and a
range of premiums of approximately 35% to 45% for the one-week period. NMS then
applied such premiums to the closing prices of Innovative's Common Stock on
March 24, 1998 (30 trading-days prior to the date of the closing prices used by
NMS in delivering its opinion to the Board of Directors) and April 27, 1998 (one
week prior to the date of the closing prices used by NMS in the delivery of its
opinion to the Board of Directors), resulting in a range of values for
Innovative Common Stock between $5.00 and $6.00 per share.
COMPARABLE MERGER AND ACQUISITION TRANSACTION ANALYSIS. NMS reviewed the
consideration paid in several acquisition transactions involving asset and
project management software and other software companies. NMS analyzed the
consideration paid in such transactions as a multiple of the target company's
revenues for the last 12 months reported prior to announcement of the
transaction ("LTM revenues"). The transactions reviewed by NMS for purposes of
this analysis included the acquisitions of: (i) Magic Solutions International,
Inc. by Network Associates, Inc.; (ii) State of the Art, Inc. by The Sage Group
plc; (iii) Software Artistry, Inc. by IBM; (iv) TSW International, Inc. by The
Indus Group, Inc.; (v) Aurum Software, Inc. by Baan Company, N.V.; and (vi)
Bendata Inc. by Astea International, Inc. Such analysis yielded a range of
transaction multiples of between 3.5x to 4.5x LTM revenues. NMS then applied
this range of transaction multiples to Innovative's LTM revenues (as of April
30, 1998) resulting in a range of implied equity values for Innovative of
between $60 million and $77 million or between $4.00 and $5.00 per share.
CONTRIBUTION ANALYSIS. NMS performed a contribution analysis for
Innovative. This analysis reviewed the projected contribution of Innovative and
Peregrine to the LQA revenues and projected calendar year 1998 operating and net
income of the Combined Company. According to this analysis, Innovative's
contribution to LQA revenues and calendar year 1998 operating and net income
reflects a range of between 13% and 18%, which would imply a range of equity
values for Innovative of between $73 million and $101 million, or between $5.00
and $7.00 per share.
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PRO FORMA EARNINGS ANALYSIS. NMS analyzed the potential effect of the
Merger on the projected combined income statement of Innovative and Peregrine
for the 1996, 1997 and 1998 calendar years. This analysis was based on (i)
Peregrine's and Innovative's historical income statements; (ii) published third-
party estimates of future financial results for Peregrine; (iii) estimates of
Innovative future financial results based on management's projections; and (iv)
Peregrine's prevailing market price of $24.00 per share as of May 4, 1998. This
analysis concluded that the Merger could increase Peregrine's projected calendar
year 1998 earnings by 0.6% or $0.004 per share.
DISCOUNTED CASH FLOW ANALYSIS. NMS performed a discounted cash flow
analysis for Innovative. The analysis aggregated (a) the present value of the
projected free cash flow (defined as earnings before interest and taxes, minus
increases in working capital requirements) from 1998 through 2002; and (b) the
present value of a range of terminal values for the year 2002. The terminal
values for Innovative were determined by applying multiples of 3.9x (as a low
estimate) and 4.1x (as a high estimate) to Innovative's estimated revenue for
2002. Innovative's cash flow streams and terminal values were discounted to
present value using discount rates ranging from 25% to 35%, chosen to reflect
different assumptions reflecting the revenue multiples of competitors with a
range of market capitalizations, Innovative's history of realizing its
projections and competition in the asset and project management software
industry. Such analysis indicated a range of implied equity values for
Innovative of between $78 million and $118 million, or between $5.00 and $8.00
per share (net of debt, cash and cash equivalents).
While the foregoing summary describes the analyses and examinations that NMS
deemed material to its opinion, it is not a comprehensive description of all
analyses and examinations actually performed. The preparation of a fairness
opinion necessarily is not susceptible to partial analysis or summary
description. NMS believes that such analyses and the summary set forth above
must be considered as a whole and that selecting portions of its analyses and of
the factors considered, without considering all such analyses and factors, would
create an incomplete view of the analyses set forth in its presentation to the
Innovative Board. In addition, NMS may have given various analyses more or less
weight than other analyses, and may have deemed various assumptions more or less
probable than other assumptions, so that the ranges of valuations resulting from
any particular analysis should not be taken to be NMS's view of the actual value
of Innovative, Peregrine or the Combined Company.
In performing its analyses, NMS made numerous assumptions with respect to
industry performance, general business and economic conditions and other
matters, many of which are beyond the control of Innovative or Peregrine. The
analyses performed by NMS are not necessarily indicative of actual values or
actual future results, which may be significantly more or less favorable than
suggested by such analyses. Such analyses were prepared solely as part of NMS's
analysis of the fairness of the Merger to the shareholders of Innovative from a
financial point of view and were provided to the Innovative Board in connection
with the delivery of NMS's opinion. The analyses do not purport to be appraisals
or to reflect the prices at which a company might actually be sold or the prices
at which any securities may trade at the present time or at any time in the
future. NMS used in its analyses various projections of results of operations
prepared by the managements of Innovative and Peregrine and by research analysts
of third party brokerage firms. The projections are based on numerous variables
and assumptions that are inherently unpredictable and must be considered not
certain of occurrence as projected. Accordingly, actual results could vary
significantly from those set forth in such projections.
As described above, NMS's opinion and presentation to the Innovative Board
were among the many factors taken into consideration by the Innovative Board in
making its determination to approve, and to recommend that its shareholders
approve, the Merger.
In connection with the Merger, Innovative has agreed to pay NMS a fee of
$625,000, $300,000 of which became due upon NMS's delivery of its fairness
opinion and the remainder of which will become due upon consummation of the
Merger. Innovative has also agreed to reimburse NMS for its reasonable
out-of-pocket expenses. Pursuant to a separate Indemnification and Contribution
Agreement, Innovative has agreed to indemnify NMS, its affiliates, and their
respective directors, officers, agents, shareholders,
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consultants, employees and controlling persons against certain liabilities,
including liabilities under the federal securities laws.
In the ordinary course of its business, NMS actively trades securities of
Innovative and Peregrine for its own account and for the accounts of customers
and, accordingly, may at times hold a long or short position in such securities.
Certain employees of NMS may also own shares of Innovative Common Stock and
Peregrine Common Stock.
The full text of NMS's opinion, dated May 5, 1998, which sets forth the
assumptions made, general procedures followed, matters considered and
limitations on the scope of review undertaken by NMS in rendering its opinion,
is attached as Appendix C to this Proxy Statement/Prospectus and is incorporated
herein by reference. NMS's opinion is addressed to the Board of Directors of
Innovative and is directed only to the fairness from a financial point of view,
as of May 5, 1998, of the consideration to be issued to the stockholders of
Innovative in the Merger and does not constitute a recommendation to any
Innovative shareholder as to how such shareholder should vote with respect to
the Merger.
INTERESTS OF CERTAIN PERSONS IN THE MERGER
INTERESTS IN INNOVATIVE COMMON STOCK AND INNOVATIVE OPTIONS. As of the
Innovative Record Date, the executive officers and directors of Innovative
beneficially owned an aggregate of 3,674,473 shares of Innovative Common Stock
(including 849,998 shares of Innovative Common Stock subject to Innovative
Options exercisable within 60 days of the Innovative Record Date and excluding
the 713,460 shares of Innovative Common Stock subject to the Thompson Voting
Agreements). Based upon the closing sale price of Peregrine Common Stock on June
19, 1998 of $25.875, and assuming the exercise of outstanding Innovative Options
exercisable within 60 days of the Innovative Record Date, the aggregate dollar
value of Peregrine Common Stock to be received in the Merger by the executive
officers and directors of Innovative is approximately $17,086,756.
EMPLOYMENT AGREEMENTS WITH JOHN M. THOMPSON AND WILLIAM M.
THOMPSON. Effective upon the consummation of the Merger, Peregrine has made
offers of employment, on behalf of Peregrine Systems Facilities Management, Inc.
as the surviving corporation in the Merger (the "Surviving Corporation"), to
each of William M. Thompson and John M. Thompson. William M. Thompson is
Innovative's Chief Executive Officer and Chairman of the Innovative Board. John
M. Thompson is Innovative's President, Chief Operating Officer, Chief Financial
Officer and Treasurer, and a member of the Innovative Board. Pursuant to their
respective employment agreements, William M. Thompson will become President of
the Surviving Corporation, and John M. Thompson will become Vice President,
Operations, of the Surviving Corporation. William M. Thompson and John M.
Thompson are brothers.
The employment agreements provide that each of the Thompsons will receive a
base annual salary of $175,000 with an annual bonus of up to $75,000, subject to
satisfaction of certain performance objectives. In addition, upon the
effectiveness of the Merger, Peregrine will grant each of the Thompsons an
option to acquire up to 275,000 shares of Peregrine Common Stock under
Peregrine's 1994 Stock Option Plan with an exercise price per share equal to the
fair market value of the Peregrine Common Stock on the date of grant. Each
option will vest over four years, with 25% of the shares subject to option
becoming exercisable on the first anniversary of the effectiveness of the
Merger, and the remaining shares becoming exercisable in quarterly installments
thereafter. In the event Peregrine or the Surviving Corporation terminate the
employment of one or both of the Thompsons without cause (as defined in their
respective employment agreements) prior to the third anniversary of the Merger,
the terminated Thompson will continue to receive his base annual salary and
maximum annual bonus, and his options will continue to vest and remain
exercisable, through such anniversary.
The employment agreements also require Peregrine to maintain, through the
earlier of the third anniversary of the Merger or a voluntary termination of
employment, two life insurance policies covering each of the Thompsons, each in
the amount of $10 million, benefits to be paid one-half to a beneficiary
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designated by the insured Thompson and one-half to Peregrine. In the event
Peregrine terminates the employment of either Thompson without cause prior to
the third anniversary of the Merger, it is required to maintain his insurance
until such anniversary.
NONCOMPETITION PAYMENTS. In connection with the Merger, each of John M.
Thompson and William M. Thompson entered into noncompetition agreements, which
will become effective upon consummation of the Merger. The noncompetition
agreements provide that, from the Effective Time until the later of seventy-two
(72) months after the Effective Time or six months from the date of the
termination of his employment by Peregrine or Surviving Corporation for any
reason, either William Thompson or John Thompson, as the case may be, will not
(other than in connection with their employment with Innovative, Peregrine, the
Surviving Corporation, their successors, or assigns): (i) engage in software
development in the market for infrastructure management software applications
(including, without limitation, related help desk, asset management, and
facilities management applications); (ii) be or become an officer, director,
shareholder, owner, affiliate, salesperson, co-owner, partner, trustee,
promoter, technician, engineer, analyst, employee, agent, representative,
supplier, consultant, advisor or manager of or to, or otherwise acquire or hold
any interest in, any person or entity that competes in the market for
infrastructure management software applications (including, without limitation,
related help desk, asset management, and facilities management applications); or
(iii) provide any service (as an employee, consultant or otherwise), support,
product or technology to any person or entity, if such service, support, product
or technology involves or relates to software development in the market for
infrastructure management software applications (including, without limitation,
related help desk, asset management, and facilities management applications). In
consideration of the Thompsons' entering such noncompetition agreements,
Peregrine will make a cash payment of $2.0 million to each of the Thompsons upon
the effectiveness of the Merger.
LEASE ARRANGEMENTS. Innovative currently leases its headquarters facility,
consisting of 20,000 square feet of office space in Warminster, Pennsylvania,
from Thompson L.P. The Thompsons and Karen A. Thompson, their sister and an
executive officer of Innovative, are limited partners of Thompson L.P. and the
sole shareholders of Thompson Capital Corporation, a Pennsylvania corporation
and the general partner of Thompson L.P. During fiscal 1998, 1997, and 1996,
Innovative paid $259,500, $162,500, and $96,500, respectively, to Thompson L.P.
in connection with such lease arrangements. Under the terms of the lease,
Innovative is scheduled to pay Thompson L.P. $288,334 for such lease in fiscal
1999 and $285,833 in fiscal 2000. In addition, Innovative incurred costs of
approximately $284,000, $23,000, and $155,000 in fiscal 1998, 1997 and 1996,
respectively, in connection with leasehold improvements to the property subject
to the lease. In addition, during the first four months of fiscal 1999,
Innovative incurred costs of approximately $89,000 in connection with leasehold
improvements to the Warminster facility and anticipates incurring additional
improvement costs of $50,000 during the balance of fiscal 1999. Pursuant to the
Merger Agreement, it is a condition to Closing that Innovative enter into an
amendment to such lease providing for certain provisions requested by Peregrine
to comport with Peregine's planned future use of the Warminster facility.
INDEMNIFICATION ARRANGEMENTS. Peregrine has agreed to maintain, with
certain limitations for a period of six years after the Effective Time, the
policies of directors' and officers' liability insurance maintained by
Innovative or to provide comparable coverage. In addition, Peregrine is
obligated to fulfill and honor Innovative's obligations under the
indemnification provisions of Innovative's charter documents.
The foregoing interests in the Merger of the directors and certain members
of management of Innovative may mean that such persons have personal interests
in the Merger which may not be identical to the interests of other shareholders
of Innovative or holders of the Innovative Warrants.
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ACCOUNTING TREATMENT
The Merger is intended to qualify as a purchase for accounting and financial
reporting purposes. In connection with the Merger, Peregrine will issue
approximately 3.19 million shares of Peregrine Common Stock, valued for purposes
of the transaction, at approximately $73 million. Additionally, Peregrine
expects to incur costs of approximately $9.75 million associated with the
transaction.
In connection with the purchase price allocation, Peregrine has received a
preliminary appraisal of the intangible assets which indicated that
approximately $73 million of the acquired intangible assets consisted of
in-process research and development. Because there can be no assurance that
Peregrine will be able to successfully complete the development and integration
of such Innovative products or that the acquired technology has any alternative
future use, substantially all of the acquisition price will be charged to
expense as acquired in-process research and development by Peregrine in the
quarter in which the Merger closes.
INNOVATIVE VOTING AGREEMENTS
In accordance with the terms of the Merger Agreement, certain directors and
executive officers of Innovative have executed and delivered the Innovative
Voting Agreements, obligating them, among other things, to vote their shares of
Innovative Common Stock in favor of approval and adoption of the Merger
Agreement and the Merger. As a result, all of the 3,534,296 shares of Innovative
Common Stock (which excludes 849,998 shares subject to Innovative Options)
beneficially owned by such directors and executive officers of Innovative and
their respective affiliates as of the Innovative Record Date (representing
approximately 30.9% of the total number of shares of Innovative Common Stock
outstanding at such date) will be voted for approval of and adoption of the
Merger Agreement and the Merger. Of such shares, 713,460 are subject to the
Thompson Voting Agreements, granting William M. Thompson and John M. Thompson
authority to vote such shares on all issues presented for a vote to shareholders
of Innovative, including the Merger and other matters that may be presented at
the Innovative Special Meeting. The Thompson Voting Agreements terminate upon a
sale or transfer of the shares by the registered holder and impose no
restrictions on such holders' ability to sell or otherwise transfer such shares
at any time. Excluding the shares subject to the Thompson Voting Agreements,
2,820,836 shares of Innovative Common (representing approximately 24.7% of the
total number of shares of Innovative Common Stock outstanding as of the
Innovative Record Date) will be voted for approval of and adoption of the Merger
Agreement and the Merger. As of May 31, 1998, directors and executive officers
of Peregrine and their respective affiliates beneficially owned less than one
percent of the outstanding shares of Innovative Common Stock, and Peregrine
owned no shares of Innovative Common Stock.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The following discussion addresses certain material federal income tax
considerations of the Merger that are generally applicable to holders of
Innovative Common Stock. Shareholders of Innovative should be aware that the
following discussion does not deal with all federal income tax considerations
that may be relevant to particular shareholders of Innovative in light of their
particular circumstances, such as shareholders who are dealers in securities,
who are foreign persons, or who acquired their Innovative Common Stock through
stock option or stock purchase programs or in other compensatory transactions.
In addition, the following discussion does not address the foreign, state or
local tax laws or tax consequences of transactions effectuated prior to or after
the Merger (whether or not such transactions are in connection with the Merger)
including, without limitation, the exercise of options or rights to purchase
Innovative Common Stock in anticipation of the Merger. ACCORDINGLY, SHAREHOLDERS
OF INNOVATIVE ARE URGED TO CONSULT THEIR OWN TAX ADVISORS AS TO THE SPECIFIC TAX
CONSEQUENCES TO THEM OF THE MERGER, INCLUDING THE APPLICABLE FEDERAL, STATE,
LOCAL AND FOREIGN TAX CONSEQUENCES TO THEM OF THE MERGER.
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This discussion is based on the interpretation by the Companies' respective
counsel of the Code, applicable Treasury Regulations, judicial authority and
administrative ruling and practice, all as of the date hereof. The Internal
Revenue Service (the "IRS") is not precluded from adopting a contrary position.
In addition, there can be no assurance that future legislative, judicial or
administrative changes or interpretations will not adversely affect the accuracy
of the statements and conclusions set forth herein. Any such changes or
interpretations could be applied retroactively and could affect the tax
consequences of the Merger to Peregrine, Innovative and/or their respective
stockholders.
The Merger is intended to qualify as a reorganization within the meaning of
Section 368(a) of the Code, in which case the following tax consequences will
result:
(a) No gain or loss will be recognized by the holders of Innovative
Common Stock upon the receipt of Peregrine Common Stock solely in exchange
for such Innovative Common Stock in the Merger (except to the extent of cash
received in lieu of fractional shares);
(b) The aggregate tax basis of the Peregrine Common Stock so received by
shareholders of Innovative in the Merger (including any fractional share of
Peregrine Common Stock not actually received) will be the same as the
aggregate tax basis of the Innovative Common Stock surrendered in exchange
therefor;
(c) The holding period of the Peregrine Common Stock so received by each
shareholder of Innovative in the Merger will include the period for which
the Innovative Common Stock surrendered in exchange therefor was considered
to be held, provided that the Innovative Common Stock so surrendered is held
as a capital asset at the Effective Time;
(d) Cash payments received by holders of Innovative Common Stock in lieu
of receipt of a fractional share of Peregrine Common Stock will be treated
as if such fractional share of Peregrine Common Stock had been issued in the
Merger and then redeemed by Peregrine and a shareholder of Innovative
receiving such cash will generally recognize gain or loss, upon such
payment, measured by the difference (if any) between the amount of cash
received and the basis in such fractional share; and
(e) None of Peregrine, Merger Sub, or Innovative will recognize gain or
loss solely as a result of the Merger.
Neither Peregrine nor Innovative has requested a ruling from the IRS in
connection with the Merger. As a condition to the consummation of the Merger,
Peregrine and Innovative will receive opinions from their respective counsel,
WSGR and A&G (the "Tax Opinions"), to the effect that, for federal income tax
purposes, the Merger will constitute a reorganization within the meaning of
Section 368(a) of the Code. The Tax Opinions neither bind the IRS nor preclude
the IRS from adopting a contrary position. The Tax Opinions are subject to
certain assumptions and qualifications and will be based on the truth and
accuracy of certain representations of Peregrine, Innovative and Merger Sub,
including representations in certain certificates of the respective managements
of Peregrine, Innovative and Merger Sub.
A successful IRS challenge to the reorganization status of the Merger would
result in a shareholder of Innovative recognizing gain or loss with respect to
each share of Innovative Common Stock surrendered equal to the difference
between the shareholder's basis in such share and the fair market value, as of
the Effective Time, of the Peregrine Common Stock received in exchange therefor.
In such event, the Innovative shareholder's aggregate basis in the Peregrine
Common Stock so received would equal its fair market value, and the
shareholder's holding period for such stock would begin the day after the
Merger.
Even if the Merger qualifies as a reorganization, a recipient of shares of
Peregrine Common Stock would recognize gain to the extent that such shares were
considered to be received in exchange for services or property (other than
solely Innovative Common Stock). All or a portion of such gain may be taxable as
ordinary income. Gain would also have to be recognized to the extent that such
Innovative shareholder was
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treated as receiving (directly or indirectly) consideration other than Peregrine
Common Stock in exchange for the Innovative Common Stock.
GOVERNMENTAL AND REGULATORY MATTERS
The Merger must satisfy the requirements of federal and certain state
securities laws.
RESTRICTIONS ON RESALE OF PEREGRINE COMMON STOCK AND PEREGRINE WARRANTS
The shares of Peregrine Common Stock issuable to shareholders of Innovative
upon consummation of the Merger and, if the Warrant Amendment is not approved,
the Peregrine Warrants issuable upon assumption of the Innovative Warrants, have
been registered under the Securities Act. Such shares and warrants (if issued)
may be freely traded without restriction by those former shareholders of
Innovative who are not deemed to be "affiliates" of Peregrine or Innovative, as
that term is defined under the Securities Act.
Shares of Peregrine Common Stock or Peregrine Warrants received by those
shareholders of Innovative or holders of the Innovative Warrants, as the case
may be, who are deemed to be affiliates of Innovative may be resold without
registration under the Securities Act only as permitted by Rule 145 under the
Securities Act or as otherwise permitted under the Securities Act. Each person
deemed to be an affiliate of Innovative has agreed not to offer, sell, pledge,
transfer or otherwise dispose of any shares of Peregrine Common Stock or the
Peregrine Warrants distributed to them pursuant to the Merger, except in
compliance with Rule 145 under the Securities Act, or in a transaction that is
otherwise exempt from the registration requirements of the Securities Act and
provided that an opinion of counsel, satisfactory to Peregrine, has been
provided to Peregrine to the effect that no such registration is required in
connection with the proposed transaction, or in an offering that is registered
under the Securities Act. In general, Rule 145, as currently in effect, imposes
restrictions on the manner in which affiliates of Innovative may resell
Peregrine Common Stock received in the Merger and the amount of Peregrine Common
Stock that such affiliates (including persons with whom the affiliates act in
concert) may sell within any three-month period. These restrictions will
generally apply for at least one year after the Merger (assuming such person is
not then an affiliate of Peregrine). See "The Merger and Related
Transactions--Restrictions on Resale of Peregrine Common Stock."
NASDAQ NATIONAL MARKET QUOTATION
It is a condition to the Merger that the shares of Peregrine Common Stock to
be issued in connection with the Merger be approved for quotation on the Nasdaq
National Market. A notice of listing has been filed for listing such shares of
Peregrine Common Stock on the Nasdaq National Market.
In the event the Warrant Amendment is not approved and Peregrine is required
to assume the Innovative Warrants, Peregrine anticipates that it will list the
Peregrine Warrants for trading on the Nasdaq National Market until they are
redeemed in accordance with their terms.
DISSENTERS' RIGHTS
Any shareholder of Innovative who does not vote in favor of the Merger
Agreement may, under certain circumstances and by following the procedures
prescribed by Illinois Law, exercise dissenters' rights and obtain payment in
cash of the fair value (as defined in the Illinois Law) of their shares of
Innovative Common Stock. Stockholders of Peregrine will not have dissenter's
rights in connection with the Merger. Copies of Sections 11.65 and 11.70 of the
Illinois Law are attached as Annex D hereto. See "The Innovative Special
Meeting--Dissenters' Rights."
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THE MERGER AGREEMENT
THE FOLLOWING IS A BRIEF SUMMARY OF CERTAIN PROVISIONS OF THE MERGER
AGREEMENT, A COPY OF WHICH IS ATTACHED AS ANNEX A TO THIS PROXY
STATEMENT/PROSPECTUS AND INCORPORATED HEREIN BY REFERENCE. THIS SUMMARY IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE MERGER AGREEMENT. SHAREHOLDERS OF
INNOVATIVE ARE URGED TO READ THE MERGER AGREEMENT IN ITS ENTIRETY FOR A MORE
COMPLETE DESCRIPTION OF THE MERGER. IN CASE OF ANY CONFLICT BETWEEN THE MERGER
AGREEMENT AND THE SUMMARY SET FORTH HEREIN, THE MERGER AGREEMENT WILL CONTROL.
THE MERGER
The Merger Agreement provides that, following the approval and adoption of
the Merger Agreement by the shareholders of Innovative and the satisfaction or
waiver of the other conditions to the Merger, and subject to the applicable
provisions of Delaware law and Illinois Law, Merger Sub will be merged with and
into Innovative, with Innovative continuing as the Surviving Corporation under
the name "Peregrine Systems Facilities Management, Inc." and becoming a
wholly-owned subsidiary of Peregrine.
Subject to the provisions of the Merger Agreement, Peregrine, Innovative and
Merger Sub shall cause the Merger to be consummated by the concurrent filing of
(i) a Certificate of Merger with the Secretary of State of the State of Delaware
in accordance with the relevant provisions of Delaware law and (ii) Articles of
Merger with the Secretary of State of the State of Illinois in accordance with
the relevant provisions of Illinois Law. The closing of the Merger shall take
place at the offices of WSGR, at a time and date to be specified by the parties,
which shall be no later than the second business day after the satisfaction or
waiver of the conditions to the Merger set forth in the Merger Agreement, or at
such other time, date and location as Peregrine and Innovative agree in writing
(the "Closing"). The Closing is anticipated to occur on or before August 31,
1998.
EFFECTIVE TIME
If all such conditions to the Merger are satisfied or waived, the Merger
will become effective upon the later of (a) the date and time of the filing of a
Articles of Merger with the Secretary of State of the State of Delaware, (b) the
date and time of the issuance of a Certificate of Merger by the Secretary of
State of Illinois, and (c) such other date and time as is agreed to in writing
by Peregrine and Innovative (the "Effective Time").
CONVERSION OF SECURITIES
At the Effective Time, by virtue of the Merger and without any action on the
part of Merger Sub, Innovative or any security holder of Innovative, each share
of Innovative Common Stock issued and outstanding immediately prior to the
Effective Time (other than any shares of Innovative Common Stock held by a
holder who has demanded and perfected dissenters' rights for such shares in
accordance with the Illinois Law and who has not withdrawn or lost such
dissenters' rights) will be canceled and extinguished and automatically
converted into the right to receive 0.2341 of a share of Peregrine Common Stock,
upon surrender of the certificate representing such share of Innovative Common
Stock in the manner provided in the Merger Agreement (or a bond in respect
thereof). Each share of Innovative Common Stock held by Innovative or owned by
Merger Sub, Peregrine or any direct or indirect wholly-owned subsidiary of
Innovative or Peregrine immediately prior to the Effective Time shall be
canceled and extinguished without any conversion thereof.
No fraction of a share of Peregrine Common Stock will be issued by virtue of
the Merger, but in lieu thereof, each holder of shares of Innovative Common
Stock who would otherwise be entitled to a fraction of a share of Peregrine
Common Stock (after aggregating all fractional shares of Peregrine Common Stock
that otherwise would be received by such holder) shall be entitled to receive
from Peregrine an amount of cash (rounded to the nearest whole cent) equal to
the product of (i) such fraction and (ii) the average of
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the last reported sale prices of Peregrine Common Stock for the five (5) most
recent days that Peregrine Common Stock has traded ending on the trading day
immediately prior to the Effective Time, as reported on the Nasdaq National
Market.
At the Effective Time, all Innovative Options shall be assumed by Peregrine
and become a Peregrine Option to acquire, on the same terms and conditions as
were applicable under such Innovative Option, the same number of shares of
Peregrine Common Stock (rounded down to the nearest whole number) that the
holder of such Innovative Option would have been entitled to receive pursuant to
the Merger had such holder exercised such option in full, including as to
unvested shares, immediately prior to the Effective Time. The exercise price per
share (rounded up to the nearest whole cent) of the Peregrine Option will equal
(i) the aggregate exercise price for the shares of Innovative Common Stock
purchasable pursuant to the Innovative Option divided by (ii) the number of
shares of Peregrine Common Stock purchasable pursuant to the Peregrine Option.
If the Warrant Amendment is approved by the holders of the Innovative
Warrants, at the Effective Time, each outstanding Innovative Warrant will be
exchanged for and converted into the right to receive that number of shares of
Peregrine Common Stock, based on the Exchange Ratio, as would have been the case
if such Innovative Warrant had been exercised for Innovative Common Stock
immediately prior to the Effective Time on a net issuance basis, based on the
average of the last reported sale prices of Peregrine Common Stock as reported
on the Nasdaq National Market on the five most recent trading days ending on the
trading day immediately prior to the Effective Time, subject to the surrender of
the certificates representing the Innovative Warrants (or a bond in respect
thereof). No fractional shares of Peregrine Common Stock will be issued in
connection with such exchange. Cash will be paid to holders of the Innovative
Warrants in an amount equal to such fraction multiplied by the average of the
last reported sale prices of Peregrine Common Stock for the five most recent
days the Peregrine Common Stock has traded, ending on the trading day
immediately prior to the Effective Time. The Warrant Amendment will become
effective at 5:00 p.m. (Eastern Time) on the date on which Innovative has
received properly executed Warrant Consents, and such Warrant Consents have not
been revoked or otherwise withdrawn, from holders of 66 2/3% in interest of the
Innovative Warrants (based on the number of shares of Innovative Common Stock
issuable upon exercise of the Innovative Warrants).
In the event the Warrant Amendment is not approved prior to the Effective
Time, each outstanding Innovative Warrant will be assumed by Peregrine and
become a Peregrine Warrant to acquire, on substantially the same terms and
conditions as were applicable under such Innovative Warrant, that number of
shares of Peregrine Common Stock (rounded down to the nearest whole number) that
the holder of the Innovative Warrant would have been entitled to receive
pursuant to the Merger had such holder exercised such Innovative Warrant
immediately prior to the Effective Time. The exercise price per share of the
Peregrine Warrant (rounded up to the nearest whole cent) will equal (i) the
aggregate exercise price for the shares of Innovative Common Stock purchasable
pursuant to the Innovative Warrant divided by (ii) the number of shares of
Peregrine Common Stock purchasable pursuant to the Peregrine Warrant. In the
event Peregrine is required to assume the Innovative Warrants in connection with
the Merger, Peregrine will, promptly after the Effective Time, effect a
redemption of the then-outstanding Peregrine Warrants in accordance with their
terms.
Peregrine, Innovative, and the holders of the Underwriter Warrants have
previously entered an agreement providing that, to the extent not exercised
prior to the Effective Time, each Underwriter Warrant will be exchanged for and
converted into the right to receive that number of shares of Peregrine Common
Stock, based on the Exchange Ratio, as would have been the case if the
Underwriter Warrants had been exercised for Innovative Common Stock immediately
prior to the Effective Time on a net issuance basis, based on the last reported
sale price of Peregrine Common Stock as reported on the Nasdaq National Market
on the five most recent trading days ending on the trading day immediately prior
to the Effective Time, subject to the surrender of the certificates representing
the Underwriter Warrants (or bond in respect thereof).
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The Exchange Ratio shall be adjusted to reflect appropriately the effect of
any stock split, reverse stock split, stock dividend (including any dividend or
distribution of securities convertible into Peregrine Common Stock or Innovative
Common Stock), reorganization, recapitalization, reclassification or other like
change with respect to Peregrine Common Stock or Innovative Common Stock
occurring on or after the date of the Merger Agreement and prior to the
Effective Time.
At or promptly after the Effective Time, Peregrine, acting thought the
Exchange Agent, will deliver to each Innovative shareholder of record as of such
date a letter of transmittal with instructions to be used by such shareholder in
surrendering certificates which, prior to the Merger, represented shares of
Innovative Common Stock and which, pursuant to the Merger, will be exchanged for
shares of Peregrine Common Stock. CERTIFICATES SHOULD NOT BE SURRENDERED BY THE
HOLDERS OF INNOVATIVE COMMON STOCK UNTIL SUCH HOLDERS RECEIVE THE LETTER OF
TRANSMITTAL FROM THE EXCHANGE AGENT.
If the Merger becomes effective and the Warrant Amendment has been approved,
Peregrine, acting through the Exchange Agent, will as soon as reasonably
practicable deliver a letter of transmittal with instructions to all holders of
record of Innovative Warrants immediately prior to the Effective Time for use in
surrendering their warrant certificates (or providing a bond in respect thereof)
in exchange for certificates representing shares of Peregrine Common Stock. If
the Merger becomes effective and the Warrant Amendment has not been approved,
Peregrine does not intend to issue new certificates evidencing the Peregrine
Warrants; rather, certificates representing Innovative Warrants will be deemed
to represent Peregrine Warrants (subject to adjustment of the number of shares,
exercise price, and redemption price to reflect the Merger), pending the
redemption by Peregrine of the Peregrine Warrants. CERTIFICATES SHOULD NOT BE
SURRENDERED BY HOLDERS OF INNOVATIVE WARRANTS UNLESS AND UNTIL SUCH HOLDERS
RECEIVE THE LETTER OF TRANSMITTAL FROM THE EXCHANGE AGENT.
CONDUCT FOLLOWING THE MERGER
Once the Merger is consummated, Merger Sub will cease to exist as a
corporation, and all of the business, assets, liabilities and obligations of
Merger Sub will be merged into Innovative with Innovative remaining as the
Surviving Corporation. Following the Merger, Innovative will continue to operate
as a wholly owned subsidiary of Peregrine under the name "Peregrine Systems
Facilities Management, Inc." The shareholders of Innovative will become
stockholders of Peregrine, and their rights as stockholders will be governed by
the Peregrine Certificate of Incorporation and the laws of the state of
Delaware. See "Comparison of Rights of Shareholders of Innovative and
Stockholders of Peregrine."
Pursuant to the Merger Agreement, the Certificate of Incorporation of Merger
Sub in effect immediately prior to the Effective Time will become the Articles
of Incorporation (subject to such changes as necessary to comply with Illinois
Law and to change the name of Merger Sub to Peregrine Systems Facilities
Management, Inc.) of the Surviving Corporation and the Bylaws of Merger Sub will
become the Bylaws of the Surviving Corporation. At the Effective Time, the Board
of Directors of the Surviving Corporation will consist of the directors who were
serving as directors of Merger Sub immediately prior to the Effective Time until
their respective successors are duly elected or appointed and qualified. The
officers of Merger Sub immediately prior to the Effective Time will remain as
officers of the Surviving Corporation, until their successors are duly
appointed.
CONDUCT OF INNOVATIVE'S BUSINESS PRIOR TO THE MERGER
During the period from the date of the Merger Agreement and continuing until
the earlier of the termination of the Merger Agreement pursuant to its terms or
the Effective Time, Innovative has agreed (except to the extent that Peregrine
shall otherwise consent in writing) to carry on its business and to cause its
subsidiaries to carry on their business in the ordinary course and in
substantially the same manner as
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previously conducted and in compliance in all material respects with all
applicable laws and regulations, to pay their debts and taxes when due (subject
to good faith disputes over such debts or taxes), to pay or perform other
material obligations when due, and to use all reasonable efforts consistent with
past practice and policies to preserve intact their present business
organizations, keep available the services of their present officers and key
employees, and preserve their relationships with customers, suppliers,
distributors, licensors, licensees, and others having business dealings with
them, all with the goal of preserving unimpaired the goodwill and ongoing
businesses of Innovative and its subsidiaries at the Effective Time. Innovative
is required to notify Peregrine promptly of any event which materially adversely
affects Innovative, any of its subsidiaries, or their businesses.
In addition, neither Innovative nor any subsidiary of Innovative may do any
of the following without the written prior consent of Peregrine:
(a) Waive any stock repurchase rights, accelerate, amend or change the
period of exercisability of any Innovative Options or Innovative Common
Stock subject to vesting, or reprice options granted under any employee,
consultant, director or other stock plans or authorize cash payments in
exchange for any options granted under any of such plans;
(b) Grant any severance or termination pay to any director, officer or
employee except pursuant to written agreements outstanding, or policies
existing, on the date of the Merger Agreement and as disclosed to Peregrine,
or adopt any new severance plan;
(c) Transfer or license to any person or entity or otherwise extend,
amend, or modify in any respect any rights to Innovative intellectual
property (other than end-user licenses granted to customers of Innovative
and its subsidiaries in the ordinary course of business), or enter into
grants to future patent rights;
(d) Enter into or amend any agreements pursuant to which any other party
is granted marketing, distribution, or similar rights of any type or scope
with respect to any products or products licensed by Innovative and its
subsidiaries;
(e) Amend or otherwise modify (or agree to do so), except in the
ordinary course of business, or violate the terms of, any of Innovative's
material agreements;
(f) Commence any litigation, except to enforce its rights under or to
interpret the Merger Agreement or any other agreement, obligation, or
arrangement contemplated thereby or entered into or established in
connection therewith;
(g) Declare, set aside, or pay any dividends on or make any other
distributions (whether in cash, stock, equity securities, or property) in
respect of any Innovative capital stock or split, combine, or reclassify any
Innovative capital stock or issue or authorize the issuance of any other
securities in respect of, in lieu of, or in substitution for any Innovative
capital stock;
(h) Purchase, redeem or otherwise acquire, directly or indirectly, any
shares of Innovative capital stock or capital stock of any subsidiary of
Innovative, except repurchases of unvested shares at cost in connection with
the termination of the employment relationship with any employee pursuant to
stock option or purchase agreements in effect on the date of the Merger
Agreement;
(i) Issue, grant, deliver or sell or authorize or propose the issuance,
grant, delivery or sale of, or purchase or propose the purchase of, any
shares of Innovative's capital stock or securities convertible into, or
subscriptions, rights, warrants or options to acquire, or other agreements
or commitments of any character obligating it to issue any such shares or
other convertible securities (other than Innovative Common Stock issued upon
exercise of Innovative Options outstanding as of the date of the Merger
Agreement, the Innovative Warrants, or the Underwriter Warrants);
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(j) Cause, permit or propose any amendments to its Articles of
Incorporation, Bylaws or similar governing instruments of Innovative or any
subsidiary;
(k) Acquire or agree to acquire by merging or consolidating with, or by
purchasing any equity interest in or a portion of the assets of, or by any
other manner, any business or any corporation, partnership, association or
other business organization or division thereof, or otherwise acquire or
agree to acquire any assets which are material, individually or in the
aggregate, to the business of Innovative or enter into any joint ventures,
strategic partnerships, or alliances;
(l) Sell, lease, license, encumber or otherwise dispose of any
properties or assets which are material, individually or in the aggregate,
to the business of Innovative;
(m) Incur any indebtedness for borrowed money or guarantee any such
indebtedness of another person, issue or sell any debt securities or
options, warrants, calls or other rights to acquire any debt securities of
Innovative or any subsidiary of Innovative, enter into any "keep well" or
other agreement to maintain any financial statement condition or enter into
any arrangement having the economic effect of any of the foregoing;
(n) Effect or agree to effect, including by way of hiring or involuntary
termination, any change in its directors, officers, or key employees;
(o) Adopt or amend any employee benefit plan or employee stock purchase
or employee stock option plan, or enter into any employment contract or
collective bargaining agreement (other than offer letters and letter
agreements entered into in the ordinary course of business consistent with
past practice with employees who are terminable "at will"), pay or agree to
pay any special bonus or special remuneration to any director, employee, or
consultant, or increase the salaries or wage rates or fringe benefits
(including rights to severance or indemnification) of its directors,
officers, employees or consultants, other than in the ordinary course of
business, consistent with past practice, or change in any material respect
any management policies or procedures;
(p) Make any payments outside of the ordinary course of business in
excess of $75,000;
(q) Except in the ordinary course of business, modify, amend or
terminate any material contract or agreement to which Innovative or any
subsidiary is a party or waive, release, or assign any material rights or
claims thereunder;
(r) Revalue any of its assets, including, without limitation, writing
down the value of inventory or writing off notes or accounts receivable,
other than in the ordinary course of business;
(s) Except as required by GAAP, effect any changes in its accounting
methods, principles, or practices;
(t) Make or change any material election in respect of taxes, adopt or
change any accounting method in respect of taxes, enter into any closing
agreement, settle any claim or assessment in respect of taxes, or consent to
any extension or waiver of the limitation period applicable to any claim or
assessment in respect of taxes, provided that Peregrine shall not
unreasonably withhold its consent to any of the foregoing;
(u) Engage in any action with the intent to directly or indirectly
adversely impact any of the transactions contemplated by the Merger
Agreement; or
(v) Agree in writing or otherwise to take any of the actions described
in (a) through (u) above.
Moreover, Innovative has agreed to terminate its 401(k) plan and the 401(k)
plan of one of its subsidiaries immediately prior to the Effective Time, unless
Peregrine, in its sole and absolute discretion, agrees to sponsor and maintain
such plans by providing Innovative with written notice of such election at least
three (3) days before the Effective Time.
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REPRESENTATIONS AND WARRANTIES
The Merger Agreement contains statements that various representations and
warranties made by Innovative and Peregrine and Merger Sub as of the date of the
Merger Agreement and contained therein are true and correct except as disclosed
by Innovative or Peregrine in writing, as the case may be. Specifically,
Innovative provided representations and warranties relating to, among other
things, (a) its organization and similar corporate matters as well as the
organization and similar corporate matters of each of its subsidiaries; (b) its
capital structure, which representations and warranties included statements made
concerning the Innovative Warrants and the Underwriter Warrants and the
agreements governing such securities; (c) that Innovative had no current
obligations with respect to its capital stock; (d) the authorization, execution,
delivery, performance and enforcement of the Merger Agreement and related
matters, subject only to the approval and adoption of the Merger Agreement and
the Merger by the shareholders of Innovative, and that no government entity need
consent to the Merger other than with respect to the filing of this Proxy
Statement/Prospectus with the Commission, the filing of the Certificate of
Merger with the Secretary of State of the State of Delaware and the Articles of
Merger with the Secretary of State of the State of Illinois; (e) the accuracy
and completeness, in all material respects, of documents and financial
statements filed with the Commission since Innovative's 1994 public offering of
its Common Stock; (f) the absence of certain specified material changes or
events since January 31, 1998; (g) the accurate preparation and timely filing of
all returns and payment of taxes owed; (h) the absence of restrictions on
business activities; (i) title to properties; (j) title to intellectual
property; (k) the compliance with applicable laws and material Innovative
agreements; (l) the absence of litigation; (m) the absence of interested party
transactions; (n) the absence of fees payable to brokers or finders in
connection with the Merger, except for the fee payable to NMS; (o) certain labor
and employee benefit matters; (p) compliance with environmental regulations; (q)
the absence of certain specified agreements and compliance with any such
agreements that exist; (r) the absence of any payments to current or former
officers and directors of Innovative that would become due as a result of the
Merger; (s) the accuracy of information supplied by Innovative in connection
with this Proxy Statement/Prospectus; (t) the determination of the fairness of
the terms of the Merger to the shareholders of Innovative by the Innovative
Board and the recommendation by the Innovative Board that such shareholders
approve the Merger; (u) the receipt of the NMS Opinion; and (v) the
inapplicability of Section 11.75 of the Illinois Law (concerning business
combinations) to the Merger.
Peregrine and Merger Sub provided representations and warranties relating
to, among other things, (a) their organization and similar corporate matters;
(b) the authorization, execution, delivery, performance and enforcement of the
Merger Agreement and related matters and that no government entity need consent
to the Merger other than with respect to the filing of the Registration
Statement with the Commission, the filing of the Certificate of Merger with the
Secretary of State of the State of Delaware and the Articles of Merger with the
Secretary of State of the State of Illinois; (c) the Peregrine Common Stock to
be issued in the Merger will be validly issued, fully paid and nonassessable and
will not be subject to restrictions on resale otherwise than provided for under
Rule 145 of the Securities Act; (d) the accuracy and completeness, in all
material respects, of documents and financial statements filed with the
Commission; (e) the absence of certain specified material changes or events
since January 1, 1998; and (f) the accuracy of information supplied by Peregrine
in connection with this Proxy Statement/Prospectus.
FORM S-3 OR FORM S-8 REGISTRATION STATEMENT
Within five (5) days after the Closing, Peregrine will file a registration
statement on Form S-3 or Form S-8, as the case may be, or other appropriate form
for the shares of Peregrine Common Stock issuable with respect to the Innovative
Options assumed by Peregrine pursuant to the Merger Agreement.
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NO SOLICITATION
Subject to the provisions of the Merger Agreement summarized in the
following paragraph, from and after the date of the Merger Agreement until the
earlier of the Effective Date or the termination of the Merger Agreement
pursuant to its terms, Innovative and its subsidiaries will not, nor will they
authorize or permit any of their respective officers, directors, affiliates or
employees or any investment banker, attorney, or other advisor or representative
retained by any of them to, directly or indirectly, (i) solicit, initiate,
encourage or induce the making, submission or announcement of any Acquisition
Proposal; (ii) participate in any discussions or negotiations regarding, or
furnish to any person any non-public information with respect to, or take any
other action to facilitate any inquiries or the making of any proposal that
constitutes or may reasonably be expected to lead to, any Acquisition Proposal;
(iii) engage in discussions with any person with respect to any Acquisition
Proposal, except as to the existence the no solicitation provisions contained in
the Merger Agreement; (iv) approve, endorse or recommend any Acquisition
Proposal other than with respect to a Superior Offer; or (v) enter into any
letter of intent or similar document or any contract agreement or commitment
contemplating or otherwise relating to any Acquisition Transaction. However, the
Merger Agreement does not prohibit Innovative from furnishing nonpublic
information regarding the Innovative and its subsidiaries to, entering into a
confidentiality agreement with, or entering into discussions with, any person or
group in response to an Acquisition Proposal submitted by such person or group
(and not withdrawn) if (A) neither Innovative nor any representative of
Innovative or any of its subsidiaries shall have violated any of the
restrictions described above; (B) the Innovative Board concludes in good faith,
after consultation with its outside legal counsel, that such action is required
in order for the Innovative Board to comply with its fiduciary obligations to
Innovative's shareholders under applicable law; (C) prior to furnishing any such
nonpublic information to, or entering into discussions with, such person or
group, Innovative gives Peregrine written notice of the identity of such person
or group and of Innovative's intention to furnish nonpublic information to, or
enter into discussions with, such person or group and Innovative receives from
such person or group an executed confidentiality agreement containing customary
limitations on the use and disclosure of all nonpublic written and oral
information furnished to such person or group by or on behalf of Innovative and
such limitations are at least as restrictive as the limitations set forth in the
confidentiality agreement previously entered into between Innovative and
Peregrine; and (D) contemporaneously with furnishing any such nonpublic
information to such person or group, Innovative furnishes such nonpublic
information to Peregrine. Moreover, as of May 7, 1998, Innovative and its
subsidiaries have agreed to cease any and all existing activities, discussions,
or negotiations with any parties conducted prior to the execution of the Merger
Agreement with respect to any Acquisition Proposal. In addition to the
foregoing, Innovative has agreed (i) to provide Peregrine with at least 24 hours
prior notice of any meeting of the Innovative Board at which the Innovative
Board is reasonably expected to consider a Superior Offer and (ii) not to accept
or recommend to its shareholders a Superior Offer for a period of at least five
(5) business days after Peregrine's receipt of a copy of such Superior Offer.
The Merger Agreement does not, however, prevent the Innovative Board from
withholding, withdrawing, amending or modifying its unanimous recommendation in
favor of the Merger if (i) a Superior Offer is made to Innovative and is not
withdrawn, (ii) Innovative has not breached its covenants regarding
nonsolicitation under the Merger Agreement, and (iii) the Innovative Board or
any committee thereof concludes in good faith, after consultation with its
outside legal counsel, that, in light of such Superior Offer, the withholding,
withdrawal, amendment, or modification of such recommendation is required in
order for the Innovative Board or any committee thereof to comply with its
fiduciary obligations to Innovative's shareholders under applicable law. Subject
to applicable laws, the Merger Agreement does not limit Innovative's obligation
to hold and convene the Innovative Special Meeting (regardless of whether the
unanimous recommendation of the Innovative Board shall have been withdrawn,
amended, or modified).
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In addition to the obligations of Innovative described above, Innovative, as
promptly as practicable, will advise Peregrine orally and in writing of any
request for non-public information which Innovative reasonably believes could
lead to an Acquisition Proposal or of any Acquisition Proposal, or any inquiry
with respect to or which Innovative reasonably should believe would lead to any
Acquisition Proposal; the material terms and conditions of such request,
Acquisition Proposal or inquiry; and the identity of the person or group making
any such request, Acquisition Proposal or inquiry. Innovative must keep
Peregrine informed in all material respects of the status and details (including
material amendments or proposed amendments) of any such request, Acquisition
Proposal or inquiry.
CONDITIONS TO THE MERGER
The respective obligations of each party to the Merger Agreement to effect
the Merger are subject to the satisfaction at or prior to the Closing Date of
the following conditions: (i) the Merger Agreement and the Merger and other
transactions contemplated thereby shall have been approved and adopted by
Innovative's shareholders by the requisite vote under applicable law and
Innovative's Articles of Incorporation; (ii) the Commission shall have declared
the Registration Statement effective and no stop order suspending the
effectiveness of the Registration Statement or any part thereof shall have been
issued and no proceeding for that purpose, and no similar proceeding in respect
of the Proxy Statement/Prospectus, shall have been initiated or threatened in
writing by the Commission; (iii) no governmental entity shall have enacted,
issued, promulgated, enforced or entered any statute, rule, regulation,
executive order, decree, injunction or other order (whether temporary,
preliminary or permanent) which is in effect and which has the effect of making
the Merger illegal or otherwise prohibiting consummation of the Merger and all
material foreign antitrust approvals required to be obtained prior to the Merger
in connection with the transactions contemplated hereby shall have been
obtained; (iv) Peregrine and Innovative shall have received the Tax Opinions
from their respective counsels to the effect that the Merger will constitute a
reorganization within the meaning of Section 368(a) of the Code.
In addition, the obligation of Innovative to consummate and effect the
Merger is subject to the satisfaction on or prior to the Closing of each of the
following conditions, any of which may be waived by Innovative: (i) each
representation and warranty of Peregrine and Merger Sub contained in the Merger
Agreement (A) shall have been true and correct as of the date of the Merger
Agreement and (B) shall be true and correct on and as of the Closing with the
same force and effect as if made on the Closing except for changes contemplated
by the Merger Agreement and for those representations and warranties which
address matters only as of a particular date (which representations shall have
been true and correct as of such particular date), and except (other than with
respect to certain enumerated representations and warranties) in such cases
where the failure to be so true and correct would not have a material adverse
effect on Peregrine; (ii) Peregrine and Merger Sub shall have performed or
complied in all material respects with all agreements and covenants required by
the Merger Agreement to be performed or complied with by them on or prior to the
Closing; and (iii) no material adverse effect with respect to Peregrine shall
have occurred since the date of the Merger Agreement.
Further, the obligations of Peregrine and Merger Sub to consummate and
effect the Merger are subject to the satisfaction on or prior to the Closing of
each of the following conditions, any of which may be waived, in writing,
exclusively by Peregrine: (i) each representation and warranty of Innovative
contained in the Merger Agreement (A) shall have been true and correct as of the
date of the Merger Agreement and (B) shall be true and correct on and as of the
Closing with the same force and effect as if made on and as of the Closing ,
except for changes contemplated by the Merger Agreement and for those
representations and warranties which address matters only as of a particular
date (which representations shall have been true and correct as of such
particular date and except (other than with respect to certain enumerated
representations and warranties) where the failure to be so true and correct
would not have a material adverse effect on Innovative; (ii) Innovative shall
have performed or complied in all material respects with all agreements and
covenants required by the Merger Agreement to be performed or
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complied with by it at or prior to the Closing; (iii) no material adverse effect
with respect to Innovative and its subsidiaries shall have occurred since the
date of the Merger Agreement; (iv) each affiliate of Innovative shall have
entered into the Affiliate Agreement in the form attached to the Merger
Agreement as Exhibit C and each of such agreements shall be in full force and
effect as of the Effective Time; (v) Innovative shall have obtained all
consents, waivers and approvals required in connection with the consummation of
the Merger and any related transactions contemplated by the Merger Agreement;
and (vi) shall have entered into an amendment agreement to the lease governing
its headquarters with Thompson L.P. providing for certain provisions requested
by Peregrine to comport with Peregrine's planned future use of the Warminster
facility.
TERMINATION OF THE MERGER AGREEMENT
The Merger Agreement may be terminated at any time prior to the Effective
Time, whether before or after the requisite approval of the shareholders of
Innovative: (i) by mutual written consent of the Peregrine Board and the
Innovative Board; (ii) by either Innovative or Peregrine if the Merger shall not
have been consummated by October 31, 1998 for any reason; provided, however,
that the right to terminate the Merger Agreement for the failure of the Merger
to occur prior to such date shall not be available to any party whose action or
failure to act has been a principal cause of or resulted in the failure of the
Merger to occur on or before such date and such action or failure to act
constitutes a breach of the Merger Agreement; (iii) by either Innovative or
Peregrine if a governmental entity shall have issued an order, decree or ruling
or taken any other action in any case having the effect of permanently
restraining, enjoining or otherwise prohibiting the Merger, which order, decree
or ruling is final and nonappealable; (iv) by either Innovative or Peregrine if
the required approvals of the shareholders of Innovative contemplated by the
Merger Agreement shall not have been obtained by reason of the failure to obtain
the required vote at a meeting of Innovative's shareholders duly convened
therefor or at any adjournment thereof (provided that the right to terminate the
Merger Agreement for failure to obtain Innovative shareholder approval shall not
be available to Innovative where the failure to obtain approval of Innovative's
shareholders shall have been caused by the action or failure to act of
Innovative in breach of the Merger Agreement); (v) by Peregrine, in the event of
a Peregrine Termination Condition; (vi) by Innovative upon a breach of any
representation, warranty, covenant, or agreement on the part of Peregrine set
forth in the Merger Agreement, or if any representation or warranty of Peregrine
shall have become untrue, provided, that if such inaccuracy in Peregrine's
representations and warranties or breach by Peregrine is curable by Peregrine
through the exercise of its commercially reasonable efforts, then Innovative may
not terminate the Merger Agreement for ten (10) days after Peregrine receives
notice from Innovative of such breach, provided that Peregrine continues to
exercise such commercially reasonable efforts to cure such breach; (vii) by
Peregrine, upon a breach of any representation, warranty, covenant or agreement
on the part of the Innovative set forth in the Merger Agreement, or if any
representation or warranty of Innovative shall have become untrue, provided,
that if such inaccuracy in Innovative's representations and warranties or breach
by Innovative is curable by Innovative through the exercise of its commercially
reasonable efforts, then Peregrine may not terminate the Merger Agreement under
this section for ten (10) days after Innovative receives notice from Peregrine
of such breach, provided that Innovative continues to exercise such commercially
reasonable efforts to cure such breach; (viii) by Innovative in the event of an
Innovative Termination Condition.
BREAK UP FEES
The Merger Agreement provides that, upon the occurrence of a Peregrine
Termination Condition, Innovative may be required to pay Peregrine the Initial
Fee of $1.7 million in immediately available funds within one business day
following the earlier to occur of (A) the decision of Peregrine to terminate the
Merger Agreement as a result of the occurrence of a Peregrine Termination
Condition; (B) the decision of Innovative to terminate the Merger Agreement as a
result of the occurrence of an Innovative Termination Condition; or (C) the date
the shareholders of Innovative fail to approve the Merger Agreement at the
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Innovative Special Meeting or at any adjournment thereof. If Innovative
consummates a Company Acquisition within 12 months after the Initial Fee becomes
due and payable, Innovative is obligated to pay Peregrine an additional $2.5
million in immediately payable funds within one business day following such
consummation.
Except as set forth above, all fees and expenses incurred in connection with
the Merger Agreement and the transactions contemplated thereby will be paid by
the party incurring such expenses whether or not the Merger is consummated;
provided, however, that Peregrine and Innovative will share equally all fees and
expenses, other than attorneys' and accountants fees and expenses, incurred in
relation to the printing and filing of the Proxy Statement/Prospectus (including
any preliminary materials related thereto) and the Registration Statement
(including financial statements and exhibits) and any amendments or supplements
thereto.
RELATED AGREEMENTS
INNOVATIVE VOTING AGREEMENTS
As an inducement to Peregrine to enter into the Merger Agreement, certain
directors and executive officers of Innovative entered into the Innovative
Voting Agreements (each a "Innovative Voting Agreement Shareholder" and
collectively the "the Innovative Voting Agreement Shareholders") with Peregrine,
irrevocably appointing Peregrine (or any nominee of Peregrine) as his, hers or
its lawful attorney and proxy. Such proxies give Peregrine the limited right to
vote the shares of Innovative Common Stock beneficially owned by the Innovative
Voting Agreement Shareholders (including any shares of Innovative Common Stock
that such shareholders acquire after the time they entered into the Voting
Agreements) (collectively, the "Innovative Voting Agreement Shares") for the
approval and adoption of the Merger Agreement.
In exercising its right to vote the Innovative Voting Agreement Shares as
lawful attorney and proxy of the Innovative Voting Agreement Shareholders,
Peregrine (or any nominee of Peregrine) will be limited, at every Innovative
shareholders meeting and every written consent in lieu of such meeting, to vote
the shares (i) in favor of approval of the Merger and the Merger Agreement and
(ii) against approval of any proposal made in opposition to or in competition
with the consummation of the Merger and against any merger, consolidation, sale
of assets, reorganization or recapitalization with any party other than
Peregrine and any liquidation or winding up of Innovative. The Innovative Voting
Agreement Shareholders may vote their own shares themselves on all other
matters. The Innovative Voting Agreements terminate upon the earlier to occur of
(i) the Effective Time or (ii) such date as the Merger Agreement shall be
terminated in accordance with its terms (the "Expiration Date"). Each Innovative
Voting Agreement Shareholder has agreed not to transfer his or her Innovative
Voting Agreement Shares prior to the Expiration Date.
As a result, all of the 3,534,296 shares of Innovative Common Stock (which
excludes 849,998 shares subject to Innovative Options) beneficially owned by
Innovative Voting Agreement Shareholders as of the Innovative Record Date
(representing approximately 30.9% of the total number of shares of Innovative
Common Stock outstanding at such date) will be voted for approval of and
adoption of the Merger Agreement and the Merger. Of such shares, 713,460 are
subject to the Thompson Voting Agreements, granting William M. Thompson and John
M. Thompson authority to vote such shares on all issues presented for a vote to
shareholders of Innovative, including the Merger and other matters that may be
presented at the Innovative Special Meeting. The Thompson Voting Agreements
terminate upon a sale or transfer of the shares by the registered holder and
impose no restrictions on such holders' ability to sell or otherwise transfer
such shares at any time. Excluding the shares subject to the Thompson Voting
Agreements, 2,820,836 shares of Innovative Common (representing approximately
24.7% of the total number of shares of Innovative Common Stock outstanding as of
the Innovative Record Date) will be voted for approval of and adoption of the
Merger Agreement and the Merger.
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AFFILIATE AGREEMENTS
In connection with the Merger, each member of the Innovative Board and
certain executive officers of Innovative (those individuals who in the
reasonable judgement of Innovative are affiliates of Innovative within the
meaning of Rule 145 promulgated under the Securities Act (each an "Innovative
Affiliate")) has executed an Affiliate Agreement in the form attached to the
Merger Agreement as Exhibit C that will be effective as of the Effective Time.
Accordingly, Peregrine will be entitled to place appropriate legends on the
certificates evidencing any Peregrine Common Stock and, if the Warrant Amendment
is not approved, Peregrine Warrants to be received by an Innovative Affiliate in
connection with the Merger, and to issue appropriate stop transfer instructions
to the transfer agent for the Peregrine Common Stock or Peregrine Warrants,
consistent with the terms of the Affiliate Agreements. Pursuant to such
agreements, the Innovative Affiliates will have also acknowledged the resale
restrictions imposed by Rule 145 under the Securities Act on shares of Peregrine
Common Stock or Peregrine Warrants to be received by them in the Merger. See
"The Plan of Merger and Related Transactions--Restrictions on Resale of
Peregrine Common Stock and Peregrine Warrants."
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THE WARRANT AMENDMENT
GENERAL
This Proxy Statement/Prospectus is being furnished to the holders of the
Innovative Warrants in connection with Innovative's solicitation of the Warrant
Consents.
Pursuant to the Merger Agreement, Peregrine required that Innovative use its
best efforts to obtain approval of the Warrant Amendment prior to the Effective
Time, such that, immediately after the Effective Time, the Innovative Warrants
would no longer be outstanding. The purpose of the solicitation of the Warrant
Consents is to obtain such approval of the Warrant Amendment.
If the Warrant Amendment is approved, each Innovative Warrant will be
exchanged for and converted into the right to receive that number of shares of
Peregrine Common Stock, based on the Exchange Ratio, as would have been the case
if the Innovative Warrants had been exercised for Innovative Common Stock
immediately prior to the Effective Time on a net issuance basis, based on the
average of the last reported sale prices of Peregrine Common Stock as reported
on the Nasdaq National Market on the five most recent trading days ending on the
trading day immediately prior to the Effective Time. The Warrant Amendment will
become effective at 5:00 p.m. (Eastern Time) on the date on which Innovative has
received properly executed Warrant Consents approving the Warrant Amendment, and
such Warrant Consents have not been revoked or otherwise withdrawn, from holders
of 66 2/3% in interest of the Innovative Warrants (based on the number of shares
of Innovative Common Stock issuable upon exercise of the Innovative Warrants)
(the "Warrant Effective Time"). In the event of a termination of the Merger
Agreement in accordance with its terms after the Warrant Effective Time, the
Warrant Amendment will terminate and be of no further force or effect.
In the event the Warrant Amendment is not approved on or prior to the
Effective Time, each outstanding Innovative Warrant will be assumed by Peregrine
and converted into a Peregrine Warrant. The Peregrine Warrants will be issued on
substantially the same terms and conditions as were applicable under the
Innovative Warrants (other than the number of shares, exercise price, and
redemption price). Each Peregrine Warrant will be exercisable for that number of
shares of Peregrine Common Stock (rounded down to the nearest whole number) that
the holder of the Innovative Warrant would have been entitled to receive
pursuant to the Merger had such holder exercised such Innovative Warrant
immediately prior to the Effective Time. The exercise price per share of the
Peregrine Warrant (rounded up to the nearest whole cent) will equal (i) the
aggregate exercise price for the shares of Innovative Common Stock purchasable
pursuant to the Innovative Warrant divided by (ii) the number of shares of
Peregrine Common Stock purchasable pursuant to the Peregrine Warrant.
IN THE EVENT THE WARRANT AMENDMENT IS NOT APPROVED PRIOR TO THE EFFECTIVE
TIME, PEREGRINE INTENDS, PROMPTLY AFTER THE EFFECTIVE TIME, TO REDEEM THE
THEN-OUTSTANDING PEREGRINE WARRANTS IN ACCORDANCE WITH THEIR TERMS. SEE "--
PEREGRINE REDEMPTION" AND "DESCRIPTION OF INNOVATIVE CAPITAL STOCK--THE
INNOVATIVE WARRANTS."
Based on the closing sale price of Peregrine Common Stock on the Nasdaq
National Market on June 19, 1998 of $25.875 and the Exchange Ratio, approval of
the Warrant Amendment would result in the issuance to each holder of an
Innovative Warrant of 0.23328 shares of Peregrine Common Stock for each
Innovative Warrant held and in a per share purchase price for each Innovative
Warrant of $6.039. The number of shares of Peregrine Common Stock to be received
at the Effective Time by holders of the Innovative Warrants will vary based on
the trading price of Peregrine Common Stock over the five trading days
immediately prior to the Effective Time. See "--Effect of Warrant Amendment--Net
Issuance." Holders of Innovative Warrants are strongly encouraged to obtain
current market quotations for the Peregrine Common Stock, the Innovative Common
Stock, and the Innovative Warrants. If the Merger is completed, holders of
Innovative Warrants will no longer hold any interest in Innovative other than
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through their interest in shares of Peregrine Common Stock (assuming approval of
the Warrant Amendment) or the Peregrine Warrants (assuming the Warrant Amendment
is not approved).
The Innovative Board has unanimously approved the Merger Agreement, the
Merger, and the Warrant Amendment, and believes that the terms of the Merger
Agreement are fair to, and that the Merger is in the best interests of
Innovative, its shareholders, and the holders of the Innovative Warrants. In
order to expedite the Merger and avoid the redemption of the Peregrine Warrants,
the Innovative Board unanimously recommends that holders of the Innovative
Warrants vote FOR approval and adoption of the Warrant Amendment.
RECORD DATE AND OUTSTANDING WARRANTS
Only holders of record of the Innovative Warrants at the close of business
on June 16, 1998 (the "Innovative Record Date") are entitled to notice of and to
consent to the Warrant Amendment. At the close of business on the Innovative
Record Date, there were 865,872 Innovative Warrants outstanding and entitled to
consent, held of record by 42 holders. Each holder of an outstanding Innovative
Warrant will be entitled to a number of votes equal to the aggregate number of
shares of Innovative Common Stock issuable upon exercise of the Innovative
Warrants held by such holder.
WARRANT CONSENTS
The Warrant Consent accompanying this Proxy Statement/Prospectus is
solicited on behalf of the Innovative Board for use in connection with obtaining
approval of the Warrant Amendment. Holders of the Innovative Warrants are
requested to complete, date, and sign the accompanying Warrant Consent and
promptly return it in the accompanying envelope or otherwise mail it to
Innovative. Each Warrant Consent that is properly executed and returned, and
that is not revoked prior to the Warrant Effective Time, will be deemed voted in
accordance with the instructions indicated thereon. Executed but unmarked
Warrant Consents will be treated as abstentions and will not be counted as voted
in connection with approval of the Warrant Amendment. Any Warrant Consent given
pursuant to this solicitation may be revoked at any time prior to the Warrant
Effective Time by the person giving it by a writing delivered by personal
delivery, certified U.S. mail, or recognized overnight courier service to John
M. Thompson, President and Chief Operating Officer, Innovative Tech Systems,
Inc., 444 Jacksonville Road, Warminster, Pennsylvania 18974. No written
revocation received after the Warrant Effective Time will be effective. In the
event of a termination of the Merger Agreement in accordance with its terms, the
Warrant Amendment will terminate and be of no further force or effect.
VOTE REQUIRED
Approval of the Warrant Amendment will require that Innovative receive
Warrant Consents approving the Warrant Amendment from (i) Goldmen and (ii) the
holders of 66 2/3% in interest of the Innovative Warrants (based on the number
of shares of Innovative Common Stock issuable upon exercise of the Innovative
Warrants outstanding on the Innovative Record Date) and will be deemed effective
as of the Warrant Effective Time. The Warrant Consent of Goldmen has been
previously obtained. As of the Innovative Record Date, no executive officer or
director of Innovative or Peregrine, or any of their respective affiliates, held
any Innovative Warrants.
ABSTENTIONS; BROKER NON-VOTES
Since the required consent of the holders of Innovative Warrants is based on
the number of shares of Innovative Common Stock issuable upon exercise of the
Innovative Warrants, abstentions and broker non-votes will have the same effect
as withholding consent to the Warrant Amendment.
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INNOVATIVE BOARD RECOMMENDATION
THE INNOVATIVE BOARD HAS UNANIMOUSLY APPROVED THE WARRANT AMENDMENT AND
BELIEVES THAT THE TERMS OF THE WARRANT AMENDMENT ARE FAIR TO, AND IN THE BEST
INTERESTS OF, INNOVATIVE AND THE HOLDERS OF INNOVATIVE WARRANTS. THE INNOVATIVE
BOARD RECOMMENDS THAT HOLDERS OF THE INNOVATIVE WARRANTS MARK THE ENCLOSED
WARRANT CONSENT INDICATING THEIR APPROVAL OF THE WARRANT AMENDMENT, SIGN IT AS
INDICATED, AND RETURN IT IN THE ENCLOSED ENVELOPE.
TERMS OF WARRANT AMENDMENT
If approved, the Warrant Amendment will amend and restate Section 4 of the
Warrant Agreement to provide that, in connection with the Merger, each
Innovative Warrant will be exchanged for and converted into the right to receive
that number of shares of Peregrine Common Stock, based on the Exchange Ratio, as
would have been the case if the Innovative Warrants had been exercised for
Innovative Common Stock immediately prior to the Effective Time on a net
issuance basis, based on the average of the last reported sale prices of
Peregrine Common Stock as reported by the Nasdaq National Market on the five
most recent trading days ending on the trading day immediately prior to the
Effective Time. No fractional shares of Peregrine Common Stock will be issued in
connection with such exchange. Cash will be paid to holders of the Innovative
Warrants in an amount equal to such fraction (rounded to the fifth decimal
place) multiplied by the average of the last reported sale prices of Peregrine
Common Stock for the five most recent days the Peregrine Common Stock has
traded, ending on the trading day immediately prior to the Effective Time.
Section 4 of the Warrant Agreement currently governs the procedure for effecting
a cash exercise of the Innovative Warrants. For a more detailed discussion of
the proposed net issuance conversion feature, see "--Effect of Warrant
Amendment."
The Warrant Amendment also provides that a holder of an Innovative Warrant
may revoke a properly executed and delivered Warrant Consent at any time prior
to the Warrant Effective Time by a writing delivered by personal delivery,
certified U.S. mail, or recognized overnight courier service to John M.
Thompson, President, Innovative Tech Systems, Inc., 444 Jacksonville Road,
Warminster, Pennsylvania 18974. No written revocation received after the Warrant
Effective Time will be effective. The Warrant Effective Time will be 5:00 p.m.
(Eastern Time) on the date on which Innovative has received properly executed
Warrant Consents approving the Warrant Amendment, and such Warrant Consents have
not been revoked or otherwise withdrawn, from holders of 66 2/3% in interest of
the Innovative Warrants (based on the number of shares of Innovative Common
Stock issuable upon exercise of Innovative Warrants).
In the event of a termination of the Merger Agreement in accordance with its
terms, the Warrant Amendment will terminate and be of no further force or
effect. See "The Merger Agreement--Termination of the Merger Agreement." The
Warrant Amendment will be governed by the laws of the State of New York.
EFFECT OF WARRANT AMENDMENT
GENERAL. The purpose of the Warrant Amendment is to permit holders of
Innovative Warrants to exchange such warrants for Peregrine Common Stock in
connection with the Merger by providing holders of the Innovative Warrants with
essentially the same consideration as is being delivered to shareholders of
Innovative, subject to adjustments necessary to reflect the economic terms of
the Innovative Warrants. In the event the Warrant Amendment is not approved
prior to the Effective Time, Peregrine will, promptly after the Effective Time,
effect a redemption of the Peregrine Warrants assumed in connection with the
Merger. See "--Peregrine Redemption."
NET ISSUANCE. The Warrant Amendment provides that, in connection with the
Merger, each Innovative Warrant will be exchanged for and converted into the
right to receive that number of shares of
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Peregrine Common Stock, based on the Exchange Ratio, as would have been the case
if the Innovative Warrants had been exercised for Innovative Common Stock
immediately prior to the Effective Time on a net issuance basis, based on the
average of the last reported sale prices of Peregrine Common Stock as reported
on the Nasdaq National Market on the five most recent trading days ending on the
trading day immediately prior to the Effective Time. For purposes of the Warrant
Amendment, a "net issuance" means that, in lieu of payment of the exercise price
in cash, the warrant holder will surrender shares subject to the Innovative
Warrant in payment of the exercise price. The net issuance provision is intended
to deliver to holders of Innovative Warrants, in connection with their exchange
for and conversion into Peregrine Common Stock, the economic equivalent of the
consideration delivered to shareholders of Innovative, less the amount that such
holders would have been required to pay if they had exercised the Innovative
Warrants. No fractional shares of Peregrine Common Stock would be issued in
connection with such exchange. Cash would be paid to holders of the Innovative
Warrants in an amount equal to such fraction (rounded to the fifth decimal
place) multiplied by the average of the last reported sale prices of Peregrine
Common Stock for the five most recent days the Peregrine Common Stock has
traded, ending on the trading day immediately prior to the Effective Time.
The number of shares of Peregrine Common Stock issuable upon conversion and
exchange of the Innovative Warrants would be determined by the following
formula:
<TABLE>
<S> <C> <C>
Y*Z*(A-B),
X = A where
</TABLE>
"X" equals the number of shares of Peregrine Common Stock to be issued to a
holder of Innovative Warrants upon such conversion and exchange; "Y" equals the
number of shares of Innovative Common Stock issuable upon exercise of Innovative
Warrants held by such holder (aggregating all Innovative Warrants for which such
holder is the record or beneficial owner); "Z" equals the Exchange Ratio; "A"
equals the average of the last reported sale prices of Peregrine Common Stock as
reported on the Nasdaq National Market on the five most recent trading days
ending on the trading day immediately prior to the Effective Time; and "B"
equals the exercise price per share of Innovative Common Stock currently
applicable under the Innovative Warrants.
As an example, assume that a holder holds in the aggregate Innovative
Warrants to acquire 1,000 shares of Innovative Common Stock. As of the
Innovative Record Date, the exercise price per share of Innovative Common Stock
for all Innovative Warrants was $0.08. Using an assumed average trading price of
Peregrine Common Stock of $25.875 (the last reported sales price of the
Peregrine Common Stock on June 19, 1998), such holder would receive, in
connection with the Merger, 233 shares of Peregrine Common Stock. The fractional
share amount of 0.37621 share of Peregrine Common Stock would be paid to the
holder in cash in the amount of $9.73 (representing such fractional share amount
(rounded to the fifth decimal place) multiplied by such price).
PEREGRINE REDEMPTION
Section 8.5 of the Warrant Amendment requires any potential acquiror of
Innovative, in connection with any merger with or acquisition of Innovative, to
assume the Innovative Warrants such that the Innovative Warrants will, after
such transaction, be exercisable for the securities issued in such transaction
as if such holder had exercised the Innovative Warrants immediately prior to
such transaction. Accordingly, if the Warrant Amendment is not approved prior to
the Effective Time, Peregrine will assume the Innovative Warrants. In such case,
each Innovative Warrant will become a Peregrine Warrant to acquire, on
substantially the same terms and conditions as were applicable under the
Innovative Warrants, that number of shares of Peregrine Common Stock (rounded
down to the nearest whole number) that the holder of the Innovative Warrant
would have been entitled to receive pursuant to the Merger had such holder
exercised such Innovative Warrant immediately prior to the Effective Time. The
exercise price per
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share of the Peregrine Warrant (rounded up to the nearest whole cent) will equal
(i) the aggregate exercise price for the shares of Innovative Common Stock
purchasable pursuant to the Innovative Warrant divided by (ii) the number of
shares of Peregrine Common Stock purchasable pursuant to the Peregrine Warrant.
IF THE WARRANT AMENDMENT IS NOT APPROVED AND PEREGRINE IS REQUIRED TO ASSUME
THE INNOVATIVE WARRANTS IN CONNECTION WITH THE MERGER, PEREGRINE WILL, PROMPTLY
AFTER THE EFFECTIVE TIME, EFFECT A REDEMPTION OF THE PEREGRINE WARRANTS IN
ACCORDANCE WITH THEIR TERMS. The Innovative Warrants are redeemable upon 30
days' prior written notice to the holders of Innovative Warrants if the average
closing bid price of Innovative Common Stock as reported on The Nasdaq SmallCap
Market is greater than $2.92 per share for a period of 20 consecutive trading
days within the 30 days ending on the fifth trading day prior to the date on
which such notice is given. Accordingly, the Innovative Warrants are currently
redeemable, and the redemption price per share of Innovative Common Stock is
currently $0.67. After adjustment for the Merger, the applicable redemption
price of the Peregrine Warrants will be $2.86.
If the Warrant Amendment is not approved, Peregrine will, promptly after the
Effective Time, deliver the required notice to the holders of the
then-outstanding Peregrine Warrants, indicating its intent to redeem all
outstanding Peregrine Warrants at 5:00 p.m. (Eastern Time) on the thirty-first
day following the date of mailing of such notice (the "Redemption Effective
Time"). The notice will specify, in addition to the date of the Redemption
Effective Time and the applicable redemption price, the procedures for
delivering certificates for the Peregrine Warrants and for payment of the
redemption price. As a result, holders of the Peregrine Warrants will be
required either (i) to exercise their Peregrine Warrants by delivering to
Peregrine a written notice of exercise together with payment in cash of the
aggregate exercise price for the Peregrine Warrants being exercised or (ii)
permit Peregrine to redeem their Peregrine Warrants for a redemption price of
$2.86 per Peregrine Warrant. The right to exercise the Peregrine Warrant will
terminate at 5:00 p.m. (Eastern Time) on the business day immediately preceding
the Redemption Effective Time. Following the Redemption Effective Time, the
Peregrine Warrants will no longer be publicly traded on the Nasdaq National
Market, and certificates representing the Peregrine Warrants will represent only
the right to receive payment of the applicable redemption price.
TRANSFER OF INNOVATIVE WARRANT CERTIFICATES
If the Merger becomes effective and the Warrant Amendment has been approved,
Peregrine, acting through the Exchange Agent, will as soon as reasonably
practicable deliver a letter of transmittal with instructions to all holders of
record of Innovative Warrants immediately prior to the Effective Time for use in
surrendering their warrant certificates (or providing a bond in respect thereof)
in exchange for certificates representing shares of Peregrine Common Stock. If
the Merger becomes effective and the Warrant Amendment has not been approved,
Peregrine does not intend to issue new certificates evidencing the Peregrine
Warrants; rather, certificates representing Innovative Warrants will be deemed
to represent Peregrine Warrants (subject to adjustment of the number of shares,
exercise price, and redemption price to reflect the Merger), pending the
redemption by Peregrine of the Peregrine Warrants. CERTIFICATES SHOULD NOT BE
SURRENDERED BY HOLDERS OF INNOVATIVE WARRANTS UNLESS AND UNTIL SUCH HOLDERS
RECEIVE THE LETTER OF TRANSMITTAL FROM THE EXCHANGE AGENT. See "The Merger
Agreement--Conversion of Securities."
CERTAIN FEDERAL INCOME TAX CONSEQUENCES OF THE WARRANT AMENDMENT
Assuming the Merger qualifies as a reorganization under the Code, under
recently promulgated IRS regulations and except to the extent of cash received
in lieu of fractional shares, no gain or loss should be recognized by the
holders of Innovative Warrants (other than the holders of the Underwriter
Warrants, the tax consequences of which are not discussed herein) upon either
the receipt of Peregrine Common Stock or, alternatively, Peregrine Warrants if
the Warrant Amendment is not approved, solely in exchange for the Innovative
Warrants. The aggregate tax basis of the Peregrine Common Stock (or the
Peregrine Warrants) will be the same as the aggregate tax basis of the
Innovative Warrant surrendered in exchange therefor by
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the holders of the Innovative Warrants (other than the holders of the
Underwriter Warrants). However, the law is not entirely clear as to the holding
period applicable to any Peregrine Common Stock received. If the Peregrine
Common Stock is considered received in exchange for the Innovative Warrants
pursuant to the Merger, then the holding period of the Peregrine Common Stock to
be received by each holder of an Innovative Warrant should include the period
for which the Innovative Warrant surrendered in exchange therefor was considered
to be held. It is possible, however, that the IRS could assert that the exchange
of an Innovative Warrant for Peregrine Common Stock should be treated as the
exercise of the Innovative Warrant (rather than as an exchange pursuant to the
Merger), in which case the holding period would commence on the date of the
Merger. ACCORDINGLY, HOLDERS OF INNOVATIVE WARRANTS ARE URGED TO CONSULT THEIR
OWN TAX ADVISORS AS TO THE SPECIFIC TAX CONSEQUENCES TO THEM OF THE WARRANT
AMENDMENT AND EXCHANGE OF THE INNOVATIVE WARRANTS IN CONNECTION WITH THE MERGER.
In the event the Warrant Amendment is not approved and Peregrine is required
to assume the Innovative Warrants in connection with the Merger, Peregrine will,
promptly after the Effective Time, effect a redemption of the then-outstanding
Peregrine Warrants in accordance with their terms. The Innovative Warrants are
currently redeemable at a redemption price of $0.67 per Innovative Warrant. As a
result of the redemption, holders of the Peregrine Warrants will be required
either (i) to exercise their Peregrine Warrants by delivering to Peregrine a
written notice of exercise together with payment in cash of the aggregate
exercise price for the Peregrine Warrants being exercised or (ii) to permit
Peregrine to redeem their Peregrine Warrants for a redemption price of $2.86 per
Peregrine Warrant, which reflects adjustments to the number of shares, exercise
price, and redemption price of the Innovative Warrants in connection with their
assumption by Peregrine in the Merger. Under such circumstances and assuming
exercise of the Peregrine Warrants, the aggregate tax basis of the Peregrine
Common Stock issued upon exercise of the Peregrine Warrants will equal the
holder's aggregate tax basis in the Peregrine Warrants plus the exercise price
and the holding period for the Peregrine Common Stock will commence on the date
of exercise.
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BUSINESS OF PEREGRINE
THE FOLLOWING DISCUSSION CONTAINS FORWARD-LOOKING STATEMENTS WITHIN THE
MEANING OF SECTION 27A OF THE SECURITIES ACT OF 1933 AND SECTION 21E OF THE
SECURITIES EXCHANGE ACT OF 1934. THESE FORWARD LOOKING STATEMENTS ARE SUBJECT TO
CERTAIN RISKS AND UNCERTAINTIES THAT COULD CAUSE ACTUAL RESULTS TO DIFFER
MATERIALLY FROM HISTORICAL RESULTS OR ANTICIPATED RESULTS, INCLUDING THOSE SET
FORTH UNDER THE SECTIONS OF THIS PROXY STATEMENT/ PROSPECTUS CAPTIONED "RISK
FACTORS" AND "PEREGRINE MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS" AND ELSEWHERE IN OR INCORPORATED BY
REFERENCE INTO THIS PROXY STATEMENT/ PROSPECTUS. THE FOLLOWING DISCUSSION AND
ANALYSIS SHOULD BE READ IN CONJUNCTION WITH "SELECTED HISTORICAL AND UNAUDITED
PRO FORMA COMBINED CONDENSED FINANCIAL DATA" AND PEREGRINE'S CONSOLIDATED
FINANCIAL STATEMENTS AND NOTES THERETO INCLUDED ELSEWHERE IN THIS PROXY
STATEMENT/PROSPECTUS.
OVERVIEW
Peregrine, The Infrastructure Management Company, provides enterprise
infrastructure management application software. The objective of Peregrine's
infrastructure management strategy is to provide organizations control over
their infrastructure assets and related information throughout the asset life
cycle based on maximizing the availability of assets, minimizing investments and
expenses, consolidating enterprise data, and interfacing to enterprise
applications. Peregrine develops, markets, and supports, an integrated suite of
applications that automates the management of complex, enterprise-wide
information and infrastructure assets. SERVICECENTER and ASSETCENTER are
designed to address the Consolidated Service Desk and asset management
requirements of large organizations and can be deployed across all major
hardware platforms and network operating systems and protocols. Each utilizes
advanced client/server and intelligent agent technologies and a modular
architecture. The SERVICECENTER and ASSETCENTER product suites are intended to
provide organizations a single view of all the elements of their infrastructure,
in order to optimize performance and minimize costs.
The Company was incorporated in California in 1981 and reincorporated in
Delaware in 1994. Unless the context otherwise requires, references to
"Peregrine" refer to Peregrine Systems, Inc., a Delaware corporation, its
predecessor, Peregrine Systems, Inc., a California corporation, and its
subsidiaries. Peregrine's executive offices are located at 12670 High Bluff
Drive, San Diego, California 92130 and its telephone number is (619) 481-5000.
The development of the market for Peregrine's products reflects an
increasingly competitive business environment in which information technology
and control over corporate infrastructure have become important sources of
competitive advantage. Organizations rely heavily on information technology in
efforts to improve operational efficiency, react more quickly to changes in the
marketplace, and better understand and respond to customer needs. Information
technology ("IT") is an integral part of many core business functions, including
plant management, inventory management, and customer billing, and is critical to
many new tactical and strategic initiatives such as business process
reengineering, supply chain management, and enhanced customer care.
Most traditional IT management solutions have been designed to address a
limited set of problems, principally problem tracking and problem resolution.
These applications have been deployed on a departmental or divisional level or
have otherwise taken a segmented approach to IT management that requires a
specific and separate application to manage each component or system within the
IT infrastructure and and creates difficulty in integration with other third
party IT applications. Similarly, management of infrastructure is limited to
tools that assist in managing events or asset portfolios. Peregrine believes
that its infrastructure management applications offer the first application
suite with the capability to unite these two disciplines. SERVICECENTER provides
an integrated and automated suite of seven applications, consisting of problem
management, problem resolution, change management, inventory/configuration
management, request management, work management, and service level agreements.
ASSETCENTER provides an integrated
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and automated suite of four applications, consisting of asset management
(comprised of asset, warranty, and financial management), lease management,
procurement management, and cost management.
Peregrine believes that its future growth and profitability will depend on a
number of factors, including, among others, factors relating to the quality of
its products and to its ability to further penetrate existing markets and to
penetrate new markets. In that regard, Peregrine's strategy is focused on
maintaining and enhancing its technological position and the functionality of
its products; developing an integrated product line of software applications to
manage all aspects of the enterprise infrastructure, including management of IT,
plant and facilities, communications resources and distribution systems;
creating organizational awareness of the benefits to be obtained from an
integrated approach to infrastructure management; broadening its target markets
from the Fortune 500 to include smaller organizations worldwide comprising the
Global 2000; expanding international sales; leveraging a product authorship
model that rewards individual product developers based on sales of products
developed by them; expanding its direct sales force and locations and increasing
indirect sales opportunities; implementing and expanding existing programs aimed
at improving customer relationships through information exchanges among
Peregrine, existing customers, and prospective customers; and expanding its
distribution channels through relationships with third party distributors,
system integrators, and original equipment manufacturers.
PRODUCTS
Peregrine's principal products are SERVICECENTER, a Consolidated Service
Desk software solution that integrates seven management applications, or
modules, on a common platform and ASSETCENTER, an asset management software
solution that integrates four management applications on a common platform.
SERVICECENTER and ASSETCENTER support most major computing platforms, including
UNIX, Microsoft Windows 3.1, Windows 95, Windows NT, and Apple Macintosh.
SERVICECENTER continues to be available on MVS. Each can be implemented readily
without modification, or users can customize the applications, screen formats,
databases or reports using Peregrine's Rapid Application Development ("RAD")
environment, a fourth generation application language for SERVICECENTER or
ASSETCENTER'S customization capabilities.
SERVICECENTER APPLICATIONS
PROBLEM MANAGEMENT. The problem management application automates the
process of reporting and tracking specific problems or classes of problems
associated with an enterprise network computing environment. Help desk personnel
open problem tickets using templates specific to the class of problem reported.
PROBLEM RESOLUTION. The problem management application works together with
Peregrine's IR EXPERT, a text search expert system that employs advanced
technology to allow network operators to retrieve relevant information. This
application assists in problem solving, based on prior solutions. The IR EXPERT
reduces a user's question, or query, to a number of "terms," refining the query
to fit knowledge in the database and can then search resolution databases using
related terms. This application is self-learning, so the customer does not have
to perform any work to keep the knowledge base up to date.
CHANGE MANAGEMENT. The change management application provides a functional
framework for proposing, accepting, scheduling, approving, reviewing and
coordinating network changes. Change management permits end-users to enter
proposed changes to the production environment and then circulate those changes
electronically for review and action. Change requests can be tracked and details
can be added at any time to the initial specifications.
INVENTORY/CONFIGURATION MANAGEMENT. The inventory/configuration management
application provides the service desk with a central repository of information
about an organization's IT environment, including inventories of networked
devices and applications as well as information concerning end-users. Easy
access
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to inventory information permits the service desk to respond to end-user
problems, to plan changes and services, and to create accurate reports about the
network's status and environmental trends.
REQUEST MANAGEMENT. The request management application automates and tracks
an organization's equipment and services ordering process from initial request
through installation and follow-up. Using SERVICECENTER, an end-user identifies
and orders products or services from a catalog of items. SERVICECENTER then
consolidates requests, forwards orders through an organization's standard
approval and order processing procedures, and consolidates orders by vendor.
End-users can track the status of requests through SERVICECENTER at all times.
SERVICE LEVEL AGREEMENT MANAGEMENT. Service Level Agreement (SLA)
Management is designed to simplify the task of SLA management by providing an
automated, real-time view of SLA performance. It provides a single, centralized
repository of SLA information and automated data feeds on network health and
technician performance. It can also help prioritize problem resolution to ensure
that SLA metrics are achieved.
WORK MANAGEMENT. Work Management is designed to help managers better
balance the demands for service and support based on the priority of tasks and
the skill set of the workforce. Work Management will automatically allocate
unassigned or incomplete problem tickets to individuals. The manager can also
assign new work, view progress on assigned items, or reassign work based on
changing properties using the drag and drop interface.
ASSETCENTER is an application suite that manages the portfolio of
investments contained within an organization's infrastructure. ASSETCENTER
automatically retrieves technical data and alarms/alerts from the most common
network inventory and administration tools including Microsoft SMS, Tally
Systems NetCensus, Hewlett Packard OpenView, and IBM Tivoli. ASSETCENTER also
includes interfaces with enterprise resource planning (ERP) systems such as SAP
AG, Oracle Corporation, PeopleSoft, Inc. and J.D. Edwards & Company. ASSETCENTER
is a client/server, multi-platform and multi-database system, integrating
advanced workflow functionality. ASSETCENTER manages financial information in
any currency or currencies, including the euro.
ASSETCENTER APPLICATIONS
ASSET MANAGEMENT. The Asset Management application provides a comprehensive
inventory of organizations equipment, users, suppliers, and contracts. The
application provides detailed descriptions of software licenses acquired and
their associated rights in order to reconcile them with the software actually
installed. Asset Management allows users to track assets throughout their life
cycle, from the initial purchase request to retirement.
LEASE MANAGEMENT. Lease Management manages the contractual aspects of
leasing and rental by returning, updating and renewing equipment through alarm
and messaging features. The application also includes a wide range of methods
for calculating lease terms and permits users to evaluate different financing
alternatives.
PROCUREMENT MANAGEMENT. This application manages the acquisition of IT
products including assets, consumables and services. Procurement Management
covers the entire purchasing cycle: request, approval, estimate, issuance of
purchase orders, delivery and receipt. The application allows users to set up
authorization procedures as well as automatic reordering based on user-defined
restocking criteria.
COST MANAGEMENT. Cost Management features analytic and budgetary functions
that allow tracking, control, and allocation of IT related expenses. The
application allows users to track costs related to each asset, including both
capital and operational expenses (E.G., training and service calls) and to
measure the costs of ownership for each asset. The application also allows users
to compare accounting and physical inventories to determine the correct
valuation of balance sheet assets.
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OTHER NETWORK MANAGEMENT PRODUCTS
Peregrine's network management solutions provide network information on a
real-time basis. OPENSNA permits users to manage IBM SNA networks graphically
from a SNMP-based management console, to determine network status, and to issue
commands. STATIONVIEW and SERVERVIEW manage Novell NetWare, Microsoft Windows
NT, and Compaq Insight Manager-based servers and workstations from SNMP-based
management platforms.
PRODUCT DEVELOPMENT; PRODUCT AUTHORSHIP MODEL
Peregrine believes that attracting and retaining talented software
developers is an important component of Peregrine's product development
activities. To this end, Peregrine has instituted a product authorship incentive
program that rewards Peregrine's developers individually with commissions based
on the market success of the applications designed, written, marketed, and
supported by them. Peregrine's product authorship program is designed to
encourage Peregrine's developers to evaluate the effectiveness of a product in
the actual user environment.
Peregrine believes that the ability to deliver new and enhanced products to
customers is a key success factor. Peregrine has historically developed its
products through a consultative process with existing and potential customers.
Peregrine expects that continued dialogue with such existing and potential
customers may result in enhancements to existing products and the development of
new products, including product suites designed for a specific market segment.
Peregrine has in the past devoted and expects in the future to continue to
devote a significant amount of resources to developing new and enhanced
products. Peregrine currently has a number of product development initiatives
underway. There can be no assurance that any enhanced products, new products or
product suites will be embraced by existing or new customers. The failure of
these products to achieve market acceptance would have a material adverse effect
on Peregrine's business, results of operations, and financial condition.
Peregrine's research and development expenditures in fiscal 1996, 1997, and
1998 were $7.7 million, $5.9 million, and $8.4 million, respectively,
representing 33%, 17%, and 14% of total revenues in the respective periods. See
"Peregrine Management's Discussion and Analysis of Financial Condition and
Results of Operations."
The market for Peregrine's products is subject to rapid technological
change, changing customer needs, frequent new product introductions and evolving
industry standards that may render existing products and services obsolete. As a
result, Peregrine's position in its existing markets or other markets that it
may enter could be eroded rapidly by product advances. The life cycles of
Peregrine's products are difficult to estimate. Peregrine's growth and future
financial performance will depend in part on its ability to enhance existing
applications, develop and introduce new applications that keep pace with
technological advances, meet changing customer requirements and respond to
competitive products. Peregrine's product development efforts are expected to
continue to require substantial investments by Peregrine. There can be no
assurance that Peregrine will have sufficient resources to make the necessary
investments. Peregrine has in the past experienced development delays, and there
can be no assurance that Peregrine will not experience such delays in the
future. There can be no assurance that Peregrine will not experience
difficulties that could delay or prevent the successful development,
introduction, or marketing of new or enhanced products. In addition, there can
be no assurance that such products will achieve market acceptance, or that
Peregrine's current or future products will conform to industry requirements.
The inability of Peregrine, for technological or other reasons, to develop and
introduce new and enhanced products in a timely manner could have a material
adverse effect on Peregrine's business, results of operations and financial
condition.
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TECHNOLOGY
Peregrine's products rely on a number of standard, commercially available
technologies for relational database storage and retrieval and client/server
communications. Peregrine's products are designed to support a range of
implementations of infrastructure management applications and the Consolidated
Service Desk within medium sized organizations to large enterprises. Peregrine
has developed other technologies designed to provide a comprehensive environment
to build, deploy, and customize a range of applications.
Peregrine commenced integration of the SERVICECENTER and ASSETCENTER product
suites shortly after completion of the acquisition of Apsylog. Peregrine has a
phased plan for converging the technologies. The first phase, completed in 1998,
integrates SERVICECENTER and ASSETCENTER using a replication scheme called the
Peregrine Repository Interface Manager ("PRIM"). PRIM allows SERVICECENTER and
ASSETCENTER to manage simultaneously data describing infrastructure assets as
though they were in the same database. Peregrine's product objective is to merge
the technologies of the two product suites, retaining the best technology from
each and maintaining an upgrade path for current customers.
THREE-TIERED ARCHITECTURE. Peregrine's database, business rules, and
presentation technologies create a three-tiered client/server architecture
intended to provide scalability and flexibility. The tiers are logically
separated, allowing changes to the database design or the graphical interface to
be made without requiring changes to the business rules or other related tiers.
EASY CUSTOMIZATION/EXTENSION. In order to make the software fit the
customers' needs, Peregrine's products provide a number of tools that enable
customers to customize and extend SERVICECENTER and ASSETCENTER. The design of
the database, the contents and appearance of the user interface, and the
business rules can be modified using Peregrine's standard tools provided with
the system.
RAPID APPLICATION DEVELOPMENT ENVIRONMENT. Peregrine has created a
"fill-in-the-blanks" development environment for building and deploying
applications. All SERVICECENTER applications are implemented using the Company's
RAD environment. If a customer requires more extensive modification, the system
can be customized by changing the applications provided by Peregrine or
implementing new applications using the RAD environment.
DISTRIBUTED SERVICES. Peregrine has distributed a database technology that
provides replication services and the capability to move work from one
SERVICECENTER system to another. These services are database vendor independent
and contain knowledge of the application schema.
ADAPTERS. Peregrine provides adapters to industry standard APIs, such as
SMTP e-mail, and leading vendors products. These adapters expand the reach of
Peregrine's products by allowing them to interact with other products currently
in the customer's environment. Peregrine has also created adapters that permit
the system to communicate using e-mail, beeper, fax and Lotus Notes. The
adapters also provide communication with third party network management tools
such as Hewlett-Packard's OpenView, CA-Unicenter, Tivoli's TME, Cabletron
Spectrum, Sun's SunNet Manager and others. In addition, Peregrine has created an
open API permitting software developed by third parties, end-users or
Peregrine's Professional Services group to be integrated into the system.
INTELLIGENT AGENTS. Peregrine provides intelligent agents that gather and
feed information to SERVICECENTER. The agents provide automated inventory
gathering and problem determination data for use in problem resolution and
management of an IT environment. The agents permit help desk personnel to open,
update, and close trouble tickets based on criteria provided by the customers.
JAVA CLIENT. Peregrine plans to introduce a Java-based SERVICECENTER GUI
client this year. The Java client duplicates the functionality of the
SERVICECENTER GUI, allowing access to the entire SERVICECENTER system via the
internet (world wide web).
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SALES AND MARKETING
Peregrine sells its software and services in both North America and
internationally primarily through a direct sales force. In addition to
Peregrine's San Diego headquarters, the North American sales force is located in
the metropolitan areas of Atlanta, Chicago, Houston, San Francisco, New York,
and Washington, D.C. The international sales force is located in the
metropolitan areas of Amsterdam, Copenhagen, Frankfurt, London, Munich, and
Paris. Peregrine's sales model focuses on telephone and network communications
for product demonstrations and product sales. When necessary, however,
Peregrine's sales force will also travel to customer locations and pursue a
consultative sales process. In addition to its direct sales strategy, Peregrine
is continuing to pursue indirect distribution channels. In the Pacific Rim and
Latin America, Peregrine has established a network of channel partners. In North
America, Peregrine has established a network of regional, national and strategic
integrators. When sold through direct channels, the sales cycle for Peregrine's
product is typically six to nine months depending on a number of factors,
including the size of the transaction and the level of competition which
Peregrine encounters in its selling activities. This sales cycle is typically
extended 90 days for product sales through indirect channels.
In the last year, Peregrine has devoted significant resources to
restructuring and building its marketing organization. In the course of this
restructuring, the marketing organization has launched a new corporate marketing
strategy emphasizing Peregrine's objective to be the leading infrastructure
management solution worldwide. As part of its marketing strategy, Peregrine has
implemented the infrastructure management strategy throughout its marketing
programs such as seminars, monthly executive briefings, direct mailing, industry
trade shows, advertising and public relations. Peregrine plans to continue to
expand its marketing organization in an effort to broaden Peregrine's market
presence.
Peregrine has significantly increased the size of its sales force over the
last year and expects to continue hiring sales personnel, both domestically and
internationally, over the next twelve months. Competition for qualified sales
personnel is intense in the software industry. Peregrine also expects to
increase the number of its regional, national, and strategic integrators,
domestically and internationally. Any failure by Peregrine to expand its direct
sales force or other distribution channels could have a material adverse effect
on Peregrine's business, results of operations, and financial condition.
Peregrine believes that its continued growth and profitability will require
expansion of its international operations, particularly in Europe, Latin
America, and the Pacific Rim. Peregrine intends to expand its international
operations and enter additional international markets, either directly or
through international distribution or similar arrangements, which will require
significant management attention and financial resources. Competition for
suitable distribution partners is intense in many markets outside North America.
There can be no assurance that Peregrine will be successful in attracting and
retaining qualified international distributors or that it will be successful in
implementing direct sales programs in selected international markets. If
Peregrine is unable to obtain qualified international distribution partners or
is otherwise unable to successfully penetrate important international markets,
Peregrine's business, results of operations, and financial condition could be
materially and adversely affected.
In addition, continued international expansion poses a number of risks
associated with conducting business outside the United States, including
fluctuations in currency exchange rates, longer payment cycles, difficulties in
staffing and managing international operations, problems in collecting accounts
receivable, seasonal reductions in business activity during the summer months in
Europe and certain other parts of the world, increases in tariffs, duties, price
controls, or other restrictions on foreign currencies, and trade barriers
imposed by foreign countries, any of which could have a material adverse effect
on Peregrine's business, operating results and financial condition. In addition,
Peregrine has only limited experience in developing localized versions of its
products and marketing and distributing its products internationally. There can
be no assurance that Peregrine will be able to successfully localize, market,
sell, and deliver its products internationally. The inability of Peregrine to
expand its international operations
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successfully and in a timely manner could have a material adverse effect on
Peregrine's business and financial condition.
PROFESSIONAL SERVICES AND CUSTOMER SUPPORT
Peregrine's Professional Services group provides technical consulting and
training to assist customers in implementing Peregrine's products.
Peregrine provides a range of consulting services. Basic consulting services
include analyzing user requirements and providing the customer with a starter
system that will quickly demonstrate significant benefits of its products. More
advanced consulting services include providing turn-key implementations using
Peregrine's Advanced Implementation Methodology, which begins with a structured
analysis to map the customer's business rules onto Peregrine's service desk
tools, continues with the technical design and construction, and finishes with
system roll out. Implementation assistance frequently involves process
reengineering and the development of interfaces between Peregrine's products and
legacy systems and other tools or systems.
Peregrine offers training courses in the implementation and administration
of its products for a fee. On a periodic basis, Peregrine offers product
training at its facilities in San Diego and London for customers and channel
partners. Customer-site training is also available.
Peregrine maintains a staff of customer service personnel, who provide
technical support and training, and periodic software updates to Peregrine's
customers and partners. Peregrine offers technical support services 24 hours a
day, seven days a week through its local offices in Europe and San Diego via
toll free lines. In addition to telephone support, Peregrine provides support
via fax, e-mail, and a Web server.
COMPETITION
The market for Peregrine's products is highly competitive, fragmented, and
subject to rapid technological change and frequent new product introductions and
enhancements. Competitors vary in size and in the scope and breadth of the
products and services offered. Peregrine encounters competition from a number of
sources, including (i) providers of internal help desk software applications
such as Remedy Corporation and Software Artistry, Inc. (now a division of
Tivoli); (ii) customer interaction software companies such as Clarify Inc. and
The Vantive Corporation, whose products include internal help desk applications;
(iii) information technology and systems management companies such as IBM,
Computer Associates, Network Associates, Inc. (recently formed as a result of
the business combination of McAfee Associates, Inc. and Network General
Corporation), and Hewlett-Packard through its acquisition of PROLIN; (iv)
providers of asset management software; and (v) the internal information
technology departments of those companies with help desk requirements. Because
barriers to entry in the software market are relatively low, Peregrine
anticipates additional competition from other established and emerging companies
as the market for enterprise infrastructure management applications expands. In
addition, current and potential competitors have established or may in the
future establish cooperative relationships among themselves or with third
parties, or large software companies could acquire or establish alliances with
smaller competitors of Peregrine. Peregrine expects software industry
consolidation to continue in the future, and it is possible that new competitors
or alliances among competitors may emerge and rapidly acquire significant market
share. For example, Peregrine's ability to sell its products depends in part on
their compatibility with and support by providers of system management products,
including Tivoli, Computer Associates, and Hewlett-Packard. Both Tivoli and
Hewlett-Packard have recently acquired providers of help desk software products.
The decision of one or more providers of system management products to close
their systems to competing vendors like Peregrine, or to bundle their
infrastructure management and/or help-desk software products with other products
for enterprise licenses for promotional purposes or as part of a long-term
pricing strategy, could have an adverse effect on Peregrine's
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ability to sell its products. Increased competition, including increased
competition as a result of acquisitions of help desk and other infrastructure
management software vendors by system management companies, is likely to result
in price reductions, reduced gross margins, and loss of market share, any of
which could have a material adverse effect on Peregrine's business, results of
operations, and financial condition. Some of Peregrine's current and many of its
potential competitors have significantly greater financial, technical, marketing
and other resources than Peregrine. As a result, they may be able to respond
more quickly to new or emerging technologies and changes in customer
requirements or to devote greater resources to the development, promotion, and
sale of their products than Peregrine. There can be no assurance that Peregrine
will be able to compete successfully against current and future competitors or
that competitive pressures faced by Peregrine will not have a material adverse
effect on Peregrine's business, results of operations, and financial condition.
Peregrine believes that the principal competitive factors affecting its
market include product features such as adaptability, scalability, ability to
integrate with third party products, functionality, ease of use, product
reputation, quality, performance, price, customer service and support,
effectiveness of sales and marketing efforts and company reputation. Although
Peregrine believes that it currently competes favorably with respect to such
factors, there can be no assurance that Peregrine can maintain its competitive
position against current and potential competitors, especially those with
greater financial, marketing, service, support, technical, and other resources
than Peregrine. In addition, Peregrine believes that its future financial
performance will depend in large part on its success in developing an integrated
product line of software applications to manage all aspects of the enterprise
infrastructure, including management of IT, plant and facilities, communication
systems, and distribution systems, and to create organizational awareness of the
benefits to be obtained from an integrated approach to infrastructure
management.
INTELLECTUAL PROPERTY
Peregrine's success is heavily dependent upon proprietary technology.
Peregrine relies primarily on a combination of copyright and trademark laws,
trade secrets, confidentiality procedures and contractual provisions to protect
its proprietary rights. Peregrine seeks to protect its software, documentation
and other written materials under trade secret and copyright laws, which afford
only limited protection. Despite precautions taken by Peregrine, it may be
possible for unauthorized third parties to copy aspects of its current or future
products or to obtain and use information that Peregrine regards as proprietary.
In particular, Peregrine may provide its licensees with access to its data model
and other proprietary information underlying its licensed applications. There
can be no assurance that Peregrine's means of protecting its proprietary rights
will be adequate or that Peregrine's competitors will not independently develop
similar or superior technology. Policing unauthorized use of Peregrine's
software is difficult and, while Peregrine is unable to determine the extent to
which piracy of its software products exists, software piracy can be expected to
be a persistent problem. In addition, the laws of some foreign countries do not
protect Peregrine's proprietary rights to the same extent as do the laws of the
United States. Litigation may be necessary in the future to enforce Peregrine's
intellectual property rights, to protect Peregrine's trade secrets or to
determine the validity and scope of the proprietary rights of others. Such
litigation could result in substantial costs and diversion of resources and
could have a material adverse effect on Peregrine's business, results of
operations, and financial condition.
Peregrine is not aware that any of its software product offerings infringes
the proprietary rights of third parties. There can be no assurance, however,
that third parties will not claim infringement by Peregrine with respect to
current or future products. Peregrine expects that software product developers
will increasingly be subject to infringement claims as the number of products
and competitors in Peregrine's industry segment grows and the functionality of
products in different industry segments overlaps. Any such claims, with or
without merit, could be time-consuming, result in costly litigation, cause
product shipment delays or require Peregrine to enter into royalty or licensing
agreements. Such royalty or
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licensing agreements, if required, may not be available on terms acceptable to
Peregrine or at all, which could have a material adverse effect on Peregrine's
business, results of operations and financial condition.
EMPLOYEES
As of March 31, 1998, Peregrine employed 340 persons, including 110 in sales
and marketing, 49 in research and development, 32 in customer support, 69 in
professional services, and 80 in finance and administration. Of Peregrine's
employees, 118 are located in Europe and the remainder are located in North
America. Peregrine believes that its future success will depend in part on its
continued ability to attract, hire and retain qualified personnel. Competition
for such personnel is intense, and there can be no assurance that Peregrine will
be able to identify, attract, and retain such personnel in the future. None of
Peregrine's employees is represented by a labor union (other than statutory
unions required by law in certain European countries). Peregrine has not
experienced any work stoppages and considers its relations with its employees to
be good.
PROPERTIES
Peregrine's principal administrative, sales, marketing, support, research
and development and training functions are located at its headquarters facility
in San Diego, California. Peregrine currently occupies 95,110 square feet of
space in the San Diego facility, and the underlying leases extend through August
2003. Management believes that its current facilities are adequate to meet its
needs through the next twelve months. An additional 13,310 square feet of leased
space at the San Diego headquarters is subleased to JMI Services, Inc., an
affiliate of Peregrine.
Peregrine also leases office space for sales, marketing, and professional
services staff in the metropolitan areas of Atlanta, Chicago, Houston, New York,
San Francisco, and Washington, D.C. In Europe, Peregrine leases space in the
metropolitan areas of Amsterdam, Copenhagen, Frankfurt, London, Munich, and
Paris for European sales, customer support, professional services and
administration.
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PEREGRINE MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THE FOLLOWING DISCUSSION CONTAINS FORWARD-LOOKING STATEMENTS WITHIN THE
MEANING OF SECTION 27A OF THE SECURITIES ACT OF 1933 AND SECTION 21E OF THE
SECURITIES EXCHANGE ACT OF 1934. THESE FORWARD LOOKING STATEMENTS ARE SUBJECT TO
CERTAIN RISKS AND UNCERTAINTIES THAT COULD CAUSE ACTUAL RESULTS TO DIFFER
MATERIALLY FROM HISTORICAL RESULTS OR ANTICIPATED RESULTS, INCLUDING THOSE SET
FORTH UNDER THE CAPTIONS "RISK FACTORS," IN THIS "PEREGRINE MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS," AND
ELSEWHERE IN OR INCORPORATED BY REFERENCE INTO THIS PROXY STATEMENT/PROSPECTUS.
THE FOLLOWING DISCUSSION AND ANALYSIS SHOULD BE READ IN CONJUNCTION WITH
"SELECTED HISTORICAL AND UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL
INFORMATION" AND PEREGRINE'S CONSOLIDATED FINANCIAL STATEMENTS AND NOTES THERETO
INCLUDED ELSEWHERE IN THIS PROXY STATEMENT/PROSPECTUS.
OVERVIEW
Peregrine develops, markets, and supports an integrated suite of
applications that automates the management of complex, enterprise-wide
information and infrastructure assets. In 1995, Peregrine commenced sales of
SERVICECENTER, Peregrine's Enterprise Service Desk product suite. During fiscal
1998, Peregrine expanded the strategic concept of its product line by
implementing its infrastructure management strategy and executing on that
strategy with the acquisition in September 1997 of United Software, Inc.
including its wholly owned subsidiary Apsylog S.A. (the "Apsylog Acquisition").
As a result of the Apsylog Acquisition, Peregrine acquired the ASSETCENTER asset
management prdouct suite. SERVICECENTER and ASSETCENTER are currently available
for the Windows NT and UNIX platforms, and SERVICECENTER continues to be
available for the MVS platform.
Since the release of SERVICECENTER in July 1995, and until the Apsylog
Acquisition, SERVICECENTER accounted for substantially all of the Peregrine's
license revenues. Since the Apsylog Acquisition, SERVICECENTER and ASSETCENTER
together have accounted for substantially all of Peregrine's license revenues.
In addition, for the year ended March 31, 1998, over 85% of Peregrine's license
sales of SERVICECENTER and ASSETCENTER have been attributable to UNIX and
Windows NT platforms.
In the latter half of fiscal 1996 and the beginning of fiscal 1997,
Peregrine implemented an internal restructuring to capitalize on the market
opportunity for products addressing the requirements of the Enterprise Service
Desk. This restructuring included rebuilding Peregrine's senior management team,
redefining the product development strategy, initiating a comprehensive
marketing strategy and strengthening Peregrine's financial and budgeting
processes. In addition, in April 1996, Peregrine substantially reorganized its
sales force and instituted new sales management procedures.
During fiscal 1998, Peregrine determined that customer needs required a more
comprehensive solution for control and management of their infrastructure
assets, including availability of assets, minimizing investments and expense,
consolidating data, and interfacing to enterprise applications. Accordingly,
Peregrine refocused its marketing strategy and product positioning to focus on
its infrastructure mangement strategy. Peregrine's focus on the Infrastructure
Management strategy, Peregrine's rapid growth, and the Apsylog Acquisition have
resulted in continuing efforts to rebuild Peregrine's senior management team,
redefine the product development strategy, establish a comprehensive marketing
strategy, and strengthen Peregrine's financial and budgeting processes.
Peregrine's revenues are derived from product licensing, maintenance and
services. License fees are generally due upon the granting of the license and
typically include a one-year maintenance period as part of the license
agreement. Peregrine also provides ongoing maintenance services, which include
technical support and product enhancements, for an annual fee based upon the
current price of the product. In fiscal 1996, 1997, and 1998, maintenance and
services revenues represented 51%, 42%, and 37% of total revenues, respectively.
Peregrine has sold its original PNMS software to a sizable installed base of
customers, many of whom have transitioned to SERVICECENTER. Peregrine's
installed customer base has
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generated a consistent level of maintenance revenues. In fiscal 1996, 1997, and
1998, more than 90% of Peregrine's customers renewed their maintenance
agreements.
Revenues from license agreements are recognized currently, provided that all
of the following conditions are met: a noncancelable license agreement has been
signed, the product has been delivered, there are no material uncertainties
regarding customer acceptance, collection of the resulting receivable is deemed
probable, and no other significant vendor obligations exist. Revenues from
post-contract support services are recognized ratably over the term of the
support period, generally one year. Maintenance revenues which are bundled with
license agreements are unbundled using vendor-specific objective evidence.
Consulting revenues are primarily related to implementation services most often
performed on a time and material basis under separate service agreements for the
installation of Peregrine's products. Revenues from consulting and training
services are recognized as the respective services are performed.
Peregrine currently derives substantially all of its license revenues from
the sale of SERVICECENTER and ASSETCENTER and expects them to account for a
significant portion of Peregrine's revenues for the foreseeable future. As a
result, Peregrine's future operating results are dependent upon continued market
acceptance of the SERVICECENTER and ASSETCENTER product suites, including future
enhancements. Factors adversely affecting the pricing of, demand for or market
acceptance of the SERVICECENTER and ASSETCENTER product suites, such as
competition or technological change, could have a material adverse effect on
Peregrine's business, operating results, and financial condition.
Peregrine conducts business overseas in a number of foreign currencies,
principally the British Pound, the Deutsche Mark and the French Franc. These
currencies have been relatively stable against the U.S. dollar for the past
several years. As a result, foreign currency fluctuations have not had a
significant impact on Peregrine's revenues or results of operations. Although
Peregrine currently derives no revenues from highly inflationary economies,
Peregrine is expanding its presence in international markets outside Europe,
including the Pacific Rim and Latin America, whose currencies have tended to
fluctuate more relative to the U.S. Dollar. There can be no assurance that
European currencies will remain stable relative to the U.S. dollar or that
future fluctuations in the value of foreign currencies will not have a material
adverse effect on Peregrine's business, operating results and financial
condition. Peregrine has implemented a foreign currency forward hedging program.
The hedging program consists primarily of using 30-day forward-rate currency
contracts. Currency contracts are in accordance with SFAS No. 52 and receive
hedge accounting treatment. Accordingly, to the extent properly hedged by
obligations denominated in local currencies, Peregrine's foreign operations
remain subject to the risks of future foreign currency fluctuations, and there
can be no assurances that Peregrine's hedging activities will adequately protect
Peregrine against such risk.
To date Peregrine's Pacific Rim sales activity has not been material.
Accordingly, Peregrine's operations and financial conditions have not been
materially impacted by the recent Asian financial crisis.
83
<PAGE>
RESULTS OF OPERATIONS
The following table sets forth for the period indicated selected
consolidated statements of operations data as a percentage of total revenues.
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
-----------------------------------------------
1994 1995 1996 1997 1998
------- ------- ------- ------- -------
(AS A PERCENTAGE OF TOTAL REVENUES)
<S> <C> <C> <C> <C> <C>
Statement of Operations Data:
Revenues:
Licenses............................ 42.6% 46.6% 49.0% 58.4% 62.7%
Maintenance and services............ 57.4 53.4 51.0 41.6 37.3
------- ------- ------- ------- -------
Total revenues.................... 100.0 100.0 100.0 100.0 100.0
Costs and expenses:
Cost of licenses.................... 2.0 2.0 1.7 0.6 0.5
Cost of maintenance and services.... 22.0 18.2 14.9 13.3 16.7
Sales and marketing................. 38.8 48.7 49.7 45.0 36.7
Research and development............ 29.6 33.0 32.6 16.8 13.6
General and administrative.......... 12.1 15.0 19.1 10.9 10.4
Acquired in-process research and
development....................... -- 3.1 -- -- 56.2
------- ------- ------- ------- -------
Total costs and expenses.......... 104.5 120.0 118.0 86.6 134.1
------- ------- ------- ------- -------
Operating income (loss)................. (4.5) (20.0) (18.0) 13.4 (34.1)
Interest income (expense) and other,
net................................... (0.2) 20.3 (1.2) (1.4) 1.3
------- ------- ------- ------- -------
Income (loss) from continuing operations
before income taxes................... (4.7) 0.3 (19.2) 12.0 (32.8)
Income tax expense (benefit)............ -- -- -- (4.5) 8.7
------- ------- ------- ------- -------
Income (loss) from continuing
operations............................ (4.7) 0.3 (19.2) 16.5 (41.5)
Loss from discontinued operations
Loss from operations.................. -- -- (3.3) -- --
Loss on disposal...................... -- -- (4.5) -- --
Loss from discontinued operations... -- -- (7.8) -- --
------- ------- ------- ------- -------
Net income (loss)..................... (4.7)% 0.3% (27.0)% 16.5% (41.5)%
------- ------- ------- ------- -------
------- ------- ------- ------- -------
</TABLE>
FISCAL YEARS ENDED MARCH 31, 1996, 1997, AND 1998
REVENUES
Total revenues were $23.8 million, $35.0 million, and $61.9 million in
fiscal 1996, 1997, and 1998, respectively, representing year-to-year increases
of 47% between 1996 and 1997 and 77% between 1997 and 1998.
LICENSES. License revenues were $11.6 million, $20.5 million, and $38.8
million in fiscal 1996, 1997, and 1998, respectively, representing 49%, 58%, and
63% of total revenues in the respective periods. The increases in license
revenues are attributable to increased demand for new licenses of SERVICECENTER
(and following the Apsylog Acquisition, licenses for ASSETCENTER), additional
seats purchased by existing SERVICECENTER customers, higher average transaction
sizes, more effective corporate marketing programs, improved sales force
productivity, expansion of Peregrine's domestic and international sales forces,
and the effect of combining Apsylog's operations since the Apsylog Acquisition
in September 1997.
MAINTENANCE AND SERVICES. Maintenance and services revenues were $12.1
million, $14.6 million, and $23.1 million in fiscal 1996, 1997, and 1998,
respectively, representing 51%, 42%, and 37% of total
84
<PAGE>
revenues in the respective periods. The dollar increases are attributable to
renewals of maintenance agreements from Peregrine's expanded installed base of
customers and maintenance revenues included as part of new licenses and an
increased number of consulting engagements related to implementation of software
from initial license agreements.
COSTS AND EXPENSES
COST OF LICENSES. Cost of license revenues was $415,000, $215,000, and
$326,000 for fiscal 1996, 1997, and 1998, respectively, representing 2%, 1%, and
1% of total license revenues in the respective periods.
COST OF MAINTENANCE AND SERVICES. Cost of maintenance and services revenues
was $3.5 million, $4.7 million, and $10.3 million in fiscal 1996, 1997, and
1998, respectively, representing 29%, 32%, and 45% of total maintenance and
services revenues in the respective periods. The dollar and percentage increases
in 1998 are attributable to an increase in customer support personnel and
professional services personnel in connection with the corresponding increase in
professional services revenue and the effect of combining Apsylog's operations
since the Apsylog Acquisition in September 1997. Cost of maintenance and
services increased as a percentage of related revenues because of increased
labor costs.
SALES AND MARKETING. Sales and marketing expenses were $11.8 million, $15.8
million, and $22.7 million in fiscal 1996, 1997, and 1998, respectively,
representing 50%, 45%, and 37% of total revenues in the respective periods. The
dollar increases are attributable to the significant expansion of both the North
American and international sales forces, increases in marketing personnel, the
effect of combining Apsylog's operations since the Apsylog Acquisition in
September 1997, and to moderate operating expense increases. Sales and marketing
expenses have decreased as a percentage of total revenues from fiscal 1996
through fiscal 1998 as a result of revenues increasing at a faster rate. If
Peregrine experiences a decrease in sales force productivity or for any other
reason a decline in revenues, it is likely that operating margins will decline
as well.
RESEARCH AND DEVELOPMENT. Research and development expenses were $7.7
million, $5.9 million, and $8.4 million in fiscal 1996, 1997, and 1998,
respectively, representing 33%, 17%, and 14% of total revenues in the respective
periods. The dollar and percentage decreases from fiscal 1996 to fiscal 1997 are
due primarily to the full year effect of Peregrine's divestiture of the entire
mainframe software development portion of its business in October 1995. The
dollar increase from fiscal 1997 to fiscal 1998 is due primarily to the
increased dollar amount of product author commissions, an increase in the number
of personnel in the Research and Development department, and the effect of
combining Apyslog's operations since the Apsylog Acquisition in September 1997.
Research and development expenses have decreased as a percentage of total
revenues from fiscal 1996 through fiscal 1998 as a result of revenues increasing
at a faster rate.
GENERAL AND ADMINISTRATIVE. General and administrative expenses were $4.5
million, $3.8 million, and $6.5 million in fiscal 1996, 1997, and 1998,
respectively, representing 19%, 11%, and 10% of total revenues in the respective
periods. The dollar increase from 1997 to 1998 is attributable primarily to
costs associated with administrative personnel additions to support growth,
management restructuring, and the effect of combining Apsylog's operations since
the Apsylog Acquisition in September 1997. The decrease from fiscal 1996 to 1997
was attributable to the costs incurred in the fiscal 1996 management
restructuring.
PROVISION FOR INCOME TAXES/INCOME TAX BENEFIT
Peregrine did not incur any significant income taxes during fiscal 1996 due
to operating losses. In fiscal 1997, Peregrine recorded an income tax benefit of
$1.6 million resulting from the utilization of a portion of Peregrine's
available net operating loss carryforwards as an offset against taxable income.
In fiscal 1998 Peregrine recorded an income tax expense of $5.4 million. As of
March 31, 1997 and 1998, Peregrine had net operating loss carry-forwards of
approximately $290,000 and $8.5 million, respectively, for federal
85
<PAGE>
income tax purposes which expire beginning in 2004. Utilization of the net
operating losses may be subject to annual limitations resulting from certain
changes in ownership of Peregrine. At March 31, 1998, Peregrine also has foreign
net operating loss carryforwards of approximately $5.8 million. Peregrine has
recorded a valuation allowance to partially offset the carrying value of its net
deferred tax assets due to uncertainty surrounding its realization. Management
evaluates on a quarterly basis the recoverability of the deferred tax assets and
the amount of the valuation allowance. At such time as it is determined that it
is more likely than not that all or part of the deferred tax assets are
realizable, the valuation allowance will be reduced accordingly. Any future
decrease in the valuation allowance will be recorded as a reduction in goodwill.
DISCONTINUED OPERATIONS
During fiscal 1996, Peregrine acquired XVT Software Inc. ("XVT"),
substantially all of the outstanding equity of which was owned by the majority
stockholder of Peregrine. In January 1996, Peregrine determined that maintaining
an interest in XVT was not consistent with Peregrine business strategy and
adopted a plan to discontinue the operations of XVT. Peregrine incurred a loss
from discontinued operations of XVT in fiscal 1996 of $1.9 million.
IMPACT OF INFLATION
The effect of inflation on Peregrine's financial position has not been
significant to date.
LIQUIDITY AND CAPITAL RESOURCES
Until April 1997, Peregrine has financed its operations through bank
borrowings and private sales of Peregrine Common Stock. In fiscal 1996,
Peregrine received net proceeds from bank borrowings of $3.7 million. In fiscal
1997, Peregrine's net repayments totaled $1.3 million. In fiscal 1997, Peregrine
received proceeds of $700,000 from the sale of a product line. In fiscal 1996
and 1997, Peregrine invested cash in the amounts of $3.5 million and $566,000,
respectively, for purchases of property and equipment including computer
hardware and software to support Peregrine's growing employee base and to
relocate to its new San Diego headquarters and training facility. In fiscal
1996, Peregrine generated $584,000 in cash from operations, but a net cash use
of $738,000 by a discontinued business resulted in an overall cash use by
Peregrine of $154,000 in connection with operating activities. In fiscal 1997,
Peregrine generated $3.2 million in cash from operations, which was reduced by a
net cash use of $1.3 million by a discontinued business resulting in $1.9
million net cash provided from operations. In fiscal 1998, Peregrine generated
$1.7 million in cash from operations, which was reduced by a net cash use of
$170,000 by a discontinued business resulting in 1.5 million net cash provided
by operations.
In April 1997, Peregrine completed the initial public offering of its Common
Stock, which resulted in net proceeds to Peregrine of $19.3 million.
Peregrine has a $5.0 million revolving credit line which expires July 31,
1998, pursuant to which there was no outstanding balance at March 31, 1998.
Borrowings under the line of credit bear interest at the bank's prime rate (8.5%
at March 31, 1998). The line of credit is secured by accounts receivable,
equipment, and certain other assets of Peregrine. The borrowing facility also
provides for a foreign exchange facility, under which the maximum principal
amount of foreign exchange transactions which may mature during any two day
period is $2.0 million.
Peregrine believes that the net proceeds from its initial public offering in
April 1997, together with its current cash and short-term investments balances,
cash available under its bank facilities, and cash flow from operations will be
sufficient to meet its working capital requirements for at least the next 12
months. Although operating activities may provide cash in certain periods, to
the extent Peregrine experiences growth in the future, Peregrine anticipates
that its operating and investing activities may use cash. Consequently, any such
future growth may require Peregrine to obtain additional equity or debt
financing, which may not be available on commercially reasonable terms or which
may be dilutive.
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<PAGE>
YEAR 2000 RISKS
Many currently installed computer systems and software products are coded to
accept only two digit entries in the date code field. These date code fields
will need to accept four digit entries to distinguish 21st century dates from
20th century dates. As a result, many companies' software and computer systems
may need to be upgraded or replaced in order to comply with such Year 2000
requirements. Significant uncertainty exists in the software industry concerning
the potential effects associated with such compliance.
Peregrine utilizes third party equipment and software that may not be Year
2000 compliant and is conducting an internal audit of products provided by
outside vendors to determine if such third party products are Year 2000
compliant. Although such audit is not yet completed, Peregrine has received
assurances from suppliers of all third party software that Peregrine deems
material to its business that such software is Year 2000 compliant. Failure of
such third party equipment or software to operate properly with regard to the
Year 2000 and thereafter could require Peregrine to incur unanticipated expenses
to remedy any problems, which could have a material adverse effect on its
business, results of operations, and financial condition. If key systems, or a
significant number of systems, were to fail as a result of Year 2000 problems or
if Peregrine was to experience delays implementing Year 2000 compliant software
products, Peregrine could incur substantial costs and disruption of its
business, which would potentially have a material adverse effect on its results
of operations and financial conditions.
Peregrine is still assessing the impact the Year 2000 issue will have on its
proprietary software products and internal information systems and will take
appropriate corrective actions based on the results of such analyses. Management
of Peregrine has not yet determined the costs related to achieving Year 2000
compliance but does not believe such costs will be material. To the extent the
costs of achieving Year 2000 compliance are material, such costs will have a
material adverse effect on its business, results of operations, and financial
condition.
In the ordinary course of its business, Peregrine tests and evaluates its
own software products and believes that its software products are generally Year
2000 compliant, meaning that the use or occurrence of dates on or after January
1, 2000 will not materially affect the performance of such software products
with respect to four digit date dependent data or the ability of such products
to correctly create, store, process and output information related to such data.
There can be no assurances, however, that Peregrine will not subsequently learn
that certain of its software products do not contain all necessary software
routines and codes necessary for the accurate calculation, display, storage and
manipulation of data involving dates. In addition, in certain circumstances,
Peregrine has warranted that the use or occurrence of dates on or after January
1, 2000 will not adversely affect the performance of its products with respect
to four digit date dependent data or the ability to create, store, process and
output information related to such data. If any licensees experience Year 2000
problems, such licensees could assert claims for damages.
In addition, the purchasing patterns of customers and potential customers
may be affected by Year 2000 issues. Many companies are expending significant
resources to correct their current software systems for Year 2000 compliance.
These expenditures may result in reduced funds available to purchase software
products such as those offered by Peregrine, which could have an adverse effect
on the business, results of operations, and financial condition of Peregrine.
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<PAGE>
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>
88
<PAGE>
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.
89
<PAGE>
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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PEREGRINE MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The following table sets forth certain information concerning the executive
officers and directors of Peregrine and their ages as of May 31, 1998:
<TABLE>
<CAPTION>
NAME AGE POSITION
- -------------------------------------- --- --------------------------------------------------------------------
<S> <C> <C>
Stephen P. Gardner.................... 44 President, Chief Executive Officer and Director
David A. Farley....................... 43 Vice President, Finance, Chief Financial Officer and Director
William G. Holsten.................... 61 Vice President, Professional Services
Gary A. Hughes........................ 34 Vice President, Worldwide Customer Support
Frederic B. Luddy..................... 43 Vice President, North America Research and Development
Richard T. Nelson..................... 38 Vice President, Secretary and General Counsel
Douglas S. Powanda.................... 41 Vice President, Worldwide Sales
Steven S. Spitzer..................... 38 Vice President, Channel Sales
Gilles Queru.......................... 39 Vice President, Corporate Development
John J. Moores (1).................... 53 Chairman of the Peregrine Board
Christopher A. Cole................... 44 Director
Richard A. Hosley II (1).............. 53 Director
Charles E. Noell III (1)(2)........... 46 Director
Norris van den Berg (2)............... 59 Director
</TABLE>
- ------------------------
(1) Member of Compensation Committee.
(2) Member of Audit Committee.
STEPHEN P. GARDNER has served as Peregrine's President and Chief Executive
Officer, and a member of the Peregrine Board since April 1998. From January 1998
to April 1998, Mr. Gardner was Peregrine's acting Chief Executive Officer. From
May 1997 to January 1998, Mr. Gardner served as Peregrine's Vice President,
Strategic Acquisitions. From May 1996 until May 1997, Mr. Gardner served as
president of Thunder & Lightning Company, an Internet software start-up company.
From 1995 until May 1996 Mr. Gardner served as the president of Alpharel Inc., a
document management software company. From 1993 until 1995, Mr. Gardner served
as a vice president of Data General Corporation, a manufacturer of multiuser
computer systems, peripheral equipment, communications systems, and related
products. From 1988 to 1993, Mr. Gardner served in various capacities with
Groupe Bull, most recently as founder and president of its Integris Business
Unit, a systems integration and software company owned by Groupe Bull of France.
Mr. Gardner holds an A.B. in Geochemistry from Princeton University and an
M.B.A. from Harvard University.
DAVID A. FARLEY has served as Peregrine's Vice President, Finance, and Chief
Financial Officer and as a member of the Peregrine Board since October 1995. Mr.
Farley served as Secretary of Peregrine from October 1995 until February 1997.
From November 1994 to November 1995, Mr. Farley was Vice President, Finance, and
Chief Financial Officer and a director of XVT, a development tools software
company. From December 1984 until October 1994, Mr. Farley held various
accounting and financial positions at BMC Software, Inc., a vendor of software
system utilities for IBM manufacture computing environments ("BMC"), most
recently as Chief Financial Officer and as a director. Mr. Farley holds a B.S.
in Accounting from the University of Alabama.
WILLIAM G. HOLSTEN has served as Peregrine's Vice President, Professional
Services since November 1995. From July 1994 until November 1995, Mr. Holsten
was Director of Professional Services for XVT. From August 1992 until June 1994,
he was a consultant with Engineering Software Solutions, a consulting firm
co-owned by Mr. Holsten and a partner, which provided consulting services to XVT
from May 1993 to June 1994. From October 1984 to July 1992, Mr. Holsten held a
variety of positions with
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<PAGE>
Precision Visuals, Inc., a graphics software company, most recently as Director
of Professional Services. Mr. Holsten holds a B.A. in Mathematics from the
University of California at Santa Barbara.
GARY A. HUGHES has served as Peregrine's Vice President, Worldwide Customer
Support since April 1998. Since joining Peregrine as a customer support
representative in July 1990, Mr. Hughes has held a variety of positions with
Peregrine, including, from January 1998, until April 1998, Peregrine's Director
of Worldwide Customer Support, from August 1997 until January 1998 Peregrine's
manager, Systems Engineers, from October 1995 until August 1997, Peregrine's
Developement Manager, and from December 1993 until December 1994, Peregrine's
Vice President, Customer Support.
FREDERIC B. LUDDY has served as Peregrine's Vice President, North American
Research and Development, and Chief Technology Officer since January 1998. Mr.
Luddy has been with Peregrine since April 1990, serving as Product Architect for
SERVICECENTER from October 1995 until January 1998 and as a Product Author prior
to that time.
RICHARD T. NELSON has served as Peregrine's General Counsel since November
1995, as its Vice President since October 1996 and as its Secretary since
February 1997. From August 1991 until November 1995, Mr. Nelson was an associate
in the Houston, Texas office of Jackson & Walker LLP, a law firm. Mr. Nelson
holds a B.S. in Accounting from Bentley College and a J.D. from the University
of Iowa College of Law.
DOUGLAS S. POWANDA has served as Peregrine's Vice President, Worldwide Sales
since January 1998. Mr. Powanda served as Peregrine's Vice President,
International Sales from September 1995 to January 1998. From June 1994 until
September 1995, he served as Peregrine's Vice President, North American Sales.
He was Peregrine's Director of Sales for Europe from September 1993 until June
1994, its Regional Sales Manager from December 1992 to August 1993, and its
Senior Accounts Manager from February 1992 until December 1992. Mr. Powanda
holds a B.S. in Business Management from Trenton State University and an M.B.A.
from Pepperdine University.
STEVEN S. SPITZER has served as Peregrine's Vice President, Channel Sales
since August 1997. From 1986 until August 1997, Mr. Spitzer held various
positions with FileNet Corporation, a provider of workflow, document-imaging,
and electronic document management software solutions, most recently as Vice
President, Channel Sales. Mr. Spitzer holds a B.S. in Business Administration,
Computer Sciences from Long Beach State University.
GILLES QUERU has served as Peregrine's Vice President, Corporate Development
since April 1998. Mr. Queru joined Peregrine as President of Apsylog in
September 1997 as a result of the Apsylog Acquisition. Mr. Queru founded Apsylog
in 1987 and served as its Chief Executive Officer and Chairman of its Board of
Directors until the Apsylog Acquisition. Prior to forming Apsylog, Mr. Queru
held several management positions with Hewlett-Packard, a developer and
manufacturer of computer and imaging product hardware. Mr. Queru is a graduate
of Ecole Centrale de Lyon.
JOHN J. MOORES has served as Chairman of the Peregrine Board since March
1990 and as a Peregrine Board member since March 1989. In 1980, Mr. Moores
founded BMC and served as its President and Chief Executive Officer from 1980 to
1986 and as Chairman of its Board of Directors from 1980 to 1992. Since December
1994, Mr. Moores has served as owner and Chairman of the Board of the San Diego
Padres Baseball Club, L.P. and since September 1991 as Chairman of the Board of
JMI Services, Inc., a private investment company ("JMI Services"). Mr. Moores
also serves as a director of Homegate Hospitality, Inc. Mr. Moores holds a B.S.
in economics and a J.D. from the University of Houston.
CHRISTOPHER A. COLE has served as a member of Peregrine's Board of Directors
since founding Peregrine in 1981. He also served as its President and Chief
Executive Officer from 1986 until 1989. Since 1992, Mr. Cole has served as
President and Chief Executive Officer of Questrel, Inc., a software development
company. Mr. Cole holds an A.B. and an A.M. in Physics from Harvard University.
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<PAGE>
RICHARD A. HOSLEY II has served as a member of the Peregrine Board since
January 1992. Prior to retiring from full-time employment, Mr. Hosley served as
President and Chief Executive Officer of BMC. Mr. Hosley also serves as a
director of Logic Works, Inc. and as a director and member of the compensation
committee of Axent Technologies, Inc. Mr. Hosley holds a B.A. in Economics from
Texas A&M University.
CHARLES E. NOELL III has served as a member of the Peregrine Board since
January 1992. Since January 1992, Mr. Noell has served as President and Chief
Executive Officer of JMI Services, Inc., a private investment company, and as a
General Partner of JMI Equity Fund, L.P., a venture capital investment firm
("JMI Equity Fund"). Mr. Noell also serves as a director of Expert Software,
Inc. and Transaction Systems Architects, Inc. and as a director and member of
the compensation committee of Homegate Hospitality, Inc. Mr. Noell holds a B.A.
in History from the University of North Carolina at Chapel Hill and an M.B.A.
from Harvard University.
NORRIS VAN DEN BERG has served as a member of the Peregrine Board since
January 1992. Mr. van den Berg has served as a General Partner of JMI Equity
Fund since July 1991 and also serves as a member of the Board of Directors of
Prism Solutions, Inc. Mr. van den Berg holds a B.A. in Philosophy and
Mathematics from the University of Maryland.
There are no family relationships among any executive officers or directors
of Peregrine.
DIRECTOR COMPENSATION
Peregrine reimburses each member of the Peregrine Board for out-of-pocket
expenses incurred in connection with attending Board meetings. No member of the
Peregrine Board currently receives any additional cash compensation. In May
1992, Peregrine granted each of directors Christopher A. Cole, Richard A. Hosley
II, Charles E. Noell III and Norris van den Berg options to acquire 45,000
shares of Common Stock under Peregrine's 1991 Nonqualified Stock Option Plan at
an exercise price of $1.34, the per share fair market value of Peregrine Common
Stock on the date of grant. All such options vested in annual installments over
four years, are now fully exercisable, and expire if not exercised prior to May
2002. In addition, in December 1990, Peregrine granted Christopher A. Cole an
option to acquire 225,000 shares of Peregrine Common Stock under Peregrine's
Nonqualified Stock Option Plan at an exercise price of $0.51 per share, the per
share fair market value of Peregrine Common Stock on the date of grant.
Following Mr. Cole's resignation as an executive officer of Peregrine and in
consideration of his continuing service as a member of the Peregrine Board,
Peregrine extended the exercisability of such option with respect to 56,250
vested shares for so long as Mr. Cole remains a member of the Peregrine Board
but no later than December 2000. See "Peregrine Certain Transactions" and
"Peregrine Stock Ownership Of Certain Beneficial Owners And Management."
Peregrine's 1997 Director Option Plan (the "Director Plan") provides that
options will be granted to non-employee directors, other than non-employee
directors who hold or are affiliated with a holder of three percent or more of
the outstanding Peregrine Common Stock, pursuant to an automatic
nondiscretionary grant mechanism. Each new non-employee director is
automatically granted an option to purchase 25,000 shares of Peregrine Common
Stock at the time he or she is first elected to the Peregrine Board. Each
non-employee director will subsequently be granted an option to purchase 5,000
shares of Peregrine Common Stock at each annual meeting of stockholders
beginning with the 1998 Annual Meeting of Stockholders. Each such option will be
granted at the fair market value of the Peregrine Common Stock on the date of
grant. Options granted to non-employee directors under the Director Plan will
become exercisable over four years, with 25% of the shares vesting after one
year and the remaining shares vesting in quarterly installments thereafter.
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<PAGE>
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Compensation Committee is responsible for determining salaries,
incentives and other forms of compensation for directors, officers and other
employees of Peregrine and administers various incentive compensation and
benefit plans. The Compensation Committee consists of directors Richard A.
Hosley II, John J. Moores and Charles E. Noell III. Stephen P. Gardner,
Peregrine's President, Chief Executive Officer and a member of the Peregrine
Board, participates in all discussions and decisions regarding salaries and
incentive compensation for all employees and consultants of Peregrine, except
that he is excluded from discussions regarding his own salary and incentive
compensation. No interlocking relationship exists between any member of the
Peregrine Compensation Committee and any member of any other company's board of
directors or compensation committee.
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<PAGE>
EXECUTIVE COMPENSATION
The following table sets forth in summary form information concerning the
compensation awarded to, earned by, or paid for services rendered to Peregrine
in all capacities during the fiscal years ended March 31, 1996, 1997, and 1998
respectively by (i) Peregrine's President and Chief Executive Officer and (ii)
Peregrine's next five most highly compensated executive officers whose salary
and bonus for fiscal 1998 exceeded $100,000 (collectively, the "Peregrine Named
Executive Officers").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM COMPENSATION
ANNUAL COMPENSATION(1) -------------------------
RESTRICTED SECURITIES
FISCAL ---------------------- STOCK UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS AWARDS OPTIONS(#) COMPENSATION
- ---------------------------------------- ------ -------- ------------ ------------ ---------- --------------
<S> <C> <C> <C> <C> <C> <C>
CURRENT EXECUTIVE OFFICERS
Stephen P. Gardner(2)................... 1998 $139,000 $ 210,000(8) $775,000(15) 150,000 $ 5,156(18)
President and 1997 -- -- -- -- --
Chief Executive Officer 1996 -- -- -- -- --
David A. Farley(3)...................... 1998 150,000 296,490(9) -- -- 3,337(19)
Vice President, Finance, 1997 150,000 126,240 -- -- 2,712
and Chief Financial Officer 1996 120,000 73,146 468,000(16) 200,000 100,321
William G. Holsten(4)................... 1998 90,000 159,547(10) -- 30,000 4,723(20)
Vice President, 1997 90,000 120,000 -- 50,000 4,481
Professional Services 1996 90,000 201,574 -- 100,000 35,387
Frederic B. Luddy(5).................... 1998 150,000 729,060(11) -- 25,000 3,946(21)
Vice President, North 1997 150,000 211,925 -- -- 2,712
American Research and 1996 150,000 133,920 -- 25,000 2,712
Development
Douglas S. Powanda...................... 1998 150,000 309,523(12) -- 75,000 3,946(22)
Vice President, 1997 150,000 104,300 -- 50,000 2,885
Worldwide Sales 1996 106,000 179,127 -- -- 7,704
FORMER EXECUTIVE OFFICERS
Alan H. Hunt(6)......................... 1998 187,500 560,336(13) -- -- 57,102(23)
President and Chief 1997 225,000 225,160 -- -- 4,862
Executive Officer 1996 192,500 130,557 936,000(17) 400,000 16,968
Douglas F. Garn(7)...................... 1998 122,747 153,257(14) -- -- 7,845(24)
Vice President, North 1997 150,000 197,324 -- 200,000 18,788
American Sales 1996 -- -- -- -- --
</TABLE>
- ------------------------------
(1) Other than the salary and bonus described herein, Peregrine did not pay any
executive officer named in the Summary Compensation Table any fringe
benefits, perquisites or other compensation in excess of 10% of such
executive officer's salary and bonus during either fiscal 1998, fiscal
1997, or fiscal 1996.
(2) Mr. Gardner became Peregrine's President and Chief Executive Officer and a
member of the Peregrine Board in April 1998. From January 1998 to April
1998, Mr. Gardner served as Peregrine's Executive Vice President and acting
Chief Executive Officer and from May 1997 to January 1998 as Peregrine's
Vice President, Strategic Acquisitions.
(3) Mr. Farley became Peregrine's Vice President, Finance, and Chief Financial
Officer in October 1995. Mr. Farley's salary and bonus for fiscal 1996
include amounts paid to him as Vice President, Finance, and Chief Financial
Officer of XVT. Peregrine acquired XVT in October 1995. See "Certain
Transactions."
(4) Mr. Holsten became Peregrine's Vice President, Professional Services in
November 1995. Mr. Holsten's salary and bonus for fiscal 1996 include
amounts paid to him as Director, Professional Services, of XVT.
(5) Mr. Luddy became Peregrine's Vice President, North American Research and
Development in January 1998. Mr. Luddy's salary and bonus for fiscal 1998,
1997, and 1996 include amounts paid to him as Chief Architect of
SERVICECENTER.
(6) Mr. Hunt resigned as Peregrine's President and Chief Executive Officer in
January 1998. Mr. Hunt's salary and bonus for fiscal 1996 include amounts
paid to him as President and Chief Executive Officer of XVT.
(7) Mr. Garn resigned as Peregrine's Vice President, North American Sales, in
January 1998.
(8) Bonus compensation for fiscal 1998 includes $50,000 earned in fiscal 1998
to be paid in fiscal 1999.
(9) Bonus compensation for fiscal 1998 includes $90,925 earned in fiscal 1998
to be paid in fiscal 1999. Bonus compensation for fiscal 1997 includes
$156,240 earned in fiscal 1997 but paid in fiscal 1998. Bonus compensation
for fiscal 1996 includes $35,000 earned in fiscal 1996 but paid in fiscal
1998.
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<PAGE>
(10) Bonus compensation for fiscal 1998 includes $15,000 earned in fiscal 1998
to be paid in fiscal 1999.
(11) Bonus compensation for fiscal 1998 consists of (i) $555,519 of product
authorship commission income earned and paid in fiscal 1998 and (ii)
$173,541 of product authorship commission income earned in fiscal 1998 to
be paid in fiscal 1999. Bonus compensation for fiscal 1997 and 1996
consists entirely of product authorship commissions.
(12) Bonus compensation for fiscal 1998 consists of (i) $10,000 of bonus
compensation and $195,053 of commission income earned and paid in fiscal
1998 and (ii) $115,570 of commission income earned in fiscal 1998 to be
paid in fiscal 1999. Bonus compensation for fiscal 1997 consists of (i)
$32,531 of bonus compensation and $26,769 of commission income earned and
paid in fiscal 1997 and (ii) $34,000 of bonus compensation and $11,000 of
commission income earned in fiscal 1997 but paid in fiscal 1998. Bonus
compensation for fiscal 1996 consists of (i) $131,492 of bonus
compensation and $4,725 of commission income earned and paid in fiscal
1996 and (ii) $37,351 of bonus compensation and $5,559 of commission
income earned in fiscal 1996 but paid in fiscal 1997.
(13) Bonus compensation for fiscal 1997 includes $136,500 earned in fiscal 1997
but paid in fiscal 1998. Bonus compensation for fiscal 1996 includes
$65,000 earned in fiscal 1996 but paid in fiscal 1997.
(14) Bonus compensation for fiscal 1998 consists of $46,602 of bonus
compensation and $106,646 in commission income. Bonus compensation for
fiscal 1997 consists of (i) $68,426 of bonus compensation and $75,898 of
commission income earned and paid in fiscal 1997 and (ii) $33,000 of bonus
compensation and $20,000 of commission income earned in fiscal 1997 but
paid in fiscal 1998.
(15) In October 1997, Peregrine issued Mr. Gardner an aggregate of 50,000
shares of Peregrine Common Stock pursuant to a restricted stock agreement.
The closing sale price of Peregrine Common Stock on the Nasdaq National
Market on October 31, 1997, the last trading date prior to the date of
issuance, was $15.50. Such shares vest incrementally over ten years,
subject to earlier vesting over six years contingent upon Peregrine's
achieving certain financial milestones. See "Employment Agreements and
Change in Control Arrangements" and "Certain Transactions."
(16) In November 1995, Peregrine issued Mr. Farley an aggregate of 200,000
shares of Peregrine Common Stock pursuant to a restricted stock agreement
in connection with his initial employment. The estimated fair value of
such shares at the time of issuance was $2.34 per share. Such shares vest
incrementally over ten years subject to earlier vesting over six years
contingent upon Peregrine's achieving certain financial milestones.
(17) In November 1995, Peregrine issued Mr. Hunt an aggregate of 400,000 shares
of Peregrine Common Stock pursuant to a restricted stock agreement in
connection with his initial employment. The estimated fair value of such
shares at the time of issuance was $2.34 per share. Pursuant to an
agreement entered into with Mr. Hunt in connection with his resignation as
Peregrine's President and Chief Executive Officer in January 1998, the
shares of Peregrine Common Stock subject to such restricted stock
agreement will continue to vest through March 31, 1998. See "Employment
Agreements and Change in Control Arrangements" and "Certain Transactions."
(18) Represents $281 in group life insurance excess premiums and $4,875 in
matching contribution under Peregrine's 401(k) paid by Peregrine in fiscal
1998.
(19) Represents $337, $337 and $84 in group life insurance excess premiums paid
by Peregrine in fiscal 1998, 1997 and 1996, respectively; $3,000, $2,375
and $1,875 in matching contributions under Peregrine's 401(k) plan paid by
Peregrine in fiscal 1998, 1997 and 1996, respectively; and $98,362 in
relocation expenses paid by Peregrine in fiscal 1996.
(20) Represents $2,317, $2,106 and $509 in group life insurance excess premiums
paid by Peregrine in fiscal 1998, 1997 and 1996, respectively; $2,406,
$2,375 and $594 in matching contributions under Peregrine's 401(k) plan
paid by Peregrine in fiscal 1998, 1997 and 1996, respectively; and $34,284
in relocation expenses paid by Peregrine in fiscal 1996.
(21) Represents $337, $337 and $337 in group life insurance premiums paid by
Peregrine in fiscal 1998, 1997 and 1996, respectively and $2,500, $2,375
and $2,375 in matching contributions under Peregrine's 401(k) plan paid by
Peregrine in fiscal 1998, 1997 and 1996, respectively.
(22) Represents $337, $337 and $248 in group life insurance excess premiums
paid by Peregrine in fiscal 1998, 1997 and 1996, respectively; $3,609,
$2,548 and $2,340 in matching contributions under Peregrine's 401(k) plan
paid by Peregrine in fiscal 1998, 1997 and 1996, respectively; and $5,116
in relocation expenses paid by Peregrine in fiscal 1996.
(23) Represents $1,114, $1,084 and $238 in group life insurance excess premiums
paid by Peregrine in fiscal 1998, 1997 and 1996, respectively; $2,628,
$3,778 and $844 in matching contributions under Peregrine's 401(k) plan
paid by Peregrine in fiscal 1998, 1997 and 1996, respectively; $37,500 and
$15,860 in consulting services and accrued vacation payments,
respectively, paid by Peregrine in fiscal 1998; and $15,886 in relocation
expenses paid by Peregrine in fiscal 1996. Amounts paid for consulting
were made in accordance with the terms of Mr. Hunt's severance
arrangements with the Company. See "Employment Agreements and Change in
Control Arrangements" and "Certain Transactions."
(24) Represents $163 and $218 in group life insurance excess premiums paid by
Peregrine in fiscal 1998 and 1997, respectively; $896 and $4,604 in
matching contributions under Peregrine's 401(k) plan paid by Peregrine in
fiscal 1998 and 1997, respectively; $6,786 in accrued vacation payments
paid by Peregrine in fiscal 1998; and $13,966 in relocation expenses paid
by Peregrine in fiscal 1997.
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<PAGE>
OPTION GRANTS IN FISCAL YEAR 1998
The following table sets forth certain information relating to stock options
awarded to the Peregrine Named Executive Officers during the fiscal year ended
March 31, 1998. All such options were awarded under Peregrine's 1994 Stock
Option Plan.
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
VALUES
INDIVIDUAL GRANTS AT ASSUMED ANNUAL
------------------------------------------------------ RATES OF
NUMBER OF PERCENT OF STOCK PRICE
SECURITIES TOTAL OPTIONS APPRECIATION FOR
UNDERLYING GRANTED TO EXERCISE OPTION TERM(1)
OPTIONS EMPLOYEES IN PRICE PER EXPIRATION ---------------------
NAME GRANTED FISCAL 1998(2) SHARE(3)(4) DATE(5) 5% 10%
- ----------------------------------- ---------- -------------- ----------- ---------- -------- -----------
<S> <C> <C> <C> <C> <C> <C>
CURRENT EXECUTIVE OFFICERS
Stephen P. Gardner................. 100,000 7.47% $ 9.00 05/12/07 $566,005 $ 1,434,368
50,000 3.74 12.50 01/23/08 393,059 996,089
David A. Farley.................... -- -- -- -- -- --
William G. Holsten................. 30,000 2.24 18.00 03/31/08 339,603 860,621
Frederic B. Luddy.................. 25,000 1.87 12.50 01/23/08 196,530 498,045
Douglas S. Powanda................. 75,000 5.6 12.50 01/23/08 589,589 1,494,134
FORMER EXECUTIVE OFFICERS
Alan H. Hunt....................... -- -- -- -- -- --
Douglas F. Garn.................... -- -- -- -- -- --
</TABLE>
- ------------------------------
(1) Potential realizable value is based on the assumption that the Peregrine
Common Stock appreciates at the annual rate shown (compounded annually) from
the date of grant until the expiration of the ten year option term. These
numbers are calculated based on the requirements promulgated by the
Commission and do not reflect Peregrine's estimate of future prices for
Peregrine Common Stock.
(2) Based on options to acquire 1,338,000 shares granted under Peregrine's 1994
Stock Option Plan during fiscal 1998. All options granted to the Peregrine
Named Executive Officers during fiscal 1998 are governed by Peregrine's 1994
Stock Option Plan.
(3) Options were granted at an exercise price equal to the closing sales of the
Peregrine Common Stock on the date of grant as reported by the Nasdaq
National Market.
(4) Exercise price may be paid in cash, check, by delivery of already-owned
shares of Peregrine Common Stock subject to certain conditions, or pursuant
to a cashless exercise procedure under which the optionee provides
irrevocable instructions to a brokerage firm to sell the purchased shares
and to remit to Peregrine, out of the sale proceeds, an amount equal to the
exercise price plus all applicable withholding taxes.
(5) Twenty-five percent (25%) of the shares issuable upon exercise of options
granted under Peregrine's 1994 Stock Option Plan become vested on the first
anniversary of the date of grant, and the remaining shares vest over three
years at the rate of 6.25% of the shares subject to option at the end of
each three-month period thereafter.
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<PAGE>
AGGREGATE OPTION EXERCISES
IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION VALUES
The following table sets forth certain information regarding the exercise of
options by the Peregrine Named Executive Officers during the fiscal year ended
March 31, 1998 and stock options held as of March 31, 1998 by the Named
Executive Officers.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS AT
OPTIONS AT MARCH 31, 1998(2)
SHARES VALUE MARCH 31, 1998 --------------------------------
ACQUIRED REALIZED ---------------------------------- EXERCISABLE UNEXERCISABLE
NAME ON EXERCISE ($)(1) EXERCISABLE (#) UNEXERCISABLE (#) ($) ($)
- ----------------------- ----------- -------------- --------------- ----------------- -------------- ----------------
<S> <C> <C> <C> <C> <C> <C>
CURRENT EXECUTIVE
OFFICERS
Stephen P. Gardner..... -- -- -- 150,000 -- 1,343,750
David A. Farley........ 112,500 1,202,375 -- 87,500 -- 1,468,688
William G. Holsten..... 25,000 291,500 47,819 108,125 800,848 1,345,078
Frederic B. Luddy...... -- -- 81,250 43,750 1,463,681 477,844
Douglas S. Powanda..... 25,101 362,217 122,399 127,500 2,069,467 1,378,088
FORMER EXECUTIVE
OFFICERS
Alan H. Hunt(3)........ -- -- 225,000 175,000 3,776,625 2,937,375
Douglas F. Garn(4)..... 87,500 1,316,188 -- 112,500 -- 1,888,318
</TABLE>
- ------------------------------
(1) Based on the fair market value of Peregrine Common Stock on the date of
exercise minus the exercise price.
(2) Amounts reflecting gains on outstanding stock options are based on the
closing price of Peregrine Common Stock on March 31, 1998 of $19.125.
(3) In April 1998, Mr. Hunt exercised options to purchase an aggregate of
185,000 shares of Peregrine Common Stock which resulted in an aggregate
realized value of $4,238,968.
(4) In May 1998, Mr. Garn exercised options to purchase 12,500 shares of
Peregrine Common Stock which resulted in an aggregate realized value of
$245,750.
EMPLOYMENT AGREEMENTS AND CHANGE OF CONTROL ARRANGEMENTS
Peregrine does not currently have any employment contracts in effect with
any Named Executive Officer. Peregrine and certain Named Executive Officers are
parties to separate agreements relating to restricted stock issuances, severance
arrangements and consulting arrangements. See "Certain Transactions."
Peregrine and David A. Farley, its Chief Financial Officer and a member of
the Peregrine Board, are parties to a restricted stock agreement dated November
1, 1995 pursuant to which Peregrine issued Mr. Farley 200,000 shares of
Peregrine Common Stock. Peregrine and Stephen P. Gardner, its President and
Chief Executive Officer and a member of the Peregrine Board, are parties to a
similarly structured restricted stock agreement dated November 1, 1997 pursuant
to which Peregrine issued Mr. Gardner 50,000 shares of Peregrine Common Stock.
The shares issued to each of Messrs. Farley and Gardner vest incrementally over
ten years, subject to earlier vesting over six years contingent upon Peregrine's
achieving certain financial milestones. The restricted stock agreements permit
Messrs. Farley or Gardner to surrender shares subject to their respective
restricted stock agreements to satisfy withholding tax obligations that arise as
the shares vest. Accordingly, in connection with the vesting of 8,333 shares of
his restricted stock in April 1998, Mr. Gardner surrendered 2,955 shares to
satisfy withholding tax obligations. In the event of a merger or change in
control of Peregrine, all such shares will become automatically vested. See
"Executive Compensation."
Peregrine is also party to a restricted stock agreement dated November 1,
1995 with Alan H. Hunt, who resigned in January 1998 as Peregrine's President
and Chief Executive Officer and a member of the Peregrine Board. Pursuant to the
restricted stock agreement with Mr. Hunt, Peregrine issued Mr. Hunt 400,000
shares of Peregrine Common Stock. Such shares were to vest incrementally over
ten years, subject
98
<PAGE>
to earlier vesting over six years contingent upon Peregrine achieving certain
financial milestones. In connection with the vesting of 66,000 shares in each of
April 1997 and April 1998, Mr. Hunt surrendered 28,296 and 27,296 shares,
respectively, to satisfy withholding tax obligations as permitted by his
restricted stock agreement. In January 1998, in connection with his resignation,
Peregrine and Mr. Hunt entered a separate agreement pursuant to which Peregrine
retained Mr. Hunt as a consultant through January 1999 at a monthly fee of
$18,750. In addition, the agreement provides that options held by Mr. Hunt to
acquire 215,000 shares of Peregrine Common Stock will continue to vest through
January 1999 (such that 115,000 shares would be fully vested as of January 31,
1999) and remain exercisable until May 1, 1999. In addition, the shares subject
to the restricted stock agreement between Peregrine and Mr. Hunt will also
continue to vest through March 31, 1999 (such that 142,408 shares will be vested
on March 31, 1999, subject to Peregrine's achieving the financial milestones set
forth in the original restricted stock agreement). In connection with his
resignation, Mr. Hunt also agreed not to engage in any activities that are
competitive with those of Peregrine for a period of three years ending January
2001.
In connection with his resignation as Peregrine's Vice President, North
American Sales in January 1998, Douglas F. Garn and Peregrine entered into an
agreement whereby Mr. Garn agreed not to engage in activities that are
competitive with those of Peregrine for a period of one year ending January
1999. Pursuant to the terms of Mr. Garn's agreement, Peregrine has agreed that
the options under Peregrine's 1994 Stock Option Plan to acquire 12,500 shares of
Peregrine Common Stock held by Mr. Garn will continue to vest until July 1, 1998
(such that such options would be vested with respect to all 12,500 shares at
such date) and remain exercisable until September 29, 1998.
Under the 1994 Plan, in the event of a merger or a change in control of
Peregrine, vesting of options outstanding under the 1994 Plan will automatically
accelerate such that outstanding options will become fully exercisable,
including with respect to shares for which such options would be otherwise
unvested.
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<PAGE>
PEREGRINE CERTAIN TRANSACTIONS
John J. Moores, chairman of the Peregrine Board and the majority stockholder
of Peregrine, was party to a Continuing and Unconditional Guaranty dated
November 13, 1995 (as subsequently amended) with NationsBank of Texas, N.A.
("NationsBank"), pursuant to which Mr. Moores guaranteed Peregrine's obligations
under its bank line of credit agreement and term loan with NationsBank. As of
March 31, 1997, Peregrine's outstanding obligations under such credit line and
term loan were $2.0 million and $1.6 million, respectively. Both the credit line
and term loan were repaid from proceeds of Peregrine's April 1997 initial public
offering, and Peregrine terminated the line of credit agreement with NationsBank
in September 1997. Peregrine's current line of credit agreement with Wells Fargo
Bank, N.A. is not guaranteed by Mr. Moores. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Liquidity and Capital
Resources."
From time to time since becoming a stockholder of Peregrine in 1989 and
prior to Peregrine's initial public offering in April 1997, Mr. Moores made
short-term working capital loans to Peregrine on an as-needed basis, each such
loan bearing interest at the prime rate announced by major commercial banks. In
September 1995, Mr. Moores made a loan to Peregrine in the amount of $250,000,
which was repaid in November 1995. In July 1996, Mr. Moores made a loan to
Peregrine in the amount of $2,000,000, which was repaid three days later.
Peregrine used the proceeds of the $2,000,000 loan to make a capital
contribution to its subsidiary in the United Kingdom, which, in turn, repaid
certain advances owed to Peregrine. In December 1996, Mr. Moores loaned the
Company $250,000, which was repaid in February 1997.
Peregrine and JMI Services are parties to a sublease pursuant to which
Peregrine subleases approximately 13,310 square feet of office space at its San
Diego headquarters to JMI Services. The term of the sublease is from June 1,
1996 through October 21, 2003. The sublease provides for initial monthly rental
payments of $16,638 to increase by $666 per month on each anniversary of the
sublease. Mr. Moores serves as Chairman of the Board of JMI Services, and
Charles E. Noell, III, a member of the Peregrine Board, serves as JMI Services'
President and Chief Executive Officer. Peregrine believes that the terms of the
sublease are at competitive market rates.
Peregrine leases a suite at San Diego's Qualcomm Stadium at competitive
rates and on an informal basis from the San Diego Padres Baseball Club, L.P.
(the "Padres"). Mr. Moores has served as owner and Chairman of the Board of the
Padres since December 1994. Peregrine's annual payments for such suite total
approximately $45,000.
From October 1993 through September 1994, Peregrine made various short-term
advances to Frederic B. Luddy, Peregrine's Vice President North American
Research and Development, totalling approximately $360,000. The advances were
non-interest bearing and were paid back each pay period, beginning in March 1994
at the rate of one half of Mr. Luddy's product authorship commission amount
payable for that pay period. On January 15, 1998, the final installment was
made, and the advance was repaid in full.
Pursuant to an Acquisition Agreement dated November 29, 1995 among
Peregrine, Skunkware, Inc. ("Skunkware") and Peregrine/Bridge Transfer
Corporation, at the time a database software subsidiary of Peregrine ("PBTC"),
Peregrine sold all the outstanding shares of PBTC to Skunkware for an aggregate
purchase price of approximately $559,000. In addition, under such Acquisition
Agreement, Peregrine receives a royalty on certain license sales of PBTC. The
royalty payments to Peregrine are limited to an aggregate of $677,000. Peregrine
had acquired the business assets of PBTC in March 1995 for an aggregate
consideration consisting of $181,000 in cash and 225,000 shares of Peregrine
Common Stock, which were valued for purposes of the transaction at $2.34 per
share or an aggregate of $526,500. The related acquisition agreement included an
earn-out provision pursuant to which Peregrine issued an additional 12,000
shares of Peregrine Common Stock in July 1996. JMI Equity Fund is the
controlling stockholder of Skunkware. Mr. Noell and Norris van den Berg, a
member of the Peregrine Board, are general partners of JMI Equity Fund, and Mr.
Moores is a limited partner of JMI Equity Fund. Pursuant to such Acquisition
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Agreement, Peregrine provides certain computer and administrative resources to
PBTC for a monthly fee of $37,500.
Pursuant to an Agreement and Plan of Merger dated as of November 30, 1995,
Peregrine acquired XVT. In connection with the acquisition, Peregrine issued
approximately 2,018,808 shares of Peregrine Common Stock, which were then valued
for purposes of the transaction at $2.34 per share or an aggregate of
$4,724,010, in exchange for all of XVT's issued and outstanding preferred stock
and common stock. The terms of Peregrine's acquisition of XVT, including the
aggregate consideration paid, were determined by negotiations among officers of
Peregrine and XVT, including the companies' respective financial and accounting
advisors. The fairness of such terms was not determined by any independent third
party. JMI Equity Fund held voting control of XVT's outstanding capital stock,
and trusts for which Mr. Moores serves as trustee also owned 131,332 shares of
XVT's Series C Preferred Stock. The shares of Peregrine Common Stock issued in
connection with the acquisition included 1,579,436 shares issued to JMI Equity
Fund and such trusts. JMI Equity Fund and such trusts had acquired their shares
of XVT in a series of financing transactions between June 1992 and September
1994 for an aggregate consideration of $3,466,333. In addition, in December
1994, David A. Farley, Peregrine's Vice President, Finance, Chief Financial
Officer and a member of the Peregrine Board, had purchased approximately 32,833
shares of XVT's outstanding Series C Preferred Stock for an aggregate
consideration of $350,000. In consideration of such shares and in payment for
certain accumulated dividends owing on the Series C Preferred, Peregrine issued
Mr. Farley 149,408 shares of Peregrine Common Stock in connection with the
acquisition of XVT. Peregrine also assumed all outstanding options to acquire
XVT's Common Stock, including outstanding options to William G. Holsten,
Peregrine's Vice President, Professional Services, and Christopher A. Cole, a
member of the Peregrine Board. Following such assumption and after adjustment of
the number of shares subject to such options to reflect the applicable exchange
ratio, Messrs. Cole and Holsten received options to acquire 2,828 and 944
shares, respectively, of Peregrine Common Stock. Outstanding options to acquire
XVT's Common Stock held by Alan H. Hunt, Peregrine's former President and Chief
Executive Officer, and Mr. Farley were cancelled in connection with their
becoming executive officers of Peregrine.
Peregrine is a party to restricted stock agreements with Messrs. Farley,
Gardner and Hunt pursuant to which Peregrine has issued an aggregate of 650,000
shares of Peregrine Common Stock. See "Peregrine Management--Employment
Agreements and Change in Control Arrangements."
In October 1995, Peregrine agreed to extend the exercisability of the vested
portion of an option granted to Christopher A. Cole in December 1990 for so long
as Mr. Cole remains a member of the Peregrine Board but no later than December
2000. The option was originally granted under Peregrine's Nonqualified Stock
Option Plan and, in accordance with the form of stock option agreement used in
connection with such plan, would otherwise have terminated following a
termination of Mr. Cole's continuous employment with Peregrine. At the time of
Mr. Cole's resignation as an executive officer of Peregrine, such option was
vested with respect to 56,250 shares. See "Peregrine Management--Director
Compensation."
Peregrine has entered into certain agreements with Alan H. Hunt and Douglas
F. Garn relating to their resignation as officers of Peregrine. See "Peregrine
Management--Employment Agreements and Change of Control Agreements."
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PEREGRINE STOCK OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding the beneficial
ownership of the Peregrine Common Stock by (i) each person or entity who is
known by Peregrine to own beneficially 5% or more of the outstanding Peregrine
Common Stock; (ii) each member of the Peregrine Board; (iii) each of the
Peregrine Named Executive Officers; and (iv) all current directors and executive
officers of Peregrine as a group. All information contained in the table below
is based on beneficial ownership as of May 31, 1998.
<TABLE>
<CAPTION>
SHARES OF COMMON STOCK
BENEFICIALLY OWNED
---------------------------
PERCENTAGE
NAME AND ADDRESS (1) NUMBER OWNERSHIP(2)
- ------------------------------------------------------------------------------------- ------------ -------------
<S> <C> <C>
PRINCIPAL STOCKHOLDERS
Putnam Investments, Inc. (3) ........................................................ 1,063,401 5.5%
One Post Office Square
Boston, Massachusetts 02109
CURRENT EXECUTIVE OFFICERS AND DIRECTORS
Stephen P. Gardner (4)............................................................... 77,045 *
David A. Farley (5).................................................................. 504,408 2.6
William G. Holsten (6)............................................................... 78,194 *
Frederic B. Luddy (7)................................................................ 83,674 *
Douglas S. Powanda (8)............................................................... 71,150 *
John J. Moores (9)................................................................... 9,524,167 49.4
Norris van den Berg (10)............................................................. 102,336 *
Christopher A. Cole (11)............................................................. 630,821 3.3
Richard A. Hosley II (12)............................................................ -- *
Charles E. Noell III (13)............................................................ 99,587 *
All current executive officers and directors as a group (14 persons) (14)............ 11,123,244 58.6%
FORMER EXECUTIVE OFFICERS
Alan H. Hunt (15).................................................................... 409,408 2.1
Douglas F. Garn (16)................................................................. 12,500 *
</TABLE>
- ------------------------------
* Less than 1%
(1) The persons named in the table above have sole voting and investment power
with respect to all shares of Peregrine's Common Stock shown as
beneficially owned by them, subject to applicable community property laws,
and to the information contained in footnotes to this table. Unless
otherwise indicated, the address for each listed stockholder is c/o
Peregrine Systems, Inc., 12670 High Bluff Drive, San Diego, California
92130.
(2) Applicable percentage ownership is based on 19,264,932 shares of Peregrine
Common Stock outstanding as of May 31, 1998. Beneficial ownership is
determined in accordance with the rules of the Securities and Exchange
Commission and generally includes voting or investment power with respect
to securities subject to community property laws, where applicable. Shares
of Peregrine's Common Stock subject to options that are presently
exercisable or exercisable within 60 days of May 31, 1998 are deemed to be
beneficially owned by the person holding such options for the purpose of
computing the percentage ownership of such person but are not treated as
outstanding for the purpose of computing the percentage ownership of any
other person. To the extent that any shares are issued upon exercise of
options, warrants or other rights to acquire Peregrine's capital stock that
are presently outstanding or granted in the future or reserved for future
issuance under Peregrine's stock plans, there will be further dilution to
new investors.
(3) Based solely on a Schedule 13G, dated January 16, 1998, filed with the
Commission on January 21, 1998.
(4) Includes 25,000 shares of Peregrine Common Stock issuable upon exercise of
outstanding stock options which are presently exercisable or will become
exercisable within 60 days of May 31, 1998 and 47,045 shares subject to a
restricted stock agreement.
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Mr. Gardner is Peregrine's President and Chief Executive Officer and a
member of the Peregrine Board. See "Peregrine Management--Employment
Agreements and Change in Control Arrangements."
(5) Includes 200,000 shares subject to a restricted stock agreement. Mr. Farley
is Peregrine's Vice President, Finance, and Chief Financial Officer and a
member of the Peregrine Board. See "Peregrine Management--Employment
Agreements and Change in Control Arrangements."
(6) Includes 57,194 shares of Peregrine Common Stock issuable upon exercise of
outstanding stock options which are presently exercisable or will become
exercisable within 60 days of May 31, 1998. Mr. Holsten is Peregrine's Vice
President, Professional Services.
(7) Includes 81,250 shares of Peregrine Common stock issuable upon exercise of
outstanding stock options which are presently exercisable or will become
exercisable within 60 days of May 31, 1998. Mr. Luddy is Peregrine's Vice
President, North American Research and Development.
(8) Includes 71,149 shares of Peregrine Common Stock issuable upon exercise of
outstanding stock options which are presently exercisable or will become
exercisable within 60 days of May 31, 1998. Mr. Powanda is Peregrine's Vice
President, Worldwide Sales.
(9) Includes 3,623,700 shares held by Mr. Moores as trustee under various
trusts, substantially all of which were established for members of Mr.
Moores's family. Mr. Moores is Chairman of the Peregrine Board.
(10) Includes 45,000 shares of Peregrine Common Stock issuable upon exercise of
outstanding stock options which are presently exercisable or will become
exercisable within 60 days of May 31, 1998. Mr. van den Berg is a member
of the Peregrine Board.
(11) Mr. Cole is a member of the Peregrine Board.
(12) Mr. Hosley is a member of the Peregrine Board.
(13) Includes 45,000 shares of Peregrine Common Stock issuable upon exercise of
outstanding stock options which are presently exercisable or will become
exercisable within 60 days of May 31, 1998. Mr. Noell is a member of the
Peregrine Board.
(14) Includes 391,125 shares of Peregrine Common Stock issuable upon exercise
of outstanding stock options which are presently exercisable or will
become exercisable within 60 days of May 31, 1998.
(15) Includes 65,000 shares of Peregrine Common Stock issuable upon exercise of
outstanding stock options which are presently exercisable or will become
exercisable within 60 days of May 31, 1998 and 344,408 shares subject to a
restricted stock agreement. In connection with his resignation as
Peregrine's President and Chief Executive Officer in January 1998, Mr.
Hunt and Peregrine entered into an agreement pursuant to which 215,000
shares of Peregrine Common Stock subject to options held by Mr. Hunt will
continue to vest through January 1999 (such that 115,000 shares would be
fully vested as of January 31, 1999 assuming Mr. Hunt does not elect to
exercise any additional vested options prior to such time) and remain
exercisable until May 1, 1999. In addition, 344,408 shares of Peregrine
Common Stock subject to Mr. Hunt's restricted stock agreement will
continue to vest through March 31, 1998 (such that 142,408 shares will be
fully vested on March 31, 1998). See "Peregrine Management--Employment
Agreements and Change in Control Arrangements."
(16) Includes 12,500 shares of Peregrine Common Stock issuable upon exercise of
outstanding stock options which are presently exercisable or will become
exercisable within 60 days of May 31, 1998. In connection with his
resignation as Peregrine's Vice President, North American sales in January
1998, Mr. Garn and Peregrine entered into an agreement pursuant to which
12,500 shares of Peregrine Common Stock subject to outstanding options
held by Mr. Garn will continue to vest through July 1, 1998 (such that all
12,500 shares will be fully vested as of July 1, 1998) and remain
exercisable until September 29, 1998. See "Peregrine
Management--Employment Agreement and Change in Control Arrangements."
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DESCRIPTION OF PEREGRINE CAPITAL STOCK
GENERAL
Peregrine is authorized to issue 50,000,000 shares of Peregrine Common
Stock, $0.001 par value, and 5,000,000 shares of undesignated Preferred Stock,
$0.001 par value ("Peregrine Preferred Stock"). As of May 31, 1998, an aggregate
of 19,264,932 shares of Peregrine Common Stock were outstanding, 3,019,099
shares of Peregrine Common Stock were issuable upon exercise of outstanding
options, and no shares of Peregrine Preferred Stock were issued and outstanding.
The following description of Peregrine's capital stock does not purport to
be complete and is subject to and qualified in its entirety by Peregrine's
Amended and Restated Certificate of Incorporation and Bylaws and by the
provisions of applicable Delaware law.
The Amended and Restated Certificate of Incorporation and Bylaws contain
certain provisions that are intended to enhance the likelihood of continuity and
stability in the composition of the Peregrine Board and which may have the
effect of delaying, deferring, or preventing a future takeover or change in
control of Peregrine unless such takeover or change in control is approved by
the Peregrine Board.
COMMON STOCK
Holders of Peregrine Common Stock are entitled to one vote per share on all
matters to be voted upon by the stockholders. Holders of Peregrine Common Stock
do not have cumulative voting rights, and, therefore, holders of a majority of
the shares voting for the election of directors can elect all of the directors.
In such event, the holders of the remaining shares will not be able to elect any
directors.
Holders of the Peregrine Common Stock are entitled to receive such dividends
as may be declared from time to time by the Peregrine Board out of funds legally
available therefor, subject to the terms of any existing or future agreements
between Peregrine and its debtholders. Peregrine has never declared or paid cash
dividends on its capital stock, expects to retain future earnings, if any, for
use in the operation and expansion of its business, and does not anticipate
paying any cash dividends in the foreseeable future. In the event of the
liquidation, dissolution or winding up of Peregrine, the holders of Peregrine
Common Stock are entitled to share ratably in all assets legally available for
distribution after payment of all debts and other liabilities and subject to the
prior rights of any holders of Peregrine Preferred Stock then outstanding.
PREFERRED STOCK
Peregrine is authorized to issue 5,000,000 shares of undesignated Peregrine
Preferred Stock. The Peregrine Board has the authority to issue the Peregrine
Preferred Stock in one or more series and to fix the price, rights, preferences,
privileges and restrictions thereof, including dividend rights, dividend rates,
conversion rights, voting rights, terms of redemption, redemption prices,
liquidation preferences and the number of shares constituting a series or the
designation of such series, without any further vote or action by Peregrine's
stockholders. The issuance of Peregrine Preferred Stock, while providing
desirable flexibility in connection with possible acquisitions and other
corporate purposes, could have the effect of delaying, deferring or preventing a
change in control of Peregrine without further action by the stockholders and
may adversely affect the market price of, and the voting and other rights of,
the holders of Peregrine Common Stock. The issuance of Peregrine Preferred Stock
with voting and conversion rights may adversely affect the voting power of the
holders of Peregrine Common Stock, including the loss of voting control to
others. Peregrine has no current plans to issue any shares of Peregrine
Preferred Stock.
PEREGRINE WARRANTS
In the event the Warrant Amendment is not approved on or prior to the
Effective Time, each outstanding Innovative Warrant will be assumed by Peregrine
and become a Peregrine Warrant. The
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Peregrine Warrant will be issued on substantially the same terms and conditions
as were applicable under the Innovative Warrant (other than number of shares,
exercise price, and redemption price) and will be exercisable for that number of
shares of Peregrine Common Stock (rounded down to the nearest whole number) that
the holder of the Innovative Warrant would have been entitled to receive
pursuant to the Merger had such holder exercised such Innovative Warrant
immediately prior to the Effective Time. The exercise price per share of the
Peregrine Warrant (rounded up to the nearest whole cent) will equal (i) the
aggregate exercise price for the shares of Innovative Common Stock purchasable
pursuant to the Innovative Warrant divided by (ii) the number of shares of
Peregrine Common Stock purchasable Pursuant to the Peregrine Warrant. See
"Description of Innovative Capital Stock--Innovative Warrants."
In the event Peregrine is required to assume the Innovative Warrants in
connection with the Merger, Peregrine will, promptly after the Effective Time,
effect a redemption of the then-outstanding Peregrine Warrants in accordance
with their terms. The applicable redemption price for the Peregrine Warrants
will equal $2.86. See "The Warrant Amendment--Peregrine Redemption."
REGISTRATION RIGHTS
Peregrine has granted registration rights to the former stockholders of
Apsylog to request registration of any unsold portion of shares of the Peregrine
Common Stock received in connection with the Apsylog Acquisition. Such
registration rights expire in September 1998.
ANTITAKEOVER EFFECTS OF PROVISIONS OF CERTIFICATE OF INCORPORATION AND BYLAWS
Peregrine's Amended and Restated Certificate of Incorporation provides that
all stockholder actions must be effected at a duly called annual or special
meeting and may not be effected by written consent. Peregrine's Bylaws provide
that, except as otherwise required by law, special meetings of the stockholders
can only be called by the Peregrine Board, the Chairman of the Peregrine Board,
the Chief Executive Officer of Peregrine or stockholders holding shares in the
aggregate entitled to cast not less than 10% of the votes at such meeting. In
addition, Peregrine's Bylaws establish an advance notice procedure for
stockholder proposals to be brought before an annual meeting of stockholders,
including proposed nominations of persons for election to the Peregrine Board.
Stockholders at an annual meeting may only consider proposals or nominations
specified in the notice of meeting or brought before the meeting by or at the
direction of the Peregrine Board or by a stockholder who was a stockholder of
record on the record date for the meeting, who is entitled to vote at the
meeting and who has delivered timely written notice in proper form to
Peregrine's secretary of the stockholder's intention to bring such business
before the meeting.
The foregoing provisions of Peregrine's Amended and Restated Certificate of
Incorporation and Bylaws are intended to enhance the likelihood of continuity
and stability in the composition of the Peregrine Board and in the policies
formulated by the Peregrine Board and to discourage certain types of
transactions which may involve an actual or threatened change of control of
Peregrine. Such provisions are designed to reduce the vulnerability of Peregrine
to an unsolicited acquisition proposal and, accordingly, could discourage
potential acquisition proposals and could delay or prevent a change in control
of Peregrine. Such provisions are also intended to discourage certain tactics
that may be used in proxy fights but could, however, have the effect of
discouraging others from making tender offers for Peregrine's shares and,
consequently, may also inhibit fluctuations in the market price of Peregrine's
shares that could result from actual or rumored takeover attempts. These
provisions may also have the effect of preventing changes in the management of
Peregrine.
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EFFECT OF DELAWARE ANTITAKEOVER STATUTE
Peregrine is subject to Section 203 of the Delaware General Corporation Law
(the "Antitakeover Law"), which regulates corporate acquisitions. The
Antitakeover Law prevents certain Delaware corporations, including those whose
securities are listed for trading on the Nasdaq National Market, from engaging,
under certain circumstances in a "business combination" with any "interested
stockholder" for three years following the date that such stockholder became an
interested stockholder. For purposes of the Antitakeover Law, a business
combination" includes, among other things, a merger or consolidation involving
Peregrine and the interested stockholder and the sale of more than ten percent
(10%) of Peregrine's assets. In general, the Antitakeover Law defines an
"interested stockholder" as any entity or person beneficially owning 15% or more
the outstanding voting stock of Peregrine and any entity or person affiliated
with or controlling or controlled by such entity or person. A Delaware
corporation may "opt out" of the Antitakeover Law with an express provision in
its original certificate of incorporation or an express provision in its
certificate of incorporation or bylaws resulting from amendments approved by the
holders of at least a majority of Peregrine's outstanding voting shares.
Peregrine has not "opted out" of the provisions of the Antitakeover Law.
TRANSFER AGENT
The Transfer Agent and Registrar for the Peregrine Common Stock is
ChaseMellon Shareholder Services, LLC.
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BUSINESS OF INNOVATIVE
THE FOLLOWING DISCUSSION CONTAINS FORWARD-LOOKING STATEMENTS WITHIN THE
MEANING OF SECTION 27A OF THE SECURITIES ACT OF 1933 AND SECTION 21E OF THE
SECURITIES EXCHANGE ACT OF 1934. THESE FORWARD LOOKING STATEMENTS ARE SUBJECT TO
CERTAIN RISKS AND UNCERTAINTIES THAT COULD CAUSE ACTUAL RESULTS TO DIFFER
MATERIALLY FROM HISTORICAL RESULTS OR ANTICIPATED RESULTS, INCLUDING THOSE SET
FORTH UNDER THE SECTIONS OF THIS PROXY STATEMENT/ PROSPECTUS CAPTIONED "RISK
FACTORS," "INNOVATIVE MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS," AND ELSEWHERE IN OR INCORPORATED BY
REFERENCE INTO THIS PROXY STATEMENT/ PROSPECTUS. THE FOLLOWING DISCUSSION AND
ANALYSIS SHOULD BE READ IN CONJUNCTION WITH "SELECTED HISTORICAL AND UNAUDITED
PRO FORMA COMBINED CONDENSED FINANCIAL DATA" AND INNOVATIVE'S CONSOLIDATED
FINANCIAL STATEMENTS AND NOTES THERETO INCLUDED ELSEWHERE IN THIS PROXY
STATEMENT/PROSPECTUS.
OVERVIEW
Innovative was incorporated under the laws of the state of Illinois on May
2, 1986, as Windy City Capital Corporation. Prior to January 1990, Innovative
was a publicly held corporation engaged in the business of acquiring existing
businesses in exchange for the issuance of Innovative securities and the payment
of small amounts of cash.
In January 1990, Windy City Capital Corporation issued 22,750,000 shares of
restricted common stock to Innovative Tech Systems, Inc., a Pennsylvania
corporation, pursuant to an asset purchase agreement, whereby Innovative
purchased substantially all of the assets of Innovative Tech Systems, Inc.,
including a space analysis software product and a note receivable. Windy City
Capital Corporation's name was changed to "Innovative Tech Systems, Inc." in
connection with such transaction.
On February 7 1990, Innovative acquired from Micro-Vector, Inc., a New York
corporation, all copyrights, contracts, and source code to the following
software products: space projections, vertical stacking, block studies,
inventory, lease master, construction budgeting, and stacksheet. The products
were acquired for a combination of cash, notes and common stock with
registration rights (which rights have since expired).
Effective July 26 1996, a subsidiary of Innovative, Innovative Tech Systems,
Inc. of Delaware, merged with Facility Management Systems, Inc ("FMS"), an
Illinois corporation. The former shareholders of FMS received 645,619 restricted
shares of Innovative Common Stock in connection with such merger. The FMS
product line consists of software and remote data collection systems which
automate the tracking and management of security and life safety systems. The
hand-held collection devices and accessories utilized in the FMS product line
are purchased from third parties and resold to customers. At the end of fiscal
1998, Innovative Tech Systems, Inc. of Delaware was merged into Innovative Tech
and the separate corporate existence of the subsidiary was terminated.
Since the consummation of such transactions, Innovative has been engaged in
the business of designing, developing, and marketing facilities automation
software and remote data collection systems to automate the tracking and
management of facilities, assets, maintenance and operations, space design,
security, and life safety. Facilities automation is a term developed by
Innovative to describe the integrated products and services which Innovative
provides to the facilities management industry. Computer-aided facilities
management or "CAFM" software products were previously available to service this
need within the facilities management industry, and such CAFM products continue
to be marketed in competition with Innovative's facilities automation products
and solutions.
In June 1997, Innovative established its wholly owned subsidiary, Innovative
Tech Systems of Canada, Inc., a corporation organized under the laws of Canada
("Innovative Canada"). Headquartered in Winnepeg, Manitoba, Innovative Canada
was established to, and continues to, provide sales support and marketing for
Innovative's products and services to customers located throughout Canada.
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THE FACILITIES AUTOMATION INDUSTRY
The facilities automation industry refers to facilities automation software
and remote data collection systems used to automate the tracking and management
of facilities, assets, maintenance and operations, space design, security, and
life safety. Automated CAFM applications first appeared in the late 1970's with
the advent of extremely expensive mainframe solutions. By 1983, a four-user
turnkey system typically sold for between $400,000 and $600,000, thus
eliminating a very large portion of the available market. During the 1985 to
1987 period, expensive PC-based solutions were introduced and by 1988, the
market had matured to the point that DOS-based solutions were significantly
influencing automated facilities management product sales.
Innovative believes that the facilities automation industry is developing
due to the fact that facilities automation software applications aid in the
control of expenses for corporations and other business entities. With the
availability of local area network, or "LAN," solutions to provide facilities
automation software databases as a shared resource within an organization,
management believes that the industry should continue to grow.
INNOVATIVE PRODUCTS/SERVICES--THE INNOVATIVE SOLUTION
Innovative and its subsidiaries have developed, field-tested and actively
marketed an exclusive line of SPAN-FM brand solutions, including SPAN-FM
software, the leading enterprise-wide facilities automation software. Also under
the SPAN-FM brand is the remote data collection systems product line, which
includes INSPECTION MANAGER, FIREPROOF and TOURWATCH. These systems automate
field data collection and management systems for operations, maintenance,
security and fire safety applications. Innovative believes that its integrated
product line meets the needs of a wide range of users in the facilities
automation marketplace.
SPAN-FM applications are designed to be integrated with every other SPAN-FM
product as well as the individual client's existing core business systems. In
addition, SPAN-FM solutions may interface to various computer-aided design
systems and other control systems. This universal connectivity is accomplished
by developing SPAN-FM products on an open system architecture in Innovative's
software. In practical terms, this enables SPAN-FM solutions to link with
information throughout the customer's organization, including financial and
human resources databases. SPAN-FM software solutions operate on Windows 3.1,
Windows 95 or NT and can access Microsoft Access, Watcom, SQL Anywhere, Oracle
7.x, Microsoft SQL Server, and Sybase databases stored on Novell, Windows NT or
UNIX servers, using ODBC or direct drivers. SPAN-FM software is developed under
PowerBuilder, widely recognized as the standard in client-server development
tools.
SPAN-FM solutions are compatible with most core business systems, and offer
an integrated approach that spans all facilities management disciplines. This
enables organizations to become fully integrated in a step-by-step approach,
adding applications as growth demands. In addition, the SPAN-FM brand series of
products is one of the few existing facilities automation PC-based products that
will run independent of an associated computer-aided design (CAD) package.
The SPAN-FM family of products is primarily engineered for use by facility
managers, space planners, architects, interior designers, asset managers,
telecommunications and cable professionals, maintenance managers, and strategic
planners. Innovative's customers include Fortune 1000 companies, private and
public corporations, healthcare organizations, municipal governments, domestic
government agencies, international government agencies, universities and
colleges, financial institutions, retail chains, facility management service
providers, manufacturers, telecommunications providers and utilities.
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COMPETITION
Innovative competes with numerous companies. Innovative is not aware of any
published information as to the size of the facilities
automation/CAFM/computerized facilities management market in which Innovative
competes. Accordingly, Innovative is unable to estimate its proportionate share
of sales made in such market or the potential for growth in such market.
Although Innovative believes that there are no dominant competitors, Innovative
faces competition from many companies on a specific module basis. Innovative's
ability to compete favorably is, in significant part, dependent upon its ability
to control costs, react timely and appropriately to short and long-term trends
and competitively price its products and services. Firms compete in the
facilities management industry based on product functionality, product
reliability, price, performance characteristics, ease of product use, end-user
support, distribution networks, and corporate reputation.
INTELLECTUAL PROPERTY RIGHTS
Innovative's success is heavily dependent upon proprietary technology.
Innovative relies primarily on a combination of copyright law, patents and trade
secret law to protect its proprietary technology. In most cases, Innovative
distributes its products under "shrink-wrap" software license agreements which
grant end-users licenses to Innovative's products and which contain various
provisions to protect Innovative's ownership of, and the confidentiality of, the
underlying technology. Innovative also requires its employees and other parties
with access to its confidential information to execute agreements prohibiting
the unauthorized use or disclosure of Innovative's technology. Despite these
precautions, it may be possible for a third party to misappropriate Innovative's
technology or to independently develop similar technology. In addition,
"shrink-wrap" licenses, which are not signed by the end-user, may be
unenforceable in certain jurisdictions.
Innovative has made appropriate filings and registrations to obtain and
protect its significant trademarks and patents. Management believes that no
single copyright, patent or technology license is material to Innovative's
business. Due to the rapid pace of technological innovation within the
facilities automation industry, Innovative's ability to establish and maintain a
position of technological leadership in the facilities automation industry is
more dependent upon the skills of its development personnel than upon the legal
protection afforded its existing technology.
There can be no assurance that Innovative's means of protecting its
proprietary rights will be adequate or that Innovative's competitors will not
independently develop similar or superior technology. Policing unauthorized use
of Innovative's software is difficult and, while Innovative is unable to
determine the extent to which piracy of its software products exists, software
piracy can be expected to be a persistent problem. In addition, the laws of some
foreign countries do not protect Innovative's proprietary rights to the same
extent as do the laws of the United States. Litigation may be necessary in the
future to enforce Innovative's intellectual property rights, to protect
Innovative's trade secrets or to determine the validity and scope of the
proprietary rights of others. Such litigation could result in substantial costs
and diversion of resources and could have a material adverse effect on
Innovative's business, operating results and financial condition.
Innovative is not aware that any of its products infringes the proprietary
rights of third parties. There can be no assurance, however, that third parties
will not claim infringement by Innovative with respect to current or future
products. Innovative expects that software product developers will increasingly
be subject to infringement claims as the number of products and competitors in
Innovative's industry segment grows and the functionality of products in
different industry segments overlaps. Any such claims, with or without merit,
could be time-consuming, result in costly litigation, cause product shipment
delays or require Innovative to enter into royalty or licensing agreements. Such
royalty or licensing agreements, if required, may not be available on terms
acceptable to Innovative or at all, which could have a material adverse effect
on Innovative's business, operating results and financial condition.
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PRODUCT DEVELOPMENT
Innovative believes that its future success will depend upon its ability to
enhance its existing products and develop and introduce new products that keep
pace with technological developments in the marketplace and address the
increasingly sophisticated needs of its end-users. Innovative intends to
continue to use its best efforts to expand its existing product offerings and to
introduce new application products for the computer integrated facilities
management industry. While Innovative expects that certain of its new products
will be developed internally, Innovative may, based on timing and cost
considerations, expand its product offerings through acquisitions.
Innovative has, in the past, released enhanced versions of its software
modules at least once each year, although there can be no assurances that this
practice will continue. All of Innovative's software modules share the same
technological foundation, which makes the enhancement of the entire product line
more efficient. Software enhancements to a product are usually driven by
requests received from existing end-users or by interviews with certain key
end-users, technological developments and by competitive analysis.
MARKETING AND DISTRIBUTION--THE INNOVATIVE STRATEGY
Innovative has identified several specific markets for Innovative's SPAN-FM
brand of Facilities Automation software products, including any corporation with
over 50,000 square feet of space or over 200 employees; approximately 10,000
design and architectural firms; and certain software resellers.
Innovative pursues the following strategies with respect to the marketing
and distribution of its products:
DIRECT MARKETING. Innovative currently attributes the majority of its
revenues to direct sales generated by Innovative's sales staff. Innovative has
expanded its direct sales staff by hiring regional sales representatives that
operate from their homes with product shipment, support and customization being
done from the Company's home office in Warminster, Pennsylvania and its regional
offices in Chicago, Illinois; Walnut Creek, California; Huntsville, Alabama; and
Winnipeg, Canada. Innovative currently has regional sales representatives
located in Los Angeles, California; New York, New York; Philadelphia,
Pennsylvania; Atlanta, Georgia; Dallas, Texas; Herndon, Virginia; Fairfax,
Virginia; and St. Charles, Illinois. During fiscal 1999, Innovative plans to
hire additional sales representatives throughout the United States and Canada.
Innovative has also instituted direct mail, trade journal, and telephone
solicitation campaigns in order to develop new customers.
INDIRECT MARKETING. Under the terms of an OEM agreement, Intergraph
Corporation marketed, sold and distributed certain Innovative software packages.
The financial terms of the agreement provided for Innovative to receive
royalties on all sales of the SPAN-FM software made by Intergraph Corporation.
Pursuant to the agreement, Innovative Tech received royalties of $100,550,
$398,832, and $214,558 for the years ended January 31, 1998, 1997, and 1996,
respectively. In September, 1997, both parties mutually agreed to terminate the
OEM agreement. In connection with such termination, Intergraph paid Innovative a
one time fee of $115,300, which was recognized as revenue for the fiscal year
ended January 31, 1998.
PENETRATION OF INTERNATIONAL MARKETS. On April 11, 1996, Innovative signed
a seven (7) year strategic marketing agreement with Elektrowatt AG Landis &
Staefa (Europe), a Swiss-based provider of building performance and energy
efficiency solutions, with approximately $2.1 billion in annual revenues. Under
the terms of the agreement, Elektrowatt AG Landis & Staefa (Europe) will
distribute and market Innovative's SPAN-FM product line in Europe, South Africa,
and the Near and the Middle East. The terms of the agreement, in the initial
year, call for Elektrowatt AG Landis & Staefa (Europe) to commit financial
resources for revisions and enhancements to the SPAN-FM product line. During the
remaining six (6) years of the contract, Innovative is to receive royalties
based on revenue generated from product distribution and sales of SPAN--FM by
Elektrowatt AG Landis & Staefa (Europe) in Europe. As the new European partner
of Innovative, Elektrowatt AG Landis & Staefa (Europe) will also translate the
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SPAN-FM software into the various languages used in the market area. To date,
SPAN-FM software has been translated into German, Swedish and Italian; a French
translation is presently underway. Innovative recognized $291,633 and $545,365
in revenues pursuant to the agreement for the years ended January 31, 1998 and
1997, respectively.
SERVICE AND SUPPORT. As part of its strategy to provide complete facilities
automation solutions to end-users, Innovative provides comprehensive end-user
service and support. Innovative believes that providing its end-users with
training, consulting, customization, and support services helps ensure that end-
users obtain maximum benefits offered by its products. Innovative believes that
the availability of a good support program to its end-users will help to
differentiate Innovative from its competitors. While Innovative provides support
and services to its end-users at the present time, it is anticipated that
Innovative will strive to make available an increased level of support for its
customers in the future. Innovative believes that the demand by end-users for
various support services does and will continue to provide revenue opportunities
for Innovative. The following is a list of end-user support programs currently
offered by Innovative:
SOFTWARE UPGRADES AND TELEPHONE SUPPORT. This program allows end-users to
obtain, for an annual fee, all product upgrades released by Innovative during
the year as well as unlimited telephone support. Innovative believes that
charging end-users an annual fee, rather than a separate fee for each product
enhancement, facilitates Innovative's, as well as the end-user's, budgeting
process.
DIRECT SUPPORT. Innovative offers on-site training and technical support to
end-users for a negotiated fee between Innovative and the end-user.
CONSULTING SERVICES. Innovative offers facilities automation consulting
services for a negotiated fee with the end-user based on scope and length of
required services.
CUSTOM PROGRAMMING AND DATA CONVERSION. Innovative offers custom
programming services either for a negotiated fee or on an hourly basis. Included
in these custom programming services are data conversion services that entail
electronically converting data from one system into the SPAN-FM database modules
purchased by the end-user.
For the fiscal year ended January 31, 1998, revenues from software sales,
hardware sales, and services and support were 54%, 15% and 31%, respectively, of
total revenues. For the fiscal year ended January 31, 1997, revenues from
software sales, hardware sales, and services and support were 41%, 13% and 46%,
respectively, of total revenues. For the fiscal year ended January 31, 1996,
revenues from software sales, hardware sales, and services and support were 52%,
1% and 47%, respectively, of total revenues.
SIGNIFICANT CUSTOMERS
Revenues from significant customers as a percentage of total revenues were
as follows:
<TABLE>
<CAPTION>
CUSTOMER 1998 1997 1996
- ------------------------------------------------------------------------- ----- ----- -----
<S> <C> <C> <C>
The Boeing Company....................................................... 17% --% --%
Southwestern Bell Telephone.............................................. 11 -- --
U.S. Department of Defense............................................... 3 6 25
Intergraph Corporation................................................... 2 6 11
CIBC..................................................................... -- 1 16
</TABLE>
EMPLOYEES
As of May 31, 1998, Innovative had 152 full-time employees and 9 part-time
employees. None of Innovative's employees are represented by labor unions, and
Innovative believes that its employee relations are satisfactory.
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PROPERTIES
Innovative's principal corporate offices are located at 444 Jacksonville
Road, Warminster, Pennsylvania 18974. Under the terms of a five (5) year lease,
dated as of June 1, 1995, the Company leases 20,000 square feet of office space,
with the option to renew for two (2) successive additional terms of five (5)
years. The building is owned and operated by Thompson Enterprises, L.P., a
Pennsylvania limited partnership. William M. Thompson, John M. Thompson and
Karen A. Thompson are the limited partners of Thompson Enterprises, L.P. and the
sole shareholders of Thompson Capital Corporation, the general partner of the
limited partnership. William M. Thompson and John M. Thompson are executive
officers and significant shareholders of Innovative. Karen A. Thompson is an
executive officer of Innovative. William Thompson and John Thompson are
brothers, and Karen Thompson is their sister. See "Innovative Certain
Transactions" and "The Merger--Interests of Certain Persons."
Innovative's midwest regional office is located at 7250 N. Cicero Avenue,
Chicago, Illinois 60646. Under the terms of a five (5) year lease, dated as of
February 1, 1995, Innovative leases 9,612 square feet of office space, with the
option to renew for one (1) term of five (5) years.
Innovative's western regional office is located at 2175 N. California
Boulevard, Suite 990, Walnut Creek, California 94596. Under the terms of a
twenty eight (28) month lease, dated as of October 1, 1996, the Company leases
3,444 square feet of office space.
Innovative's Canadian regional office is located at 812-1661 Portage Avenue,
Winnipeg, Manitoba R3J 3T7. Under the terms of a five (5) year lease, dated as
of May 1, 1997, Innovative leases 2,840 square feet of office space.
Innovative's Alabama regional office is located at 9238 Highway 20 West,
Suites 1300A and 1400, Madison, Alabama 35758. Under the terms of a five (5)
year lease, dated as of March 1, 1998, the Company leases 4,313 square feet of
office space, with the option to renew for two (2) terms of three (3) years.
Management of Innovative believes that each of the facilities occupied by
Innovative is adequate to meet current needs.
LEGAL PROCEEDINGS
From time to time, Innovative is a party to various legal proceedings or
claims, either asserted or unasserted, which arise in the ordinary course of
business. Management of Innovative has reviewed all pending legal matters to
which Innovative is party and believes that the resolution of such matters will
not have a significant adverse effect on Innovative's financial condition or
results of operations.
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INNOVATIVE MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THE FOLLOWING DISCUSSION CONTAINS FORWARD-LOOKING STATEMENTS WITHIN THE
MEANING OF SECTION 27A OF THE SECURITIES ACT OF 1933 AND SECTION 21E OF THE
SECURITIES EXCHANGE ACT OF 1934. THESE FORWARD LOOKING STATEMENTS ARE SUBJECT TO
CERTAIN RISKS AND UNCERTAINTIES THAT COULD CAUSE ACTUAL RESULTS TO DIFFER
MATERIALLY FROM HISTORICAL RESULTS OR ANTICIPATED RESULTS, INCLUDING THOSE SET
FORTH UNDER THE CAPTIONS "RISK FACTORS," IN THIS "INNOVATIVE MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS" AND
ELSEWHERE IN THIS PROXY STATEMENT/PROSPECTUS. THE FOLLOWING DISCUSSION AND
ANALYSIS SHOULD BE READ IN CONJUNCTION WITH "SELECTED HISTORICAL AND UNAUDITED
PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION" AND INNOVATIVE'S
CONSOLIDATED FINANCIAL STATEMENTS AND NOTES THERETO INCLUDED ELSEWHERE IN THIS
PROXY STATEMENT/PROSPECTUS.
OVERVIEW AND SIGNIFICANT EVENTS
Innovative reported record revenues for the year ended January 31, 1998. The
continued revenue growth experienced by Innovative was the result of increased
volume from its strategic marketing efforts and new product releases. The
significant progress made by Innovative during fiscal 1998 continued during the
first quarter of fiscal 1999, as Innovative reported revenues of $4,582,468 for
the three months ended April 30, 1998. The continued revenue growth experienced
by Innovative results from increased sales volume from its strategic marketing
efforts, new product releases, increased services and support and its commitment
to continued investment and expansion of its sales force.
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 term of the contract. Revenues from consulting and custom
programming services are recognized as the services are performed. Revenue is
reduced for estimated customer returns and allowances.
On May 7, 1998, Innovative entered into the Merger Agreement with Peregrine
pursuant to which Peregrine will acquire Innovative in a tax-free merger in
which MergerSub will merge into Innovative, with Innovative being the surviving
corporation. Accordingly, following the merger, Innovative will become a
wholly-owned subsidiary of Peregrine. See "The Plan of Merger and Related
Transactions," "The Merger Agreement," and "The Warrant Amendment."
On July 26, 1996, Innovative acquired Facility Management Systems, Inc.
("FMS"), a developer of specialty software systems used in the management of
facilities, utilizing hand-held data collection devices to monitor operating
conditions and ensure regulatory compliance within a facility. Current users of
the systems include Ford Motor Company, Chrysler Corporation, and Pitney Bowes.
The acquisition created a significant presence for Innovative in the Midwestern
United States.
On April 11, 1996, Innovative signed a seven (7) year strategic marketing
agreement with Elektrowatt AG Landis & Staefa (Europe), a Swiss-based provider
of building performance and energy efficiency solutions, with approximately $2.1
billion in annual revenues. Under the terms of the agreement, Elektrowatt AG
Landis & Staefa (Europe) will distribute and market Innovative's SPAN-FM product
line in Europe, South Africa, and the Near and the Middle East. The terms of the
agreement, in the initial year, call for Elektrowatt AG Landis & Staefa (Europe)
to commit financial resources for revisions and enhancements to the SPAN-FM
product line. During the remaining six (6) years of the contract, Innovative is
to receive royalties based on revenue generated from product distribution and
sales of SPAN-FM by Elektrowatt AG Landis & Staefa (Europe) in Europe. As the
new European partner of Innovative, Elektrowatt AG Landis & Staefa (Europe) will
also translate the SPAN-FM software into the various languages used in the
market area. To date, SPAN-FM software has been translated into German, Swedish
and Italian; a French translation is presently underway. Innovative recognized
$291,633 and
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$545,365 in revenues pursuant to the agreement for the years ended January 31,
1998 and 1997, respectively.
Under the terms of an OEM agreement, for several years Intergraph
Corporation marketed, sold and distributed certain Innovative software packages.
The financial terms of the agreement provided for Innovative to receive
royalties on all sales of the SPAN-FM software by Intergraph Corporation.
Pursuant to the agreement, Innovative received royalties of $100,550, $398,832,
and $214,558 for the years ended January 31, 1998, 1997, and 1996, respectively.
In September, 1997, both parties mutually agreed to terminate the OEM agreement.
In connection with such termination, Intergraph paid Innovative a one time fee
of $115,300, which was recognized as revenue for the fiscal year ended January
31, 1998.
RESULTS OF OPERATIONS
THREE MONTHS ENDED APRIL 30, 1998 AND 1997
Total revenues for the three months ended April 30, 1998 and 1997 were
$4,582,468 and $3,220,239, respectively. Management attributes the increase to
the release of the Windows version of its SPAN-FM product line and increased
sales and marketing activities that generated a higher volume of sales
transactions. Software revenues for the first three months ended April 30, 1998
increased by $71,999 or five percent (5%) over the same three month period in
1997. For the three months ended April 30, 1998, hardware revenues increased
$547,459 or 74% over the same three month period in 1997. The increase is
primarily attributable to one sale made to the Company's significant customer
for the quarter. Services and support revenues for the three months ended April
30, 1998 increased $742,771 or 70% over the same three month period in 1997. The
increase is primarily attributable to the past increases in software sales.
Innovative normally charges an 18% maintenance fee along with the software for
support and upgrades. These fees are recognized over the period of the contract,
normally one year.
Cost of revenues were $1,222,297 and $1,086,858 for the three months ended
April 30, 1998 and 1997, respectively. The increase from 1997 to 1998 is mainly
attributable to the growth in sales made by Innovative, which can be evidenced
through its increase in revenues. As a percentage of total revenue, the cost of
revenues for the three months ended April 30, 1998 was 27% compared to the same
period in 1997 which was 34%. The increase can be attributed to the increase in
services and support revenue realized by Innovative during the quarter ended
April 30, 1998 have higher margins. As a percentage of total revenue, cost of
revenues increased from 6% for the three months ended April 30, 1997 to 13% for
the three months ended April 30, 1998. Included within cost of revenues are
hardware, software and accessories purchased by Innovative and subsequently
resold to customers, amortization of capitalized software, and salaries and
wages of service and support personnel. Hardware purchases are made only as
required under customer contracts. Therefore, the volume of hardware purchases
may fluctuate significantly based upon specific contract requirements.
Selling, general and administrative expenses were $2,576,899 and $1,786,286
for three months ended April 30, 1998 and 1997, respectively. The increase in
1998 is due to increased wages incurred by Innovative as a result of hiring
additional personnel to support Innovative's development, sales and marketing
efforts. Selling, general and administrative expenses as a percentage of
revenues was 56 percent for the three months ended April 30, 1998 and 55 percent
for the same time period in 1997.
Research & development expenses were $500,984 and $281,777 for the three
months ended April 30, 1998 and 1997, respectively. As Innovative continues to
grow, it needs to expand its product base. Therefore, Innovative has committed
to devote more effort in the research and development area. As a percentage of
total revenues, research & development increased from 9% for the three months
ended April 30, 1997 to 11% for the same time period in 1998.
FISCAL YEARS ENDED JANUARY 31, 1998, 1997 AND 1996
Total revenues for the fiscal years ended January 31, 1998, 1997 and 1996
were $15,082,742, $8,903,682 and $2,784,965, respectively. Management attributes
the current year increase to the release of the
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Windows version of its SPAN-FM product line and increased sales and marketing
activities, which generated a higher volume of sales transactions and its single
largest order of approximately $2,300,000.
Fiscal 1998 software revenues increased $4,502,026 or 125% over fiscal 1997
software revenues, of which 51% was from the single largest order. Fiscal 1998
hardware revenues increased $1,108,664 or 95% over fiscal 1997 hardware which
includes FMS for the full fiscal year. Fiscal 1998 services and support revenues
increased $568,370 or 14% over fiscal 1997 services and support revenues.
Fiscal 1997 software revenues increased $2,139,331 or 147% over fiscal 1996
software revenues. Of this increase, $880,627 or 41% related to the FMS
acquisition. Fiscal 1997 hardware revenues increased $1,154,946 over fiscal 1996
hardware revenues, which was due primarily to the acquisition of FMS. Fiscal
1997 services and support revenues increased $2,824,440 over fiscal 1996
services and support revenues. Of this increase, $508,994 or 18% related to the
FMS acquisition.
Cost of revenues was $4,295,534, $3,121,428 and $1,001,157 for fiscal years
1998, 1997 and 1996, respectively. Included within cost of revenues are
hardware, software and accessories purchased by Innovative and subsequently sold
to customers, amortization of capitalized software, and salaries and wages of
service and support personnel. Hardware purchases are made only as required
under customer contracts. Therefore, the volume of hardware purchases may
fluctuate significantly based upon specific contract requirements. The increase
from 1997 to 1998 is mainly attributable to the growth in sales made by
Innovative, which can be evidenced through its increase in revenues. The
significant increase in fiscal 1997 is primarily attributable to the FMS
acquisition. The FMS product line utilizes hand-held collection devices and
accessories which are purchased and resold to customers. The fiscal 1997 cost of
revenues included $977,473 related to sales of the FMS product line, which
represents 31% of the fiscal 1997 total. Cost of revenues as a percentage of
revenues was 29%, 35% and 36% for fiscal years 1998, 1997 and 1996,
respectively.
Selling, general and administrative expenses were $8,730,088, $4,963,942 and
$2,585,587 for fiscal years 1998, 1997 and 1996, respectively. The increases in
fiscal years 1998 and 1997 are due to increased wages incurred by Innovative as
a result of hiring additional employees to support Innovative's development,
sales and marketing efforts. The increased development and marketing efforts
have resulted in increased revenues. The increase in these types of expenses in
1997 is also due to the FMS acquisition, which accounted for $1,459,383 or 29%
of the fiscal 1997 total. Selling, general and administrative expenses as a
percentage of revenues was 58%, 56% and 93% for fiscal years 1998, 1997 and
1996, respectively.
Research & development expenses were $1,105,013, $793,970 and $424,415 for
fiscal years 1998, 1997 and 1996, respectively. The 1997 amount includes
$107,498 or 14% related to the FMS acquisition. Innovative expensed $485,000 of
in-process research and development acquired as part of the acquisition of FMS.
This one-time charge resulted in Innovative reporting a loss in fiscal 1997 (see
note 12 to the consolidated financial statements).
LIQUIDITY AND CAPITAL RESOURCES
Innovative's liquidity needs have related to and are expected to continue to
relate to capital investments and working capital requirements. Innovative has
met its liquidity needs over the last three (3) years primarily through funds
provided by the issuance of Innovative Common Stock in an underwritten public
offering completed in 1994. On January 30, 1997, Innovative obtained a $1.5
million bank line of credit. The line is payable on demand and bears interest at
the rate of prime plus 1/4%. There were no borrowings outstanding under the line
of credit at April 30, 1998. In January 1998, Innovative entered into a new
$775,000 term loan. On February 9, 1998, Innovative entered into a Letter of
Credit for $102,600 which is supported by the Line of Credit. Innovative
believes that cash provided by operating activities and the available bank line
of credit should be adequate for its presently foreseeable working capital and
capital investment requirements.
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Innovative's cash position at April 30, 1998, decreased $1,490,065 or 43.3%
from the January 31, 1998 balance. The decrease was primarily attributable to
cash and cash equivalents utilized in operations. For the three months ended
April 30, 1998, Innovative utilized $1,010,476 from operations, utilized
$588,141 for the purchases of property and equipment, software and software
development, repaid $38,750 of long-term debt and received $147,302 from the
issuance of securities.
Accounts receivable at April 30, 1998 increased by $1,548,033 from the
January 31, 1998 balance. This increase is due primarily to the higher sales
revenue in the last month of the quarter ended April 30, 1998 compared to the
prior quarter, since invoices are not due until 30 days after the invoice is
sent. The Company has not experienced any material collection difficulties.
Working capital at April 30, 1998 was $4,816,951. The Company had $736,250 of
term debt at April 30, 1998.
For the three months ended April 30, 1997, the Company generated $34,970
from operations, utilized $133,551 for the purchases of property, equipment, and
software and $10,714 for repayment of long-term debt.
IMPACT OF INFLATION
Subject to industry pricing trends and risks, Innovative can increase its
prices to counter the effects of inflation. By doing so, inflation should have
little effect on net sales and on income from continuing operations for new
sales. However, for sales made in the past where prices are fixed for a period
of time, inflation may adversely affect Innovative's earnings in the future. The
effect of inflation on Innovative's financial position has not been significant
to date.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board issued SFAS No. 130,
"Reporting Comprehensive Income" and SFAS No. 131, "Disclosures about Segments
of an Enterprise and Related Information," SFAS No. 130 establishes standards
for reporting and display of comprehensive income and its components (revenues,
expenses, gains and losses) in a full set of general-purpose financial
statements and requires that all items that are required to be recognized under
accounting standards as components of comprehensive income be reported in
financial statements that is displayed with the same prominence as other
financial statements. SFAS No. 130 is required to be adopted for Innovative's
fiscal year ending January 31, 1999. The adoption of this pronouncement is
expected to have no impact on Innovative's financial position or results of
operations. SFAS No. 131 establishes standards for the way that public business
enterprises report information about operating segments in annual financial
statements and requires that those enterprises report selected information about
operating segments in interim financial reports issued to stockholders. It also
establishes standards for related disclosures about products and services,
geographic areas, and major customers. SFAS No. 131 is required to be adopted
for Innovative's fiscal year ending January 31, 1999. Innovative's is currently
evaluating the impact, if any, of the adoption of this pronouncement on
Innovative's existing disclosures.
In October 1997, the American Institute of Certified Public Accountants
("AICPA") issued Statement of Position ("SOP") No. 97-2, "Software Revenue
Recognition." SOP No. 97-2 is effective for Innovative's fiscal year beginning
February 1, 1998, and provides guidance on applying generally accepted
accounting principles in recognizing revenue on software transactions. SOP No.
97-2 supersedes SOP No. 91-1. "Software Revenue Recognition." Application of SOP
No. 97-2 is not anticipated to materially impact Innovative's revenue.
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.
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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.
YEAR 2000 RISKS
YEAR 2000 ISSUES. Many currently installed computer systems and software
products are coded to accept only two digit entries in the date code field.
These date code fields will need to accept four digit entries to distinguish
21st century dates from 20th century. As a result, many companies' software and
computer systems may need to be upgraded or replaced in order to comply with
such Year 2000 requirements. Significant uncertainty exists in the software
industry concerning the potential effects associated with such compliance.
Innovative utilizes third party equipment and software that may not be Year
2000 compliant and is conducting an internal audit of products provided by
outside vendors to determine if such third party products are Year 2000
compliant. Failure of such third party equipment or software to operate properly
with regard to the Year 2000 and thereafter could require Innovative to incur
unanticipated expenses to remedy any problems, which could have a material
adverse effect on Innovative's business, results of operations, and financial
condition. If key systems, or a significant number of systems, were to fail as a
result of Year 2000 problems or Innovative were to experience delays in
implementing Year 2000 compliant software products, Innovative could incur
substantial costs and disruption of its businesses, which would potentially have
a material adverse effect on its results of operations and financial condition.
Innovative is still assessing the impact the Year 2000 issue will have on
its proprietary software products and internal information systems and will take
appropriate corrective actions based on the results of such analyses. Management
of Innovative has not yet determined the costs related to achieving Year 2000
compliance but does not believe such costs will be material. To the extent the
costs of achieving Year 2000 compliance are material, such costs will have a
material adverse effect on Innovative's business, results of operations, and
financial condition.
In the ordinary course of its business, Innovative tests and evaluates its
own software products and believes that its software products are generally Year
2000 compliant, meaning that the use or occurrence of dates on or after January
1, 2000 will not materially affect the performance of such software products
with respect to four digit date dependent data or the ability of such products
to correctly create, store, process and output information related to such data.
There can be no assurances, however, that Innovative will not subsequently learn
that certain of its software products do not contain all necessary software
routines and codes necessary for the accurate calculation, display, storage and
manipulation of data involving dates. In addition, in certain circumstances,
Innovative has warranted that the use or occurrence of dates on or after January
1, 2000 will not adversely affect the performance of its products with respect
to four digit date dependent data or the ability to create, store, process and
output information related to such data. If any licensees experience Year 2000
problems, such licensees could assert claims for damages.
In addition, the purchasing patterns of customers and potential customers
may be affected by Year 2000 issues. Many companies are expending significant
resources to correct their current software systems for Year 2000 compliance.
These expenditures may result in reduced funds available to purchase software
products such as those offered by Innovative, which could have an adverse effect
on the business, results of operations, and financial condition of Innovative.
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<PAGE>
INNOVATIVE DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE
On November 22, 1996, Innovative dismissed Coopers & Lybrand, L.L.P.,
independent accountants, who had previously been engaged as Innovative's
principal accountant to audit Innovative's financial statements. Coopers &
Lybrand, L.L.P. continued to provide services to Innovative through November 27,
1996 in connection with the filing by Innovative of an amendment to its Form
10-Q filed with respect to the period ended July 31, 1996. Coopers & Lybrand,
L.L.P.'s dismissal was intended to be effective as of December 2, 1996.
Innovative disputes the accuracy of the statement made in the letter of
Coopers & Lybrand, L.L.P. concerning the resignation of Coopers & Lybrand,
L.L.P. prior to its dismissal. It is Innovative's position that Coopers &
Lybrand, L.L.P. did not notify Innovative's president of its intention to resign
until after Coopers & Lybrand, L.L.P. had been notified that Innovative's letter
of dismissal had been sent. Written confirmation as to the termination of the
client-auditor relationship between Innovative and Coopers & Lybrand, L.L.P. was
not issued by Coopers & Lybrand, L.L.P. until November 27, 1996. Innovative did
not receive any other form of written notification from Coopers & Lybrand,
L.L.P. concerning its resignation as Innovative's principal accountant.
The decision to change accountants was approved by Innovative's Board of
Directors. The former accountant's report on Innovative's financial statements
for either of the two years immediately preceding the dismissal of Coopers &
Lybrand L.L.P. did not contain an adverse opinion or a disclaimer of opinion,
nor was either report qualified as to uncertainty, audit scope or accounting
principles.
It is Innovative's position that, during the two fiscal years of Innovative
and subsequent interim periods immediately preceding the dismissal of Coopers &
Lybrand, L.L.P., there were no disagreements with the former accountant on any
matter of accounting principles or practices, financial statement disclosure, or
auditing scope or procedure, which disagreements, if not resolved to the
satisfaction of the former accountant, would have caused it to make a reference
to the subject matter of the disagreements in connection with its reports.
Innovative takes exception to the "reportable event" noted in the letter of
Coopers & Lybrand, L.L.P. for the following reasons:
(i) On the date Innovative filed its Form 10-Q for the quarterly period
ended July 31, 1996, a partner at Coopers & Lybrand, L.L.P. advised
Innovative that information had come to their attention that it had
concluded materially impacted the fairness of the unaudited,
management-prepared financial statements included in such Form 10-Q.
(ii) The item in the financial statements which was in issue was the
presentation as a gain of the extinguishment of debt payable to certain
former shareholders of a company acquired by Innovative.
(iii) In determining the proper presentation to be used for such item,
Innovative had repeatedly consulted with Coopers & Lybrand, L.L.P. and had
been advised that the extinguishment of such debt was properly shown as a
gain.
(iv) Based upon Coopers & Lybrand, L.L.P.'s advice, Innovative prepared
the Form 10-Q for the quarterly period ended July 31, 1996 and showed the
extinguishment of the debt as a gain.
(v) After Innovative received notification from Coopers & Lybrand,
L.L.P. that the debt owed to the former shareholders of the company acquired
by Innovative should have been recorded at its fair value at the time of
acquisition and, upon extinguishment of such debt, no gain or loss should
have been recorded, Innovative further investigated, in consultation with
Coopers & Lybrand, L.L.P., the correct financial statement presentation for
such item and concurred with Coopers & Lybrand, L.L.P.'s recommendation.
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<PAGE>
(vi) Innovative prepared an Amendment to its Form 10-Q for the quarterly
period ended on July 31, 1996 which was forwarded to Coopers & Lybrand,
L.L.P. for its review and approval on November 22, 1996 and filed with the
Commission on November 27, 1996.
(vii) Based upon the foregoing chronology of events and discussions which
took place between Innovative's management and Coopers & Lybrand, L.L.P. at
the time the Form 8-K relating to the dismissal of Cooper's & Lybrand,
L.L.P. was filed on November 27, 1996, Innovative maintains that, at the
time of Coopers & Lybrand, L.L.P.'s dismissal, there were no unresolved
issues between Innovative and Coopers & Lybrand, L.L.P. concerning financial
statement preparation or disclosure or financial reporting.
On March 3, 1997, Innovative engaged Price Waterhouse LLP as its independent
accountants to audit Innovative's consolidated financial statements for the year
ended January 31, 1997. During the two fiscal years ended January 31, 1996 and
the interim periods of fiscal 1997 prior to engaging Price Waterhouse LLP,
Innovative did not consult with Price Waterhouse LLP on any matters.
119
<PAGE>
INNOVATIVE MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The following table sets forth certain information concerning executive
officers and directors of Innovative and their ages as of May 31, 1998:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ----------------------------------- --- -----------------------------------------------------------------------
<S> <C> <C>
William M. Thompson................ 39 Chairman of the Innovative Board and Chief Executive Officer
John M. Thompson................... 36 President, Chief Operating Officer, Chief Financial Officer and
Treasurer, Director
Karen A. Thompson.................. 32 Executive Vice President of Information Services and Secretary
John R. Smart...................... 33 Executive Vice President of Strategic Marketing and Director
Mark R. Hernick.................... 36 Director
Julie Moore........................ 39 Director
</TABLE>
WILLIAM M. THOMPSON has served as Chairman of the Innovative Board and
Innovative's Chief Executive Officer since January 1990. From January 1990, to
March 1995, Mr. Thompson served as President of Innovative. From January 1998,
to January 1990, Mr. Thompson served as President and as a director of
Innovative Tech Systems, Inc., a Pennsylvania corporation, substantially all of
the assets of which were acquired by Innovative in January 1990. From December
1986 to January 1988, Mr. Thompson was an independent consultant. From October
1985 to December 1986, Mr. Thompson was Director of Operations for CAD, Inc.
Prior to joining CAD, Inc., Mr. Thompson served as Vice President of Marketing
for Computer Graphics Division, Inc.
JOHN M. THOMPSON has served as Innovative's Treasurer and a member of the
Innovative Board since January 1990, as Innovative's Secretary from January 1990
to March 1995, as Innovative's Chief Operating Officer since June 1994, and as
Innovative's President since March 1995. Mr. Thompson has also served as
Innovative's Chief Financial Officer since June 1997 and also served in such
capacity from January 1990 to June 1994. From April 1989 to January 1990, Mr.
Thompson served as Treasurer and Director of Innovative Tech Systems, Inc., a
Pennsylvania corporation, substantially all of the assets of which were acquired
by Innovative in January 1990. Mr. Thompson served as Vice President of Finance
for Philadelphia Ship Maintenance Co., Inc., from July 1988 through April 1989
and as that company's controller from June 1984 to May 1987. Mr. Thompson has
also served as controller for Display Corporation of America and as a staff
accountant for Manufacturers Hanover Financial Services, Inc.
KAREN A. THOMPSON has served as Innovative's Executive Vice President of
Information Services and Secretary since March 1995 and served as Innovative's
Vice President from January 1990 to March 1995. From April 1989 to January 1990,
Ms. Thompson served as Vice President of Innovative Tech Systems, Inc., a
Pennsylvania corporation, substantially all of the assets of which were acquired
by Innovative in January 1990. Prior to 1990, Ms. Thompson was employed as
administrator of dealer finance for Manufacturers Hanover Financial Services,
Inc., and Customer Service and Technical Support Manager for Applied Computer
Products.
JOHN R. SMART has served as a member of the Innovative Board since May 1994
and as Executive Vice President of Strategic Marketing since March 1995 and
served as Innovative's Vice President of Marketing from January 1990 to March
1995. Prior to joining Innovative Tech Systems, Inc., substantially all of the
assets of which were acquired by Innovative in January 1990, in October 1989,
Mr. Smart served as an independent distributor of drinking water systems for
Multi Pure Corporation, and as a financial consultant for A.F. Investments,
Inc., a subsidiary of Atlantic Financial Corporation, where his primary function
was in sales and product marketing.
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<PAGE>
MARK R. HERNICK has served as a member of the Innovative Board since May,
1994. Mr. Hernick is currently a Partner and Vice-President of the Display
Division of Showtime Enterprises, Inc. Showtime Enterprises is engaged in the
design and production of point of purchase displays, tradeshow exhibits,
museums, retail environments, merchandising fixtures and Premium/Incentive
programs with facilities in Philadelphia, Atlanta and Boston. Previously, Mr.
Hernick was Vice President of Sales and Marketing for the display division of
Art Guild, Inc. Mr. Hernick had been with Art Guild, Inc. from November, 1987 to
November, 1997, directing all sales and marketing activities for the firm, which
designs and produces custom point-of-purchase displays, store fixtures, mall
kiosks, trade show and museum exhibits and showrooms. Mr. Hernick is also a Vice
President, and a Director, of Spinnaker Solutions, Inc., which is engaged in the
design, development, supply and use of industrial coatings.
JULIE MOORE has served as a member of the Innovative Board since May 1994.
Ms. Moore was formerly employed by Temple University Hospital in Philadelphia,
Pennsylvania as a physician liaison for the heart transplant program. From June
1992 to March 1993, Ms. Moore served as a sales specialist for Home Health Corp.
of America, with her primary responsibilities being the marketing of medical
respiratory products to physicians. From June 1990 to June 1992, Ms. Moore was a
hospital sales representative with Fujisawa Pharmaceutical Company, where she
sold and promoted a line of pharmaceuticals. Ms. Moore was employed as Vice
President of Marketing for Frank's School Uniforms, Inc. from 1987 to 1990.
William M. Thompson and John M. Thompson are brothers, and Karen A. Thompson
is their sister.
DIRECTOR COMPENSATION
Directors of Innovative, who are not also employees of Innovative, receive
$500 per Innovative Board meeting attended and are reimbursed for their
out-of-pocket expenses incurred in connection with their duties as members of
the Innovative Board. In addition, in July 1997, Innovative granted to each of
Mark R. Hernick and Julie Moore, who are directors but not employees of
Innovative, an option to purchase 7,500 shares of Innovative Common Stock at an
exercise price of $1.125 per share. Such options vest in three equal annual
installments for so long as the optionee remains a director of Innovative.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Innovative does not have a Compensation Committee. The Innovative Board
determines the salaries, incentives, and other forms of compensation for
directors, officers and other employees of Innovative and administers various
incentive compensation and benefit plans. Compensation and incentives for
employees of Innovative who are also members of the Innovative Board are
approved by Innovative's non-employee directors. No member of the Innovative
Board sits on the compensation committee of any other board of directors.
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<PAGE>
EXECUTIVE COMPENSATION
The following table sets forth in summary form information concerning the
compensation awarded to, earned by, or paid for services rendered to Innovative
in all capacities during each of the fiscal years ended January 31, 1998, 1997,
and 1996 respectively by (i) Innovative's Chairman and Chief Executive Officer
and (ii) each of the three most highly compensated executive officers of
Innovative whose salary and bonus for fiscal 1998 exceeded $100,000
(collectively, the "Innovative Named Executive Officers").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
AWARDS
ANNUAL COMPENSATION(1) -------------
SECURITIES
---------------------- UNDERLYING OTHER ANNUAL
NAME AND PRINCIPAL POSITIONS FISCAL YEAR SALARY($) BONUS($) OPTIONS(#) COMPENSATION($)(2)
- ------------------------------------------ ----------- ---------- ---------- ------------- -------------------
<S> <C> <C> <C> <C> <C>
William M. Thompson(3) ................... 1998 $ 110,000 $ 75,000 50,000 $ 3,595(7)
CHAIRMAN AND CHIEF EXECUTIVE OFFICER 1997 110,000 -- -- 3,462
1996 110,000 -- -- 1,958
John M. Thompson(4) ...................... 1998 110,000 75,000 50,000 2,367(8)
PRESIDENT, CHIEF OPERATING OFFICER, 1997 110,000 -- -- 2,234
CHIEF FINANCIAL OFFICER AND TREASURER 1996 110,000 -- -- 678
John R. Smart(5) ......................... 1998 90,000 35,000 93,500 451(9)
EXECUTIVE VICE PRESIDENT OF STRATEGIC 1997 65,000 -- -- 313
MARKETING AND DIRECTOR 1996 65,000 -- -- --
Karen A. Thompson(6) ..................... 1998 90,000 25,000 150,000 451(10)
EXECUTIVE VICE PRESIDENT OF INFORMATION 1997 65,000 -- -- 313
SERVICES AND SECRETARY 1996 65,000 -- -- --
</TABLE>
- ------------------------------
(1) Other than the salary and bonus described herein, Innovative did not pay any
executive officer named in the Summary Compensation table any fringe
benefits, perquisites or other compensation in excess of 10% of such
executive officer's salary and bonus during fiscal 1996, 1997 and 1998. The
above compensation does not include certain insurance and other personal
benefits, the total value of which does not exceed as to any named officer
or director or group of executive officers the lesser of $50,000 or 10% of
such person's or persons' cash compensation.
(2) All of Innovative's group life, health, hospitalization or medical
reimbursement plans, if any, do not discriminate in scope, terms or
operation, in favor of the executive officers or directors of Innovative and
are generally available to all salaried employees.
(3) Mr. William Thompson has served as Innovative's Chief Executive Officer and
Chairman of the Innovative Board since January 1990.
(4) Mr. John Thompson has served as Innovative's President since March 1995, as
its Chief Operating Officer since June 1994, as its Chief Financial Officer
since 1997, and as its Treasurer and a member of the Innovative Board since
January 1990.
(5) Mr. Smart has served as Innovative's Executive Vice President of Strategic
Marketing since 1995 and a member of the Innovative Board since May 1994.
(6) Ms. Thompson has served as Innovative's Executive Vice President of
Information Services and Secretary since March 1995.
(7) Represents $1,876, $1,876 and $1,958 in keyman life insurance premiums paid
by Innovative in fiscal 1998, 1997 and 1996, respectively, and $1,719 and
$1,586 in matching contributions under Innovative's 401(k) plan paid by
Innovative in fiscal 1998 1997, respectively.
(8) Represents $648, $648 and $678 in keyman life insurance premiums paid by
Innovative in fiscal 1998, 1997 and 1996, respectively, and $1,719 and
$1,586 in matching contributions under Innovative's 401(k) plan paid by
Innovative in fiscal 1998 and 1997, respectively.
(9) Represents $451 and $313 in matching contributions under Innovative's 401(k)
plan paid by Innovative in fiscal 1998 and 1997, respectively.
(10) Represents $451 and $313 in matching contributions under Innovative's
401(k) plan paid by Innovative in fiscal 1998 and 1997, respectively.
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<PAGE>
OPTION GRANTS IN FISCAL YEAR 1998
The following table sets forth certain information relating to stock options
awarded to the Innovative Named Executive Officers during the fiscal year ended
January 31, 1998. All such options were awarded under Innovative's 1994 Stock
Option Plan.
INDIVIDUAL GRANTS
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
VALUES AT ASSUMED
NUMBER OF PERCENT OF ANNUAL RATES OF STOCK
SECURITIES TOTAL OPTIONS PRICE APPRECIATION FOR
UNDERLYING GRANTED TO EXERCISE OPTION TERM(1)
OPTIONS EMPLOYEES IN PRICE PER EXPIRATION ----------------------
NAME GRANTED FISCAL 1998(2) SHARE(3)(4) DATE(5) 5% 10%
- ------------------------------------ ----------- --------------- ----------- ----------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
William M. Thompson................. 50,000 3.78% $ 1.2500 02/25/07 $ 39,306 $ 99,609
John M. Thompson.................... 50,000 3.78 1.2500 02/25/07 39,306 99,609
John R. Smart....................... 50,000 3.78 1.2500 02/25/07 39,306 99,609
43,500 3.29 1.1875 09/09/07 32,486 82,327
Karen A. Thompson................... 150,000 11.35 1.2500 02/25/07 117,918 298,827
</TABLE>
- ------------------------------
(1) Potential realizable value is based on the assumption that the Innovative
Common Stock appreciates at the annual rate shown (compounded annually) from
the date of grant until the expiration of the ten year option term. These
numbers are calculated based on the requirements promulgated by the
Commission and do not reflect Innovative's estimate or projection of future
prices for Innovative Common Stock.
(2) Based on options to acquire 1,321,800 shares granted under Innovative's 1994
Stock Plan during fiscal 1998. All options granted to the Innovative Named
Executive Officers during fiscal 1998 are governed by Innovative's 1994
Stock Plan.
(3) Options were granted at an exercise price equal to the closing sales price
of Innovative Common Stock on the date of grant as reported by The Nasdaq
SmallCap Market.
(4) Exercise price must be paid by certified or official bank check or the
equivalent thereof acceptable to Innovative.
(5) One-third of the shares issuable upon exercise of options granted under
Innovative's 1994 Stock Option Plan vest on each of the first three
anniversaries of the date of grant.
AGGREGATE OPTION EXERCISES
IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION VALUES
No Innovative Named Executive Officer exercised any stock option during
fiscal 1998. The following table sets forth certain information with respect
stock options held by the Innovative Named Executive Officers as of January 31,
1998.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
OPTIONS AT JANUARY 31, IN-THE-MONEY OPTIONS
1998 AT JANUARY 31, 1998(1)
-------------------------- --------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---------------------------------------------------------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
William M. Thompson....................................... 225,000 50,000 $ 348,525 $ 98,450
John M. Thompson.......................................... 225,000 50,000 348,525 98,450
John R. Smart............................................. 150,000 93,500 232,350 186,820
Karen A. Thompson......................................... 150,000 150,000 232,350 295,350
</TABLE>
- ------------------------------
(1) Based on a value of $3.219 per share, the closing sale price of Innovative
Common Stock on The Nasdaq SmallCap Market on January 30, 1998, minus the
per share exercise price, multiplied by the number of shares issued upon
exercise of the option.
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<PAGE>
INNOVATIVE CERTAIN TRANSACTIONS
Innovative currently leases its headquarters facility, consisting of 20,000
square feet of office space in Warminster, Pennsylvania, from Thompson L.P. The
Thompsons and Karen A. Thompson, their sister and an executive officer of
Innovative, are limited partners of Thompson L.P. and the sole shareholders of
Thompson Capital Corporation, a Pennsylvania corporation and the general partner
of Thompson L.P. During fiscal 1998, 1997 and 1996, Innovative paid $259,500,
$162,500 and $96,500, respectively, to Thompson L.P. in connection with such
lease arrangements. Under the terms of the lease, Innovative is scheduled to pay
Thompson L.P. $288,334 for such lease in fiscal 1999 and $285,833 in fiscal
2000. In addition, Innovative has incurred costs of approximately $284,000,
$23,000, and $155,000 1998, 1997 and 1996 in connection with leasehold
improvements to the property subject to the lease. In addition, during the first
four months of fiscal 1999 Innovative had incurred costs of $88,861 in
connection with leasehold improvements on the Warminster facility and
anticipates incurring additional improvement costs approximating $50,000 before
the end of fiscal 1999. Pursuant to the Merger Agreement, it is a condition to
closing that Innovative enter into an amendment to such lease providing for
certain provisions requested by Peregrine to comport with Peregine's planned
future use of the Warminster facility.
Innovative has from time to time advanced certain sums to Mr. William M.
Thompson, which advances are non-interest bearing. As of May 31, 1998 the
aggregate principal amount outstanding as a result of such advances equals
$76,673, which represents the highest outstanding balance of such advances made
by Innovative to Mr. William Thompson to date. Such advances are repayable by
Mr. William Thompson to Innovative upon demand.
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<PAGE>
INNOVATIVE STOCK OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding the beneficial
ownership of Innovative Common Stock by (i) each person or entity who is known
by Innovative to own beneficially 5% or more of the outstanding Innovative
Common Stock; (ii) each member of the Innovative Board; (iii) each of the
Innovative Named Executive Offices; and (iv) all current directors and executive
officers of Innovative as a group. All information contained in the table below
is based on beneficial ownership as of the Innovative Record Date.
<TABLE>
<CAPTION>
SHARES OF COMMON STOCK
BENEFICIALLY OWNED
---------------------------
PERCENTAGE
NAME AND ADDRESS(1) NUMBER OWNERSHIP(2)
- --------------------------------------------------------------------------------------- ---------- ---------------
<S> <C> <C>
William M. Thompson(3)................................................................. 1,983,395 17.0%
John M. Thompson(4).................................................................... 1,271,423 10.9
John R. Smart(5)....................................................................... 183,655 1.6
Karen A. Thompson(6)................................................................... 232,361 2.0
Mark R. Hernick(7)..................................................................... 1,617 *
Julie Moore(8)......................................................................... 2,022 *
All current executive officers and directors as a group (six persons)(9)............... 3,674,473 29.9
</TABLE>
- ------------------------
* Less than 1%
(1) Except as otherwise noted, the persons named in the table above have sole
voting and investment power with respect to all shares of Innovative Common
Stock shown as beneficially owned by them, subject to applicable community
property laws and to the information contained in footnotes to this table.
The address for each listed stockholder is c/o Innovative Tech Systems,
Inc., 444 Jacksonville Road, Warminster, Pennsylvania, 18974. Except as
otherwise noted, each holder named in the table has sole voting and
investment power with respect to all shares of Innovative Common Stock shown
as beneficially owned.
(2) Applicable percentage ownership is based on 11,442,029 shares of Innovative
Common Stock outstanding as of the Innovative Record Date and, in the case
of officers and directors, applicable options. Shares of Innovative Common
stock subject to options that are exercisable within 60 days of May 31, 1998
are deemed to be beneficially owned by the person holding such options for
the purpose of computing the percentage ownership of such person but are not
treated as outstanding for the purpose of computing any other person's
percentage ownership.
(3) Includes 241,666 shares of Innovative Common Stock issuable upon exercise of
outstanding options which are presently exercisable or will become
exercisable within 60 days of the Innovative Record Date. Excludes 713,460
shares of Innovative Common which are subject to the Thompson Voting
Agreements. Mr. Thompson is Chairman of the Innovative Board and
Innovative's Chief Executive Officer.
(4) Includes 241,666 shares of Innovative Common Stock issuable upon exercise of
outstanding options which are presently exercisable or will become
exercisable within 60 days of the Innovative Record Date. Excludes 713,460
shares of Innovative Common Stock which are subject to the Thompson Voting
Agreements. Mr. Thompson is Innovative's President, Chief Operating Officer,
Chief Financial Office, Treasurer and a member of the Innovative Board.
(5) Includes 166,666 shares of Innovative Common Stock issuable upon exercise of
outstanding options which are presently exercisable or will become
exercisable within 60 days of the Innovative Record Date. Mr. Smart is
Innovative's Executive Vice President of Strategic Marketing and a member of
the Innovative Board.
(6) Includes 200,000 shares of Innovative Common Stock issuable upon exercise of
outstanding options which are presently exercisable or will become
exercisable within 60 days of the Innovative Record Date. Ms. Thompson is
Innovative's Executive Vice President of Information Services and Secretary.
(7) Mr. Hernick is a member of the Innovative Board.
(8) Includes 1,617 shares of Innovative Common Stock held by Ms. Moore's
husband. Ms. Moore is a member of the Innovative Board.
(9) Includes 849,998 shares of Innovative Common Stock issuable upon exercise of
outstanding options which are presently exercisable or will become
exercisable within 60 days of the Innovative Record Date. Excludes 713,460
shares of Innovative Common Stock subject to the Thompson Voting Agreements.
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<PAGE>
DESCRIPTION OF INNOVATIVE CAPITAL STOCK
GENERAL
Innovative is authorized by its Articles of Incorporation, as amended, to
issue an aggregate of 100,000,000 shares of Innovative Common Stock, par value
$0.0185 per share ("Innovative Common Stock"), and 200,000,000 shares of
Preferred Stock, without par value ("Innovative Preferred Stock"). As of the
Innovative Record Date, there were 11,372,899 shares of Innovative Common Stock
issued and outstanding and no shares of Innovative Preferred Stock issued or
outstanding. In addition, as of the Innovative Record Date, 2,189,334 shares of
Innovative Common Stock were issuable upon exercise of outstanding options,
865,872 shares of Innovative Common Stock were issuable upon exercise of the
Innovative Warrants, and 370,500 shares of Innovative Common Stock were issuable
upon exercise of the Underwriter Warrant exercisable for Common Stock. In
addition, certain of the Underwriter Warrants are also exercisable to purchase
Innovative Warrants which are in turn exercisable for 3,375 shares of Innovative
Common Stock. All outstanding shares of Innovative Common Stock are of the same
class, and have equal rights and attributes.
The following description of Innovative's capital stock does not purport to
be complete and is subject to, and qualified in its entirety by, Innovative's
Amended and Restated Articles of Incorporation and Bylaws and by the provisions
of applicable Illinois law.
COMMON STOCK
The holders of shares of Innovative Common Stock are entitled to one vote
per share held on all matters submitted to a vote of shareholders of Innovative.
In addition, holders of the Innovative Common Stock are entitled to receive
ratably such dividends, if any, as may be declared from time to time by the
Innovative Board out of funds legally available therefor. In the event of the
dissolution, liquidation or winding up of Innovative, the holders of the
Innovative Common Stock are entitled to share ratably in all assets remaining
after payment of all liabilities of Innovative. All outstanding shares of
Innovative Common Stock are fully paid and nonassessable.
The holders of Innovative Common Stock do not have any subscription,
redemption or conversion rights, nor do they have any preemptive or other rights
to acquire or subscribe for additional, unissued or treasury shares.
Accordingly, if Innovative were to elect to sell additional shares of Common
Stock, the then current shareholders would have no right to purchase additional
shares, and as a result, their percentage equity interest in Innovative would be
reduced.
Except as otherwise provided in Innovative's Articles of Incorporation or
By-Laws, and except for any matters which, pursuant to the Illinois Law, require
a greater percentage vote for approval, the holders of a majority of the
outstanding Innovative Common Stock, if present in person or by proxy, are
sufficient to constitute a quorum for the transaction of business at meetings of
Innovative's shareholders. Further, except (i) in connection with amendments to
Innovative's Articles of Incorporation or By-laws, dissolution of Innovative,
merger or consolidation of Innovative, share exchange between Innovative and one
or more other companies, or the sale, lease, exchange or other disposition of
all or substantially all of the property and assets of Innovative, which such
transactions require for approval the affirmative vote of a majority of all
shares of Innovative Common Stock then outstanding, (ii) as otherwise provided
in Innovative's Articles of Incorporation or By-laws, and (iii) as to any
matters which, pursuant to Illinois Law, require a greater percentage vote for
approval, the affirmative vote of the holders of a majority of the Innovative
Common Stock present in person or by proxy at any meeting (provided a quorum is
present) is sufficient to authorize, affirm or ratify any action.
The holders of Innovative Common Stock do not have cumulative voting rights.
Accordingly, the holders of more than half of the outstanding shares of
Innovative Common Stock can elect all of the directors to be elected in any
election. In such event, the holders of the remaining shares of Innovative
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Common Stock would not be able to elect any directors. Only the Innovative Board
is empowered to fill any vacancies on the Innovative Board created by the
resignation, death or removal of a director. A director elected to fill a
vacancy may hold office only until the next election of directors by
shareholders.
In addition to voting at duly called meetings at which a quorum is present
in person or by proxy, the Illinois Law provides that shareholders of Innovative
may take action without the holding of a meeting by written consent or consents
signed by the holders of outstanding shares having not less than the minimum
number of votes that would be necessary to authorize such action at a meeting.
If such consents are to be signed by less than all of the shareholders entitled
to vote thereon, then at least five days prior to the execution of any such
consent, a written notice must be delivered to all of the shareholders entitled
to vote thereon concerning the action proposed to be taken. In addition, prompt
written notice of the taking of any action without a meeting by less than
unanimous consent of the shareholders must be given to those shareholders who do
not consent in writing to the action. The purposes of these provisions are to
facilitate action by shareholders and to reduce the corporate expense associated
with annual and special meetings of shareholders. Pursuant to the rules and
regulations of the Commission, if shareholder action is taken by written
consent, Innovative will be required to send to each shareholder entitled to
vote on the matter, but whose consent was not solicited, an information
statement containing information substantially similar to that which would have
been contained in a proxy statement.
PREFERRED STOCK
The Innovative Preferred Stock may be issued in series, and shares of each
series will have such rights and preferences as are fixed by the Innovative
Board in the resolutions authorizing the issuance of that particular series. In
designating any series of Innovative Preferred Stock, the Innovative Board may,
without further action by the holders of Innovative Common Stock, fix the number
of shares constituting that series and fix the dividend rights, dividend rate,
conversion rights, voting rights (which may be greater or less than the voting
rights of the Innovative Common Stock), rights and terms of redemption
(including any sinking fund provisions), and the liquidation preferences of the
series of Innovative Preferred Stock. Holders of any series of Innovative
Preferred Stock, when and if issued, may have priority claims to dividends and
to any distributions upon liquidation of Innovative and may have other
preferences over the holders of Innovative Common Stock. Holders of Innovative
Preferred Stock do not have preemptive rights.
The Innovative Board may issue one or more series of Innovative Preferred
Stock without action of the shareholders of Innovative. Accordingly, the
issuance of Innovative Preferred Stock may adversely affect the rights of the
holders of the Innovative Common Stock. In addition, the issuance of Innovative
Preferred Stock may be used as an "anti-takeover" device without further action
on the part of the shareholders. Issuance of Innovative Preferred Stock, which
may be accomplished through a public offering or a private placement to parties
favorable to current management, may dilute the voting power of holders of
Innovative Common Stock (such as by issuing Innovative Preferred Stock with
superior voting rights) and may render more difficult the removal of current
management, even if such removal may be in the shareholders' best interest.
WARRANTS
In connection with Innovative's 1994 underwritten public offering,
Innovative issued the Innovative Warrants to purchase shares of Innovative
Common Stock and the Underwriter Warrants to purchase both shares of Innovative
Common Stock and Innovative Warrants. The Innovative Warrants are traded on the
Nasdaq SmallCap Market under the symbol "ITSYW." See "Market Price and Dividend
Information."
As of the Innovative Record Date, the Innovative Warrants (not including the
Innovative Warrants issuable upon exercise of the Underwriter Warrants) were
exercisable for an aggregate 865,872 shares of Innovative Common Stock, and the
Underwriter Warrants were exercisable for (i) an aggregate of
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370,500 shares of Innovative Common Stock and (ii) for Innovative Warrants to
purchase an aggregate of 3,375 shares of Innovative Common Stock. Such share
figures reflect the three-for-one split of Innovative Common Stock effected in
September 1995, and the one-for-eight split of the number of shares purchasable
under the Innovative Common Innovative Warrants effected in September 1997 (the
"1997 Split").
THE INNOVATIVE WARRANTS
The Innovative Warrants are governed by the terms of the Warrant Agreement.
Shares of Innovative Common Stock are purchasable under the Innovative Warrants
at an exercise price of $0.08 per share. Pursuant to a September 1997 amendment
of the Warrant Agreement, the per share exercise price of the Innovative
Warrants was reduced to $0.08.
The Warrant Agreement provides that the holders of Innovative Warrants may
exercise the Innovative Warrants at any time prior to the close of business on
July 25, 1999. Payments of any exercise price due upon exercise of the
Innovative Warrants are to be made on a cash basis. According to the Warrant
Agreement, the Innovative Warrants may not be exercised in any state where
Innovative has not obtained requisite approvals or registration under that
state's applicable security laws. Due to such restrictions, the Innovative
Warrants are not currently exercisable by residents of the following states:
Alabama, Iowa, Kansas, Louisiana, Maine, Michigan, Nebraska, New Jersey, New
York, North Dakota, Ohio, Oklahoma, Puerto Rico, South Dakota, Tennessee, Utah,
Virginia, Washington, and Wyoming.
Generally, in the event that Innovative sells shares of Innovative Common
Stock for a per share purchase price that is less than the per share exercise
price of the Innovative Warrants (a "Dilutive Issuance"), the anti-dilution
provisions of the Warrant Agreement provide that the number of shares of
Innovative Common Stock purchasable upon exercise of the Innovative Warrants
shall be adjusted according to a formula set forth in the Warrant Agreement that
is largely determined according to the number of shares of Innovative Common
Stock are sold in such a Dilutive Issuance. Further, in the event of such a
Dilutive Issuance, the per share exercise price of the Innovative Warrants will
be appropriately adjusted. At of the date of this Proxy Statement/Prospectus,
there have been no Dilutive Issuances since the time the Innovative Warrant were
originally issued in 1994. The number of shares purchasable upon exercise of the
Innovative Warrants and the per share exercise price will be adjusted in the
event Innovative or any successor corporation effects a stock dividend, stock
split, reclassification or similar event. In the event of a merger involving
Innovative, holders of the Innovative Warrants have the right to receive on
exercise of the Innovative Warrants the kind and amount of securities and
property which would have been received by such holder in such a merger if the
holder had exercised his or her Innovative Warrants immediately prior to such
event.
At the election of Innovative, the Innovative Warrants are redeemable upon
30 days' prior written notice provided that the average closing bid price of
Innovative Common Stock as reported by The Nasdaq Small Cap Market is greater
than $2.92 per share for a period of 20 consecutive trading days within the 30
days ending on the fifth trading day prior to the date on which such notice is
given. The redemption price is $0.67 per share of Innovative Common Stock.
Any amendment of the Warrant Agreement requires that Innovative receive
written consents approving the amendment from (i) Goldmen and (ii) the holders
of 66 2/3% in interest of the Innovative Warrants (based on the number of shares
of Innovative Common Stock issuable upon exercise of Innovative Warrants).
This Proxy Statement/Prospectus is being furnished to the holders of the
Innovative Warrants in connection with Innovative's solicitation of the Warrant
Consents. Pursuant to the Merger Agreement, Innovative is required to use its
best efforts to obtain approval of the Warrant Amendment prior to the Effective
Time, such that immediately after the Effective Time, the Innovative Warrants
will no longer be outstanding. The purpose of the solicitation of the Warrant
Consents is to obtain such approval of the
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Warrant Amendment. If the Warrant Amendment is approved, each Innovative Warrant
will be exchanged for and converted into the right to receive that number of
shares of Peregrine Common Stock, based on the Exchange Ratio, as would have
been the case if the Innovative Warrants had been exercised for Innovative
Common Stock immediately prior to the Effective Time on a net issuance basis,
based on the average of the last reported sale prices of Peregrine Common Stock
as reported on the Nasdaq National Market on the five most recent trading days
ending on the trading day immediately prior to the Effective Time. No fractional
shares of Peregrine Common Stock would be issued in connection with such
exchange. Cash would be paid to holders of the Innovative Warrants in an amount
equal to such fraction multiplied by the average of the last reported sale
prices of Peregrine Common Stock for the five most recent days the Peregrine
Common Stock has traded, ending on the trading day immediately prior to the
Effective Time.
In the event the Warrant Amendment is not approved on or prior to the
Effective Time, each outstanding Innovative Warrant will be assumed by Peregrine
and become a Peregrine Warrant. The Peregrine Warrant will be issued on
substantially the same terms and conditions as were applicable under the
Innovative Warrant (other than the number of shares, exercise price, and
redemption price) and will be exercisable for the number of whole shares of
Peregrine Common Stock (rounded down to the nearest whole number) that the
holder of the Innovative Warrant would have been entitled to receive pursuant to
the Merger had such holder exercised such Innovative Warrant immediately prior
to the Effective Time. The exercise price per share of the Peregrine Warrant
(rounded up to the nearest whole cent) will equal (i) the aggregate exercise
price for the shares of Innovative Common Stock purchasable pursuant to the
Innovative Warrant divided by (ii) the number of whole shares of Peregrine
Common Stock purchasable pursuant to the Peregrine Warrant. In the event the
Warrant Amendment is not approved prior to the Effective Time, Peregrine
intends, promptly following the Effective Time, to redeem the then-outstanding
Peregrine Warrants in accordance with their terms. Goldmen has already approved
the Warrant Amendment. See "The Warrant Amendment."
THE UNDERWRITER WARRANTS
The Underwriter Warrants are governed by the terms of the Underwriter's
Warrant Agreement, dated as of July 26, 1994 as amended through the date hereof
(the "Underwriter's Warrant Agreement"). Shares of Innovative Common Stock are
purchasable under the Underwriter Warrants at an exercise price of $2.50 per
share. In addition, as of the Innovative Record Date, Innovative Warrants to
purchase an aggregate of 3,375 shares of Innovative Common Stock were also
issuable upon exercise of the Underwriter Warrants at an exercise price of $0.01
per share of Innovative Common Stock purchaseable upon exercise of such
Warrants. As described above, the exercise price per share of Innovative Common
Stock issuable upon exercise of the Innovative Warrants underlying the
Underwriter Warrants is $0.08 per share.
The Underwriter's Warrant Agreement provides that the holders of the
Innovative Warrants issuable upon exercise of the Underwriter Warrants may
exercise such warrants at any time prior to the close of business on July 25,
1999. Payments of any exercise price due upon exercise of such Innovative
Warrants are to be made on a cash or net issuance basis.
The number of shares of Innovative Common Stock purchasable upon exercise of
the Underwriter Warrants (including the number of shares of Innovative Common
Stock purchasable upon exercise of the Innovative Warrants issuable upon
exercise of the Underwriter Warrants) and the per share exercise price will be
adjusted in the event Innovative or any successor corporation effects a stock
dividend, stock split, reclassification or similar event. In the event of a
merger involving Innovative, holders of the Underwriter Warrants have the right
to receive a replacement warrant to receive, upon exercise of such replacement
warrant, the kind and amount of securities and property which would have been
received by such holder in such a merger if the holder had exercised his or her
Underwriter Warrant immediately prior to such event.
Peregrine, Innovative, and the holders of the Underwriter Warrants have
entered an agreement providing that, to the extent not exercised prior to the
Effective Time, each Underwriter Warrant will be
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exchanged for and converted into the right to receive that number of shares of
Peregrine Common Stock, based on the Exchange Ratio, as would have been the case
if the Underwriter Warrants had been exercised for Innovative Common Stock
immediately prior to the Effective Time, on a net issuance basis, based on the
last reported sale price of Peregrine Common Stock as reported on the Nasdaq
National Market on the five most recent trading days ending on the trading day
immediately prior to the Effective Time, subject to the surrender of the
certificates representing the Underwriter Warrants (or a bond in respect
thereof).
REGISTRATION RIGHTS
Pursuant to the Warrant Agreement, Innovative has agreed to register the
Innovative Warrants and the shares of Innovative Common Stock Issuable upon
exercise of such warrants under the Securities Act and keep such registration
statement effective until the Innovative Warrants are no longer outstanding.
Pursuant to certain agreements entered into between Innovative and certain of
its securities holders, Innovative has agreed to grant certain registration
rights to various holders of Innovative Common Stock or warrants or options to
purchase Innovative Common Stock. Under the terms of those agreements, if
Innovative proposes to register any of its securities under the Securities Act,
either for its own account or for the account of other securities holders
exercising registration rights, such holders are entitled to include shares of
such Innovative Common Stock therein. Holders of registration rights may also
require Innovative to file a registration statement under the Securities Act at
Innovative's expense with respect to their shares of Innovative Common Stock,
and Innovative is required to use its best efforts to effect such registration.
Further, holders may require Innovative to file registration statements on Form
S-3 at Innovative's expense. All such registration rights are subject to certain
conditions and limitations.
TRANSFER AGENT
The Transfer Agent and Registrar for the Innovative Common Stock and Warrant
Agent for the Innovative Warrants is Continental Stock Transfer & Trust Company,
Two Broadway, New York, New York 10004.
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COMPARATIVE RIGHTS OF SHAREHOLDERS OF INNOVATIVE
AND SHAREHOLDERS OF PEREGRINE
AS A RESULT OF THE MERGER, SHAREHOLDERS OF INNOVATIVE WILL BECOME
SHAREHOLDERS OF PEREGRINE, AND THEIR RIGHTS WILL BE GOVERNED BY THE PEREGRINE
CERTIFICATE OF INCORPORATION, THE PEREGRINE BYLAWS AND DELAWARE LAW, WHICH
DIFFER IN CERTAIN MATERIAL RESPECTS FROM THE INNOVATIVE ARTICLES OF
INCORPORATION, THE INNOVATIVE BYLAWS AND ILLINOIS LAW.
GENERAL
Innovative is incorporated under the Illinois Law and Peregrine is
incorporated under the Delaware General Corporation Law (the "DCGL"). Holders of
Innovative Common Stock, whose rights as shareholders are currently governed by
the Innovative Amended and Restated Articles of Incorporation (the "Innovative
Articles") and Bylaws as well as by the Illinois Law, will, at the Effective
Time, become holders of Peregrine Common Stock and their rights as such will by
governed by the Certificate of Incorporation of Peregrine (the "Peregrine
Certificate") and the Amended and Restated Bylaws of Peregrine (the "Peregrine
Bylaws") as well as by the DCGL. Certain differences between the rights of
holders of Innovative Common Stock and Peregrine Common Stock are summarized
below.
Certain provisions of the DCGL, the Peregrine Certificate, and the Peregrine
Bylaws discourage transactions involving an actual or threatened change in
control of Peregrine. To the extent any of these provisions has such an effect,
stockholders of Peregrine might thereby be deprived of an opportunity to sell
their shares of Peregrine Common Stock at a premium above the market price.
These provisions could thus be considered to be anti-takeover measures. See the
discussion below for a description of existing provisions in the Peregrine
Certificate and the Peregrine Bylaws that may be viewed as having anti-takeover
effects. See "Risk Factors--Risks Related to Peregrine--Effect of Certain
Peregrine Charter Provisions; Limitation of Liability of Directors; Antitakeover
Effects of Delaware Law" and "Description of Peregrine Common Stock."
AUTHORIZED CAPITAL
The authorized capital stock of Innovative consists of 100,000,000 shares of
Innovative Common Stock per share and 200,000,000 shares of Innovative Preferred
Stock. The Innovative Preferred Stock may be issued in series, and shares of
each series will have such rights and preferences as are fixed by the Innovative
Board in the resolutions authorizing the issuance of that particular series. In
designating any series of Innovative Preferred Stock, the Innovative Board may,
without further action by the holders of Innovative Common Stock, fix the number
of shares constituting that series and fix the dividend rights, dividend rate,
conversion rights, voting rights (which may be greater or less than the voting
rights of the Innovative Common Stock), rights and terms of redemption
(including any sinking fund provisions), and the liquidation preferences of the
series of Innovative Preferred Stock. Holders of any series of Innovative
Preferred Stock, when and if issued, may have priority claims to dividends and
to any distributions upon liquidation of Innovative and may have other
preferences over the holders of Innovative Common Stock.
The authorized capital stock of Peregrine consists of 50,000,000 shares of
Peregrine Common Stock with a par value of $0.001 per share and 5,000,000 shares
of Peregrine Preferred Stock with a par value of $0.001 per share. The Peregrine
Board has the authority to issue the Peregrine Preferred Stock in one or more
series and to fix the price, rights, preferences, privileges and restrictions
thereof, including dividend rights, dividend rates, conversion rights, voting
rights, terms of redemption, redemption prices, liquidation preferences and the
number of shares constituting a series or the designation of such series,
without any further vote or action by holders of Peregrine Common Stock. Holders
of any series of Peregrine Preferred Stock, when and if issued, may have
priority claims to dividends and to any distributions upon liquidation of
Peregrine and may have other preferences over the holders of Peregrine Common
Stock.
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DISSENTERS' OR APPRAISAL RIGHTS
Under the Illinois Law, a shareholder of Innovative who does not vote in
favor of the Merger may, under certain circumstances, and by following the
procedures prescribed by the Illinois Law, exercise dissenters' rights and
obtain payment in cash of the fair value (as defined in the Illinois Law) of
their shares of Innovative Common Stock. The Innovative Articles do not address
dissenters' rights. See "The Innovative Special Meeting--Dissenter's Rights."
Stockholders of Peregrine are not entitled to appraisal rights under the
DGCL in connection with a merger or similar transaction involving Peregrine,
including the Merger.
VOTE ON FUNDAMENTAL ISSUES
In general, the Illinois Law requires that a plan of merger, consolidation,
exchange, sale of all or substantially all of a corporation's assets other than
in the ordinary course, or dissolution by approved by at least two-thirds of the
outstanding shares entitled to vote thereon. The Illinois Law, however, also
allows a corporation's charter to change this threshold requirement. The
Innovative Articles set the number of votes required to approve such
transactions at a majority of the outstanding shares entitled to vote on the
matter and a majority of the outstanding shares of each class of shares entitled
to vote as a class on the matter.
The DGCL requires that any merger, consolidation, sale of all or
substantially all of the assets, or dissolution of a corporation be approved by
the affirmative vote of the holders of a majority of the outstanding shares of
the corporation entitled to vote thereon. The Peregrine Certificate does not
contain provisions that alter this requirement.
CUMULATIVE VOTING
The Illinois Law allows a corporation to provide that, in all elections for
directors, every shareholder shall have the right to vote the number of shares
owned by him or her for as many persons as there are directors to be elected, or
to cumulate such shares, and give one candidate as many votes as the number of
directors multiplied by the number his or her shares shall equal, or to
distribute such votes in any proportion among any number of candidates. The
Illinois Law, however, also allows a corporation's charter to change this
threshold requirement. The Innovative Articles provide that the holders of
shares of Innovative stock have no right to cumulate their votes for the
election of directors of Innovative. Therefore, shareholders holding a majority
of Innovative's voting stock will be able to elect all of Innovative's
directors.
The DGCL provides that the certificate of incorporation of any corporation
may grant stockholders the right to cumulate their votes. The Peregrine
Certificate does not provide stockholders the right to cumulate their votes in
the election of directors. Therefore, stockholders holding a majority of
Peregrine's voting stock will be able to elect all of Peregrine's directors.
SPECIAL MEETINGS OF SHAREHOLDERS
In general, the Illinois Law provides that special meetings of the
shareholders may be called by the president, the board of directors or the
holders of not less than one-fifth of all outstanding shares entitled to vote on
the matter for which the meeting is called. Illinois Law, however, also allows a
corporation's charter to change this threshold requirement. The Innovative
Bylaws provide that, in addition to the president and the board of directors, a
special meeting may be called by a holder of not less than 15 percent of the
outstanding capital stock of the corporation entitled to vote at such a meeting.
Under the DGCL, the Board of Directors or such other persons as authorized
by the certificate of incorporation or by the bylaws may call a special meeting
of the stockholders. The Peregrine Bylaws provide that, in addition to the Board
of Directors, a special meeting may be called by the president, the
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chief executive officer or one or more stockholders holding shares in the
aggregate entitled to cast votes totalling not less than ten percent of
Peregrine's outstanding voting stock.
SHAREHOLDER ACTION BY WRITTEN CONSENT
The Illinois Law permits shareholder action to be taken pursuant to written
consent signed by shareholders having not less than a majority of Innovative's
outstanding stock. If such consent is executed by less than all shareholders
entitled to vote, then such consent shall become effective only if at least five
days prior to the execution of any such consent, a written notice with respect
to the subject matter of the action was delivered to all of the shareholders
entitled to vote thereon. In addition, after the effective date of the corporate
action taken by written consent, notice of such action must be promptly sent to
those shareholders who did not consent in writing. The Innovative Bylaws are
consistent with the Illinois Law with respect to shareholder action taken by
written consent.
Unless otherwise specified in a company's charter, the DGCL permits
stockholder action to be taken pursuant to written consent signed by
stockholders having not less than the minimum number of votes that would be
necessary to authorize or take such action at a meeting at which all shares
entitled to vote thereto were present and voted. Prompt notice of the taking of
corporate action without a meeting by less than unanimous written consent shall
be given to those stockholders who have not consented in writing. The Peregrine
Certificate and the Peregrine Bylaws prevent Peregrine stockholders from taking
action without a meeting and specify certain procedures for nominating directors
and submitting proposals for consideration at stockholder meetings.
AMENDMENT OF ARTICLES OR CERTIFICATE OF INCORPORATION
The Illinois Law generally allows a corporation to amend its articles of
incorporation if the board of directors of the corporation adopts a resolution
approving such amendment, and the holders of at least two-thirds of the
outstanding shares entitled to vote in respect thereof vote in favor of the
amendment. The Innovative Articles do not contain provisions that alter this
requirement.
Under the DGCL, amendments to the Peregrine Certificate must be approved by
the holders of a majority of all outstanding shares entitled to vote on an
amendment, including a majority of all outstanding shares of each class or
series if the rights of the holders of such securities would be adversely
affected by the amendment. The Peregrine Certificate does not contain provisions
that alter this requirement.
ANTI-TAKEOVER PROVISIONS
Under the Illinois Law, a corporation is prohibited from engaging in certain
business combinations with any interested shareholder for a period of three
years following the date on which such shareholder became an interested
shareholder, unless (i) the board of directors of the corporation approved the
business combination or the transaction in which such shareholder became an
interested shareholder, (ii) upon the consummation of the transaction in which
the shareholder became an interested shareholder, such shareholder owned at
least 85 percent of the outstanding shares of the corporation (excluding shares
held by certain persons), or (iii) the business combination is approved by the
board of directors and authorized at a meeting of the shareholders by the
affirmative vote of at least two-thirds of the outstanding voting shares which
are not owned by the interested shareholder.
Peregrine is subject to Section 203 of the DGCL (the "Antitakeover Law"),
which regulates corporate acquisitions. The Antitakeover Law prevents certain
Delaware corporations, including those whose securities are listed for trading
on the Nasdaq National Market, from engaging, under certain circumstances, in a
"business combination" with any "interested stockholder" for three years
following the date that such stockholder became an interested stockholder. For
purposes of the Antitakeover Law, a "business combination" includes, among other
things, a merger or consolidation involving Peregrine and
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the interested stockholder and the sale of more than 10% of Peregrine's assets.
In general, the Antitakeover Law defines an "interested stockholder" as any
entity or person beneficially owning 15% or more of the outstanding voting stock
of Peregrine and any entity or person affiliated with or controlling or
controlled by such entity or person. A Delaware corporation may "opt out" of the
Antitakeover Law with an express provision in its original certificate of
incorporation or an express provision in its certificate of incorporation or
bylaws resulting from amendments approved by the holders of at least a majority
of the company's outstanding voting shares. Peregrine has not "opted out" of the
provisions of the Antitakeover Law. See "Risk Factors--Risks Related to
Peregrine--Effect of Certain Peregrine Charter Provisions; Limitation of
Liability of Directors; Anti-takeover Effects of Delaware Law" and "Description
of Peregrine Capital Stock."
LIMITATIONS ON LIABILITY AND INDEMNIFICATION OF DIRECTORS
Generally, the Illinois Law provides that a corporation may indemnify any
person who is a party or is threatened to be made a party to any proceeding by
reason of the fact that such person is a director, officer, employee or agent of
the corporation, if such person acted in good faith and in a manner he or she
reasonably believed to be in, or not opposed, to the best interests of the
corporation, and, with respect to any criminal action, had no reasonable cause
to believe his or her actions were unlawful.
The Innovative Articles and the Innovative Bylaws provide that the
corporation will indemnify its officers, directors, employees and agents to the
fullest extent permitted by Illinois law.
Generally, the DGCL provides that a corporation may indemnify any person who
was or is a party to an action (other than an action by or in the right of the
indemnifying corporation) against all expenses, liability and loss reasonably
incurred or suffered by such person in connection with his activities as a
director or officer of the corporation (or as a director or officer of another
company if such a position were held at the request of the indemnifying
corporation). However, the DGCL also provides that, in order to be indemnified,
such person must have acted in good faith and in a manner reasonably believed to
be not opposed to the best interests of the indemnifying corporation, and with
respect to any criminal action or proceeding, did not have reasonable cause to
believe that his or her conduct would be unlawful. The DGCL also permits a
corporation to indemnify a person against expenses incurred in connection with
the defense or settlement of any action by or in the right of the indemnifying
corporation if such person acted in good faith and in a manner reasonably
believed to be not opposed to the best interests of the indemnifying
corporation. However, if a person is judged liable to the indemnifying
corporation, indemnification is permitted only to the extent the court deems
proper.
In general, under the DGCL, the indemnification provided for therein is not
deemed to be exclusive of any nonstatutory indemnification rights provided to
directors, officers and employees under any bylaw, agreement or vote of the
stockholders or disinterested directors.
The Peregrine Certificate and the Peregrine Bylaws provide that the
corporation will indemnify its officers, directors, employees and agents to the
fullest extent permitted by Delaware law. In addition, Peregrine has entered
into indemnification agreements with each of its directors and officers.
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INNOVATIVE SHAREHOLDER PROPOSALS
Proposals of shareholders of Innovative to be presented by such shareholders
at Innovative's 1999 Annual Meeting of Shareholders (if the Merger is not
consummated) must be received by the Secretary or President of Innovative no
later than March 25, 1999 in order to be included in the proxy statement and
form of proxy relating to that meeting.
ADJOURNMENT OF INNOVATIVE SPECIAL MEETING
In the event that there are not sufficient votes to approve and adopt the
Merger Agreement at the time of the Innovative Special Meeting, such proposal
could not be approved unless the shareholders Innovative Special Meeting were
adjourned in order to permit further solicitation of proxies from shareholders
of Innovative. Proxies that are being solicited by the Innovative Board grant
the discretionary authority to vote for any such adjournment, if necessary. If
it is necessary to adjourn the Innovative Special Meeting and the adjournment is
for a period of less than 30 days, no notice of the time and place of the
adjourned meeting is required to be given to shareholders of Innovative other
than an announcement of such time and place at the Innovative Special Meeting. A
majority of the voting power represented and voting at the Innovative Special
Meeting is required to approve any such adjournment, provided that a quorum is
present. If a quorum is not present, then either the chairman of the Meeting or
the shareholders entitled to vote at the Innovative Special Meeting may adjourn
the meeting.
LEGAL MATTERS
The validity of the shares of Peregrine Common Stock to be issued in
connection with the Merger will be passed upon for Peregrine by Wilson Sonsini
Goodrich & Rosati, Professional Corporation, Palo Alto, California. Certain
legal matters in connection with the Merger will be passed upon for Innovative
by Archer & Greiner, A Professional Corporation, Haddonfield, New Jersey.
EXPERTS
The consolidated financial statements of Peregrine Systems, Inc. as of March
31, 1997 and 1998, and for each of the years in the three-year period ended
March 31, 1998 and the consolidated financial statements of United Software,
Inc. as of December 31, 1995 and 1996 and for each of the years then ended,
included in this Proxy Statement/Prospectus and Registration Statement have been
audited by Arthur Andersen LLP, independent public accountants, as indicated in
their reports with respect thereto, and are included in reliance upon the
authority of said firm as experts in giving said reports.
The consolidated financial statements of Innovative as of January 31, 1998
and 1997 and for the years then ended included in this Proxy
Statement/Prospectus have been so included in reliance upon the report of Price
Waterhouse LLP, independent accountants, given on the authority of said firm as
experts in auditing and accounting.
The statements of operations, changes in shareholder's equity, and cash
flows of Innovative for the year ended January 31, 1996 included in this Proxy
Statement/Prospectus have been included herein in reliance on the report of
Coopers & Lybrand L.L.P., independent accountants, given on the authority of
that firm as experts in accounting and auditing.
135
<PAGE>
PEREGRINE SYSTEMS, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
PEREGRINE SYSTEMS, INC. CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Public Accountants................................................................. F-2
Consolidated Balance Sheets.............................................................................. F-3
Consolidated Statements of Operations.................................................................... F-4
Consolidated Statements of Stockholders' Equity (Deficit)................................................ F-5
Consolidated Statements of Cash Flows.................................................................... F-6
Notes to Consolidated Financial Statements............................................................... F-8
UNITED SOFTWARE, INC. CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Public Accountants................................................................. F-22
Consolidated Balance Sheets.............................................................................. F-23
Consolidated Statements of Operations.................................................................... F-24
Consolidated Statements of Stockholders' Deficit......................................................... F-25
Consolidated Statements of Cash Flows.................................................................... F-26
Notes to Consolidated Financial Statements............................................................... F-27
INNOVATIVE TECH SYSTEMS, INC. CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Accountants........................................................................ F-35
Report of Independent Accountants........................................................................ F-36
Consolidated Balance Sheets.............................................................................. F-37
Consolidated Statements of Operations.................................................................... F-38
Consolidated Statements of Changes in Shareholders' Equity............................................... F-39
Consolidated Statements of Cash Flows.................................................................... F-40
Notes to Consolidated Financial Statements............................................................... F-41
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Peregrine Systems, Inc.:
We have audited the accompanying consolidated balance sheets of Peregrine
Systems, Inc. (a Delaware corporation) and subsidiaries as of March 31, 1997 and
1998, and the related consolidated statements of operations, stockholders'
equity (deficit) and cash flows for each of the three years in the period ended
March 31, 1998. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Peregrine Systems, Inc. and
subsidiaries as of March 31, 1997 and 1998, and the results of their operations
and their cash flows for each of the three years in the period ended March 31,
1998, in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
San Diego, California
April 22, 1998 (except with respect to the matter
in Note 10, as to which the date is May 7, 1998)
F-2
<PAGE>
PEREGRINE SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
MARCH 31,
----------------------
1997 1998
---------- ----------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents................................................................. $ 305 $ 14,950
Short-term investments.................................................................... -- 7,027
Accounts receivable, net of allowance for doubtful accounts of $220 and $485,
respectively............................................................................ 10,191 16,761
Financed receivables...................................................................... 1,182 --
Deferred tax assets....................................................................... 1,752 7,297
Other current assets...................................................................... 924 2,905
---------- ----------
Total current assets.................................................................. 14,354 48,940
Property and equipment, net............................................................... 4,364 5,455
Goodwill and other........................................................................ 1,020 2,342
---------- ----------
$ 19,738 $ 56,737
---------- ----------
---------- ----------
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current Liabilities:
Bank line of credit..................................................................... $ 1,974 $ --
Accounts payable........................................................................ 916 2,337
Accrued expenses........................................................................ 6,249 9,310
Deferred revenue........................................................................ 8,419 11,570
Current portion of long-term debt....................................................... 497 151
Current portion of capital lease obligation............................................. 364 --
---------- ----------
Total current liabilities............................................................. 18,419 23,368
Long-term debt, net of current portion.................................................... 1,395 966
Deferred revenue, net of current portion.................................................. 2,773 1,802
---------- ----------
Total liabilities..................................................................... 22,587 26,136
---------- ----------
Stockholders' Equity (Deficit):
Preferred stock, $0.001 par value, 5,000,000 shares authorized, no shares issued or
outstanding........................................................................... -- --
Common stock, $0.001 par value, 5,000,000 shares authorized, 12,920,000 and 18,790,000
shares issued and outstanding, respectively........................................... 13 19
Additional paid-in capital.............................................................. 15,081 74,351
Accumulated deficit..................................................................... (15,807) (41,461)
Unearned portion of deferred compensation............................................... (1,748) (1,493)
Cumulative translation adjustment....................................................... (388) (553)
Treasury stock (at cost)................................................................ -- (262)
---------- ----------
Total stockholders' equity (deficit).................................................. (2,849) 30,601
---------- ----------
$ 19,738 $ 56,737
---------- ----------
---------- ----------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
<PAGE>
PEREGRINE SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
--------------------------------
1996 1997 1998
--------- --------- ----------
<S> <C> <C> <C>
Revenues:
Licenses...................................................................... $ 11,642 $ 20,472 $ 38,791
Maintenance and services...................................................... 12,124 14,563 23,086
--------- --------- ----------
Total revenues.............................................................. 23,766 35,035 61,877
--------- --------- ----------
Costs and Expenses:
Cost of licenses.............................................................. 415 215 326
Cost of maintenance and services.............................................. 3,526 4,661 10,326
Sales and marketing........................................................... 11,820 15,778 22,728
Research and development...................................................... 7,742 5,877 8,394
General and administrative.................................................... 4,529 3,816 6,463
Acquired in process research and development.................................. -- -- 34,775
--------- --------- ----------
Total costs and expenses.................................................... 28,032 30,347 83,012
--------- --------- ----------
Operating income (loss)..................................................... (4,266) 4,688 (21,135)
Interest income (expense) and other............................................. (286) (478) 839
--------- --------- ----------
Income (loss) from continuing operations before income taxes.................... (4,552) 4,210 (20,296)
Income tax expense (benefit).................................................... -- (1,592) 5,358
--------- --------- ----------
Income (loss) from continuing operations........................................ (4,552) 5,802 (25,654)
--------- --------- ----------
Loss from discontinued business:
Loss from operations.......................................................... 781 -- --
Loss from disposal............................................................ 1,078 -- --
--------- --------- ----------
Loss from discontinued business................................................. (1,859) -- --
--------- --------- ----------
Net income (loss)............................................................. $ (6,411) $ 5,802 $ (25,654)
--------- --------- ----------
--------- --------- ----------
Net income (loss) per share--basic:
Income (loss) from continuing operations........................................ $ (0.37) $ 0.45 $ (1.48)
Loss from discontinued operations............................................... (0.15) -- --
--------- --------- ----------
Net income (loss) per share..................................................... $ (0.52) $ 0.45 $ (1.48)
--------- --------- ----------
--------- --------- ----------
Weighted average common shares outstanding...................................... 12,331 12,920 17,380
--------- --------- ----------
--------- --------- ----------
Net income (loss) per share--diluted:
Income (loss) from continuing operations........................................ $ (0.37) $ 0.39 $ (1.48)
Loss from discontinued operations............................................... (0.15) -- --
--------- --------- ----------
Net income (loss) per share..................................................... $ (0.52) $ 0.39 $ (1.48)
--------- --------- ----------
--------- --------- ----------
Weighted average common and common equivalent shares
outstanding................................................................... 12,331 14,964 17,380
--------- --------- ----------
--------- --------- ----------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE>
PEREGRINE SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
(IN THOUSANDS)
<TABLE>
<CAPTION>
UNEARNED
NUMBER OF ADDITIONAL PORTION OF CUMULATIVE
SHARES PAID-IN ACCUMULATED DEFERRED TRANSLATION
OUTSTANDING COMMON STOCK CAPITAL DEFICIT COMPENSATION ADJUSTMENT
------------- ------------- ----------- ------------ --------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balance, March 31, 1995......... 10,237 $ 10 $ 9,044 $ (11,273) $ -- $ 22
Net loss...................... -- -- -- (6,411) -- --
Issuance of shares for XVT.... 2,018 2 3,923 (3,925) -- --
Issuance of common stock...... 43 -- 43 -- -- --
Restricted stock shares
granted..................... 600 1 1,403 -- (1,404) --
Equity adjustment from foreign
currency translation........ -- -- -- -- -- 115
------ --- ----------- ------------ ------- -----
Balance, March 31, 1996......... 12,898 13 14,413 (21,609) (1,404) 137
Net income.................... -- -- -- 5,802 -- --
Issuance of shares for XVT.... -- -- -- -- -- --
Issuance of common stock...... 22 -- 37 -- -- --
Compensation expense related
to restricted stock and
options..................... -- -- -- -- 287 --
Deferred compensation related
to options granted.......... -- -- 631 -- (631) --
Equity adjustment from foreign
currency translation........ -- -- -- -- -- (525)
------ --- ----------- ------------ ------- -----
Balance, March 31, 1997......... 12,920 13 15,081 (15,807) (1,748) (388)
Net loss...................... -- -- -- (25,654) -- --
Issuance of common stock in
IPO, net of issuance costs
of $1,181................... 2,300 2 18,069 -- -- --
Stock options exercised and
restricted stock granted
(net)....................... 1,654 2 2,792 -- -- --
Stock issued for Apsylog
acquisition................. 1,916 2 30,504 -- -- --
Stock option tax benefit...... -- -- 7,905 -- -- --
Compensation expense related
to restricted stock and
options..................... -- -- -- -- 414 --
Deferred compensation related
to options granted.......... -- -- -- -- (159) --
Stock repurchased............. -- -- -- -- -- --
Equity adjustment from foreign
currency translation........ -- -- -- -- -- (165)
------ --- ----------- ------------ ------- -----
Balance, March 31, 1998......... 18,790 $ 19 $ 74,351 $ (41,461) $ (1,493) $ (553)
------ --- ----------- ------------ ------- -----
------ --- ----------- ------------ ------- -----
<CAPTION>
TOTAL
STOCKHOLDERS'
TREASURY EQUITY
STOCK (DEFICIT)
----------- -------------
<S> <C> <C>
Balance, March 31, 1995......... $ -- $ (2,197)
Net loss...................... -- (6,411)
Issuance of shares for XVT.... -- --
Issuance of common stock...... -- 43
Restricted stock shares
granted..................... -- --
Equity adjustment from foreign
currency translation........ -- 115
----- -------------
Balance, March 31, 1996......... -- (8,450)
Net income.................... -- 5,802
Issuance of shares for XVT.... -- --
Issuance of common stock...... -- 37
Compensation expense related
to restricted stock and
options..................... -- 287
Deferred compensation related
to options granted.......... -- --
Equity adjustment from foreign
currency translation........ -- (525)
----- -------------
Balance, March 31, 1997......... -- (2,849)
Net loss...................... -- (25,654)
Issuance of common stock in
IPO, net of issuance costs
of $1,181................... -- 18,071
Stock options exercised and
restricted stock granted
(net)....................... -- 2,794
Stock issued for Apsylog
acquisition................. -- 30,506
Stock option tax benefit...... -- 7,905
Compensation expense related
to restricted stock and
options..................... -- 414
Deferred compensation related
to options granted.......... -- (159)
Stock repurchased............. (262) (262)
Equity adjustment from foreign
currency translation........ -- (165)
----- -------------
Balance, March 31, 1998......... $ (262) $ 30,601
----- -------------
----- -------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE>
PEREGRINE SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
--------------------------------
1996 1997 1998
--------- --------- ----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss).............................................................. $ (6,411) $ 5,802 $ (25,654)
Adjustments to reconcile net income (loss) to net cash, excluding effects of
acquisitions, provided by (used in) operating activities:
Depreciation and amortization................................................ 1,540 1,838 2,119
Loss from discontinued business.............................................. 1,859 -- --
Gain on sale of fixed assets................................................. (93) -- --
Charge for acquired research and development................................. -- -- 34,775
Increase (decrease) in cash resulting from changes in:
Accounts receivable........................................................ (2,416) (3,936) (7,164)
Financed receivables....................................................... -- (1,182) 1,182
Deferred tax assets........................................................ -- (1,752) (5,545)
Other current assets....................................................... 311 (163) (1,116)
Accounts payable........................................................... 714 (499) 674
Accrued expenses........................................................... 2,464 2,458 512
Deferred revenue........................................................... 2,364 1,381 1,361
Other...................................................................... 252 (705) 534
--------- --------- ----------
584 3,242 1,678
--------- --------- ----------
Net cash used by discontinued business..................................... (738) (1,303) (170)
--------- --------- ----------
Net cash provided by (used in) operating activities...................... (154) 1,939 1,508
--------- --------- ----------
Cash flows from investing activities:
Purchases of short-term investments............................................ -- -- (45,732)
Maturities of short-term investments........................................... -- -- 38,705
Purchases of property and equipment............................................ (3,516) (566) (2,427)
Proceeds from sale of product line............................................. -- 700 --
Proceeds from sale of subsidiary and fixed assets, net......................... 653 -- --
Cash acquired in acquisition................................................... -- -- 582
--------- --------- ----------
Net cash provided by (used in) investing activities........................ (2,863) 134 (8,872)
--------- --------- ----------
Cash flows from financing activities:
Proceeds (repayment) on bank line of credit, net............................... 1,514 (855) (3,387)
Proceeds from long-term debt................................................... 3,508 287 --
Repayments of long-term debt................................................... (1,354) (774) (2,541)
Issuance of common stock....................................................... 15 37 28,770
Treasury stock purchased....................................................... -- -- (262)
Principal payments under capital lease obligation.............................. (401) (375) (406)
--------- --------- ----------
Net cash provided by (used in) financing activities........................ 3,282 (1,680) 22,174
--------- --------- ----------
Effect of exchange rate changes on cash.......................................... 115 (525) (165)
--------- --------- ----------
Net increase (decrease).......................................................... 380 (132) 14,645
Cash and cash equivalents, beginning of year..................................... 57 437 305
--------- --------- ----------
Cash and cash equivalents, end of year........................................... $ 437 $ 305 $ 14,950
--------- --------- ----------
--------- --------- ----------
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
F-6
<PAGE>
PEREGRINE SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS) (CONTINUED)
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
--------------------------------
1996 1997 1998
--------- --------- ----------
<S> <C> <C> <C>
Supplemental Disclosure of Cash Flow Information:
Cash paid during the year for:
Interest....................................................................... $ 389 $ 400 $ 38
Income taxes................................................................... $ 36 $ 27 $ 622
Supplemental Disclosure of Non Cash Investing and Financial Activities:
Stock issued and other non-cash consideration for acquisition.................. $ 3,925 $ -- $ 38,617
Realization of the benefit of certain Apsylog net operating loss carryforwards
through the reduction of goodwill............................................ -- -- $ 1,794
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-7
<PAGE>
PEREGRINE SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. COMPANY OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
THE COMPANY
Peregrine Systems, Inc. ("Peregrine" or the "Company") is a leading provider
of Infrastructure Management solutions. Infrastructure Management unites the
unique disciplines of the Consolidated Service Desk and Enterprise Asset
Management through utilizing common shared data. The Company develops, markets,
and supports ServiceCenter and AssetCenter. Service Center is an integrated
suite of applications that automates the management of complex, enterprise-wide
information technology ("IT") infrastructures. AssetCenter is an application
suite that adds the essential dimension of managing the portfolio of investments
contained within an organization's infrastructure. These product suites are
designed to meet the IT infrastructure management requirements of large
organizations and are distinguished by their breadth of functionality and their
ability to be deployed across all major hardware platforms and network operating
systems and protocols. The Company sells its software and services in both North
America and internationally through both a direct sales force and through
business partnerships.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Peregrine
Systems, Inc. and its wholly owned subsidiaries. All significant intercompany
accounts and transactions have been eliminated.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
REVENUE RECOGNITION
The Company generates revenues from licensing the rights to use its software
products primarily to end users. The Company also generates revenues from
post-contract support (maintenance), consulting and training services performed
for customers who license its products.
Revenues from software license agreements are recognized currently, provided
that all of the following conditions are met: a noncancelable license agreement
has been signed, the software has been delivered, there are no material
uncertainties regarding customer acceptance, collection of the resulting
receivable is deemed probable, and no other significant vendor obligations
exist. Revenues from maintenance services are recognized ratably over the term
of the maintenance period, generally one year. Maintenance revenues which are
bundled with license agreements are unbundled using vendor specific objective
evidence. Consulting revenues are primarily related to implementation services
performed on a time and material basis under separate service agreements for the
installation of the Company's software products. Revenues from consulting and
training services are recognized as the respective services are performed.
Cost of license revenues consists primarily of amounts paid to third-party
vendors, product media, manuals, packaging materials, personnel and related
shipping costs. Cost of maintenance and services
F-8
<PAGE>
PEREGRINE SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. COMPANY OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
revenues consists primarily of salaries, benefits, and allocated overhead costs
incurred in providing telephone support, consulting services, and training to
customers.
Deferred revenue primarily relates to customer support fees, which have been
paid by customers in advance of the performance of these services.
BUSINESS RISK AND CONCENTRATIONS OF CREDIT RISK
Financial instruments which potentially subject the Company to
concentrations of credit risk principally consist of trade and other
receivables. The Company performs ongoing credit evaluations of its customers
financial condition. Management believes that the concentration of credit risk
with respect to trade receivables is further mitigated as the Company's customer
base consists primarily of Fortune 1000 companies. The Company maintains
reserves for credit losses and such losses historically have been within
management expectations.
A significant portion of the Company's revenues are from its ServiceCenter
and AssetCenter products and related services. Any factor adversely affecting
the pricing of, demand for or market acceptance of these products could have a
material adverse effect on the Company's business, financial condition and
results of operations.
See "Factors that May Affect Future Results" in Management's Discussion and
Analysis of Financial Condition and Results of Operations for a more complete
analysis of risks affecting the Company's business.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with an original
maturity of three months or less to be cash equivalents. Cash equivalents
primarily consist of overnight repurchase agreements and money market accounts.
The carrying amount reported for cash and cash equivalents approximates its fair
value.
SHORT-TERM INVESTMENTS
The company accounts for its short-term investments in accordance with
Statement of Financial Accounting Standards No. 115, "Accounting for Certain
Investments in Debt and Equity Securities" (SFAS No. 115). Short-term
investments consist of tax-exempt municipal auction rate preferred stock with
original maturities at date of purchase beyond three months and less than twelve
months. These securities are classified as held-to-maturity and are carried at
amortized cost. The amount of gross unrealized gains or gross unrealized losses
were not significant.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying value of certain of the Company's financial instruments,
including accounts receivable, accounts payable and accrued expenses
approximates fair value due to their short maturities. Based on borrowing rates
currently available to the Company for loans with similar terms, the carrying
value of its notes payable, capital lease obligations and borrowings under the
Company's line of credit approximates fair value.
F-9
<PAGE>
PEREGRINE SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. COMPANY OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
FINANCED RECEIVABLES
Financed receivables represent trade accounts receivable for which the
original payment terms extend beyond the Company's customary net 45 payment
terms. These receivables are substantially all due within the next twelve
months. Amounts due greater than one year from the balance sheet date are
included in other assets in the accompanying consolidated financial statements.
The majority of these long-term receivables relate to items included in
long-term deferred revenues.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation and amortization are
provided using the straight-line method over estimated useful lives, generally
three to five years for furniture and equipment. Amortization of leasehold
improvements is provided using the straight-line method over the lesser of the
useful lives of the assets or the terms of the related leases.
Maintenance and repairs are charged to operations as incurred. When assets
are sold, or otherwise disposed of, the cost and related accumulated
depreciation are removed from the accounts and any gain or loss is included in
operations for the applicable period.
LONG-LIVED ASSETS
The Company evaluates potential impairment of long-lived assets and
long-lived assets to be disposed of in accordance with Statement of Financial
Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived
Assets to be Disposed Of" ("SFAS No. 121"). SFAS No. 121 establishes procedures
for review of recoverability, and measurement of impairment if necessary, of
long-lived assets and certain identifiable intangibles held and used by an
entity. SFAS No. 121 requires that those assets be reviewed for impairment
whenever events of changes in circumstances indicate that the carrying amount of
an asset may not be fully recoverable. SFAS No. 121 also requires that
long-lived assets and certain identifiable intangibles to be disposed of be
reported at the lower of carrying amount or fair value less estimated selling
costs. As of March 31, 1998, management believes that there has not been any
impairment of the Company's long-lived assets or other identifiable intangibles.
GOODWILL
Goodwill is carried at cost less accumulated amortization, which is being
provided on a straight line basis over five years.
CAPITALIZED COMPUTER SOFTWARE
In accordance with Statement of Financial Accounting Standards No. 86,
"Accounting for the Costs of Computer Software to be Sold, Leased or Otherwise
Marketed", software development costs are capitalized from the time the
product's technological feasibility has been established until the product is
released for sale to the general public. During the three years in the period
ended March 31, 1998, no software development costs were capitalized as the
costs incurred between achieving technological feasibility and product release
were minimal. Research and development costs, including the design of product
enhancements, are expensed as incurred.
F-10
<PAGE>
PEREGRINE SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. COMPANY OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
FOREIGN CURRENCY TRANSLATION AND RISK MANAGEMENT
Assets and liabilities of the Company's foreign operations are translated
into United States dollars at the exchange rate in effect at the balance sheet
date, and revenue and expenses are translated at the average exchange rate for
the period. Translation gains or losses of the Company's foreign subsidiaries
are not included in operations but are reported as a separate component of
stockholders' equity (deficit). The functional currency of those subsidiaries is
the primary currency in which the subsidiary operates. Gains and losses on
transactions in denominations other than the functional currency of the
Company's foreign operations, while not significant in amount, are included in
the results of operations.
The Company enters into forward exchange contracts to minimize the
short-term impact of foreign currency fluctuations on assets and liabilities
denominated in currencies other than the functional currency of the reporting
entity. All foreign exchange forward contracts are designated as and effective
as a hedge and are highly inversely correlated to the hedged item as required by
generally accepted accounting principles.
Gains and losses on the contracts are included in other income and offset
foreign exchange gains or losses from the revaluation of intercompany balances
or other current assets and liabilities denominated in currencies other than the
functional currency of the reporting entity.
INCOME TAXES
Deferred taxes are provided utilizing the liability method as prescribed by
SFAS No. 109, "Accounting for Income Taxes," whereby deferred tax assets are
recognized for deductible temporary differences and operating loss
carryforwards, and deferred tax liabilities are recognized for taxable temporary
differences. Temporary differences are the differences between the reported
amounts of assets and liabilities and their tax bases. Deferred tax assets and
liabilities are adjusted for the effects of changes in tax laws and rates on the
date of enactment. Deferred tax assets are reduced by a valuation allowance
when, in the opinion of management, it is more likely than not that some portion
or all of the deferred tax assets will not be realized.
COMPUTATION OF NET INCOME (LOSS) PER SHARE
Effective fiscal year 1998, the Company retroactively adopted the provisions
of Statement of Financial Accounting Standards No. 128 ("SFAS No. 128"),
"Earnings per share." SFAS No. 128 requires companies to compute net income
(loss) per share under two different methods, basic and diluted per share data
for all periods for which an income statement is presented. Basic earnings per
share was computed by dividing net income by the weighted average number of
common shares outstanding during the period. Diluted earnings per share reflects
the potential dilution that could occur if the income were divided by the
weighted-average number of common shares and potential common shares from
outstanding stock options for the year ended March 31, 1997. Potential common
shares were calculated using the treasury stock method and represent incremental
shares issuable upon exercise of the Company's outstanding options. For the
years ended March 31, 1998 and March 31, 1996, the diluted loss per share
calculation excludes effects of outstanding stock options as such inclusion
would be anti-dilutive. The following table provides
F-11
<PAGE>
PEREGRINE SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. COMPANY OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
reconciliation of numerators and denominators used in calculating basic and
diluted earnings per share for the prior three years.
<TABLE>
<CAPTION>
FOR THE YEARS ENDED MARCH 31,
--------------------------------
1996 1997 1998
--------- --------- ----------
<S> <C> <C> <C>
Net income (loss)............................................................... $ (6,411) $ 5,802 $ (25,654)
--------- --------- ----------
--------- --------- ----------
BASIC EARNINGS PER SHARE:
Income (loss) available to common shareholders................................ $ (6,411) $ 5,802 $ (25,654)
Weighted average common shares outstanding.................................... 12,331 12,920 17,380
--------- --------- ----------
Basic earnings (loss) per share................................................. $ 0.52 $ 0.45 $ (1.48)
--------- --------- ----------
--------- --------- ----------
DILUTED EARNINGS PER SHARE:
Income (loss) available to common shareholders................................ $ (6,411) $ 5,802 $ (25,654)
--------- --------- ----------
--------- --------- ----------
Weighted average common shares outstanding.................................... 12,331 12,920 17,380
Common stock options granted (unless anti-dilutive)........................... -- 2,044 --
--------- --------- ----------
Total weighted average common shares and equivalents............................ 12,331 14,964 17,380
--------- --------- ----------
Diluted earnings (loss) per share............................................... $ (0.52) $ 0.39 $ (1.48)
--------- --------- ----------
--------- --------- ----------
</TABLE>
DISCONTINUED OPERATIONS
During fiscal 1996, the Company acquired XVT Software Inc. ("XVT"),
substantially all of the outstanding equity of which was owned by the majority
stockholder of the Company. In January 1996, the Company determined that
maintaining an interest in XVT was not consistent with the Company's business
strategy and adopted a plan to discontinue the operations of XVT. The Company
incurred a loss from discontinued operations of XVT in fiscal 1996 of $1.9
million.
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 accounting principles in
recognizing revenue on software transactions. The Company will adopt SOP 97-2
F-12
<PAGE>
PEREGRINE SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. COMPANY OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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.
2. ACQUISITION
In September 1997, the Company completed the acquisition of all of the
outstanding stock of United Software, Inc., a developer of decision software
solutions designed for asset management. The consideration given for the stock
of United Software included 1,916,220 shares of Peregrine Systems common stock
valued at $15.92 per share or $30,506,000 plus an additional $8,111,000 of
expenses directly related to the acquisition and assumption of net liabilities
of United Software.
The acquisition was accounted for as a purchase. Accordingly, the purchase
price was allocated to the net liabilities assumed based on their estimated fair
market values. In connection with the acquisition, the Company received an
appraisal of the intangible assets, which indicated that approximately $34.8
million represented in-process research and development. The acquired in-process
research and development was expensed in the quarter ended September 30, 1997.
In addition, the company recorded goodwill of $2.1 million that is being
amortized on a straight line basis over five years.
The following table presents the unaudited pro forma results assuming the
Company had acquired United Software at the beginning of fiscal years 1997 and
1998, respectively. Net income and diluted earnings per share amounts have been
adjusted to exclude the write-off of acquired in process research and
development of $34.8 million and include the goodwill amortization of $420,000
for the twelve months ended March 31, 1997 and 1998. This information may not
necessarily be indicative of the future combined results of the Company.
<TABLE>
<CAPTION>
(IN THOUSANDS EXCEPT PER SHARE
DATA)
FOR THE YEARS ENDED MARCH 31,
<S> <C> <C>
1997 1998
------------------- --------------
Revenues................................................ $ 41,503 $ 63,171
Net income.............................................. $ 670 $ 8,340
Diluted earnings per share.............................. $ 0.04 $ 0.40
Basic earnings per share................................ $ 0.05 $ 0.43
</TABLE>
F-13
<PAGE>
PEREGRINE SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. BALANCE SHEET COMPONENTS
Other current assets consists of the following (in thousands):
<TABLE>
<CAPTION>
MARCH 31,
--------------------
1997 1998
--------- ---------
<S> <C> <C>
Prepaid expenses and other................................................... $ 326 $ 2,661
Employee advances............................................................ 198 244
Receivable from sale of product line......................................... 400 --
--------- ---------
$ 924 $ 2,905
--------- ---------
--------- ---------
</TABLE>
Property and equipment consists of the following (in thousands):
<TABLE>
<CAPTION>
MARCH 31,
--------------------
1997 1998
--------- ---------
<S> <C> <C>
Furniture and equipment.................................................. $ 7,319 $ 10,219
Leasehold improvements................................................... 1,963 2,249
--------- ---------
9,282 12,468
Less accumulated depreciation............................................ (4,918) (7,013)
--------- ---------
$ 4,364 $ 5,455
--------- ---------
--------- ---------
</TABLE>
Accrued expenses consist of the following (in thousands):
<TABLE>
<CAPTION>
MARCH 31,
--------------------
1997 1998
--------- ---------
<S> <C> <C>
Employee Compensation...................................................... $ 1,631 $ 2,745
Commissions................................................................ 2,499 3,494
Other...................................................................... 2,119 3,071
--------- ---------
$ 6,249 $ 9,310
--------- ---------
--------- ---------
</TABLE>
4. DEBT
LINE OF CREDIT
Effective July 1, 1997, the Company entered into an agreement for a line of
credit facility that provides for maximum borrowings of $5.0 million and expires
on July 31, 1998. Borrowings under the line of credit bear interest at the
bank's prime rate (8.5% at March 31, 1998). The line of credit is collateralized
by the Company's accounts receivable, equipment, and certain other assets. In
addition, the debt agreement contains certain covenants, the most significant of
which places certain restrictions on future on borrowings and acquisitions above
specified levels. The Company is required to maintain certain financial ratios
and minimum equity balances. The agreement also provides for a foreign exchange
facility, under which the maximum principal amount of foreign exchange
transactions which may mature during any two day period is $2.0 million. The
Company did not have an outstanding balance on the line of credit at March 31,
1998.
F-14
<PAGE>
PEREGRINE SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. DEBT (CONTINUED)
LONG-TERM DEBT
Long-term debt consists of the following (in thousands):
<TABLE>
<CAPTION>
MARCH 31,
--------------------
1997 1998
--------- ---------
<S> <C> <C>
Note payable to bank. Note secured by trade receivables, fixed assets and guaranteed by the
majority stockholder. Interest at prime (8.5% as of March 31, 1997). Equal monthly
installments of principal of $37 plus interest, repaid in 1998................................ $ 1,612 $ --
Note payable to lessor. Unsecured; interest at 8%. Monthly payments of principal and interest
of $4.2 through November 2003................................................................. 234 227
French Government Agency loans. Interest of up to 6.55%, due in 2000........................... -- 762
Other.......................................................................................... 46 128
--------- ---------
1,892 1,117
Less current portion........................................................................... (497) (151)
--------- ---------
$ 1,395 $ 966
--------- ---------
--------- ---------
</TABLE>
Scheduled principal payments on long-term debt due as of March 31, 1998 are
as follows (in thousands):
<TABLE>
<S> <C>
1999................................................................ $ 151
2000................................................................ 808
2001................................................................ 39
2002................................................................ 43
2003................................................................ 47
2004................................................................ 29
---------
$ 1,117
---------
---------
</TABLE>
F-15
<PAGE>
PEREGRINE SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. INCOME TAXES
The tax effects of temporary differences that give rise to significant
portions of the net deferred tax assets are as follows (in thousands):
<TABLE>
<CAPTION>
MARCH 31,
--------------------
1997 1998
--------- ---------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards........................................ $ 1,356 $ 5,497
Deferred maintenance revenue............................................ 1,148 1,452
Other................................................................... 960 1,324
--------- ---------
3,464 8,273
Deferred tax liabilities:
Depreciation............................................................ (295) (168)
Deferred revenue........................................................ (160) --
--------- ---------
3,009 8,105
Valuation allowance....................................................... (1,257) (808)
--------- ---------
Net deferred tax assets................................................... $ 1,752 $ 7,297
--------- ---------
--------- ---------
</TABLE>
As of March 31, 1998, the Company had net operating loss carryforwards of
approximately $8.5 million for domestic federal and state income tax reporting
purposes, which expire beginning in 2004. In certain circumstances, as specified
in the Internal Revenue Code, a fifty percent or more ownership change by
certain combinations of the Company's stockholders during any three year period
could result in a limitation on the Company's ability to utilize portions of its
domestic net operating loss carryforwards. The Company currently has net
operating loss carryforwards of approximately $1.2 million that may be subject
to these limitations. As of March 31, 1998, the Company also has foreign net
operating loss carryforwards of approximately $5.8 million. See Note 9 for a
table of foreign and domestic components of operating income (loss).
A valuation allowance in the amount set forth in the table above has been
recorded to properly reflect a portion of the deferred tax assets due to
uncertainties surrounding its realization. The current valuation allowance
relates to assets acquired in the Company's acquisition of United Software, Inc.
Management evaluates on a quarterly basis the recoverability of the deferred tax
assets and the amount of the valuation allowance. At such time as it is
determined that it is more likely than not that the deferred tax assets are
realizable, the valuation allowance will be reduced. Any future decrease in the
valuation allowance will be recorded as a reduction to goodwill.
F-16
<PAGE>
PEREGRINE SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. INCOME TAXES (CONTINUED)
A reconciliation of expected income taxes using the statutory federal income
tax rate to the effective income tax provision is as follows (in thousands):
<TABLE>
<CAPTION>
MARCH 31,
------------------------------------------
1996 1997 1998 RATE
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Federal tax at the statutory rate.................... $ (2,180) $ 980 $ 4,923 34.00%
State tax, net of federal benefit.................... (385) 173 869 6.00%
Foreign losses (not benefited)....................... 418 -- -- --
Other................................................ 227 140 16 0.11%
Change in valuation allowance........................ 1,920 (2,885) (449) (3.10)%
--------- --------- --------- ---------
Total income tax provision........................... $ -- $ (1,592) $ 5,359 37.01%
--------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>
The amounts stated in the table above for the year ended March 31, 1998
exclude a $34,775,000 expense for acquired in-process research and development
relating to the Company's acquisition of United Software, Inc.
The income tax provision (benefit) consisted of the following (in
thousands):
<TABLE>
<CAPTION>
MARCH 31,
--------------------
1997 1998
--------- ---------
<S> <C> <C>
Current
Federal................................................................. $ 76 $ 5,197
State................................................................... 84 1,017
--------- ---------
Total Current......................................................... 160 6,214
--------- ---------
Deferred
Federal................................................................. (1,523) (728)
State................................................................... (229) (128)
--------- ---------
Total deferred............................................................ (1,752) (856)
--------- ---------
Total provision (benefit)................................................. $ (1,592) $ 5,358
--------- ---------
--------- ---------
</TABLE>
The Company realizes an income tax benefit from the exercise or early
disposition of certain stock options. This benefit results in a decrease in
current income taxes payable and an increase in additional paid-in capital. The
amount of this benefit for the year ended March 31, 1998 was $7,905,000.
F-17
<PAGE>
PEREGRINE SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. COMMITMENTS AND CONTINGENCIES
The Company leases certain buildings and equipment under noncancelable
operating lease agreements. The leases generally require the Company to pay all
executory costs such as taxes, insurance and maintenance related to the leased
assets. Certain of the leases contain provisions for periodic rate escalations
to reflect cost-of-living increases. Rent expense for such leases totaled
approximately $1,961,000, $2,051,000 and $2,565,000 in fiscal 1996, 1997, and
1998, respectively.
Future minimum lease payments under noncancelable operating leases, at March
31, 1998 are as follows (in thousands):
<TABLE>
<CAPTION>
OPERATING
LEASES
-----------
<S> <C>
1999............................................................................... $ 2,407
2000............................................................................... 2,286
2001............................................................................... 2,278
2002............................................................................... 2,381
2003............................................................................... 2,448
Thereafter......................................................................... 1,543
-----------
Total minimum lease payments................................................... $ 13,343
-----------
-----------
</TABLE>
The Company subleases office space at its corporate headquarters to an
affiliated company. The term of the sublease is from June, 1996 to October, 2003
and requires monthly rental payments of approximately $17,000.
The Company pays commissions to employees who have authored certain of the
Company's products based on a percentage of the respective product's sales.
Commissions paid under such agreements are included in research and development
expense in the accompanying consolidated statements of operations and were
approximately $600,000, $1,100,000, and $1,700,000 for fiscal 1996, 1997, and
1998, respectively.
The Company is involved in various legal proceedings and claims arising in
the ordinary course of business, none of which, in the opinion of management, is
expected to have a material adverse effect on the Company's consolidated
financial position or results of operations.
7. STOCKHOLDERS' EQUITY
PREFERRED STOCK
The Company has authorized 5,000,000, $0.001 par value, undesignated
preferred shares, none of which were issued or outstanding at March 31, 1997 and
1998. The Board of Directors has the authority to issue the preferred stock in
one or more series and to fix the price, rights, preferences, privileges, and
restrictions, including dividend rights and rates, conversion and voting rights,
and redemption terms and pricing without any further vote or action by the
Company's stockholders.
STOCK OPTIONS
The Company has three stock option plans, the Nonqualified Stock Option Plan
("1990 Plan"), the 1991 Nonqualified Stock Option Plan ("1991 Plan"), and the
1994 Stock Option Plan ("1994 Plan").
F-18
<PAGE>
PEREGRINE SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. STOCKHOLDERS' EQUITY (CONTINUED)
The Company may no longer grant options under the 1990 and 1991 Plans. The
Company may grant up to 4,999,000 options under the 1994 Plan. Under the Plans,
the option exercise price is determined by the Board of Directors on a per-grant
basis, but shall not be less than fair market value. Option grants under all
three stock option plans generally vest over four years. During December 1996,
the Company recorded $631,000 in deferred compensation related to the grant of
185,000 options. This deferred compensation is being amortized on a straight
line basis to expense over the options' four year vesting period.
A summary of the status of the Company's three stock option plans at March
31, 1996, 1997, and 1998 as well as changes during the periods then ended is as
follows:
<TABLE>
<CAPTION>
WEIGHTED
WEIGHTED WEIGHTED AVERAGE
SHARES AVERAGE SHARES AVERAGE SHARES EXERCISE
(000) EXERCISE PRICE (000) EXERCISE PRICE (000) PRICE
--------- --------------- --------- --------------- --------- -------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding, beginning of year...... 3,041.2 $ 1.42 3,597.4 $ 1.79 4,061.3 $ 2.08
--------- ----- --------- ----- --------- ------
Granted............................. 1,440.4 2.37 989.9 3.24 1,628.8 $ 13.59
Exercised........................... (30.0) 1.01 (22.8) 1.64 (1,806.2) $ 1.50
Canceled............................ (854.2) 1.18 (503.2) 1.4 (285.5) 12.25
--------- ----- --------- ----- --------- ------
--------- ----- --------- ----- --------- ------
Outstanding, end of year............ 3,597.4 $ 1.79 4,061.3 $ 2.08 3,598.4 $ 6.77
--------- ----- --------- ----- --------- ------
--------- ----- --------- ----- --------- ------
Exercisable, end of year............ 1,786.0 $ 1.34 2,171.7 $ 1.48 1,160.5 $ 7.64
--------- ----- --------- ----- --------- ------
--------- ----- --------- ----- --------- ------
Weighted average fair value of
options granted................... $ -- $ -- $ --
----- ----- ------
----- ----- ------
</TABLE>
Because certain of the options awarded to date have been granted at
significant premiums, under the minimum value pricing model the options were
determined to collectively have no value. As a result, had compensation cost for
stock options granted during the years ended March 31, 1996 and 1997 been
determined consistent with SFAS No. 123, the Company's net income (loss) and
related per share amounts on a pro forma basis would not be materially different
as the per share amounts reported in the accompanying consolidated statements of
operations for the years ended March 31, 1996 and 1997.
Compensation cost for stock options granted during the year ended March 31,
1998 determined consistent with SFAS No. 123 would have reduced the Company's
net income and related per share amounts on a pro-forma basis by $1.3 million
and $0.07, respectively. The fair value of each option grant is estimated using
the minimum value method of option pricing model with the following assumptions
used in fiscal 1998; weighted average risk-free interest rate of 6.11 percent;
volatility of 63.06 percent; expected dividend yields of 0.00 percent; and an
expected life of 4 years.
RESTRICTED STOCK
During fiscal 1996, the Company granted 600,000 shares of nontransferable
common stock under restricted stock agreements to certain employees. These
shares were valued at a fair value of $2.34. The restrictions lapse on the
shares ten years from the date of grant or, if the Company achieves certain
objectives for earnings growth from fiscal 1997 through fiscal 2002, or, on a
change in control of the Company. The unearned portion of restricted stock is
included in stockholders' deficit and is being
F-19
<PAGE>
PEREGRINE SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. STOCKHOLDERS' EQUITY (CONTINUED)
amortized as compensation expense on a straight-line basis over the vesting
period. During fiscal 1998, 202,000 of the above shares were cancelled.
During the fiscal year 1998, the Company granted an additional 50,000 shares
of nontransferrable common stock under restricted stock agreements valued at
$12.625. These shares vest over a six-year term and are currently being
amortized as compensation expense over this term.
1997 EMPLOYEE STOCK PURCHASE PLAN
In February 1997, the Board adopted, and the stockholders approved, the 1997
Employee Stock Purchase Plan ("Purchase Plan"). The Company has reserved 250,000
shares of common stock for issuance under the Purchase Plan. The Purchase Plan
enables eligible employees to purchase common stock at 85% of the lower of the
fair market value of the Company's common stock on the first or last day of each
option purchase period, as defined. No shares were issued under the Purchase
Plan during fiscal 1997 and 35,000 shares were issued under the Purchase Plan
during fiscal 1998.
DIRECTOR OPTION PLAN
In February 1997, the Board adopted, and the stockholders approved, the 1997
Director Option Plan ("Director Plan"). The Company has reserved 150,000 shares
of common stock for issuance under the Director Plan. The Director Plan provides
an initial grant of options to purchase 25,000 shares of common stock to each
new eligible outside director of the Company upon election to the Board. In
addition, commencing with the 1998 Annual Stockholders meeting, such eligible
outside directors are granted an option to purchase 5,000 shares of common stock
at each annual meeting. The exercise price per share of all options granted
under the Director Plan will be equal to the fair market value of the Company's
common stock on the date of grant. Options may be granted for periods up to ten
years and generally vest over four years. No grants were made under the Director
Plan in fiscal 1997 and 1998.
8. EMPLOYEE BENEFIT PLAN
The Company has a 401(k) Employee Savings Plan ("Plan") covering
substantially all employees. The Plan provides for savings and pension benefits
and is subject to the provisions of the Employee Retirement Income Security Act
of 1974. Those employees who participate in the Plan are entitled to make
contributions of up to 20 percent of their compensation, limited by IRS
statutory contribution limits. In addition to employee contributions, the
Company also contributes to the Plan by matching 25% of employee contributions.
Amounts contributed to the Employee Savings Plan by the Company during fiscal
1996, 1997 and 1998 were $203,000, $189,000, and $200,000 respectively.
F-20
<PAGE>
PEREGRINE SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. GEOGRAPHIC OPERATIONS
The Company operates exclusively in the computer software industry. A
summary of the Company's continuing operations by geographic area is presented
below:
<TABLE>
<CAPTION>
UNITED EUROPE AND
STATES OTHER CONSOLIDATED
------------ ----------- ------------
<S> <C> <C> <C>
Year ended March 31, 1996
Revenues.......................................... $ 16,818 $ 6,948 $ 23,766
Operating profit (loss)........................... (5,010) 458 (4,552)
Identifiable assets............................... 9,427 4,390 13,817
Year ended March 31, 1997
Revenues.......................................... $ 24,925 $ 10,110 $ 35,035
Operating profit (loss)........................... 3,513 697 4,210
Identifiable assets............................... 14,353 5,385 19,738
Year ended March 31, 1998
Revenues.......................................... $ 39,512 $ 22,365 $ 61,877
Operating profit (loss)........................... (26,649) 5,514 (21,135)
Identifiable assets............................... 45,603 11,134 56,737
</TABLE>
10. SUBSEQUENT EVENT
On May 7, 1998, the Company announced a definitive merger agreement with
Innovative Tech Systems, Inc. to acquire all its outstanding common stock. The
merger has been approved by the Board of Directors of both companies and is
subject to approval by the shareholders of Innovative Tech Systems. Under the
agreement, Innovative Tech Systems shareholders will receive 0.2341 shares of
Peregrine stock for each share of Innovative stock. Based on market values of
the outstanding stock values of both companies on May 7, consideration given for
the acquisition would be $72.9 million plus acquisition related costs. The
acquisition will be accounted for as a purchase and Peregrine expects to take a
charge related to the purchase of in-process research and development of
substantially all of the cost of the acquisition price. It is anticipated that
the transaction will be completed during the quarter ending September 30, 1998.
F-21
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To United Software, Inc.:
We have audited the accompanying consolidated balance sheets of United
Software, Inc. (a Delaware corporation) and subsidiaries as of December 31, 1995
and 1996 and the related consolidated statements of operations, stockholders'
deficit and cash flows for the years then ended. These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of United Software, Inc. and
subsidiaries as of December 31, 1995 and 1996, and the results of their
operations and their cash flows for the years then ended in conformity with
generally accepted accounting principles.
ARTHUR ANDERSEN LLP
San Diego, California
September 19, 1997
F-22
<PAGE>
UNITED SOFTWARE, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, JUNE 30,
1995 1996 1997
------------ ------------ -----------
<S> <C> <C> <C>
(UNAUDITED)
ASSETS
Current Assets:
Cash.................................................................. $ 168 $ 1,114 $ 896
Accounts receivable, net of allowance for doubtful accounts of $70,
$45 and $97, respectively........................................... 2,352 3,297 4,030
Other current assets.................................................. 290 370 258
------------ ------------ -----------
Total current assets................................................ 2,810 4,781 5,184
Property and equipment, net........................................... 240 322 348
Other assets.......................................................... 94 875 887
------------ ------------ -----------
$ 3,144 $ 5,978 $ 6,419
------------ ------------ -----------
------------ ------------ -----------
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current Liabilities:
Bank line of credit................................................... $ 439 $ 675 $ 1,486
Accounts payable...................................................... 933 1,854 1,701
Accrued expenses...................................................... 1,957 5,702 3,993
Deferred revenue...................................................... 92 1,033 2,315
Notes payable......................................................... -- 1,218 1,329
------------ ------------ -----------
Total current liabilities........................................... 3,421 10,482 10,824
------------ ------------ -----------
------------ ------------ -----------
Commitments and Contingencies
Stockholders' Deficit:
Series A, preferred stock............................................. 2,182 2,589 2,974
Series B, preferred stock............................................. -- -- 1,455
Accumulated deficit................................................... (2,429) (7,141) (8,878)
Cumulative translation adjustment..................................... (30) 48 44
------------ ------------ -----------
Total stockholders' deficit......................................... (277) (4,504) (4,405)
------------ ------------ -----------
$ 3,144 $ 5,978 $ 6,419
------------ ------------ -----------
------------ ------------ -----------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
F-23
<PAGE>
UNITED SOFTWARE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS ENDED
DECEMBER 31, JUNE 30,
1995 1996 1996 1997
--------- --------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C>
Revenues:
Licenses............................................................. $ 5,422 $ 4,168 $ 1,875 $ 2,672
Maintenance and services............................................. 1,537 2,300 1,232 1,807
--------- --------- --------- ---------
Total revenues..................................................... 6,959 6,468 3,107 4,479
--------- --------- --------- ---------
Costs and Expenses:
Cost of licenses..................................................... 909 1,179 475 605
Cost of maintenance and services..................................... 1,417 2,334 1,165 1,349
Sales and marketing.................................................. 2,289 2,961 1,317 1,616
Research and development............................................. 2,706 3,001 1,165 1,529
General and administrative........................................... 1,569 2,030 903 1,107
--------- --------- --------- ---------
Total costs and expenses........................................... 8,890 11,505 5,025 6,206
--------- --------- --------- ---------
Operating loss..................................................... (1,931) (5,037) (1,918) (1,727)
Interest income (expense) and other, net............................... 328 325 226 (10)
--------- --------- --------- ---------
Net loss............................................................... $ (1,603) $ (4,712) $ (1,692) $ (1,737)
--------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
F-24
<PAGE>
UNITED SOFTWARE, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT
(IN THOUSANDS)
<TABLE>
<CAPTION>
NO. OF SERIES A
PREFERRED SERIES A NO. OF SERIES B SERIES B CUMULATIVE
SHARES PREFERRED PREFERRED PREFERRED COMMON ACCUMULATED TRANSLATION
OUTSTANDING STOCK SHARES SHARES STOCK DEFICIT ADJUSTMENT
--------------- ----------- --------------- ----------- ----------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31,
1994................... 2,000 $ 1,500 -- $ -- $ -- $ (826) $ --
Net Loss................. -- -- -- -- -- (1,603) --
Issuance of Series A
Preferred Stock........ 909 682 -- -- -- -- --
Equity adjustment from
foreign currency
translation............ -- -- -- -- -- -- (30)
----- ----------- ------ ----------- ----------- ------------ -----------
Balance, December 31,
1995................... 2,909 2,182 -- -- -- (2,429) (30)
Net Loss................. -- -- -- -- -- (4,712) --
Issuance of Series A
Preferred Stock........ 543 407 -- -- -- -- --
Equity adjustment from
foreign currency
translation............ -- -- -- -- -- -- 78
----- ----------- ------ ----------- ----------- ------------ -----------
Balance, December 31,
1996................... 3,452 2,589 -- -- -- (7,141) 48
Net Loss (Unaudited)..... -- -- -- -- -- (1,737) --
Issuance of Series A
Preferred Stock
(Unaudited)............ 514 385 -- -- -- -- --
Issuance of Series B
Preferred Stock
(Unaudited)............ -- -- 2,010 1,455 -- -- --
Equity adjustment from
foreign currency
translation
(Unaudited)............ -- -- -- -- -- -- (4)
----- ----------- ------ ----------- ----------- ------------ -----------
Balance, June 30, 1997
(Unaudited)............ 3,966 $ 2,974 2,010 $ 1,455 $ -- $ (8,878) $ 44
----- ----------- ------ ----------- ----------- ------------ -----------
----- ----------- ------ ----------- ----------- ------------ -----------
<CAPTION>
TOTAL
STOCKHOLDERS
DEFICIT
------------
<S> <C>
Balance, December 31,
1994................... $ 674
Net Loss................. (1,603)
Issuance of Series A
Preferred Stock........ 682
Equity adjustment from
foreign currency
translation............ (30)
------------
Balance, December 31,
1995................... (277)
Net Loss................. (4,712)
Issuance of Series A
Preferred Stock........ 407
Equity adjustment from
foreign currency
translation............ 78
------------
Balance, December 31,
1996................... (4,504)
Net Loss (Unaudited)..... (1,737)
Issuance of Series A
Preferred Stock
(Unaudited)............ 385
Issuance of Series B
Preferred Stock
(Unaudited)............ 1,455
Equity adjustment from
foreign currency
translation
(Unaudited)............ (4)
------------
Balance, June 30, 1997
(Unaudited)............ $ (4,405)
------------
------------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
F-25
<PAGE>
UNITED SOFTWARE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS ENDED
DECEMBER 31, JUNE 30,
1995 1996 1996 1997
--------- --------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C>
Cash flow from operating activities:
Net loss............................................................. $ (1,603) $ (4,712) $ (1,692) $ (1,737)
Adjustments to reconcile net loss to net cash provided by (used in)
operating activities:
Depreciation and amortization........................................ 65 81 38 47
Increase (decrease) in cash resulting from changes in:
Accounts receivable, net............................................. 186 (945) (235) (733)
Other current assets................................................. 359 (80) (353) 112
Other assets......................................................... (22) (59) (10) (12)
Accounts payable..................................................... (114) 921 905 (153)
Accrued expenses..................................................... 463 4,255 645 (2,219)
Deferred revenue..................................................... 76 941 54 1,282
--------- --------- --------- ---------
Net cash provided by (used in) operating activities................ (590) 402 (648) (3,413)
--------- --------- --------- ---------
Cash flows from investing activities:
Purchases of property and equipment.................................. (222) (163) (52) (73)
Cash paid for goodwill............................................... -- (212) (212) --
--------- --------- --------- ---------
Net cash (used in) investing activities.............................. (222) (375) (264) (73)
--------- --------- --------- ---------
Cash flows from financing activities:
Proceeds (repayments) from bank line of credit, net.................. 164 236 (79) 811
Notes payable........................................................ (64) 198 385 621
Issuance of preferred stock.......................................... 682 407 407 1,840
--------- --------- --------- ---------
Net cash provided by financing activities.......................... 782 841 713 3,272
--------- --------- --------- ---------
Effect of exchange rate changes on cash.............................. (30) 78 31 (4)
--------- --------- --------- ---------
Net increase (decrease) in cash........................................ (60) 946 (168) (218)
--------- --------- --------- ---------
Cash, beginning of year................................................ 228 168 168 1,114
--------- --------- --------- ---------
Cash, end of year...................................................... 168 $ 1,114 $ -- $ 896
--------- --------- --------- ---------
Supplemental Disclosure of Cash Flow Information:
Cash paid during the year for: Interest.............................. $ -- $ 17 $ 7 $ 61
--------- --------- --------- ---------
--------- --------- --------- ---------
Supplemental Disclosure of Non Cash Investing and Financing Activities:
Issuance of note payable in connection with acquisition.............. $ -- $ 510 $ 510 $ --
--------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
F-26
<PAGE>
UNITED SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION RELATING TO THE SIX MONTHS ENDED
JUNE 30, 1996 AND 1997 IS UNAUDITED)
1. COMPANY OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
THE COMPANY
On May 30, 1997, Apsylog S.A., a French corporation organized under the laws
of the Republic of France, became a majority-owned subsidiary of United
Software, Inc., a Delaware corporation. United Software, Inc. is a worldwide
leader in IT Asset Management software and services. Apsylog Asset Manager is a
comprehensive decision support software solution that manages the entire IT
asset lifecycle, from asset acquisition, through asset deployment and tracking,
to asset retirement. Designed to meet the requirements of some of the world's
most sophisticated users of information technology, Asset Manager combines
procurement, asset tracking, and help desk modules into a powerful enterprise
information resource. The company sells its software and services in both Europe
and the United States through both a direct and indirect sales force.
Pursuant to an Agreement and Plan of Reorganization dated effective as of
August 29, 1997, on September 19, 1997, the Company completed the sale of all of
its outstanding capital stock to Peregrine Systems, Inc. ("Peregrine"). See Note
10.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements have been prepared in accordance with
U.S. Generally Accepted Accounting Principles and include the accounts of United
Software, Inc. and its wholly owned subsidiaries (collectively, "the Company").
All significant intercompany accounts and transactions have been eliminated.
INTERIM FINANCIAL INFORMATION (UNAUDITED)
The unaudited interim balance sheet as of June 30, 1997 and the statements
of operations and cash flows and related notes for the six months ended June 30,
1997 and 1996 have been prepared on the same basis as the audited financial
statements and, in the opinion of management, include all adjustments,
consisting of only normal recurring adjustments, necessary for a fair
presentation of the financial position and results of operations in accordance
with generally accepted accounting principles. Results for the interim periods
are not necessarily indicative of results to be expected for the full fiscal
year.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
REVENUE RECOGNITION
The Company generates revenues from licensing the rights to use its software
products primarily to end users. The Company also generates revenues from
post-contract support (maintenance), consulting and training services performed
for customers who license its products.
F-27
<PAGE>
UNITED SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION RELATING TO THE SIX MONTHS ENDED
JUNE 30, 1996 AND 1997 IS UNAUDITED)
1. COMPANY OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
Revenues from software license agreements are recognized currently, provided
that all of the following conditions are met: a legally binding agreement has
been signed, the software has been delivered, there are no material
uncertainties regarding customer acceptance, collection of the resulting
receivable is deemed probable, and no other significant vendor obligations
exist. Revenues from maintenance services are recognized ratably over the term
of the maintenance period, generally one year. Maintenance revenues which are
bundled with license agreements are unbundled using vendor specific objective
evidence. Consulting revenues are primarily related to implementation services
performed on a time and material basis under separate service agreements for the
installation of the Company's software products. Revenues from consulting and
training services are recognized as the respective services are performed.
Cost of license revenues consist primarily of amounts to be paid to
third-party vendors, product media, manuals, packaging materials, personnel and
related shipping costs. Cost of maintenance and service revenues consists
primarily of salaries, benefits, and allocated overhead costs incurred in
providing telephone support, consulting services, and training to customers.
BUSINESS RISK AND CONCENTRATIONS OF CREDIT RISK
Financial instruments which potentially subject the Company to
concentrations of credit risk principally consist of trade receivables. The
Company performs ongoing credit evaluations of its customers financial
condition. Management believes that the concentration of credit risk with
respect to trade receivables is further mitigated as the Company's customer base
consists primarily of large companies. The Company maintains reserves for credit
losses and such losses historically have been within management expectations.
A significant portion of the Company's revenues are from its Apsylog Asset
Manager product and related services. Any factor adversely affecting the pricing
of, demand for or market acceptance of, the Apsylog Asset Manager product could
have a material adverse affect on the Company's business, financial condition
and results of operations.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying value of certain of the Company's financial instruments,
including accounts receivable, accounts payable and accrued expenses
approximates fair value due to their short maturities. Based on borrowing rates
currently available to the Company for loans with similar terms, the carrying
value of its term debt and borrowings under the Company's line of credit
approximates fair value.
FOREIGN CURRENCY RISK
The Company conducts business principally in French francs. As a result, the
Company is subject to the risk of foreign currency fluctuations. To date, the
Company has not experienced any material losses as a result of foreign currency
fluctuations.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation and amortization are
provided using the straight-line method over estimated useful lives, generally
three to five years for furniture and equipment.
F-28
<PAGE>
UNITED SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION RELATING TO THE SIX MONTHS ENDED
JUNE 30, 1996 AND 1997 IS UNAUDITED)
1. COMPANY OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
Amortization of leasehold improvements is provided using the straight-line
method over the lesser of the useful lives of the assets or the terms of the
related leases.
Maintenance and repairs are charged to operations as incurred. When assets
are sold, or otherwise disposed of, the cost and related accumulated
depreciation are removed from the accounts and any gain or loss is included in
operations for the applicable period.
GOODWILL
The excess of acquisition cost over the fair value of net assets of
businesses acquired (goodwill) is being amortized using the straight-line
method, generally over five years.
CAPITALIZED COMPUTER SOFTWARE
In accordance with Statement of Financial Accounting Standards No. 86,
"Accounting for the Costs of Computer Software to be Sold, Leased or Otherwise
Marketed", software development costs are capitalized from the time the
product's technological feasibility has been established until the product is
released for sale to the general public. During the two years ended December 31,
1995 and 1996 and the six months ended June 30, 1997 no software development
costs were capitalized as the costs incurred between achieving technological
feasibility and product release were minimal. Research and development costs,
including the design of product enhancements, are expensed as incurred.
FOREIGN CURRENCY TRANSLATION
The functional currency of the Company is the French franc. Assets and
liabilities of the Company's foreign operations are translated into United
States dollars at the exchange rate in effect at the balance sheet date, and
revenue and expenses are translated at the average exchange rate for the period.
Translation gains or losses of the Company's foreign subsidiaries are not
included in operations but are reported as a separate component of stockholders'
deficit. Gains and losses on transactions in denominations other than the
functional currency of the Company's foreign operations, while not significant
in amount, are included in the results of operations. The Company does not enter
into foreign exchange transactions to hedge its balance sheet exposures or
intercompany balances against movements in foreign exchange rates.
INCOME TAXES
Deferred taxes are provided utilizing the liability method as prescribed by
SFAS No. 109, "Accounting for Income Taxes," whereby deferred tax assets are
recognized for deductible temporary differences and operating loss
carryforwards, and deferred tax liabilities are recognized for taxable temporary
differences. Temporary differences are the differences between the reported
amounts of assets and liabilities and their tax bases. Deferred tax assets and
liabilities are adjusted for the effects of changes in tax laws and rates on the
date of enactment. Deferred tax assets are reduced by a valuation allowance
when, in the opinion of management, it is more likely than not that some portion
or all of the deferred tax assets will not be realized.
F-29
<PAGE>
UNITED SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION RELATING TO THE SIX MONTHS ENDED
JUNE 30, 1996 AND 1997 IS UNAUDITED)
2. BALANCE SHEET COMPONENTS
Other current assets consist of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, JUNE 30,
1995 1996 1997
------------ ------------ ------------
<S> <C> <C> <C>
(UNAUDITED)
Inventory.......................................... $ 197 $ 177 $ 136
Prepaids and other................................. 93 193 122
----- ----- -----
$ 290 $ 370 $ 258
----- ----- -----
----- ----- -----
</TABLE>
Property and equipment consist of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, JUNE 30,
1995 1996 1997
------------ ------------ ------------
<S> <C> <C> <C>
(UNAUDITED)
Furniture and Equipment............................ $ 328 $ 435 $ 487
Leasehold improvements............................. 1 57 78
----- ----- -----
329 492 565
Accumulated depreciation........................... (89) (170) (217)
----- ----- -----
$ 240 $ 322 $ 348
----- ----- -----
----- ----- -----
</TABLE>
Other assets consist of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, JUNE 30,
1995 1995 1997
------------ ------------ ------------
<S> <C> <C> <C>
(UNAUDITED)
Goodwill, net...................................... $ 9 $ 731 $ 753
Other long-term assets............................. 85 144 134
----- ----- -----
$ 94 $ 875 $ 887
----- ----- -----
----- ----- -----
</TABLE>
Accrued expenses consist of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, JUNE 30,
1995 1995 1997
------------ ------------ ------------
<S> <C> <C> <C>
(UNAUDITED)
Salaries and benefits.............................. $ 242 $ 370 $ 254
Legal and professional............................. -- 77 77
Foreign taxes...................................... 733 1,295 1,311
Other.............................................. 982 3,960 2,351
------ ------ ------
$ 1,957 $ 5,702 $ 3,993
------ ------ ------
------ ------ ------
</TABLE>
F-30
<PAGE>
UNITED SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION RELATING TO THE SIX MONTHS ENDED
JUNE 30, 1996 AND 1997 IS UNAUDITED)
3. SALE OF SUBSIDIARIES
Subsequent to June 30, 1997, the Company sold the operations of its SMI and
Apsydoc subsidiaries. These subsidiaries were engaged in software related
services and hardware distribution. These companies were sold to their
respective management. The sales of these companies did not result in any
significant gains or losses. The assets of these companies have been included in
the June 30, 1997 balance sheet at their respective net realizable values.
Additionally, as part of the acquisition of the Company by Peregrine (see
Note 10), the management of its Netform and Apsynet subsidiaries are in the
process of negotiating the acquisition of these units from Peregrine.
Accordingly, net assets of these companies have been stated at their anticipated
net realizable value as of June 30, 1997.
The operations of SMI, Apsydoc, Apsynet and Netform were not significant
either individually or collectively during the years ended December 31, 1995 and
1996 or during the six months ended June 30, 1997 and 1996.
4. DEBT
LINE OF CREDIT
The Company has a demand line of credit with a bank which provides for
maximum borrowings of 7 million French francs ($1,180,339 U.S. Dollars). The
maximum commitment is based on 100 percent of available accounts receivable and
are secured by commercial notes. Borrowings under the agreement bear interest at
the bank's French federal funds rate (6.3% at June 30, 1997) plus 3.25 percent
and are collateralized by trade receivables. At June 30, 1997, the Company had
exceeded its borrowing limit.
The Company's U.S. subsidiary had a demand line of credit with a bank for up
to $80,000 in support of trade accounts receivable. These advances bear interest
at prime plus 3 percent. These borrowings are secured by U.S. accounts
receivable. At June 30, 1997 the line was inactive. As of December 31, 1995 and
1996 and June 30, 1997, there was $80,000, $0, and $0 outstanding, respectively.
NOTES PAYABLE
During 1993, Apsylog S.A. entered into agreements totaling 11,000,000 French
Francs ($2,059,926) with the French Government Export and Export Insurance
Administrator for the development of export products. These funds are to be
spent only for the development of export related products and are due upon a
change in control of the Company. These advances do not bear interest and are to
be repaid before 2001. At December 31, 1995 and 1996 and at June 30, 1997, the
following were outstanding $0, $708,000 and $819,000, respectively.
Additionally, during January 1996, the Company acquired the operations of
another company for approximately $1,000,000, of which approximately 50% was
paid at closing. The Company has allocated this purchase price to the net assets
acquired based on fair market value. The Company is obligated to pay the
remaining balance should the Company be acquired. Accordingly, the unpaid
balance of approximately $510,000 has been recorded as non-interest bearing
notes payable in the accompanying financial statements as of December 31, 1996
and June 30, 1997. The operations of this company were not significant in the
year ended December 31, 1996 or during the six months ended June 30, 1997.
F-31
<PAGE>
UNITED SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION RELATING TO THE SIX MONTHS ENDED
JUNE 30, 1996 AND 1997 IS UNAUDITED)
5. INCOME TAXES
The Company has incurred losses since its inception. Net operating loss
carryforwards for foreign income tax purposes as of December 31, 1996 were
approximately $3,600,000. Net operating loss carryforwards for U.S. federal
income tax purposes as of December 31, 1996 were approximately $1,500,000. All
operating loss carryforwards are subject to certain limitations. In accordance
with SFAS 109, the Company has recorded a full valuation allowance against its
deferred tax asset since the Company cannot currently demonstrate that it is
more likely than not that its deferred tax asset will be realizable in future
periods.
6. COMMITMENTS AND CONTINGENCIES
The Company leases certain buildings and equipment under noncancellable
operating lease agreements. The leases generally require the Company to pay all
executory costs such as taxes, insurance, and maintenance related to the assets.
Certain of the leases contain provisions for periodic rate escalations to
reflect cost-of-living increases. Rent expense for such leases totaled
approximately $524,000 and $521,000 in 1995 and 1996, and $280,000 and $293,000
for the six months ended June 30, 1996 and 1997, respectively. Future minimum
lease payments for operating leases at June 30, 1997 are as follows (in
thousands):
<TABLE>
<CAPTION>
OPERATING
LEASES
--------
<S> <C>
July 1, 1997 - December 31, 1997................................................... $ 75
1998............................................................................... 121
1999............................................................................... 66
2000............................................................................... 2
Thereafter......................................................................... --
--------
Total minimum lease payments................................................... $ 264
--------
--------
</TABLE>
The Company is involved in various legal proceedings and claims arising in
the ordinary course of business, none of which, in the opinion of management, is
expected to have a material adverse effect on the Company's consolidated
financial position or results of operations.
7. STOCKHOLDERS' DEFICIT
On May 30, 1997, Apsylog S.A. was reorganized to become a majority-owned
subsidiary of United Software, Inc., a Delaware corporation. In connection
therewith, substantially all of the shares of common stock of Apsylog were
exchanged for a similar number of Preferred A shares of United Software, Inc.
Additionally, 3,078,983 common shares of Apsylog S.A. are subject to put/call
arrangements at a similar exchange rate. Accordingly, the common stock of
Apsylog S.A. is considered Preferred A shares of United Software, Inc. for all
periods presented.
United Software, Inc. has no operations apart from holding its investment in
Apsylog S.A.
In connection with the reincorporation of Apsylog discussed above, United
Software established the following capital structure:
F-32
<PAGE>
UNITED SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION RELATING TO THE SIX MONTHS ENDED
JUNE 30, 1996 AND 1997 IS UNAUDITED)
7. STOCKHOLDERS' DEFICIT (CONTINUED)
Common Stock: 15,000,000 authorized of which 1,000,000 have been reserved
for issuance under the Company's 1997 Stock plan. There are no outstanding
common shares at June 30, 1997.
PREFERRED STOCK
In connection with the reincorporation, 10,000,000 shares of preferred stock
have been authorized of which two series, A and B, have been designated.
Series A
3,966,084 shares of preferred stock have been designated Series A. These shares
are junior to Series B in liquidation and carry a $.075 annual non-cumulative
dividend. The common shares outstanding are considered Series A Preferred for
all periods presented. These shares are convertible into an equal number of
common shares at the option of the holder or upon the occurrence of an initial
public offering or upon a change of control.
Series B
2,009,530 shares have been designated Series B preferred stock. These shares
have a liquidation preference before Series A and carry an annual non-cumulative
dividend rate of $.075 per share. These shares are convertible at the option of
the holder into an equal number of common shares. The conversion is mandatory
upon the occurrence of an initial public offering or upon a change of control.
The remaining 4,024,386 preferred shares are undesignated.
STOCK OPTIONS
During July 1997, the Company established the 1997 United Software, Inc.
Stock Plan. The Company has reserved 1,000,000 shares of common stock for grant
under this plan. This plan provides for the grant of options or stock at a
current price as determined by the Company's Board of Directors. Option and
stock grants generally vest over four years.
There have been no grants of stock options through June 30, 1997. See Note
10.
8. PROFIT SHARING PLAN
The Company maintains a profit sharing plan covering substantially all
employees in France. This plan provides for payments to employees by the
attainment of certain revenue and income targets. During the year ended December
31, 1995 and during the six-month periods ended June 30, 1996 and 1997 the
Company did not reach the revenue and income targets and therefore made no
payments during the respective periods. However, for the year ended December 31,
1996, the Company provided $111,674.
F-33
<PAGE>
UNITED SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION RELATING TO THE SIX MONTHS ENDED
JUNE 30, 1996 AND 1997 IS UNAUDITED)
9. GEOGRAPHIC OPERATIONS
The Company operates exclusively in the computer software industry. A
summary of the Company's operations by geographic area is presented below (in
thousands):
<TABLE>
<CAPTION>
UNITED STATES EUROPE CONSOLIDATED
------------- --------- ------------
<S> <C> <C> <C>
Year ended December 31, 1995
Revenues................................................................ $ 273 $ 6,686 $ 6,959
Operating (loss)........................................................ (290) (1,641) (1,931)
Identifiable assets..................................................... 65 3,079 3,144
Year ended December 31, 1996
Revenues................................................................ $ 636 $ 5,832 $ 6,468
Operating (loss)........................................................ (681) (4,356) (5,037)
Identifiable assets..................................................... 1,147 4,831 5,978
Six months ended June 30, 1996
Revenues................................................................ $ 38 $ 3,069 $ 3,107
Operating (loss)........................................................ (387) (1,531) (1,918)
Identifiable assets..................................................... 640 3,670 4,310
Six months ended June 30, 1997
Revenues................................................................ $ 464 $ 4,015 $ 4,479
Operating (loss)........................................................ (492) (1,235) (1,727)
Identifiable assets..................................................... 1,658 4,761 6,419
</TABLE>
10. SUBSEQUENT EVENTS
In July 1997, the Company granted 511,858 options at $0.075 per share and
stock grants for 1,563,708 shares at $0.075 per share, all of which vested 100%
at the date of grant. Accordingly, the Company will take a charge in the
relevant period for the fair value of the grants.
On August 29, 1997 the Company's Board of Directors approved, and pursuant
to an Agreement and Plan of Reorganization dated effective as of August 29,
1997, on September 19, 1997, the Company completed the sale of all of its
outstanding equity interest, including outstanding options, to Peregrine for
1,916,213 shares of Peregrine common stock valued at approximately $30,506,000.
F-34
<PAGE>
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 audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial 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 (CONTINUED)
(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>
ANNEX A
AGREEMENT AND PLAN OF REORGANIZATION
BY AND AMONG
PEREGRINE SYSTEMS, INC.
HOMER ACQUISITION CORPORATION
AND
INNOVATIVE TECH SYSTEMS, INC.
DATED AS OF MAY 7, 1998
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C> <C>
ARTICLE I THE MERGER......................................................................................... A-1
1.1 The Merger......................................................................................... A-1
1.2 Effective Time; Closing............................................................................ A-1
1.3 Effect of the Merger............................................................................... A-2
1.4 Certificate of Incorporation; Bylaws............................................................... A-2
1.5 Directors and Officers............................................................................. A-2
1.6 Effect on Capital Stock............................................................................ A-2
1.7 Appraisal Rights................................................................................... A-3
1.8 Surrender of Certificates.......................................................................... A-4
1.9 No Further Ownership Rights in Company Common Stock................................................ A-5
1.10 Lost, Stolen, or Destroyed Certificates............................................................ A-5
1.11 Tax Consequences................................................................................... A-5
1.12 Taking of Necessary Action; Further Action......................................................... A-5
ARTICLE II REPRESENTATIONS AND WARRANTIES OF THE COMPANY..................................................... A-6
2.1 Organization of the Company........................................................................ A-6
2.2 Company Capital Structure.......................................................................... A-6
2.3 Obligations With Respect to Capital Stock.......................................................... A-8
2.4 Authority.......................................................................................... A-8
2.5 SEC Filings; Company Financial Statements.......................................................... A-9
2.6 Absence of Certain Changes or Events............................................................... A-10
2.7 Taxes.............................................................................................. A-12
2.8 Restrictions on Business Activities................................................................ A-13
2.9 Title to Properties; Absence of Liens and Encumbrances............................................. A-14
2.10 Intellectual Property.............................................................................. A-14
2.11 Compliance; Permits; Restrictions.................................................................. A-17
2.12 Litigation......................................................................................... A-17
2.13 Interested Party Transactions...................................................................... A-18
2.14 Brokers' and Finders' Fees......................................................................... A-18
2.15 Employee Benefit Plans............................................................................. A-18
2.16 Environmental Matters.............................................................................. A-21
2.17 Agreements, Contracts, and Commitments............................................................. A-21
2.18 Change of Control Payments......................................................................... A-22
2.19 Statements; Proxy Statement/Prospectus............................................................. A-22
2.20 Board Approval..................................................................................... A-23
2.21 Fairness Opinion................................................................................... A-23
2.22 Section 11.75 of the Illinois General Corporation Law Not Applicable............................... A-23
ARTICLE III REPRESENTATIONS AND WARRANTIES OF PARENT
AND MERGER SUB.............................................................................................. A-23
3.1 Organization of Parent and Merger Sub.............................................................. A-23
3.2 Authority.......................................................................................... A-23
3.3 Parent Common Stock................................................................................ A-24
3.4 SEC Filings; Parent Financial Statements........................................................... A-24
3.5 No Material Adverse Change......................................................................... A-24
3.6 Statements; Proxy Statement/Prospectus............................................................. A-25
ARTICLE IV CONDUCT PRIOR TO THE EFFECTIVE TIME............................................................... A-25
4.1 Conduct of Business by the Company................................................................. A-25
4.2 Termination of 401(k) Plans........................................................................ A-27
</TABLE>
A-i
<PAGE>
<TABLE>
<CAPTION>
PAGE
---------
<S> <C> <C>
ARTICLE V ADDITIONAL AGREEMENTS.............................................................................. A-27
5.1 Proxy Statement/Prospectus; Registration Statement; Other Filings; Board Recommendations........... A-27
5.2 Meeting of Company Shareholders.................................................................... A-28
5.3 Confidentiality; Access to Information............................................................. A-29
5.4 No Solicitation.................................................................................... A-29
5.5 Public Disclosure.................................................................................. A-31
5.6 Reasonable Efforts; Notification................................................................... A-31
5.7 Third Party Consents............................................................................... A-32
5.8 Stock Options and Employee Benefits................................................................ A-32
5.9 Form S-8........................................................................................... A-32
5.10 Indemnification.................................................................................... A-32
5.11 Nasdaq Listing..................................................................................... A-33
5.12 Company Affiliate Agreement........................................................................ A-33
5.13 Tax-Free Reorganization............................................................................ A-33
5.14 Comfort Letter..................................................................................... A-33
5.15 Shareholder Rights Plan............................................................................ A-33
5.16 Amendment of Redeemable Warrants................................................................... A-33
5.17 Warrant Assumption................................................................................. A-34
ARTICLE VI CONDITIONS TO THE MERGER.......................................................................... A-34
6.1 Conditions to Obligations of Each Party to Effect the Merger....................................... A-34
6.2 Additional Conditions to Obligations of the Company................................................ A-35
6.3 Additional Conditions to the Obligations of Parent and Merger Sub.................................. A-35
ARTICLE VII TERMINATION, AMENDMENT AND WAIVER................................................................ A-36
7.1 Termination........................................................................................ A-36
7.2 Notice of Termination; Effect of Termination....................................................... A-37
7.3 Fees and Expenses.................................................................................. A-37
7.4 Amendment.......................................................................................... A-39
7.5 Extension; Waiver.................................................................................. A-39
ARTICLE VIII GENERAL PROVISIONS.............................................................................. A-39
8.1 Non-Survival of Representations and Warranties..................................................... A-39
8.2 Notices............................................................................................ A-39
8.3 Interpretation..................................................................................... A-40
8.4 Counterparts....................................................................................... A-40
8.5 Entire Agreement; Third Party Beneficiaries........................................................ A-40
8.6 Severability....................................................................................... A-41
8.7 Other Remedies; Specific Performance............................................................... A-41
8.8 Governing Law...................................................................................... A-41
8.9 Rules of Construction.............................................................................. A-41
8.10 Assignment......................................................................................... A-41
8.11 Waiver of Jury Trial............................................................................... A-41
</TABLE>
INDEX OF EXHIBITS
<TABLE>
<S> <C>
Exhibit A Form of Voting Agreement
Exhibit B Form of Non-Competition Agreement
Exhibit C Form of Employee Offer Letter
Exhibit D Form of Company Affiliate Agreement
</TABLE>
A-ii
<PAGE>
AGREEMENT AND PLAN OF REORGANIZATION
This AGREEMENT AND PLAN OF REORGANIZATION is made and entered into as of May
7, 1998, among Peregrine Systems, Inc., a Delaware corporation (the "PARENT"),
Homer Acquisition Corporation, a Delaware corporation and wholly-owned
subsidiary of Parent (the "MERGER SUB"), and Innovative Tech Systems, Inc., an
Illinois corporation (the "COMPANY").
RECITALS
A. Upon the terms and subject to the conditions of this Agreement (as
defined in Section 1.2 below) and in accordance with the Delaware General
Corporation Law ("DELAWARE LAW") and the Illinois Business Corporation Act
("ILLINOIS LAW"), Parent and the Company intend to enter into a business
combination transaction.
B. The Board of Directors of the Company (i) has determined that the Merger
(as defined in Section 1.1) is consistent with and in furtherance of the
long-term business strategy of the Company and is fair to, and in the best
interests of, the Company and its shareholders, (ii) has unanimously approved
this Agreement, the Merger and the other transactions contemplated by this
Agreement, and (iii) has determined to recommend that the shareholders of the
Company adopt and approve this Agreement and approve the Merger.
C. Concurrently with the execution of this Agreement, and as a condition
and inducement to Parent's willingness to enter into this Agreement, certain
affiliates of the Company are entering into Voting Agreements in substantially
the form attached hereto as EXHIBIT A.
D. The parties intend, by executing this Agreement, to adopt a plan of
reorganization within the meaning of Section 368 of the Internal Revenue Code of
1986, as amended (the "CODE").
E. Concurrently with the execution of this Agreement, and as a condition
and inducement to Parent's willingness to enter into this Agreement, certain
officers of the Company are entering into Noncompetition Agreements in
substantially the form attached hereto as EXHIBIT B in favor of the Company
following the Merger.
F. Concurrently with the execution of this Agreement, Parent and certain
officers of the Company are entering into employment agreements, effective upon
the Effective Time (as defined in Section 1.2), in substantially the form
attached hereto as EXHIBIT C.
NOW, THEREFORE, in consideration of the covenants, promises and
representations set forth herein, and for other good and valuable consideration,
the receipt and sufficiency of which are hereby acknowledged, the parties agree
as follows:
ARTICLE I
THE MERGER
1.1 THE MERGER. At the Effective Time (as defined in Section 1.2) and
subject to and upon the terms and conditions of this Agreement and the
applicable provisions of Delaware Law and Illinois Law, Merger Sub shall be
merged with and into the Company (the "MERGER"), the separate corporate
existence of Merger Sub shall cease, and the Company shall continue as the
surviving corporation and as a wholly-owned subsidiary of Parent. The Company as
the surviving corporation after the Merger is hereinafter sometimes referred to
as the "SURVIVING CORPORATION."
1.2 EFFECTIVE TIME; CLOSING. Subject to the provisions of this Agreement,
the parties hereto shall cause the Merger to be consummated by filing
concurrently (i) a Certificate of Merger with the Secretary of State of the
State of Delaware in accordance with the relevant provisions of Delaware Law
(the "CERTIFICATE OF MERGER") (the time of such filing (or such later time as
may be agreed in writing by the
A-1
<PAGE>
Company and Parent and specified in the Certificate of Merger) being the
"EFFECTIVE TIME") as soon as practicable on or after the Closing Date (as herein
defined) and (ii) Articles of Merger with the Secretary of State of the State of
Illinois in accordance with the relevant provisions of Illinois Law (the
"ARTICLES OF MERGER"). The Certificate of Merger and the Articles of Merger are
referred to collectively herein as the "MERGER FILINGS." Unless the context
otherwise requires, the term "AGREEMENT" as used herein refers collectively to
this Agreement and Plan of Reorganization and the Merger Filings. The closing of
the Merger (the "CLOSING") shall take place at the offices of Wilson Sonsini
Goodrich & Rosati, Professional Corporation, 650 Page Mill Road, Palo Alto,
California 94304-1050, at a time and date to be specified by the parties, which
shall be no later than the second business day after the satisfaction or waiver
of the conditions set forth in Article VI, or at such other time, date and
location as the parties hereto agree in writing (the "CLOSING DATE").
1.3 EFFECT OF THE MERGER. At the Effective Time, the effect of the Merger
shall be as provided in this Agreement and the applicable provisions of Delaware
Law and Illinois Law. Without limiting the generality of the foregoing, and
subject thereto, at the Effective Time, all the property, rights, privileges,
powers and franchises of the Company and Merger Sub shall vest in the Surviving
Corporation, and all debts, liabilities and duties of the Company and Merger Sub
shall become the debts, liabilities and duties of the Surviving Corporation.
1.4 CERTIFICATE OF INCORPORATION; BYLAWS.
(a) At the Effective Time, the Certificate of Incorporation of Merger Sub,
as in effect immediately prior to the Effective Time, shall be the Certificate
of Incorporation of the Surviving Corporation until thereafter amended as
provided by law and such Certificate of Incorporation; PROVIDED, HOWEVER, that
Article I of the Certificate of Incorporation of the Surviving Corporation shall
be amended to read as follows: "The name of the corporation is Peregrine Systems
Facilities Management, Inc."
(b) The Bylaws of Merger Sub, as in effect immediately prior to the
Effective Time, shall be the Bylaws of the Surviving Corporation until
thereafter amended.
1.5 DIRECTORS AND OFFICERS. The director(s) of Merger Sub immediately
prior to the Effective Time shall be the initial director(s) of the Surviving
Corporation, each to hold office in accordance with the Certificate of
Incorporation and Bylaws of the Surviving Corporation, until their respective
successors are duly elected or appointed and qualified. The officers of Merger
Sub immediately prior to the Effective Time shall be the initial officers of the
Surviving Corporation, each to hold office in accordance with the Bylaws of the
Surviving Corporation until their respective successors are duly appointed.
1.6 EFFECT ON CAPITAL STOCK. Subject to the terms and conditions of this
Agreement, at the Effective Time, by virtue of the Merger and without any action
on the part of Merger Sub, the Company or the holders of any shares of the
Company's capital stock, the following shall occur:
(a) CONVERSION OF COMPANY COMMON STOCK. Each share of Common Stock, $0.0185
par value per share, of the Company (the "COMPANY COMMON STOCK") issued and
outstanding immediately prior to the Effective Time, other than any shares of
Company Common Stock to be cancelled pursuant to Section 1.6(b) and any
Dissenting Shares (as defined and to the extent provided in Section 1.7(a)),
will be cancelled and extinguished and automatically converted into the right to
receive .2341 shares of the Common Stock of Parent (the "PARENT COMMON STOCK")
(such ratio, as adjusted pursuant to Section 1.6(f) below, being defined herein
as the "EXCHANGE RATIO") upon surrender of the certificate representing such
share of Company Common Stock in the manner provided in Section 1.8 (or in the
case of a lost, stolen or destroyed certificate, upon delivery of an affidavit
(and bond, if required) in the manner provided in Section 1.10).
(b) CANCELLATION OF PARENT-OWNED AND COMPANY-OWNED STOCK. Each share of
Company Common Stock held by the Company or owned by Merger Sub, Parent or any
direct or indirect wholly-owned
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subsidiary of the Company or Parent immediately prior to the Effective Time
shall be canceled and extinguished without any conversion thereof.
(c) STOCK OPTIONS. At the Effective Time, all options to purchase Company
Common Stock then outstanding under the Company's 1994 Stock Option Plan (the
"1994 OPTION PLAN") shall be assumed by Parent in accordance with Section 5.8
hereof (each a "COMPANY OPTION" and, collectively, the "COMPANY OPTIONS").
(d) WARRANTS. Subject to Section 5.17 of this Agreement, all outstanding
Redeemable Warrants (as defined in Section 2.2(b)) below, shall have been
amended and exercised in accordance with Section 5.16 of this Agreement, and the
Goldmen Warrants (as defined in Section 2.2(b) below) shall have been either
redeemed or exercised not later than the Effective Time, or amended to require
their exchange for Parent Common Stock at the Effective Time, as contemplated by
Section 2.2(d) below.
(e) CAPITAL STOCK OF MERGER SUB. Each share of Common Stock, $0.001 par
value per share, of Merger Sub (the "MERGER SUB COMMON STOCK") issued and
outstanding immediately prior to the Effective Time, shall be converted into one
validly issued, fully paid and nonassessable share of Common Stock, $0.001 par
value per share, of the Surviving Corporation. Each certificate evidencing
ownership of shares of Merger Sub Common Stock shall continue to evidence
ownership of such shares of capital stock of the Surviving Corporation.
(f) ADJUSTMENTS TO EXCHANGE RATIO. The Exchange Ratio shall be adjusted to
reflect appropriately the effect of any stock split, reverse stock split, stock
dividend (including any dividend or distribution of securities convertible into
Parent Common Stock or Company Common Stock), reorganization, recapitalization,
reclassification or other like change with respect to Parent Common Stock or
Company Common Stock occurring on or after the date hereof and prior to the
Effective Time.
(g) FRACTIONAL SHARES. No fraction of a share of Parent Common Stock will
be issued by virtue of the Merger, but in lieu thereof, each holder of shares of
Company Common Stock who would otherwise be entitled to a fraction of a share of
Parent Common Stock (after aggregating all fractional shares of Parent Common
Stock that otherwise would be received by such holder) shall be entitled to
receive from Parent an amount of cash (rounded to the nearest whole cent) equal
to the product of (i) such fraction and (ii) the average of the last reported
sale prices of Parent Common Stock for the five (5) most recent days that Parent
Common Stock has traded ending on the trading day immediately prior to the
Effective Time, as reported on the Nasdaq National Market ("NASDAQ").
1.7 APPRAISAL RIGHTS.
(a) Notwithstanding any provision of this Agreement to the contrary, any
shares of Company Common Stock held by a holder who has demanded and perfected
appraisal rights for such shares in accordance with Illinois Law and who, as of
the Effective Time, has not effectively withdrawn or lost such appraisal rights
("DISSENTING SHARES"), shall not be converted into or represent a right to
receive Parent Common Stock pursuant to Section 1.6, but the holder thereof
shall only be entitled to such rights as are granted by Illinois Law.
(b) Notwithstanding the provisions of subsection (a), if any holder of
shares of Company Common Stock who demands appraisal of such shares under
Illinois Law shall effectively withdraw or lose (through failure to perfect or
otherwise) the right to appraisal, then, as of the later of the Effective Time
or the occurrence of such event, such holder's shares of Company Common Stock
shall automatically be converted into and represent only the right to receive,
upon surrender of the certificate representing such shares of Company Common
Stock, shares of Parent Common Stock issuable pursuant to Section 1.6 in
exchange for outstanding shares of Company Common Stock, cash in an amount
sufficient for payment in lieu of fractional shares pursuant to Section 1.6(g),
and any dividends or other distributions pursuant to Section 1.8(d).
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(c) The Company shall give Parent (i) prompt notice of any written demands
for appraisal of any shares of Company Common Stock, withdrawals of such
demands, and any other instruments served pursuant to Illinois Law and received
by the Company and (ii) the opportunity to participate in all negotiations and
proceedings with respect to demands for appraisal under Illinois Law. The
Company shall not, except with the prior written consent of Parent, voluntarily
make any payment with respect to any demands for appraisal of Company Common
Stock or offer to settle or settle any such demands.
1.8 SURRENDER OF CERTIFICATES.
(a) EXCHANGE AGENT. Prior to the Effective Time, Parent shall select a bank
or trust company to act as the exchange agent in the Merger (the "EXCHANGE
AGENT").
(b) PARENT TO PROVIDE COMMON STOCK. Promptly after the Effective Time,
Parent shall make available to the Exchange Agent, for exchange in accordance
with this Article I, (i) the shares of Parent Common Stock issuable pursuant to
Section 1.6 in exchange for outstanding shares of Company Common Stock and (ii)
cash in an amount sufficient for payment in lieu of fractional shares pursuant
to Section 1.6(g) and any dividends or distributions to which holders of shares
of Company Common Stock may be entitled pursuant to Section 1.8(d).
(c) EXCHANGE PROCEDURES. Promptly after the Effective Time, Parent shall
cause the Exchange Agent to mail to each holder of record (as of the Effective
Time) of a certificate or certificates (the "CERTIFICATES"), which immediately
prior to the Effective Time represented outstanding shares of Company Common
Stock whose shares were converted into the right to receive shares of Parent
Common Stock pursuant to Section 1.6, cash in lieu of any fractional shares
pursuant to Section 1.6(g), and any dividends or other distributions pursuant to
Section 1.8(d), (i) a letter of transmittal (which shall specify that delivery
shall be effected, and risk of loss and title to the Certificates shall pass,
only upon delivery of the Certificates to the Exchange Agent and shall contain
such other provisions as Parent may reasonably specify) and (ii) instructions
for use in effecting the surrender of the Certificates in exchange for
certificates representing shares of Parent Common Stock, cash in lieu of any
fractional shares pursuant to Section 1.6(g), and any dividends or other
distributions pursuant to Section 1.8(d). Upon surrender of a Certificate for
cancellation to the Exchange Agent or to such other agent or agents as may be
appointed by Parent, together with such letter of transmittal, duly completed
and validly executed in accordance with the instructions thereto, the holder of
such Certificate shall be entitled to receive in exchange therefor a certificate
representing the number of whole shares of Parent Common Stock into which their
shares of Company Common Stock were converted at the Effective Time, payment in
lieu of fractional shares which such holder has the right to receive pursuant to
Section 1.6(g) and any dividends or distributions payable pursuant to Section
1.8(d), and the Certificate so surrendered shall forthwith be cancelled. Until
so surrendered, each outstanding Certificate that, prior to the Effective Time,
represented shares of Company Common Stock will be deemed, from and after the
Effective Time, for all corporate purposes, subject to Section 1.8(d) as to the
payment of dividends, to evidence only the ownership of the number of full
shares of Parent Common Stock into which such shares of Company Common Stock
shall have been so converted and the right to receive an amount in cash in lieu
of the issuance of any fractional shares in accordance with Section 1.6(g), and
any dividends or distributions payable pursuant to Section 1.8(d).
(d) DISTRIBUTIONS WITH RESPECT TO UNEXCHANGED SHARES. No dividends or other
distributions declared or made after the date of this Agreement with respect to
Parent Common Stock with a record date after the Effective Time will be paid to
the holders of any unsurrendered Certificate with respect to the shares of
Parent Common Stock represented thereby until the holders of record of such
Certificate shall surrender such Certificate. Subject to applicable law,
following surrender of any such Certificate, the Exchange Agent shall deliver to
the record holder thereof, without interest, a certificate representing whole
shares of Parent Common Stock issued in exchange therefor along with payment in
lieu of fractional shares pursuant to Section 1.6(g) hereof and the amount of
any such dividends or other distributions with a record date after the Effective
Time payable with respect to such whole shares of Parent Common Stock.
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(e) TRANSFERS OF OWNERSHIP. If any certificate representing shares of
Parent Common Stock is to be issued in a name other than that in which the
Certificate surrendered in exchange therefor is registered, it will be a
condition of the issuance thereof that the Certificate so surrendered will be
properly endorsed and otherwise in proper form for transfer and that the persons
requesting such exchange will have paid to Parent or any agent designated by it
any transfer or other taxes required by reason of the issuance of certificates
representing shares of Parent Common Stock in any name other than that of the
registered holder of the Certificate surrendered, or established to the
satisfaction of Parent or any agent designated by it that such tax has been paid
or is not payable.
(f) NO LIABILITY. Notwithstanding anything to the contrary in this Section
1.8, none of the Exchange Agent, Parent, the Surviving Corporation, or any party
hereto shall be liable to a holder of shares of Parent Common Stock or Company
Common Stock for any amount properly paid to a public official pursuant to any
applicable abandoned property, escheat, or similar law.
1.9 NO FURTHER OWNERSHIP RIGHTS IN COMPANY COMMON STOCK. All shares of
Parent Common Stock issued upon the surrender for exchange of shares of Company
Common Stock in accordance with the terms hereof (including any cash paid in
respect thereof pursuant to Section 1.6(g) and 1.8(d)) shall be deemed to have
been issued in full satisfaction of all rights pertaining to such shares of
Company Common Stock, and there shall be no further registration of transfers on
the records of the Surviving Corporation of shares of Company Common Stock which
were outstanding immediately prior to the Effective Time. If, after the
Effective Time, Certificates are presented to the Surviving Corporation for any
reason, they shall be cancelled and exchanged as provided in this Article I.
1.10 LOST, STOLEN, OR DESTROYED CERTIFICATES. In the event that any
Certificate shall have been lost, stolen, or destroyed, the Exchange Agent shall
issue in exchange for such lost, stolen, or destroyed Certificate, upon the
making of an affidavit of that fact by the holder thereof, certificates
representing the shares of Parent Common Stock into which the shares of Company
Common Stock represented by such Certificates were converted pursuant to Section
1.6, cash for fractional shares, if any, as may be required pursuant to Section
1.6(g), and any dividends or distributions payable pursuant to Section 1.8(d);
PROVIDED, HOWEVER, that Parent may, in its discretion and as a condition
precedent to the issuance of such certificates representing shares of Parent
Common Stock, cash, and other distributions, require the owner of such lost,
stolen, or destroyed Certificate to deliver a bond in such sum as it may
reasonably direct as indemnity against any claim that may be made against
Parent, the Surviving Corporation, or the Exchange Agent with respect to the
Certificates alleged to have been lost, stolen, or destroyed.
1.11 TAX CONSEQUENCES. It is intended by the parties hereto that the
Merger shall (i) constitute a reorganization within the meaning of Section 368
of the Code and (ii) qualify for accounting treatment as a purchase. The parties
hereto adopt this Agreement as a "plan of reorganization" within the meaning of
Sections 1.368-2(g) and 1.368-3(a) of the United States Income Tax Regulations.
1.12 TAKING OF NECESSARY ACTION; FURTHER ACTION. If, at any time after the
Effective Time, any further action is necessary or desirable to carry out the
purposes of this Agreement and to vest the Surviving Corporation with full
right, title and possession to all assets, property, rights, privileges, powers
and franchises of the Company and Merger Sub, the officers and directors of the
Company and Merger Sub, are fully authorized in the names of their respective
corporations or otherwise to take, and will take, all such lawful and necessary
action.
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ARTICLE II
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
The Company hereby represents and warrants to Parent and Merger Sub, subject
to the specific exceptions specifically disclosed in writing in the disclosure
letter and schedules thereto (each referencing the appropriate section numbers
of this Article II for which an exception exists), dated as of the date hereof,
certified by a duly authorized officer of the Company, and delivered by the
Company to Parent (the "COMPANY SCHEDULES"), as follows:
2.1 ORGANIZATION OF THE COMPANY.
(a) The Company is a corporation duly organized, validly existing, and in
good standing under the laws of the State of Illinois, and each Subsidiary (as
defined herein) is a corporation duly organized, validly existing, and in good
standing under the laws of its respective jurisdiction of incorporation. The
Company and each Subsidiary has the corporate power and authority to own, lease,
and operate its assets and property and to carry on its business as now being
conducted and as proposed to be conducted and is duly qualified or licensed to
do business and is in good standing in each jurisdiction where the character of
the properties owned, leased, or operated by it or the nature of its activities
makes such qualification or licensing necessary, except where the failure to be
so qualified would not have a Material Adverse Effect (as defined in Section
8.3(c) below) on the Company.
(b) Schedule 2.1(b) sets forth a complete list of each corporation,
partnership, limited liability company, joint venture, business trust or
association, or other entity in which the Company, directly or indirectly, holds
an equity, partnership, or other ownership interest (each, a "SUBSIDIARY" and
collectively, the "SUBSIDIARIES"). Schedule 2.1(b) identifies, for each
Subsidiary, the issued and outstanding capital stock (or partnership or other
ownership interests), the identity and address of each holder of the issued and
outstanding capital stock of such Subsidiary (or partnership or other ownership
interests), and the number of shares of capital stock (or similar partnership or
ownership interests) of such Subsidiary held by such holder. All of the
outstanding shares of the capital stock of each Subsidiary have been duly
authorized and validly issued, are fully paid and nonassessable, and all such
shares (or partnership or other ownership interests) are wholly owned by the
Company, directly or indirectly through a Subsidiary, free and clear of any
lien, adverse claim, security interest, equity or other encumbrance. There are
no options, warrants, calls, rights, commitments or agreements of any character,
written or oral, to which any Subsidiary is a party or by which any Subsidiary
is bound, obligating such Subsidiary to issue, deliver, sell, repurchase or
redeem, or cause to be issued, delivered, sold, repurchased or redeemed, any
shares of such Subsidiary's capital stock or any partnership or other ownership
interest in such Subsidiary.
(c) The Company has made available to Parent a true and correct copy of its
Articles of Incorporation and Bylaws and the similar constituent documents of
each Subsidiary, each as amended to date, and each such instrument is in full
force and effect. Neither the Company nor any Subsidiary is in violation of any
of the provisions of its Articles of Incorporation or Bylaws or equivalent
governing instruments.
2.2 COMPANY CAPITAL STRUCTURE.
(a) The authorized capital stock of the Company consists of 100,000,000
shares of Common Stock, $0.0185 par value per share, of which there were
11,344,845 shares issued and outstanding as of May 7, 1998 (excluding shares
held in treasury of which there were none), and 200,000,000 shares of Senior
Preferred Stock, $0.001 par value per share, of which no shares were issued or
outstanding as of May 7, 1998. All outstanding shares of Company Common Stock
are duly authorized, validly issued, fully paid and nonassessable and are not
subject to preemptive rights created by statute, the Articles of Incorporation
or Bylaws of the Company, or any agreement or document to which the Company is a
party or by which it is bound. As of May 7, 1998, the Company had reserved an
aggregate of 2,089,334 shares of Company Common Stock, net of exercises, for
issuance pursuant to the 1994 Option Plan. In addition, there was an option
outstanding outside the 1994 Option Plan to acquire 100,000 shares of Company
Common Stock
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held by a consultant to the Company. As of May 7, 1998, there were options
outstanding to purchase an aggregate of 2,089,334 shares of Company Common Stock
pursuant to the 1994 Option Plan, of which options to purchase 1,160,145 shares
were fully vested and exercisable as of May 7, 1998. As of May 7, 1998, there
were outstanding warrants to purchase an aggregate of 1,336,937 shares of
Company Common Stock (including warrants issuable upon exercise of outstanding
warrants).
(b) The Warrant Agreement (the "WARRANT AGREEMENT") dated as of July 26,
1994 between the Company and Continental Stock Transfer & Trust Company (the
"WARRANT AGENT") governs outstanding warrants for the purchase of a total of
940,187 shares of Company Common Stock as of the date of this Agreement (the
"REDEEMABLE WARRANTS"); PROVIDED, HOWEVER, that warrants (the "GOLDMEN
WARRANTS") for the purchase of (x) a total of 390,000 shares of Company Common
Stock and (y) additional warrants for the purchase of 6,750 shares of Company
Common Stock, all of which are held by transferees of A.S. Goldmen & Co., Inc.
("GOLDMEN"), are subject to the provisions of the Underwriter's Warrant
Agreement dated as of July 26, 1994 between the Company and Goldmen. The
Redeemable Warrants and the Goldmen Warrants (including the warrants issuable
upon exercise of the Goldmen Warrants) are referred to collectively herein as
the "WARRANTS." The Warrant Agreement, together with the certificates for the
Redeemable Warrants, constitutes the entire agreement among the Company, the
Warrant Agent and the holders of the Redeemable Warrants with respect to the
Redeemable Warrants, and except as the terms of the Redeemable Warrants have
been amended in connection with the solicitation of the holders of the
Redeemable Warrants effected September 30, 1997, there has been no change in or
modification or alteration of such terms, nor has there been any amendment or
modification of the Warrant Agreement or any other agreement which would affect
the terms of the Redeemable Warrants or the related rights and obligations of
the holders of the Redeemable Warrants or the parties to the Warrant Agreement.
Among other terms, the Redeemable Warrants (i) are currently exercisable at a
price of $0.08 per share of Company Common Stock, (ii) expire July 25, 1999
(subject to adjustment in accordance with the Warrant Agreement), and (iii) are
currently redeemable at a redemption price of $0.67 per share, subject to the
requirements set forth in Section 9 of the Warrant Agreement, which condition
the redemption of the Redeemable Warrants based on an average closing sale price
of the Company Common Stock (as required in such Section 9) of $2.33 per share,
after adjustment for the three-for-one forward split of the Company Common Stock
effected on September 18, 1995. The amendment to the Redeemable Warrants made in
connection with the solicitation of the holders of the Redeemable Warrants in
September 1997 was in compliance with applicable federal and state securities
laws. The Company has complied and continues to comply with the terms of the
Redeemable Warrants and the Warrant Agreement; has not issued or agreed to issue
at any time any securities, including any options, warrants or similar rights
for the purchase of securities of the Company, which would result in any
adjustment to the number of shares underlying the Redeemable Warrants or the
exercise price thereof; and has maintained the currency of the registration
statement permitting the exercise of the Redeemable Warrants in accordance with
Section 5(b) of the Warrant Agreement. Warrants for the purchase of 940,187
shares are listed for trading on the Nasdaq SmallCap Market, and the grant of
Redeemable Warrants and/or the issue and sale of shares of Company Common Stock
upon exercise thereof comply or will comply with applicable federal and state
securities laws.
(c) All shares of Company Common Stock subject to issuance upon exercise of
outstanding options or warrants, upon issuance on the terms and conditions
specified in the instruments pursuant to which they are issuable, would be duly
authorized, validly issued, fully paid and nonassessable. All outstanding shares
of Company Common Stock, all outstanding securities exchangeable or convertible
into or exercisable for Company Common Stock, and any other outstanding
securities of the Company were issued in compliance with applicable federal and
state securities laws. Schedule 2.2 lists for each person who held options to
acquire shares of Company Common Stock as of May 7, 1998, the name of the holder
of such option, the exercise price of such option, the number of shares as to
which such option had vested at such date, the vesting schedule for such option,
and the extent to which such option will be accelerated in any way by the
transactions contemplated by this Agreement. Schedule 2.2 also lists all
outstanding Warrants and other
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securities exercisable for or convertible into shares of Company Common Stock,
the record holder thereof, the applicable exercise or conversion price therefor,
and the expiration or termination date thereof. All Company Options have been
granted under and in accordance with the requirements of the 1994 Option Plan,
have been properly authorized by appropriate action of the Company's Board of
Directors, have been granted with an exercise price of not less than fair market
value as of the date of grant, and, except with respect to the grant of Company
Options to consultants or directors of the Company, have not required or
resulted in compensation charges under generally accepted accounting principles.
(d) Prior to the execution of this Agreement, the Company has obtained in
writing from Goldmen and each of the holders of the Goldmen Warrants such
waivers and consents, in a form satisfactory to Parent and signed copies of
which have been attached to the Company Schedules, to ensure that (i) the
Goldmen Warrants will be either redeemed or exercised not later than the
Effective Time, or amended prior to the execution of this Agreement to provide
that the Goldmen Warrants shall be exchanged for Parent Common Stock at the
Effective Time, with appropriate adjustments based on the Exchange Ratio, and
(ii) neither Goldmen nor any holder of the Goldmen Warrants has (or at the
Effective Time will have) any contractual rights or claims against the Company
or Parent of any nature (including but not limited to Board representation
rights, registration rights, rights to payment of commissions or fees, or
information rights).
2.3 OBLIGATIONS WITH RESPECT TO CAPITAL STOCK. Except as set forth in
Section 2.2, there are no equity securities, partnership interests or similar
ownership interests of any class of equity securities of the Company, or any
securities exchangeable or convertible into or exercisable for such equity
securities, partnership interests or similar ownership interests, issued,
reserved for issuance or outstanding. Except as set forth in Section 2.2, there
are no subscriptions, options, warrants, equity securities, partnership
interests or similar ownership interests, calls, rights (including preemptive
rights), commitments or agreements of any character to which the Company or any
Subsidiary is a party or by which it is bound obligating the Company or any
Subsidiary to issue, deliver or sell, or cause to be issued, delivered or sold,
or repurchase, redeem or otherwise acquire, or cause the repurchase, redemption
or acquisition of, any shares of capital stock, partnership interests or similar
ownership interests of the Company or any Subsidiary or obligating the Company
or any Subsidiary to grant, extend, accelerate the vesting of or enter into any
such subscription, option, warrant, equity security, call, right, commitment or
agreement. As of the date of this Agreement, and except as set forth on Schedule
2.3 and as contemplated by this Agreement, no person or entity holds the right
to require the registration or qualification under applicable securities laws of
any securities of the Company or any Subsidiary, and there is no voting trust,
proxy, rights plan, antitakeover plan or other agreement or understanding to
which the Company is a party or by which it is bound with respect to any class
of equity security of the Company or with respect to any equity security,
partnership interest or similar ownership interest of any class of equity
security of any Subsidiary.
2.4 AUTHORITY.
(a) The Company has all requisite corporate power and authority to enter
into this Agreement and to consummate the transactions contemplated hereby and
thereby. The execution and delivery of this Agreement and the consummation of
the transactions contemplated hereby have been duly authorized by all necessary
corporate action on the part of the Company, subject only to the approval and
adoption of this Agreement and the approval of the Merger by the Company's
shareholders in accordance with Illinois Law and the filing of the Merger
Filings pursuant to Delaware Law and Illinois Law. The vote required of the
Company's shareholders to approve and adopt this Agreement and approve the
Merger is a majority of the outstanding shares of Company Common Stock. The
Company's Board of Directors has unanimously approved the Merger and this
Agreement. This Agreement has been duly executed and delivered by the Company
and constitutes a valid and binding obligation of the Company, enforceable
against the Company in accordance with its terms. The execution and delivery of
this Agreement by the Company does not, and the performance of this Agreement by
the Company will not, and as of the Effective Time, the consummation of the
transactions contemplated hereby will not, (i) conflict with or violate the
Articles of
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Incorporation or Bylaws of the Company or the constituent documents of any
Subsidiary; (ii) subject to obtaining the approval and adoption of this
Agreement and the approval of the Merger by the Company's shareholders as
contemplated in Section 5.2 and compliance with the requirements set forth in
Section 2.4(b) below, conflict with, or result in any violation of, law, rule,
regulation, order, judgment or decree applicable to the Company or any
Subsidiary or by which the Company or any Subsidiary or any of their respective
properties is bound or affected; or (iii) except for the consents, waivers, and
approvals described in Schedule 2.4(a), result in any breach of or constitute a
default (or an event that with notice or lapse of time or both would become a
default) under, or impair the Company's rights or alter the rights or
obligations of any third party under, or give to others any rights of
termination, amendment, acceleration or cancellation of, or result in the
creation of a lien or encumbrance on any of the properties or assets of the
Company or any Subsidiary pursuant to, any note, bond, mortgage, indenture,
contract, agreement, lease, license, permit, franchise, concession, or other
instrument or obligation to which the Company or any Subsidiary is a party or by
which the Company or any Subsidiary or its or any of their respective assets are
bound or affected. Schedule 2.4(a) lists all consents, waivers and approvals
under any agreements, contracts, licenses or leases of the Company or any
Subsidiary required to be obtained in connection with the Merger and the
consummation of the transactions contemplated hereby, which, if individually or
in the aggregate not obtained, would result in a material loss of benefits to
the Company, Parent, or the Surviving Corporation.
(b) No consent, waiver, approval, order or authorization of, or
registration, declaration or filing with any court, administrative agency or
commission or other federal, state, county, local, or foreign governmental
authority or instrumentality ("GOVERNMENTAL ENTITY") or any third party, is
required to be obtained or made by the Company or any Subsidiary in connection
with the execution and delivery of this Agreement or the consummation of the
Merger, except for (i) the Merger Filings with the Secretaries of State of the
States of Delaware and Illinois; (ii) the filing of the Proxy
Statement/Prospectus (as defined in Section 2.19) with the Securities and
Exchange Commission (the "SEC") in accordance with the Securities Exchange Act
of 1934, as amended (the "EXCHANGE ACT"); (iii) such consents, approvals,
orders, authorizations, registrations, declarations, and filings as may be
required under applicable federal, foreign, and state securities (or related)
laws, and the securities or antitrust laws of any foreign country; and (iv) such
other consents, authorizations, filings, approvals, and registrations which if
not obtained or made would not be material to the Company or Parent or adversely
effect the ability of the parties hereto to consummate the Merger.
2.5 SEC FILINGS; COMPANY FINANCIAL STATEMENTS.
(a) Except as set forth on Schedule 2.5, the Company has filed all forms,
reports, and documents required to be filed by the Company with the SEC since
July 26, 1994. All such required forms, reports and documents (including those
that the Company may file subsequent to the date hereof, are referred to herein
as the "COMPANY SEC REPORTS." As of their respective filing dates: the Company
SEC Reports (i) complied in all material respects with the requirements of the
Securities Act of 1933, as amended (the "SECURITIES ACT"), or the Exchange Act,
as the case may be, and the rules and regulations of the SEC thereunder
applicable to such Company SEC Reports and (ii) did not at the time they were
filed (or if amended or superseded by a filing prior to the date of this
Agreement, then on the date of such filing) contain any untrue statement of a
material fact or omit to state a material fact required to be stated therein or
necessary in order to make the statements therein, in the light of the
circumstances under which they were made, not misleading. No Subsidiary is
required to file any forms, reports, or other documents with the SEC.
(b) Each of the consolidated financial statements (including, in each case,
any related notes thereto) contained in the Company SEC Reports (the "COMPANY
FINANCIAL STATEMENTS"), including each Company SEC Report filed after the date
hereof until the Closing (i) complied as to form in all material respects with
the published rules and regulations of the SEC with respect thereto; (ii) was
prepared in accordance with United States generally accepted accounting
principles ("GAAP") applied on a consistent basis
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throughout the periods indicated (except as may be indicated in the notes
thereto or, in the case of unaudited statements, as may be permitted by the SEC
on Form 10-Q under the Exchange Act); and (iii) fairly presented the
consolidated financial position of the Company and the Subsidiaries as at the
respective dates thereof and the consolidated results of the Company's
operations and cash flows for the periods indicated (subject, in the case of
unaudited financial statements, to normal audit adjustments). The balance sheet
of the Company contained in the Company's Annual Report on Form 10-K for the
year ended January 31, 1998 (as filed with the SEC on May 1, 1998) is
hereinafter referred to as the "COMPANY BALANCE SHEET." Except as disclosed in
the Company Financial Statements, since the date of the Company Balance Sheet,
neither the Company nor any Subsidiary has incurred any liability required under
GAAP to be set forth on a balance sheet (absolute, accrued, contingent or
otherwise) which is, individually or in the aggregate, material to the business,
results of operations or financial condition of the Company and the
Subsidiaries, taken as a whole, except for liabilities incurred since the date
of the Company Balance Sheet in the ordinary and usual course of business
consistent with past practices.
(c) The Company has heretofore furnished to Parent a complete and correct
copy of any amendments or modifications, which have not yet been filed with the
SEC but which are required to be filed, to agreements, documents, or other
instruments which previously had been filed by the Company with the SEC pursuant
to the Securities Act or the Exchange Act.
2.6 ABSENCE OF CERTAIN CHANGES OR EVENTS. Since the date of the Company
Balance Sheet (or such other date specifically set forth herein), except as
otherwise contemplated by this Agreement, disclosed in the Company SEC Reports,
or described in Schedule 2.6, the Company and each Subsidiary have conducted
their businesses only in the ordinary and usual course and, without limiting the
generality of the foregoing:
(a) Neither the Company nor any Subsidiary has sustained any damage,
destruction, or loss by reason of fire, explosion, earthquake, casualty,
labor trouble (including but not limited to any claim of wrongful discharge
or other unlawful labor practice), requisition or taking of property by any
government or agent thereof, windstorm, embargo, riot, act of God or public
enemy, flood, accident, revocation of license or right to do business, total
or partial termination, suspension, default or modification of contracts,
governmental restriction or regulation, other calamity, or other similar or
dissimilar event (whether or not covered by insurance) that has resulted or
would result in a Material Adverse Effect on the Company.
(b) There have been no changes in the condition (financial or
otherwise), business, net worth, assets, properties, operations,
obligations, liabilities (fixed or contingent), or prospects of the Company
which, individually or in the aggregate, have resulted or will result
(whether before or after the Effective Time) in a Material Adverse Effect on
the Company.
(c) Neither the Company nor any Subsidiary has issued, or authorized for
issuance, any equity security, bond, note, or other security, except for
shares of Company Common Stock issued upon exercise of outstanding Company
Options and the Warrants, except for shares of Company Common Stock and
options to acquire Company Common Stock granted under the 1994 Option Plan,
which options are listed in Schedule 2.2, or accelerated the vesting of any
employee stock benefits (including vesting under stock purchase agreements
or the exercisability of Company Options). Neither the Company nor any
Subsidiary has granted or entered into any commitment or obligation to issue
or sell any such equity security, bond, note or other security of the
Company or such Subsidiary, whether pursuant to offers, stock option
agreements, stock bonus agreements, stock purchase plans, incentive
compensation plans, warrants, calls, conversion rights or otherwise, except
for shares of Company Common Stock issued upon the exercise of the Company
Options and the Warrants.
(d) Neither the Company nor any Subsidiary has incurred any additional
debt for borrowed money, nor incurred any obligation or liability (fixed,
contingent, or otherwise) except in the ordinary and usual course of
business.
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(e) Neither the Company nor any Subsidiary has paid any obligation or
liability (fixed, contingent, or otherwise), or discharged or satisfied any
lien or encumbrance, or settled any liability, claim, dispute, proceeding,
suit, or appeal, pending or threatened against it or any of its assets or
properties, except for current liabilities included in the Company Balance
Sheet and current liabilities incurred since the date of the Company Balance
Sheet in the ordinary and usual course of business.
(f) Neither the Company nor any Subsidiary has declared, set aside for
payment, or paid any dividend, payment, or other distribution on or with
respect to any share of its capital stock.
(g) Neither the Company nor any Subsidiary has purchased, redeemed, or
otherwise acquired or committed itself to acquire, directly or indirectly,
any shares of its capital stock.
(h) Neither the Company nor any Subsidiary has mortgaged, pledged,
otherwise encumbered, or subjected to lien any of its material assets or
properties, tangible or intangible, nor has it committed itself to do any of
the foregoing, except for liens for current Taxes (as defined in Section
2.7) which are not yet due and payable and purchase money liens arising out
of the purchase and sale of products or services made in the ordinary and
usual course of business.
(i) Neither the Company nor any Subsidiary has disposed of, or agreed to
dispose of, any material asset or property, tangible or intangible, except
in the ordinary and usual course of business, nor has the Company or any
Subsidiary leased or licensed to others (including officers and directors of
the Company), or agreed so to lease or license, any asset or property,
except for the licensing of the Company's software to customers,
distributors, and resellers in the ordinary and usual course of business.
(j) Neither the Company nor any Subsidiary has purchased or agreed to
purchase or otherwise acquire any debt or equity securities of any
corporation, partnership, joint venture, firm, or other entity.
(k) Neither the Company nor any Subsidiary has entered into any material
transaction or contract, or made any commitment to do the same, except in
the ordinary and usual course of business. Neither the Company nor any
Subsidiary has made any expenditure or commitment for the purchase,
acquisition, construction, or improvement of a capital asset except in the
ordinary and usual course of business. Neither the Company nor any
Subsidiary has waived any right of substantial value or cancelled any
material debts or claims or voluntarily suffered any extraordinary losses.
(l) Neither the Company nor any Subsidiary has sold, assigned,
transferred, or conveyed, or committed itself to sell, assign, transfer or
convey, any Company Intellectual Property Rights (as defined in Section
2.10), except for the licensing of software to customers, distributors, and
resellers in the ordinary and usual course of business, and neither the
Company nor any Subsidiary has entered into any product development,
technology or product sharing, or similar strategic arrangement with any
other party.
(m) Neither the Company nor any Subsidiary has effected or agreed to
effect any amendment or supplement to any employee profit sharing, stock
option, stock purchase, pension, bonus, incentive, retirement, medical
reimbursement, life insurance, deferred compensation or any other employee
benefit plan or arrangement. Neither the Company nor any Subsidiary has paid
or committed itself to pay to or for the benefit of any of its directors,
officers, employees, consultants or shareholders any compensation of any
kind other than wages, salaries, and benefits at times and rates in effect
prior to the date of the Company Balance Sheet (other than regularly
scheduled increases for non-officer employees in the ordinary and usual
course of business). Neither the Company nor any Subsidiary has effected or
agreed to effect any change, including by way of hiring or involuntary
termination, in the employment or engagement terms of any of its directors,
executive officers, or key employees.
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(n) Since July 22, 1994, the Company has not effected or committed
itself to effect any amendment or modification to its Articles of
Incorporation or Bylaws.
(o) The Company has not changed in any way its accounting methods or
practices (including any change in depreciation or amortization policies or
rates, any changes in policies in making or reversing accruals, or any
change in capitalization of software development costs).
(p) Neither the Company nor any Subsidiary has made any loan to any
person or entity, and neither the Company nor any Subsidiary has guaranteed
the payment of any loan or debt of any person or entity, except for (i)
travel or similar advances made to employees in connection with their
employment duties in the ordinary and usual course of business, consistent
with past practices and (ii) accounts receivable incurred in the ordinary
and usual course of business consistent with past practices.
(q) Neither the Company nor any Subsidiary has changed in any material
respect the prices or royalties set or charged by the Company or such
Subsidiary.
(r) Neither the Company nor any Subsidiary has negotiated or agreed to
do any of the things described in the preceding clauses (a) through (q)
(other than negotiations with Parent and its representatives regarding the
transactions contemplated by this Agreement).
2.7 TAXES.
(a) DEFINITION OF TAXES. For the purposes of this Agreement, "TAX" or
collectively, "TAXES," means any and all federal, state, local and foreign
taxes, assessments, and other governmental charges, duties, impositions and
liabilities, including taxes based upon or measured by gross receipts, income,
profits, sales, use and occupation, and value added, ad valorem, transfer,
franchise, withholding, payroll, recapture, employment, excise and property
taxes, together with all interest, penalties and additions imposed with respect
to such amounts and any obligations under any agreements or arrangements with
any other person with respect to such amounts and including any liability for
taxes of a predecessor entity.
(b) TAX RETURNS AND AUDITS.
(i) The Company and each Subsidiary has accurately prepared and timely
filed all required federal, state, local and foreign returns, estimates,
information statements, and reports ("RETURNS") relating to Taxes of the
Company, any Subsidiary, or their operations and have paid all Taxes shown
to be due on such Returns. Such Returns are true and correct in all material
respects and have been completed in accordance with applicable law.
(ii) The Company and each Subsidiary as of the Effective Time (A) will
have paid or accrued all Taxes it is required to pay or accrue and (B) will
have withheld with respect to its employees all federal and state income
taxes, Taxes pursuant to the Federal Insurance Contribution Act ("FICA"),
Taxes pursuant to the Federal Unemployment Tax Act ("FUTA"), and other Taxes
required to be withheld.
(iii) Neither the Company nor any Subsidiary has been delinquent in the
payment of any Tax nor is there any Tax deficiency outstanding, proposed, or
assessed against the Company or any Subsidiary, nor has the Company or any
Subsidiary executed any unexpired waiver of any statute of limitations on or
extending the period for the assessment or collection of any Tax.
(iv) No audit or other examination of any Return of the Company or any
Subsidiary by any Tax authority is presently in progress, nor has the
Company or any Subsidiary been notified of any request for such an audit or
other examination.
(v) No adjustment relating to any Returns filed by the Company or any
Subsidiary has been proposed formally or informally by any Tax authority to
the Company or any of its subsidiaries or any representative thereof.
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(vi) Neither the Company nor any Subsidiary has any liability for unpaid
Taxes which has not been accrued or reserved against in accordance with GAAP
on the Company Balance Sheet, whether asserted or unasserted, contingent or
otherwise other than any liability for unpaid Taxes that may have accrued
since the date of the Company Balance Sheet in connection with the operation
in the ordinary course of the business of the Company and the Subsidiaries.
The accrual for Taxes of the Company and the Subsidiaries shown on the
Company Balance Sheet is sufficient to discharge the Taxes for all periods
(or the portion of any period) ending on or prior to the date of the Company
Balance Sheet, and no Taxes will be incurred by the Company or any
Subsidiary between that date and the Closing Date, except in the ordinary
course of business.
(vii) The Company has provided Parent copies of all federal, state, and
foreign income and all state sales and use Tax Returns of the Company or any
Subsidiary for each of the Company's last five fiscal years.
(viii) There are (and, as of immediately following the Closing, there will
be) no liens, pledges, charges, claims, security interests or other
encumbrances of any kind ("LIENS") on the assets of the Company or any
Subsidiary relating to or attributable to Taxes, other than Liens for Taxes
not yet due and payable or Liens that would not materially impair the use of
the encumbered assets.
(ix) There is no contract, agreement, plan or arrangement to which the
Company is a party as of the date of this Agreement, including but not
limited to the provisions of this Agreement, covering any employee or former
employee of the Company or any Subsidiary that, individually or
collectively, could give rise to the payment of any amount that would not be
deductible pursuant to Sections 280G, 404 or 162(m) of the Code.
(x) Neither the Company nor any Subsidiary has filed any consent
agreement under Section 341(f) of the Code or agreed to have Section
341(f)(2) of the Code apply to any disposition of a subSection (f) asset (as
defined in Section 341(f)(4) of the Code) owned by the Company.
(xi) Neither the Company nor any Subsidiary is party to or has any
obligation under any tax-sharing, tax indemnity or tax allocation agreement
or arrangement.
(xii) Except as may be required as a result of the Merger, the Company
and the Subsidiary have not been and will not be required to include any
adjustment in taxable income for any tax period (or portion thereof)
pursuant to Section 481 or Section 263A of the Code or any comparable
provision under state or foreign tax laws as a result of transactions,
events or accounting methods employed prior to the Closing.
(xiii) None of the assets of the Company or any Subsidiary is tax exempt
use property within the meaning of Section 168(h) of the Code.
(xiv) The Company Schedules list (A) any foreign tax holidays, (B) any
intercompany transfer pricing agreements, or other arrangements that have
been established by the Company or any Subsidiary with any Tax authority,
and (C) any expatriate programs or policies affecting the Company or any
Subsidiary.
2.8 RESTRICTIONS ON BUSINESS ACTIVITIES. There is no agreement
(noncompetition, field of use, or otherwise), judgment, injunction, order, or
decree binding upon the Company or any Subsidiary which has or reasonably could
be expected to have the effect of prohibiting or impairing any business practice
of the Company or any Subsidiary, any acquisition of property (tangible or
intangible) by the Company or any Subsidiary, or the conduct of any line of
business by the Company or any Subsidiary. Without limiting the foregoing,
neither the Company nor any Subsidiary has entered into any agreement under
which the Company or any Subsidiary is restricted from selling, licensing, or
otherwise distributing any products to any class of customers, in any geographic
area, during any period of time or in any segment of the market.
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2.9 TITLE TO PROPERTIES; ABSENCE OF LIENS AND ENCUMBRANCES.
(a) Neither the Company nor any Subsidiary owns any real property, nor has
the Company or any Subsidiary ever owned any real property. Schedule 2.9(a) sets
forth a list of all real property currently leased by the Company and the
Subsidiaries, the name of the lessor, and the date and term of the lease and
each amendment thereto. All such current leases are in full force and effect,
are valid and effective in accordance with their respective terms, and there is
not, under any of such leases, any existing default or event of default (or
event which with notice or lapse of time, or both, would constitute an event of
default) that would give rise to a claim in an amount greater than $15,000. To
the knowledge of the Company, neither its operations nor the operation of the
Subsidiaries on any such real property, nor such real property, including
improvements thereon, violate in any material respect any applicable building
code, zoning requirement, or classification, or pollution control ordinance or
statute relating to the particular property to such operations, and such
non-violation is not dependent, in any instance, on so-called non-conforming use
exceptions.
(b) The Company and the Subsidiaries have good and valid title to, or, in
the case of leased properties and assets, valid leasehold interests in, all of
their tangible properties and assets, real, personal and mixed, used or held for
use in their business, free and clear of any Liens, except as reflected in the
Company Financial Statements, except for liens created by the lessors of such
properties or assets, and except for Liens for Taxes not yet due and payable and
such imperfections of title and encumbrances, if any, which are not material in
character, amount or extent, and which do not materially detract from the value,
or materially interfere with the present use, of the property subject thereto or
affected thereby.
2.10 INTELLECTUAL PROPERTY. For the purposes of this Agreement, the
following terms have the following definitions:
"INTELLECTUAL PROPERTY" shall mean any or all of the following and all
rights in, arising out of, or associated therewith: (i) all United States,
international and foreign patents and applications therefor and all
reissues, divisions, renewals, extensions, provisionals, continuations and
continuations-in-part thereof; (ii) all inventions (whether or not
patentable), invention disclosures, improvements, trade secrets, proprietary
information, know how, computer software programs (in both source code and
object code form), technology, technical data and customer lists, tangible
or intangible proprietary information, and all documentation relating to any
of the foregoing; (iii) all copyrights, copyrights registrations and
applications therefor, and all other rights corresponding thereto throughout
the world; (iv) all industrial designs and any registrations and
applications therefor throughout the world; (v) all trade names, logos,
common law trademarks and service marks, trademark and service mark
registrations and applications therefor throughout the world; (vi) all
databases and data collections and all rights therein throughout the world;
(vii) all moral and economic rights of authors and inventors, however
denominated, throughout the world; and (viii) any similar or equivalent
rights to any of the foregoing anywhere in the world.
"COMMERCIAL SOFTWARE RIGHTS" shall mean packaged commercially available
software programs generally available to the public through retail dealers
in computer software which have been licensed to the Company or a Subsidiary
pursuant to end-user licenses and which are used in the business of the
Company and the Subsidiaries but are in no way a component of or
incorporated in any products of the Company or any Subsidiary or any related
Company Intellectual Property.
"COMPANY INTELLECTUAL PROPERTY" shall mean any Intellectual Property
that is used in the business of the Company and the Subsidiaries as
currently conducted and as proposed to be conducted.
"REGISTERED INTELLECTUAL PROPERTY" shall mean all United States,
international and foreign: (i) patents and patent applications (including
provisional applications); (ii) registered trademarks, applications to
register trademarks, intent-to-use applications, or other registrations or
applications related to trademarks; (iii) registered copyrights and
applications for copyright registration; and
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<PAGE>
(iv) any other Intellectual Property that is the subject of an application,
certificate, filing, registration or other document issued, filed with, or
recorded by any state, government or other public legal authority.
"COMPANY REGISTERED INTELLECTUAL PROPERTY" means all of the Registered
Intellectual Property owned by, or filed in the name of, the Company.
(a) Schedule 2.10(a) sets forth a complete list of all Registered
Intellectual Property and all material Intellectual Property included in the
Company Intellectual Property and specifies the jurisdictions in which such
Company Intellectual Property has been issued or registered or in which an
application for such issuance and registration has been filed, including the
respective registration or application numbers and the names of all registered
owners, together with a list of all software products currently marketed by the
Company and the Subsidiaries and an indication as to which, if any, of such
software products have been registered for copyright protection with the United
States Copyright Office and any foreign offices and by whom such items have been
registered.
(b) Schedule 2.10(b) sets forth a complete list of (i) any requests the
Company or any Subsidiary has received to make any such registration, including
the identity of the requestor and the item requested to be so registered and the
jurisdiction for which such request has been made; (ii) all licenses,
sublicenses, and other agreements to which the Company or any Subsidiary is a
party and pursuant to which the Company, any Subsidiary, or any other person is
authorized to use any Company Intellectual Property or trade secret material to
the Company or any Subsidiary, and includes the identity of all parties thereto,
a description of the nature and subject matter thereof, the applicable royalty,
and the term thereof (other than standard customer, distributor, and reseller
software license agreements entered into by the Company or any Subsidiary in the
ordinary course of business); and (iii) any agreement pursuant to which a third
party has licensed or transferred any Intellectual Property to the Company
(other than licenses of Commercial Software Rights). The execution and delivery
of this Agreement by the Company, and the consummation of the transactions
contemplated hereby, will cause neither the Company nor any Subsidiary to be in
violation or default under any such license, sublicense or agreement, nor
entitle any other party to any such license, sublicense or agreement to
terminate or modify such license, sublicense or agreement.
(c) Neither the Company nor any Subsidiary has been sued or charged as a
defendant in any claim, suit, action, or proceeding which involves a claim of
infringement of any Intellectual Property of any third party and which has not
been finally terminated prior to the date hereof nor does the Company have any
knowledge of any such charge or claim, and there is not any infringement
liability with respect to, or infringement or violation by, the Company or any
Subsidiary of any Intellectual Property of another. No Company Intellectual
Property or product of the Company or any of Subsidiary is subject to any
outstanding decree, order, judgment, or stipulation restricting in any manner
the licensing of products by the Company and the Subsidiaries.
(d) Each item of Company Registered Intellectual Property is valid and
subsisting, all necessary registration, maintenance and renewal fees currently
due in connection with such Registered Intellectual Property have been made and
all necessary documents, recordations and certificates in connection with such
Registered Intellectual Property have been filed with the relevant patent,
copyright, trademark or other authorities in the United States or foreign
jurisdictions, as the case may be, for the purposes of maintaining such
Registered Intellectual Property.
(e) The Company or a Subsidiary is the sole and exclusive owner or licensee
of, with all right, title, and interest in and to each item of Company
Intellectual Property, free and clear of any Lien, and has sole and exclusive
rights (and is not contractually obligated to pay any compensation to any third
party in respect thereof) to the use thereof or the material covered thereby in
connection with the services or products in respect of which the Company
Intellectual Property is being used. Neither the Company nor any Subsidiary uses
or is licensed to use, and none of their products include or incorporate, any
(i) software distributed free of charge on a trial basis for which a paid
license would be required for commercial
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distribution, (ii) software whose ownership has been retained by a third party
who controls its distribution, or (iii) any other code obtained from the public
domain.
(f) To the extent that any material Intellectual Property has been developed
or created by a third party for the Company or any Subsidiary, the Company or a
Subsidiary has a written agreement with such third party with respect thereto,
and the Company or a Subsidiary thereby either (i) has obtained ownership of,
and is the exclusive owner of, or (ii) has obtained a license (sufficient for
the conduct of its business as currently conducted and as proposed to be
conducted) to all such third party's Intellectual Property in such work,
material or invention by operation of law or by valid assignment, to the fullest
extent it is legally possible to do so.
(g) The Company has not transferred ownership of, or granted any exclusive
license with respect to, any Intellectual Property that is or was material
Company Intellectual Property, to any third party.
(h) All contracts, licenses and agreements relating to the Company
Intellectual Property are in full force and effect. The execution and delivery
of this Agreement by the Company and the consummation of the transactions
contemplated hereby will neither violate nor result in the breach, modification,
cancellation, termination, or suspension of such contracts, licenses and
agreements. The Company is in compliance with, and has not breached any term of
such contracts, licenses and agreements and, to the knowledge of the Company,
all other parties to such contracts, licenses and agreements are in compliance
with, and have not breached any term of, such contracts, licenses and
agreements. Following the Closing Date, the Surviving Corporation will be
permitted to exercise all of the Company's rights under such contracts, licenses
and agreements to the same extent the Company would have been able to had the
transactions contemplated by this Agreement not occurred and without the payment
of any additional amounts or consideration other than ongoing fees, royalties,
or payments which the Company would otherwise be required to pay.
(i) No claims with respect to Company Intellectual Property have been
asserted or, to the Company's knowledge, are threatened by any person, nor to
the Company's knowledge are there any valid grounds for any bona fide claims (i)
to the effect that the manufacture, sale, licensing or use of any of the
products of the Company and the Subsidiaries infringes on or misappropriates any
Intellectual Property or constitutes unfair competition or trade practices under
the laws of any jurisdiction; (ii) against the use by the Company or any
Subsidiary of any Intellectual Property used in the business of the Company and
the Subsidiaries as currently conducted or as proposed to be conducted; or (iii)
challenging the ownership by the Company or any Subsidiary, validity or
effectiveness of any Company Intellectual Property. The business of the
Subsidiaries as currently conducted or as proposed to be conducted has not and
does not infringe on any proprietary right of any third party. To the Company's
knowledge, there is no unauthorized use, infringement or misappropriation of any
Company Intellectual Property by any third party, including any employee or
former employee of the Company or any Subsidiary.
(j) To the Company's knowledge, neither the Company nor any Subsidiary has
breached or violated the terms of its license, sublicense, or other agreement
relating to any Commercial Software Rights, and the Company and the Subsidiaries
have a valid right to use such Commercial Software Rights under such licenses
and agreements. Neither the Company nor any Subsidiary is or will be as a result
of the execution and delivery of this Agreement or the performance of the
Company's obligations hereunder, in violation of any license, sublicense, or
agreement relating to Commercial Software Rights. No claims with respect to the
Commercial Software Rights have been asserted or, to the knowledge of the
Company, are threatened by any person against the Company or any Subsidiary, nor
to the knowledge of the Company is there any valid grounds for any bona fide
claims (i) to the effect that the use of any product as now used or proposed for
use by the Company and the Subsidiaries infringes on any Intellectual Property,
(ii) against the use by the Company or any Subsidiary of any Company
Intellectual Property, or (iii) challenging the validity or effectiveness of any
of the rights of the Company and the Subsidiaries to use Commercial Software
Rights.
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To the knowledge of the Company, there is no material unauthorized use,
infringement, or misappropriation of any of the Commercial Software Rights by
the Company or any Subsidiary or any employee or former employee of the Company
or any Subsidiary. To the knowledge of the Company, no Commercial Software Right
is subject to any outstanding order, judgment, decree, stipulation, or agreement
restricting in any manner the use thereof by the Company or any Subsidiary.
(k) The Company has taken reasonable steps to protect the Company's rights
in the Company's confidential information and trade secrets that it wishes to
protect or any trade secrets or confidential information of third parties
provided to the Company, and, without limiting the foregoing, the Company has
and enforces a policy requiring each employee and contractor to execute a
proprietary information/ confidentiality agreement substantially in the form
provided to Parent and all current and former employees and contractors of the
Company have executed such an agreement, except where the failure to do so is
not reasonably expected to be material to the Company.
2.11 COMPLIANCE; PERMITS; RESTRICTIONS.
(a) Neither the Company nor any Subsidiary is in conflict with, or in
default or in violation of (i) any law, rule, regulation, order, judgment or
decree applicable to the Company or any Subsidiary or by which the Company or
any Subsidiary or any of their respective properties is bound or affected or
(ii) any note, bond, mortgage, indenture, contract, agreement, lease, license,
permit, franchise or other instrument or obligation to which the Company or any
Subsidiary is a party or by which the Company or any Subsidiary or any of their
respective properties are bound or affected, except for conflicts, violations
and defaults that (individually or in the aggregate) would not cause the Company
to lose any material benefit or incur any material liability. No investigation
or review by any Governmental Entity is pending or, to the Company's knowledge,
has been threatened against the Company or any Subsidiary, nor, to the Company's
knowledge, has any Governmental Entity indicated an intention to conduct an
investigation of the Company or any Subsidiary.
(b) The Company and the Subsidiaries hold, to the extent legally required,
all permits, licenses, variances, exemptions, orders and approvals from
governmental authorities that are material to and required for the operation of
the business of the Company or such Subsidiary as currently conducted
(collectively, the "COMPANY PERMITS"). The Company and the Subsidiaries are in
compliance in all material respects with the terms of the Company Permits,
except where the failure to be in compliance with the terms of the Company
Permits would not have a Material Adverse Effect on the Company.
2.12 LITIGATION. Except as disclosed in the Company Schedules, there is no
action, suit, proceeding, claim, arbitration, or investigation pending before
any court or administrative agency against the Company or any Subsidiary (or any
officer, director, or key employee of the Company or any Subsidiary in their
capacity as such). To the Company's knowledge, no such action, proceeding,
claim, arbitration, or investigation has been threatened, and the Company is not
aware of any basis for any such action, suit, proceeding, claim, arbitration, or
investigation. No Governmental Entity has at any time challenged or questioned
the legal right of the Company to design, manufacture, offer or sell any of its
products in the present manner or style thereof.
Except as disclosed in Schedule 2.12, the Company has never been subject to
an audit, compliance review, investigation, or like contract review by the GSA
office of the Inspector General or other Governmental Entity or agent thereof in
connection with any government contract (a "GOVERNMENT AUDIT"). To the Company's
knowledge, no Government Audit is threatened or reasonably anticipated, and in
the event of such Government Audit, to the knowledge of the Company, no basis
would exist for a finding of noncompliance with any material provision of any
government contract or a refund of any amounts paid or owed by any Governmental
Entity pursuant to such government contract. For each item disclosed in Schedule
2.12, a true and complete copy of all correspondence and documentation with
respect thereto has been provided to Parent.
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2.13 INTERESTED PARTY TRANSACTIONS. Except as set forth in Schedule 2.13,
no officer, director, or key employee of the Company or any Subsidiary or any
holder of 5% or more of the Company's outstanding capital stock (nor any
ancestor, sibling, descendant, or spouse of any of such persons, or any trust,
partnership or corporation in which any of such persons has an economic
interest) has, directly or indirectly, (i) an economic interest in any entity
which furnishes or sells services or products that the Company or any Subsidiary
furnishes or sells, or proposes to furnish or sell, (ii) an economic interest in
any entity that purchases from or sells or furnishes to the Company or any
Subsidiary any goods or services, or (iii) a beneficial interest in any contract
or agreement of the Company or any Subsidiary; PROVIDED, HOWEVER, that no
officer, director, key employee, or shareholder of the Company or any Subsidiary
shall be deemed to have such an economic interest solely by virtue of holding
less than one percent (1%) of the outstanding voting stock of a corporation
whose equity securities are traded on a recognized stock exchange in the United
States or quoted on The Nasdaq Stock Market. There are no receivables of the
Company or any Subsidiary owing by any director, officer, employee, or
consultant to the Company or any Subsidiary (or any ancestor, sibling,
descendant, or spouse of any such persons, or any trust, partnership, or
corporation in which any of such persons has an economic interest), other than
advances in the ordinary and usual course of business for reimbursable business
expenses (as determined in accordance with the Company's established employee
reimbursement policies and consistent with past practice).
2.14 BROKERS' AND FINDERS' FEES. Except for fees payable to NationsBanc
Montgomery Securities ("MONTGOMERY") pursuant to an engagement letter dated
April 20, 1998, a copy of which has been provided to Parent, the Company has not
incurred, nor will it incur, directly or indirectly, any liability for brokerage
or finders' fees or agents' commissions or any similar charges in connection
with this Agreement or any transaction contemplated hereby.
2.15 EMPLOYEE BENEFIT PLANS.
(a) DEFINITIONS. With the exception of the definition of "Affiliate" set
forth in Section 2.15(a)(i) below (which definition shall apply only to this
Section 2.15), for purposes of this Agreement, the following terms shall have
the meanings set forth below:
(i) "AFFILIATE" shall mean any other person or entity under common
control with the Company within the meaning of Section 414(b), (c), (m) or
(o) of the Code and the regulations issued thereunder;
(ii) "COMPANY EMPLOYEE PLAN" shall mean any plan, program, policy,
practice, contract, agreement or other arrangement providing for
compensation, severance, termination pay, performance awards, stock or
stock-related awards, fringe benefits or other employee benefits or
remuneration of any kind, whether written or unwritten or otherwise, funded
or unfunded, including without limitation, each "employee benefit plan,"
within the meaning of Section 3(3) of ERISA which is or has been maintained,
contributed to, or required to be contributed to, by the Company or any
Affiliate for the benefit of any Employee
(iii) "COBRA" shall mean the Consolidated Omnibus Budget Reconciliation
Act of 1985, as amended
(iv) "DOL" shall mean the Department of Labor;
(v) "EMPLOYEE" shall mean any current, former, or retired employee,
officer, or director of the Company or any Affiliate;
(vi) "EMPLOYEE AGREEMENT" shall mean each management, employment,
severance, consulting, relocation, repatriation, expatriation, visas, work
permit or similar agreement or contract between the Company or any Affiliate
and any Employee or consultant;
(vii) "ERISA" shall mean the Employee Retirement Income Security Act of
1974, as amended;
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(viii) "FMLA" shall mean the Family Medical Leave Act of 1993, as amended;
(ix) "INTERNATIONAL EMPLOYEE PLAN" shall mean each Company Employee Plan
that has been adopted or maintained by the Company, whether informally or
formally, for the benefit of Employees outside the United States;
(x) "IRS" shall mean the Internal Revenue Service;
(xi) "MULTIEMPLOYER PLAN" shall mean any "Pension Plan" (as defined
below) which is a "multiemployer plan," as defined in Section 3(37) of
ERISA;
(xii) "PBGC" shall mean the Pension Benefit Guaranty Corporation; and
(xiii) "PENSION PLAN" shall mean each Company Employee Plan which is an
"employee pension benefit plan," within the meaning of Section 3(2) of
ERISA.
(b) SCHEDULE. Schedule 2.15 contains an accurate and complete list of each
Company Employee Plan and each material Employee Agreement. The Company does not
have any plan or commitment to establish any new Company Employee Plan, to
modify any Company Employee Plan or Employee Agreement (except to the extent
required by law or to conform any such Company Employee Plan or Employee
Agreement to the requirements of any applicable law, in each case as previously
disclosed to Parent in writing, or as required by this Agreement), or to enter
into any Company Employee Plan or material Employee Agreement, nor does it have
any intention or commitment to do any of the foregoing.
(c) DOCUMENTS. The Company has provided to Parent (i) correct and complete
copies of all documents embodying each Company Employee Plan and each Employee
Agreement including all amendments thereto and written interpretations thereof;
(ii) the most recent annual actuarial valuations, if any, prepared for each
Company Employee Plan; (iii) the three (3) most recent annual reports (Form
Series 5500 and all schedules and financial statements attached thereto), if
any, required under ERISA or the Code in connection with each Company Employee
Plan or related trust; (iv) if the Company Employee Plan is funded, the most
recent annual and periodic accounting of Company Employee Plan assets; (v) the
most recent summary plan description together with the summary of material
modifications thereto, if any, required under ERISA with respect to each Company
Employee Plan; (vi) all IRS determination, opinion, notification and advisory
letters, and rulings relating to Company Employee Plans and copies of all
applications and correspondence to or from the IRS or the DOL with respect to
any Company Employee Plan; (vii) all material written agreements and contracts
relating to each Company Employee Plan, including, but not limited to,
administrative service agreements, group annuity contracts and group insurance
contracts; (viii) all communications material to any Employee or Employees
relating to any Company Employee Plan and any proposed Company Employee Plans,
in each case, relating to any amendments, terminations, establishments,
increases or decreases in benefits, acceleration of payments or vesting
schedules or other events which would result in any material liability to the
Company; (ix) all COBRA forms and related notices; and (x) all registration
statements and prospectuses prepared in connection with each Company Employee
Plan.
(d) EMPLOYEE PLAN COMPLIANCE. (i) The Company has performed in all
material respects all obligations required to be performed by it under, is not
in default or violation of, and has no knowledge of any default or violation by
any other party to each Company Employee Plan, and each Company Employee Plan
has been established and maintained in all material respects in accordance with
its terms and in compliance with all applicable laws, statutes, orders, rules
and regulations, including but not limited to ERISA or the Code; (ii) each
Company Employee Plan intended to qualify under Section 401(a) of the Code and
each trust intended to qualify under Section 501(a) of the Code has either
received a favorable determination letter from the IRS with respect to each such
Plan as to its qualified status under the Code, including all amendments to the
Code effected by the Tax Reform Act of 1986 and subsequent legislation, or has
remaining a period of time under applicable Treasury regulations or IRS
pronouncements in which to apply for such a determination letter and make any
amendments necessary to obtain a favorable
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determination; (iii) no "prohibited transaction," within the meaning of Section
4975 of the Code or Sections 406 and 407 of ERISA, and not otherwise exempt
under Section 408 of ERISA, has occurred with respect to any Company Employee
Plan; (iv) there are no actions, suits or claims pending, or, to the knowledge
of the Company, threatened or reasonably anticipated (other than routine claims
for benefits) against any Company Employee Plan or against the assets of any
Company Employee Plan; (v) each Company Employee Plan can be amended, terminated
or otherwise discontinued after the Effective Time in accordance with its terms,
without liability to Parent, the Company or any of its Affiliates (other than
ordinary administration expenses typically incurred in a termination event);
(vi) there are no audits, inquiries or proceedings pending or, to the knowledge
of the Company or any Affiliates, threatened by the IRS or DOL with respect to
any Company Employee Plan; and (vii) neither the Company nor any Affiliate is
subject to any penalty or tax with respect to any Company Employee Plan under
Section 402(i) of ERISA or Sections 4975 through 4980 of the Code.
(e) PENSION PLANS. The Company does not now, nor has it ever, maintained,
established, sponsored, participated in, or contributed to, any Pension Plan
which is subject to Title IV of ERISA or Section 412 of the Code.
(f) MULTIEMPLOYER PLANS. At no time has the Company contributed to or been
requested to contribute to any Multiemployer Plan.
(g) NO POST-EMPLOYMENT OBLIGATIONS. No Company Employee Plan provides, or
has any liability to provide, retiree life insurance, retiree health or other
retiree employee welfare benefits to any person for any reason, except as may be
required by COBRA or other applicable statutes, and the Company has never
represented, promised or contracted (whether in oral or written form) to any
Employee (either individually or to Employees as a group) or any other person
that such Employee(s) or other person would be provided with retiree life
insurance, retiree health or other retiree employee welfare benefit, except to
the extent required by statute.
(h) Neither the Company nor any Affiliate has, prior to the Effective Time,
and in any material respect, violated any of the health care continuation
requirements of COBRA, the requirements of FMLA or any similar provisions of
state law applicable to its Employees.
(i) EFFECT OF TRANSACTION
(i) The execution of this Agreement and the consummation of the
transactions contemplated hereby will not (either alone or upon the
occurrence of any additional or subsequent events) constitute an event under
any Company Employee Plan, Employee Agreement, trust or loan that will or
may result in any payment (whether of severance pay or otherwise),
acceleration, forgiveness of indebtedness, vesting, distribution, increase
in benefits or obligation to fund benefits with respect to any Employee.
(ii) No payment or benefit which will or may be made by the Company or
its Affiliates with respect to any Employee as a result of the transactions
contemplated by this Agreement will be characterized as an "excess parachute
payment," within the meaning of Section 280G(b)(1) of the Code.
(j) EMPLOYMENT MATTERS. The Company (i) is in compliance in all material
respects with all applicable foreign, federal, state and local laws, rules and
regulations respecting employment, employment practices, terms and conditions of
employment and wages and hours, in each case, with respect to Employees; (ii)
has withheld all amounts required by law or by agreement to be withheld from the
wages, salaries and other payments to Employees; (iii) is not liable for any
arrears of wages or any taxes or any penalty for failure to comply with any of
the foregoing; and (iv) is not liable for any material payment to any trust or
other fund or to any governmental or administrative authority, with respect to
unemployment compensation benefits, social security or other benefits or
obligations for Employees (other than routine payments to be made in the normal
course of business and consistent with past practice). There are no
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pending, threatened or reasonably anticipated claims or actions against the
Company under any worker's compensation policy or long-term disability policy.
To the Company's knowledge, no employee of the Company has violated any
employment contract, nondisclosure agreement or noncompetition agreement by
which such employee is bound due to such employee being employed by the Company
and disclosing to the Company or using trade secrets or proprietary information
of any other person or entity.
(k) LABOR. No work stoppage or labor strike against the Company is
pending, threatened or reasonably anticipated. The Company does not know of any
activities or proceedings of any labor union to organize any Employees. There
are no actions, suits, claims, labor disputes or grievances pending, or, to the
knowledge of the Company, threatened or reasonably anticipated relating to any
labor, safety or discrimination matters involving any Employee, including,
without limitation, charges of unfair labor practices or discrimination
complaints, which, if adversely determined, would, individually or in the
aggregate, result in any material liability to the Company. Neither the Company
nor any of its subsidiaries has engaged in any unfair labor practices within the
meaning of the National Labor Relations Act. The Company is not presently, nor
has it been in the past, a party to, or bound by, any collective bargaining
agreement or union contract with respect to Employees, and no collective
bargaining agreement is being negotiated by the Company.
(l) INTERNATIONAL EMPLOYEE PLAN. Each International Employee Plan has been
established, maintained and administered in material compliance with its terms
and conditions and with the requirements prescribed by any and all statutory or
regulatory laws that are applicable to such International Employee Plan.
Furthermore, no International Employee Plan has unfunded liabilities, that as of
the Effective Time, will not be offset by insurance or fully accrued. Except as
required by law, no condition exists that would prevent the Company or Parent
from terminating or amending any International Employee Plan at any time for any
reason.
2.16 ENVIRONMENTAL MATTERS. The Company and each of the Subsidiaries (i)
have obtained all approvals which are required to be obtained under all
applicable federal, state, foreign or local laws or any regulation, code, plan,
order, decree, judgment, notice or demand letter issued, entered, promulgated or
approved hereunder relating to pollution or protection of the environment,
including laws relating to emissions, discharges, releases or threatened
releases of pollutants, contaminants, or hazardous or toxic materials or wastes
into ambient air, surface water, ground water, or land or otherwise relating to
the manufacture, processing, distribution, use, treatment, storage, disposal,
transport, or handling of pollutants, contaminants or hazardous or toxic
materials or wastes by the Company or the Subsidiaries ("ENVIRONMENTAL LAWS");
(ii) are in compliance with all terms and conditions of such required approvals,
and prohibitions, requirements, obligations, schedules and timetables contained
in applicable Environmental Laws or any event, condition, circumstance,
activity, practice, incident, action or plan which is reasonably likely to
interfere with or prevent continued compliance with or which would give rise to
any common law or statutory liability, or otherwise form the basis of any claim,
action, suit or proceeding, against the Company or any of the Subsidiaries based
on or resulting from the manufacture, processing, distribution, use, treatment,
storage, disposal, transport or handling, or the emission, discharge or release
into the environment, of any pollutant, contaminant or hazardous or toxic
material or waste; and (iv) have taken all actions necessary under applicable
Environmental Laws to register any products or materials required to be
registered by the Company or the Subsidiaries (or any of their respective
agents) thereunder.
2.17 AGREEMENTS, CONTRACTS, AND COMMITMENTS. Except as set forth in
Schedule 2.17, neither the Company nor any Subsidiary is a party to or is bound
by:
(a) any employment or consulting agreement, contract or commitment with any
officer, director, higher level employee, or member of the Company's Board of
Directors, other than those that are terminable by the Company or any Subsidiary
on no more than thirty days' notice without liability or
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financial obligation, except to the extent general principles of wrongful
termination law may limit the ability of the Company or any Subsidiary to
terminate employees at will;
(b) any agreement or plan, including, without limitation, any stock option
plan, stock appreciation right plan or stock purchase plan, any of the benefits
of which will be increased, or the vesting of benefits of which will be
accelerated, by the occurrence of any of the transactions contemplated by this
Agreement or the value of any of the benefits of which will be calculated on the
basis of any of the transactions contemplated by this Agreement;
(c) any collective bargaining agreements;
(d) any bonus, deferred compensation, pension, profit sharing or retirement
plans;
(e) any agreement of indemnification or any guaranty (other than as set
forth in standard customer, distributor, and reseller software license
agreements entered into in connection with the sale or license of software
products in the ordinary course of business);
(f) any agreement, contract or commitment relating to the disposition or
acquisition of assets or any interest in any business enterprise outside the
ordinary course of the Company's business since July 26, 1996;
(g) any distribution, joint marketing, or development agreement under which
the Company or any Subsidiary has continuing obligations to jointly market any
product, technology or service, or any agreement pursuant to which the Company
or any Subsidiary has continuing obligations to jointly develop any intellectual
property that will not be owned, in whole or in part, by the Company or such
Subsidiary;
(h) any agreement, contract, or commitment to provide source code to any
third party for any product or technology;
(i) any agreement containing any covenant limiting the freedom of the
Company or any Subsidiary to engage in any line of business or to compete with
any person or entity; or
(j) any agreement, contract or commitment currently to license any third
party to manufacture or reproduce any product, service or technology (other than
as set forth in standard distributor and reseller software license agreements
entered into in the normal course of business).
Neither the Company nor any Subsidiary, is in breach, violation or default
under, and neither the Company nor any Subsidiary has received notice that it
has breached, violated or defaulted under, any of the terms or conditions of any
of the agreements, contracts, or commitments to which the Company or any
Subsidiary is a party or by which it is bound that are required to be disclosed
in the Company Schedules pursuant to clauses (a) through (j) above or pursuant
to Section 2.10 hereof (any such agreement, contract or commitment, a "COMPANY
CONTRACT"). Each Company Contract is in full force and effect and, except as
otherwise disclosed in Schedule 2.17, is not subject to any default thereunder
of which the Company has knowledge by any party obligated to the Company or any
Subsidiary pursuant thereto.
2.18 CHANGE OF CONTROL PAYMENTS. Schedule 2.18 sets forth each plan or
agreement pursuant to which any amounts may become payable (whether currently or
in the future) to current or former officers and directors of the Company or any
Subsidiary as a result of or in connection with the Merger.
2.19 STATEMENTS; PROXY STATEMENT/PROSPECTUS. The information supplied by
the Company for inclusion in the Registration Statement (as defined in Section
3.2(b)) shall not at the time the Registration Statement is filed with the SEC
and at the time it becomes effective under the Securities Act contain any untrue
statement of a material fact or omit to state any material fact required to be
stated therein or necessary in order to make the statements therein, in light of
the circumstances under which they are made, not false or misleading. The
information supplied by the Company for inclusion in the proxy
statement/prospectus to be sent to the shareholders of the Company in connection
with the meeting of the Company's shareholders to consider the approval and
adoption of this Agreement and the approval of the
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Merger (the "COMPANY SHAREHOLDERS' MEETING") (such proxy statement/prospectus as
amended or supplemented being referred to herein as the "PROXY
STATEMENT/PROSPECTUS") shall not, on the date the Proxy Statement/Prospectus is
first mailed to the Company's shareholders or at the time of the Company
Shareholders' Meeting, contain any untrue statement of a material fact or omit
to state any material fact required to be stated therein or necessary in order
to make the statements therein, in light of the circumstances under which they
are made, not false or misleading; or omit to state any material fact necessary
to correct any statement in any earlier communication with respect to the
solicitation of proxies for the Company Shareholders' Meeting which has become
false or misleading. The Proxy Statement/ Prospectus will comply as to form in
all material respects with the provisions of the Securities Act, the Exchange
Act, and the rules and regulations thereunder. If, at any time prior to the
Effective Time, any event relating to the Company or any of its affiliates,
officers, or directors should be discovered by the Company which is required to
be set forth in an amendment to the Registration Statement or a supplement to
the Proxy Statement/Prospectus, the Company shall promptly inform Parent.
Notwithstanding the foregoing, the Company makes no representation or warranty
with respect to any information supplied by Parent or Merger Sub which is
contained in any of the foregoing documents.
2.20 BOARD APPROVAL. The Board of Directors of the Company has, as of the
date of this Agreement, unanimously determined (i) that the Merger is fair to
and in the best interests of the Company and its shareholders and (ii) to
recommend that the shareholders of the Company approve and adopt this Agreement
and approve the Merger.
2.21 FAIRNESS OPINION. The Company's Board of Directors has received a
written opinion from Montgomery, dated as of the date hereof, to the effect that
as of the date hereof, the Exchange Ratio is fair to the Company's shareholders
from a financial point of view. The Company has delivered a copy of such opinion
to Parent.
2.22 SECTION 11.75 OF THE ILLINOIS GENERAL CORPORATION LAW NOT
APPLICABLE. The Board of Directors of the Company has taken all actions so that
the restrictions contained in Section 11.75 of the Illinois Business Corporation
Act applicable to a "business combination" (as defined in such Section 11.75)
will not apply to the execution, delivery, or performance of this Agreement or
to the consummation of the Merger or the other transactions contemplated by this
Agreement.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF PARENT AND MERGER SUB
Parent and Merger Sub represent and warrant to the Company as follows:
3.1 ORGANIZATION OF PARENT AND MERGER SUB. Parent is a corporation duly
organized, validly existing, and in good standing under the laws of the State of
Delaware. Merger Sub is a corporation duly organized, validly existing, and in
good standing under the laws of the State of Delaware. Each of Parent and Merger
Sub has the corporate power to own its properties and to carry on its business
as now being conducted and is duly qualified to do business and is in good
standing in each jurisdiction in which the failure to be so qualified would have
a material adverse effect on the ability of Parent and Merger Sub to consummate
the transactions contemplated hereby.
3.2 AUTHORITY.
(a) Parent and Merger Sub have all requisite corporate power and authority
to enter into this Agreement and to consummate the transactions contemplated
hereby. The execution and delivery of this Agreement and the consummation of the
transactions contemplated hereby have been duly authorized by all necessary
corporate action on the part of Parent and Merger Sub. This Agreement has been
duly executed and delivered by Parent and Merger Sub and constitutes the valid
and binding obligation of Parent and Merger Sub, enforceable in accordance with
its terms. The execution and delivery of this Agreement does not, and the
consummation of the transactions contemplated hereby and thereby will not,
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conflict with, or result in any violation of, or default (with or without notice
or lapse of time, or both), or give rise to a right of termination, cancellation
or acceleration of any obligation or to loss of a benefit under any provision of
(i) the Certificate of Incorporation or Bylaws of Parent or Merger Sub or (ii)
any mortgage, indenture, lease, contract or other agreement or instrument,
permit, concession, franchise, license, judgment, order, decree, statute, law,
ordinance, rule or representation applicable to Parent or on which Parent's
business, financial condition, operations or prospects is substantially
dependent, the breach, violation, default, termination or forfeiture of which
would result in a material adverse effect upon the ability of Parent or Merger
Sub to consummate the Merger, or a Material Adverse Effect on Parent or Merger
Sub.
(b) No consent, approval, order or authorization of, or registration,
declaration or filing with any Governmental Entity is required to be obtained or
made by Parent or Merger Sub in connection with the execution and delivery of
this Agreement or the consummation of the Merger, except for (i) the filing of a
Registration Statement (the "REGISTRATION STATEMENT") on Form S-4 (or any
similar successor form thereto) with the SEC in accordance with the Securities
Act; (ii) the Merger Filings with the Secretaries of State of the States of
Delaware and Illinois; (iii) such consents, approvals, orders, authorizations,
registrations, declarations and filings as may be required under applicable
federal, foreign and state securities (or related) laws and the securities or
antitrust laws of any foreign country; and (iv) such other consents,
authorizations, filings, approvals and registrations which if not obtained or
made would not be material to Parent or the Company or have a material adverse
effect on the ability of the parties hereto to consummate the Merger.
3.3 PARENT COMMON STOCK. The Parent Common Stock to be issued pursuant to
the Merger has been duly authorized and will, when issued and delivered in
accordance with this Agreement be validly issued, fully paid and nonassessable
will not be subject to any restrictions on resale under the Securities Act,
other than restrictions imposed by Rule 145 promulgated under the Securities
Act.
3.4 SEC FILINGS; PARENT FINANCIAL STATEMENTS.
(a) Parent has filed all forms, reports, and documents required to be filed
by Parent with the SEC and has made available to the Company such forms,
reports, and documents in the form filed with the SEC. All such required forms,
reports and documents (including those that Parent may file subsequent to the
date hereof) are referred to herein as the "PARENT SEC REPORTS." As of their
respective filing dates, the Parent SEC Reports (i) complied in all material
respects with the requirements of the Securities Act or the Exchange Act, as the
case may be, and the rules and regulations of the SEC thereunder applicable to
such Parent SEC Reports and (ii) did not at the time they were filed (or if
amended or superseded by a filing prior to the date of this Agreement, then on
the date of such filing) contain any untrue statement of a material fact or omit
to state a material fact required to be stated therein or necessary in order to
make the statements therein, in the light of the circumstances under which they
were made, not misleading.
(b) Each of the consolidated financial statements of Parent (including, in
each case, the notes thereto), included in the Parent SEC Reports (the "PARENT
FINANCIAL STATEMENTS"), including each Parent SEC Report filed after the date
hereof until the Closing, (i) complied as to form in all material respects with
the published rules and regulations of the SEC with respect thereto; (ii) was
prepared in accordance with GAAP applied on a consistent basis throughout the
periods indicated (except as may be indicated in the notes thereto or, in the
case of unaudited statements, as may be permitted by the SEC on Form 10-Q under
the Exchange Act); and (iii) fairly presented the consolidated financial
position of Parent and its subsidiaries as at the respective dates thereof and
the consolidated results of Parent's operations and cash flows for the periods
indicated (subject, in the case of unaudited financial statements, to normal
audit adjustments). There has been no change in Parent's accounting policies
except as described in the notes to the Parent Financial Statements.
3.5 NO MATERIAL ADVERSE CHANGE. Since December 31, 1997, Parent has
conducted its business in the ordinary course and there has not occurred (a) any
material adverse change in the financial condition,
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results of operations, liabilities, assets (including intangible assets),
business, or prospects of Parent and its subsidiaries, taken as a whole; (b) any
amendment or change in the Certificate of Incorporation or Bylaws of Parent; or
(c) any damage to, destruction or loss of any assets of the Parent (whether or
not covered by insurance) that materially and adversely affects the financial
condition or business of Parent and its subsidiaries, taken as a whole.
3.6 STATEMENTS; PROXY STATEMENT/PROSPECTUS. The information supplied by
Parent for inclusion in the Registration Statement shall not at the time the
Registration Statement is filed with the SEC, and at the time it becomes
effective under the Securities Act, contain any untrue statement of a material
fact or omit to state any material fact required to be stated therein or
necessary in order to make the statements therein, in light of the circumstances
under which they are made, not false or misleading. The information supplied by
Parent for inclusion in the Proxy Statement/Prospectus shall not, on the date
the Proxy Statement/Prospectus is first mailed to the Company's shareholders or
at the time of the Company Shareholders' Meeting contain any untrue statement of
a material fact or omit to state any material fact required to be stated therein
or necessary in order to make the statements therein, in light of the
circumstances under which they are made, not false or misleading; or omit to
state any material fact necessary to correct any statement in any earlier
communication with respect to the solicitation of proxies for the Company
Shareholders' Meeting which has become false or misleading. If at any time prior
to the Effective Time, any event relating to Parent or any of its affiliates,
officers or directors should be discovered by Parent which is required to be set
forth in an amendment to the Registration Statement or a supplement to the Proxy
Statement/Prospectus, Parent shall promptly inform the Company. Notwithstanding
the foregoing, Parent makes no representation or warranty with respect to any
information supplied by the Company which is contained in any of the foregoing
documents.
ARTICLE IV
CONDUCT PRIOR TO THE EFFECTIVE TIME
4.1 CONDUCT OF BUSINESS BY THE COMPANY. During the period from the date of
this Agreement and continuing until the earlier of the termination of this
Agreement pursuant to its terms or the Effective Time, the Company agrees
(except to the extent that Parent shall otherwise consent in writing) to carry
on its business and to cause the Subsidiaries to carry on their business in the
ordinary course in substantially the same manner as heretofore conducted and in
compliance in all material respects with all applicable laws and regulations, to
pay their debts and Taxes when due (subject to good faith disputes over such
debts or Taxes), to pay or perform other material obligations when due, and to
use all reasonable efforts consistent with past practice and policies to
preserve intact their present business organizations, keep available the
services of their present officers and key employees, and preserve their
relationships with customers, suppliers, distributors, licensors, licensees, and
others having business dealings with them, all with the goal of preserving
unimpaired the goodwill and ongoing businesses of the Company and the
Subsidiaries at the Effective Time. The Company shall promptly notify Parent of
any event which materially adversely affects the Company, any Subsidiary, or
their businesses. Except as expressly contemplated by this Agreement or
disclosed in Schedule 4.1, the Company shall not, and shall not permit any
Subsidiary to, without the prior written consent of Parent:
(a) Waive any stock repurchase rights, accelerate, amend or change the
period of exercisability of any Company Options or Company Common Stock subject
to vesting, or reprice options granted under any employee, consultant, director
or other stock plans or authorize cash payments in exchange for any options
granted under any of such plans;
(b) Grant any severance or termination pay to any director, officer or
employee except pursuant to written agreements outstanding, or policies
existing, on the date hereof and as disclosed in the Company Schedules, or adopt
any new severance plan;
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(c) Transfer or license to any person or entity or otherwise extend, amend,
or modify in any respect any rights to the Company Intellectual Property (other
than end-user licenses granted to customers of the Company and the Subsidiaries
in the ordinary course of business), or enter into grants to future patent
rights;
(d) Enter into or amend any agreements pursuant to which any other party is
granted marketing, distribution, or similar rights of any type or scope with
respect to any products or products licensed by the Company and the
Subsidiaries;
(e) Amend or otherwise modify (or agree to do so), except in the ordinary
course of business, or violate the terms of, any of the agreements set forth or
described in the Company Schedules;
(f) Commence any litigation except to enforce its rights under or to
interpret this Agreement or any other agreement, obligation, or arrangement
contemplated hereby or entered into or established in connection therewith.
(g) Declare, set aside, or pay any dividends on or make any other
distributions (whether in cash, stock, equity securities, or property) in
respect of any capital stock or split, combine, or reclassify any capital stock
or issue or authorize the issuance of any other securities in respect of, in
lieu of, or in substitution for any capital stock;
(h) Purchase, redeem or otherwise acquire, directly or indirectly, any
shares of capital stock of the Company or any Subsidiary, except repurchases of
unvested shares at cost in connection with the termination of the employment
relationship with any employee pursuant to stock option or purchase agreements
in effect on the date hereof;
(i) Issue, grant, deliver or sell or authorize or propose the issuance,
grant, delivery or sale of, or purchase or propose the purchase of, any shares
of the Company's capital stock or securities convertible into, or subscriptions,
rights, warrants or options to acquire, or other agreements or commitments of
any character obligating it to issue any such shares or other convertible
securities (other than Company Common Stock issued upon exercise of Company
Options outstanding as of the date hereof and the Warrants);
(j) Cause, permit or propose any amendments to its Articles of
Incorporation, Bylaws or similar governing instruments;
(k) Acquire or agree to acquire by merging or consolidating with, or by
purchasing any equity interest in or a portion of the assets of, or by any other
manner, any business or any corporation, partnership, association or other
business organization or division thereof, or otherwise acquire or agree to
acquire any assets which are material, individually or in the aggregate, to the
business of the Company or enter into any joint ventures, strategic
partnerships, or alliances;
(l) Sell, lease, license, encumber or otherwise dispose of any properties or
assets which are material, individually or in the aggregate, to the business of
the Company;
(m) Incur any indebtedness for borrowed money or guarantee any such
indebtedness of another person, issue or sell any debt securities or options,
warrants, calls or other rights to acquire any debt securities of the Company or
any Subsidiary, enter into any "keep well" or other agreement to maintain any
financial statement condition or enter into any arrangement having the economic
effect of any of the foregoing;
(n) Effect or agree to effect, including by way of hiring or involuntary
termination, any change in its directors, officers, or key employees;
(o) Adopt or amend any employee benefit plan or employee stock purchase or
employee stock option plan, or enter into any employment contract or collective
bargaining agreement (other than offer letters and letter agreements entered
into in the ordinary course of business consistent with past practice
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with employees who are terminable "at will"), pay or agree to pay any special
bonus or special remuneration to any director, employee, or consultant or
increase the salaries or wage rates or fringe benefits (including rights to
severance or indemnification) of its directors, officers, employees or
consultants other than in the ordinary course of business, consistent with past
practice, or change in any material respect any management policies or
procedures;
(p) Make any payments outside of the ordinary course of business in excess
of $75,000;
(q) Except in the ordinary course of business, modify, amend or terminate
any material contract or agreement to which the Company or any Subsidiary is a
party or waive, release, or assign any material rights or claims thereunder;
(r) Revalue any of its assets, including, without limitation, writing down
the value of inventory or writing off notes or accounts receivable other than in
the ordinary course of business;
(s) Except as required by GAAP, effect any changes in its accounting
methods, principles, or practices;
(t) Make or change any material election in respect of Taxes, adopt or
change any accounting method in respect of Taxes, enter into any closing
agreement, settle any claim or assessment in respect of Taxes, or consent to any
extension or waiver of the limitation period applicable to any claim or
assessment in respect of Taxes, provided that Parent shall not unreasonably
withhold its consent to any of the foregoing;
(u) Engage in any action with the intent to directly or indirectly adversely
impact any of the transactions contemplated by this Agreement; or
(v) Agree in writing or otherwise to take any of the actions described in
Article 4 (a) through (u) above.
4.2 TERMINATION OF 401(K) PLANS. The Company agrees to terminate the
401(k) plans of the Company and of Facility Management Systems, Inc. immediately
prior to the Effective Time, unless Parent, in its sole and absolute discretion,
agrees to sponsor and maintain such plans by providing the Company with written
notice of such election at least three (3) days before the Effective Time.
ARTICLE V
ADDITIONAL AGREEMENTS
5.1 PROXY STATEMENT/PROSPECTUS; REGISTRATION STATEMENT; OTHER FILINGS;
BOARD RECOMMENDATIONS. As promptly as practicable after the execution of this
Agreement, the Company and Parent will prepare, and file with the SEC, the Proxy
Statement/Prospectus, and Parent will prepare and file with the SEC the
Registration Statement in which the Proxy Statement/Prospectus will be included
as a prospectus. Each of the Company and Parent will respond to any comments of
the SEC, will use its respective commercially reasonable efforts to have the
Registration Statement declared effective under the Securities Act as promptly
as practicable after such filing, and, subject to Section 5.2(c), the Company
will cause the Proxy Statement/Prospectus to be mailed to its shareholders at
the earliest practicable time after the Registration Statement is declared
effective by the SEC. As promptly as practicable after the date of this
Agreement, each of the Company and Parent will prepare and file any other
filings required to be filed by it under the Exchange Act, the Securities Act or
any other federal, foreign or Blue Sky or related laws relating to the Merger
and the transactions contemplated by this Agreement (the "OTHER FILINGS"). Each
of the Company and Parent will notify the other promptly upon the receipt of any
comments from the SEC or its staff or any other government officials and of any
request by the SEC or its staff or any other government officials for amendments
or supplements to the Registration Statement, the Proxy Statement/Prospectus, or
any Other Filing or for additional information and will supply the other with
copies of all correspondence between such party or any of its representatives,
on the one hand, and the SEC, or its staff or any other
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government officials, on the other hand, with respect to the Registration
Statement, the Proxy Statement/ Prospectus, the Merger or any Other Filing. Each
of the Company and Parent will cause all documents that it is responsible for
filing with the SEC or other regulatory authorities under this Section 5.1(a) to
comply in all material respects with all applicable requirements of law and the
rules and regulations promulgated thereunder. Whenever any event occurs which is
required to be set forth in an amendment or supplement to the Proxy
Statement/Prospectus, the Registration Statement or any Other Filing, the
Company or Parent, as the case may be, will promptly inform the other of such
occurrence and cooperate in filing with the SEC or its staff or any other
government officials, and/or mailing to shareholders of the Company, such
amendment or supplement.
5.2 MEETING OF COMPANY SHAREHOLDERS.
(a) Promptly after the date hereof, the Company will take all action
necessary in accordance with the Illinois Law and its Articles of Incorporation
and Bylaws to convene the Company Shareholders' Meeting to be held as promptly
as practicable, and in any event (to the extent permissible under applicable
law) within 45 days after the declaration of effectiveness of the Registration
Statement, for the purpose of voting upon this Agreement and the Merger or the
issuance of shares of Parent Common Stock pursuant to the Merger, respectively,
subject to Section 5.2(c). The Company will use its commercially reasonable
efforts to solicit from its shareholders proxies in favor of the adoption and
approval of this Agreement and the approval of the Merger and will take all
other action necessary or advisable to secure the vote or consent of its
shareholders required by the rules of Nasdaq or Illinois Law to obtain such
approvals. Notwithstanding anything to the contrary contained in this Agreement,
the Company may adjourn or postpone the Company Shareholders' Meeting to the
extent necessary to ensure that any necessary supplement or amendment to the
Prospectus/Proxy Statement is provided to the Company's shareholders in advance
of a vote on the Merger and this Agreement or, if as of the time for which the
Company Shareholders' Meeting is originally scheduled (as set forth in the
Prospectus/Proxy Statement), there are insufficient shares of Company Common
Stock represented (either in person or by proxy) to constitute a quorum
necessary to conduct the business of the Company's Shareholders' Meeting.
Subject to Section 5.2(c), the Company shall ensure that the Company
Shareholders' Meeting is called, noticed, convened, held and conducted, and that
all proxies solicited by the Company in connection with the Company
Shareholders' Meeting are solicited, in compliance with Illinois Law, its
Articles of Incorporation and Bylaws, the rules of Nasdaq, and all other
applicable legal requirements. The Company's obligation to call, give notice of,
convene and hold the Company Shareholders' Meeting in accordance with this
Section 5.2(a) shall not be limited to or otherwise affected by the
commencement, disclosure, announcement, or submission to the Company of any
Acquisition Proposal (as defined in Section 5.4), or by any withdrawal,
amendment, or modification of the recommendation of the Board of Directors of
the Company with respect to the Merger, except as permitted by Section 5.2(c).
(b) Subject to Section 5.2(c), (i) the Board of Directors of the Company
shall unanimously recommend that the Company's shareholders vote in favor of and
adopt and approve this Agreement and the Merger at the Company Shareholders'
Meeting; (ii) the Prospectus/Proxy Statement shall include a statement to the
effect that the Board of Directors of the Company has unanimously recommended
that the Company's shareholders vote in favor of and adopt and approve this
Agreement and the Merger at the Company Shareholders' Meeting; and (iii) neither
the Board of Directors of the Company nor any committee thereof shall withdraw,
amend or modify, or propose or resolve to withdraw, amend or modify in a manner
adverse to Parent, the unanimous recommendation of the Board of Directors of the
Company that the Company's shareholders vote in favor of and adopt and approve
this Agreement and the Merger. For purposes of this Agreement, the
recommendation of the Board of Directors shall be deemed to have been modified
in a manner adverse to Parent if such recommendation shall no longer be
unanimous.
(c) Nothing in this Agreement shall prevent the Board of Directors of the
Company from withholding, withdrawing, amending or modifying its unanimous
recommendation in favor of the Merger if (i) a Superior Offer (as defined below)
is made to the Company and is not withdrawn, (ii) neither the Company
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nor any of its representatives shall have violated any of the restrictions set
forth in Section 5.4, and (iii) the Board of Directors of the Company or any
committee thereof concludes in good faith, after consultation with its outside
legal counsel, that, in light of such Superior Offer, the withholding,
withdrawal, amendment, or modification of such recommendation is required in
order for the Board of Directors of the Company or any committee thereof to
comply with its fiduciary obligations to the Company's shareholders under
applicable law. Subject to applicable laws, nothing contained in this Section
5.2 shall limit the Company's obligation to hold and convene the Company
Shareholders' Meeting (regardless of whether the unanimous recommendation of the
Board of Directors of the Company shall have been withdrawn, amended, or
modified); PROVIDED, HOWEVER, that in the event the Board of Directors of the
Company shall recommend a Superior Offer to the shareholders of the Company in
accordance with the provisions of Section 5.2(c) and such recommendation occurs
prior to the date of mailing of the Prospectus/Proxy Statement to the
shareholders of the Company (the "SHAREHOLDER MAILING DATE") and the Company is
not otherwise in material breach of this Agreement, the Company's obligation to
hold and convene the Company Shareholders' Meeting shall cease. For purposes of
this Agreement, "SUPERIOR OFFER" shall mean an unsolicited, bona fide written
offer made by a third party to consummate any of the following transactions: (i)
a merger, consolidation, business combination, recapitalization, liquidation,
dissolution or similar transaction involving the Company pursuant to which the
shareholders of the Company immediately preceding such transaction hold less
than 50% of the equity interest in the surviving or resulting entity of such
transaction; (ii) a sale or other disposition by the Company of assets
representing in excess of 50% of the fair market value of the Company's business
immediately prior to such sale; or (iii) the acquisition by any person or group
(including by way of a tender offer or an exchange offer or issuance by the
Company), directly or indirectly, of beneficial ownership or a right to acquire
beneficial ownership of shares representing in excess of 50% of the voting power
of the then outstanding shares of capital stock of the Company, on terms that
the Board of Directors of the Company determines, in its reasonable judgment,
after consultation with its financial advisor, to be more favorable to the
Company's shareholders from a financial point of view than the terms of the
Merger; PROVIDED, HOWEVER, that any such offer shall not be deemed to be a
"Superior Offer" if any financing required to consummate the transaction
contemplated by such offer is not committed and is not likely in the judgment of
the Company's Board of Directors to be obtained by such third party on a timely
basis.
5.3 CONFIDENTIALITY; ACCESS TO INFORMATION.
(a) CONFIDENTIALITY AGREEMENT. The parties acknowledge that the Company
and Parent have previously executed a Mutual Confidentiality Agreement, dated as
of November 12, 1997 (the "CONFIDENTIALITY AGREEMENT"), which Confidentiality
Agreement will continue in full force and effect in accordance with its terms.
(b) ACCESS TO INFORMATION. Each of the Company and Parent will afford the
other party and its accountants, counsel and other representatives reasonable
access during normal business hours to the properties, books, records and
personnel of the Company during the period prior to the Effective Time to obtain
all information concerning the business, including the status of product
development efforts, properties, results of operations and personnel of such
party. No information or knowledge obtained in any investigation pursuant to
this Section 5.3 will affect or be deemed to modify any representation or
warranty contained herein or the conditions to the obligations of the parties to
consummate the Merger.
5.4 NO SOLICITATION.
(a) From and after the date of this Agreement until the Effective Time or
termination of this Agreement pursuant to Article VII, the Company and the
Subsidiaries will not, nor will they authorize or permit any of their respective
officers, directors, affiliates or employees or any investment banker, attorney,
or other advisor or representative retained by any of them to, directly or
indirectly, (i) solicit, initiate, encourage or induce the making, submission or
announcement of any Acquisition Proposal; (ii) participate in any discussions or
negotiations regarding, or furnish to any person any non-public
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information with respect to, or take any other action to facilitate any
inquiries or the making of any proposal that constitutes or may reasonably be
expected to lead to, any Acquisition Proposal; (iii) engage in discussions with
any person with respect to any Acquisition Proposal, except as to the existence
of these provisions; (iv) subject to Section 5.2(c), approve, endorse or
recommend any Acquisition Proposal; or (v) enter into any letter of intent or
similar document or any contract agreement or commitment contemplating or
otherwise relating to any Acquisition Transaction (as hereinafter defined);
PROVIDED, HOWEVER, that prior to the approval of this Agreement by the required
vote of the Company's shareholders, this Section 5.4(a) shall not prohibit the
Company from furnishing nonpublic information regarding the Company and the
Subsidiaries to, entering into a confidentiality agreement with or entering into
discussions with, any person or group in response to an Acquisition Proposal
submitted by such person or group (and not withdrawn) if (A) neither the Company
nor any representative of the Company or any of the Subsidiaries shall have
violated any of the restrictions set forth in this Section 5.4; (B) the Board of
Directors of the Company concludes in good faith, after consultation with its
outside legal counsel, that such action is required in order for the Board of
Directors of the Company to comply with its fiduciary obligations to the
Company's shareholders under applicable law; (C) prior to furnishing any such
nonpublic information to, or entering into discussions with, such person or
group, the Company gives Parent written notice of the identity of such person or
group and of the Company's intention to furnish nonpublic information to, or
enter into discussions with, such person or group and the Company receives from
such person or group an executed confidentiality agreement containing customary
limitations on the use and disclosure of all nonpublic written and oral
information furnished to such person or group by or on behalf of the Company and
such limitations are at least as restrictive as the limitations set forth in the
Confidentiality Agreement; and (D) contemporaneously with furnishing any such
nonpublic information to such person or group, the Company furnishes such
nonpublic information to Parent (to the extent such nonpublic information has
not been previously furnished by the Company to Parent). The Company and the
Subsidiaries will immediately cease any and all existing activities,
discussions, or negotiations with any parties conducted heretofore with respect
to any Acquisition Proposal. Without limiting the foregoing, it is understood
that any violation of the restrictions set forth in the preceding two sentences
by any officer, director, or employee of the Company or any Subsidiary or any
investment banker, attorney or other advisor or representative of the Company or
any Subsidiary shall be deemed to be a breach of this Section 5.4 by the
Company. In addition to the foregoing, the Company shall (i) provide Parent with
at least 24 hours prior notice of any meeting of the Company's Board of
Directors at which the Company's Board of Directors is reasonably expected to
consider a Superior Offer and (ii) not accept or recommend to its shareholders a
Superior Offer for a period of at least five (5) business days after Parent's
receipt of a copy of such Superior Offer (or a written description of the
significant terms and conditions of such Superior Offer, if not in writing).
For purposes of this Agreement, "ACQUISITION PROPOSAL" shall mean any offer
or proposal (other than an offer or proposal by Parent) relating to any
Acquisition Transaction. For the purposes of this Agreement, "ACQUISITION
TRANSACTION" shall mean any transaction or series of related transactions other
than the transactions contemplated by this Agreement involving (A) any
acquisition or purchase from the Company by any person or "group" (as defined
under Section 13(d) of the Exchange Act and the rules and regulations
thereunder) of more than a 10% interest in the total outstanding voting
securities of the Company or any of Subsidiary or any tender offer or exchange
offer that if consummated would result in any person or "group" (as defined
under Section 13(d) of the Exchange Act and the rules and regulations
thereunder) beneficially owning 10% or more of the total outstanding voting
securities of the Company or any Subsidiary or any merger, consolidation,
business combination or similar transaction involving the Company pursuant to
which the shareholders of the Company immediately preceding such transaction
hold less than 90% of the equity interests in the surviving or resulting entity
of such transaction; (B) any sale, lease (other than in the ordinary course of
business), exchange, transfer, license (other than in the ordinary course of
business), acquisition, or disposition of more than 50% of the assets of the
Company; or (C) any liquidation or dissolution of the Company.
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(b) In addition to the obligations of the Company set forth in paragraph (a)
of this Section 5.4, the Company, as promptly as practicable, shall advise
Parent orally and in writing of any request for non-public information which the
Company reasonably believes could lead to an Acquisition Proposal or of any
Acquisition Proposal, or any inquiry with respect to or which the Company
reasonably should believe would lead to any Acquisition Proposal; the material
terms and conditions of such request, Acquisition Proposal or inquiry; and the
identity of the person or group making any such request, Acquisition Proposal or
inquiry. The Company will keep Parent informed in all material respects of the
status and details (including material amendments or proposed amendments) of any
such request, Acquisition Proposal or inquiry.
5.5 PUBLIC DISCLOSURE. Parent and the Company will consult with each
other, and to the extent practicable, agree, before issuing any press release or
otherwise making any public statement with respect to the Merger, this
Agreement, or an Acquisition Proposal and will not issue any such press release
or make any such public statement prior to such consultation, except as may be
required by law or any listing agreement with a national securities exchange.
The parties have agreed to the text of the joint press release announcing the
signing of this Agreement.
5.6 REASONABLE EFFORTS; NOTIFICATION.
(a) Upon the terms and subject to the conditions set forth in this
Agreement, each of the parties agrees to use all reasonable efforts to take, or
cause to be taken, all actions, and to do, or cause to be done, and to assist
and cooperate with the other parties in doing, all things necessary, proper or
advisable to consummate and make effective, in the most expeditious manner
practicable, the Merger and the other transactions contemplated by this
Agreement, including using reasonable efforts to accomplish the following: (i)
the taking of all reasonable acts necessary to cause the conditions precedent
set forth in Article VI to be satisfied; (ii) the obtaining of all necessary
actions or nonactions, waivers, consents, approvals, orders and authorizations
from Governmental Entities and the making of all necessary registrations,
declarations and filings (including registrations, declarations and filings with
Governmental Entities, if any) and the taking of all reasonable steps as may be
necessary to avoid any suit, claim, action, investigation or proceeding by any
Governmental Entity; (iii) the obtaining of all necessary consents, approvals or
waivers from third parties; (iv) the defending of any suits, claims, actions,
investigations or proceedings, whether judicial or administrative, challenging
this Agreement or the consummation of the transactions contemplated hereby,
including seeking to have any stay or temporary restraining order entered by any
court or other Governmental Entity vacated or reversed; and (v) the execution or
delivery of any additional instruments necessary to consummate the transactions
contemplated by, and to fully carry out the purposes of, this Agreement. In
connection with and without limiting the foregoing, the Company and its Board of
Directors shall, upon the terms and subject to the conditions set forth in this
Agreement, if any state takeover statute or similar statute or regulation is or
becomes applicable to the Merger, this Agreement or any of the transactions
contemplated by this Agreement, use all reasonable efforts to ensure that the
Merger and the other transactions contemplated by this Agreement may be
consummated as promptly as practicable on the terms contemplated by this
Agreement and otherwise to minimize the effect of such statute or regulation on
the Merger, this Agreement and the transactions contemplated hereby.
Notwithstanding anything herein to the contrary, nothing in this Agreement shall
be deemed to require the Parent or Company or any Subsidiary or affiliate
thereof to agree to any divestiture by itself or any of its affiliates of shares
of capital stock or of any business, assets or property, or the imposition of
any material limitation on the ability of any of them to conduct their
businesses or to own or exercise control of such assets, properties and stock.
(b) The Company shall give prompt notice to Parent in the event any
representation or warranty made by it in this Agreement becomes untrue or
inaccurate, or the Company fails to comply with or satisfy in any material
respect any covenant, condition or agreement to be complied with or satisfied by
it under this Agreement, in each case, such that the conditions set forth in
Section 6.3(a) or 6.3(b) would not be
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satisfied; PROVIDED, HOWEVER, that no such notification shall affect the
representations, warranties, covenants, or agreements of the parties or the
conditions to the obligations of the parties under this Agreement.
(c) Parent shall give prompt notice to the Company in the event any
representation or warranty made by it or Merger Sub in this Agreement becomes
untrue or inaccurate, or either Parent or Merger Sub fails to comply with or
satisfy in any material respect any covenant, condition or agreement to be
complied with or satisfied by it under this Agreement, in each case, such that
the conditions set forth in Section 6.2(a) or 6.2(b) would not be satisfied;
PROVIDED, HOWEVER, that no such notification shall affect the representations,
warranties, covenants or agreements of the parties or the conditions to the
obligations of the parties under this Agreement.
5.7 THIRD PARTY CONSENTS. As soon as practicable following the date
hereof, each of Parent and the Company will use its commercially reasonable
efforts to obtain any consents, waivers and approvals under any of its or its
subsidiaries' respective agreements, contracts, licenses or leases required to
be obtained in connection with the consummation of the transactions contemplated
hereby.
5.8 STOCK OPTIONS AND EMPLOYEE BENEFITS.
(a) At the Effective Time, each Company Option, whether or not exercisable,
will be assumed by Parent. Each Company Option so assumed by Parent under this
Agreement will continue to have, and be subject to, the same terms and
conditions set forth in the 1994 Option Plan immediately prior to the Effective
Time (including, without limitation, any repurchase rights or vesting
provisions), except that (i) each Company Option will be exercisable (or will
become exercisable in accordance with its terms) for that number of whole shares
of Parent Common Stock equal to the product of the number of shares of Company
Common Stock that were issuable upon exercise of such Company Option immediately
prior to the Effective Time multiplied by the Exchange Ratio, rounded down to
the nearest whole number of shares of Parent Common Stock and (ii) the per share
exercise price for the shares of Parent Common Stock issuable upon exercise of
such assumed Company Option will be equal to the quotient determined by dividing
the exercise price per share of Company Common Stock at which such Company
Option was exercisable immediately prior to the Effective Time by the Exchange
Ratio, rounded up to the nearest whole cent.
(b) It is intended that Company Options assumed by Parent shall qualify
following the Effective Time as incentive stock options as defined in Section
422 of the Code to the extent Company Options qualified as incentive stock
options immediately prior to the Effective Time, and the provisions of this
Section 5.8 shall be applied consistent with such intent.
(c) Notwithstanding anything to the contrary in this Section 5.8, in lieu of
assuming outstanding options under the 1994 Option Plan, Parent may, at its
election, cause such outstanding options to be replaced by issuing substantially
equivalent replacement stock options therefor.
5.9 FORM S-8. Parent agrees to file a registration statement on Form S-8
for the shares of Parent Common Stock issuable with respect to assumed Company
Options as soon as is reasonably practicable after the Effective Time but in any
event within five (5) days of the Closing Date.
5.10 INDEMNIFICATION.
(a) From and after the Effective Time, Parent will cause the Surviving
Corporation to fulfill and honor in all respects the obligations of the Company
pursuant to any indemnification agreements between the Company and its directors
and officers as of the Effective Time (the "INDEMNIFIED PARTIES") and any
indemnification provisions under the Company's Certificate of Incorporation or
Bylaws as in effect on the date hereof. The Certificate of Incorporation and
Bylaws of the Surviving Corporation will contain provisions with respect to
exculpation and indemnification that are at least as favorable to the
Indemnified Parties as those contained in the Certificate of Incorporation and
Bylaws of the Company as in effect on the date hereof, which provisions will not
be amended, repealed or otherwise modified for a period of six
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years from the Effective Time in any manner that would adversely affect the
rights thereunder of individuals who, immediately prior to the Effective Time,
were directors, officers, employees or agents of the Company, unless such
modification is required by law.
(b) For a period of six years after the Effective Time, Parent will cause
the Surviving Corporation to use its commercially reasonable efforts to maintain
in effect, if available, directors' and officers' liability insurance covering
those persons who are currently covered by the Company's directors' and
officers' liability insurance policy on terms comparable to those applicable to
the current directors and officers of the Company; PROVIDED, HOWEVER, that in no
event will Parent or the Surviving Corporation be required to expend in excess
of 125% of the annual premium currently paid by the Company for such coverage
(or such coverage as is available for 125% of such annual premium).
5.11 NASDAQ LISTING. Parent agrees to authorize for listing on the Nasdaq
National Market the shares of Parent Common Stock issuable, and those required
to be reserved for issuance, in connection with the Merger, upon official notice
of issuance.
5.12 COMPANY AFFILIATE AGREEMENT. Schedule 5.12 lists those persons who
may be deemed to be, in the Company's reasonable judgment, affiliates of the
Company within the meaning of Rule 145 promulgated under the Securities Act
(each a "COMPANY AFFILIATE"). The Company will provide Parent with such
information and documents as Parent reasonably requests for purposes of
reviewing such list. The Company will use its commercially reasonable efforts to
deliver or cause to be delivered to Parent, as promptly as practicable on or
following the date hereof, from each Company Affiliate an executed affiliate
agreement in substantially the form attached hereto as EXHIBIT D (the "COMPANY
AFFILIATE AGREEMENT"), each of which will be in full force and effect as of the
Effective Time. Parent will be entitled to place appropriate legends on the
certificates evidencing any Parent Common Stock to be received by a Company
Affiliate pursuant to the terms of this Agreement, and to issue appropriate stop
transfer instructions to the transfer agent for the Parent Common Stock,
consistent with the terms of the Company Affiliate Agreement.
5.13 TAX-FREE REORGANIZATION. No party shall take any action either prior
to or after the Effective Time that could reasonably be expected to cause the
Merger to qualify as a "reorganization" under Section 368(a) of the Code.
5.14 COMFORT LETTER. Company shall use its reasonable best efforts to
cause Price Waterhouse, certified public accountants to Company, to provide a
letter reasonably acceptable to Parent, relating to their review of the
financial statements and other financial data and schedules relating to Company
contained in or incorporated by reference in the Registration Statement.
5.15 SHAREHOLDER RIGHTS PLAN. Prior to the Effective Time, without
Parent's prior written consent, Company will not adopt a shareholder rights
plan.
5.16 AMENDMENT OF REDEEMABLE WARRANTS. As promptly as practicable after
the execution of this Agreement:
(a) The Company shall prepare and include within the Registration Statement
as part of the Proxy Statement/Prospectus an information statement meeting the
requirements of Schedule 14C of the Exchange Act for the purpose of soliciting
the holders of the Redeemable Warrants. The purpose of such solicitation shall
be to seek the requisite approval of the holders of the Redeemable Warrants to
amend all of the outstanding Redeemable Warrants, such amendment to be
conditioned upon and effective concurrent with the Effective Time, to provide
that as of the Effective Time, the Redeemable Warrants shall be deemed
automatically exchanged for and converted into the right to receive that number
of shares of Parent Common Stock, based on the Exchange Ratio, (or cash in lieu
thereof for any fractional share, in accordance with Section 1.6(g) above) as
would be the case if the Redeemable Warrants had been exercised for Company
Common Stock immediately prior to the Effective Time on a net issuance basis,
based on the average of the last reported sale prices of Parent Common Stock as
reported by Nasdaq on
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the five (5) most recent trading days ending on the trading day immediately
preceding the Effective Time, subject to the surrender of the certificates
representing the Redeemable Warrants.
(b) The Company shall cooperate with Parent in providing all necessary
information required for the solicitation of the holders of the Redeemable
Warrants as contemplated in subparagraph (a) above in the preparation of the
Registration Statement, and shall solicit the holders of the Redeemable Warrants
in accordance with the requirements of Section 14(c) of the Exchange Act and the
related rules and regulations. The Company shall ensure that the amendment of
the Redeemable Warrants is completed in accordance with the requirements of the
Warrant Agreement, and shall take such actions as may be reasonably requested by
the Warrant Agent (as defined in the Warrant Agreement) to effect such
amendment. In addition, the Company shall ensure that the amendment of the
Redeemable Warrants is in compliance with all applicable state securities laws.
5.17 WARRANT ASSUMPTION. In the event that the amendment of the Redeemable
Warrants is not completed as provided in Section 5.16 above, Parent shall take
such actions as shall be necessary to assume the Redeemable Warrants in
accordance with the provisions of the Warrant Agreement, except that (i) each
Redeemable Warrant will be exercisable for that number of whole shares of Parent
Common Stock equal to the product of the number of shares of Company Common
Stock that were issuable upon exercise of such Redeemable Warrant immediately
prior to the Effective Time multiplied by the Exchange Ratio, rounded down to
the nearest whole number of shares of Parent Common Stock, (ii) the per share
exercise price and redemption price for the shares of Parent Common Stock
subject to the Redeemable Warrants so assumed will be equal to the quotient
determined by dividing the exercise price and redemption price per share of
Company Common Stock subject to the Redeemable Warrant by the Exchange Ratio,
rounded up to the nearest whole cent, (iii) and such other adjustments may be
made as are consistent with the provisions of the Warrant Agreement.
ARTICLE VI
CONDITIONS TO THE MERGER
6.1 CONDITIONS TO OBLIGATIONS OF EACH PARTY TO EFFECT THE MERGER. The
respective obligations of each party to this Agreement to effect the Merger
shall be subject to the satisfaction at or prior to the Closing Date of the
following conditions:
(a) COMPANY SHAREHOLDER APPROVAL. This Agreement and the Merger and other
transactions contemplated hereby shall have been approved and adopted by the
Company's shareholders by the requisite vote under applicable law and the
Company's Articles of Incorporation.
(b) REGISTRATION STATEMENT EFFECTIVE; PROXY STATEMENT. The SEC shall have
declared the Registration Statement effective. No stop order suspending the
effectiveness of the Registration Statement or any part thereof shall have been
issued and no proceeding for that purpose, and no similar proceeding in respect
of the Proxy Statement/Prospectus, shall have been initiated or threatened in
writing by the SEC.
(c) NO ORDER. No Governmental Entity shall have enacted, issued,
promulgated, enforced or entered any statute, rule, regulation, executive order,
decree, injunction or other order (whether temporary, preliminary or permanent)
which is in effect and which has the effect of making the Merger illegal or
otherwise prohibiting consummation of the Merger. All material foreign antitrust
approvals required to be obtained prior to the Merger in connection with the
transactions contemplated hereby shall have been obtained.
(d) TAX OPINIONS. The Company shall have received from Archer & Greiner,
P.C., and Parent shall have received from Wilson Sonsini Goodrich & Rosati,
P.C., written opinions to the effect that the Merger will constitute a
reorganization within the meaning of Section 368 of the Code. In rendering such
opinions, counsel may rely on (and to the extent reasonably required, the
parties shall make) reasonable representations related thereto.
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6.2 ADDITIONAL CONDITIONS TO OBLIGATIONS OF THE COMPANY. The obligation of
the Company to consummate and effect the Merger shall be subject to the
satisfaction on or prior to the Closing Date of each of the following
conditions, any of which may be waived, in writing, exclusively by the Company:
(a) REPRESENTATIONS AND WARRANTIES. Each representation and warranty of
Parent and Merger Sub contained in this Agreement (i) shall have been true and
correct as of the date of this Agreement and (ii) shall be true and correct on
and as of the Closing Date with the same force and effect as if made on the
Closing Date except for changes contemplated by this Agreement and for those
representations and warranties which address matters only as of a particular
date (which representations shall have been true and correct as of such
particular date), and except, with regard to the foregoing clauses (i) and (ii),
in such cases where the failure to be so true and correct would not have a
Material Adverse Effect on Parent (it being understood that, for purposes of
determining the accuracy of such representations and warranties, (i) all
"Material Adverse Effect" qualifications and other qualifications based on the
word "material" or similar phrases contained in such representations and
warranties shall be disregarded and (ii) any update of or modification to the
Parent Schedules made or purported to have been made after the date of this
Agreement shall be disregarded). The Company shall have received a certificate
with respect to the foregoing signed on behalf of Parent by an authorized
officer of Parent.
(b) AGREEMENTS AND COVENANTS. Parent and Merger Sub shall have performed
or complied in all material respects with all agreements and covenants required
by this Agreement to be performed or complied with by them on or prior to the
Closing Date, and the Company shall have received a certificate to such effect
signed on behalf of Parent by an authorized officer of Parent.
(c) MATERIAL ADVERSE EFFECT. No Material Adverse Effect with respect to
Parent shall have occurred since the date of this Agreement.
6.3 ADDITIONAL CONDITIONS TO THE OBLIGATIONS OF PARENT AND MERGER SUB. The
obligations of Parent and Merger Sub to consummate and effect the Merger shall
be subject to the satisfaction on or prior to the Closing Date of each of the
following conditions, any of which may be waived, in writing, exclusively by
Parent:
(a) REPRESENTATIONS AND WARRANTIES. Each representation and warranty of
the Company contained in this Agreement (i) shall have been true and correct as
of the date of this Agreement and (ii) shall be true and correct on and as of
the Closing Date with the same force and effect as if made on and as of the
Closing Date, except for changes contemplated by this Agreement and for those
representations and warranties which address matters only as of a particular
date (which representations shall have been true and correct and except, with
regard to the foregoing clauses (i) and (ii), in such cases (other than with
respect to the representations and warranties set forth in Sections 2.2, 2.3,
and 2.21) where the failure to be so true and correct would not have a Material
Adverse Effect on the Company as of such particular date (it being understood
that, for purposes of determining the accuracy of such representations and
warranties, (i) all "Material Adverse Effect" qualifications and other
qualifications based on the word "material" or similar phrases contained in such
representations and warranties shall be disregarded and (ii) any update of or
modification to the Company Schedules made or purported to have been made after
the date of this Agreement shall be disregarded)). Parent shall have received a
certificate with respect to the foregoing signed on behalf of the Company by the
Chief Executive Officer and the Chief Financial Officer.
(b) AGREEMENTS AND COVENANTS. The Company shall have performed or complied
in all material respects with all agreements and covenants required by this
Agreement to be performed or complied with by it at or prior to the Closing
Date, and Parent shall have received a certificate to such effect signed on
behalf of the Company by the Chief Executive Officer and the Chief Financial
Officer of the Company.
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(c) MATERIAL ADVERSE EFFECT. No Material Adverse Effect with respect to
the Company and the Subsidiaries shall have occurred since the date of this
Agreement.
(d) AFFILIATE AGREEMENTS. Each of the Company Affiliates shall have
entered into the Company Affiliate Agreement and each of such agreements will be
in full force and effect as of the Effective Time.
(e) CONSENTS. The Company shall have obtained all consents, waivers and
approvals required in connection with the consummation of the transactions
contemplated hereby in connection with the agreements, contracts, licenses or
leases set forth on Schedule 6.3(e).
(f) LEASE AMENDMENT. Parent, the Company, and Thompson Enterprises, L.P.
shall have entered an amendment to the Business Lease dated June 1, 1995,
providing for (i) the potential adjustment of the applicable rent owing
thereunder based on a market appraisal to be completed by an independent
appraiser, (ii) the amendment of the tenant's renewal option thereunder from one
additional five year term to five additional one year terms, (iii) the amendment
of the environmental indemnification provisions to reflect more standard terms
for commercial leases, and (iv) such additional amendments relating to such
lease as the parties shall agree.
ARTICLE VII
TERMINATION, AMENDMENT AND WAIVER
7.1 TERMINATION. This Agreement may be terminated at any time prior to the
Effective Time, whether before or after the requisite approval of the
shareholders of the Company:
(a) by mutual written consent duly authorized by the Boards of Directors of
Parent and the Company;
(b) by either the Company or Parent if the Merger shall not have been
consummated by October 31, 1998 for any reason; PROVIDED, HOWEVER, that the
right to terminate this Agreement under this Section 7.1(b) shall not be
available to any party whose action or failure to act has been a principal cause
of or resulted in the failure of the Merger to occur on or before such date and
such action or failure to act constitutes a breach of this Agreement;
(c) by either the Company or Parent if a Governmental Entity shall have
issued an order, decree or ruling or taken any other action in any case having
the effect of permanently restraining, enjoining or otherwise prohibiting the
Merger, which order, decree or ruling is final and nonappealable;
(d) by either the Company or Parent if the required approvals of the
shareholders of the Company contemplated by this Agreement shall not have been
obtained by reason of the failure to obtain the required vote at a meeting of
the Company's shareholders duly convened therefor or at any adjournment thereof
(provided that the right to terminate this Agreement under this Section 7.1(d)
shall not be available to the Company where the failure to obtain approval of
the Company's shareholder shall have been caused by the action or failure to act
of the Company in breach of this Agreement);
(e) by Parent, if (i) the Board of Directors of the Company shall have
withheld, withdrawn or modified in a manner adverse to Parent its recommendation
in favor of adoption and approval of this Agreement or the Merger; (ii) the
Company shall have failed to include in the Proxy Statement/Prospectus the
unanimous recommendation of the Board of Directors of Company in favor of the
Merger and this Agreement; (iii) the Board of Directors of Company shall have
failed to reconfirm such recommendation within ten (10) business days after a
written request to do so at any time following the announcement or disclosure of
an Acquisition Proposal; (iv) the Board of Directors of the Company shall have
accepted any Acquisition Proposal or recommended any Acquisition Proposal to the
shareholders of the Company; (v) the Company shall have entered into any letter
of intent or similar document or any agreement, contract or commitment accepting
any Acquisition Proposal; or (vi) the Board of Directors of the Company shall
have resolved to do any of the foregoing;
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(f) by the Company, upon a breach of any representation, warranty, covenant,
or agreement on the part of Parent set forth in this Agreement, or if any
representation or warranty of Parent shall have become untrue, in either case
such that the conditions set forth in Section 6.2(a) or Section 6.2(b) would not
be satisfied as of the time of such breach or as of the time such representation
or warranty shall have become untrue, provided, that if such inaccuracy in
Parent's representations and warranties or breach by Parent is curable by Parent
through the exercise of its commercially reasonable efforts, then the Company
may not terminate this Agreement under this Section 7.1(f) for ten (10) days
after notice from the Company of such breach, provided that Parent continues to
exercise such commercially reasonable efforts to cure such breach;
(g) by Parent, upon a breach of any representation, warranty, covenant or
agreement on the part of the Company set forth in this Agreement, or if any
representation or warranty of Company shall have become untrue, in either case
such that the conditions set forth in Section 6.3(a) or Section 6.3(b) would not
be satisfied as of the time of such breach or as of the time such representation
or warranty shall have become untrue, provided, that if such inaccuracy in the
Company's representations and warranties or breach by the Company is curable by
the Company through the exercise of its commercially reasonable efforts, then
Parent may not terminate this Agreement under this Section 7.1(g) for ten (10)
days after notice from Parent of such breach, provided that the Company
continues to exercise such commercially reasonable efforts to cure such breach;
(h) by the Company at any time prior to the approval of the Merger by the
shareholders of the Company, if the Board of Directors recommends a Superior
Offer to the shareholders of the Company in accordance with the provisions of
Section 5.4(c); provided that in the event such recommendation occurs after the
Shareholder Mailing Date, the right of the Company under this Section 7.1(h)
shall not be exercisable until the sooner to occur of (A) the date that is one
hundred twenty (120) days after the date of this Agreement, or (B) the date of a
Company Negative Vote.
7.2 NOTICE OF TERMINATION; EFFECT OF TERMINATION. Any termination of this
Agreement under Section 7.1 above will be effective immediately upon the
delivery of written notice of the terminating party to the other parties hereto.
In the event of the termination of this Agreement as provided in Section 7.1,
this Agreement shall be of no further force or effect, except (i) as set forth
in this Section 7.2, Section 7.3 and Article VIII (General Provisions), each of
which shall survive the termination of this Agreement and (ii) nothing herein
shall relieve any party from liability for any willful or intentional breach of
this Agreement. No termination of this Agreement shall affect the obligations of
the parties contained in the Confidentiality Agreement or the Company Option
Agreement, all of which obligations shall survive termination of this Agreement
in accordance with their terms.
7.3 FEES AND EXPENSES.
(a) GENERAL. Except as set forth in this Section 7.3, all fees and
expenses incurred in connection with this Agreement and the transactions
contemplated hereby shall be paid by the party incurring such expenses whether
or not the Merger is consummated; PROVIDED, HOWEVER, that Parent and the Company
shall share equally all fees and expenses, other than attorneys' and accountants
fees and expenses, incurred in relation to the printing and filing of the Proxy
Statement/Prospectus (including any preliminary materials related thereto) and
the Registration Statement (including financial statements and exhibits) and any
amendments or supplements thereto.
(b) COMPANY PAYMENTS.
(i) If prior to or concurrent with the termination of this Agreement,
(A) the Board of Directors of the Company shall have withheld, withdrawn, or
modified in a manner adverse to Parent its unanimous recommendation in favor
of the adoption and approval of this Agreement and the approval of the
Merger or (B) Company shall have failed to include in the Proxy Statement/
Prospectus the unanimous recommendation of the Board of Directors of Company
in favor of this
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Agreement and the Merger, or (C) the Board of Directors of the Company shall
have failed to reconfirm such unanimous recommendation within ten (10)
business days after a written request from Parent to do so at any time
following the announcement or disclosure of an Acquisition Proposal, or (D)
the Board of Directors of the Company shall have accepted any Acquisition
Proposal or recommended any Acquisition Proposal to the shareholders of
Company, or (E) the Company shall have entered into any letter of intent or
similar agreement or any contract, agreement, or commitment accepting any
Acquisition Proposal, or (F) the Board of Directors shall have resolved to
take any of the actions described in the foregoing clauses (A) through (E),
then the Company shall pay to Parent an amount equal to $1,700,000 in
immediately available funds within one business day following the earlier to
occur of (x) the termination of this Agreement pursuant to Section 7.1(e),
(y) the termination of this Agreement pursuant to Section 7.1(h), or (z) a
Company Negative Vote (as defined below); PROVIDED, HOWEVER, that in the
event a payment is required pursuant to this subparagraph 7.3(b)(i) and
within 12 months following the date the Company is required to make such
payment the Company consummates a Company Acquisition, the Company shall pay
to Parent an amount (which shall be in addition to the amount previously
required to be paid) equal to $2,500,000 in immediately payable funds within
one business day following such consummation.
(ii) If no payment shall be required pursuant to clause 7.3(b)(i) above,
and if (x) the vote of the shareholders of Company as contemplated by this
Agreement approving and adopting this Agreement and approving the Merger
shall not have been obtained by reason of the failure to obtain the required
vote at a meeting duly convened therefor or at any adjournment thereof (a
"COMPANY NEGATIVE VOTE") and (y) prior to such Company Negative Vote there
shall have occurred an Acquisition Proposal which shall have been publicly
disclosed, and (z) within 12 months following such Company Negative Vote,
the Company shall enter into a definitive agreement with respect to a
Company Acquisition, then Company shall pay to Parent an amount equal to
$1,700,000 in immediately available funds within one business day following
the execution by the Company of such definitive agreement; PROVIDED,
HOWEVER, that in the event a payment is required pursuant to this
subparagraph 7.3(b)(ii) and within four months following the date the
Company is required to make such payment the Company consummates a Company
Acquisition, the Company shall pay to Parent an amount (which shall be in
addition to the amount previously required to be paid) equal to $2,500,000
in immediately payable funds within one business day following such
consummation. "COMPANY ACQUISITION" shall mean any of the following
transactions or series of related transactions: (i) a merger, consolidation,
business combination, recapitalization, liquidation, dissolution or similar
transaction involving the Company pursuant to which the shareholders of the
Company immediately preceding such transaction or series of related
transactions hold less than 60% of the equity interests in the surviving or
resulting entity of such transaction or transactions; (ii) a sale and
issuance by the Company of shares of capital stock of the Company which
would, upon issuance, represent more than 40% of the outstanding shares of
capital stock of the Company; (iii) a sale or other disposition by the
Company of assets (excluding inventory and used equipment sold in the
ordinary course of business) representing in excess of 40% of the fair
market value of the Company's business immediately prior to such sale; or
(iv) the acquisition by any person or group (including by way of a tender
offer or an exchange offer or issuance by Company), directly or indirectly,
of beneficial ownership or a right to acquire beneficial ownership of 40% or
more of the then outstanding shares of capital stock of the Company.
(c) The Company acknowledges that the agreements contained in Section 7.3(b)
are an integral part of the transactions contemplated by this Agreement, and
that, without these agreements, Parent would not enter into this Agreement;
accordingly, if the Company fails promptly to pay the amounts due pursuant to
Section 7.3(b), and, in order to obtain such payment, Parent commences a suit
which results in a judgment against the Company for the amounts set forth in
Section 7.3(b) and such judgment is not set aside or reversed, Company shall pay
to Parent its reasonable costs and expenses (including attorneys' fees and
expenses) in connection with such suit, together with interest on the amounts
set forth in Section 7.3(b) at
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the prime rate announced by Bank of America in effect on the date such payment
was required to be made.
(d) Payment of the fees described in Section 7.3(b) above shall not be in
lieu of damages incurred in the event of breach of this Agreement.
7.4 AMENDMENT. Subject to applicable law, this Agreement may be amended by
the parties hereto at any time by execution of an instrument in writing signed
on behalf of each of Parent and the Company.
7.5 EXTENSION; WAIVER. At any time prior to the Effective Time, any party
hereto may, to the extent legally allowed, (i) extend the time for the
performance of any of the obligations or other acts of the other parties hereto,
(ii) waive any inaccuracies in the representations and warranties made to such
party contained herein or in any document delivered pursuant hereto, and (iii)
waive compliance with any of the agreements or conditions for the benefit of
such party contained herein. Any agreement on the part of a party hereto to any
such extension or waiver shall be valid only if set forth in an instrument in
writing signed on behalf of such party. Delay in exercising any right under this
Agreement shall not constitute a waiver of such right.
ARTICLE VIII
GENERAL PROVISIONS
8.1 NON-SURVIVAL OF REPRESENTATIONS AND WARRANTIES. The representations
and warranties of the Company, Parent and Merger Sub contained in this Agreement
shall terminate at the Effective Time, and only the covenants that by their
terms survive the Effective Time shall survive the Effective Time.
8.2 NOTICES. All notices and other communications hereunder shall be in
writing and shall be deemed given if delivered personally or by commercial
delivery service, or sent via telecopy (receipt confirmed) to the parties at the
following addresses or telecopy numbers (or at such other address or telecopy
numbers for a party as shall be specified by like notice):
(a) if to Parent or Merger Sub, to:
Peregrine Systems, Inc.
12670 High Bluff Drive
San Diego, California 92130
ATTN: Richard T. Nelson, General Counsel
Telephone No.: (619) 481-5000
Facsimile No.: (619) 794-6033
with a copy (which shall not constitute notice) to:
Wilson Sonsini Goodrich & Rosati, P.C.
650 Page Mill Road
Palo Alto, California 94304-1050
ATTN: Douglas H. Collom, Esq.
Telephone No.: (650) 493-9300
Facsimile No.: (650) 493-6811
(b) if to the Company, to:
Innovative Tech Systems, Inc.
445 Jacksonville Road, Suite 200
Warminster, Pennsylvania 18974
ATTN: John M. Thompson, President
Telephone No.: (215) 441-5600
Facsimile No.: (215) 441-5733
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with a copy (which shall not constitute notice) to:
Archer & Greiner
A Professional Corporation
One Centennial Square
Haddonfield, New Jersey 08033
ATTN: Gary L. Green, Esq.
Telephone No.: (609) 795-2121
Facsimile No.: (609) 795-0574
8.3 INTERPRETATION.
(a) When a reference is made in this Agreement to Exhibits, such reference
shall be to an Exhibit to this Agreement unless otherwise indicated. When a
reference is made in this Agreement to Sections, such reference shall be to a
Section of this Agreement unless otherwise indicated. The words "INCLUDE,"
"INCLUDES," and "INCLUDING," when used herein, shall be deemed in each case to
be followed by the words "without limitation." The table of contents and
headings contained in this Agreement are for reference purposes only and shall
not affect in any way the meaning or interpretation of this Agreement. When
reference is made herein to "THE BUSINESS OF" an entity, such reference shall be
deemed to include the business of all direct and indirect subsidiaries of such
entity. Reference to the subsidiaries of an entity shall be deemed to include
all direct and indirect subsidiaries of such entity.
(b) For purposes of this Agreement, the term "PERSON" shall mean any
individual, corporation (including any non-profit corporation), general
partnership, limited partnership, limited liability partnership, joint venture,
estate, trust, company (including any limited liability company or joint stock
company), firm or other enterprise, association, organization, entity or
Governmental Entity.
(c) For purposes of this Agreement, the term "MATERIAL ADVERSE EFFECT" when
used in connection with an entity means any change, event, violation,
inaccuracy, circumstance or effect that is materially adverse to the business,
assets (including intangible assets), capitalization, financial condition,
results of operations or prospects of such entity and its subsidiaries taken as
a whole, except for those changes, events, violations, inaccuracies,
circumstances and effects that (i) are caused by conditions affecting the United
States economy as a whole or affecting the industry in which such entity
competes as a whole, which conditions do not affect such entity in a
disproportionate manner, or (ii) are related to or result from announcement or
pendency of the Merger.
(d) For purposes of this Agreement, "TO THE KNOWLEDGE OF THE COMPANY" shall
mean the knowledge of any of William M. Thompson, John M. Thompson, Karen A.
Thompson, John R. Smart, Mark R. Hernick, Julie Moore, Jerry Cox, Hugo J.
Affanato, Richard M. Salva, or Jonathan Manin. "KNOWLEDGE," when used in this
context shall mean, as to the facts or circumstances represented, (i) actual
knowledge of such person, and (ii) knowledge that an officer or director should
be expected to have after examination of such books and records which such
officer or director would be expected to examine, and otherwise, through the
exercise of reasonable care in the conduct of the business of the Company.
8.4 COUNTERPARTS. This Agreement may be executed in one or more
counterparts, all of which shall be considered one and the same agreement and
shall become effective when one or more counterparts have been signed by each of
the parties and delivered to the other party, it being understood that all
parties need not sign the same counterpart.
8.5 ENTIRE AGREEMENT; THIRD PARTY BENEFICIARIES. This Agreement and the
documents and instruments and other agreements among the parties hereto as
contemplated by or referred to herein, including the Company Schedules and the
Parent Schedules (a) constitute the entire agreement among the parties with
respect to the subject matter hereof and supersede all prior agreements and
understandings, both written and oral, among the parties with respect to the
subject matter hereof, it being understood that the Confidentiality Agreement
shall continue in full force and effect until the Closing and shall survive any
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termination of this Agreement and (b) are not intended to confer upon any other
person any rights or remedies hereunder, except as specifically provided in
Section 5.10.
8.6 SEVERABILITY. In the event that any provision of this Agreement or the
application thereof, becomes or is declared by a court of competent jurisdiction
to be illegal, void or unenforceable, the remainder of this Agreement will
continue in full force and effect and the application of such provision to other
persons or circumstances will be interpreted so as reasonably to effect the
intent of the parties hereto. The parties further agree to replace such void or
unenforceable provision of this Agreement with a valid and enforceable provision
that will achieve, to the extent possible, the economic, business and other
purposes of such void or unenforceable provision.
8.7 OTHER REMEDIES; SPECIFIC PERFORMANCE. Except as otherwise provided
herein, any and all remedies herein expressly conferred upon a party will be
deemed cumulative with and not exclusive of any other remedy conferred hereby,
or by law or equity upon such party, and the exercise by a party of any one
remedy will not preclude the exercise of any other remedy. The parties hereto
agree that irreparable damage would occur in the event that any of the
provisions of this Agreement were not performed in accordance with their
specific terms or were otherwise breached. It is accordingly agreed that the
parties shall be entitled to seek an injunction or injunctions to prevent
breaches of this Agreement and to enforce specifically the terms and provisions
hereof in any court of the United States or any state having jurisdiction, this
being in addition to any other remedy to which they are entitled at law or in
equity.
8.8 GOVERNING LAW. This Agreement shall be governed by and construed in
accordance with the laws of the State of California, regardless of the laws that
might otherwise govern under applicable principles of conflicts of law thereof;
provided that issues involving the corporate governance of any of the parties
hereto shall be governed by their respective jurisdictions of incorporation.
Each of the parties hereto irrevocably consents to the exclusive jurisdiction of
any state or federal court within the Southern District of California, in
connection with any matter based upon or arising out of this Agreement or the
matters contemplated herein, other than issues involving the corporate
governance of any of the parties hereto, agrees that process may be served upon
them in any manner authorized by the laws of the State of California for such
persons, and waives and covenants not to assert or plead any objection which
they might otherwise have to such jurisdiction and such process.
8.9 RULES OF CONSTRUCTION. The parties hereto agree that they have been
represented by counsel during the negotiation and execution of this Agreement
and, therefore, waive the application of any law, regulation, holding or rule of
construction providing that ambiguities in an agreement or other document will
be construed against the party drafting such agreement or document.
8.10 ASSIGNMENT. No party may assign either this Agreement or any of its
rights, interests, or obligations hereunder without the prior written approval
of the other parties. Subject to the preceding sentence, this Agreement shall be
binding upon and shall inure to the benefit of the parties hereto and their
respective successors and permitted assigns.
8.11 WAIVER OF JURY TRIAL. EACH OF PARENT, THE COMPANY AND MERGER SUB
HEREBY IRREVOCABLY WAIVES ALL RIGHT TO TRIAL BY JURY IN ANY ACTION, PROCEEDING
OR COUNTERCLAIM (WHETHER BASED ON CONTRACT, TORT OR OTHERWISE) ARISING OUT OF OR
RELATING TO THIS AGREEMENT OR THE ACTIONS OF PARENT, THE COMPANY OR MERGER SUB
IN THE NEGOTIATION, ADMINISTRATION, PERFORMANCE AND ENFORCEMENT HEREOF.
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IN WITNESS WHEREOF, Parent, Merger Sub, and the Company have caused this
Agreement to be signed as of the date first written above.
<TABLE>
<S> <C> <C> <C>
PEREGRINE SYSTEMS, INC. INNOVATIVE TECH SYSTEMS, INC.
a Delaware Corporation an Illinois Corporation
By /s/ STEPHEN P. GARDNER By /s/ WILLIAM M. THOMPSON
-------------------------------------- --------------------------------------
Stephen P. Gardner William M. Thompson
PRESIDENT AND CHIEF EXECUTIVE OFFICER CHAIRMAN AND CHIEF EXECUTIVE OFFICER
HOMER ACQUISITION CORPORATION
a Delaware Corporation
By /s/ STEPHEN P. GARDNER
--------------------------------------
Stephen P. Gardner
PRESIDENT AND CHIEF EXECUTIVE OFFICER
</TABLE>
[SIGNATURE PAGE TO AGREEMENT AND PLAN OF REORGANIZATION]
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EXHIBIT A TO MERGER AGREEMENT
FORM OF VOTING AGREEMENT
This Voting Agreement ("Agreement") is made and entered into as of May 7,
1998, between Peregrine Systems, Inc., a Delaware corporation ("Parent"), and
the undersigned shareholder ("Shareholder") of Innovative Tech Systems, Inc., an
Illinois corporation (the "Company").
RECITALS
A. Concurrently with the execution of this Agreement, Parent, Company and
Homer Acquisition Corporation, a Delaware corporation and a wholly owned
subsidiary of Parent ("Merger Sub"), have entered into an Agreement and Plan of
Reorganization dated as of May 7, 1998 (the "Merger Agreement") which provides
for the merger (the "Merger") of Merger Sub with and into the Company. Pursuant
to the Merger, shares of Common Stock of the Company will be converted into
Common Stock of Parent on the basis described in the Merger Agreement.
B. The Shareholder is the record holder and beneficial owner (as defined in
Rule 13d-3 under the Securities Exchange Act of 1934, as amended (the "Exchange
Act")) of such number of shares of the outstanding Common Stock of the Company
as is indicated on the final page of this Agreement (the "Shares").
C. Parent desires the Shareholder to agree, and the Shareholder is willing
to agree, not to transfer or otherwise dispose of any of the Shares, or any
other shares of capital stock of the Company acquired hereafter and prior to the
Expiration Date (as defined in Section 1.1 below, except as otherwise permitted
hereby), and to vote the Shares and any other such shares of capital stock of
the Company so as to facilitate consummation of the Merger.
NOW, THEREFORE, in consideration of the parties agree as follows:
1. AGREEMENT TO RETAIN SHARES.
1.1 TRANSFER AND ENCUMBRANCE. Shareholder agrees not to transfer (except
as may be specifically required by court order), sell, exchange, pledge or
otherwise dispose of or encumber any of the Shares or any New Shares as defined
in Section 1.2 below, or to make any offer or agreement relating thereto, at any
time prior to the Expiration Date. As used herein, the term "Expiration Date"
shall mean the earlier to occur of (i) such date and time as the Merger shall
become effective in accordance with the terms and provisions of the Merger
Agreement and (ii) such date as the Merger Agreement shall be terminated
pursuant to Article VII thereof.
1.2 ADDITIONAL PURCHASES. Shareholder agrees that any shares of capital
stock of the Company that Shareholder purchases or with respect to which
Shareholder otherwise acquires beneficial ownership (as such term is defined in
Rule 13d-3 under the Exchange Act) after the execution of this Agreement and
prior to the Expiration Date ("New Shares") shall be subject to the terms and
conditions of this Agreement to the same extent as if they constituted Shares.
2. AGREEMENT TO VOTE SHARES. At every meeting of the shareholders of the
Company called with respect to any of the following, and at every adjournment
thereof, and on every action or approval by written consent of the Shareholders
of the Company with respect to any of the following, Shareholder shall vote the
Shares and any New Shares: (i) in favor of approval of the Merger Agreement and
the Merger and any matter that could reasonably be expected to facilitate the
Merger; and (ii) against approval of any proposal made in opposition to or
competition with consummation of the Merger and against any merger,
consolidation, sale of assets, reorganization or recapitalization, with any
party other than with Parent and its affiliates and against any liquidation or
winding up of the Company (each of the foregoing is hereinafter referred to as
an "Opposing Proposal"). Shareholder agrees not to take any actions contrary to
Shareholder's obligations under this Agreement.
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<PAGE>
3. IRREVOCABLE PROXY. Concurrently with the execution of this Agreement,
Shareholder agrees to deliver to Parent a proxy in the form attached hereto as
Exhibit A (the "Proxy"), which shall be irrevocable, with the total number of
shares of capital stock of the Company beneficially owned (as such term is
defined in Rule 13d-3 under the Exchange Act) by Shareholder set forth therein.
4. REPRESENTATIONS, WARRANTIES AND COVENANTS OF THE
SHAREHOLDER. Shareholder hereby represents, warrants and covenants to Parent as
follows:
4.1 OWNERSHIP OF SHARES. Shareholder (i) is the beneficial owner of the
Shares, which at the date hereof and at all times up until the Expiration Date
will be free and clear of any liens, claims, options, charges or other
encumbrances; (ii) does not beneficially own any shares of capital stock of the
Company other than the Shares (excluding shares as to which Shareholder
currently disclaims beneficial ownership in accordance with applicable law); and
(iii) has full power and authority to make, enter into and carry out the terms
of this Agreement and the Proxy.
4.2 NO PROXY SOLICITATIONS. Shareholder will not, and will not permit any
entity under Shareholder's control to: (i) solicit proxies or become a
"participant" in a "solicitation" (as such terms are defined in Regulation 14A
under the Exchange Act) with respect to an Opposing Proposal or otherwise
encourage or assist any party in taking or planning any action that would
compete with, restrain or otherwise serve to interfere with or inhibit the
timely consummation of the Merger in accordance with the terms of the Merger
Agreement; (ii) initiate a Shareholders' vote or action by consent of the
Company Shareholders with respect to an Opposing Proposal; or (iii) become a
member of a "group" (as such term is used in Section 13(d) of the Exchange Act)
with respect to any voting securities of the Company with respect to an Opposing
Proposal.
5. ADDITIONAL DOCUMENTS. Shareholder hereby covenants and agrees to execute
and deliver any additional documents necessary or desirable, in the reasonable
opinion of Parent or Shareholder, as the case may be, to carry out the intent of
this Agreement.
6. CONSENT AND WAIVER. Shareholder hereby gives any consents or waivers
that are reasonably required for the consummation of the Merger under the terms
of any agreements to which Shareholder is a party or pursuant to any rights
Shareholder may have.
7. TERMINATION. This Agreement and the Proxy delivered in connection
herewith shall terminate and shall have no further force or effect as of the
Expiration Date.
8. MISCELLANEOUS.
8.1 SEVERABILITY. If any term, provision, covenant or restriction of this
Agreement is held by a court of competent jurisdiction to be invalid, void or
unenforceable, then the remainder of the terms, provisions, covenants and
restrictions of this Agreement shall remain in full force and effect and shall
in no way be affected, impaired or invalidated.
8.2 BINDING EFFECT AND ASSIGNMENT. This Agreement and all of the
provisions hereof shall be binding upon and inure to the benefit of the parties
hereto and their respective successors and permitted assigns, but, except as
otherwise specifically provided herein, either this Agreement nor any of the
rights, interests or obligations of the parties hereto may be assigned by either
of the parties without prior written consent of the other.
8.3 AMENDMENTS AND MODIFICATION. This Agreement may not be modified,
amended, altered or supplemented except upon the execution and delivery of a
written agreement executed by the parties hereto.
8.4 SPECIFIC PERFORMANCE; INJUNCTIVE RELIEF. The parties hereto
acknowledge that Parent will be irreparably harmed and that there will be no
adequate remedy at law for a violation of any of the covenants or agreement of
Shareholder set forth herein. Therefore, it is agreed that, in addition to any
other
AA-2
<PAGE>
remedies that may be available to Parent upon any such violation, Parent shall
have the right to enforce such covenants and agreements by specific performance,
injunctive relief or by any other means available to Parent at law or in equity.
8.5 NOTICES. All notices, requests, claims, demands and other
communications hereunder shall be in writing and sufficient if delivered in
person, by cable, telegram or telex, or sent by mail (registered or certified
mail, postage prepaid, return receipt requested) or overnight courier (prepaid)
to the respective parties as follows:
<TABLE>
<S> <C>
If to Parent: Peregrine Systems, Inc.
12670 High Bluff Drive
San Diego, California 92130
Attn: General Counsel
With a copy to: Wilson Sonsini Goodrich & Rosati
650 Page Mill Road
Palo Alto, California 94304
Attn: Douglas H. Collom, Esq.
If to the Shareholder: --------------------------------
--------------------------------
--------------------------------
With a copy to: Archer & Greiner
One Centennial Square
Haddonfield, New Jersey 08033
Attn: Gary L. Green, Esq.
</TABLE>
or to such other address as any party may have furnished to the other in writing
in accordance herewith, except that notices of change of address shall only be
effective upon receipt.
8.6 GOVERNING LAW. This Agreement shall be governed by, and construed and
enforced in accordance with, the internal laws of the State of California.
8.7 ENTIRE AGREEMENT. This Agreement contains the entire understanding of
the parties in respect of the subject matter hereof, and supersedes all prior
negotiations and understandings between the parties with respect to such subject
matter.
8.8 COUNTERPARTS. This Agreement may be executed in several counterparts,
each of which shall be an original, but all of which together shall constitute
one and the same agreement.
8.9 EFFECT OF HEADINGS. The section headings herein are for convenience
only and shall not affect the construction of interpretation of this Agreement.
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<PAGE>
IN WITNESS WHEREOF, the parties have caused this Voting Agreement to be duly
executed on the date and year first above written.
<TABLE>
<S> <C> <C>
PEREGRINE SYSTEMS, INC.
By:
-----------------------------------------
Stephen P. Gardner
PRESIDENT AND CHIEF EXECUTIVE OFFICER
SHAREHOLDER:
By:
-----------------------------------------
Shareholder's Address for Notice:
---------------------------------------
---------------------------------------
---------------------------------------
Shares beneficially owned:
shares of Common Stock
</TABLE>
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<PAGE>
EXHIBIT A TO VOTING AGREEMENT
IRREVOCABLE PROXY
The undersigned Shareholder of Innovative Tech Systems, Inc., an Illinois
corporation ("Company"), hereby irrevocably appoints the directors on the Board
of Directors of Peregrine Systems, Inc., a Delaware corporation ("Parent"), and
each of them, as the sole and exclusive attorneys and proxies of the
undersigned, with full power of substitution and resubstitution, to the full
extent of the undersigned's rights with respect to the shares of capital stock
of the Company beneficially owned by the undersigned, which shares are listed on
the final page of this Proxy (the "Shares"), and any and all other shares or
securities issued or issuable in respect thereof on or after the date hereof,
until such time as that certain Agreement and Plan of Reorganization dated as of
May 7, 1998 (the "Merger Agreement"), among Parent, Homer Acquisition
Corporation, a Delaware corporation and a wholly-owned subsidiary of Parent
("Merger Sub"), and Company, shall be terminated in accordance with its terms or
the Merger (as defined in the Merger Agreement) is effective. Upon the execution
hereof, all prior proxies given by the undersigned with respect to the Shares
and any and all other shares or securities issued or issuable in respect thereof
on or after the date hereof are hereby revoked and no subsequent proxies will be
given.
This proxy is irrevocable, is granted pursuant to the Voting Agreement dated
as of May 7, 1998 between Parent and the undersigned Shareholder (the "Voting
Agreement"), and is granted in consideration of Parent entering into the Merger
Agreement. The attorneys and proxies named above will be empowered at any time
prior to termination of the Merger Agreement to exercise all voting and other
rights (including, without limitation, the power to execute and deliver written
consents with respect to the Shares) of the undersigned at every annual, special
or adjourned meeting of Company Shareholders, and in every written consent in
lieu of such a meeting, or otherwise, in favor of approval of the Merger and the
Merger Agreement and any matter that could reasonably be expected to facilitate
the Merger, and against any proposal made in opposition to or competition with
the consummation of the Merger and against any merger, consolidation, sale of
assets, reorganization or recapitalization of the Company with any party other
than Parent and its affiliates and against any liquidation or winding up of the
Company.
The attorneys and proxies named above may only exercise this proxy to vote
the Shares subject hereto at any time prior to termination of the Merger
Agreement at every annual, special or adjourned meeting of the Shareholders of
Company and in every written consent in lieu of such meeting, in favor of
approval of the Merger and the Merger Agreement and any matter that could
reasonably be expected to facilitate the Merger, and against any merger,
consolidation, sale of assets, reorganization or recapitalization of Company
with any party other than Parent and its affiliates, and against any liquidation
or winding up of the Company, and may not exercise this proxy on any other
matter. The undersigned Shareholder may vote the Shares on all other matters.
Any obligation of the undersigned hereunder shall be binding upon the
successors and assigns of the undersigned.
This proxy is irrevocable.
Dated: May 7, 1998
Signature of Shareholder: ___________________________
Print Name of Shareholder: __________________________
Shares beneficially owned:
______________ shares of Common Stock
***PROXY***
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<PAGE>
EXHIBIT B TO MERGER AGREEMENT
FORM OF NONCOMPETITION AGREEMENT
THIS NONCOMPETITION AGREEMENT is being executed and delivered as of May ,
1998 by (the "Shareholder") in favor of and for the benefit
of PEREGRINE SYSTEMS, INC., a Delaware corporation ("Parent"), and INNOVATIVE
TECH SYSTEMS, INC., an Illinois corporation (the "Company"). For purposes of
this Agreement, the term "Company" shall mean, following consummation of the
Merger (as defined herein), Peregrine Systems Facilities Management, Inc. as
successor in interest to the business of the Company.
RECITALS
A. As an employee and shareholder of the Company, Shareholder has obtained
and will obtain extensive and valuable knowledge and information concerning the
business of the Company (including confidential information relating to the
Company and its operations, assets, contracts, customers, personnel, plans and
prospects).
B. Contemporaneously with the execution and delivery of this Noncompetition
Agreement, the Company is entering into an Agreement and Plan of Reorganization
with Parent and a subsidiary of Parent (the "Reorganization Agreement"), which
provides (subject to the conditions set forth therein) for the merger of
Parent's subsidiary into the Company (the "Merger"). It is contemplated that, as
a result of the Merger, the Company will become a wholly-owned subsidiary of
Parent, and Shareholder will receive shares of common stock of Parent in
exchange for Shareholder's shares of common stock of the Company.
C. It is also contemplated that, on the date as of which the Merger becomes
effective (the "Effective Date"), Shareholder will remain an employee of the
Company and, as such, will obtain extensive and valuable knowledge and
information concerning the business of Parent (including confidential
information relating to Parent and its operations, assets, contracts, customers,
personnel, plans and prospects).
D. In connection with the Merger (and as a condition to entering into the
Reorganization Agreement and consummating the Merger), and to more fully secure
unto Parent the benefits of the Merger, Parent has requested that Shareholder
enter into this Noncompetition Agreement; and Shareholder is entering into this
Noncompetition Agreement in order to induce Parent to enter into the
Reorganization Agreement and consummate the Merger.
E. Both Parent and the Company have conducted, are conducting and will
continue to conduct their respective businesses on a worldwide basis.
AGREEMENT
In order to induce Parent to enter into the Reorganization Agreement and
consummate the Merger, and in consideration of the issuance and delivery to
Shareholder of shares of common stock of Parent pursuant to the Reorganization
Agreement and the payment by Parent to the Shareholder of $2,000,000 upon the
closing of the Merger, Shareholder agrees as follows:
1. ACKNOWLEDGMENTS BY SHAREHOLDER. Shareholder acknowledges that the
promises and restrictive covenants that Shareholder is providing in this
Noncompetition Agreement are reasonable and necessary to the protection of
Parent's business and Parent's legitimate interests in its acquisition of the
Company (including the Company's goodwill) pursuant to the Reorganization
Agreement. Shareholder acknowledges that, in connection with the consummation of
the Merger, all of the Shareholder's shares of stock of the Company will be
exchanged for shares of common stock of Parent.
2. NONCOMPETITION. During the Restriction Period (as defined below),
Shareholder shall not (other than in connection with employment with the
Company, Parent, their successors, or assigns):
AB-1
<PAGE>
(a) engage in software development in the market for infrastructure
management software applications (including, without limitation, related help
desk, asset management, and facilities management applications);
(b) be or become an officer, director, shareholder, owner, affiliate,
salesperson, co-owner, partner, trustee, promoter, technician, engineer,
analyst, employee, agent, representative, supplier, consultant, advisor or
manager of or to, or otherwise acquire or hold any interest in, any person or
entity that competes in the market for infrastructure management software
applications (including, without limitation, related help desk, asset
management, and facilities management applications); or
(c) provide any service (as an employee, consultant or otherwise), support,
product or technology to any person or entity, if such service, support, product
or technology involves or relates to software development in the market for
infrastructure management software applications (including, without limitation,
related help desk, asset management, and facilities management applications);
PROVIDED, HOWEVER, that nothing in this Section 2 shall prevent Shareholder from
owning as a passive investment less than 1% of the outstanding shares of the
capital stock of a publicly-held Company if (A) such shares are actively traded
on an established national securities market in the United States and (B)
Shareholder is not otherwise associated directly or indirectly with such
corporation or any affiliate of such corporation.
"Restriction Period" as used herein shall mean the period commencing on the
Effective Date and ending on the date that is 72 months from the Effective Date;
provided that notwithstanding the lapse of such period, the Restriction Period
shall continue for six months from the date of Shareholder's termination of
employment by Parent or any subsidiary of Parent for any reason.
3. NONSOLICITATION. Shareholder further agrees that Shareholder will not:
(a) personally or through others, encourage, induce, attempt to induce,
solicit or attempt to solicit (on Shareholder's own behalf or on behalf of any
other person or entity) during the Restricted Period any employee of the
Company, Parent or any of Parent's subsidiaries to leave his or her employment
with the Company, Parent or any of Parent's subsidiaries;
(b) employ, or permit any entity over which Shareholder exercises voting
control to employ, during the Restricted Period any person who shall have
terminated his or her employment with the Company, Parent or any of Parent's
subsidiaries, provided that the foregoing restriction shall not limit the
Shareholder's ability to employ any member of the Shareholder's immediate family
following the third anniversary of the closing of the Merger; or
(c) personally or through others, interfere or attempt to interfere with the
relationship or prospective relationship of the Company, Parent or any of
Parent's subsidiaries with any person or entity that is, was or is expected to
become a customer or client of the Company, Parent or any of Parent's
subsidiaries.
4. INDEPENDENCE OF OBLIGATIONS. The covenants and obligations of
Shareholder set forth in this Noncompetition Agreement shall be construed as
independent of any other agreement or arrangement between Shareholder, on the
one hand, and the Company or Parent on the other.
5. SPECIFIC PERFORMANCE. Shareholder agrees that in the event of any breach
by Shareholder of any covenant, obligation or other provision contained in this
Noncompetition Agreement, Parent and the Company shall be entitled (in addition
to any other remedy that may be available to them including but not limited to a
claim for damages based on the stock and cash consideration paid to Shareholder
by Parent) to the extent permitted by applicable law (a) a decree or order of
specific performance to enforce the observance and performance of such covenant,
obligation or other provision, and (b) an injunction restraining such breach or
threatened breach.
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<PAGE>
6. NON-EXCLUSIVITY. The rights and remedies of Parent and the Company
hereunder are not exclusive of or limited by any other rights or remedies which
parent or the Company may have, whether at law, in equity, by contract or
otherwise, all of which shall be cumulative (and not alternative). Without
limiting the generality of the foregoing, the rights and remedies of Parent and
the Company hereunder, and the obligations and liabilities of Shareholder
hereunder, are in addition to their respective rights, remedies, obligations and
liabilities under the law of unfair competition, misappropriation of trade
secrets and the like. This Noncompetition Agreement does not limit Shareholder's
obligations or the rights of Parent or the Company (or any affiliate of Parent
or the Company) under the terms of any other agreement between Shareholder and
Parent or the Company or any affiliate of Parent or the Company.
7. NOTICES. Any notice or other communication required or permitted to be
delivered to Shareholder, the Company or Parent under this Noncompetition
Agreement shall be in writing and shall be deemed properly delivered, given and
received when delivered (by hand, by registered mail, by courier or express
delivery service or by facsimile) to the address or facsimile telephone number
set forth beneath the name of such party below (or to such other address or
facsimile telephone number as such party shall have specified in a written
notice delivered in accordance with this Section 7):
<TABLE>
<S> <C>
IF TO PARENT: Peregrine Systems, Inc.
12670 High Bluff Drive
San Diego, California 92130
Attention: Richard T. Nelson
Facsimile No.: (619) 794-6033
with a copy to:
Peregrine Systems Facilities
Management, Inc.
445 Jacksonville Road, Suite 200
Warminster, Pennsylvania 18974
Attention: President
Facsimile No.: (215) 441-5733
IF TO SHAREHOLDER: William M. Thompson
301 Haines Drive
North Wales, Pennsylvania 19454
</TABLE>
8. SEVERABILITY. If any provision of this Noncompetition Agreement or any
part of any such provision is held under any circumstances to be invalid or
unenforceable in any jurisdiction, then (a) such provision or part thereof
shall, with respect to such circumstances and in such jurisdiction, be deemed
amended to conform to applicable laws so as to be valid and enforceable to the
fullest possible extent, (b) the invalidity or unenforceability of such
provision or part thereof under such circumstances and in such jurisdiction
shall not affect the validity or enforceability of such provision or part
thereof under any other circumstances or in any other jurisdiction, and (c) such
invalidity of enforceability of such provision or part thereof shall not affect
the validity or enforceability of the remainder of such provision or the
validity or enforceability of any other provision of this Noncompetition
Agreement. Each provision of this Noncompetition Agreement is separable from
every other provision of this Noncompetition Agreement, and each part of each
provision of this Noncompetition Agreement is separable from every other part of
such provision.
9. GOVERNING LAW. This Noncompetition Agreement shall be construed in
accordance with, and governed in all respects by, the laws of the Commonwealth
of Pennsylvania (without giving effect to principles of conflicts of laws).
AB-3
<PAGE>
10. WAIVER. No failure on the part of Parent or the Company to exercise any
power, right, privilege or remedy under this Noncompetition Agreement, and no
delay on the part of Parent or the Company in exercising any power, right,
privilege or remedy under this Noncompetition Agreement, shall operate as a
waiver of such power, right, privilege or remedy; and no single or partial
exercise of any such power, right, privilege or remedy shall preclude any other
or further exercise thereof or of any other power, right, privilege or remedy.
Neither Parent nor the Company shall be deemed to have waived any claim arising
out of this Noncompetition Agreement, or any power, right, privilege or remedy
under this Noncompetition Agreement, unless the waiver of such claim, power,
right, privilege or remedy is expressly set forth in a written instrument duly
executed and delivered on behalf of such party; and any such waiver shall not be
applicable or have any effect except in the specific instance in which it is
given.
11. CAPTIONS. The captions contained in this Noncompetition Agreement are
for convenience of reference only, shall not be deemed to be a part of this
Noncompetition Agreement and shall not be referred to in connection with the
construction or interpretation of this Noncompetition Agreement.
12. FURTHER ASSURANCES. Shareholder shall execute and/or cause to be
delivered to the Company and Parent such instruments and other documents and
shall take such other actions as Company and Parent may reasonably request to
effectuate the intent and purposes of this Noncompetition Agreement.
13. ENTIRE AGREEMENT. This Noncompetition Agreement, and the other
agreements referred to herein set forth the entire understanding of Shareholder,
the Company and Parent relating to the subject matter hereof and thereof and
supersede all prior agreements and understandings between any of such parties
relating to the subject matter hereof and thereof.
14. AMENDMENTS. This Noncompetition Agreement may not be amended, modified,
altered, or supplemented other than by means of a written instrument duly
executed and delivered on behalf of Parent and Shareholder.
15. ASSIGNMENT. This Noncompetition Agreement and all obligations hereunder
are personal to Shareholder and may not be transferred or assigned by
Shareholder at any time. Parent may assign its rights under this Noncompetition
Agreement to any entity in connection with any sale or transfer of all or
substantially all of Parent's assets to such entity.
16. BINDING NATURE. Subject to Section 15, this Noncompetition Agreement
will be binding upon Shareholder and Shareholder's representatives, executors,
administrators, estate, heirs, successors and assigns, and will inure to the
benefit of Parent and the Company and their respective successors and assigns.
IN WITNESS WHEREOF, the undersigned has executed this Noncompetition
Agreement as of the date first above written.
<TABLE>
<S> <C>
------------------------------------------
SHAREHOLDER
</TABLE>
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<PAGE>
EXHIBIT C TO MERGER AGREEMENT
FORM OF EMPLOYMENT OFFER LETTERS
May , 1998
Name and address of Offeree
Dear :
On behalf of Peregrine Systems Facilities Management, Inc. ("PSFM"), I would
like to extend our offer to you for the position of of PSFM,
reporting to . Your employment will become effective on the date
of the closing (the "Closing Date") of the acquisition by Peregrine Systems,
Inc. ("PSI") of Innovative Tech Systems, Inc., the predecessor-in-interest to
PSFM, although this agreement is being entered as of the date of signing of
definitive agreements relating to such acquisition. Between the date of this
letter and the Closing Date, your employment will continue with Innovative Tech
Systems, Inc. under your existing terms of employment. The terms of this letter
shall govern your employment with PSFM from the Closing Date until the earlier
of a termination of your employment or the third anniversary of the Closing
Date. Although you will be an employee of PSFM, PSI hereby guarantees payment of
all amounts and the provision of all benefits due hereunder.
Upon the effectiveness of this agreement, your starting salary will be
$ per semi-monthly pay period. In addition, you will be eligible for a
bonus of up to $ per annum based on the attainment of specific employment
objectives. You will be entitled to the employment benefits offered to all
employees of PSFM, which currently include medical and group life insurance
benefits and participation in the 401(k) plan available to PSFM employees. Upon
your commencement of employment, you will also receive $ in consideration
of your execution and delivery of and agreement to be bound by the
Noncompetition Agreement entered into by you and PSI in connection with the
acquisition. All amounts payable under this agreement, including the $
payable under the Noncompetition Agreement, will be subject to applicable tax
withholding requirements.
Upon your commencement of employment, you will receive options to
purchase common stock of PSI. This grant has been approved by the PSI Board of
Directors in connection with your employment and shall be priced at an exercise
price determined by, and four-year vesting pursuant to, the PSI 1994 Stock
Option Plan on the date of your first day of employment. Your employment shall
not be effective until we have received an executed Invention and
Non-Disclosure, and Arbitration Agreement, a copy of which is attached.
In addition, PSFM agrees to maintain a key man life insurance policy under
which you will be the insured party and under which benefits in the amount of
$ will be payable, one-half to PSFM and one-half to a beneficiary or
beneficiaries to be designated by you. PSFM's obligation to maintain such
insurance shall terminate upon the earliest to occur of (i) the third
anniversary of the Closing Date, (ii) your voluntary termination of employment
with PSFM, and (iii) a termination of your employment by PSFM for Cause (as
defined herein).
PSFM is an "at-will" employer, and as such your employment is subject to
termination at any time by either party, with or without Cause. Accordingly,
either PSFM or you may terminate your employment for any reason or no reason and
at any time. In the event that PSFM terminates your employment without Cause
prior to the third anniversary of the Closing Date, you will be entitled (i) to
continue to receive your base salary, payable in accordance with PSFM's payroll
procedures, from the date of such termination until the third anniversary of the
Closing Date, (ii) to receive on each April 1 following the termination date
until the third anniversary of the Closing Date the amount of $ ,
representing the maximum bonus to which you could have become entitled had you
remained employed on that date, and (iii) to continued vesting of the
options granted hereunder, in accordance with the terms of such options as if
you had remained employed with PSFM through the third anniversary of the Closing
Date.
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<PAGE>
For purposes of this agreement, "Cause" shall mean (i) willful failure to
perform your employment duties, other than a failure resulting from complete or
partial incapacity due to physical or mental illness or impairment, (ii) a
willful act which constitutes gross misconduct and which is injurious to PSI,
PSFM, or any of their subsidiaries (collectively, the "Company), (iii) a willful
breach of a material provision of this agreement, (iv) any breach of any
material provision of the Noncompetition Agreement or the Invention and
Non-Disclosure, and Arbitration Agreement, or (v) a material and willful
violation of a federal or state law or regulation applicable to the business of
the Company. No act, or failure to act, by you shall be considered "willful"
unless committed without good faith without a reasonable belief that the act or
omission was in the Company's best interest.
During the term of this agreement, the Company agrees that (i) the total
number of days on which you will be required to travel on an overnight basis
will not exceed 40% of the total number of business days during any calendar
year, (ii) you will not be required to relocate to any office of the Company
outside metropolitan Philadelphia without your prior consent, and (iii) your job
responsibilities as an employee of the Company will be consistent with those of
a senior executive of PSFM. For purposes of this agreement, your job
responsibilities will be deemed to be inconsistent with those of a senior
executive of PSFM if, among other reasons, you no longer report to (or
other senior executive of the Company responsible for the management of the
Company's facilities management software product). The Company's breach of any
obligation pursuant to this paragraph shall be deemed a termination of your
employment without Cause.
No compensation or benefits will be paid or provided to you under this
agreement for any period following the effectiveness of any termination of
employment by you, any termination by PSFM or PSI for Cause, or as a result of
your death. Except as set forth in this agreement relating to the vesting of the
options in the event of a termination by PSI without Cause, your rights
under the benefit plans of the Company shall be determined under the provisions
of those plans.
In compliance with the Immigration Control and Reform Act, this offer of
employment is contingent upon your showing proof within three days of commencing
work of eligibility and right to work in the United States. Proof is comprised
of original documents that establish your identity and your eligibility to work
in this country.
, we are confident that you will enjoy our environment and that your
talents will contribute to the continued success of Peregrine Systems Facilities
Management.
Very truly yours,
Stephen P. Gardner
Chief Executive Officer of Peregrine Systems, Inc.
Chief Executive Officer of Peregrine Systems Facilities Management, Inc.
SPG/ssw
Acknowledged and Agreed:
<TABLE>
<S> <C>
- ------------------------------------------- -------------------------------------------
Signature Date
</TABLE>
AC-2
<PAGE>
EXHIBIT D TO MERGER AGREEMENT
INNOVATIVE TECH SYSTEMS, INC.
FORM OF AFFILIATE AGREEMENT
This AFFILIATE AGREEMENT (the "Agreement") is made and entered into as of
May , 1998, between Peregrine Systems, Inc., a Delaware corporation (the
"Parent"), and the undersigned shareholder (the "Affiliate") of Innovative Tech
Systems, Inc., an Illinois corporation (the "Company").
RECITALS
WHEREAS, the Parent, the Company, and Homer Acquisition Corporation, a
Delaware corporation ("Homer"), have entered into an Agreement and Plan of
Reorganization (the "Merger Agreement") of even date herewith pursuant to which
Homer will merge with and into the Company (the "Merger"), and the Company will
become a subsidiary of Parent (capitalized terms not otherwise defined herein
shall have the meanings ascribed to them in the Merger Agreement);
WHEREAS, pursuant to the Merger, at the Effective Time, outstanding shares
of Company Common Stock, including any shares owned by Affiliate, will be
converted into the right to receive shares of Parent Common Stock;
WHEREAS, the execution and delivery of this Agreement by the Affiliate is a
material inducement to Parent to enter into the Merger Agreement;
WHEREAS, it is intended that the Merger will constitute a reorganization
within the meaning of Section 368(a) of the Internal Revenue Code of 1986 as
amended (the "Code"), and that it will be a condition to the effectiveness of
the Merger that legal counsel for each of the Company and Parent deliver written
opinions to such effect;
WHEREAS, the Affiliate has been advised that Affiliate may be deemed to be
an "affiliate" of the Company, as the term "affiliate" is used for purposes of
paragraphs (c) and (d) of Rule 145 of the Rules and Regulations (the "Rules and
Regulations") of the Securities and Exchange Commission (the "Commission"), as
amended, although nothing contained herein shall be construed as an admission by
Affiliate that Affiliate is in fact an "affiliate" of the Company.
AGREEMENT
NOW, THEREFORE, intending to be legally bound, the parties hereby agree as
follows:
1. COMPLIANCE WITH RULE 145 AND THE SECURITIES ACT.
(a) The Affiliate has been advised that (i) the issuance of shares of Parent
Common Stock in connection with the Merger is expected to be effected pursuant
to a Registration Statement on Form S-4 to be filed with the Commission to
register the shares of Parent Common Stock under the Securities Act of 1933, as
amended (the "Securities Act"), and as such will not be deemed "restricted
securities" within the meaning of Rule 144 promulgated under the Securities Act,
and resale of such shares will not be subject to any restrictions other than as
set forth in Rule 145 under the Securities Act (which will not apply if such
shares are otherwise transferred pursuant to an effective registration statement
under the Securities Act or an appropriate exemption from registration), and
(ii) the Affiliate may be deemed to be an "affiliate" of the Company within the
meaning of the Securities Act and, in particular, Rule 145 promulgated
thereunder. Affiliate accordingly agrees not to sell, transfer, or otherwise
dispose of any Parent Common Stock issued to the Affiliate in the Merger unless
(i) such sale, transfer or other disposition is made in conformity with the
requirements of Rule 145(d) promulgated under the Securities Act; (ii) such
sale, transfer or other disposition is made pursuant to an effective
registration statement under the Securities Act; or (iii) the Affiliate delivers
to Parent a written opinion of counsel, reasonably acceptable to Parent in form
and
AD-1
<PAGE>
substance, that such sale, transfer, or other disposition is otherwise exempt
from registration under the Securities Act. In connection with the obligations
of the Affiliate hereunder, Parent agrees to file all reports required under the
Exchange Act to satisfy the requirements of Rule 144(c) as long as the Affiliate
shall be subject to the requirements of Rule 145.
(b) Parent will give stop transfer instructions to its transfer agent with
respect to any Parent Common Stock received by Affiliate pursuant to the Merger,
and there will be placed on the certificates representing such Common Stock, or
any substitutions therefor, a legend stating in substance:
"The shares represented by this certificate were issued in a transaction
to which Rule 145 applies and may only be transferred in conformity with
Rule 145(d), pursuant to an effective registration statement under the
Securities Act of 1933, as amended, or in accordance with a written opinion
of counsel, reasonably acceptable to the issuer in form and substance, that
such transfer is exempt from registration under the Securities Act of 1933,
as amended."
The foregoing legend shall be removed (by delivery of a substitute
certificate without such legend) if the Affiliate delivers to Parent (i)
satisfactory written evidence that the shares have been sold in compliance with
Rule 145 (in which case, the substitute certificate will be issued in the name
of the transferee) or (ii) an opinion of counsel, in form and substance
reasonably satisfactory to Parent, to the effect that public sale of the shares
by the holder thereof is no longer subject to Rule 145.
2. SHARE OWNERSHIP. The Affiliate is the beneficial owner of that number of
shares of Company Common Stock (including shares issuable upon exercise of stock
options and warrants) as set forth on the signature page hereto (the "Company
Securities"). Except for the Company Securities, the Affiliate does not
beneficially own any shares of Company Common Stock or any other equity
securities of the Company or any options, warrants, or other rights to acquire
any equity securities of the Company.
3. MISCELLANEOUS.
(a) For the convenience of the parties hereto, this Agreement may be
executed in one or more counterparts, each of which shall be deemed an original,
but all of which together shall constitute one and the same instrument.
(b) This Agreement shall be enforceable by, and shall inure to the benefit
of and be binding upon, the parties hereto and their respective successors and
assigns. As used herein, the term "successors and assigns" shall mean, where the
context so permits, heirs, executors, administrators, trustees and successor
trustees, and personal and other representatives.
(c) This Agreement shall be governed by and construed, interpreted and
enforced in accordance with the internal laws of the State of California.
(d) If a court of competent jurisdiction determines that any provision of
this Agreement is not enforceable or enforceable only if limited in time or
scope, this Agreement shall continue in full force and effect with such
provision stricken or so limited.
(e) Counsel to the parties to the Merger Agreement shall be entitled to rely
upon this Agreement as appropriate.
(f) This Agreement shall not be modified or amended, or any right hereunder
waived or any obligation excused, except by a written agreement signed by both
parties.
[REMAINDER OF THIS PAGE INTENTIONALLY LEFT BLANK]
AD-2
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Affiliate Agreement as of
the date set forth on the first page of this Agreement.
<TABLE>
<S> <C> <C>
PEREGRINE SYSTEMS, INC.
By: --------------------------------------
Name: --------------------------------------
Title: --------------------------------------
AFFILIATE
By: --------------------------------------
Name of
Affiliate: ------------------------------------
Name of Signatory (if different from name of
Affiliate):
------------------------------------
Title of Signatory (if applicable):
---------------------------------------------
Company shares beneficially owned:
------------------- shares of Common Stock
Company shares subject to outstanding options:
------------------- shares of Common Stock
Company shares subject to outstanding warrants:
------------------- shares of Common Stock
</TABLE>
***INNOVATIVE TECH SYSTEMS, INC. AFFILIATE AGREEMENT***
AD-3
<PAGE>
ANNEX B
AMENDMENT NUMBER 2 TO WARRANT AGREEMENT
In accordance with Section 11 of the Warrant Agreement dated July 24, 1996,
as amended effective September 30, 1997 (the "WARRANT AGREEMENT") between
Innovative Tech Systems, Inc., an Illinois corporation (the "COMPANY") and
Continental Stock Transfer & Trust Company, a New York company (the "WARRANT
AGENT"), this Amendment Number 2 to the Warrant Agreement (the "WARRANT
AMENDMENT") is entered into, as of the Warrant Effective Time (as defined
herein), by and among the Company, the Warrant Agent, Peregrine Systems, Inc., a
Delaware corporation ("PEREGRINE"), and each holder (each, a "HOLDER" and
collectively, the "HOLDERS") of record as of June 18, 1998 (the "INNOVATIVE
RECORD DATE") of certain redeemable warrants (the "INNOVATIVE WARRANTS") to
purchase shares of the Company's Common Stock, par value $0.0185 per share
("INNOVATIVE COMMON STOCK").
RECITALS
A. Peregrine, Innovative, and Homer Acquisition Corporation, a Delaware
corporation, are parties to the Agreement and Plan of Reorganization, dated as
of May 7, 1998 (the "MERGER AGREEMENT"), pursuant to which Merger Sub will be
merged with and into the Company (the "MERGER"), and the Company will survive
the Merger and become a wholly-owned subsidiary of Peregrine.
B. In connection with the Merger, each share of Innovative Common Stock
issued and outstanding at the time the Merger becomes effective (the "MERGER
EFFECTIVE TIME") will be converted into 0.2341 of a share (the "EXCHANGE RATIO")
of Peregrine's common stock, par value $0.001 per share ("PEREGRINE COMMON
STOCK").
C. Peregrine and Innovative have requested that, in connection with the
Merger, each Holder exchange and convert his or her Innovative Warrants at the
Merger Effective Time into and for the right to receive that number of shares of
Peregrine Common Stock, based on the Exchange Ratio, as would have been the case
if such Holder had exercised his or her Innovative Warrants immediately prior to
the Effective Time on a net issuance basis, based on the average of the last
reported sales price of Peregrine Common Stock as reported on the Nasdaq
National Market on the five most recent trading days ending on the trading day
immediately prior to the Effective Time.
D. Pursuant to Section 11 of the Warrant Agreement, the Warrant Amendment
will require that Innovative receive executed Warrant Consents approving the
Warrant Amendment from (i) Holders representing 66 2/3% in interest of the
Innovative Warrants outstanding as of the Innovative Record Date (based on the
number of shares of Innovative Common Stock issuable upon exercise of the
Innovative Warrants) and (ii) A.S. Goldmen & Company, Inc., the underwriter of
the Company's 1994 public offering.
E. Innovative is soliciting the Warrant Consent in connection with the
solicitation of approval of the Merger from holders of Innovative Common Stock
and has mailed to each registered Holder, in connection with this solicitation,
a copy of the Innovative Tech Systems, Inc. Shareholder Proxy Statement and
Warrant Holder Information Statement/Peregrine Systems, Inc. Prospectus.
NOW, THEREFORE, in consideration of the covenants, promises and
representations set forth herein, and for other good and valuable consideration,
the receipt and sufficiency of which is hereby acknowledged, the parties agree
as follows:
AGREEMENT
1. EFFECTIVE TIME. This Warrant Amendment will become effective at 5:00
p.m. (Eastern Time) on the date on which Innovative has received properly
executed Warrant Consents approving the Warrant Amendment, and such Warrant
Consents have not been revoked or otherwise withdrawn, from Holders of 66 2/3%
in interest of the Innovative Warrants (based on the number of shares of
Innovative Common Stock issuable upon exercise of the Innovative Warrants) (the
"WARRANT EFFECTIVE TIME").
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<PAGE>
2. TERMINATION ON MERGER TERMINATION. In the event of a termination of the
Merger Agreement in accordance with its terms, this Warrant Amendment will
terminate and be of no further force or effect.
3. REVOCATION. The Holder may revoke a properly executed and delivered
Warrant Consent at any time prior to the Warrant Effective Time by a writing
delivered by personal delivery, certified U.S. mail, or recognized overnight
courier service to John M. Thompson, President and Chief Operating Officer,
Innovative Tech Systems, Inc., 444 Jacksonville Road, Warminster, Pennsylvania
18974. No written revocation received after the Warrant Effective Time will be
effective.
4. AMENDMENT. Section 4 of the Warrant Agreement is hereby amended and
restated to read in its entirety as follows:
"4. EXCHANGE AND CONVERSION OF WARRANTS.
(a) WARRANT EXCHANGE. At the Merger Effective Time, each Innovative
Warrant issued and outstanding will be exchanged for and
converted into that number of shares of Peregrine Common Stock
(rounded down to the nearest whole share), based on the Exchange
Ratio, as would have been issued to the holder of such
Innovative Warrant in the Merger had such warrant been exercised
for Innovative Common Stock immediately prior to the effective
time of the Merger on a net issuance basis as provided in
subsection 4(b) hereof, subject to the surrender to Peregrine or
its transfer agent of the certificates representing the
Innovative Warrants (or a bond in respect thereof).
(b) NET ISSUANCE. Upon exchange and conversion of the Innovative
Warrants in the manner described in subsection 4(b), Peregrine
shall issue to each Holder, in consideration for such exchange
and conversion, that number of shares of Peregrine Common Stock
determined as follows:
<TABLE>
<S> <C>
Y*Z*(A-B)
X = A
</TABLE>
Where X = the number of shares of Peregrine Common Stock to be issued to the
Holder (any fraction to be rounded to the fifth decimal place);
Y = the aggregate number of shares of Innovative Common Stock issuable
upon exercise of Innovative Warrants held by such Holder
(aggregating all Innovative Warrants held by such Holder);
Z = the Exchange Ratio;
A = the average of the last reported sales price of Peregrine Common
Stock as reported on the Nasdaq National Market on the five most
recent trading days ending on the trading day immediately prior to
the Effective Time; and
B = the per share exercise price that would be due upon exercise of
Innovative Warrants (as adjusted to the date of such calculation)
held by such Holder.
(c) FRACTIONAL SHARES. No fractional shares of Peregrine Common
Stock will be issued pursuant to this Section 4. Peregrine will
instead pay cash to the Holders in an amount equal to any
fractional amount calculated pursuant to Section 4(b) above
multiplied by the average of the last reported sale prices of
Peregrine Common Stock as reported by the Nasdaq National Market
for the five most recent days the Peregrine Common Stock has
traded, ending on the trading day immediately prior to the
Effective Time."
5. MISCELLANEOUS. This Second Amendment may be executed in one or more
counterparts, each of which shall constitute one and the same instrument. This
Second Amendment shall be governed by and construed in accordance with the laws
of the State of New York as applied to agreements among New York residents
entered and to be performed entirely within the State of New York. Except as
expressly set forth herein, the Warrant Agreement shall continue in full force
and effect in accordance with its terms.
B-2
<PAGE>
ANNEX C
[LOGO]
May 5, 1998
Board of Directors
Innovative Tech Systems, Inc.
444 Jacksonville Road
Warminster, PA 18974
Members of the Board:
We understand that Innovative Tech Systems, Inc., an Illinois corporation
("Seller"), and Peregrine Systems, Inc., a Delaware corporation ("Buyer"), are
expected to enter into a merger agreement to be dated May 6, 1998 (the "Merger
Agreement"), pursuant to which Seller will become a wholly-owned subsidiary of
the Buyer (the "Merger"). Pursuant to the Merger, as more fully described in the
Merger Agreement and as further described to us by management of Seller, we
understand that each outstanding share of the common stock, $0.0185 par value
per share ("Seller Common Stock"), of Seller will be converted into and
exchangeable for 0.2341 shares of the common stock, $0.001 par value per share
("Buyer Common Stock"), of Buyer (the "Consideration"). The terms and conditions
of the Merger are set forth in more detail in the Merger Agreement.
You have asked for our opinion as investment bankers as to whether the
Consideration to be received by the shareholders of Seller pursuant to the
Merger is fair to such shareholders from a financial point of view, as of the
date hereof. For purposes of our opinion, we have assumed that the Merger will
qualify as a tax-free reorganization under the United States Internal Revenue
Code for the shareholders of the Seller. As you are aware, we were not requested
to nor did we assist Seller in soliciting indications of interest from third
parties for all or any part of the Seller.
In connection with our opinion, we have, among other things: (i) reviewed
certain publicly available financial and other data with respect to Seller and
Buyer, including the consolidated financial statements for recent years and
interim periods to March 31, 1998 and certain other relevant financial and
operating data relating to Seller and Buyer made available to us from published
sources and from the internal records of Seller and Buyer; (ii) reviewed the
financial terms and conditions of the Merger Agreement; (iii) reviewed certain
publicly available information concerning the trading of, and the trading market
for, Seller Common Stock and Buyer Common Stock; (iv) compared Seller and Buyer
from a financial point of view with certain other companies in the software
industry which we deemed to be relevant; (v) considered the financial terms, to
the extent publicly available, of selected recent business combinations of
companies in the software industry which we deemed to be comparable, in whole or
in part, to the Merger; (vi) reviewed the premiums paid of selected recent
mergers which we deemed to be comparable in whole or in part, to the Merger;
(vii) reviewed the financial contribution each company is making to the combined
company and compared that contribution to the percentage ownership each
company's shareholders will hold in the combined company after the transaction
closes; (viii) reviewed and discussed with representatives of the management of
Seller and Buyer certain information of a business and financial nature
regarding Seller and Buyer, furnished to us by them, including financial
forecasts and related assumptions of Seller and Buyer; and (ix) performed such
other analyses and examinations as we have deemed appropriate.
C-1
<PAGE>
Innovative Tech Systems, Inc.
May 5, 1998
Page 2 of 3
In connection with our review, we have not assumed any obligation
independently to verify the foregoing information and have relied on its being
accurate and complete in all material respects. With respect to the financial
forecasts for Seller and Buyer provided to us by their respective managements,
upon their advice and with your consent we have assumed for purposes of our
opinion that the forecasts have been reasonably prepared on bases reflecting the
best available estimates and judgments of their respective managements at the
time of preparation as to the future financial performance of Seller and Buyer
and that they provide a reasonable basis upon which we can form our opinion.
With respect to the forecasts for Buyer provided to us by its management, for
purposes of our analyses we have assumed that they provide a reasonable basis
upon which we can form our opinions. We have also assumed that there have been
no material changes in Seller's or Buyer's assets, financial condition, results
of operations, business or prospects since the respective dates of their last
financial statements made available to us. We have relied on advice of counsel
and independent accountants to Seller as to all legal and financial reporting
matters with respect to Seller, the Merger and the Merger Agreement. We have
assumed that the Merger will be consummated in a manner that complies in all
respects with the applicable provisions of the Securities Act of 1933, as
amended (the "Securities Act"), the Securities Exchange Act of 1934 and all
other applicable federal and state statutes, rules and regulations. In addition,
we have not assumed responsibility for making an independent evaluation,
appraisal or physical inspection of any of the assets or liabilities (contingent
or otherwise) of Seller or Buyer, nor have we been furnished with any such
appraisals. You have informed us, and we have assumed, that the Merger will be
recorded as a purchase under generally accepted accounting principles. Finally,
our opinion is based on economic, monetary, market and other conditions as in
effect on, and the information made available to us as of, the date hereof.
Accordingly, although subsequent developments may affect this opinion, we have
not assumed any obligation to update, revise or reaffirm this opinion.
We have further assumed with your consent that the Merger will be
consummated in accordance with the terms described in the Merger Agreement,
without any further amendments thereto, and without waiver by Seller of any of
the conditions to its obligations thereunder.
We have acted as financial advisor to Seller in connection with the Merger
and will receive a fee for our services, including rendering this opinion, a
significant portion of which is contingent upon the consummation of the Merger.
Based upon the foregoing and in reliance thereon, it is our opinion as
investment bankers that the Consideration to be received by the shareholders of
Seller pursuant to the Merger is fair to such shareholders from a financial
point of view, as of the date hereof.
We are not expressing an opinion regarding the price at which the Buyer
Common Stock may trade at any future time. The Consideration to be received by
the shareholders of Seller pursuant to the Merger is based upon a fixed exchange
ratio, accordingly, the market value of the Consideration may vary
significantly.
This opinion is directed to the Board of Directors of Seller in its
consideration of the Merger and is not a recommendation to any shareholder as to
how such shareholder should vote with respect to the Merger. Further, this
opinion addresses only the financial fairness of the Consideration to the
shareholders and does not address the relative merits of the Merger and any
alternatives to the Merger, Seller's underlying decision to proceed with or
effect the Merger, or any other aspect of the Merger. This opinion may not be
used or referred to by Seller, or quoted or disclosed to any person in any
manner, without our
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<PAGE>
Innovative Tech Systems, Inc.
May 5, 1998
Page 3 of 3
prior written consent, which consent is hereby given to the inclusion of this
opinion in any proxy statement or prospectus filed with the Securities and
Exchange Commission in connection with the Merger. In furnishing this opinion,
we do not admit that we are experts within the meaning of the term "experts" as
used in the Securities Act and the rules and regulations promulgated thereunder,
nor do we admit that this opinion constitutes a report or valuation within the
meaning of Section 11 of the Securities Act.
Very truly yours,
NATIONSBANC MONTGOMERY SECURITIES LLC
/s/ NationsBanc Montgomery Securities LLC
C-3
<PAGE>
ANNEX D
ILLINOIS BUSINESS CORPORATION ACT
SECTION 11.65 RIGHT TO DISSENT.
(a) A shareholder of a corporation is entitled to dissent from, and obtain
payment for his or her shares in the event of any of the following corporate
actions:
(1) consummation of a plan of merger or consolidation or a plan of share
exchange to which the corporation is a party if (i) shareholder
authorization is required for the merger or consolidation or the share
exchange by Section 11.20 or the articles of incorporation or (ii) the
corporation is a subsidiary that is merged with its parent or another
subsidiary under Section 11.30;
(2) consummation of a sale, lease or exchange of all, or substantially
all, of the property and assets of the corporation other than in the usual
and regular course of business;
(3) an amendment of the articles of incorporation that materially and
adversely affects rights in respect of a dissenter's shares because it:
(i) alters or abolishes a preferential right of such shares;
(ii) alters or abolishes a right in respect of redemption, including
a provision respecting a sinking fund for the redemption or repurchase,
of such shares;
(iii) in the case of a corporation incorporated prior to January 1,
1982, limits or eliminates cumulative voting rights with respect to such
shares; or
(4) any other corporate action taken pursuant to a shareholder vote if
the articles of incorporation, by-laws, or a resolution of the board of
directors provide that shareholders are entitled to dissent and obtain
payment for their shares in accordance with the procedures set forth in
Section 11.70 or as may be otherwise provided in the articles, by-laws or
resolution.
(b) A shareholder entitled to dissent and obtain payment for his or her
shares under this Section may not challenge the corporate action creating his or
her entitlement unless the action is fraudulent with respect to the shareholder
or the corporation or constitutes a breach of a fiduciary duty owed to the
shareholder.
(c) A record owner of shares may assert dissenters' rights as to fewer than
all the shares recorded in such person's name only if such person dissents with
respect to all shares beneficially owned by any one person and notifies the
corporation in writing of the name and address of each person on whose behalf
the record owner asserts dissenters' rights. The rights of a partial dissenter
are determined as if the shares as to which dissent is made and the other shares
recorded in the names of different shareholders. A beneficial owner of shares
who is not the record owner may assert dissenters' rights as to shares held on
such person's behalf only if the beneficial owner submits to the corporation the
record owner's written consent to the dissent before or at the same time the
beneficial owner asserts dissenters' rights. (Last amended by P.A. 85-1269, L.
'88, eff. 1-1-89.)
SECTION 11.70 PROCEDURE TO DISSENT.
(a) If the corporate action giving rise to the right to dissent is to be
approved at a meeting of shareholders, the notice of meeting shall inform the
shareholders of their right to dissent and the procedure to dissent. If, prior
to the meeting, the corporation furnishes to the shareholders material
information with respect to the transaction that will objectively enable a
shareholder to vote on the transaction and to determine whether or not to
exercise dissenters' rights, a shareholder may assert dissenters' rights only if
the shareholder delivers to the corporation before the vote is taken a written
D-1
<PAGE>
demand for payment for his or her shares if the proposed action is consummated,
and the shareholder does not vote in favor of the proposed action.
(b) If the corporate action giving rise to the right to dissent is not to be
approved at a meeting of shareholders, the notice to shareholders describing the
action taken under Section 11.30 or Section 7.10 shall inform the shareholders
of their right to dissent and the procedure to dissent. If, prior to or
concurrently with the notice, the corporation furnishes to the shareholders
material information with respect to the transaction that will objectively
enable a shareholder to determine whether or not to exercise dissenters' rights,
a shareholder may assert dissenter's rights only if he or she delivers to the
corporation within 30 days from the date of mailing the notice a written demand
for payment for his or her shares.
(c) Within 10 days after the date on which the corporate action giving rise
to the right to dissent is effective or 30 days after the shareholder delivers
to the corporation the written demand for payment, whichever is later, the
corporation shall send each shareholder who has delivered a written demand for
payment a statement setting forth the opinion of the corporation as to the
estimated fair value of the shares, the corporation's latest balance sheet as of
the end of a fiscal year ending not earlier than 16 months before the delivery
of the statement, together with the statement of income for that year and the
latest available interim financial statements, and either a commitment to pay
for the shares of the dissenting shareholder at the estimated fair value thereof
upon transmittal to the corporation of the certificate or certificates, or other
evidence of ownership, with respect to the shares, or instructions to the
dissenting shareholder to sell his or her shares with 10 days after delivery of
the corporation's statement to the shareholder. The corporation may instruct the
shareholder to sell only if there is a public market of the shares at which the
shares may be readily sold. If the shareholder does not sell within that 10 day
period after being so instructed by the corporation, for purposes of this
Section the shareholder shall be deemed to have sold his or her shares at the
average closing price of the shares, if listed on a national exchange, or the
average of the bid and asked price with respect to the shares quoted by a
principal market maker, if not listed on a national exchange, during that 10 day
period.
(d) A shareholder who makes written demand for payment under this Section
retains all other rights of a shareholder until those rights are cancelled or
modified by the consummation of the proposed corporate action. Upon consummation
of that action, the corporation shall pay to each dissenter who transmits to the
corporation the certificate or other evidence of ownership of the shares the
amount the corporation estimates to be the fair value of the shares, plus
accrued interest, accompanied by a written explanation of how the interest was
calculated.
(e) If the shareholder does not agree with the opinion of the corporation as
to the estimated fair value of the share or the amount of interest due, the
shareholder, within 30 days from the delivery of the corporation's statement of
value, shall notify the corporation in writing of the shareholder's estimated
fair value and amount of interest due and demand payment for the difference
between the shareholder's estimate of fair value and interest date and the
amount of the payment by the corporation or the proceeds of sale by the
shareholder, whichever is applicable because of the procedure for which the
corporation opted pursuant to subsection (c).
(f) If, within 60 days from delivery to the corporation of the shareholder
notification of estimate of fair value of the shares and interest due, the
corporation and the dissenting shareholder have not agreed in writing upon the
fair value of the shares and interest due, the corporation shall either pay the
difference in value demanded by the shareholder, with interest, or file a
petition in the circuit court of the county in which either the registered
office or the principal office of the corporation is located, requesting the
court to determine the fair value of the shares and interest due. The
corporation shall make all dissenters, whether or not residents of this State,
whose demands remain unsettled parties to the proceeding as an action against
their share and all parties shall be served with a copy of the petition.
Nonresidents may be served by registered or certified mail or by publication as
provided by law. Failure of the corporation to
D-2
<PAGE>
commence an action pursuant to this Section shall not limit or affect the right
of the dissenting shareholders to otherwise commence an action as permitted by
law.
(g) The jurisdiction of the court in which the proceeding is commenced under
subsection (f) by a corporation is plenary and exclusive. The court may appoint
one or more persons as appraisers to receive evidence and recommend decision on
the question of fair value. The appraisers have the power described in the order
appointing them, or in any amendment to it.
(h) Each dissenter made a party to the proceeding is entitled to judgment
for the amount, if any, by which the court finds that the fair value of his or
her shares, plus interest, exceeds the amount paid by the corporation or the
proceeds of sale by the shareholder, whichever amount is applicable.
(i) The court, in a proceeding commenced under subsection (f), shall
determine all costs of the proceeding, including the reasonable compensation and
expenses of the appraisers, if any, appointed by the court under subsection (g),
but shall exclude the fees and expenses of counsel and experts for the
respective parties. If the fair value of the shares as determined by the court
materially exceeds the amount which the corporation estimated to be the fair
value of the shares or if no estimate was made in accordance with subsection
(c), then all or any part of the costs may be assessed against the corporation.
If the amount which any dissenter estimated to be the fair value of the shares
materially exceeds the fair value of the shares as determined by the court, then
all or any part of the costs may be assessed against that dissenter. The court
may also assess the fees and expenses of counsel and experts for the respective
parties, in amounts the court finds equitable, as follows:
(1) Against the corporation and in favor of any or all dissenters if the
court finds that the corporation did not substantially comply with the
requirements of subsections (a), (b), (c), (d), or (f).
(2) Against either the corporation or a dissenter and in favor of any
other party if the court finds that the party against whom the fees and
expenses are assessed acted arbitrarily, vexatiously, or not in good faith
with respect to the rights provided by this Section.
If the Court finds that the services of counsel for any dissenter were of
substantial benefit to other dissenters similarly situated and that the fees for
those services should not be assessed against the corporation, the court may
award to that counsel reasonable fees to be paid out of the amounts awarded to
the dissenters who are benefited. Except as otherwise provided in this Section,
the practice, procedure, judgment and costs shall be governed by the Code of
Civil Procedure.
(j) As used in this Section:
(1) "Fair value", with respect to a dissenter's shares, means the value
of the shares immediately before the consummation of the corporate action to
which the dissenter objects excluding any appreciation or depreciation in
anticipation of the corporate action, unless exclusion would be inequitable.
(2) "Interest" means interest from the effective date of the corporate
action until the date of payment, at the average rate currently paid by the
corporation on its principal bank loans or, if none, at a rate that is fair
and equitable under all the circumstances. (Last amended by P.A. 86-1156, L.
'90, eff. 8-10-90.)
D-3
<PAGE>
INNOVATIVE TECH SYSTEMS, INC.
JULY 27, 1998 SPECIAL MEETING OF SHAREHOLDERS
PROXY FOR HOLDERS OF COMMON STOCK
PROXY SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The undersigned hereby appoints WILLIAM M. THOMPSON, JOHN M. THOMPSON, and
DEBORAH A. HAYS, and each of them, with full power of substitution, to represent
the undersigned and to vote all the shares of stock in Innovative Tech Systems,
Inc., an Illinois corporation (the "Company" or "Innovative"), which the
undersigned is entitled to vote at the Special Meeting of Shareholders of said
Company to be held on July 27, 1998, at The Courtyard by Marriott, 2350 Easton
Road, Willow Grove, Pennsylvania 19090 at 10:00 a.m., local time, and at any
adjournment or postponement thereof, (1) as hereinafter specified upon Proposal
1 listed below and as more particularly described in the Proxy
Statement/Prospectus dated June 23, 1998 (the "Proxy Statement"), receipt of
which is hereby acknowledged, and (2) in their discretion upon such other
matters as may properly come before the meeting, including any motion to adjourn
to permit further solicitation of proxies if necessary, or any postponements or
adjournments thereof.
THE SHARES REPRESENTED HEREBY SHALL BE VOTED UPON PROPOSAL 1 AS SPECIFIED.
IF NO SPECIFICATION IS MADE, SUCH SHARES SHALL BE VOTED FOR PROPOSAL 1 AND AS
SAID PROXIES DEEM ADVISABLE ON SUCH OTHER MATTERS AS MAY PROPERLY COME BEFORE
THE MEETING, INCLUDING ANY MOTION TO ADJOURN TO PERMIT FURTHER SOLICITATION OF
PROXIES, IF NECESSARY, TO ESTABLISH A QUORUM OR TO OBTAIN ADDITIONAL VOTES IN
FAVOR OF THE MERGER AGREEMENT AND THE MERGER (AS DEFINED IN THE PROXY
STATEMENT), OR ANY POSTPONEMENTS OR ADJOURNMENTS THEREOF.
/X/ PLEASE MARK VOTES AS IN THIS EXAMPLE
The Board of Directors of Innovative recommends a vote FOR the following
proposals:
1. To approve and adopt the Agreement and Plan of Reorganization (the "Merger
Agreement"), dated as of May 7, 1998, by and among Peregrine Systems, Inc.,
a Delaware corporation ("Peregrine"), Homer Acquisition Corporation, a
Delaware corporation and wholly-owned subsidiary of Peregrine ("Merger
Sub"), and Innovative, pursuant to which, among other things, (a) Merger Sub
will be merged with and into Innovative, whereby Innovative will be the
surviving corporation and will become a wholly-owned subsidiary of Peregrine
(the "Merger") and (b) each outstanding share of common stock, par value
$0.0185 per share, of Innovative will be converted into the right to receive
0.2341 of a share of common stock, par value $0.001 per share, of Peregrine.
/ / FOR / / AGAINST / / ABSTAIN
CONTINUED AND TO BE SIGNED ON REVERSE SIDE SEE REVERSE SIDE
<PAGE>
2. To transact such other business as may properly come before the special
meeting, including any motion to adjourn to a later date to permit further
solicitation of proxies, if necessary, or to obtain additional votes in
favor of the Merger, or any postponements or adjournments thereof.
/ / FOR / / AGAINST / / ABSTAIN
MARK HERE FOR ADDRESS CHANGE AND NOTE AT LEFT / /
MARK HERE IF YOU PLAN TO ATTEND THE MEETING / /
WHETHER OR NOT YOU PLAN TO ATTEND THE MEETING IN PERSON, YOU ARE URGED TO SIGN
AND PROMPTLY MAIL THIS PROXY IN THE RETURN ENVELOPE SO THAT YOUR STOCK MAY BE
REPRESENTED.
Please sign below. If shares of stock are held jointly, both or all of such
persons should sign. Corporate or partnership proxies should be signed in full
corporate or partnership name by an authorized person. Persons signing in a
fiduciary capacity should indicate their full titles in such capacities.
Signature: ___________________________
Date: ________________________________
Signature: ___________________________
Date: ________________________________
<PAGE>
INNOVATIVE TECH SYSTEMS, INC.
WRITTEN CONSENT FOR WARRANT HOLDERS
WRITTEN CONSENT SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The undersigned hereby votes all of the Redeemable Common Stock Purchase
Warrants (the "Innovative Warrants") issued by Innovative Tech Systems, Inc., an
Illinois corporation (the "Company" or "Innovative"), with respect to which the
undersigned is entitled to act, to consent, to withhold consent, or to abstain,
as indicated on the reverse side of this Written Consent, to the proposal
described on the reverse side hereof and which is more particularly described in
the Innovative Tech Systems, Inc. Shareholder Proxy Statement and Warrant Holder
Information Statement/Peregrine Systems, Inc. Prospectus, dated June 23, 1998
(the "Proxy Statement/ Prospectus").
This written consent is being solicited in connection with the Agreement and
Plan of Reorganization, dated as of May 7, 1998 (the "Merger Agreement"), by and
among the Company, Peregrine Systems, Inc., a Delaware corporation
("Peregrine"), and Homer Acquisition Corporation, a Delaware corporation and
wholly owned subsidiary of Peregrine ("Merger Sub"), pursuant to which Merger
Sub will be merged with and into Innovative and Innovative will be the surviving
corporation (the "Merger").
The undersigned hereby revokes all former consents given by the undersigned
with respect to the proposal described on the reverse side and as more
particularly described in the Proxy Statement/Prospectus, receipt of which is
hereby acknowledged.
THIS WRITTEN CONSENT, WHEN PROPERLY EXECUTED AND MARKED "CONSENT," WILL BE
DEEMED A GRANT OF CONSENT WITH RESPECT TO THE PROPOSED AMENDMENT TO THE WARRANT
AGREEMENT, DATED JULY 26, 1994 AS AMENDED THROUGH THE DATE HEREOF, BETWEEN THE
COMPANY AND CONTINENTAL STOCK TRANSFER & TRUST COMPANY (THE "WARRANT
AGREEMENT"), WHICH AMENDMENT IS DESCRIBED BELOW AND IN FURTHER DETAIL IN THE
PROXY STATEMENT/PROSPECTUS. IF NO DIRECTION IS MADE WITH RESPECT TO THE
PROPOSAL, THIS WRITTEN CONSENT WILL BE DEEMED AN ABSTENTION.
YOU ARE URGED TO MARK, SIGN AND RETURN YOUR WRITTEN CONSENT TO THE COMPANY
AS SOON AS POSSIBLE, AND IN ALL EVENTS BY THE CLOSE OF BUSINESS ON JULY 24,
1998, IN THE RETURN ENVELOPE PROVIDED FOR THAT PURPOSE, WHICH REQUIRES NO
POSTAGE IF MAILED IN THE UNITED STATES.
CONTINUED AND TO BE SIGNED ON REVERSE SIDE SEE REVERSE
SIDE
<PAGE>
(Continued from the other side)
[X] Please mark choice as shown in this example.
THE BOARD OF DIRECTORS RECOMMENDS CONSENTING TO THE FOLLOWING PROPOSAL:
1. The amendment to the Warrant Agreement in the form attached to the Proxy
Statement/Prospectus as Annex B, which provides, among other things, that at
the Effective Time of the Merger (as defined in the Merger Agreement), each
outstanding Innovative Warrant will be exchanged for and converted into the
right to receive that number of shares of Peregrine's Common Stock, par
value $0.001 per share ("Peregrine Common Stock"), based on the exchange
ratio of 0.2341 of a share of Peregrine Common Stock per share of
Innovative's common stock, par value $0.0185 per share ("Innovative Common
Stock"), as would have been the case if the Warrant Holder had exercised his
or her Innovative Warrants for Innovative Common Stock immediately prior to
the Effective Time on a net issuance basis, based on the average of the last
reported sale prices of Peregrine Common Stock as reported by the Nasdaq
National Market on the five most recent trading days ending on the trading
day immediately preceding the Effective Time, subject to surrender of the
certificates representing the Innovative Warrants (or a bond in respect
thereof).
[ ] CONSENT [ ] WITHHOLD [ ] ABSTAIN
-------------------------------------
Name of Warrant Holder
-------------------------------------
Signature(s) of Warrant Holder
WHEN SIGNING THE WRITTEN CONSENT,
PLEASE DATE IT AND TAKE CARE TO HAVE
THE SIGNATURE CONFORM TO THE NAME
UNDER WHICH THE WARRANTS ARE
REGISTERED. IF THE WARRANTS ARE
REGISTERED IN THE NAMES OF TWO OR
MORE PERSONS, EACH PERSON SHOULD SIGN
THIS WRITTEN CONSENT. CORPORATE OR
PARTNERSHIP CONSENTS SHOULD BE SIGNED
IN FULL CORPORATE OR PARTNERSHIP NAME
BY AN AUTHORIZED PERSON. PERSONS
SIGNING IN A FIDUCIARY CAPACITY
SHOULD INDICATE THEIR FULL TITLES IN
SUCH CAPACITIES WHEN SIGNING.
Dated: ________________________, 1998
