<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JANUARY 24, 1997
REGISTRATION NO. 333-19319
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------
AMENDMENT NO. 1
TO
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
---------------
PURE ATRIA CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
---------------
DELAWARE 7372 94-3141575
(STATE OR OTHER (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
JURISDICTION OF CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
INCORPORATION OR
ORGANIZATION)
1309 SOUTH MARY AVENUE
SUNNYVALE, CALIFORNIA 94087
(408) 720-1600
(ADDRESS, INCLUDING ZIP CODE AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
---------------
W. GEOFFREY STEIN, ESQ.
VICE PRESIDENT AND GENERAL COUNSEL
PURE ATRIA CORPORATION
1309 SOUTH MARY AVENUE
SUNNYVALE, CALIFORNIA 94087
(408) 720-1600
(NAME, ADDRESS, INCLUDING ZIP CODE AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
---------------
COPIES TO:
MARK A. BERTELSEN, ESQ. ROBERT V. GUNDERSON, JR., ESQ.
WILSON SONSINI GOODRICH & ROSATI STEVEN M. SPURLOCK, ESQ.
PROFESSIONAL CORPORATION GUNDERSON DETTMER STOUGH VILLENEUVE
650 PAGE MILL ROAD FRANKLIN & HACHIGIAN, LLP
PALO ALTO, CA 94304-1050 155 CONSTITUTION DRIVE
(415) 493-9300 MENLO PARK, CA 94025
(415) 321-2400
---------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: Upon
consummation of the Merger described herein.
---------------
If the securities being registered on this Form are being offered in
connection with the formation of a holding company and there is compliance
with General Instruction G, check the following box. [_]
---------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(A), MAY DETERMINE.
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- -------------------------------------------------------------------------------
<PAGE>
INTEGRITY QA SOFTWARE, INC.
1550 SOUTH BASCOM, SUITE 380
CAMPBELL, CALIFORNIA 95008
January 27, 1997
Dear Stockholder:
You will find enclosed a written consent (the "Written Consent") of the
stockholders of Integrity QA Software, Inc., a Delaware corporation
("Integrity"). The Written Consent requests your approval of the Agreement and
Plan of Reorganization dated November 17, 1996 (the "Merger Agreement") by and
among Integrity, Pure Atria Corporation, a Delaware corporation ("Pure
Atria"), and Delaware PAI Corp., a Delaware corporation and a wholly-owned
subsidiary of Pure Atria ("Merger Sub"), pursuant to which Integrity will be
merged with and into Merger Sub (the "Merger").
The Merger will become effective as soon as practicable after all necessary
regulatory and stockholder approvals are obtained and certain other conditions
are satisfied (the "Effective Date").
As a result of the Merger, each outstanding share of Integrity Series A
Preferred Stock will be converted into a right to receive (i) $6.50 in cash
and (ii) that fraction of a share of Pure Atria Common Stock obtained by
dividing $6.50 by the average of the closing prices of Pure Atria's Common
Stock as quoted on the Nasdaq National Market for the five trading days
immediately preceding the closing date of the Merger. Each outstanding share
of Integrity Common Stock will be converted into a right to receive that
fraction of a share of Pure Atria Common Stock obtained by dividing $6.3254 by
the average of the closing prices of Pure Atria's Common Stock as quoted on
the Nasdaq National Market for the five trading days immediately preceding the
closing date of the Merger. All outstanding options and warrants to acquire
Integrity capital stock will be assumed by Pure Atria, as more fully described
in the accompanying Consent Solicitation Statement/Prospectus in the section
entitled "Terms of the Merger--Manner and Basis of Converting Shares."
Pure Atria is registering the issuance of the shares of Pure Atria Common
Stock in the Merger under the Securities Act of 1933, as amended. The Merger
is intended to be a tax-free reorganization, which will not result in
recognition of any gain or loss by Integrity, Integrity stockholders or Pure
Atria.
Integrity's Board of Directors has carefully considered the terms and
conditions of the proposed Merger and has determined that the Merger is fair
and in the best interests of Integrity and its stockholders and has
unanimously approved the Merger Agreement and the transactions contemplated
thereby. THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT THE STOCKHOLDERS
OF INTEGRITY VOTE "FOR" THE APPROVAL AND ADOPTION OF THE MERGER AGREEMENT AND
THE TRANSACTIONS CONTEMPLATED THEREBY.
In the material accompanying this letter you will find a Written Consent and
a Consent Solicitation Statement/Prospectus relating to the actions to be
taken by the Integrity stockholders pursuant to the Written Consent. The
Consent Solicitation Statement/Prospectus more fully describes the proposed
Merger and includes information about Integrity and Pure Atria. I urge you to
read and consider these materials carefully. Please complete, sign, date and
return your Written Consent in the enclosed envelope.
The Merger is scheduled to be consummated on or about January 31, 1997. In
order to assure that your shares are voted on this important matter, you are
requested to complete and sign your consent and return it in the enclosed
envelope on or before January 29, 1997. The consent of 60% of the outstanding
shares of Integrity Series A Preferred Stock voting separately as a single
class and a majority of the outstanding shares of Integrity Common Stock and
Integrity Preferred Stock voting together as a single class is required to
approve the Merger.
If the Merger is approved and consummated, you will receive detailed
information on how to transmit your Integrity share certificates to obtain
your shares of Pure Atria Common Stock and cash, if applicable, representing
the Merger consideration.
On behalf of your Board of Directors, thank you for your continued support.
Sincerely,
Integrity QA Software, Inc.
Stephen J. Kahn
President and Chief Executive
Officer
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR +
+THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE +
+SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE +
+UNLAWFUL PRIOR TO THE REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS +
+OF ANY SUCH STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION, DATED JANUARY 24, 1997
INTEGRITY QA SOFTWARE, INC.
CONSENT SOLICITATION STATEMENT
-----------
PURE ATRIA CORPORATION
PROSPECTUS
-----------
This Consent Solicitation Statement/Prospectus is being furnished to
stockholders of Integrity QA Software, Inc., a Delaware corporation
("Integrity"), in connection with the solicitation of written consents
concerning the proposed acquisition of Integrity by Pure Atria Corporation, a
Delaware corporation ("Pure Atria"), by means of the merger (the "Merger") of
Integrity with and into Delaware PAI Corp., a Delaware corporation and a
wholly-owned subsidiary of Pure Atria (the "Merger Sub"), pursuant to the terms
set forth in the Agreement and Plan of Reorganization, dated as of November 17,
1996 (the "Merger Agreement"), by and among Pure Atria, Merger Sub and
Integrity.
This Consent Solicitation Statement/Prospectus also constitutes the
Prospectus of Pure Atria filed as part of a Registration Statement on Form S-4
(the "Form S-4") with the Securities and Exchange Commission (the "Commission")
under the Securities Act of 1933, as amended (the "Securities Act"), relating
to the registration of 2,000,000 shares of common stock, $0.0001 par value per
share, of Pure Atria ("Pure Atria Common Stock") to be issued to holders of (i)
Series A Preferred Stock, par value $0.001 per share, of Integrity ("Integrity
Preferred Stock") and (ii) common stock, par value $0.001 per share, of
Integrity ("Integrity Common Stock" and, together with the Preferred Stock,
"Integrity Capital Stock") upon consummation of the Merger.
Subject to the terms and conditions of the Merger Agreement, each outstanding
share of Integrity Preferred Stock will be converted into a right to receive
(i) $6.50 in cash and (ii) that fraction of a share of Pure Atria Common Stock
obtained by dividing $6.50 by the average of the closing prices of Pure Atria's
Common Stock as quoted on The Nasdaq Stock Market's Nasdaq National Market
("Nasdaq") for the five trading days immediately preceding the closing date of
the Merger. Each outstanding share of Integrity Common Stock will be converted
into a right to receive that fraction of a share of Pure Atria Common Stock
obtained by dividing $6.3254 by the average of the closing prices of Pure
Atria's Common Stock as quoted on Nasdaq for the five trading days immediately
preceding the closing date of the Merger. Cash will be paid in lieu of any
fractional shares of Pure Atria Common Stock. All outstanding options and
warrants to acquire Integrity Capital Stock will be assumed by Pure Atria, as
more fully described in the accompanying Consent Solicitation
Statement/Prospectus in the section entitled "The Merger Agreement--Manner and
Basis of Converting Shares."
This Consent Solicitation Statement/Prospectus and the accompanying form of
written consent are first being mailed to stockholders of Integrity on or about
January 27, 1997.
-----------
SEE "RISK FACTORS" COMMENCING ON PAGE 10 FOR A DISCUSSION OF CERTAIN FACTORS
THAT SHOULD BE CONSIDERED BY INTEGRITY STOCKHOLDERS IN EVALUATING THE PROPOSALS
TO BE VOTED ON BY WRITTEN CONSENT AND THE ACQUISITION OF THE SECURITIES OFFERED
HEREBY.
-----------
NEITHER THIS TRANSACTION NOR THE SECURITIES OF PURE ATRIA OFFERED HEREBY HAVE
BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY
STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COM-MISSION OR
ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
CONSENT SOLICITATION STATEMENT/PROSPECTUS. ANY REPRE-SENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
-----------
The date of this Consent Solicitation Statement/Prospectus is January 27, 1997.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
AVAILABLE INFORMATION..................................................... iii
SUMMARY................................................................... 1
The Companies........................................................... 1
Solicitation of Written Consents of Stockholders of Integrity........... 1
The Merger.............................................................. 2
The Merger Agreement.................................................... 3
Selected Historical and Pro Forma Financial Data........................ 7
RISK FACTORS.............................................................. 10
Uncertainties in Integrity Product Development, Marketing and Sales..... 10
Uncertainties Relating to Acquisition Strategy, Integration of Integrity
Operations and Integration of Recently Acquired Companies.............. 10
Risks Associated with Expansion into New Markets; Emerging Market for
ASQ Tools.............................................................. 11
Potentially Dilutive Effect of Exchange Ratio........................... 11
Costs Of Integration; Transaction Expenses.............................. 12
Effects of Merger on Customers.......................................... 12
Dependence on Unix Operating System..................................... 12
Fluctuations in Quarterly Results; Future Operating Results Uncertain... 12
Rapid Technological Change; New Product Delays; Risk of Product Defects. 13
Management of Growth; Dependence on Key Personnel....................... 13
Competition; Risks of Litigation and Potential Litigation............... 14
International Sales; Currency Fluctuations.............................. 15
Dependence on Proprietary Technology; Risk of Third Party Claims for In-
fringement............................................................. 15
Volatility Of Stock Prices.............................................. 16
Effect of Antitakeover Provisions of Delaware Law and Pure Atria's Char-
ter Documents.......................................................... 16
SOLICITATION OF WRITTEN CONSENT OF INTEGRITY STOCKHOLDERS................. 17
General................................................................. 17
Matters to Be Approved by Written Consent............................... 17
Record Date; Shares Entitled to Vote; Vote Required..................... 17
Written Consents; Written Consent Solicitation.......................... 17
THE MERGER................................................................ 18
Pure Atria's Reasons for the Merger..................................... 18
Integrity's Reasons for the Merger...................................... 18
Background of the Merger................................................ 18
Recommendations of Board of Directors of Integrity...................... 20
Interests of Certain Persons in the Merger.............................. 20
Accounting Treatment.................................................... 21
Certain Federal Income Tax Considerations............................... 21
Governmental and Regulatory Approvals................................... 24
Appraisal and Dissenters' Rights........................................ 24
</TABLE>
i
<PAGE>
<TABLE>
<CAPTION>
PAGE
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<S> <C>
THE MERGER AGREEMENT...................................................... 27
Effective Time.......................................................... 27
Manner and Basis of Converting Shares................................... 27
Stock Ownership Following the Merger.................................... 28
Legal Structure of Merger............................................... 28
Representations and Warranties.......................................... 28
Conduct of Integrity's Business Pending the Merger...................... 29
No Solicitation......................................................... 30
Conditions to the Merger................................................ 31
Termination or Amendment of Merger Agreement............................ 32
Expenses; Fees.......................................................... 32
Non-Competition Agreements.............................................. 33
Affiliate Agreements.................................................... 33
Voting Agreements....................................................... 33
UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL STATEMENTS............... 35
APPLICABILITY OF CALIFORNIA LAW TO INTEGRITY.............................. 39
DESCRIPTION OF CAPITAL STOCK.............................................. 39
COMPARISON OF RIGHTS OF HOLDERS OF PURE ATRIA COMMON STOCK AND HOLDERS OF
INTEGRITY CAPITAL STOCK.................................................. 42
PURE ATRIA BUSINESS....................................................... 43
PURE ATRIA MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.................................................... 50
PURE ATRIA MANAGEMENT AND EXECUTIVE COMPENSATION.......................... 57
PURE ATRIA CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS................. 62
PURE ATRIA SECURITY OWNERSHIP............................................. 63
STOCK PRICE AND DIVIDEND INFORMATION...................................... 64
INTEGRITY BUSINESS........................................................ 65
INTEGRITY MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
AND FINANCIAL CONDITION.................................................. 67
INTEGRITY MANAGEMENT AND EXECUTIVE COMPENSATION........................... 68
INTEGRITY CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.................. 71
INTEGRITY SECURITY OWNERSHIP.............................................. 72
EXPERTS................................................................... 73
LEGAL MATTERS............................................................. 73
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS................................ F-1
ANNEX A--Agreement and Plan of Reorganization, dated as of November 17,
1996, by and among Pure Atria Corporation, Delaware PAI Corp. and
Integrity QA Software, Inc....................................... A-1
ANNEX B--Section 262 of the Delaware General Corporation Law.............. B-1
ANNEX C--Chapter 13 of the California General Corporation Law............. C-1
</TABLE>
ii
<PAGE>
AVAILABLE INFORMATION
Pure Atria is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance
therewith files reports, proxy statements and other information with the
Commission. Such reports, proxy statements and other information may 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, at the Commission's regional offices located at Seven World Trade
Center, New York, New York 10048, and at Northwestern Atrium Center, 500 West
Madison Street, Suite 1400, Chicago, Illinois 60601-2511. Copies of such
material may be obtained by mail at prescribed rates from the Public Reference
Section of the Commission at Judiciary Plaza, 450 Fifth Street, N.W.,
Washington, D.C. 20549. The Commission maintains a Web site that contains
reports, proxy and information statements and other information regarding
registrants that file electronically with the Commission. The address of the
site is http://www.sec.gov. Pure Atria Common Stock is quoted on Nasdaq, and
such reports, proxy statements and other information can also be inspected at
the offices of Nasdaq Operations, 1735 K Street, N.W., Washington, D.C. 20006.
This Consent Solicitation Statement/Prospectus does not contain all the
information set forth in the Form S-4, certain portions of which have been
omitted as permitted by the rules and regulations of the Commission.
Statements contained in this Consent Solicitation Statement/Prospectus
concerning 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
Form S-4, each such statement being qualified in all respects by such
reference. For further information, reference is hereby made to the Form S-4.
Copies of the Form S-4 and the exhibits and schedules thereto may be
inspected, without charge, at the offices of the Commission, or obtained at
prescribed rates from the Public Reference Section of the Commission at
Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549.
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATION NOT CONTAINED IN THIS CONSENT SOLICITATION STATEMENT/PROSPECTUS
IN CONNECTION WITH THE SOLICITATION OF WRITTEN CONSENTS OR THE OFFERING OF
SECURITIES MADE HEREBY, AND, IF SO GIVEN OR MADE, SUCH INFORMATION OR
REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY PURE ATRIA
OR INTEGRITY. NEITHER THE DELIVERY HEREOF NOR ANY DISTRIBUTION OF SECURITIES
MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE AN IMPLICATION THAT
THERE HAS BEEN NO CHANGE IN THE FACTS HEREIN SET FORTH SINCE THE DATE HEREOF.
THIS CONSENT SOLICITATION STATEMENT/PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO
SELL OR A SOLICITATION OF AN OFFER TO BUY THE SECURITIES OFFERED BY THIS
CONSENT SOLICITATION STATEMENT/PROSPECTUS WHERE, OR TO ANY PERSON TO WHOM, IT
IS UNLAWFUL TO MAKE SUCH AN OFFER OR SOLICITATION.
----------------
TRADEMARKS
This Consent Solicitation Statement/Prospectus contains trademarks of Pure
Atria and Integrity and may contain other trademarks.
----------------
FORWARD-LOOKING STATEMENTS
This Consent Solicitation Statement/Prospectus contains 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
projected in the forward-looking statements as a result of certain factors,
including those set forth in the risk factors set forth herein. Reference is
made to the particular discussions set forth under "The Merger--Pure Atria's
Reasons for the Merger," "--Integrity's Reasons for the Merger," "Pure Atria
Business," "Pure Atria Management's Discussion and Analysis of Financial
Condition and Results of Operations," "Integrity Business" and "Integrity
Management's Discussion and Analysis of Financial Condition and Results of
Operations." In connection with forward-looking statements which appear in
these disclosures, stockholders should carefully review the factors set forth
in this Consent Solicitation Statement/Prospectus under "Risk Factors."
----------------
All information contained in this Consent Solicitation Statement/Prospectus
with respect to Pure Atria and Merger Sub has been provided by Pure Atria. All
information contained in this Consent Solicitation Statement/Prospectus with
respect to Integrity has been provided by Integrity.
iii
<PAGE>
SUMMARY
The following is a brief summary of certain information contained elsewhere
in this Consent Solicitation Statement/Prospectus. This summary is not a
complete statement of all material elements of the proposals to be voted on and
reference is made to, and this summary is qualified in its entirety by, the
more detailed information appearing elsewhere in this Consent Solicitation
Statement/Prospectus and in the information and documents annexed hereto.
THE COMPANIES
Pure Atria. Pure Atria develops, markets and supports a comprehensive,
integrated suite of software products that are designed to improve the software
development process and enable the production of reliable, high-quality
software. Pure Atria's products, which include ClearCase, Purify, PureDDTS and
PurePerformix, comprise a family of tools for use from initial software
development through quality assurance and deployment. These products are
designed to control the software development process, improve software
reliability, reduce development and testing cost, shorten time-to-market and
increase the predictability of software development cycles.
Pure Atria's products are sold directly by telephone and field sales
personnel in North America, Europe and Japan and through distributors in these
regions and a variety of other countries. Pure Atria's products are used by
information systems departments that develop software to support internal
operations, engineering departments that develop software as a component of a
manufactured product and independent software vendors that develop software for
resale.
In August 1996, Pure Software Inc. ("Pure") and Atria Software, Inc.
("Atria") effected a strategic combination of the two companies through the
merger of a wholly-owned subsidiary of Pure with and into Atria (the "Pure
Atria Combination"). In connection with the Pure Atria Combination, Pure
changed its name to Pure Atria Corporation. Pure Atria was initially
incorporated in California in 1991 and was reincorporated in Delaware in July
1995. Pure Atria maintains executive offices at 1309 South Mary Avenue,
Sunnyvale, California 94087, and its telephone number is (408) 720-1600.
Merger Sub. Merger Sub, which is a wholly-owned subsidiary of Pure Atria, was
recently incorporated in Delaware for the purpose of engaging in the
transactions contemplated by the Merger Agreement. Merger Sub has no material
assets and has not engaged in any activities except in connection with the
Merger. Merger Sub's executive offices are located at 1309 South Mary Avenue,
Sunnyvale, California 94087, and its telephone number is (408) 720-1600.
Integrity. Integrity was founded to develop, market and support automated
software quality ("ASQ") products for use in software development and design.
Integrity is currently developing a suite of software testing applications and
tools that is designed to automatically detect software defects and assist
development teams in removing bugs from their products. Integrity's product
suite is designed to assist software developers in ascertaining whether
software programs in development will meet functional and performance
specifications. Integrity believes that, upon successful completion of product
development, its product suite can be used to reduce time to market, enhance
software performance and lower development costs.
Integrity was incorporated in Delaware in November 1995. Integrity's
principal executive offices are located at 1550 South Bascom Avenue, Suite 380,
Campbell, California 95008, and its telephone number is (408) 369-2250.
SOLICITATION OF WRITTEN CONSENTS OF STOCKHOLDERS OF INTEGRITY
Purpose. A written consent of stockholders of Integrity (the "Written
Consent") will be mailed on or about January 27, 1997. The purpose of the
Written Consent is to consider and vote upon a proposal to approve and adopt
the Merger Agreement and the transactions contemplated thereby.
1
<PAGE>
Record Date and Vote Required. Only Integrity stockholders of record at the
close of business on November 27, 1996 (the "Record Date") are entitled to vote
by Written Consent. Under the Merger Agreement, it is a condition to
consummation of the Merger that the Merger Agreement and the transactions
contemplated thereby be approved by the affirmative vote of holders of 60% of
the outstanding shares of Integrity Preferred Stock, voting separately as a
class, and the affirmative vote of a majority of the outstanding shares of
Integrity Common Stock and Integrity Preferred Stock, voting together as a
single class.
As of the Record Date, there were outstanding an aggregate of 2,025,000
shares of Integrity Preferred Stock held by six holders of record and 2,250,000
shares of Integrity Common Stock held by two holders of record.
THE MERGER
Reasons for the Merger. In the discussions that led to the signing of the
Merger Agreement, Pure Atria and Integrity each identified a number of
potential benefits resulting from the Merger. Pure Atria's Board of Directors
believes that the addition of the product suite being developed by Integrity to
the Pure Atria product line will enhance Pure Atria's opportunity to address
key aspects of, and achieve greater scale and presence in, the ASQ market, as
well as expand the number of products it can sell to its existing customer
base. Moreover, the addition of the technical and marketing expertise of the
Integrity management and product development teams with a product suite
designed for the Windows and Windows NT operating systems will enhance Pure
Atria's opportunity to successfully compete in markets characterized by greater
usage of these operating systems and that Pure Atria considers to be
strategically important. Integrity's Board of Directors identified a number of
potential benefits that would accrue to Integrity and its stockholders,
including the potential benefit to Integrity of direct access to Pure Atria's
customer base, the increased marketing, financial and personnel resources to be
made available to Integrity as a result of the Merger and the liquidity that
will be available to holders of Integrity Capital Stock as a result of the
Merger. See "The Merger--Pure Atria's Reasons for the Merger" and "--
Integrity's Reasons for the Merger."
Recommendation of Integrity Board of Directors. Integrity's Board of
Directors has unanimously approved the Merger Agreement and the transactions
contemplated thereby and has determined that the Merger is fair to, and in the
best interests of, Integrity and its stockholders. After careful consideration,
Integrity's Board of Directors unanimously recommends a vote in favor of
approval and adoption of the Merger Agreement and the transactions contemplated
thereby.
Market Price Data. Pure Atria Common Stock was traded on Nasdaq under the
symbol "PRSW" from Pure's initial public offering in August 1995 until August
1996, when Pure Atria's trading symbol was changed to "PASW" in connection with
the Pure Atria Combination. On November 15, 1996, the last trading day before
the announcement by Pure Atria and Integrity that they had signed the Merger
Agreement, the closing price of Pure Atria Common Stock as reported on Nasdaq
was $26.625 per share. Following the Merger, Pure Atria Common Stock will
continue to be traded on Nasdaq under the symbol "PASW." On December 31, 1996,
the closing price of Pure Atria Common Stock as reported on Nasdaq was $24.75.
There can be no assurance as to the actual price of Pure Atria Common Stock
prior to, at or at any time following the Effective Time of the Merger. See
"Risk Factors" and "Stock Price and Dividend Information."
Accounting Treatment. The Merger will be accounted for under the purchase
method of accounting, in accordance with generally accepted accounting
principles. Under the purchase method of accounting, the purchase price of
Integrity (including direct costs of the Merger) will be allocated to the
assets acquired and liabilities assumed based upon their estimated relative
fair values at the Effective Time (as defined herein), with the excess of the
purchase price over the fair value of the net identifiable assets allocated to
goodwill. After the Merger, the results of operations of Integrity will be
included in the consolidated financial statements of Pure Atria.
2
<PAGE>
Certain Income Tax Considerations. The Merger is intended to qualify as a
reorganization under Section 368(a) of the Internal Revenue Code of 1986, as
amended (the "Code"). If the Merger does so qualify (i) none of Pure Atria,
Integrity or Merger Sub will recognize gain or loss as a result of the Merger
and (ii) holders of Integrity Capital Stock that exchange their shares for Pure
Atria Common Stock and cash will recognize gain, if any, in the Merger but not
in excess of the amount of cash received. However, it is possible that the
Internal Revenue Service (the "IRS") may assert that the Merger does not
qualify as a tax-free reorganization, and all Integrity stockholders should
consult their own tax advisors. See "The Merger--Certain Federal Income Tax
Considerations."
Appraisal and Dissenters' Rights. Stockholders of Integrity who do not vote
in favor of the Merger may, under certain circumstances and by following
procedures prescribed by the Delaware General Corporation Law (the "DGCL"),
exercise appraisal rights and receive cash for their shares of Integrity
Capital Stock. Alternatively, although Integrity is a Delaware corporation and
is therefore subject to Delaware law, the California General Corporation Law
(the "CGCL") provides that Integrity may be subject to California law with
respect to dissenters' rights. Accordingly, pursuant to Chapter 13 of the CGCL,
stockholders of Integrity who do not vote in favor of the Merger and who comply
with the other requirements of the CGCL will have a right to demand payment
for, and appraisal of the "fair value" of, their shares. Although a dissenting
stockholder may choose to proceed under either state's statute, a dissenting
stockholder of Integrity must follow the appropriate procedures under either
Delaware or California law or suffer the termination or waiver of such rights.
See "The Merger--Appraisal and Dissenters' Rights" and "Applicability of
California Law to Integrity."
Regulatory Matters. Other than compliance with the federal securities laws
and applicable securities and "blue sky" laws of various states, Pure Atria and
Integrity are aware of no other governmental or regulatory approvals required
for consummation of the Merger.
THE MERGER AGREEMENT
Effective Time. The Merger Agreement provides that the Merger will become
effective upon the filing of a Certificate of Merger with the Secretary of
State of the State of Delaware in accordance with the DGCL (the "Effective
Time"). It is anticipated that if the Merger Agreement is approved by written
consent and all other conditions of the Merger have been fulfilled or waived,
the Effective Time will occur on or about January 31, 1997, or on a date as
soon as practicable thereafter.
At the Effective Time, Integrity will be merged with and into Merger Sub.
Manner and Basis of Converting Shares. The aggregate purchase price to be
paid by Pure Atria (i) in exchange for the acquisition of all shares of
Integrity Capital Stock outstanding as of the Effective Time and (ii) in
consideration for the assumption of all Integrity options and warrants
outstanding will be determined as described below:
Conversion of Integrity Preferred Stock. Each share of Integrity
Preferred Stock issued and outstanding immediately prior to the Effective
Time (other than any shares held by a holder who has exercised and
perfected appraisal or dissenters' rights for such shares, as the case may
be, in accordance with the applicable provisions of the DGCL or CGCL and
who has not withdrawn or lost such rights ("Dissenting Shares")) will be
canceled and extinguished and converted automatically into the right to
receive (i) $6.50 in cash and (ii) that fraction of a share of Pure Atria
Common Stock obtained by dividing $6.50 by the average of the closing
prices of Pure Atria's Common Stock as quoted on Nasdaq for the five
trading days immediately preceding the closing date of the Merger (the
"Preferred Exchange Ratio") upon surrender of the certificate representing
such share of Integrity Preferred Stock in the manner provided in a letter
of transmittal to be sent to each record holder of Integrity Capital Stock
promptly following the Effective Time (the "Letter of Transmittal").
3
<PAGE>
Conversion of Integrity Common Stock. Each share of Integrity Common
Stock issued and outstanding immediately prior to the Effective Time (other
than any Dissenting Shares) will be canceled and extinguished and converted
automatically into the right to receive that fraction of a share of Pure
Atria Common Stock obtained by dividing $6.3254 by the average of the
closing prices of Pure Atria's Common Stock as quoted on Nasdaq for the
five trading days immediately preceding the closing date of the Merger (the
"Common Exchange Ratio") upon surrender of the certificate representing
such share of Integrity Common Stock in the manner provided in the Letter
of Transmittal. Except as otherwise provided by the Waiver and Amendment
Agreements, shares of Integrity Common Stock which are subject to a
repurchase option by Integrity prior to the Merger will be subject to a
repurchase option by Pure Atria, on the same terms, after the Merger.
Exchange of Integrity Stock Certificates. At or promptly after the
Effective Time, Pure Atria, acting through U.S. Stock Transfer Corp. as its
exchange agent (the "Exchange Agent"), will deliver to each Integrity
stockholder of record a Letter of Transmittal with instructions to be used
by such stockholder in surrendering certificates which, prior to the
Merger, represented shares of Integrity Capital Stock. CERTIFICATES SHOULD
NOT BE SURRENDERED BY THE HOLDERS OF INTEGRITY CAPITAL STOCK UNTIL SUCH
HOLDERS RECEIVE THE LETTER OF TRANSMITTAL FROM THE EXCHANGE AGENT. At the
Effective Time, each then outstanding option to purchase Integrity Common
Stock, whether vested or unvested, and warrant to purchase Integrity
Preferred Stock will be assumed by Pure Atria without any action on the
part of the holder thereof. OPTION AND WARRANT AGREEMENTS NEED NOT BE
SURRENDERED. See "The Merger Agreement--Manner and Basis of Converting
Shares."
No Fractional Shares. No fractional shares of Pure Atria Common Stock
will be issued in the Merger. Holders of Integrity Capital Stock exchanged
pursuant to the Merger who would otherwise have been entitled to receive a
fraction of a share of Pure Atria Common Stock (after taking into account
all certificates delivered by such holder) will receive, in lieu thereof,
cash in the amount equal to such fraction multiplied by the average closing
price of Pure Atria Common Stock for the five trading days immediately
preceding the closing date of the Merger, as reported on Nasdaq.
Stock Options. At the Effective Time, each outstanding option to purchase
shares of Integrity Common Stock (each an "Integrity Option") under
Integrity's 1995 Stock Option Plan (the "Integrity Option Plan"), whether
vested or unvested, will be assumed by Pure Atria, in connection with the
Merger. Each Integrity Option so assumed by Pure Atria under the Merger
Agreement will continue to have, and be subject to, the same terms and
conditions set forth in the Integrity Option Plan and/or as provided in the
respective option agreements governing such Integrity Option immediately
prior to the Effective Time, except that (i) such Integrity Option will be
exercisable for that number of whole shares of Pure Atria Common Stock
equal to the product of the number of shares of Integrity Common Stock that
were issuable upon exercise of such Integrity Option immediately prior to
the Effective Time multiplied by the Common Exchange Ratio, rounded down to
the nearest whole number of shares of Pure Atria Common Stock and (ii) the
per share exercise price for the shares of Pure Atria Common Stock issuable
upon exercise of such assumed Integrity Option will be equal to the
quotient determined by dividing the exercise price per share of Integrity
Common Stock at which such Integrity Option was exercisable immediately
prior to the Effective Time by the Common Exchange Ratio, rounded up to the
nearest whole cent. It is the intention of Pure Atria and Integrity that
the Integrity Options assumed by Pure Atria qualify following the Effective
Time as incentive stock options under the Code, to the extent the Integrity
Options qualified as incentive stock options immediately prior to the
Effective Time.
Warrants. Each warrant to purchase shares of Integrity Preferred Stock
outstanding at the Effective Time will be, in connection with the Merger,
assumed by Pure Atria. Each warrant so assumed by Pure Atria under the
Merger Agreement will continue to have, and be subject to, the same terms
and conditions set forth in the warrant agreement governing such warrant
immediately prior to the Effective Time, except that each such warrant
will, following the Effective Time, be exercisable only for cash and shares
of Pure
4
<PAGE>
Atria Common Stock, in such number, and at such exercise price as is
determined by applying the appropriate exchange ratio in accordance with
the terms of the applicable warrant agreement.
Form S-8 Registration Statement. Promptly after the closing date of the
Merger, Pure Atria will file a registration on Form S-8 under the Securities
Act covering the shares of Pure Atria Common Stock issuable upon exercise of
Integrity Options assumed by Pure Atria at the Effective Time. See "The Merger
Agreement--Manner and Basis of Converting Shares--Stock Options."
Stock Ownership Following the Merger. As of December 31, 1996, 2,025,000
shares of Integrity Preferred Stock and 2,250,000 shares of Integrity Common
Stock were issued and outstanding, and 30,000 shares of Integrity Preferred
Stock were subject to outstanding warrants and 435,350 shares of Integrity
Common Stock were subject to outstanding options. Based upon (i) the
capitalization of Integrity on December 31, 1996, (ii) the assumption that no
holder of Integrity Capital Stock exercises appraisal or dissenters' rights and
(iii) a Preferred Exchange Ratio and a Common Exchange Ratio based on the
closing price of Pure Atria Common Stock on December 31, 1996 (the "Exchange
Ratio Assumptions"), an aggregate of 1,106,854 shares of Pure Atria Common
Stock will be issued to Integrity stockholders in the Merger, and Pure Atria
will assume warrants to purchase an additional 7,878 shares of Pure Atria
Common Stock and options to purchase an additional 111,263 shares of Pure Atria
Common Stock. Based upon the number of shares of Pure Atria Common Stock issued
and outstanding as of December 31, 1996 and after giving effect to the issuance
of Pure Atria Common Stock following the Merger as described above, the former
holders of Integrity Capital Stock would hold, and have voting power with
respect to, approximately 2.7% of Pure Atria's total issued and outstanding
shares.
Conditions to the Merger. Consummation of the Merger is subject to the
satisfaction of various conditions, including the approval of the Merger by the
requisite vote of the stockholders of Integrity. Consummation of the Merger is
also subject to the satisfaction of the following conditions: no injunction,
court order or other legal restraint preventing the consummation of the Merger
shall be in effect; Pure Atria and Integrity shall have received opinions from
their respective counsel to the effect that the Merger will constitute a
"reorganization" within the meaning of the Code; the Form S-4 filed with the
Commission relating to the shares of Pure Atria Common Stock to be issued in
connection with the Merger shall be effective and such shares shall have been
authorized for listing on Nasdaq; and the Commission shall not have issued any
stop order preventing the sale or issuance of Pure Atria Common Stock. In
addition, the obligations of Integrity to consummate the Merger are subject to
certain conditions, including the following: the representations and warranties
of Pure Atria and Merger Sub contained in the Merger Agreement shall be true
and correct, except for such breaches, inaccuracies or omissions which do not
have a material adverse effect on Pure Atria; Pure Atria and Merger Sub shall
have performed in all material respects with all agreements and covenants
required by the Merger Agreement; and Integrity shall have received a legal
opinion from counsel to Pure Atria. The obligations of Pure Atria to consummate
the Merger are subject to certain conditions, including the following: the
representations and warranties of Integrity contained in the Merger Agreement
shall be true and correct, except for such breaches, inaccuracies or omissions
which do not have a material adverse effect on Integrity; Integrity shall have
performed in all material respects with all agreements and covenants required
by the Merger Agreement; and Pure Atria shall have received a legal opinion
from legal counsel to Integrity. See "The Merger Agreement--Conditions to the
Merger."
Termination; Fees. The Merger Agreement may be terminated under certain
circumstances, including, without limitation, by mutual written consent of Pure
Atria and Integrity and by either Pure Atria or Integrity if the other party
commits certain breaches of any representation, warranty or covenant contained
in the Merger Agreement or if the Merger is not consummated on or before
February 28, 1997. If the Merger Agreement is terminated by Pure Atria for any
reason other than those described in the section herein entitled "The Merger
Agreement--Termination or Amendment of Merger Agreement," Pure Atria has agreed
to pay Integrity the sum of $5 million as liquidated damages for the breach
giving rise to such termination. See "The Merger Agreement--Termination or
Amendment of Merger Agreement" and "--Expenses; Fees."
5
<PAGE>
Affiliate Agreements. The persons identified by Integrity as "affiliates" (as
that term is defined for purposes of Rule 145 promulgated under the Securities
Act) of Integrity (the "Integrity Affiliates") have entered into agreements
(the "Affiliate Agreements") with Pure Atria providing that such person will
not offer to sell or otherwise dispose of any Pure Atria Common Stock obtained
as a result of the Merger except in compliance with the Securities Act and the
rules and regulations thereunder. In order to help ensure that the Merger will
qualify as a "reorganization" under Section 368(a) of the Code, the Affiliate
Agreements contain a covenant that such affiliate will make reasonable
representations to Integrity and Pure Atria that will allow their respective
legal counsel to deliver opinions that the Merger will constitute a
"reorganization" under Section 368(a) of the Code. See "The Merger Agreement--
Affiliate Agreements."
Voting Agreements. Each Integrity Affiliate has entered into a voting
agreement (the "Voting Agreements") with Pure Atria. Pursuant to the Voting
Agreements, which are irrevocable, each of the Affiliates has agreed, among
other things, to vote in favor of approval and adoption of the Merger Agreement
and the transactions contemplated thereby. The vote in accordance with the
Voting Agreements of the shares of Integrity Common Stock and Integrity
Preferred Stock subject to the Voting Agreements will be adequate to approve
the Merger Agreement and the Merger by Integrity stockholders. See "The Merger
Agreement--Voting Agreements."
6
<PAGE>
SELECTED HISTORICAL AND PRO FORMA FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
The following selected historical financial information of Pure Atria and
Integrity has been derived from their respective historical financial
statements, and should be read in conjunction with such consolidated financial
statements and the notes thereto, included elsewhere in this Consent
Solicitation Statement/Prospectus. The selected pro forma 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 statements and the notes thereto
included in this Consent Solicitation Statement/Prospectus. For purposes of the
pro forma operating data, Pure Atria's consolidated financial statements for
the nine months ended September 30, 1996 have been combined with the Integrity
financial statements for the period from inception (November 1, 1995) through
September 30, 1996. 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 been consummated
at the beginning of the periods indicated, nor is it necessarily indicative of
future operating results or financial position.
On January 23, 1996, Pure Atria publicly announced its unaudited consolidated
operating results for the fourth quarter and audited consolidated operating
results for the year ended December 31, 1996. See "Pure Atria Management's
Discussion and Analysis of Financial Condition and Results of Operations--
Recent Operating Results."
PURE ATRIA SELECTED HISTORICAL FINANCIAL INFORMATION
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
-------------------------------------- -----------------
1991 1992 1993 1994 1995 1995 1996
------ ------ ------- ------- ------- ------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
HISTORICAL CONSOLIDATED
STATEMENT OF OPERATIONS
DATA:
Total revenues.......... $2,255 $8,413 $21,187 $42,758 $84,185 $58,689 $ 94,714
Gross margin............ 1,719 7,444 19,338 38,776 76,320 53,213 84,995
In-process research and
development............ -- -- -- -- 11,600 11,600 --
Merger and integration.. -- -- -- -- 2,961 -- 35,255
Income (loss) from
operations............. (804) 456 1,590 5,927 (563) (2,098) (17,003)
Net income (loss)....... (713) 223 1,646 5,427 (3,522) (3,016) (13,244)
Pro forma net income
(loss)(1).............. 5,132 (4,246) (3,740)
Net income (loss) per
share.................. $ (0.33)
Pro forma net income
(loss) per share(1).... $ 0.14 $ (0.11) $ (0.10)
Shares used in per share
computations........... 36,394 37,600 38,852 39,706
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31, AS OF
------------------------------------------- SEPTEMBER 30,
1991 1992 1993 1994 1995 1996
------- ------- ------- ------- -------- -------------
<S> <C> <C> <C> <C> <C> <C>
HISTORICAL CONSOLIDATED
BALANCE SHEET DATA:
Cash, cash equivalents
and short-term
investments............ $ 1,967 $ 7,123 $ 8,253 $42,532 $ 78,534 $ 93,790
Working capital......... 1,793 7,172 7,251 35,869 65,024 60,563
Total assets............ 2,292 9,912 15,234 54,716 110,074 136,892
Redeemable convertible
preferred stock........ 2,372 8,553 8,564 6,467 -- --
Total stockholders'
equity................. (1,240) (1,602) (87) 32,980 75,855 72,880
</TABLE>
7
<PAGE>
INTEGRITY SELECTED HISTORICAL FINANCIAL INFORMATION
(A COMPANY IN THE DEVELOPMENT STAGE)
<TABLE>
<CAPTION>
PERIOD FROM INCEPTION
(NOVEMBER 1, 1995)
THROUGH
SEPTEMBER 30, 1996
---------------------
<S> <C>
HISTORICAL STATEMENT OF OPERATIONS DATA:
Operating expenses...................................... $ 1,191
Net loss................................................ (1,164)
Accretion on Series A Preferred Stock and warrants...... (411)
Net loss attributable to common stock................... (1,575)
Net loss attributable to common stock per share......... (0.70)
Shares used in per share computation.................... 2,250
<CAPTION>
AS OF
SEPTEMBER 30, 1996
---------------------
<S> <C>
HISTORICAL BALANCE SHEET DATA:
Cash.................................................... $ 917
Working capital......................................... 830
Total assets............................................ 1,114
Long-term obligations................................... 148
Redeemable securities................................... 2,424
Total common stockholders' deficit...................... (1,573)
SELECTED PRO FORMA COMBINED FINANCIAL INFORMATION
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30, 1996
---------------------
<S> <C>
PRO FORMA COMBINED CONDENSED STATEMENT OF OPERATIONS
DATA(2):
Revenues................................................ $ 94,714
Merger and integration.................................. 35,255
Loss from operations.................................... (18,194)
Net loss................................................ (14,408)
Net loss per share...................................... (0.35)
Shares used in per share computation.................... 40,813
Integrity equivalent loss per share(3).................. (0.09)
<CAPTION>
AS OF
SEPTEMBER 30, 1996
---------------------
<S> <C>
PRO FORMA COMBINED CONDENSED BALANCE SHEET DATA:
Cash, cash equivalents and short-term investments....... $ 81,349
Working capital......................................... 43,035
Total assets............................................ 124,648
Stockholders' equity.................................... 55,373
</TABLE>
8
<PAGE>
<TABLE>
<CAPTION>
AS OF
SEPTEMBER 30, 1996
------------------
<S> <C>
PRO FORMA BOOK VALUE (DEFICIT) PER SHARE:
Historical Pure Atria(3)................................... $1.81
Historical Integrity(3).................................... (0.70)
Combined Pro Forma Per Pure Atria Share(4)................. 1.34
Equivalent Combined Pro Forma(5) Per Integrity Share....... 0.34
</TABLE>
- --------
(1) On November 21, 1995, Pure Atria acquired Performix, Inc. ("Performix").
The acquisition was accounted for as a pooling of interests. Pro forma net
income (loss) includes a provision for income taxes as if Performix had
been a C Corporation, fully subject to federal and state income taxes.
Prior to its acquisition by Pure Atria, Performix had elected S Corporation
status for income tax purposes and, consequently, historical results as
they relate to Performix do not include a provision for income taxes.
(2) The pro forma combined condensed statement of operations includes Pure
Atria's results of operations for the nine month period ended September 30,
1996 and Integrity's results of operations for the period from inception
(November 1, 1995) through September 30, 1996. Such results of operations
exclude the nonrecurring charges for in-process research and development
associated with this transaction.
(3) 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
the period.
(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 as of September 30, 1996.
(5) The Integrity equivalent per share amounts are calculated by multiplying
the related combined pro forma per share amounts by the Common Exchange
Ratio of 0.25557 shares of Pure Atria common stock for each share of
Integrity common stock.
See Unaudited "Pro-Forma Combined Condensed Financial Information" and
accompanying notes thereto.
9
<PAGE>
RISK FACTORS
The following risk factors should be considered carefully in evaluating the
proposals to be acted on by written consent by Integrity stockholders and the
acquisition of the securities offered hereby. Sections in this Consent
Solicitation Statement/Prospectus contain forward-looking statements that
involve risks and uncertainties. Actual results could differ materially from
those anticipated in these forward-looking statements as a result of certain
risk factors, including those set forth below and elsewhere herein.
UNCERTAINTIES IN INTEGRITY PRODUCT DEVELOPMENT, MARKETING AND SALES
In order for Pure Atria to successfully derive value from the Merger, the
product suite currently being developed by Integrity must be developed in a
timely manner, with the features, functions, performance and other key
characteristics that will adequately meet the requirements of the marketplace.
Integrity was founded in November 1995 and has been primarily engaged in
research and development since inception. Accordingly, Integrity has only a
limited operating history upon which an evaluation of Integrity, its products
and its prospects can be based. All of Integrity's products are at an early
stage of development, and Integrity has not generated any product revenue. As
a result, there can be no assurance that the product suite will be
successfully developed in accordance with the planned schedule and in
accordance with anticipated technical specifications. Furthermore, there can
be no assurance that Integrity's product suite can be successfully marketed
and sold by Pure Atria.
UNCERTAINTIES RELATING TO ACQUISITION STRATEGY, INTEGRATION OF INTEGRITY
OPERATIONS AND INTEGRATION OF RECENTLY ACQUIRED COMPANIES
As part of its efforts to enhance its market position and grow its business
in an increasingly competitive environment, Pure Atria has addressed, and
expects to continue to address, the need to develop new products through the
acquisition of other companies. Acquisitions, such as the Merger, involve
numerous risks including difficulties in the assimilation of the operations,
technologies and products of the acquired companies, the diversion of
management's attention from other business concerns, risks of entering markets
in which Pure Atria has no or limited direct prior experience and where
competitors in such markets have stronger market positions, and the potential
loss of key employees of the acquired company. Achieving the anticipated
benefits of an acquisition will depend in part upon whether the integration of
an acquired company's business is accomplished in an efficient and effective
manner, and there can be no assurance that this will be able to occur.
Moreover, the successful combination of companies in the high technology
industry may be more difficult to accomplish than in other industries.
Combining an acquired company with Pure Atria requires, among other things,
integration of such a company's respective product offerings and coordination
of their sales and marketing and research and development efforts. There can
be no assurance that such integration can be accomplished smoothly or
successfully. The difficulties of such integration may be increased by the
necessity of coordinating geographically separated organizations. The
integration of certain operations following an acquisition, including the
Merger, will require the dedication of management resources that may distract
attention from the day-to-day business of Pure Atria. The inability of
management to successfully integrate the operations of any company that Pure
Atria may acquire could have a material adverse effect on the business,
operating results and financial condition of Pure Atria. In addition, as
commonly occurs with mergers of technology companies, during the pre-merger
and integration phases, aggressive competitors may undertake initiatives to
attract customers and to recruit key employees through various incentives.
Integrity and Pure Atria have entered into the Merger Agreement with the
expectation that the proposed Merger will result in long-term strategic
benefits. Achieving these anticipated benefits will depend in part on whether
the two companies' operations can be integrated in an efficient, effective and
timely manner. There can be no assurance that this will occur. The combination
of the two companies will require, among other things, integration of the
companies' respective product offerings and coordination of the companies'
sales, marketing and research and development efforts. The difficulties of
integration are exacerbated by the necessity of integrating personnel with
disparate business backgrounds and combining two different corporate cultures.
The retention of Integrity employees is critical to ensure continued
advancement, development and support of
10
<PAGE>
Integrity's technology and product development and marketing efforts. The
difficulties of such integration may also be increased by the complexity of
the technologies being integrated. These integration activities may have an
adverse impact on Integrity's product development, commercialization and
marketing efforts at crucial stages in the process. There is no assurance that
the foregoing will be accomplished smoothly or successfully. The integration
of operations following the Merger will require the dedication of management
resources, which may distract attention from the day-to-day operations of Pure
Atria. The inability of management to successfully integrate the operations of
the companies could have a material adverse effect upon the business,
operating results and financial condition of Pure Atria.
In addition, Pure Atria has recently completed the Pure Atria Combination
(August 1996) and the acquisitions of Performix (November 1995) and QualTrak
Corporation ("QualTrak") (March 1995), and Pure Atria may acquire other
companies, products or technologies in the future. As discussed above, there
can be no assurance that these transactions and the acquisition of Integrity
can be effectively integrated, that such transactions will not result in costs
or liabilities that could materially and adversely affect Pure Atria's
business, operating results and financial condition, or that Pure Atria will
obtain the anticipated or desired benefits of such transactions.
RISKS ASSOCIATED WITH EXPANSION INTO NEW MARKETS; EMERGING MARKET FOR ASQ
TOOLS
Pure Atria expects to introduce new products and expand its product
offerings in the client/server development environments. Broad market
acceptance of Pure Atria's existing and yet to be released products in new
markets, including acceptance in markets characterized by greater usage of the
Windows and Windows NT operating systems, is critical to Pure Atria's future
success. Although Pure Atria has adapted certain of its products to the
Windows and Windows NT operating systems, Pure Atria's products have
historically been licensed for use principally on certain versions of the Unix
operating system. There can be no assurance that Pure Atria will be successful
in marketing and selling products developed by Integrity, particularly in
markets in which Pure Atria has not traditionally promoted or sold its
products.
Each of Integrity and Pure Atria believes that factors affecting the ability
of Pure Atria's products to achieve broad market acceptance include: product
performance, price, ease of adoption, displacement of existing approaches and
adaptation to rapid technological change and competitive product offerings.
There can be no assurance that Pure Atria will be able to respond promptly and
effectively to the challenges of technological change and its competitors'
innovations in these new markets, or that Pure Atria will be able to achieve
the necessary market acceptance, or compete effectively, in these new markets.
Although demand for Pure Atria's products has grown in recent years, the
market for ASQ tools is still emerging and any future growth depends upon
continued market acceptance of such tools. Historically, Pure Atria has been
required to establish new product markets by educating prospective customers
as to the advantages of its products. Pure Atria expects that new product
markets will need to be established for its future products, which will
require significant sales and marketing resources. There can be no assurance
that Pure Atria will be successful in establishing markets for its products,
that the market for such products will continue to grow, or that developers
will adopt such products for the development and testing of their software. If
the market for ASQ tools fails to grow or grows more slowly than Pure Atria
and Integrity currently anticipate, or if Pure Atria is unable to establish
product markets for its new products, Pure Atria's business, operating results
and financial condition would be materially adversely affected.
POTENTIALLY DILUTIVE EFFECT OF EXCHANGE RATIO
Under the terms of the Merger Agreement, the shares of Integrity Preferred
Stock issued and outstanding at the Effective Time will be converted into the
right to receive, in part, shares of Pure Atria Common Stock, and the shares
of Integrity Common Stock issued and outstanding at the Effective Time will be
converted into the right to receive shares of Pure Atria Common Stock. The
ratios are based upon the average closing price of a share of Pure Atria
Common Stock on Nasdaq over the five trading days prior to the closing date of
the Merger. The
11
<PAGE>
number of shares of Pure Atria Common Stock that will be issued in the Merger
will fluctuate with the price of Pure Atria Common Stock over this measurement
period. The issuance of Pure Atria Common Stock in connection with the Merger
will have the effect of reducing Pure Atria's net income per share and could
reduce the market price of Pure Atria Common Stock unless and until revenue
growth or cost savings and other business synergies sufficient to offset the
effect of such issuance can be achieved. There can be no assurance that the
market price of Pure Atria Common Stock will not decline over the measurement
period, resulting in greater dilution to holders of Pure Atria Common Stock
caused by the increase in the number of shares of Pure Atria Common Stock
issuable to holders of Integrity Capital Stock in the Merger. In addition,
there can be no assurance that the stockholders of Integrity would not achieve
greater returns on investment if Integrity were to remain an independent
company.
COSTS OF INTEGRATION; TRANSACTION EXPENSES
The Merger will be accounted for under the purchase method of accounting,
and Pure Atria estimates it will record a one-time charge of approximately $48
million consisting of an in-process research and development write-off and
other transaction costs associated with the Merger, which will be charged to
operations in the quarter ending March 31, 1997, the quarter in which the
Merger is expected to be consummated. There can be no assurance that Pure
Atria will not incur additional material charges in subsequent quarters to
reflect additional costs associated with the Merger.
EFFECTS OF MERGER ON CUSTOMERS
There can be no assurance that the present and potential customers of Pure
Atria, and the potential customers of Integrity, will continue their current
buying patterns without regard to the proposed Merger. Any significant delay
or reduction in orders could have an adverse effect on the near-term business
and results of operations of Pure Atria.
DEPENDENCE ON UNIX OPERATING SYSTEM
Although Pure Atria has adapted certain of its products to other operating
systems, Pure Atria's products have historically been licensed for use
principally on certain versions of the Unix operating system. The revenues of
Pure Atria have been primarily attributable to Unix related products and
services. Any factor adversely affecting the demand for, or the use of, the
Unix operating system that would require changes to Pure Atria's products
would have a material adverse effect upon the business, operating results and
financial condition of Pure Atria. In addition, any changes to the underlying
components of the Unix operating system that would require changes to the
products of Pure Atria would materially adversely affect Pure Atria if it were
not able to successfully develop or implement such changes in a timely
fashion.
FLUCTUATIONS IN QUARTERLY RESULTS; FUTURE OPERATING RESULTS UNCERTAIN
Pure Atria's quarterly operating results have in the past and may in the
future fluctuate significantly depending on factors such as demand for its
products, the size and timing of orders, the number, timing and significance
of new product announcements by it and its competitors, its ability to
develop, introduce and market new and enhanced versions of its products on a
timely basis, the level of product and price competition, changes in operating
expenses, changes in average selling prices and product mix, changes in its
sales incentive strategy, sales personnel changes, the mix of direct and
indirect sales, product returns and general economic factors, among others.
Pure Atria's products are typically shipped shortly after orders are received,
and consequently, order backlog at the beginning of any quarter typically
represents only a small portion of the quarter's expected revenues. Pure Atria
has routinely received and may continue to routinely receive a substantial
portion of its orders in the last month of a quarter, with these orders
frequently concentrated in the last weeks or days of a quarter. Because
product revenues in any quarter are substantially dependent on orders booked
and shipped in that quarter, revenues for any future quarter are not
predictable with any significant degree of accuracy. Product revenues are also
difficult to forecast because the market for ASQ products is rapidly evolving
and Pure Atria's sales cycle, from initial evaluation to multiple license
purchases and the provision of support services, may vary
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substantially from customer to customer. Because Pure Atria's operating
expenses are based on anticipated revenue levels and a high percentage of
expenses are relatively fixed in the short run, variations in the timing of
revenue recognition can cause significant fluctuations in operating results
from quarter to quarter and may result in unanticipated quarterly earnings,
shortfalls or losses. Operating results may be disproportionately affected by
an unanticipated decline in revenue for a particular quarter because a
relatively small amount of Pure Atria's expenses will vary with its revenue in
the short run. As a result, Pure Atria believes that period-to-period
comparisons of Pure Atria's results of operations are not and will not
necessarily be meaningful and should not be relied upon as any indication of
future performance. Due to all of the foregoing factors, it is likely that in
some future quarter Pure Atria's operating results will be below the
expectations of public market analysts and investors. In such event, the price
of Pure Atria's Common Stock would likely be materially adversely affected.
Although Pure Atria has experienced growth in revenues in recent years, there
can be no assurance that, in the future, Pure Atria will sustain revenue
growth or remain profitable on a quarterly or annual basis.
RAPID TECHNOLOGICAL CHANGE; NEW PRODUCT DELAYS; RISK OF PRODUCT DEFECTS
The software market is characterized by ongoing technological developments,
evolving industry standards and rapid changes in customer requirements. The
introduction of products embodying new technologies and the emergence of new
industry standards and practices can render existing products obsolete and
unmarketable. Pure Atria's future business, operating results and financial
condition will depend on its ability to enhance its existing products, develop
new products that address the increasingly sophisticated needs of its
customers, develop products for additional platforms and respond to
technological advances and emerging industry standards and practices. In
addition, Pure Atria expects that it will, in the future, introduce enhanced
versions of current products, as well as versions of current products that are
ported to different Unix platforms or developed for use on platforms other
than Unix. Products that are ported to additional platforms or developed for
use on platforms other than Unix entail significant technical risks. Relative
to other software products, a number of Pure Atria's products are difficult to
port across different Unix platforms and Pure Atria's products may require
significant development efforts for use on platforms other than Unix. There
can be no assurance that Pure Atria will be successful in developing,
introducing and marketing product enhancements, new products, or versions of
existing products for other Unix platforms or platforms other than Unix on a
timely basis, if at all, or that it will not experience difficulties that
could delay or prevent the successful development, introduction or marketing
of these products, or that its new products and product enhancements will
adequately meet the requirements of the marketplace and achieve market
acceptance. Delays in the commencement of commercial shipments of new products
or enhancements may result in customer dissatisfaction and delay or loss of
product revenues, and the announcement of new products may cause customers to
defer purchases of existing products. If Pure Atria is unable, for
technological or other reasons, to develop and introduce new products
(including the product suite currently under development by Integrity), or
enhancements of existing products, in a timely manner in response to changing
market conditions or customer requirements, or if new versions of existing
products do not achieve market acceptance, Pure Atria's business, operating
results and financial condition will be materially adversely affected.
Software products as complex as those offered by Pure Atria and under
development by Integrity may contain undetected errors or failures when first
introduced or as new versions are released. Although neither Pure Atria nor
Integrity has experienced material adverse effects resulting from any software
errors in any recent years, there can be no assurance that, despite testing
internally or by current or potential customers, errors will not be found in
new products after commencement of commercial shipments, resulting in loss of
or delay in market acceptance, which could have a material adverse effect upon
Pure Atria's business, operating results and financial condition. Further,
because Pure Atria relies on its own products to detect errors in its
software, any such errors could make it more difficult to sell Pure Atria's
products in the future.
MANAGEMENT OF GROWTH; DEPENDENCE ON KEY PERSONNEL
Pure Atria has recently experienced a period of significant growth that has
placed strain upon its management systems and resources. In the future, Pure
Atria will be required to continue to improve its financial and management
controls, reporting systems and procedures on a timely basis and expand, train
and manage its
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employee work force. There can be no assurance that Pure Atria will be able to
effectively manage such growth. Its failure to do so would have a material
adverse effect upon its business, operating results and financial condition.
Competition for qualified sales, technical and other qualified personnel is
intense, and there can be no assurance that Pure Atria will be able to
attract, assimilate or retain additional highly qualified employees in the
future. If Pure Atria is unable to hire and retain such personnel,
particularly those in key positions, its business, operating results and
financial condition would be materially adversely affected. Pure Atria's
future success also depends in significant part upon the continued service of
its key technical, sales and senior management personnel. The loss of the
services of one or more of these key employees could have a material adverse
effect on its business, operating results and financial condition. Additions
of new and departures of existing personnel, particularly in key positions,
can be disruptive and can result in departures of existing personnel, which
could have a material adverse effect upon Pure Atria's business, operating
results and financial condition. In particular, Integrity's development
efforts, and the successful introduction, marketing and selling of its new
product, will be substantially dependent on the efforts of its technical and
managerial staff. Loss of any of these key personnel could limit the ability
of Pure Atria to successfully bring Integrity's new product suite to market,
and thereby have a materially adverse effect on Pure Atria.
COMPETITION; RISKS OF LITIGATION AND POTENTIAL LITIGATION
The market for ASQ tools is intensely competitive and subject to rapid
technological change. Many of Pure Atria's and Integrity's current and
potential competitors have longer operating histories, significantly greater
financial, technical and marketing resources, greater name recognition and a
larger installed customer base than Pure Atria or Integrity have. In addition,
these competitors may be able to respond more quickly to new or emerging
technologies and changes in customer requirements, and to devote greater
resources to the development, promotion and sale of their products than Pure
Atria or Integrity. In particular, certain competitors of Pure Atria are
currently selling products in markets in which Pure Atria desires to sell the
product suite being developed by Integrity, and these competitive products
have a substantial installed base and market presence.
Given the relatively low barriers to entry in the software industry, Pure
Atria and Integrity expect additional competition from other established and
emerging companies that may choose to enter the market by developing products
that compete with those offered by Pure Atria or by acquiring companies,
businesses, products or product lines that compete with Pure Atria. It is also
possible that alliances among competitors may emerge and rapidly acquire
significant market share. For example, Microsoft Corporation ("Microsoft") and
Rational Software Corporation ("Rational") recently announced the formation of
a business alliance involving the transfer of certain technology, technology
cross licensing, joint development projects and joint marketing programs
involving products that could address the same or similar markets as those
addressed by Pure Atria's existing products, and by the product suite under
development by Integrity. Pure Atria and Integrity also believe that
competition will increase as a result of software industry consolidation.
There can be no assurance that Pure Atria's current or potential competitors
will not develop or acquire products comparable or superior to those developed
by Pure Atria, combine or merge to form significant competitors, or adapt more
quickly than Pure Atria to new technologies, evolving industry trends and
changing customer requirements. Increased competition could result in price
reductions, reduced margins or loss of market share, any of which could
materially and adversely affect Pure Atria's business, operating results and
financial condition. There can be no assurance that Pure Atria will be able to
compete successfully against current and future competitors or that
competitive pressures faced by Pure Atria will not have a material adverse
effect on its business, operating results and financial condition. If Pure
Atria is unable to compete successfully against current and future
competitors, Pure Atria's business, operating results and financial condition
will be materially and adversely affected.
In addition, competitors and potential competitors may resort to litigation
as a means of competition. In the past, Pure Atria has instituted litigation
against several competitors. Such litigation may be costly and expose Pure
Atria to new claims that it may not have anticipated. Although patent and
intellectual property disputes in
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the software area have often been settled through licensing, cross-licensing
or similar arrangements, costs associated with such arrangements may be
substantial. Any litigation involving Pure Atria, whether as plaintiff or
defendant, regardless of the outcome, may result in substantial costs and
expenses to Pure Atria and significant diversion of effort by Pure Atria's
technical and management personnel. In addition, there can be no assurance
that litigation, either instituted by or against Pure Atria, will not be
necessary to resolve issues that may arise from time to time in the future
with other competitors. Any such litigation could have a material adverse
effect upon Pure Atria's business, operating results and financial condition.
See "Pure Atria Business--Competition."
INTERNATIONAL SALES; CURRENCY FLUCTUATIONS
International sales represented approximately 30%, 26%, 19% and 18% of Pure
Atria's total revenues for the nine months ended September 30, 1996 and the
years ended December 31, 1995, 1994 and 1993, respectively. Pure Atria
believes that continued profitability will require additional expansion of
sales in foreign markets. This expansion has required and will continue to
require significant management attention and financial resources and could
adversely affect Pure Atria's operating margins. In order to increase
international sales in subsequent periods, Pure Atria must establish
additional foreign operations, hire additional personnel and recruit
additional international resellers. To the extent that Pure Atria is unable to
expand international sales in a timely and cost-effective manner, its
business, operating results and financial condition could be materially
adversely affected. In addition, there can be no assurance that Pure Atria
will be able to maintain or increase international market demand for its
products. Pure Atria's international sales are currently denominated in either
U.S. or local currency and it currently does not engage in any hedging
activities. Although exposure to currency fluctuations to date has not been
significant, there can be no assurance that fluctuations in the currency
exchange rates in the future will not have a material adverse impact on Pure
Atria's business, operating results and financial condition. Additional risks
inherent in Pure Atria's international business activities include unexpected
changes in regulatory requirements, tariffs and other trade barriers, costs of
localizing products for foreign countries, lack of acceptance of localized
products in foreign countries, longer accounts receivable payment cycles,
difficulties in collecting payment, difficulties in managing international
operations, potentially adverse tax consequences including repatriation of
earnings, reduced protection for intellectual property, the burdens of
complying with a wide variety of foreign laws, and the effects of high local
wage scales and other expenses. There can be no assurance that such factors
will not have a material adverse effect on Pure Atria's future international
sales and, consequently, Pure Atria's business, operating results and
financial condition.
DEPENDENCE ON PROPRIETARY TECHNOLOGY; RISK OF THIRD PARTY CLAIMS FOR
INFRINGEMENT
Pure Atria and Integrity rely on a combination of patent, copyright and
trademark laws, trade secrets, confidentiality procedures and contractual
provisions to protect their respective proprietary rights. Despite such
efforts to protect their proprietary rights, unauthorized parties may attempt
to copy aspects of Pure Atria's or Integrity's products or to obtain and use
information that Pure Atria or Integrity regards as proprietary. Policing
unauthorized use of Pure Atria's or Integrity's products is difficult, time-
consuming and costly. Although neither Pure Atria nor Integrity is able to
determine the extent to which piracy of its software products exists or may
exist in the future, software piracy can be expected to be a persistent
problem. In selling its products, Pure Atria has relied on "shrink wrap"
licenses that are not signed by licensees and, therefore, may be unenforceable
under the laws of certain jurisdictions. In addition, the laws of some foreign
countries do not protect proprietary rights to as great an extent as do the
laws of the United States. There can be no assurance that Pure Atria's means
of protecting its proprietary rights will be adequate or that its competitors
will not independently develop similar technology. Pure Atria and Integrity
expect that software product developers will be increasingly subject to
infringement claims as the number of products and competitors in their
industry segments grows and the functionality of products in different
industry segments overlaps. There can be no assurance that infringement or
invalidity claims (or claims for indemnification resulting from infringement
claims) will not be asserted against Pure Atria or Integrity or that any such
assertions will not materially adversely affect Pure Atria's business,
operating results and financial condition. Any such claims, whether with or
without merit, could be time-consuming, result in costly litigation and
diversion of resources, cause product shipment delays or require Pure
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Atria or Integrity to enter into royalty or licensing agreements. Such royalty
or licensing agreements, if required, may not be available on terms acceptable
to Pure Atria or at all. In the event of a successful claim of product
infringement against Pure Atria or Integrity and failure or inability of Pure
Atria or Integrity to license the infringed or similar technology, Pure
Atria's business, operating results and financial condition could be
materially adversely affected.
Pure Atria and Integrity also rely on certain software that it licenses from
third parties, including software that is integrated with internally developed
software and used in its products to perform key functions. There can be no
assurance that these third-party software licenses will continue to be
available to Pure Atria on commercially reasonable terms, or that the software
will be appropriately supported, maintained or enhanced by the licensors. The
loss of licenses to, or inability to support, maintain and enhance, any of
such software, could result in increased costs, or in delays or reductions in
product shipments until equivalent software could be developed, identified,
licensed and integrated, which would materially adversely affect Pure Atria's
business, operating results and financial condition.
VOLATILITY OF STOCK PRICES
The market for Pure Atria's Common Stock is highly volatile, and could be
subject to wide fluctuations in response to quarterly variations in operating
and financial results, announcements of technological innovations or new
products by Pure Atria or its competitors, changes in prices of Pure Atria's
or its competitors' products and services, changes in product mix, changes in
revenue and revenue growth rates for Pure Atria as a whole or for individual
geographic areas, product units, products or product categories, as well as
other events or factors. Statements or changes in opinions, ratings, or
earnings estimates made by brokerage firms or industry analysts relating to
the market in which Pure Atria does business or relating to Pure Atria or
Integrity specifically have resulted, and could in the future result, in an
immediate and adverse effect on the market price of Pure Atria's Common Stock.
Statements by financial or industry analysts regarding the extent of the
dilution in Pure Atria's net income per share resulting from the Merger and
the extent to which such analysts expect potential business synergies to
offset such dilution can be expected to contribute to volatility in the market
price of Pure Atria's Common Stock. In addition, the stock market has from
time to time experienced extreme price and volume fluctuations which have
particularly affected the market price for the securities of many high-
technology companies and which often have been unrelated to the operating
performance of these companies. These broad market fluctuations may adversely
affect the market price of Pure Atria's Common Stock.
EFFECT OF ANTITAKEOVER PROVISIONS OF DELAWARE LAW AND PURE ATRIA'S CHARTER
DOCUMENTS
Upon consummation of the Merger, the stockholders of Integrity will become
stockholders of Pure Atria, a corporation governed by the laws of Delaware.
Pure Atria is subject to the provisions of Section 203 of the Delaware General
Corporation Law, which has the effect of restricting changes in control of a
company. In addition, Pure Atria's Board of Directors has the authority to
issue up to 2,000,000 shares of preferred stock and to fix the rights,
preferences, privileges and restrictions, including voting rights, of such
shares without any further vote or action by the stockholders. These and other
provisions of Delaware law applicable to Pure Atria, along with Pure Atria's
charter documents, may have the effect of delaying, deterring or preventing
changes in control or management of Pure Atria.
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SOLICITATION OF WRITTEN CONSENT OF INTEGRITY STOCKHOLDERS
GENERAL
This Consent Solicitation Statement/Prospectus is furnished to holders of
Integrity Capital Stock in connection with the solicitation of the Written
Consents by the Integrity Board of Directors. This Consent Solicitation
Statement/Prospectus and the accompanying Written Consent is first being
mailed to stockholders of Integrity on or about January 27, 1997.
This Consent Solicitation Statement/Prospectus is also furnished by Pure
Atria to Integrity stockholders as the Prospectus in connection with the
issuance of Pure Atria Common Stock in connection with the Merger described
herein.
The information set forth herein concerning Integrity has been furnished by
Integrity. The information set forth herein concerning Pure Atria and Merger
Sub has been furnished by Pure Atria.
This Consent Solicitation Statement/Prospectus contains certain information
set forth more fully in the Merger Agreement attached hereto as Annex A and is
qualified in its entirety by reference to the Merger Agreement which is hereby
incorporated herein by reference. The Merger Agreement should be read
carefully by each Integrity stockholder in formulating a voting decision with
respect to the proposed Merger and other transactions contemplated by the
Merger Agreement.
MATTERS TO BE APPROVED BY WRITTEN CONSENT
Stockholders of record of Integrity as of the close of business on November
27, 1996 are being asked to sign and return the Written Consent approving a
proposal to approve and adopt the Merger Agreement and the transactions
contemplated thereby. See "The Merger" and "The Merger Agreement."
THE INTEGRITY BOARD OF DIRECTORS HAS UNANIMOUSLY APPROVED THE MERGER
AGREEMENT AND THE TRANSACTIONS CONTEMPLATED THEREBY AND RECOMMENDS THAT
INTEGRITY STOCKHOLDERS VOTE "FOR" APPROVAL AND ADOPTION OF THE MERGER
AGREEMENT AND THE TRANSACTIONS CONTEMPLATED THEREBY.
RECORD DATE; SHARES ENTITLED TO VOTE; VOTE REQUIRED
The close of business on November 27, 1996 has been fixed as the record date
for determining the holders of Integrity Capital Stock who are entitled to
vote by Written Consent (the "Record Date"). As of the Record Date, there were
2,025,000 shares of Integrity Preferred Stock outstanding and 2,250,000 shares
of Integrity Common Stock outstanding that are entitled to vote. The holders
of record of shares of Integrity Capital Stock on the Record Date are entitled
to one vote per share of Integrity Capital Stock. Under the DGCL and the
Certificate of Incorporation of Integrity, approval and adoption of the Merger
Agreement and the transactions contemplated thereby requires the affirmative
vote of (i) holders of at least 60% of the outstanding shares of Integrity
Preferred Stock, voting separately as a single class, and (ii) holders of a
majority of the outstanding shares of Integrity Common Stock and Integrity
Preferred Stock, voting together as a single class. Integrity Affiliates
holding an aggregate of 2,000,000 shares of Integrity Preferred Stock and
2,250,000 shares of Integrity Common Stock have agreed to vote in favor of the
Merger Agreement and the transactions contemplated thereby. See "The Merger
Agreement--Conditions to the Merger."
WRITTEN CONSENTS; WRITTEN CONSENT SOLICITATION
Integrity stockholders are requested to complete, sign, date and return
promptly the enclosed Written Consent in the postage-prepaid envelope.
Integrity will bear the cost of soliciting Written Consents from its
stockholders. In addition to solicitation by mail, directors, officers and
employees of Integrity may solicit Written Consents by telephone, facsimile or
otherwise. Such directors, officers and employees of Integrity will not be
additionally compensated for such solicitation, but may be reimbursed for out-
of-pocket expenses incurred in connection therewith.
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THE MERGER
PURE ATRIA'S REASONS FOR THE MERGER
Pure Atria's Board of Directors believes that the addition of the product
suite being developed by Integrity to the Pure Atria product line will enhance
Pure Atria's opportunity to address key aspects of, and achieve greater scale
and presence in, the ASQ market, as well as expand the number of products it
can sell to its existing customer base. Moreover, the addition of the
technical and marketing expertise of the Integrity management and product
development teams with a product suite designed for the Windows and Windows NT
operating systems will enhance Pure Atria's opportunity to successfully
compete in markets characterized by greater usage of these operating systems,
which Pure Atria considers to be strategically important.
INTEGRITY'S REASONS FOR THE MERGER
The Board of Directors of Integrity believes that the Merger will provide
the following benefits to Integrity and its stockholders:
. Access to Pure Atria's Customer Base. The Merger will permit
Integrity's product suite to access the worldwide installed base of
customers of Pure Atria's existing products. Integrity believes that
access to a larger customer base is increasingly critical in the
competitive market for ASQ software products.
. Availability of Pure Atria's Sales Channels. The Merger also will
provide Integrity with access to Pure Atria's worldwide sales channels.
The combined companies can thereby leverage Pure Atria's market
position to bring Integrity's product suite to a greater number of
customers more quickly than would have been possible prior to the
Merger.
. Increased Resources to Compete in ASQ Market. The ASQ market is
intensely competitive, and Integrity's primary competitors have longer
operating histories and significantly greater financial, technical,
marketing and other resources than Integrity. Integrity believes that
an alliance with a leading company in the ASQ market will significantly
assist the penetration of Integrity's product suite into this market.
. Integrated Suite of ASQ Products. Integrity is developing a product
suite that it believes is complementary to those offered by Pure Atria
and, through the Merger, Integrity expects that the combined companies
will be able to offer customers a more complete suite of software
testing products. Integrity believes that the ability to offer a more
complete solution to software developers is and increasingly will be
essential to be competitive in this market.
. Provide Liquidity to Integrity's Stockholders. The Merger will be a
means by which Integrity's stockholders and optionholders will be able
to obtain liquidity for their equity interests. The Merger was
considered in view of available alternatives, and the Board of
Directors of Integrity concluded that no other company had the
strategic fit or could offer benefits similar to those available from
Pure Atria. In addition, the Merger is expected to be accomplished as a
tax-free exchange under Section 368 of the Code.
BACKGROUND OF THE MERGER
The market for automated software development and quality tools is becoming
increasingly competitive. In its efforts to enhance its market position and
grow its business in an increasingly competitive environment, Pure Atria has
continually evaluated strategic relationships of various forms, such as
potential original equipment manufacturer ("OEM") arrangements, joint
marketing relationships and potential acquisitions of technologies and
companies.
In October 1996, based on past informal product reviews, representatives of
senior management of Pure Atria and Integrity entered into preliminary
discussions with respect to exploring a formal business relationship between
the two companies. These discussions were carried out for Integrity primarily
by Stephen J. Kahn
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(Integrity's President and Chief Executive Officer) and Robert W. Warfield
(Integrity's Vice President and Chief Technical Officer) and for Pure Atria
primarily by Reed Hastings (Pure Atria's President and Chief Executive
Officer), Robert Dickerson (Pure Atria's Vice President for Pure Atria's
Developer Product Group) and Chuck Bay (Pure Atria's Vice President, Finance
and Administration and Chief Financial Officer). In addition, technical teams
from the two companies met to review the product suite being developed by
Integrity. To facilitate these discussions, on October 25, the parties entered
into a mutual non-disclosure agreement under which each agreed to maintain the
confidentiality of the other party's confidential information.
On November 1, 1996, at a special meeting of Pure Atria's Board of Directors
conducted by telephone conference call, Messrs. Hastings, Dickerson and Bay
presented the potential strategic acquisition or other business combination
with Integrity to the Board of Directors of Pure Atria. Mr. Hastings reviewed
the discussions with Integrity to date, and the primary terms that were being
negotiated. Mr. Dickerson reviewed the technical and marketing aspects of the
product suite under development, and how it might fit into Pure Atria's
current product offering, and possible sales channels and strategies. Mr.
Dickerson also discussed Integrity's management team. Mr. Bay discussed some
potential financial aspects of the proposed transaction. The Pure Atria Board
directed management to begin to discuss with Integrity the potential financial
and other terms upon which a merger with Integrity might be structured.
As a result of discussions regarding a possible business relationship
between Pure Atria and Integrity, Mr. Kahn introduced the possibility of an
acquisition of Integrity by Pure Atria to Integrity's Board of Directors.
Throughout November 1996, a possible merger transaction with Pure Atria was
discussed by Integrity's Board of Directors.
In the first and second weeks of November, there continued to be various
meetings between representatives of senior management of Integrity and Pure
Atria, and their respective advisors, to explore the feasibility of a possible
strategic business combination, conduct due diligence reviews and discuss the
principal terms of a merger. Senior management of the two companies
communicated individually with the members of their respective Boards of
Directors over this period as well.
On November 11, 1996, the two companies agreed upon an outline of
fundamental terms by which a merger of the companies could be accomplished,
subject to completion of a comprehensive investigation by Pure Atria of the
technology and operations of Integrity, the negotiation and preparation of a
definitive agreement, and final approval by the Board of Directors of Pure
Atria and the Board of Directors of Integrity of such an agreement.
Beginning on November 15 and continuing through November 17, representatives
of senior management of the two companies and their respective legal counsel
and executive officers met to review and negotiate drafts of the Merger
Agreement and related documents. During this period, representatives of Pure
Atria continued their investigation of Integrity's technology and operations.
Pure Atria's financial advisor had further discussions with the senior
management of Pure Atria regarding valuation issues relevant to negotiation of
a mutually acceptable exchange ratio and other terms and conditions of a
potential business combination.
On November 17, a special telephone meeting of the Board of Directors of
Pure Atria was held, with various members of Pure Atria management and Pure
Atria financial and legal advisors. At the meeting management presented its
proposal regarding the exchange ratio and other principal terms of the Merger
Agreement and related documents. Senior management and legal and financial
advisors of Pure Atria discussed, among other things, the status of the
discussions, the results of the due diligence evaluation of Integrity, the
benefits and potential risks of the Merger, the state of Integrity's product
development efforts, the possible impact of the Merger on the financial
condition and business of Pure Atria, the potential dilutive effect of the
Merger, and the potential market reaction to the proposed Merger. Pure Atria's
financial advisor then reviewed, among other
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things, the strategic rationale for, and certain financial analyses relating
to, the proposed Merger. The Board of Directors then unanimously approved the
Merger Agreement and related documents.
On November 17, 1996, a special telephonic meeting of Integrity's Board of
Directors was held, with Integrity's legal advisors. At the meeting, the Board
of Directors and Integrity's legal advisors discussed Pure Atria's proposal,
and the Board of Directors then unanimously approved the merger and the
related documents.
On November 17, following final approval by the Pure Atria Board and the
Integrity Board, the Merger Agreement and related documents were executed by
both companies, and certain officers and principal stockholders of Integrity.
On the morning of November 18, Pure Atria and Integrity issued a joint press
release announcing the Merger.
RECOMMENDATIONS OF BOARD OF DIRECTORS OF INTEGRITY
Integrity's Board of Directors has unanimously approved the Merger Agreement
and the transactions contemplated thereby and has determined that the Merger
is fair to, and in the best interests of, Integrity and its stockholders.
After careful consideration, Integrity's Board of Directors unanimously
recommends a vote in favor of approval and adoption of the Merger Agreement
and the transactions contemplated thereby.
INTERESTS OF CERTAIN PERSONS IN THE MERGER
In considering the recommendation of Integrity's Board of Directors with
respect to the approval and adoption of the Merger Agreement and the
transactions contemplated thereby, stockholders of Integrity should be aware
that certain members of the management of Integrity and Integrity's Board of
Directors have certain interests in the Merger that are different from, or in
addition to, the interests of stockholders of Integrity generally.
Officers of Combined Company; Employment. Following the Effective Time, Pure
Atria has advised Integrity that it will appoint Stephen J. Kahn (President,
Chief Executive Officer and Chairman of the Board of Directors of Integrity),
Robert W. Warfield (Vice President of Engineering, Chief Technical Officer and
a member of the Board of Directors of Integrity) and Marc B. Randolph (Vice
President of Marketing of Integrity) as officers of Pure Atria. Pursuant to an
offer letter from Pure Atria dated November 17, 1996 that was accepted by Mr.
Kahn on such date, Mr. Kahn will, after the Effective Date, (i) hold the
position of Vice President, Integrity Product Group, (ii) have a target
annualized compensation of $200,000 and (iii) receive, subject to final
approval by the Board of Directors of Pure Atria, an option to purchase
100,000 shares of Pure Atria Common Stock with an exercise price equal to the
fair market value on the date of such option grant and subject to the
provisions of the Pure Atria 1995 Stock Option Plan (the "Pure Atria Option
Plan"). Pursuant to an offer letter from Pure Atria dated November 17, 1996
that was accepted by Mr. Warfield on such date, Mr. Warfield will, after the
Effective Date, (i) hold the position of Vice President, Engineering for the
Integrity Product Group, (ii) have a target annualized compensation of
$200,000 and (iii) receive, subject to final approval by the Board of
Directors of Pure Atria, an option to purchase 100,000 shares of Pure Atria
Common Stock with an exercise price equal to the fair market value on the date
of such option grant and subject to the provisions of the Pure Atria Option
Plan. Pursuant to an offer letter from Pure Atria dated November 17, 1996 that
was accepted by Mr. Randolph on such date, Mr. Randolph will, after the
Effective Date, (i) hold the position of Vice President, Corporate Marketing
and (ii) have a target annualized compensation of $200,000. On December 31,
1996, Mr. Randolph was hired by Pure Atria on a part-time basis to work in
Pure Atria's marketing group. In connection with such employment, Mr. Randolph
was granted an option to purchase 70,000 shares of Pure Atria Common Stock at
$24.75 per share (the fair market value of Pure Atria Common Stock on the date
of grant), which option is subject to the standard provisions of the Pure
Atria Option Plan. The employment of each of Messrs. Kahn, Warfield and
Randolph will be on an "at will" basis at the discretion of Pure Atria and the
respective employees. In addition, Pure Atria has indicated that it presently
intends to offer employment to all of the employees of Integrity following the
Effective Time. Such employment is expected to be on an "at will" basis at the
discretion of Pure Atria and the employee.
Waiver and Amendment Agreements. Each of Stephen J. Kahn and Robert W.
Warfield have entered into an agreement (the "Waiver and Amendment Agreement")
with Pure Atria to waive and amend certain of their
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rights received in connection with the purchase of their shares of Integrity
Common Stock pursuant to certain Restricted Stock Purchase Agreements.
Pursuant to their respective Waiver and Amendment Agreements, each of Mr. Kahn
and Mr. Warfield have agreed to waive their rights to acceleration of vesting
under their respective Restricted Stock Purchase Agreements in connection with
the consummation of the Merger in return for new rights of acceleration that
are triggered in the event either is terminated for cause. See "Integrity
Management and Executive Compensation--Employment Contracts, Termination of
Employment and Change-In-Control Arrangements."
Indemnification. Under the Merger Agreement, Pure Atria has agreed to
indemnify the officers and directors of Integrity for acts or omissions
occurring on or prior to the Effective Time to the extent provided under
Integrity's Certificate of Incorporation and Bylaws and indemnification
agreements in effect on the date of the Merger Agreement; however, such
indemnification is subject to any limitation imposed from time to time under
applicable law.
Stock Options. The Merger Agreement provides that, at the Effective Time,
each outstanding Integrity Option, whether vested or unvested, will be, in
connection with the Merger, assumed by Pure Atria. Each Integrity Option so
assumed by Pure Atria under the Merger Agreement will continue to have, and be
subject to, the same terms and conditions set forth in the Integrity Option
Plan and/or as provided in the respective option agreements governing such
Integrity Option immediately prior to the Effective Time, except that (i) such
Integrity Option will be exercisable for that number of whole shares of Pure
Atria Common Stock equal to the product of the number of shares of Integrity
Common Stock that were issuable upon exercise of such Integrity Option
immediately prior to the Effective Time multiplied by the Common Exchange
Ratio, rounded down to the nearest whole number of shares of Pure Atria Common
Stock and (ii) the per share exercise price for the shares of Pure Atria
Common Stock issuable upon exercise of such assumed Integrity Option will be
equal to the quotient determined by dividing the exercise price per share of
Integrity Common Stock at which such Integrity Option was exercisable
immediately prior to the Effective Time by the Common Exchange Ratio, rounded
up to the nearest whole cent. It is the intention of Pure Atria and Integrity
that the Integrity Options assumed by Pure Atria qualify following the
Effective Time as incentive stock options under the Code, to the extent the
Integrity Options qualified as incentive stock options immediately prior to
the Effective Time.
Certain Benefit Plans. As soon as practicable after the Effective Time, Pure
Atria has agreed to take such reasonable actions as are necessary to allow
eligible employees of Integrity to participate in the benefit programs of Pure
Atria, or alternative benefits programs substantially comparable to those
applicable to employees of Pure Atria on similar terms. For purposes of
satisfying the terms and conditions of such programs, Pure Atria has agreed to
give full credit for eligibility, vesting or benefit accrual for each
participant's period of service with Integrity, provided that, with respect to
benefit programs and plans provided by third parties, the terms of such plans
and programs permit Pure Atria to so credit the participants.
Voting Agreements. Integrity Affiliates have entered into Voting Agreements
with Pure Atria. See "The Merger Agreement--Voting Agreements."
ACCOUNTING TREATMENT
The Merger will be accounted for under the purchase method of accounting, in
accordance with generally accepted accounting principles. Under the purchase
method of accounting, the purchase price of Integrity (including direct costs
of the Merger) will be allocated to the assets acquired and liabilities
assumed based upon their estimated relative fair values at the Effective Time,
with the excess of the purchase price over the fair value of the net
identifiable assets allocated to goodwill. After the Merger, the results of
operations of Integrity will be included in the consolidated financial
statements of Pure Atria.
CERTAIN FEDERAL INCOME TAX CONSIDERATIONS
The following discussion summarizes certain of the principal federal income
tax considerations of the Merger that are generally applicable to holders of
Integrity Capital Stock. This discussion does not deal with all
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income tax considerations that may be relevant to particular Integrity
stockholders in light of their particular circumstances, such as stockholders
who are dealers in securities, foreign persons, stockholders who acquired
their shares in connection with previous mergers involving Integrity or an
affiliate, or stockholders who acquired their shares in connection with stock
option or stock purchase plans or in other compensatory transactions. In
addition, the following discussion does not address the 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
transactions in which shares of Integrity Capital Stock were or are acquired
or shares of Pure Atria Common Stock were or are disposed of. Furthermore, no
foreign, state or local tax considerations are addressed herein. ACCORDINGLY,
INTEGRITY STOCKHOLDERS ARE URGED TO CONSULT THEIR OWN TAX ADVISORS AS TO THE
SPECIFIC TAX CONSEQUENCES OF THE MERGER, INCLUDING THE APPLICABLE FEDERAL,
STATE, LOCAL AND FOREIGN TAX CONSEQUENCES TO THEM OF THE MERGER.
The Merger is intended to constitute a "reorganization" under Sections
368(a)(1)(A) and 368(a)(2)(D) of the Code with the result that, as discussed
more fully below, (i) none of Pure Atria, Integrity or Merger Sub should
recognize gain or loss as a result of the Merger and (ii) holders of Integrity
Capital Stock that exchange their shares for Pure Atria Common Stock and cash
should recognize gain (but not loss) in the Merger but not in excess of the
amount of cash received.
Assuming that the Merger qualifies as a reorganization, that Integrity is
not treated as a "collapsible corporation" within the meaning of Section 341
of the Code (in general, a "collapsible organization" is a corporation formed
or availed of principally to hold assets which would generate ordinary income
on their disposition with a view to the disposition of the corporation's stock
at capital gain rates prior to the generation of ordinary income from the
corporation's assets) and that the Integrity Capital Stock exchanged and the
Pure Atria Common Stock received by each Integrity stockholder are held as
capital assets within the meaning of Section 1221 of the Code, the following
tax consequences should result:
General. An Integrity stockholder will not recognize any loss upon the
receipt of Pure Atria Common Stock and cash. An Integrity stockholder
receiving both Pure Atria Common Stock and cash in exchange for Integrity
Capital Stock will recognize gain (measured by the sum of the fair market
value of the Pure Atria Common Stock received plus the amount of any cash
received minus the tax basis of the shares of Integrity Capital Stock
exchanged), if any, but only to the extent of the amount of any cash received.
Under applicable U.S. Supreme Court precedent, such gain should generally be
capital gain, subject to recharacterization as a dividend as described more
fully below, and should generally be long-term capital gain if the shares of
Integrity Capital Stock exchanged for cash have been held for more than one
year. (If, on the other hand, Integrity is determined to be a collapsible
corporation, then such gain would be taxable at ordinary income tax rates.)
The tax basis of the Pure Atria Common Stock received will be the same as
the tax basis of the Integrity Capital Stock exchanged, decreased by (i) the
basis of any fractional share interest for which cash is received in the
Merger and (ii) the amount of cash received at the Effective Time (other than
cash received for a fractional share interest) and increased by the amount of
gain recognized on the exchange (other than gain recognized with respect to
cash received for a fractional share interest).
In certain circumstances, an Integrity stockholder that actually or
constructively owns shares of Integrity Capital Stock that are exchanged for
Pure Atria Common Stock in the Merger or that actually or constructively owns
Pure Atria Common Stock after the Merger will be required to treat any gain
recognized as dividend income (rather than capital gain, if any) up to the
amount of cash received in the Merger if the receipt of cash by such
stockholder has the effect of a distribution of a dividend. Whether the
receipt of cash has the effect of the distribution of a dividend would depend
upon the stockholder's particular circumstances.
In general, the determination of whether a stockholder who exchanges
Integrity Capital Stock and receives Pure Atria Common Stock and cash
recognizes capital gain or dividend income is made under Sections 356(a)(2)
and 302 of the Code. Under Section 356(a)(2) of the Code, each stockholder of
Integrity Capital Stock will be treated for tax purposes as if such
stockholder had received only Pure Atria Common Stock in the Merger, and
immediately thereafter Pure Atria had redeemed appropriate portions of such
Pure Atria Common Stock in
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exchange for the cash actually distributed to such stockholder in the Merger.
Under Section 302 of the Code, the gain recognized by a stockholder on the
exchange will be taxed as capital gain if the deemed redemption from such
stockholder (i) is a "substantially disproportionate redemption" of stock with
respect to such stockholder, or (ii) is "not essentially equivalent to a
dividend" with respect to such stockholder. In making this determination,
stockholders should be aware that, under Section 318 of the Code, a
stockholder may be considered to own, after the Merger, Pure Atria Common
Stock owned (and in some cases constructively owned) by certain related
individuals and entities and Pure Atria Common Stock which the stockholder (or
such related individuals or entities) has the right to acquire upon the
exercise or conversion of options.
The deemed redemption of an Integrity stockholder's Pure Atria Common Stock
will be a "substantially disproportionate redemption" if, as a result of the
deemed redemption, the ratio determined by dividing the number of shares of
Pure Atria Common Stock owned by such stockholder immediately after the Merger
by the total number of outstanding shares of Pure Atria Common Stock is less
than 80% of the same ratio calculated as if only Pure Atria Common Stock, and
not cash, were issued to the Integrity stockholder in the Merger.
The deemed redemption of a stockholder's Pure Atria Common Stock will be
"not essentially equivalent to a dividend" if the stockholder experiences a
"meaningful reduction" in his or her proportionate equity interest in Pure
Atria by reason of the deemed redemption. Although there are no fixed rules
for determining when a meaningful reduction has occurred, the IRS has
indicated in a published ruling that the receipt of cash in the Merger would
not be characterized as a dividend if the stockholder's percentage ownership
interest in Pure Atria and Integrity prior to the Merger was minimal, the
stockholder exercises no control over the affairs of Pure Atria or Integrity,
and the stockholder's percentage ownership interest in Pure Atria is reduced
in the deemed redemption by any extent. If neither of the redemption tests set
forth above are satisfied, the stockholder will be treated as having received
a dividend equal to the amount of such stockholder's recognized gain, assuming
that such stockholder's ratable share of the earnings and profits of Integrity
(and, possibly, Pure Atria) equals or exceeds such recognized gain.
Dissenting Stockholders. An Integrity stockholder that exercises such
stockholder's right to seek an appraisal of such stockholder's shares of
Integrity Capital Stock generally will recognize capital gain or loss measured
by the difference between the amount of cash received and the tax basis of the
shares of Integrity Capital Stock exchanged therefor. Such capital gain or
loss will be long-term capital gain or loss if the shares of Integrity Capital
Stock exchanged by such dissenting stockholder have been held for more than
one year. In addition, the amount of cash received may be treated as dividend
income if the dissenting stockholder actually or constructively owns Pure
Atria Common Stock after the Merger as discussed above.
Fractional Shares. If a holder of shares of Integrity Capital Stock receives
cash in lieu of a fractional share of Pure Atria Common Stock in the Merger,
such cash amount will be treated as received in exchange for the fractional
share of Pure Atria Common Stock. Gain or loss recognized as a result of that
exchange will be equal to the cash amount received for the fractional share of
Pure Atria Common Stock reduced by the proportion of the holder's tax basis in
shares of Integrity Capital Stock exchanged and allocable to the fractional
share of Pure Atria Common Stock. Such gain or loss will be long-term capital
gain or loss if the shares of Integrity Capital Stock exchanged therefor have
been held for more than one year.
The parties are not requesting a ruling from the IRS in connection with the
Merger. As a condition to the obligations of Integrity and Pure Atria to
consummate the Merger, Integrity and Pure Atria will receive opinions from
their respective legal counsel, Gunderson Dettmer Stough Villeneuve Franklin &
Hachigian, LLP and Wilson Sonsini Goodrich & Rosati, Professional Corporation,
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. These opinions, which are collectively referred to herein as the "Tax
Opinions," neither bind the IRS nor preclude the IRS from adopting a contrary
position. In addition, the Tax Opinions are based upon (i) representations
made by Pure Atria, Merger Sub, Integrity and certain stockholders of
Integrity and (ii) the assumption that the "continuity of interest"
requirement for tax-free reorganization treatment will be satisfied. In
general, the continuity of interest requirement will be satisfied if (i) the
Pure Atria Common Stock received in the Merger, in the aggregate, represents a
substantial portion of the entire consideration received by the Integrity
stockholders in the Merger and (ii) the Integrity stockholders do not pursuant
to a plan or intent existing at the time of the Merger dispose
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of so much of the Pure Atria Common Stock received in the Merger that the
Integrity stockholders no longer have a substantial proprietary interest in
the Integrity business being conducted by Pure Atria after the Merger.
A successful IRS challenge to the "reorganization" status of the Merger (as
a result of a failure of the "continuity of interest" requirement or
otherwise) would generally result in an Integrity stockholder recognizing the
full amount of his or her gain or loss with respect to each share of Integrity
Capital Stock surrendered equal to the difference between the stockholder's
basis in such share and the fair market value, as of the Effective Time of the
Merger, of the Pure Atria Common Stock received in exchange therefor plus the
cash received.
Backup Withholding. In order to avoid "backup withholding" of federal income
tax on payments of cash to Integrity stockholders, each Integrity stockholder
must, unless an exception applies, provide the payor of such cash with the
stockholder's correct taxpayer identification number ("TIN") on Form W-9 and
certify under penalties of perjury that such number is correct and that such
stockholder is not subject to backup withholding. A Form W-9 is attached to
this proxy statement. If a stockholder fails to provide the correct TIN or
certification, the cash received in the Merger may be subject to backup
withholding at a 31% rate.
THE PRECEDING DISCUSSION IS INTENDED ONLY AS A SUMMARY OF CERTAIN FEDERAL
INCOME TAX CONSEQUENCES OF THE MERGER AND DOES NOT PURPORT TO BE A COMPLETE
ANALYSIS OR DISCUSSION OF ALL POTENTIAL TAX EFFECTS RELEVANT THERETO. THUS,
INTEGRITY STOCKHOLDERS ARE URGED TO CONSULT THEIR OWN TAX ADVISORS AS TO THE
SPECIFIC TAX CONSEQUENCES TO THEM OF THE MERGER, INCLUDING TAX RETURN
REPORTING REQUIREMENTS, THE APPLICABILITY AND EFFECT OF FEDERAL, STATE, LOCAL,
AND OTHER APPLICABLE TAX LAWS AND THE EFFECT OF ANY PROPOSED CHANGES IN THE
TAX LAWS.
GOVERNMENTAL AND REGULATORY APPROVALS
Other than compliance with the federal securities laws and applicable
securities and "blue sky" laws of various states, Pure Atria and Integrity are
aware of no other governmental or regulatory approvals required for
consummation of the Merger.
APPRAISAL AND DISSENTERS' RIGHTS
Stockholders of Integrity who do not vote in favor of the Merger may, under
certain circumstances and by following the procedure prescribed by the DGCL,
exercise appraisal rights and receive cash for their shares of Integrity
Capital Stock. Alternatively, although Integrity is a Delaware corporation and
is therefore subject to the DGCL, the CGCL provides that Integrity may be
subject to California law with respect to dissenters' rights. Accordingly,
pursuant to Chapter 13 of the CGCL, stockholders of Integrity who do not vote
in favor of the Merger and who comply with the requirements of the CGCL will
have a right to demand payment for, and appraisal of the "fair value" of,
their shares. Although a dissenting stockholder may choose to proceed under
one or both of the states' statutes, a dissenting stockholder must follow the
appropriate procedures under either the DGCL or the CGCL or suffer the
termination or waiver of such rights. See "Applicability of California Law to
Integrity."
Delaware Appraisal Rights. If a holder of Integrity Capital Stock exercises
appraisal rights in connection with the Merger under Section 262 of the DGCL
("Section 262"), any shares of Integrity Capital Stock with respect to which
such rights have been exercised and perfected will not be converted into Pure
Atria Common Stock but instead will be converted into the right to receive
such consideration as may be determined by the Delaware Court of Chancery (the
"Court") to be due with respect to such shares pursuant to the laws of the
State of Delaware. This Consent Solicitation Statement/Prospectus is being
sent by personal delivery or by mail to all holders of record of shares of
Integrity Capital Stock on or about January 27, 1997 and constitutes notice of
the appraisal rights available to such holders under Section 262.
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The following summary of the provisions of Section 262 is not intended to be
a complete statement of such provisions and is qualified in its entirety by
reference to the full text of Section 262, a copy of which is attached to this
Consent Solicitation Statement/Prospectus as Annex B and incorporated herein
by reference.
Holders of shares of Integrity Capital Stock who object to the Merger and
who follow the procedures in Section 262 will be entitled to have their shares
of Integrity Capital Stock appraised by the Court and to receive payment of
the "fair value" of such shares as of the Effective Time of the Merger.
In the event that the Integrity stockholders approve the Merger Agreement by
written consent in accordance with the DGCL, either before the Effective Time
or within ten days thereafter, Pure Atria must notify each Integrity
stockholder who did not so consent in writing of such Effective Time and that
appraisal rights are available for any or all of the shares of Integrity
Capital Stock held by such stockholder. A stockholder of Integrity electing to
exercise appraisal rights must, within 20 days of the date of mailing of such
notice, perfect his, her or its appraisal rights by demanding in writing from
Integrity the appraisal of his, her or its shares of Integrity Capital Stock.
A vote against the Merger will not constitute a demand for appraisal. A
stockholder electing to take such action must do so by a separate written
demand as provided in Section 262. A holder who elects to exercise appraisal
rights should mail or deliver his, her or its written demand to Integrity at
1550 South Bascom, Suite 380, Campbell, California 95008. The demand should
specify the holder's name and mailing address, the number of shares of
Integrity Capital Stock owned and that such holder is demanding appraisal of
his, her or its shares. Only a holder of record of shares of Integrity Capital
Stock (or his, her or its duly appointed representative) is entitled to assert
appraisal rights for the shares registered in that holder's name.
Within 120 days after the Effective Time of the Merger, any stockholder who
has made a valid written demand and who has not voted in favor of approval and
adoption of the Merger Agreement may (i) file a petition in the Court
demanding a determination of the value of shares of Integrity Capital Stock
and (ii) upon written request, receive from Integrity a statement setting
forth the aggregate number of shares of Integrity Capital Stock not voted in
favor of approval and adoption of the Merger Agreement and with respect to
which demands for appraisal have been received and the aggregate number of
holders of such shares. Such statement must be mailed within ten days after
the written request therefor has been received by Integrity.
If a petition for an appraisal is timely filed, at a hearing on such
petition, the Court is required to determine the holders of Dissenting Shares
entitled to appraisal rights and to determine the "fair value" of the
Dissenting Shares exclusive of any element of value arising from the
accomplishment or expectation of the Merger, together with a fair rate of
interest, if any, to be paid upon the value of the Dissenting Shares. In
determining such "fair value," the Court is required to take into account all
relevant factors, including the market value of Integrity Capital Stock and
the net asset and earnings value of Integrity, and in determining the fair
value of interest, the Court may consider the rate of interest which Integrity
would have had to pay to borrow money during the pendency of the proceeding.
Upon application by a stockholder, the Court may also order that all or a
portion of the expenses incurred by any stockholder in connection with the
appraisal proceeding, including, without limitation, reasonable attorneys'
fees and the fees and expenses of experts utilized in the appraisal
proceeding, be charged pro rata against the value of all the shares of
Integrity Capital Stock entitled to appraisal.
Any holder of Dissenting Shares who has duly demanded an appraisal under
Section 262 will not, after the Effective Time of the Merger, be entitled to
vote the shares subject to such demand for any purpose or be entitled to the
payment of dividends or other distributions on such Dissenting Shares (except
dividends or other distributions payable to stockholders of record as of a
date prior to the Effective Time of the Merger).
If any holder of shares of Integrity Capital Stock who demands appraisal
under Section 262 effectively withdraws or loses, his, her or its right to
appraisal, the shares of such holder will be converted into a right to receive
that number of shares of Pure Atria Common Stock and/or cash as is determined
in accordance with the Merger Agreement. A holder will effectively lose his
right to appraisal if he, she or it votes in favor of approval and adoption of
the Merger Agreement and approval of the Merger, or if no petition for
appraisal is filed within 120 days after the Effective Time of the Merger, or
if the holder delivers to Integrity a written withdrawal of
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such holder's demand for an appraisal and an acceptance of the Merger, except
that any such attempt to withdraw made more than 60 days after the Effective
Time of the Merger requires the written approval of Integrity. A holder of
stock represented by certificates may also lose his, her or its right to
appraisal if he, she or it fails to comply with the Court's direction to
submit such certificates of stock to the Register in Chancery for notation
thereon of the pendency of the appraisal proceedings.
California Dissenters' Rights. By virtue of Section 2115 of the CGCL, if
holders of Integrity Capital Stock exercise dissenters' rights in connection
with the Merger under Sections 1300-1312 of the CGCL ("Section 1300"), any
shares of Integrity Capital Stock as to which such dissenters' rights are
exercised will not be converted into the right to receive shares of Pure Atria
Common Stock and/or cash by virtue of the Merger but instead will be converted
into the right to receive such consideration as may be determined to be due
with respect to such Dissenting Shares pursuant to the laws of the State of
California. The following summary of the provisions of Section 1300 is not
intended to be a complete statement of such provisions and is qualified in its
entirety by reference to the full text of Section 1300, a copy of which is
attached hereto as Annex C and is incorporated herein by reference. See
"Applicability of California Law to Integrity."
If the Merger is approved by the required vote of Integrity's stockholders,
each holder of shares of Integrity Capital Stock who does not vote in favor of
the Merger and who follows the procedures set forth in Section 1300 will be
entitled to have shares of Integrity Capital Stock purchased by Integrity for
cash at their fair market value. The fair market value of shares of Integrity
Capital Stock will be determined as of the day before the first announcement
of the terms of the proposed Merger, excluding any appreciation or
depreciation in consequence of the proposed Merger and therefore valuing the
shares of Integrity Capital Stock as if the Merger had not occurred.
Within ten days after approval of the Merger by Integrity's stockholders,
Integrity must mail a notice of such approval (the "Approval Notice") to all
stockholders who have not voted in favor of the Merger, together with a
statement of the price determined by Integrity to represent the fair market
value of the applicable Dissenting Shares, a brief description of the
procedures to be followed in order for the stockholder to pursue dissenters'
rights, and a copy of Sections 1300-1304 of the CGCL. The statement of price
by Integrity constitutes an offer by Integrity to purchase all Dissenting
Shares at the stated amount.
A stockholder of Integrity electing to exercise dissenters' rights must,
within thirty days after the date in which the Approval Notice is mailed to
such stockholder, mail or deliver the written demand to Integrity stating that
such holder is demanding purchase of his or her shares of Integrity Capital
Stock, stating the number of shares which Integrity must purchase, what the
stockholder claims to be the fair market value of such shares and enclosing
the share certificates for endorsement by Integrity.
If Integrity and the stockholder agree that the shares are Dissenting Shares
and agree upon the price of the shares, Integrity must pay the stockholder the
agreed upon price plus interest thereon at the legal rate from the date of the
agreement on Dissenting Shares within thirty days from the later of (i) the
date of the agreement on Dissenting Shares or (ii) the date all contractual
conditions to the Merger are satisfied.
If Integrity denies that the shares are Dissenting Shares, or if Integrity
and the stockholder fail to agree upon the fair market value of shares of
Integrity Capital Stock, then within six months after the date the Approval
Notice was mailed to stockholders, any stockholder who has made a valid
written purchase demand and who has not voted in favor of approval and
adoption of the Merger may file a complaint in California superior court
requesting a determination as to whether the shares are Dissenting Shares or
as to the fair market value of such holder's shares of Integrity Capital
Stock, or both.
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THE MERGER AGREEMENT
The following discussion briefly summarizes material provisions of the
Merger Agreement; however, such discussion is not complete and is qualified in
its entirety by reference to the Merger Agreement, a conformed copy of which
is attached hereto as Annex A and incorporated herein by reference.
EFFECTIVE TIME
The Merger Agreement provides that the Merger will become effective upon the
filing of a Certificate of Merger with the Secretary of State of the State of
Delaware in accordance with the DGCL (the "Effective Time"). It is anticipated
that if the Merger Agreement is approved by written consent and all other
conditions of the Merger have been fulfilled or waived, the Effective Time
will occur on or about January 31, 1997, or on a date as soon as practicable
thereafter.
At the Effective Time, Integrity will be merged with and into Merger Sub.
MANNER AND BASIS OF CONVERTING SHARES
The aggregate purchase price to be paid by Pure Atria (i) in exchange for
the acquisition of all shares of Integrity Capital Stock outstanding as of the
Effective Time and (ii) in consideration for the assumption of all Integrity
Options and warrants outstanding will be determined as described below.
Conversion of Integrity Preferred Stock. Each share of Integrity Preferred
Stock issued and outstanding immediately prior to the Effective Time (other
than any Dissenting Shares) will be canceled and extinguished and converted
automatically into the right to receive (i) $6.50 in cash and (ii) that
fraction of a share of Pure Atria Common Stock obtained by dividing $6.50 by
the average of the closing prices of Pure Atria's Common Stock as quoted on
Nasdaq for the five trading days immediately preceding the closing date of the
Merger (the "Preferred Exchange Ratio") upon surrender of the certificate
representing such share of Integrity Preferred Stock in the Letter of
Transmittal.
Conversion of Integrity Common Stock. Each share of Integrity Common Stock
issued and outstanding immediately prior to the Effective Time (other than any
Dissenting Shares) will be canceled and extinguished and converted
automatically into the right to receive that fraction of a share of Pure Atria
Common Stock obtained by dividing $6.3254 by the average of the closing prices
of Pure Atria's Common Stock as quoted on Nasdaq for the five trading days
immediately preceding the closing date of the Merger (the "Common Exchange
Ratio") upon surrender of the certificate representing such share of Integrity
Common Stock in the manner provided in the Letter of Transmittal. Except as
otherwise provided by the Waiver and Amendment Agreements, shares of Integrity
Common Stock which are subject to a repurchase option by Integrity prior to
the Merger will be subject to a repurchase option by Pure Atria, on the same
terms, after the Merger.
No Fractional Shares. No fractional shares of Pure Atria Common Stock will
be issued in the Merger. Holders of Integrity Capital Stock exchanged pursuant
to the Merger who would otherwise have been entitled to receive a fraction of
a share of Pure Atria Common Stock (after taking into account all certificates
delivered by such holder) will receive, in lieu thereof, cash in the amount
equal to such fraction multiplied by the average closing price of Pure Atria
Common Stock for the five trading days immediately preceding the closing date
of the Merger, as reported on Nasdaq.
Stock Options. At the Effective Time, each outstanding Integrity Option,
whether vested or unvested, will be assumed by Pure Atria, in connection with
the Merger. Each Integrity Option so assumed by Pure Atria under the Merger
Agreement will continue to have, and be subject to, the same terms and
conditions set forth in the Integrity Option Plan and/or as provided in the
respective option agreements governing such Integrity Option immediately prior
to the Effective Time, except that (i) such Integrity Option will be
exercisable for that number of whole shares of Pure Atria Common Stock equal
to the product of the number of shares of Integrity Common
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Stock that were issuable upon exercise of such Integrity Option immediately
prior to the Effective Time multiplied by the Common Exchange Ratio, rounded
down to the nearest whole number of shares of Pure Atria Common Stock and (ii)
the per share exercise price for the shares of Pure Atria Common Stock
issuable upon exercise of such assumed Integrity Option will be equal to the
quotient determined by dividing the exercise price per share of Integrity
Common Stock at which such Integrity Option was exercisable immediately prior
to the Effective Time by the Common Exchange Ratio, rounded up to the nearest
whole cent. It is the intention of Pure Atria and Integrity that the Integrity
Options assumed by Pure Atria qualify following the Effective Time as
incentive stock options under the Code, to the extent the Integrity Options
qualified as incentive stock options immediately prior to the Effective Time.
In connection with the Merger, the Integrity Common Stock subject to an
early exercise stock purchase agreement under the Integrity Option Plan will
be exchanged for Pure Atria Common Stock at the Common Exchange Ratio, and the
shares of Pure Atria Common Stock so received shall continue to be subject to
the same repurchase right in favor of Pure Atria. The number of shares of Pure
Atria Common Stock subject to repurchase from time to time after the Merger
and the repurchase price per share shall be appropriately adjusted to reflect
the exchange of Integrity Common Stock for Pure Atria Common Stock.
Promptly after the closing date of the Merger, Pure Atria will file a
registration statement on Form S-8 under the Securities Act covering the
shares of Pure Atria Common Stock issuable upon exercise of Integrity Options
assumed by Pure Atria at the Effective Time.
Warrants. Each warrant to purchase shares of Integrity Preferred Stock
outstanding at the Effective Time will be, in connection with the Merger,
assumed by Pure Atria. Each warrant so assumed by Pure Atria under the Merger
Agreement will continue to have, and be subject to, the same terms and
conditions set forth in the warrant agreement governing such warrant
immediately prior to the Effective Time, except that each such warrant will,
following the Effective Time, be exercisable only for cash and shares of Pure
Atria Common Stock, in such number, and at such exercise price as is
determined by applying the appropriate exchange ratio in accordance with the
terms of the applicable warrant agreement.
STOCK OWNERSHIP FOLLOWING THE MERGER
Based on the capitalization of Integrity as of December 31, 1996 and the
Exchange Ratio Assumptions, an aggregate of 1,106,854 shares of Pure Atria
Common Stock will be issued to Integrity stockholders in the Merger, and Pure
Atria will assume warrants to purchase an additional 7,878 shares of Pure
Atria Common Stock and options to purchase an additional 111,263 shares of
Pure Atria Common Stock. Based upon the number of shares of Pure Atria Common
Stock issued and outstanding as of December 31, 1996 and after giving effect
to the issuance of Pure Atria Common Stock following the Merger as described
above, the former holders of Integrity Capital Stock would hold, and have
voting power with respect to, approximately 2.7% of Pure Atria's total issued
and outstanding shares.
LEGAL STRUCTURE OF MERGER
Under the Merger Agreement, Integrity will merge with and into Merger Sub
with Merger Sub being the surviving corporation of the Merger (the "Surviving
Corporation"). The Certificate of Incorporation of Merger Sub in effect
immediately prior to the Effective Time will become the Certificate of
Incorporation of the Surviving Corporation, the Bylaws of Merger Sub will
become the Bylaws of the Surviving Corporation, the members of the Board of
Directors of Merger Sub shall be the initial members of the Board of Directors
of the Surviving Corporation and the officers of Merger Sub shall be the
initial officers of the Surviving Corporation. At the Effective Time, the
Certificate of Incorporation of the Surviving Corporation will be amended to
change the name of the Surviving Corporation to "Integrity QA Software, Inc."
REPRESENTATIONS AND WARRANTIES
The Merger Agreement includes various customary representations and
warranties of the parties thereto.
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The Merger Agreement includes representations and warranties of Integrity as
to: (1) the organization, standing and corporate power of Integrity, (2)
Integrity's capital structure, (3) Integrity's corporate structure, (4) the
authorization, execution, delivery and enforceability of the Merger Agreement,
the consummation of the transactions contemplated in the Merger Agreement, and
the absence of conflicts under Integrity's charter and bylaws, contracts and
applicable law, (5) the accuracy of Integrity's financial statements and their
compliance with generally accepted accounting principles, (6) the absence of
undisclosed liabilities since October 31, 1996, (7) the absence of material
changes since October 31, 1996, (8) compliance with laws relating to tax and
other returns and reports, (9) restrictions on business activities, (10) title
to properties and the absence of liens and encumbrances, (11) intellectual
property, (12) agreements, contracts and commitments, (13) interested party
transactions, (14) compliance with laws, (15) litigation, (16) insurance, (17)
minute books, (18) environmental matters, (19) brokers' and finders' fees and
third-party expenses, (20) employee matters and benefit plans, (21) employees,
(22) governmental authorization, (23) third party consents and (24) the
accuracy and completeness of representations.
The Merger Agreement also includes representations and warranties of Pure
Atria and Merger Sub as to (1) organization, standing and corporate power, (2)
authority, noncontravention and approvals, (3) capital structure, (4) SEC
filings and financial statements, (5) litigation, (6) restrictions on business
activities, (7) changes to Pure Atria's charter documents and (8) the accuracy
and completeness of the representations.
CONDUCT OF INTEGRITY'S BUSINESS PENDING THE MERGER
Under the Merger Agreement, Integrity has agreed, 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 (except to the extent that Pure Atria otherwise consents in writing): (a)
to carry on its business in the usual, regular and ordinary course in
substantially the same manner as previously conducted; (b) to pay its debts
and taxes when due; (c) to pay or perform other obligations when due; (d) to
the extent consistent with such business, to use all reasonable efforts
consistent with past practice and policies to (i) preserve intact its present
business organization, (ii) keep available the services of its present
officers and key employees and (iii) preserve its relationships with
customers, suppliers, distributors, licensors, licensees, and others having
business dealings with it; and (e) to promptly notify Pure Atria of any
materially negative event related to Integrity or its business.
Under the Merger Agreement, Integrity has agreed, 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, not to: (a) enter into any commitment or transaction not in the ordinary
course of business; (b) transfer to any person or entity any rights to
intellectual property rights owned by Integrity; (c) enter into or amend any
agreements pursuant to which any other party is granted manufacturing,
marketing, distribution or similar rights of any type or scope with respect to
any products of Integrity; (d) 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 schedules attached to the Merger
Agreement; (e) commence any litigation; (f) declare, set aside or pay any
dividends on or make any other distributions in respect of any of its capital
stock, or split, combine or reclassify any of its capital stock or issue or
authorize the issuance of any other securities in respect of, in lieu of or in
substitution for shares of capital stock of Integrity, or repurchase, redeem
or otherwise acquire, directly or indirectly, any shares of its capital stock
(or options, warrants or other rights exercisable thereof); (g) except for the
issuance of shares of Integrity Capital Stock upon exercise or conversion of
presently outstanding Integrity stock options or warrants, 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 its 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; (h) cause or permit any
amendments to its Certificate of Incorporation or Bylaws; (i) acquire or agree
to acquire by merging or consolidating with, or by purchasing any assets or
equity securities 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
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<PAGE>
acquire any assets which are material, individually or in the aggregate, to
the business of Integrity, (j) sell, lease, license or otherwise dispose of
any of its properties or assets, except in the ordinary course of business and
consistent with past practice; (k) incur any indebtedness for borrowed money
or guarantee any such indebtedness or issue or sell any debt securities or
guarantee any debt securities of others; (l) grant any severance or
termination pay to any director, officer, employee or consultant, except
payments made pursuant to standard written agreements outstanding on the date
of the Merger Agreement; (m) adopt or amend any employee benefit plan, or
enter into any employment contract, extend employment offers, pay or agree to
pay any special bonus or special remuneration to any director, employee or
consultant, or increase the salaries or wage rates of its employees; (n)
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; (o) take any action to accelerate the vesting of
any restricted stock or any options, warrants or other rights to acquire
shares of Integrity Capital Stock; (p) except as contemplated by the Merger
Agreement, pay, discharge or satisfy, in an amount in excess of $25,000 (in
any one case) or $50,000 (in the aggregate), any claim, liability or
obligation, other than the payment, discharge or satisfaction in the ordinary
course of business of liabilities reflected or reserved against in its
financial statements dated October 31, 1996; (q) 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; (r) enter
into any strategic alliance, joint development or joint marketing arrangement
or agreement; (s) fail to pay or otherwise satisfy its monetary obligations as
they become due, except such as are being contested in good faith; (t) waive
or commit to waive any rights with a value in excess of $10,000, in any one
case, or $25,000, in the aggregate; (u) cancel, materially amend or renew any
insurance policy other than in the ordinary course of business; (v) alter, or
enter into any commitment to alter, its interest in any corporation,
association, joint venture, partnership or business entity in which Integrity
directly or indirectly holds any interest on the date hereof; or (w) take, or
agree in writing or otherwise to take, any of the actions described in (a)
through (v) above, or any other action that would prevent Integrity from
performing or cause Integrity not to perform its covenants hereunder.
NO SOLICITATION
Until the earlier of the Effective Time or the date of the termination of
the Merger Agreement, Integrity has agreed that it will not (nor will
Integrity permit any of Integrity's officers, directors, agents,
representatives or affiliates to) directly or indirectly, take any of the
following actions with any party other than Pure Atria and its designees: (a)
solicit, initiate, entertain, or encourage any proposals or offers from, or
conduct discussions with or engage in negotiations with, any person relating
to any possible acquisition of Integrity or any of its subsidiaries (whether
by way of merger, purchase of capital stock, purchase of assets or otherwise),
any material portion of its or their capital stock or assets or any equity
interest in Integrity or any of its subsidiaries; (b) provide information with
respect to it to any person, other than Pure Atria, relating to, or otherwise
cooperate with, facilitate or encourage any effort or attempt by any such
person with regard to, any possible acquisition of Integrity (whether by way
of merger, purchase of capital stock, purchase of assets or otherwise), any
material portion of its or their capital stock or assets or any equity
interest in Integrity or any of its subsidiaries; (c) enter into an agreement
with any person, other than Pure Atria, providing for the acquisition of
Integrity (whether by way of merger, purchase of capital stock, purchase of
assets or otherwise), any material portion of its or their capital stock or
assets or any equity interest in Integrity or any of its subsidiaries; or (d)
make or authorize any statement, recommendation or solicitation in support of
any possible acquisition of Integrity or any of its subsidiaries (whether by
way of merger, purchase of capital stock, purchase of assets or otherwise),
any material portion of its or their capital stock or assets or any equity
interest in Integrity or any of its subsidiaries by any person, other than by
Pure Atria. In addition to the foregoing, Integrity has agreed that if it
receives prior to the Effective Time or the termination of the Merger
Agreement any offer or proposal relating to any of the above, it shall
promptly notify Pure Atria thereof, including information as to the identity
of the offeror or the party making any such offer or proposal and the specific
terms of such offer or proposal, as the case may be, and such other
information related thereto as Pure Atria may reasonably request.
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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 Effective Time
of the following conditions: (a) the Merger Agreement and the Merger shall
have been approved and adopted by the stockholders of Integrity; (b) no
temporary restraining order, preliminary or permanent injunction or other
order issued by any court of competent jurisdiction or other legal or
regulatory restraint or prohibition preventing the consummation of the Merger
shall be in effect; (c) Pure Atria and Integrity shall each have received
substantially identical written opinions from their respective counsel to the
effect that the Merger will constitute a reorganization within the meaning of
Section 368(a) of the Code; (d) all approvals of governments and governmental
agencies necessary to consummate the transactions under the Merger Agreement,
including the S-4 Registration Statement being declared effective by the
Commission; (e) the shares of Pure Atria Common Stock issuable to stockholders
of Integrity pursuant to the Merger Agreement and such other shares required
to be reserved for issuance in connection with the Merger shall have been
authorized for listing on Nasdaq; and (f) the Commission shall not have issued
any stop order preventing the sale or issuance of Pure Atria Common Stock.
In addition, the obligations of Integrity to consummate the Merger and the
transactions contemplated by the Merger Agreement are subject to the
satisfaction at or prior to the Effective Time of each of the following
conditions: (a) the representations and warranties of Pure Atria and Merger
Sub contained in the Merger Agreement shall be true and correct on and as of
the Closing Date, except for changes contemplated by Merger Agreement and
except for those representations and warranties which address matters only as
of a particular date (which shall remain true and correct as of such date),
with the same force and effect as if made on and as of the Closing Date,
except, in all such cases, for such breaches, inaccuracies or omissions of
such representations and warranties which do not have a Material Adverse
Effect (as defined in the Merger Agreement) on Pure Atria; (b) Pure Atria 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 it on or prior to the Effective Time; (c) Integrity shall
have received a legal opinion from counsel to Pure Atria, in substantially the
form attached as Exhibit B to the Merger Agreement; and (d) Pure Atria shall
have obtained all consents required to consummate the transactions
contemplated by the Merger Agreement and all other consents in connection with
the transactions contemplated hereby.
The obligations of Pure Atria and Merger Sub to consummate the Merger and
the transactions contemplated by the Merger Agreement shall be subject to the
satisfaction at or prior to the Effective Time of the following conditions:
(a) the representations and warranties of Integrity contained in the Merger
Agreement shall be true and correct on and as of the Closing Date, except for
changes contemplated by the Merger Agreement and except for those
representations and warranties which address matters only as of a particular
date (which shall remain true and correct as of such date), with the same
force and effect as if made on and as of the Closing Date, except, in all such
cases, for such breaches, inaccuracies or omissions of such representations
and warranties which do not have a Material Adverse Effect on Integrity; (b)
Integrity 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 it on or prior to the Effective Time; (c) Pure Atria shall
have been furnished with evidence satisfactory to it that Integrity has
obtained the consents, approvals and waivers set forth in Schedule 6.3(c) to
the Merger Agreement; (d) Pure Atria shall have received a legal opinion from
legal counsel to Integrity, in substantially the form attached as Exhibit C to
the Merger Agreement; (e) each of the Integrity Affiliates shall have
delivered an executed Affiliate Agreement which shall be in full force and
effect; (f) no holders of outstanding shares of Integrity Capital Stock as of
the date of the Merger Agreement shall have exercised, nor shall they have any
continued right to exercise, appraisal, dissenters' or similar rights under
applicable law with respect to their shares by virtue of the Merger; (g) each
person listed on Schedule 6.3(g) of the Merger Agreement shall have executed
and delivered to Pure Atria a Non-Competition Agreement in substantially the
form of Exhibit D to the Merger Agreement and all of the Non-Competition
Agreements shall be in full force and effect; (h) Integrity shall have made no
cash distributions or compensation adjustments since the date of the Merger
Agreement other than such as are approved by Pure Atria in writing; (i) each
of the Integrity Affiliates shall, contemporaneously with the execution of the
Merger Agreement, have delivered an executed Voting Agreement in the form
attached
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to the Merger Agreement as Exhibit E covering all of the Integrity Capital
Stock owned by them, (j) each of the employees of Integrity listed as Part A
of Schedule 6.3(j) shall have accepted offers of employment from Pure Atria
having substantially the form attached to the Merger Agreement as Exhibit F,
and Integrity shall use its best efforts to have the employees of Integrity
listed on Part B of Schedule 6.3(j) accept such offers and (k) each of Stephen
J. Kahn and Robert W. Warfield shall have executed and delivered a Waiver and
Amendment Agreement in substantially the form attached to the Merger Agreement
as Exhibit G.
TERMINATION OR AMENDMENT OF MERGER AGREEMENT
The Merger Agreement provides that it may be terminated at any time prior to
the Effective Time: (a) by mutual written consent of Integrity and Pure Atria;
(b) by Pure Atria or Integrity if: (i) the Effective Time has not occurred by
February 28, 1997; (ii) there shall be a final nonappealable order of a
federal or state court in effect preventing consummation of the Merger; or
(iii) there shall be any statute, rule, regulation or order enacted,
promulgated or issued or deemed applicable to the Merger by any governmental
entity that would make consummation of the Merger illegal; (c) by Pure Atria
if there shall be any action taken, or any statute, rule, regulation or order
enacted, promulgated or issued or deemed applicable to the Merger, by any
governmental entity, which would: (i) prohibit Pure Atria's or Integrity's
ownership or operation of any portion of the business of Integrity or (ii)
compel Pure Atria or Integrity to dispose of or hold separate, as a result of
the Merger, all or a portion of the business or assets of Integrity or Pure
Atria; (d) by Pure Atria if it is not in material breach of its obligations
under the Merger Agreement and there has been a breach of any representation,
warranty, covenant or agreement contained in the Merger Agreement on the part
of Integrity or contained in the Voting Agreements on the part of the
Integrity stockholders that are parties to such agreements and (i) such breach
has not been cured within twenty (20) business days after written notice to
Integrity (provided that, a five-business-day cure period shall be required
for a breach of any Voting Agreement and no cure period shall be required for
a breach which by its nature cannot be cured), and (ii) as a result of such
breach the conditions Integrity would not be able to satisfy its obligations
at closing as described above would not then be satisfied; and (e) by
Integrity if it is not in material breach of its obligations under the Merger
Agreement and there has been a breach of any representation, warranty,
covenant or agreement contained in the Merger Agreement on the part of Pure
Atria and (i) such breach has not been cured within twenty (20) business days
after written notice to Pure Atria and (ii) as a result of such breach Pure
Atria, would not be able to satisfy its obligations at closing as described
above.
In the event of termination of the Merger Agreement as provided therein, the
Merger Agreement shall forthwith become void and there shall be no liability
or obligation on the part of Pure Atria or Integrity, or their respective
officers, directors or stockholders under the Merger Agreement, provided that
each party shall remain liable for any breaches of the Merger Agreement prior
to its termination. Notwithstanding the foregoing, the provisions of the
Merger Agreement relating to the confidentiality obligations of the parties to
the Merger Agreement shall remain in full force and effect and survive any
termination of the Merger Agreement.
EXPENSES; FEES
If the Merger is not consummated, all fees and expenses incurred in
connection with the Merger, including, without limitation, all legal,
accounting, financial, advisory, consulting and all other fees and expenses of
third parties ("Third Party Expenses") shall be borne by the party that
incurred such Third Party Expenses. If the Merger is consummated, all
reasonable Third Party Expenses incurred by Integrity in connection with the
negotiation and effectuation of the terms and conditions of the Merger
Agreement and the transactions contemplated thereby, and all Third Party
Expenses incurred by Pure Atria in connection with the negotiation and
effectuation of the terms and conditions of the Merger and the transactions
contemplated thereby shall be paid by Pure Atria.
If the Merger Agreement is terminated by Pure Atria for any reason other
than those described above in "Termination or Amendment of Merger Agreement,"
Pure Atria has agreed to pay Integrity the sum of $5 million as liquidated
damages for the breach giving rise to such termination.
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NON-COMPETITION AGREEMENTS
Stephen J. Kahn and Robert W. Warfield have entered into non-competition
agreements with Pure Atria and Merger Sub. The non-competition agreements
contain provisions restricting such persons for a period of 18 months
following the closing of the Merger from participating or engaging in the
design, development, manufacture, production, marketing, sale or servicing of
any product or the provision of any service, that directly or indirectly
competes with Integrity's or Pure Atria's products or services. These
restrictions cease if the restricted party's employment is terminated by Pure
Atria or Merger Sub other than for cause (as defined in the non-competition
agreements) and other than as a result of a voluntary resignation.
AFFILIATE AGREEMENTS
The Pure Atria Common Stock to be issued pursuant to the Merger will be
freely transferable under the Securities Act, except for shares issued to any
person who is an "affiliate" of Pure Atria or Integrity within the meaning of
Rules 144 and 145 under the Securities Act. Rules 144 and 145 impose
restrictions on the manner in which such affiliates may resell securities and
also on the quantity of securities that such affiliates and others with whom
they might act in concert may resell within any three- month period.
As a condition to the Merger, prior to the Effective Time, each Integrity
Affiliate is required to have entered into an Affiliate Agreement with Pure
Atria providing that such person will not offer to sell or otherwise dispose
of any Pure Atria Common Stock obtained as a result of the Merger except in
compliance with the Securities Act and the rules and regulations thereunder.
Generally this will require that such sales be made in accordance with Rule
145(d) under the Securities Act, which in turn requires that, for specified
periods, such sales be made in compliance with the volume limitations, manner
of sale provisions and current information requirements of Rule 144 under the
Securities Act. The volume limitations should not pose any material
limitations on any Pure Atria stockholder who owns less than one percent of
the outstanding Pure Atria Common stock after the Merger unless, pursuant to
Rule 144, such stockholder's shares are required to be aggregated with those
of another stockholder and together they exceed the one percent threshold.
In order to help ensure that the Merger will qualify as a "reorganization"
under Section 368(a) of the Code, the Affiliate Agreements contain a covenant
that such Integrity Affiliate will make reasonable representations to
Integrity and Pure Atria that will allow their respective legal counsel to
deliver opinions that the Merger will constitute a "reorganization" under
Section 368(a) of the Code.
VOTING AGREEMENTS
Each Integrity Affiliate has entered into a Voting Agreement with Pure
Atria. Pursuant to such Voting Agreements, which are irrevocable, each of the
Integrity Affiliates has agreed to vote in favor of approval and adoption of
the Merger Agreement and the transactions contemplated thereby. The vote in
accordance with the Voting Agreements of the shares of Integrity Common Stock
and Integrity Preferred Stock subject to the Voting Agreements will be
adequate to approve the Merger Agreement and the Merger by Integrity
stockholders. Pursuant to the Voting Agreements, each of the Integrity
Affiliates has also agreed that it will not (nor will they permit any of their
officers, directors, agents, representatives or affiliates to) directly or
indirectly, take any of the following actions with any party other than Pure
Atria and its designees: (a) solicit, initiate, entertain, or encourage any
proposals or offers from, or conduct discussions with or engage in
negotiations with, any person relating to any possible acquisition of
Integrity or any of its subsidiaries (whether by way of merger, purchase of
capital stock, purchase of assets or otherwise), any material portion of its
or their capital stock or assets or any equity interest in Integrity or any of
its subsidiaries; (b) provide information with respect to Integrity to any
person, other than Pure Atria, relating to, or otherwise cooperate with,
facilitate or encourage any effort or attempt by any such person with regard
to, any possible acquisition of Integrity (whether by way of merger, purchase
of capital stock, purchase of assets or otherwise), any material portion of
its or their capital stock or assets or any equity interest in Integrity or
any of its subsidiaries; (c) enter into an agreement with any person, other
than Pure Atria, providing for the acquisition of Integrity (whether by way of
merger, purchase of capital stock, purchase of assets or otherwise), any
material portion of its or their capital stock or assets or any equity
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interest in Integrity or any of its subsidiaries; or (d) make or authorize any
statement, recommendation or solicitation in support of any possible
acquisition of Integrity or any of its subsidiaries (whether by way of merger,
purchase of capital stock, purchase of assets or otherwise), any material
portion of its or their capital stock or assets or any equity interest in
Integrity or any of its subsidiaries by any person, other than by Pure Atria.
In addition to the foregoing, the Integrity Affiliate has agreed that if it
receives prior to the Effective Time or the termination of the Merger
Agreement any offer or proposal relating to any of the above, it shall
promptly notify Pure Atria thereof, including information as to the identity
of the offeror or the party making any such offer or proposal and the specific
terms of such offer or proposal, as the case may be, and such other
information related thereto as Pure Atria may reasonably request.
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UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL INFORMATION
The following unaudited pro forma combined condensed financial statements
have been prepared to give effect to the Merger, using the purchase method of
accounting.
The unaudited pro forma combined condensed financial statements reflect
certain assumptions deemed probable by management regarding the proposed
Merger (e.g., that share information used in the unaudited pro forma
information approximates actual share information at the closing date of the
merger). No adjustments to the unaudited pro forma combined condensed
financial information have been made to account for different possible results
in connection with the foregoing, as management believes that the impact on
such information of the varying outcomes, individually or in the aggregate,
would not be materially different.
The unaudited pro forma combined condensed balance sheet as of September 30,
1996 gives effect to the Merger as if it had occurred on September 30, 1996,
and combines the unaudited condensed consolidated balance sheet of Pure Atria
and the audited balance sheet of Integrity as of September 30, 1996.
The unaudited pro forma combined condensed statement of operations combines
the unaudited consolidated statement of operations of Pure Atria for the nine
months ended September 30, 1996, and the audited statement of operations of
Integrity for the period from inception (November 1, 1995) through September
30, 1996, as if the Merger had occurred at the beginning of the respective
period. The operating results of Integrity for the period from inception
(November 1, 1995) through December 31, 1996 were immaterial.
If the Merger is consummated under the proposed terms thereof, management of
Pure Atria anticipate that approximately $47.8 million of the aggregate
purchase price will be allocated to in-process research and development, which
will result in a charge to operations of this amount in the period in which
the Merger is consummated.
Such unaudited pro forma combined condensed financial information is
presented for illustrative purposes only and is not necessarily indicative of
the financial position or results of operations that would have actually been
reported had the Merger occurred at the beginning of the periods presented,
nor is it necessarily indicative of future financial position or results of
operations. These unaudited pro forma combined condensed financial statements
are based upon the respective historical financial statements of Pure Atria
and Integrity and should be read in conjunction with the respective historical
financial statements and notes thereto of Pure Atria and Integrity included
elsewhere in this Consent Solicitation Statement/Prospectus, and do not
incorporate any benefits from cost savings or synergies of operations of the
companies as a combined entity.
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UNAUDITED PRO FORMA COMBINED CONDENSED BALANCE SHEET
SEPTEMBER 30, 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
INTEGRITY
(A COMPANY
IN THE PRO PRO
PURE DEVELOPMENT FORMA FORMA
ASSETS ATRIA STAGE) ADJUSTMENTS COMBINED
------ ----- ----------- ----------- --------
<S> <C> <C> <C> <C>
Current assets:
Cash and cash equivalents.... $ 38,450 $ 917 $(13,358)(a) $ 26,009
Short-term investments....... 55,340 -- 55,340
Accounts receivables, net.... 21,706 -- 21,706
Prepaid expenses and other
current assets.............. 3,198 28 3,226
Deferred tax assets.......... 5,881 -- 5,881
-------- ------- -------- --------
Total current assets....... 124,575 945 (13,358) 112,162
Property and equipment, net.. 10,566 160 10,726
Other assets, net............ 1,751 9 1,760
-------- ------- -------- --------
Total assets............... $136,892 $ 1,114 $(13,358) $124,648
======== ======= ======== ========
LIABILITIES, REDEEMABLE
SECURITIES AND STOCKHOLDERS'
EQUITY (DEFICIT)
-----------------------------
Current liabilities:
Current portion of bank
borrowings and capital lease
obligations................. $ -- $ 73 $ $ 73
Accounts payable............. 2,928 -- 2,928
Accrued payroll and related
expenses.................... 8,338 -- 8,338
Accrued integration and
merger costs................ 18,969 -- 5,000 (a) 23,969
Other accrued expenses....... 11,031 42 11,073
Deferred revenue............. 21,081 -- 21,081
Income taxes................. 1,665 -- 1,665
-------- ------- -------- --------
Total current liabilities.. 64,012 115 5,000 69,127
Long-term bank borrowings and
capital lease obligations.... -- 148 148
Redeemable Series A preferred
stock........................ -- 2,405 (2,405)(a) --
Redeemable warrants on Series
A preferred stock............ -- 19 (19)(a) --
Stockholders' equity:
Common stock................. 4 2 (2)(a) 4
Additional paid-in capital... 88,802 -- 30,299 (a) 119,101
Cumulative translation
adjustments................. (517) -- (517)
Accumulated deficit.......... (15,409) (1,575) (46,231)(a) (63,215)
-------- ------- -------- --------
Total stockholders' equity
(deficit)................. 72,880 (1,573) (18,358) 55,373
-------- ------- -------- --------
Total liabilities,
redeemable securities and
stockholders' equity...... $136,892 $ 1,114 $(13,358) $124,648
======== ======= ======== ========
</TABLE>
See accompanying notes to pro forma combined condensed financial statements.
36
<PAGE>
UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENT OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1996
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
INTEGRITY
(A COMPANY
IN THE
PURE DEVELOPMENT PRO FORMA PRO FORMA
ATRIA STAGE) ADJUSTMENTS COMBINED
-------- ----------- ----------- ---------
<S> <C> <C> <C> <C>
Revenues........................... $ 94,714 $ -- $ $ 94,714
Cost of revenues................... 9,719 -- 9,719
-------- ------- ----- --------
Gross margin.................... 84,995 -- 84,995
-------- ------- ----- --------
Operating expenses:
Sales and marketing............... 42,596 -- 42,596
Research and development.......... 16,528 642 17,170
General and administrative........ 7,619 549 8,168
Merger and integration............ 35,255 -- 35,255
-------- ------- ----- --------
Total operating expenses........ 101,998 1,191 103,189
-------- ------- ----- --------
Loss from operations............... (17,003) (1,191) (18,194)
Other income....................... 2,476 27 2,503
-------- ------- ----- --------
Loss before income taxes........ (14,527) (1,164) (15,691)
Income taxes....................... (1,283) -- (1,283)
-------- ------- ----- --------
Net loss........................ $(13,244) $(1,164) $ -- $(14,408)
======== ======= ===== ========
Net loss per share................. $ (0.33) $ (0.35)
======== ========
Shares used in per share
computation....................... 39,706 1,107 40,813
======== ===== ========
</TABLE>
See accompanying notes to pro forma combined condensed financial statements.
37
<PAGE>
NOTES TO UNAUDITED PRO FORMA COMBINED
CONDENSED FINANCIAL STATEMENTS
(1) DESCRIPTION OF TRANSACTION
On November 17, 1996, Pure Atria, Merger Sub and Integrity entered into an
Agreement and Plan of Reorganization. Under the terms of the Agreement, each
outstanding share of Integrity Series A preferred stock will be converted into
a right to receive (i) $6.50 in cash and (ii) that fraction of a share of the
Company's common stock obtained by dividing $6.50 by the average of the
closing prices of the Company's common stock as quoted on the Nasdaq National
Market for the five trading days immediately preceding the closing date of the
Merger. Each outstanding share of Integrity common stock will be converted
into a right to receive that fraction of a share of the Company's common stock
obtained by dividing $6.3254 by the average of the closing prices of the
Company's common stock as quoted on the Nasdaq National Market for the five
trading days immediately preceding the closing date of the Merger. Each
outstanding warrant to purchase shares of Integrity Preferred Stock and each
outstanding option to purchase Integrity Common Stock will be assumed using
ratios based on the exchange ratios described above. Consummation of the
merger contemplated by the Agreement is conditioned upon the affirmative vote
of both companies' stockholders, among other conditions. Using the closing
price of Pure Atria common stock on December 31, 1996, Pure Atria would have
issued 1,106,855 shares of Pure Atria common stock pursuant to the Agreement.
The actual number of shares of Pure Atria common stock to be issued will be
determined on the effective date of the Merger based on the average closing
prices of Pure Atria's common stock five trading days immediately preceding
the closing date and the number of shares of Integrity preferred and common
stock actually outstanding on such date.
As a result of the merger, Merger Sub will merge with and into Integrity,
resulting in Integrity becoming a wholly-owned subsidiary of Pure Atria. Based
on the terms of the Agreement and other direct costs and cost of integration
of approximately $5,000,000, the aggregate purchase price will be
approximately $48,657,000. The transaction will be accounted for as a
purchase. For purposes of the Pro Forma Combined Condensed Financial
Statements, the carrying value of the assets and liabilities of Integrity
approximate their preliminary estimated fair values based upon available
information and are subject to revision.
(2) PRO FORMA ADJUSTMENTS
BALANCE SHEET
<TABLE>
<S> <C>
(a)Record fair value of Pure Atria common stock issued and
warrants and options assumed to complete the merger.......... $ 30,299
Cash paid to acquire preferred shares and warrants.............. 13,358
Eliminate Integrity preferred stock............................. (2,405)
Eliminate warrants on preferred stock........................... (19)
Eliminate Integrity common stockholders' deficit................ 1,573
Accrue for direct costs and costs of integration................ 5,000
Charge related to write-off of in process research and
development.................................................... (47,806)
</TABLE>
STATEMENT OF OPERATIONS
The combined pro forma statements of operations exclude the anticipated
nonrecurring charge of approximately $47.8 million for in-process research and
development expected to result from the acquisition of Integrity by Pure
Atria. Using the closing price of Pure Atria common stock on December 31,
1996, Pure Atria would have issued 1,106,855 shares of Pure Atria common stock
pursuant to the Agreement. The actual number of shares of Pure Atria common
stock to be issued will be determined on the effective date of the Merger
based on the average closing prices of Pure Atria's common stock five trading
days immediately preceding the closing date and the number of shares of
Integrity preferred and common stock actually outstanding on such date.
38
<PAGE>
APPLICABILITY OF CALIFORNIA LAW TO INTEGRITY
Section 2115 of the CGCL makes substantial portions of the CGCL applicable,
with limited exceptions, to a foreign corporation with more than half of its
outstanding stock held of record by persons having addresses in California and
more than half of its business conducted in the state (as measured by factors
based on a corporation's levels of property, payroll and sales determined for
California franchise tax purposes), irrespective of the corporation's state of
incorporation. Although Integrity is incorporated in Delaware, it is subject
to Section 2115. The statutory provisions of the CGCL to which Integrity is
subject include, but are not limited to, provisions governing a director's
standard of care in performing the duties of a director, a stockholder's right
to vote cumulatively in any election of directors, a director's or
stockholder's right to inspect corporate records, indemnification requirements
concerning directors, officers and others and the corporate requirements to
effectuate corporate reorganizations (including mergers and acquisitions).
Section 2115 also invokes the application of Chapter 13 of the CGCL to the
Merger with respect to Integrity stockholders who elect to exercise
dissenters' rights. Under Section 2115, the provisions of the CGCL made
applicable pursuant to such section apply to the exclusion of the law of the
jurisdiction in which the foreign corporation is incorporated.
Upon completion of the Merger, the statutory protections available to
Integrity stockholders pursuant to Section 2115 will cease to exist.
DESCRIPTION OF CAPITAL STOCK
PURE ATRIA CAPITAL STOCK
The authorized capital stock of Pure Atria consists of 80,000,000 shares of
Common Stock, $0.0001 par value per share, and 2,000,000 shares of Preferred
Stock, $0.0001 par value per share.
Pure Atria Common Stock
As of December 31, 1996, there were approximately 40,821,800 shares of Pure
Atria Common Stock outstanding held of record by approximately 407
stockholders. Pure Atria Common Stock is listed on Nasdaq under the symbol
"PASW." Holders of Pure Atria Common Stock are entitled to one vote per share
on all matters to be voted upon by the stockholders. The stockholders do not
have a right to take action by written consent nor may they cumulate votes in
connection with the election of the Board of Directors. The holders of Pure
Atria Common Stock are entitled to receive ratably such dividends, if any, as
may be declared from time to time by the Board of Directors out of funds
legally available therefor. In the event of a liquidation, dissolution or
winding up of Pure Atria, the holders of Pure Atria Common Stock are entitled
to share ratably in all assets remaining after payment of liabilities. Pure
Atria Common Stock has no preemptive or conversion rights or other
subscription rights. There are no redemption or sinking fund provisions
applicable to Pure Atria Common Stock. All outstanding shares of Pure Atria
Common Stock are fully paid and non-assessable, and the shares of Pure Atria
Common Stock to be outstanding upon completion of the Merger will be fully
paid and non-assessable.
Preferred Stock
As of December 31, 1996, no shares of Preferred Stock were outstanding. The
Board of Directors has the authority to issue these shares of Preferred Stock
in one or more series and to fix the rights, preferences, privileges and
restrictions granted to or imposed upon any unissued and undesignated shares
of Preferred Stock and to fix the number of shares constituting any series and
the designations of such series, without any further vote or action by the
stockholders. Although it presently has no intention to do so, the Board of
Directors, without stockholder approval, can issue Preferred Stock with voting
and conversion rights which could adversely affect the voting power or other
rights of the holders of Pure Atria Common Stock, and the issuance of
Preferred Stock may have the effect of delaying, deferring or preventing a
change in control of Pure Atria.
39
<PAGE>
Transfer Agent and Registrar
The Transfer Agent and Registrar for the Pure Atria Common Stock is U.S.
Stock Transfer Corp., 1745 Gardena Ave., Glendale, CA 91204, and its telephone
number is (818) 502-1404.
INTEGRITY CAPITAL STOCK
The authorized capital stock of Integrity consists of 10,000,000 shares of
Common Stock, $0.001 par value, and 5,000,000 shares of Preferred Stock,
$0.001 par value, 2,055,000 shares of which are designated as Series A
Preferred.
Common Stock. As of the Record Date, there were 2,250,000 shares of
Integrity Common Stock outstanding and held of record by two stockholders.
Holders of Integrity Common Stock have no preemptive rights and no right to
convert Integrity Common Stock into any other securities. All outstanding
shares of the Integrity Common Stock are validly issued, fully paid and
nonassessable.
Preferred Stock. As of the Record Date, there were 2,025,000 shares of
Series A Preferred Stock issued and outstanding and held of record by six
stockholders. The principal rights, privileges and preferences of the issued
and outstanding shares of Integrity Preferred Stock are as set forth below.
Dividends. Holders of Integrity Series A Preferred Stock are entitled to
dividend preferences, when, as and if declared by the Integrity Board, at
annual rates of $.08 per share. All dividends are non-cumulative. Integrity
may not pay cash dividends on Integrity Common Stock while there are any
declared but unpaid cash dividends on any shares of Series A Preferred
outstanding.
Liquidation. In the event of any liquidation, dissolution or winding up
of Integrity (which, as defined in Integrity's Certificate of
Incorporation, would include the Merger, unless otherwise agreed upon by
holders of at least 67% of the Series A Preferred), holders of the Series A
Preferred are entitled to receive, prior and in preference to any
distribution of any assets of Integrity to the holders of Integrity Common
Stock, $1.00 per share plus all declared but unpaid dividends. After the
holders of Integrity Series A Preferred Stock have received such amount,
the holders of Integrity Common Stock are entitled to share pro rata in the
remaining assets of Integrity with the holders of Series A Preferred until
the holders of the Series A Preferred have received an aggregate of $4.00
per share. Thereafter, the holders of Integrity Common Stock are entitled
to the remaining assets of Integrity until such holders have received an
aggregate of $4.00 per share, and thereafter, if assets remain in
Integrity, the holders of Integrity Common Stock are entitled to share pro
rata in the remaining assets of Integrity with the holders of Series A
Preferred.
Redemption. Beginning after January 1, 2003, holders of not less than 67%
of the Series A Preferred have certain limited rights to require Integrity
to purchase their shares at the greater of (i) $1.00 per share of Series A
Preferred or (ii) the fair market value of the Series A Preferred as
determined by an independent appraiser mutually agreed upon by Integrity
and the holders of not less than 67% of the Series A Preferred.
Conversion. Each share of Series A Preferred is presently convertible
into one share of Integrity Common Stock, subject to anti-dilution
adjustment provisions. Such shares are voluntarily convertible at any time
at the election of their holder and will convert automatically (i) in the
event of the consummation of an initial public offering meeting certain
criteria, (ii) upon Integrity obtaining the written consent to such
conversion from holders of a majority of the Series A Preferred or (iii) as
to a particular holder of Series A Preferred, in the event of consummation
by Integrity of a financing meeting certain criteria in which such holder
of Series A Preferred does not purchase its requisite share of the
securities issued in such financing.
Certain Protective Provisions Applicable to Series A Preferred. In
addition to any other rights provided by law or agreement, so long as at
least 500,000 shares of Series A Preferred shall be outstanding, Integrity
may not, without first obtaining the affirmative vote or written consent of
the holders of at least 60% of the then outstanding shares of the Series A
Preferred: (i) create any new series or class of stock having any
preference or priority as to voting, conversion rights, dividends or
liquidation rights on parity with or superior to any such preference or
priority of the Series A Preferred; (ii) alter or change the rights,
40
<PAGE>
preferences, privileges or restrictions of the Series A Preferred in a
different manner than any other series of Preferred Stock; (iii) amend the
Certificate of Incorporation to increase or decrease the number of
authorized shares of Series A Preferred; (iv) sell or otherwise dispose of
substantially all its assets or merge into or consolidate with any other
corporation (other than a wholly-owned subsidiary); (v) declare or pay any
dividends on the Common Stock; (vi) other than as set forth elsewhere in
the Certificate of Incorporation, redeem, purchase or acquire any shares of
Preferred Stock or Common Stock, subject to limited exceptions relating to
repurchase of shares from employees and officers of the corporation; (vii)
make loans or advances to its employees or members of their immediate
families, with certain limited exceptions; (viii) unless unanimously
approved by the Board of Directors, guarantee any indebtedness or
obligation of any party other than in the ordinary course of business; (ix)
unless unanimously approved by the Board of Directors, create or suffer to
be imposed any lien, mortgage, security interest or other charge on or
against all or substantially all of the assets of corporation; (x) unless
unanimously approved by the Board of Directors, acquire or permit any
subsidiary to acquire any stock or other securities of any corporation,
partnership or entity unless immediately following such acquisition such
corporation, partnership or entity would be wholly-owned by the corporation
or its subsidiary.
Voting Rights. Subject to the protective provisions described above and
except as otherwise required by law, the holders of Series A Preferred and
Integrity Common Stock are entitled to notice of any stockholders' meeting and
to vote together as one class upon any matter submitted to the stockholders
for a vote on the following basis:
(a) Common Vote. Each share of Integrity Common Stock issued and
outstanding has one vote.
(b) Preferred Vote. Each holder of Series A Preferred has a number of
votes equal to the number of full shares of Integrity Common Stock into
which such Preferred Stock is then convertible.
41
<PAGE>
COMPARISON OF RIGHTS OF HOLDERS OF PURE ATRIA
COMMON STOCK AND HOLDERS OF INTEGRITY CAPITAL STOCK
Upon consummation of the Merger, the holders of Integrity Common Stock and
the holders of Integrity Preferred Stock will become holders of Pure Atria
Common Stock. As of the Effective Time, holders of Integrity Preferred Stock
will no longer be entitled to certain rights and privileges previously
provided for in Integrity's Certificate of Incorporation. Such rights include
(i) a dividend preference in the amounts described above, (ii) a liquidation
preference in the amounts described above, (iii) certain redemption rights as
described above, (iv) certain anti-dilution adjustments upon dilutive
issuances of Integrity Capital Stock and (v) the right to vote as a separate
class (with 60% approval requirement) concerning certain corporate
transactions, including the Merger. Appraisal and dissenters' rights are
available to stockholders of Integrity with respect to the Merger. See "The
Merger--Appraisal and Dissenters' Rights."
In addition, certain other rights and privileges of Integrity stockholders
will change as a result of the Merger. Upon completion of the Merger, the
percentage ownership of Pure Atria by each former Integrity stockholder will
be substantially less than his, her or its current percentage ownership of
Integrity. Accordingly, former Integrity stockholders will have a
significantly smaller voting influence over the affairs of Pure Atria than
they currently have over the affairs of Integrity. Moreover, certain
contractual rights presently possessed by holders of Integrity Preferred Stock
will cease to exist after the Merger. Specifically, certain information
rights, registration rights, rights to attendance at meetings of the Integrity
Board, rights to participate in future financings and other rights unique to
the organization and financing of Integrity will terminate at the Effective
Time. In addition, stockholders of Pure Atria cannot take action by written
consent; any such actions must be taken at a duly called annual or special
meeting. Finally, the statutory protections available to Integrity
stockholders under Section 2115 of the CGCL will no longer exist. See
"Applicability of California Law to Integrity."
42
<PAGE>
PURE ATRIA BUSINESS
This Business section and other parts of this Consent Solicitation
Statement/Prospectus contain forward-looking statements that involve risk and
uncertainties. Pure Atria's actual results may differ significantly from the
results discussed in the forward-looking statements. Factors that might cause
such a difference include, but are not limited to, those discussed below and
separately in "Risk Factors" and "Pure Atria Management's Discussion and
Analysis of Financial Condition and Results of Operations."
BACKGROUND
Pure Atria develops, markets and supports a comprehensive, integrated suite
of software products that are designed to improve the software development
process and enable the production of reliable, high-quality software. Pure
Atria's products, which include ClearCase, Purify, PureDDTS and PurePerformix,
comprise a family of tools for use from initial software development through
quality assurance and deployment. These products are designed to control the
software development process, improve software reliability, reduce development
and testing cost, shorten time-to-market and increase the predictability of
software development cycles.
Pure Atria's products are sold directly by telephone and field sales
personnel in North America, Europe and Japan and through distributors in these
regions and a variety of other countries. Pure Atria's products are used by
information systems departments that develop software to support internal
operations, engineering departments that develop software as a component of a
manufactured product and independent software vendors that develop software
for resale.
RECENT DEVELOPMENTS
In August 1996, Pure and Atria effected a strategic combination of the two
companies through the merger of a wholly-owned subsidiary of Pure with and
into Atria, after which the combined company changed its name to Pure Atria
Corporation. In connection with the Pure Atria Combination, Pure issued
1.544615 shares of common stock for each outstanding share of Atria common
stock in a transaction accounted for as a pooling of interests. The combined
company also assumed all outstanding options to purchase Atria common stock.
Effective as of December 31, 1996, Pure Atria entered into an Asset Purchase
Agreement and related Stockholders Agreement with Silicon Valley Networks,
Inc. ("SVN"). The Asset Purchase Agreement provides for the sale of certain
technology and assets relating to the PureTestExpert product ("PTE") from Pure
Atria to SVN. In exchange, SVN will issue 1,800,000 shares of its Common Stock
(approximately 9% of its capital stock on a fully diluted basis) to Pure Atria
and make certain payments to Pure Atria based on net revenues recognized by
SVN from sales of PTE.
PRODUCTS
Competitive pressures on organizations to deliver more sophisticated
products and services and to operate more efficiently have increased demand
for large, complex, technology-based solutions. Software has become an
increasingly critical component of technology-driven products and services,
and the functional requirements of software have increased significantly. The
complex and unpredictable nature of software development drives the
requirements for ASQ tools. These tools must facilitate the efficient
management of complex software development, provide early detection of
problems in software, track and coordinate software changes and related
information across multiple groups and automate complex test suites. Pure
Atria's products are designed to address the needs of developers, quality
assurance professionals and managers at each stage of the software development
process. Pure Atria's products include the following:
CLEARCASE PRODUCT FAMILY
(ClearCase, ClearCase MultiSite, ClearCase Attache and ClearGuide)
Provides comprehensive software configuration management, including version
control, workspace management, build management and process control.
PURIFY
Locates a broad range of software errors related to memory usage, enabling
developers to identify errors earlier in the development process.
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PUREPERFORMIX
Load-tests client/server applications to assess multi-user quality,
performance and scalability.
PUREDDTS
Provides change request management to track and record defect and
enhancement request information.
QUANTIFY
Locates performance bottlenecks, allowing developers to remove software
instructions that slow overall operation.
PURECOVERAGE
Identifies which lines of code have been tested, verifying that each
software application is fully tested before release.
PURELINK
Accelerates the software build process by reducing link time by relinking
only the portions of a software program that have changed since the last
link.
SALES AND MARKETING
Pure Atria sells its products to software development and quality assurance
professionals within a variety of organizations, such as telecommunications,
aerospace, financial services and transportation companies, independent
software vendors and consultants.
Pure Atria markets and distributes its products worldwide through a direct
sales force, which is a combination of telesales, field sales and sales
engineers, and, to a lesser extent, through indirect channels such as Value
Added Resellers ("VARs"), System Integrators ("SIs"), OEMs and distributors.
As of September 30, 1996, Pure Atria had 256 sales people worldwide, of which
150 were located in North America and 106 were located overseas. To support
its worldwide sales force, Pure Atria conducts a variety of programs intended
to market and position its suite of software quality products. These programs
include advertising, direct mail, telemarketing, public relations, product
seminars, electronic newsletters, web pages and training sessions for sales
personnel. Promotional offers and bundles are designed to convert individual
sales into multi-product sales. Due to the technical complexity of Pure
Atria's products, Pure Atria also maintains a staff of pre-sales support
engineers to assist Pure Atria's direct sales force.
In North America, Pure Atria currently markets and distributes its products
primarily through its direct sales force with offices throughout the United
States and in Canada. Pure Atria also has operations in both Europe and Japan.
Pure Atria's European headquarters is in The Netherlands, with additional
sales offices located in France, Germany and the United Kingdom. Pure Atria
has a Japanese subsidiary, which is based in Tokyo, and sells product both
directly and through business partners throughout Japan. Pure Atria has also
recently established subsidiaries in Australia and Sweden.
In addition, Pure Atria's sales and marketing organization is complemented
by international distributors in Europe and the Pacific Rim and by its
relationships with VARs, SIs and OEMs in North America. These distributors and
OEMs license certain of Pure Atria's products at a discount for relicensing,
and may provide training, support, and consulting services to their end-users.
Pure Atria receives a fee for the support and maintenance Pure Atria provides
these distributors, SIs, VARs and OEMs.
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<PAGE>
CUSTOMER SUPPORT
Because many of Pure Atria's customers depend on Pure Atria's products to
support development of complex, large-scale applications on which the success
of their organizations may depend, a high level of customer service and
technical support is critical. A majority of Pure Atria's customers currently
have maintenance agreements that entitle them to product upgrades, as well as
technical support and training. Pure Atria's customer support operations in
Sunnyvale, California, Lexington, Massachusetts and Hoofddorp, The
Netherlands, provide telephone support coverage for a total of 18 hours a day
among these sites, in addition to 24-hour e-mail, facsimile, bulletin board
and World Wide Web access. Pure Atria also provides customer support from its
office in Tokyo, Japan. Distributors and OEMs generally offer first-level
customer support to their end-user customers and rely on Pure Atria for any
additional support as needed.
Pure Atria also offers comprehensive training programs to customers.
Training is offered at in-house facilities at Pure Atria's headquarters and at
various of its other offices. Other training, usually provided at the customer
site, is available on request. Pure Atria also provides consulting services to
assist customers in the customization, integration and implementation of Pure
Atria's products.
RESEARCH AND DEVELOPMENT
Pure Atria believes that its future success will depend in large part on its
ability to maintain and enhance its current product line, develop new
products, maintain technological competitiveness and meet an expanding range
of customer requirements. Pure Atria's research and development organization
is divided into product development teams consisting of development engineers,
quality assurance professionals and technical writers. In addition to product
development, Pure Atria's research and development organization is responsible
for exploring new directions and applications of the core technologies,
migrating new technologies into the existing product lines and maintaining
strong relationships outside Pure Atria both within industry and in academia.
Pure Atria uses all of its own products to improve software quality and to
improve its software development process. In addition, Pure Atria has an
internal tools group that develops new tools for improving software quality
and process automation for internal use.
Since inception, Pure Atria has made substantial investments in product
development and related activities. Currently, over one-third of research and
development resources are dedicated to development of new products or the
porting of existing products into new platforms. Pure Atria maintains its
products on a number of Unix platforms. Further, Pure Atria recognizes that
substantial development activity occurs on platforms other than Unix,
particularly Windows 95 and Windows NT, and is dedicating significant
engineering resources to address the needs of developers on those platforms.
Software products as complex as Pure Atria's are subject to delay and there
can be no assurance that Pure Atria will not encounter difficulties that could
delay or prevent the successful and timely development, introduction and
marketing of these products. In addition, because the market for these tools
is an emerging market, there can be no assurance that these products will
achieve any significant degree of market acceptance. Failure to release these
products in a timely manner and on a cost-effective basis, or failure of these
products to achieve any significant degree of market acceptance, could have a
material adverse effect upon Pure Atria's business, operating results and
financial condition.
Pure Atria expects to continue to enhance its existing products, develop new
products and augment its product base through acquisitions. As of September
30, 1996, Pure Atria's research and development organization consisted of 173
full-time employees. During 1995, 1994 and 1993, research and development
expenses were $15.5 million, $9.5 million and $5.1 million, or 18%, 22% and
24% of total revenues, respectively. During the first three quarters of 1996,
research and development expenses were $16.5 million or 17% of total revenues.
Historically, Pure Atria has expensed its product costs as incurred. Pure
Atria anticipates that it will continue to commit substantial resources to
research and development in the future.
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COMPETITION
The market for automated software quality tools is intensely competitive and
subject to rapid technological change, and Pure Atria faces a variety of
competition with respect to its products.
Pure Atria faces indirect competition from its existing and potential
customers, many of which internally design and develop their own software
quality tools for their particular needs and may therefore be reluctant to
purchase products offered by independent vendors such as Pure Atria. As a
result, Pure Atria must educate prospective customers as to the advantages of
Pure Atria's products versus internally developed software quality systems.
Pure Atria also experiences direct competition with respect to a number of
its products, both from utilities commonly bundled with versions of operating
systems and from stand-alone product offerings. For example, versions of Unix
are commonly bundled with utilities (such as SCCS and RCS) that provide
version control, which is part of the functionality provided by ClearCase.
Some system vendors, such as Sun Microsystems, Inc. ("Sun") already have
products, such as Workshop, that provide features that could compete with
Purify or other of Pure Atria's products if offered on a stand-alone basis.
CenterLine's TestCenter product competes with Purify and PureCoverage, and
Platinum Technology, Inc.'s ("Platinum") Memory Advisor product also competes
with Purify. With the acquisition of Performix, Pure Atria competes directly
with GUI testing vendors, including Mercury Interactive Corporation and SQA,
Inc. (which was recently acquired by Rational), in the area of load testing.
Companies offering products competitive with ClearCase in the Unix
marketplace, include Sun, which offers TeamWare, IBM, which offers
Configuration Management/Version Control ("CMVC"), Computer Associates ("CA")
through its acquisition of LEGENT Corporation, which offers its Endeavor WSX
product, and Platinum through its acquisition of Softool Corp., which markets
CCC Harvest. In addition, there are several smaller, privately-held companies
that market competitive products, including Continuous Software Corporation,
which markets Continuous/CM. Those companies that are publicly-held generally
have significantly greater financial, technological and marketing resources
than Pure Atria.
Other companies have offered version control or configuration management
products outside the Unix market. The primary companies in this category are
CA, Intersolv and Microsoft. CA has a large installed base of its
configuration management product on IBM mainframes. Intersolv has a large
installed base of DOS and Windows software developers. In 1994, Microsoft
acquired OneTree Software which offers a version control product. These
companies have significantly greater financial, technological and marketing
resources than Pure Atria. There can be no assurance that Pure Atria will be
able to compete effectively.
Pure Atria expects additional competition from other established and
emerging companies. There can be no assurance that Sun, which has a license to
Pure Atria's patents, will not introduce products that compete with Pure
Atria. Many of Pure Atria's current and potential competitors have longer
operating histories, significantly greater financial, technical and marketing
resources, greater name recognition and a larger installed customer base than
Pure Atria. In addition, any of these established competitors may be able to
respond more quickly to new or emerging technologies and changes in customer
requirements, and to devote greater resources to the development, promotion
and sale of their products than Pure Atria. Furthermore, because there are
relatively low barriers to entry in the software industry, Pure Atria expects
additional competition from other established and emerging companies that may
choose to enter the market by developing products that compete with those
offered by Pure Atria or by acquiring companies, businesses, products or
product lines that compete with Pure Atria. It is also possible that alliances
among competitors may emerge and rapidly acquire significant market share. For
example, Microsoft and Rational recently announced the formation of a business
alliance involving the transfer of certain technology, technology cross
licensing, joint development projects and joint marketing programs involving
products that could address the same or similar markets as those addressed by
Pure Atria's existing products, and by the product suite under development by
Integrity. Pure Atria and Integrity also believe that competition will
increase as a result of software industry consolidation.
46
<PAGE>
There can be no assurance that Pure Atria's current or potential competitors
will not develop or acquire products comparable or superior to those developed
by Pure Atria, combine or merge to form significant competitors or adapt more
quickly than Pure Atria to new technologies, evolving industry trends and
changing customer requirements. Increased competition could result in price
reductions, reduced margins or loss of market share, any of which could
materially and adversely affect Pure Atria's business, operating results and
financial condition. There can be no assurance that Pure Atria will be able to
compete successfully against current and future competitors or that
competitive pressures faced by Pure Atria will not have a material adverse
effect on its business, operating results and financial condition. If Pure
Atria is unable to compete successfully against current and future
competitors, Pure Atria's business, operating results and financial condition
will be materially and adversely affected.
Pure Atria competes on the basis of certain factors, including product
quality, first-to-market product capabilities, product performance, ease of
use and customer support. Pure Atria believes that it currently competes
favorably overall with respect to these factors, particularly product quality
and customer support.
PATENTS AND PROPRIETARY RIGHTS
Pure Atria relies on a combination of patent, copyright and trademark laws,
trade secrets, confidentiality procedures and contractual provisions to
protect its technology. Pure Atria also believes that factors such as the
technological and creative skills of its personnel, new product developments,
frequent product enhancements, name recognition and reliable product
maintenance are essential to establishing and maintaining a technology
leadership position.
Pure Atria currently holds four U.S. patents and has additional pending
patent applications on file at the U.S. Patent and Trademark Office. Pure
Atria also has corresponding foreign patent applications pending. Pure Atria's
issued patents begin expiring in the year 2010. There can be no assurance that
any patent owned by Pure Atria will not be invalidated, circumvented or
challenged, that the rights granted thereunder will provide competitive
advantages to Pure Atria or that any of Pure Atria's pending or future patent
applications, whether or not being currently challenged by applicable
governmental patent examiners, will be issued with the scope of the claims
sought by Pure Atria, if at all. Furthermore, there can be no assurance that
others will not develop technologies that are similar or superior to Pure
Atria's technology or design around the patents owned by Pure Atria.
The source code for Pure Atria's proprietary software is protected both as a
trade secret and as an unpublished copyrighted work. Despite these
precautions, it may be possible for a third party to otherwise obtain and use
Pure Atria's products or technology without authorization or to develop
similar technology independently. In addition, effective copyright and trade
secret protection may be unavailable or limited in certain foreign countries.
Pure Atria generally enters into confidentiality or license agreements with
its employees, distributors and customers and limits access to and
distribution of its software, documentation and other proprietary information.
Nevertheless, there can be no assurance that the steps taken by Pure Atria
will prevent misappropriation of its technology.
Despite Pure Atria's efforts to protect its proprietary rights, unauthorized
parties may attempt to copy aspects of Pure Atria's products or to obtain and
use information that Pure Atria regards as proprietary. Policing unauthorized
use of Pure Atria's products is difficult, and while Pure Atria 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 selling its products,
Pure Atria relies on "shrink wrap" licenses that are not signed by licensees
and, therefore, may be unenforceable under the laws of certain jurisdictions.
In addition, the laws of some foreign countries do not protect Pure Atria's
proprietary rights to as great an extent as do the laws of the United States.
There can be no assurance that Pure Atria's means of protecting its
proprietary rights will be adequate or that Pure Atria's competitors will not
independently develop similar technology or design around patents owned by
Pure Atria.
47
<PAGE>
Pure Atria expects that software product developers will be increasingly
subject to infringement claims as the number of products and competitors in
Pure Atria's industry segment grows and the functionality of products in
different industry segments overlaps. There can be no assurance that
infringement or invalidity claims (or claims for indemnification resulting
from infringement claims) will not be asserted against Pure Atria or that any
such assertions will not materially adversely affect Pure Atria's business,
operating results and financial condition. Any such claims, whether with or
without merit, could be time-consuming, result in costly litigation and
diversion of resources, cause product shipment delays or require Pure Atria to
enter into royalty or licensing agreements. Such royalty or licensing
agreements, if required, may not be available on terms acceptable to Pure
Atria or at all. In the event of a successful claim of product infringement
against Pure Atria and failure or inability of Pure Atria to license the
infringed or similar technology, Pure Atria's business, operating results and
financial condition could be materially adversely affected.
Pure Atria also relies on certain software that it licenses from third
parties, including software that is integrated with internally developed
software and used in Pure Atria's products to perform key functions. There can
be no assurance that these third-party software licenses will continue to be
available to Pure Atria on commercially reasonable terms. The loss of or
inability to maintain any of these software licenses could result in delays or
reductions in product shipments until equivalent software could be developed,
identified, licensed and integrated, which would adversely affect Pure Atria's
business, operating results and financial condition.
EMPLOYEES
As of September 30, 1996, Pure Atria had a total of 629 employees, of which
523 were based in the United States and 106 were based overseas. Of the total,
297 were engaged in sales and marketing, 93 were in customer support, 173 were
in research and development and 66 were in administration and finance. Pure
Atria's success depends in significant part upon the continued service of its
key technical and senior management personnel and its continuing ability to
attract and retain highly qualified technical, sales and managerial personnel.
Competition for such personnel is intense and there can be no assurance that
Pure Atria will be able to retain its key technical, sales and managerial
employees or that it will be able to attract, assimilate or retain other
highly qualified technical, sales and managerial personnel in the future. None
of Pure Atria's employees is represented by a labor union. Pure Atria has not
experienced any work stoppages and considers its relations with its employees
to be good.
PROPERTIES
Pure Atria's principal administrative, sales, marketing, support and
research and development facility is located in a building providing
approximately 54,000 square feet of available space in Sunnyvale, California.
The leases on the office space in Sunnyvale expire in 1997, 1999 and 2002.
Pure Atria has recently entered into a lease for approximately 101,000 square
feet of office space in Cupertino, California, which will expire in 2006. Pure
Atria leases approximately 87,000 square feet of office space in Lexington,
Massachusetts, pursuant to leases expiring in 2000 and 2001. Pure Atria leases
approximately 7,000 square feet of office space in McLean, Virginia;
approximately 7,000 square feet of office space in Hoofddorp, The Netherlands;
and approximately 2,000 square feet of office space in Tokyo, Japan. These
leases expire between 1997 and 2002. Pure Atria believes that suitable
additional or alternative space will be available in the future on
commercially reasonable terms as needed.
LEGAL PROCEEDINGS
Litigation has been necessary in the past, and may be necessary in the
future, to enforce Pure Atria's patents and other intellectual property
rights, protect Pure Atria's trade secrets, determine the validity and scope
of the proprietary rights of others or defend against claims of infringement
or invalidity. In March 1995, Pure Atria brought suit against AIB Software
Inc. ("AIB") in the U.S. District Court for the Northern District of
California, asserting that AIB's Sentinel II product infringes one of Pure
Atria's patents and seeking injunctive relief and damages; the complaint has
since been amended to also assert that AIB's Sentinel II product infringes
another of
48
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Pure Atria's patents. AIB responded by filing suit against Pure Atria in the
U.S. District Court for the Eastern District of Virginia for Declaratory
Judgment of noninfringement, invalidity and unenforceability of Pure Atria's
U.S. Pat. Nos. 5,193,180 and 5,335,344 and seeking $1,000,000 in compensatory
and $10,000,000 in punitive damages under U.S. copyright law and various
Virginia trade secret and computer laws. These claims were later transferred
to the Northern District of California. On September 29, 1995, a motion by
Pure Atria for summary judgment, or dismissal in the alternative, on AIB's
copyright law and various Virginia trade secret and computer law claims was
granted in Pure Atria's favor.
On September 25, 1996, Pure Atria also brought suit against Platinum, the
parent company of AIB, in the U.S. District Court for the Northern District of
California, asserting that Platinum's selling of Memory Advisor (another name
for AIB's Sentinel II product), and Platinum's use of the Memory Advisor
product to make other products, infringes Pure Atria's patents, and seeking
damages and an injunction against further sales of the Memory Advisor product
and other products Platinum has made through the use of the Memory Advisor
Product. Platinum has also sought counterclaims against Pure Atria along
substantially the same lines as those currently sought by AIB, and both
Platinum and AIB have entered counterclaims against Pure Atria alleging
antitrust violations. Pure Atria is vigorously defending these claims, as well
as continuing to pursue Pure Atria's claims against Platinum and AIB.
Pure Atria has incurred and may continue to incur significant costs with
respect to the prosecution and defense of these claims, which costs if
material or not offset by payments received from adverse parties could have a
material adverse effect on Pure Atria's business, operating results and
financial condition. In the event of an adverse ruling in any intellectual
property litigation that now exists or might arise in the future, Pure Atria
might be required to discontinue the use of certain technology, cease the sale
and support of infringing products, expend significant resources to develop
non-infringing technology or license the infringed technology or similar
technology. There can be no assurance, however, that under such circumstances,
a license would be available under commercially reasonable terms or at all. In
the event of a successful claim against Pure Atria, Pure Atria's business,
operating results and financial condition could be adversely affected.
49
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PURE ATRIA MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The discussion in "Management's Discussion and Analysis of Financial
Condition and Results of Operations" contains trend analysis and other forward
looking statements within the meaning of Section 27A of the Securities
Exchange Act of 1993, as amended, and Section 21E of the Securities Exchange
Act of 1994, as amended. Pure Atria operates in a rapidly changing environment
that involves a number of risks and uncertainties, including those set forth
in this discussion under "Factors That May Affect Future Results," as well as
the risk factors associated with the merger and successful integration of
Integrity as set forth in this Consent Solicitation Statement/Prospectus, and
other risks detailed from time to time in other SEC Reports filed by Pure
Atria.
RESULTS OF OPERATIONS
The following table sets forth, as a percentage of total revenues,
consolidated statement of operations data for the periods indicated. These
operating results are not necessarily indicative of the results for any future
period.
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
--------------------------- ---------------
1993 1994 1995 1995 1996
------- ------- ------- ------ ------
<S> <C> <C> <C> <C> <C>
Revenue:
Product........................... 79% 75% 74% 74% 71%
Maintenance and other............. 21 25 26 26 29
------- ------- ------- ------ ------
Total revenues.................. 100 100 100 100 100
------- ------- ------- ------ ------
Cost of revenues:
Product........................... 3 2 2 2 2
Maintenance and other............. 6 7 7 7 8
------- ------- ------- ------ ------
Total cost of revenues.......... 9 9 9 9 10
------- ------- ------- ------ ------
Gross margin...................... 91 91 91 91 90
------- ------- ------- ------ ------
Operating expenses
Sales and marketing............... 49 44 46 46 45
Research and development.......... 24 22 18 18 18
General and administrative........ 11 10 9 10 8
Merger and integration.......... -- -- 4 -- 37
In-process research and
development...................... -- -- 14 20 --
------- ------- ------- ------ ------
Total operating expenses........ 84 77 91 94 108
------- ------- ------- ------ ------
Income (loss) from operations..... 7 14 -- (3) (18)
Other income...................... 1 2 2 2 3
------- ------- ------- ------ ------
Income (loss) before income
taxes.......................... 8 16 2 (1) (15)
Income taxes (benefit)............ -- 3 6 4 (1)
------- ------- ------- ------ ------
Net income (loss)................. 8 13 (4) (5) (14)
======= ======= ======= ====== ======
</TABLE>
Revenues
Pure Atria's revenues are derived from license fees for its software
products, from software maintenance fees and from other sources. Product
revenues are derived from product licensing fees. Maintenance and other
revenues are derived from software maintenance fees, from training fees, from
consulting fees and from royalties for technology licenses. Fees for
maintenance, training and consulting are generally billed separately from
licenses for Pure Atria's products. Pure Atria recognizes revenue in
accordance with the provisions of American
50
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Institute of Certified Public Accountants Statement of Position No. 91-1,
Software Revenue Recognition. Product revenues from software licenses are
recognized upon shipment to an end-user if collection is probable and
remaining vendor obligations are insignificant. Product returns and sales
allowances are estimated and provided for at the time of sale. Maintenance
revenues from ongoing customer support and product upgrades are recognized
ratably over the term of the maintenance agreement. Payments for maintenance
fees are generally received in advance and are nonrefundable. Revenues for
training and consulting are recognized when the services are performed.
Revenues from royalties for technology licenses are recognized when earned and
when collection is probable.
Total revenues increased 61% to $94.7 million for the nine months ended
September 30, 1996 from $58.7 million for the prior year's comparable nine
months. Total revenues were $84.2 million, $42.8 million and $21.2 million in
1995, 1994 and 1993, respectively, representing increases of 97% from 1994 to
1995 and 102% from 1993 to 1994.
Total revenues increased primarily due to increased unit sales of software
licenses, an expanded product line, and increased maintenance, training and
consulting fees resulting from a larger installed base. Pure Atria distributes
its products primarily through its direct sales force and continues to expand
its international operations, particularly in Europe.
Product Revenues. Revenues from product licenses increased 54% to $66.8
million for the nine months ended September 30, 1996 from $43.4 million for
the prior year's comparable nine months. Revenues from product licenses were
$62.1 million, $32.1 million and $16.7 million in 1995, 1994 and 1993,
respectively. This represents increases of 94% from 1994 to 1995 and 92% from
1993 to 1994. For the nine months ended September 30, 1996 and the years 1995,
1994 and 1993, product revenues as a percentage of total revenues was 71%,
74%, 75% and 79%, respectively.
Substantially all of the period-to-period growth in product revenues was due
to higher unit sales of software licenses and an expanded product line. The
higher unit sales resulted from an increase in the number of direct sales
personnel worldwide, the addition of two new products, PureDDTS and
PureTestExpert, in connection with the acquisition of QualTrak, the release of
ClearCase for Microsoft Windows NT and ClearCase Attache in the first and
second quarters of 1995, the release of Purify for Microsoft Windows NT in the
second quarter of 1996, releases of new versions of existing products, and
expansion of the platforms supported for Unix based products.
Maintenance and Other Revenues. Maintenance and other revenues increased 82%
to $27.9 million for the nine months ended September 30, 1996 from $15.3
million for the prior year's comparable nine months. Maintenance and other
revenues were $22.1 million, $10.7 million and $4.5 million in 1995, 1994 and
1993, respectively, representing increases of 106% from 1994 to 1995 and 140%
from 1993 to 1994. For the nine months ended September 30, 1996 and the years
1995, 1994 and 1993, maintenance and other revenues as a percentage of total
revenues was 29%, 26%, 25% and 21%, respectively. The growth in maintenance
and other revenues was primarily attributable to a larger installed base
requiring incrementally more maintenance, training and consulting support.
International Revenues. International revenues as a percentage of total
revenues increased to 30% or $28.3 million for the nine months ended September
30, 1996 as compared to 27% and $15.8 million, respectively, for the prior
year's comparable nine month period. International revenues accounted for
approximately 26%, 19% and 18% of total revenues in 1995, 1994 and 1993,
respectively.
The increases in international revenues as a percentage of total revenues
were primarily due to the increase in the number of direct sales and marketing
personnel and the expansion of operations in the international market. The
majority of international sales were made within Europe. Pure Atria intends to
continue increasing the number of direct sales and marketing personnel,
particularly within Europe and Asia.
Pure Atria expects that international revenues will increase as a percentage
of total revenues to the extent that Pure Atria continues its penetration of
international markets, and Pure Atria believes that continued growth
51
<PAGE>
and profitability will require further expansion of sales in these markets.
However, future growth in international sales and operations are subject to
risks and uncertainties. Some of the factors that could adversely affect such
growth are: the imposition of government controls, export license requirements
and restrictions, political and economic conditions and instability, trade
restrictions, changes in tariffs and taxes, risks of acceptance of non-
localized products and costs of localizing products for foreign countries,
reduced protection for intellectual property rights, difficulties in staffing
and managing international operations, high local wage scales and other
operating costs and expenses. A significant portion of Pure Atria's
international sales are denominated in foreign currencies and accordingly,
Pure Atria is subject to foreign currency exchange risk. To the extent that
international sales denominated in foreign currencies increase, Pure Atria's
operating results could be adversely affected. Pure Atria has not engaged in
foreign currency hedging activities, but is considering a hedging strategy for
the future. See "Risk Factors--International Sales; Currency Fluctuations."
Cost of Revenues
Cost of Product Revenues. Cost of product revenues consists primarily of
product media and duplication, manuals, packaging materials and shipping
expenses. For the nine month periods ended September 30, 1996 and 1995, the
cost of product revenues was $1,762,000 and $1,426,000, respectively,
representing 3% of product revenues for each of the periods. The increase in
the dollar amount was primarily due to the higher volume of products shipped.
Cost of product revenues was $1.9 million, $841,000 and $560,000 in 1995,
1994 and 1993, respectively, representing 3% of the related product revenues.
Cost of product revenues in absolute dollars increased 127% from 1994 to 1995
and 50% from 1993 to 1994. The increase in dollar amount was primarily due to
the higher volume of products shipped and the amortization of certain
intangible assets capitalized in connection with the 1995 acquisition of
QualTrak.
Cost of Maintenance and Other Revenues. Cost of maintenance and other
revenues consists primarily of costs incurred in providing telephone support,
product upgrades, and training and consulting to customers. Cost of
maintenance and other revenues increased 96% to $8.0 million for the nine
months ended September 30, 1996 from $4.1 million for the comparable prior
year period, representing 28% and 26% of the related revenues for each nine
month period, respectively.
Cost of maintenance and other revenues was $6.0 million, $3.1 million and
$1.3 million in 1995, 1994 and 1993, respectively, representing 27%, 29% and
29% of the related maintenance and other revenues for each respective year.
Cost of maintenance and other revenues increased 90% from 1994 to 1995 and
144% from 1993 to 1994. The increase in dollar amount was primarily due to the
increase in the number of customer support, training and consulting personnel
and related overhead costs necessary to support a larger installed product
base and expanded product line. Pure Atria believes that the cost of
maintenance and other revenues will increase in dollar amount in the future.
Operating Expenses
Sales and Marketing. Sales and marketing expenses consist primarily of
salaries, commissions and bonuses of sales and marketing personnel and
promotional expenses. For the nine month period ended September 30, 1996,
sales and marketing expense increased 57% to $42.6 million from $27.1 million
for the prior year comparable period, representing 45% and 46%, respectively,
of total revenues for each nine month period.
Sales and marketing expenses were $39.1 million, $18.9 million and $10.3
million, or 46%, 44% and 49% as a percentage of total revenues, in 1995, 1994
and 1993, respectively. The dollar increase in sales and marketing expenses
for all periods is primarily attributable to the domestic and international
expansion of Pure Atria's sales force and related travel expenses and
increased marketing activities, including trade shows, seminars and
promotional expenses. Pure Atria believes that sales and marketing expenses
will increase in dollar amounts in the future as Pure Atria continues to
expand its sales and marketing staff.
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<PAGE>
Research and Development. For the nine month period ended September 30,
1996, research and development expenses increased 53% to $16.5 million from
$10.8 million for the prior year's comparable period, representing 17% and 18%
of total revenues, respectively.
Research and development expenses were $15.5 million, $9.5 million and $5.1
million, or 18%, 22% and 24% as a percentage of total revenues, in 1995, 1994
and 1993, respectively. This represents an increase of 63% from 1994 to 1995
and 86% from 1993 to 1994. The dollar increase in research and development
expense was primarily due to increased staffing and associated support for
software engineers required to expand and enhance Pure Atria's product line.
Pure Atria believes that research and development expenses will continue to
increase in dollar amounts in the future.
General and Administrative. For the nine month period ended September 30,
1996, general and administrative expenses increased 32% to $7.6 million from
$5.8 million for the prior year's comparable period, representing 8% and 10%
of total revenues, respectively.
General and administrative expenses were $7.8 million, $4.5 million and $2.3
million, or 9%, 10% and 11% as a percentage of total revenues, in 1995, 1994
and 1993, respectively. The dollar increase in general and administrative
expenses for all periods was primarily due to increased staffing and
associated expenses necessary to manage and support Pure Atria's growth.
General and administrative expenses as a percentage of revenues have decreased
for all periods as the result of increased revenue growth and economies of
scale.
In-Process Research and Development. In March 1995, Pure Atria acquired
QualTrak for a purchase price of $11.9 million, of which $10.1 million was
allocated to in-process research and development and expensed at the time of
acquisition. Additionally, in the third quarter of 1995, Pure Atria recorded a
$1.5 million dollar charge related to the acquisition of technology that was
incorporated into the release of a client/server change request management
product.
Merger and Integration. In the third quarter 1996, Pure Atria recorded a
charge of $35.3 million related to the Pure Atria Combination. This charge
included direct transaction costs of $8.3 million and $27.0 million associated
with integrating the operations of both companies. Included in integration
charges were severance costs and other compensation expenses, redundant
facility costs, computer and other equipment write-offs, contract termination
costs, and other related costs. There can be no assurance that Pure Atria will
not incur additional charges associated with the Merger or that management
will be successful in its efforts to integrate the operations of the two
companies. Merger-related expenses of $3.0 million were also recorded during
the year ended December 31, 1995 in connection with the acquisition of
Performix.
Other Income
Other income consists of the net effect of interest income, interest expense
and miscellaneous income and expense items. Other income was $2.5 million for
the nine months ended September 30, 1996 as compared to $1.6 million for the
nine months ended September 30, 1995. Other income was $2.4 million, $835,000
and $139,000, or 2%, 2% and 1% as a percentage of total revenues, for 1995,
1994 and 1993, respectively. The increase in other income for each period
primarily resulted from interest income generated from higher average cash
balances.
Income Taxes
The income tax benefit for the nine months ended September 30, 1996 was $1.3
million. Pure Atria incurred income tax expense of $2.5 million for the nine
months ended September 30, 1995, despite its operating loss for the nine
months ended September 30, 1995 because the in-process research and
development expense incurred in connection with the acquisition of QualTrak
was not deductible for tax purposes.
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<PAGE>
Pure Atria incurred income tax expenses of $5.4 million, $1.3 million and
$83,000 in the years ended 1995, 1994, and 1993, respectively. The actual tax
rates differ from the statutory rate primarily due to certain nonrecurring
charges incurred in connection with acquisitions in both 1995 and 1996 which
are not fully deductible for tax purposes, state income taxes, tax exempt
interest and research credits. See Note 9 of Notes to Consolidated Financial
Statements.
RECENT OPERATING RESULTS
The following table shows selected consolidated financial data for the
quarter and year ended December 31, 1996. Pure Atria believes that this
information reflects all adjustments necessary for a fair presentation of the
information for the periods presented. The operating results are not
necessarily indicative of the results for any future period.
<TABLE>
<CAPTION>
THREE MONTHS
ENDED YEAR ENDED
DECEMBER 31, 1996 DECEMBER 31, 1996
----------------- -----------------
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE
DATA)
<S> <C> <C>
Total Revenues.............................. $37,780 $132,495
------- --------
Income (loss) from operations............... $ 9,038 $ (7,965)
Net income (loss)........................... $ 6,585 $ (6,657)(1)
======= ========
Net income per share........................ $ 0.15 $ (0.17)(1)
======= ========
Shares used in per share computation........ 43,572 39,921
======= ========
</TABLE>
- --------
(1) Exclusive of non-recurring merger and integration charges in 1996 of
$35,255,000, net income for the year would have been $20.8 million, or
$0.48 per share.
LIQUIDITY AND CAPITAL RESOURCES
Since inception, Pure Atria has financed its operations primarily through
the sale of stock and cash generated from operations. In August 1995, Pure
completed its initial public offering and received net proceeds of
approximately $30.4 million. Additionally, Atria completed its initial public
offering (collectively, with Pure's initial public offering, the "IPOs") in
May 1994 and received proceeds of approximately $21.4 million. Pure Atria
expects to use the remaining proceeds from these offerings for general
corporate purposes, including working capital. A portion of these proceeds may
also be used for the acquisition of businesses, products and technologies that
are complementary to those of Pure Atria. Pending such uses, these proceeds
are invested in short term investments as discussed below. Prior to these
IPOs, Pure Atria was funded by cash provided by operations.
Cash and cash equivalents totaled $38.5 million at September 30, 1996
compared to $24.3 million at December 31, 1995 and compared to $20.5 million
at December 31, 1994. The increase in cash and cash equivalents was primarily
due to operating results, excluding merger and integration charges, and cash
proceeds from the issuance of common stock, partially offset by capital
additions related to the expansion of operations. As of September 30, 1996 and
December 31, 1995, Pure Atria had short-term investments of $55.3 million and
$54.2 million, respectively, with a maturity date of greater than three months
from the date of purchase.
For the nine month periods ended September 30, 1996 and 1995, Pure Atria
incurred a net loss of $13.2 million and $3.0 million, respectively, which
included non-recurring charges of $35.3 million and $11.6 million for the nine
months ended September 30, 1996 and 1995, respectively, related to merger and
integration expenses and in-process research and development expenses. For the
nine months ended September 30, 1996, net cash was provided by operations
primarily as a result of deferred revenues generated during the period,
accruals required for merger and integration expenses, and other noncash
expenses. For the nine months ended September 30, 1995, net cash was provided
by operations primarily because the net loss of $3.0 million included a non-
cash charge of $11.6 million related to in-process research and development.
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For the year ended December 31, 1995, Pure Atria incurred a net loss of $3.5
million which included non-recurring charges of $14.6 million. Net cash was
provided by operations for the year ended December 31, 1995, primarily as the
result of operations, as adjusted for non-recurring charges and depreciation,
and deferred revenues generated during the period, accruals for payroll,
merger and integration and other items, partially offset by growth in accounts
receivable and increases in deferred taxes and other assets. The increase in
accounts receivable reflects an increase in Days Sales Outstanding ("DSO"), as
well as increased revenue levels. Pure Atria expect that DSO will increase as
international revenues increase as Pure Atria expands into new markets and the
customer base expands. For the year ended December 31, 1994, net cash was
provided by operations as adjusted for depreciation, deferred revenues and
accrued expenses, offset by an increase in accounts receivable.
In the nine month periods ended September 30, 1996 and 1995, Pure Atria
utilized $8.0 million and $5.6 million, respectively, of cash to purchase
property and equipment. The purchases of property and equipment were primarily
for computer hardware and software to support Pure Atria's growing employee
base. In the nine months ended September 30, 1995, Pure Atria also used cash
of $1.4 million in connection with the acquisition of QualTrak. In the year
ended December 31, 1995, Pure Atria used cash of $8.2 million for the purchase
of property and equipment and $1.6 million in connection with the acquisition
of QualTrak. In 1994 and 1993, Pure Atria's investing activities consisted
primarily of purchases of property and equipment. Pure Atria expects that the
rate of purchases of property and equipment will remain constant or increase.
Net cash provided by financing activities in the nine months ended September
30, 1996 consisted primarily of $5.1 million from the issuance of common stock
through the employee stock purchase plan and exercise of stock options. In the
nine months ended September 30, 1995, net cash was provided by the common
stock issued in connection with the initial public offering of Pure which was
partially offset by a distribution to stockholders of Performix.
In the year ended December 31, 1995, net cash of $29.4 million was provided
by financing activities, primarily from the sale of common stock in connection
with Pure's initial public offering, partially offset by S corporation
distributions to Performix shareholders. Net cash provided by financing
activities in the year ended December 31, 1994 was $25.5 million and consisted
primarily of sale of common stock in connection with a stock offering and
proceeds for the issuance of redeemable convertible preferred stock. Net cash
from financing activities in 1993 consisted primarily of bank borrowings,
offset by S Corporation distributions to stockholders of Performix.
As of September 30, 1996, Pure Atria had working capital of $60.6 million,
compared to $65.0 million at December 31, 1995. Pure Atria does not have a
bank line of credit. Pure Atria believes that its current cash balances,
short-term investments, and anticipated cash flow from operations will be
sufficient to meet its working capital and capital expenditure requirements
for at least the next twelve months.
From time to time, Pure Atria evaluates acquisitions of businesses, products
or technologies that complement Pure Atria's business. Pure Atria has no
present understandings, commitments or agreements with respect to any material
acquisitions of other businesses, products or technologies. Any such
transactions, if consummated, may use a portion of Pure Atria's working
capital or require the issuance of additional debt or equity instruments.
FACTORS THAT MAY AFFECT FUTURE RESULTS
Pure Atria operates in a rapidly changing environment that involves a number
of risks, some of which are beyond the company's control. The following
discussion highlights some of these risks. In addition, the following
discussion should be read in conjunction with the section entitled "Risk
Factors" included elsewhere in this Consent Solicitation Statement/Prospectus.
Pure Atria's future results are subject to substantial risks and
uncertainties. Although demand for Pure Atria's products has grown in recent
years, the market for software tools is still emerging and any future growth
depends upon continued market acceptance of software quality tools. Broad
market acceptance of Pure Atria's
55
<PAGE>
products, including acceptance in markets characterized by greater usage of
the Windows and Windows NT operating systems, is critical to Pure Atria's
future success. Pure Atria believes that factors affecting the ability of Pure
Atria's products to achieve broad market acceptance include: product
performance, price, ease of adoption and the ability to displace existing
approaches. The application development software industry is extremely
competitive and is subject to rapid technological change, frequent new product
introductions and evolving domestic and international industry standards that
may render existing products and services obsolete. To be successful in the
future, Pure Atria must respond promptly and effectively to the challenges of
technological change and its competitors' innovations by continually enhancing
its current products and developing new products on a timely basis. In
addition, Pure Atria expects that new product markets will need to be
established for its future products, which will require significant sales and
marketing resources. Pure Atria expects to confront new competitors as it
introduces new products and expands into new markets. Certain current and
potential competitors of Pure Atria are more established, benefit from greater
market recognition and have substantially greater financial, development and
marketing resources than Pure Atria. Competitive pressures or other factors,
including entry into new markets, may result in significant price erosion that
could have a material adverse effect on Pure Atria's results of operations. If
the market for software tools fails to grow, or grows more slowly than Pure
Atria anticipates, or if Pure Atria is unable to establish product markets for
its new products, Pure Atria's business, operating results and financial
condition would be materially affected. See "Risk Factors--Risks Associated
with Expansion into New Markets; Emerging Market for ASQ Tools" and "--
Competition; Risks of Litigation and Potential Litigation."
Pure Atria's quarterly operating results have in the past and may in the
future fluctuate significantly depending on factors such as demand for Pure
Atria's products, the size and timing of orders, the number, timing and
significance of new product announcements by Pure Atria and its competitors,
the ability of Pure Atria to develop, introduce and market new and enhanced
versions of Pure Atria's products on a timely basis, the level of product and
price competition, changes in operating expenses, changes in average selling
prices and product mix, changes in Pure Atria's sales incentive strategy,
sales personnel changes, the mix of direct and indirect sales, product returns
and general economic factors, among others. Pure Atria's products are
typically shipped shortly after orders are received, and consequently, order
backlog at the beginning of any quarter typically represents only a small
portion of that quarter's expected revenues. Pure Atria has routinely received
and may continue to routinely receive a substantial portion of its orders in
the last month of a quarter, with these orders frequently concentrated in the
last weeks or days of a quarter. Because product revenues in any quarter are
substantially dependent upon orders booked and shipped during that quarter,
revenues for any future quarter are not predictable with any significant
degree of accuracy. Product revenues are also difficult to forecast because
the markets for ASQ products is rapidly evolving and Pure Atria's sales cycle,
from initial evaluation to multiple license purchases and the provision of
support services, may vary substantially from customer to customer. Because
Pure Atria's operating expenses are based on anticipated revenue levels and a
high percentage of expenses are relatively fixed in the short term, variations
in the timing of revenue recognition can cause significant fluctuations in
operating results from quarter to quarter and may result in unanticipated
quarterly earnings, shortfalls or losses. In such an event the price of Pure
Atria Common Stock would likely be adversely affected. See "Risk Factors--
Fluctuations in Quarterly Results; Future Operating Results Uncertain."
56
<PAGE>
PURE ATRIA MANAGEMENT AND EXECUTIVE COMPENSATION
DIRECTORS AND EXECUTIVE OFFICERS
The executive officers and directors of Pure Atria and their ages as of
December 31, 1996 are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Paul Levine........................ 42 Chairman of the Board of Directors
Reed Hastings...................... 36 President and Chief Executive Officer
Chuck Bay.......................... 39 Vice President, Finance, Chief Financial
Officer, and Secretary
W. Geoffrey Stein.................. 38 Vice President and General Counsel
Louis J. Volpe..................... 47 Director
David A. Litwack................... 49 Director
Thomas A. Jermoluk................. 40 Director
Larry W. Sonsini................... 55 Director
Aki Fujimura....................... 38 Director
</TABLE>
MR. LEVINE has been Chairman of the Board of Directors of Pure Atria since
August 1996. From February 1990 through August 1996, Mr. Levine was President,
Chief Executive Officer and a director of Atria Software, Inc., which he co-
founded.
MR. HASTINGS has been President and Chief Executive Officer and a director
of Pure Atria since August 1996. From October 1991 through August 1996, Mr.
Hastings served as President, Chief Executive Officer and as a director of
Pure Software, Inc., which he founded in October 1991. From October 1990 to
September 1991, Mr. Hastings was initially a full-time employee and later a
part-time consultant at ADAPTIVE, Inc., a manufacturer of high speed
communication switching products.
MR. BAY has been Vice President, Finance, Chief Financial Officer and
Secretary of Pure Atria since August 1996. Prior to August 1996, Mr. Bay had
served as Vice President, Finance, Chief Financial Officer and General Counsel
of Pure Software, Inc. since January 1995, and as Secretary since March 1995.
From April 1994 to January 1995, Mr. Bay held various positions with Software
Alliance Corporation, a software development and integration company, most
recently as President and Chief Operating Officer. From April 1993 to April
1994, Mr. Bay held various positions with Spatial Technology, Inc., a software
development company, most recently as President and Chief Financial Officer.
From April 1989 to April 1993, Mr. Bay held various positions, including
Treasurer, of NeXT Computer, Inc., a software development company.
MR. STEIN has served as Vice President and General Counsel of Pure Atria
since August 1996. From September 1995 to August 1996, Mr. Stein was General
Counsel of Atria Software, Inc. From August 1992 to August 1995, Mr. Stein
held a variety of positions in the Lotus Development Corporation legal
department. From September 1988 to August 1992, Mr. Stein was an attorney at
the law firm of Hutchins, Wheeler & Dittmar.
MR. LITWACK has been a director of Pure Atria since August 1996, and was a
director of Atria Software, Inc. from March 1994 through August 1996. Since
July 1995, Mr. Litwack has been Senior Vice President of Sybase, Inc., a
database software company. Since January 1994, Mr. Litwack has been President
of the Powersoft Division of Sybase. From January 1992 to January 1994, Mr.
Litwack was the President of Powersoft Corporation. From 1988 to January 1992,
Mr. Litwack was the Senior Vice President, Research and Development of
Powersoft Corporation.
MR. VOLPE has been a director of Pure Atria since August 1996, and was a
director of Atria Software, Inc., from March 1993 through August 1996. Since
February 1996, Mr. Volpe has been Senior Vice President of Sales and Marketing
of GeoTel Communications Corporation. From January 1995 to February 1996, Mr.
Volpe was the Executive Assistant for Business Development with Parametric
Technology Corporation, and was responsible for developing and marketing
mechanical design automation software. From May 1993 to January 1995, Mr.
Volpe was the Senior Vice President of Marketing and Operations of Parametric
Technology Corporation. From September 1989 to May 1993, Mr. Volpe was the
Vice President of Marketing and Operations of Parametric Technology
Corporation. Mr. Volpe is a director of Softdesk, Inc.
57
<PAGE>
MR. JERMOLUK has been a director of Pure Atria since August 1996 and was a
director of Pure Software Inc. from February 1996 to August 1996. Since August
1996, Mr. Jermoluck has been Chairman of the Board, President and Chief
Executive Officer of @Home Networks. From 1994 to August 1996, Mr. Jermoluk
was President and Chief Operating Officer of Silicon Graphics, Inc. ("SGI").
From 1991 to 1994, he was Executive Vice President of SGI, and from 1988 to
1991, he was Vice President and General Manager of SGI's Advanced System
Division. He is a director of SGI and Forte Software, Inc.
MR. SONSINI has been a director of Pure Atria since August 1996 and was a
director of Pure Software Inc. from February 1996 to August 1996. Mr. Sonsini
has been an attorney with the law firm of Wilson Sonsini Goodrich & Rosati,
Professional Corporation, since 1966. He has been a member of that firm since
1970 and serves as Chairman of its Executive Committee. He is a director of
Lattice Semiconductor Corporation, Novell, Inc., Pixar, Inc. and Silicon
Valley Group Inc.
MR. FUJIMURA has served as a director of Pure Atria since October 1996 and
was a director of Pure Software, Inc. from April 1993 to August 1996. From
December 1995 through August 1996, he served as Vice President, Systems
Business Unit and Customer Satisfaction Group of Pure Software, Inc. From
April 1993 until December 1995, he was Vice President, Engineering of Pure
Software, Inc. From 1988 until April 1993, Mr. Fujimura held various positions
at Cadence Design Systems, Inc., an electronic design automation company, most
recently as Vice President, Framework Group.
Pure Atria's executive officers are appointed by, and serve at the
discretion of, the Board of Directors. Each executive officer is a full-time
employee of Pure Atria. There is no family relationship between any director
or executive officer of Pure Atria.
COMPENSATION OF DIRECTORS
Directors do not receive additional monetary compensation for their services
as directors of the Company. Nonemployee directors participate in the Pure
Atria Option Plan. The Pure Atria Option Plan was adopted by the Board of
Directors in May 1995 and approved by the stockholders in July 1995. The Pure
Atria Option Plan provides for an automatic grant of a nonstatutory stock
option to purchase 15,000 shares of Common Stock to a nonemployee director (an
"Initial Option"). For directors holding their positions as of the date on
which the underwriting agreement was signed in connection with Pure Atria's
initial public offering, the Initial Option was granted on such date, and for
directors who become such after such date, the Initial Option is granted on
the date of the first meeting on which such individual participates as a
director. An Initial Option has a term of ten years, is immediately
exercisable subject to a repurchase option in favor of Pure Atria, and vests
(i.e., is released from the Pure Atria's repurchase option) annually in equal
fractions over four years, provided the Board member continues to serve as
such on each anniversary of the Initial Option's date of grant. In addition,
at each annual stockholders meeting, beginning in 1996, each nonemployee
director will automatically be granted at that meeting, whether or not he or
she is standing for re-election at that particular meeting, a stock option to
purchase 5,000 shares of Common Stock (a "Subsequent Option"), provided such
individual has served on the Board for at least six months prior to such
meeting. Each Subsequent Option has a term of ten years, is immediately
exercisable subject to a repurchase option in favor of Pure Atria, and vests
(i.e., is released from the Pure Atria's repurchase option) in full on the
first anniversary of its date of grant, provided the Board member continues to
serve as such on such anniversary date. The exercise price of each option
granted equals 100% of the fair market value of the Common Stock, based on the
closing sales price of the Common Stock as reported on Nasdaq on the date of
grant.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Pure Atria's Compensation Committee was formed in May 1995 and is currently
composed of Messrs. Jermoluk, Litwack and Volpe. No interlocking relationship
exists between any member of Pure Atria's Board of
58
<PAGE>
Directors or Compensation Committee and any member of the board of directors
or compensation committee of any other company, nor has any such interlocking
relationship existed in the past. No member of the Compensation Committee is
or was formerly an officer or an employee of Pure Atria or its subsidiaries.
SUMMARY COMPENSATION TABLE
The following table sets forth certain information concerning total
compensation of the Chief Executive Officer of Pure Atria and each of the five
most highly compensated executive officers of Pure Atria during the last year
(the "Pure Atria Named Officers"), for services rendered to the Company in all
capacities during the last three fiscal years ended December 31, 1996:
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
------------
AWARDS
------------
ANNUAL COMPENSATION SECURITIES
NAME AND -------------------- UNDERLYING ALL OTHER
PRINCIPAL POSITION YEAR SALARY BONUS OPTIONS COMPENSATION
- ----------------------- ---- ------ --------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Reed Hastings.......... 1996 $ 160,000 $ 71,288 -- --
President, Chief
Executive 1995 145,208 23,000 -- --
Officer and Director 1994 125,000 42,500 -- --
Paul H. Levine(1)...... 1996 160,000 120,000 55,606(2) $ 510 (3)
Chairman of the Board
of Directors 1995(4) 160,000 120,000 30,892(2) 510
1994(4) 150,000 49,500 -- 332
Chuck Bay.............. 1996 140,000 112,475 60,000 --
Vice President,
Finance, Chief 1995 122,167 27,094 180,000 --
Financial Officer and
Secretary 1994 -- -- -- --
W. Geoffrey Stein(5)... 1996 124,667 20,000 54,833(2) 75,304 (6)
Vice President and
General Counsel 1995 -- -- -- --
1994 -- -- -- --
David E. Anderson(7)... 1996 118,731 93,985 55,000 100,750(8)
Former Vice President,
North 1995 83,425 53,103 200,000 --
American Sales and
Corporate 1994 -- -- -- --
Marketing
Aki Fujimura(9)........ 1996 139,632 60,125 100,000 260,944 (8)
Director and former
Vice President, 1995 140,000 31,000 -- --
Systems Business Unit
and 1994 130,000 41,000 -- --
Customer Satisfaction
Group
</TABLE>
- --------
(1) Mr. Levine was President and Chief Executive Officer of Atria until the
Pure Atria Combination, when he became Chairman of the Board of Pure
Atria.
(2) Represents the number of shares of Pure Atria Common Stock underlying an
option that was originally granted by Atria for Atria capital stock. Such
option was assumed by Pure Atria in connection with the Pure Atria
Combination and was adjusted to reflect the exchange ratio for the Pure
Atria Combination.
(3) Consists of premiums for term life insurance.
(4) The compensation information for this year represents compensation earned
by Mr. Levine for services rendered to Atria in such year.
(5) Mr. Stein was General Counsel of Atria until the Pure Atria Combination,
when he became Vice President and General Counsel of Pure Atria.
(6) Consists of $75,000 in reimbursement for relocation expenses and $304 in
premiums for term life insurance.
(7) Mr. Anderson resigned as an executive officer of Pure Atria effective
August 1996.
(8) Represents payments under agreements relating to employment. See "--
Employment Contracts."
(9) Mr. Fujimura resigned as an executive officer of Pure Atria effective
August 1996. He is currently a Director of Pure Atria.
59
<PAGE>
OPTION GRANTS IN LAST FISCAL YEAR
The following table sets forth, as to the Pure Atria Named Officers,
information concerning stock options granted during the year ended December
31, 1996.
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
---------------------------------------------- POTENTIAL REALIZABLE VALUE AT
NUMBER OF PERCENT OF ASSUMED ANNUAL RATES OF
SECURITIES TOTAL OPTIONS STOCK PRICE APPRECIATION
UNDERLYING GRANTED TO FOR OPTION TERM(2)
OPTIONS EMPLOYEES IN EXERCISE EXPIRATION -----------------------------
NAME GRANTED FISCAL YEAR PRICE DATE(1) 5% 10%
- ------------------------ ---------- ------------- -------- ---------- -------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Reed Hastings........... -- -- -- -- -- --
Paul H. Levine.......... 55,606(3) 1.2% $21.69 01/30/06 $ 758,506 $ 1,922,203
Chuck Bay............... 60,000(4) 1.3 23.625 11/21/06 891,458 2,259,130
W. Geoffrey Stein....... 3,861(3) .1 21.69 01/30/06 52,667 133,468
50,972(5) 1.1 21.69 07/25/06 695,295 1,762,014
David E. Anderson....... 55,000(4) 1.1 27.75 01/26/06 959,850 2,432,449
Aki Fujimura............ 100,000(4) 2.1 27.75 01/26/06 1,745,183 4,422,635
</TABLE>
- --------
(1) Options may terminate before their expiration upon the termination of
optionee's status as an employee or consultant, the optionee's death or an
acquisition of Pure Atria.
(2) Under rules promulgated by the Commission, the amounts in these two
columns represent the hypothetical gain that would exist for the options
in this table based on assumed stock price appreciation from the date of
grant until the end of such options' ten-year term at assumed annual rates
of 5% and 10%. Annual compounding results in total appreciation of 63% (at
5% per year) and 159% (at 10% per year). If the price of Pure Atria Common
Stock were to increase at such rates from the price at 1996 year end
($24.75 per share) over the next 10 years, the resulting stock price at 5%
and 10% appreciation would be $40 and $64, respectively. The 5% and 10%
assumed annual rates of appreciation do not represent Pure Atria's
estimate or projection of future stock price growth.
(3) These options are nonstatutory, were granted under the Atria 1994 Stock
Plan and have exercise prices equal to the fair market value on the date
of grant. All such options have ten-year terms and vest in a series of
equal quarterly installments over the next five years of employment.
(4) These options are either nonstatutory or incentive stock options, were
granted under the Pure Atria Option Plan and have exercise prices equal to
the fair market value on the date of grant. All such options have ten-year
terms, are exercisable immediately upon grant, and are subject to Pure
Atria's repurchase option which lapses as to 25% of the option shares upon
completion of one year of service from the vesting commencement date and
as to the balance of the option shares in a series of equal monthly
installments over the next 36 months of employment thereafter, except for
the options of Mr. Fujimura and Mr. Anderson, whose option vesting periods
were accelerated in connection with their respective resignations as
executive officers of Pure Atria. See "Employment Contracts."
(5) These options are nonstatutory, were granted under the Atria 1994 Stock
Plan and have exercise prices equal to the fair market value on the date
of grant. All such options have ten-year terms and vest in a series of
equal monthly installments over 48 months of employment.
60
<PAGE>
OPTION EXERCISES AND HOLDINGS
The following table sets forth, as to the Pure Atria Named Officers, certain
information concerning stock options exercised during fiscal 1996 and the
number of shares subject to both exercisable and unexercisable stock options
as of December 31, 1996. Also reported are values for "in-the-money" options
that represent the positive spread between the respective exercise prices of
outstanding stock options and the fair market value of Pure Atria's Common
Stock as of December 31, 1996.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
OPTIONS AT FISCAL YEAR- IN-THE-MONEY OPTIONS AT
SHARES END FISCAL YEAR END (1)
ACQUIRED ON VALUE ------------------------- -------------------------
NAME EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ------------------------ ----------- ---------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Reed Hastings........... -- -- -- -- -- --
Paul H. Levine.......... -- -- 139,632 24,096 $2,374,116 $130,547
Chuck Bay............... 60,000 $1,631,938 120,750 58,750 2,779,781 66,094
W. Geoffrey Stein....... 2,000 15,850 33,621 56,282 115,523 176,764
David E. Anderson....... 30,000 876,642 119,062 -- 2,066,250 --
Aki Fujimura............ 175,000 5,314,637 412,183 52,417 8,994,682 --
</TABLE>
- --------
(1) Market value of underlying securities based on the closing price of Pure
Atria's Common Stock on December 31, 1996 on Nasdaq of $24.75 minus the
exercise price.
EMPLOYMENT CONTRACTS
In August 1996, Pure Atria entered into agreements with Mr. Fujimura and Mr.
Anderson. Mr. Fujimura's agreement provided for a payment and for the
acceleration of the vesting of his options in connection with the transition
of his role from that of an executive officer to that of an independent
Director of, and his agreement to refrain from competing in certain respects
with, Pure Atria. Mr. Anderson's agreement provided for certain payments, the
acceleration of the vesting of his options, and the forgiveness of a loan with
an outstanding principal amount of $100,750 in connection with his agreement
to refrain from competing with, and certain consulting services to be provided
by him to, Pure Atria. See "Summary Compensation Table."
61
<PAGE>
PURE ATRIA CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In October 1995, Pure Atria retained Wilson Sonsini Goodrich & Rosati as its
outside legal counsel. Larry W. Sonsini, who has been a member of Wilson
Sonsini Goodrich & Rosati since 1970, became a director of Pure Atria in
February 1996.
62
<PAGE>
PURE ATRIA SECURITY OWNERSHIP
The following table sets forth the beneficial ownership of Pure Atria Common
Stock as of November 30, 1996 for the following: (i) each person or entity
known by Pure Atria to own beneficially more than 5% of the outstanding shares
of Pure Atria Common Stock; (ii) each of Pure Atria's current directors; (iii)
each Pure Atria Named Officer; and (iv) all directors and executive officers
of Pure Atria as a group.
<TABLE>
<CAPTION>
SHARES
BENEFICIALLY PERCENTAGE
NAME OWNED(1) BENEFICIALLY OWNED
---- ------------ ------------------
<S> <C> <C>
Amerindo Investment Advisors Inc.(2)(3)........ 4,702,382 11.5%
One Embarcadero Center, Suite 2300
San Francisco, CA 94111
Reed Hastings(4)............................... 4,080,000 10.0
c/o Pure Atria Corporation
1309 South Mary Avenue
Sunnyvale, CA 94087
Warburg, Pincus Counsellors, Inc.(2)........... 2,016,221 4.9
466 Lexington Avenue
New York, NY 10017
Paul H. Levine(5).............................. 504,837 1.2
Louis J. Volpe(6).............................. 62,962 *
David A. Litwack(7)............................ 4,633 *
Thomas A. Jermoluk(8).......................... 15,000 *
Larry W. Sonsini(9)............................ 15,000 *
Aki Fujimura(10)............................... 480,783 1.2
Chuck Bay(11).................................. 139,500 *
W. Geoffrey Stein(12).......................... 34,922 *
All directors and executive officers as a
group:
(9 persons)(13)............................... 5,337,398 12.8
</TABLE>
- --------
* Represents less than 1% of the outstanding shares of Pure Atria.
(1) The number and percentage of shares beneficially owned is determined
under rules of the Commission, and the information is not necessarily
indicative of beneficial ownership for any other purpose. Under such
rules, beneficial ownership includes any shares as to which the
individual has sole or shared voting power or investment power and also
any shares which the individual has the right to acquire within sixty
days of November 30, 1996 through the exercise of any stock option or
other right. Unless otherwise indicated in the footnotes, each person has
sole voting and investment power (or shares such powers with his or her
spouse) with respect to the shares shown as beneficially owned.
(2) This information was obtained from filings made with the Commission
pursuant to Sections 13(d) or 13(g) of the Securities Exchange Act of
1934, as amended.
(3) These securities are owned in the aggregate by Amerindo Investment
Advisors Inc., a California corporation, Amerindo Advisors (U.K.)
Limited, Amerindo Investment Advisors, Inc., a Panama corporation, the
Amerindo Advisors (U.K.) Limited Retirement Benefits Scheme, Alberto W.
Vilar, Gary A. Tanaka, James P.F. Stableford and Renata Le Port; however,
these stockholders expressly disclaim that they are, in fact the
beneficial owner of all but 7,723 shares of such securities.
(4) Mr. Hastings is also President, Chief Executive Officer and a director of
Pure Atria.
(5) Includes 141,176 shares of Pure Atria Common Stock subject to options
exercisable within sixty days of November 30, 1996.
(6) Includes 40,776 shares of Pure Atria Common Stock subject to options
exercisable within sixty days of November 30, 1996.
(7) Represents shares of Pure Atria Common Stock subject to options
exercisable within sixty days of November 30, 1996.
63
<PAGE>
(8) Represents shares of Pure Atria Common Stock subject to options
exercisable within sixty days of November 30, 1996.
(9) Represents shares of Pure Atria Common Stock subject to options
exercisable within sixty days of November 30, 1996. Mr. Sonsini is a
member of Wilson Sonsini Goodrich and Rosati, Professional Corporation,
counsel to Pure Atria.
(10) Includes 412,183 shares of Pure Atria Common Stock subject to options
exercisable within sixty days of November 30, 1996.
(11) Includes 119,500 shares of Pure Atria Common Stock subject to options
exercisable within sixty days of November 30, 1996.
(12) Includes 34,683 shares of Pure Atria Common Stock subject to options
exercisable within sixty days from November 30, 1996.
(13) Includes 782,951 shares of Pure Atria Common Stock subject to options
exercisable within sixty days of November 30, 1996 held by executive
officers and directors of Pure Atria.
STOCK PRICE AND DIVIDEND INFORMATION
Pure Atria Common Stock was traded on Nasdaq under the symbol "PRSW" from
Pure's initial public offering in August 1995 until August 1996, when Pure
Atria's trading symbol was changed to "PASW" in connection with the Pure Atria
Combination. The following table sets forth the range of high and low closing
prices for the Pure Atria Common Stock as reported on Nasdaq for the periods
indicated.
<TABLE>
<CAPTION>
HIGH LOW
------- -------
<S> <C> <C>
Fiscal 1995
Third Quarter*........................................... $43.75 $27.75
Fourth Quarter........................................... 39.75 31.50
Fiscal 1996
First Quarter............................................ 35.25 25.00
Second Quarter........................................... 41.00 32.50
Third Quarter............................................ 37.875 19.875
Fourth Quarter........................................... 37.50 23.375
</TABLE>
- --------
* Third Quarter data reflects the period from Pure's initial public offering
in August through September 30, 1995.
As of November 15, 1996, the last trading day prior to the announcement of
the execution of the Merger Agreement, the closing price for the Pure Atria
Common Stock as reported on Nasdaq was $26.625. As of December 31, 1996, the
closing price for the Pure Atria Common Stock as reported on Nasdaq was
$24.75.
Pure Atria has not paid any dividends since its inception and does not
intend to pay any dividends in the foreseeable future. At December 31, 1996,
there were approximately 407 Pure Atria stockholders of record.
No established trading market exists for Integrity Capital Stock. As of
December 31, 1996, there were eight holders of record of Integrity Capital
Stock, 13 holders of options to purchase shares of Integrity Common Stock and
one holder of warrants to purchase Integrity Preferred Stock. Integrity has
never paid, and has no present intention to pay in the foreseeable future, any
cash dividends on the Integrity Capital Stock.
64
<PAGE>
INTEGRITY BUSINESS
GENERAL
Integrity was founded to develop, market and support ASQ products for use in
software development and design. Integrity is currently developing a suite of
software testing applications and tools that is designed to automatically
detect software defects and assist development teams in removing bugs from
their products. Integrity's product suite is designed to assist software
developers in ascertaining whether software programs in development will meet
functional and performance specifications. Integrity believes that, upon
successful completion of product development, its product suite can be used to
reduce time to market, enhance software performance and lower development
costs.
PRODUCTS AND TESTING PROCESS
Integrity is developing an integrated suite of quality assurance software
for the ASQ market, a major component of which is a next-generation graphical
user interface tester. This software is designed to enhance the productivity
of quality assurance professionals by more rapidly discovering bugs in
software code written in C, C++, Visual Basic and Java running on Microsoft
Windows 95 and Windows NT operating systems. Integrity's product suite uses
proprietary technology and is designed to provide a repeatable quality process
that allows users to find bugs in their software with a minimum of effort.
Integrity began alpha testing in October 1996 and currently has beta testing
planned for the first half of 1997.
SALES AND MARKETING
Integrity plans to market its product suite to programmers and quality
assurance professionals working within corporate development groups and
independent software vendors. Integrity intends to implement a sales effort
comprising telesales and field sales representatives teamed together with a
dedicated system engineer concentrating on pre-sales support and installation,
and a marketing representative to help qualify leads. Integrity also intends
to implement a marketing program focused on seminar programs and the World
Wide Web.
RESEARCH AND DEVELOPMENT
Integrity believes that its future success will depend in large part on its
ability to develop and release its product suite, maintain technological
competitiveness and meet an expanding range of customer requirements. In
addition to product development, Integrity's research and development
organization is responsible for exploring new directions and applications of
the core technologies, migrating new technologies into the existing product
lines and maintaining strong relationships outside Integrity both within the
industry and in academia. Integrity uses all of its own products to improve
software quality and to improve its software development process. In addition,
Integrity has an internal tools group that develops new tools for improving
software quality and process automation for internal use.
Software products as complex as Integrity's are subject to delay and there
can be no assurance that Integrity will not encounter difficulties that could
delay or prevent the successful and timely development, introduction and
marketing of these products. In addition, because the market for these tools
is an emerging market, there can be no assurance that these products will
achieve any significant degree of market acceptance. Failure to release these
products in a timely manner and on a cost-effective basis, or failure of these
products to achieve any significant degree of market acceptance, could have a
material adverse effect upon the business, operating results and financial
condition of Integrity.
PROPRIETARY RIGHTS
Integrity relies on a combination of patent, copyright and trademark laws,
trade secrets, confidentiality procedures and contractual provisions to
protect its technology. Integrity also believes that factors such as the
technological and creative skills of its personnel, new product developments,
frequent product enhancements,
65
<PAGE>
name recognition and reliable product maintenance are essential to
establishing and maintaining a technology leadership position.
Integrity currently has one trademark application and one pending patent
application on file at the U.S. Patent and Trademark Office. There can be no
assurance that Integrity's pending or future patent applications, whether or
not being currently challenged by applicable governmental patent examiners, or
Integrity's pending or future trademark applications will be issued with the
scope of the claims sought by Integrity, if at all. Furthermore, there can be
no assurance that others will not develop technologies that are similar or
superior to Integrity's technology or design around the patents that may be
owned by Integrity.
The source code for Integrity's proprietary software is protected both as a
trade secret and as an unpublished copyrighted work. Despite these
precautions, it may be possible for a third party to otherwise obtain and use
Integrity's products or technology without authorization or to develop similar
technology independently. In addition, effective copyright and trade secret
protection may be unavailable or limited in certain foreign countries.
Integrity generally enters into confidentiality or license agreements with its
employees, distributors and potential customers and limits access to and
distribution of its software, documentation and other proprietary information.
Nevertheless, there can be no assurance that the steps taken by Integrity will
prevent misappropriation of its technology.
Integrity expects that software product developers will be increasingly
subject to infringement claims as the number of products and competitors in
Integrity's industry segment grows and the functionality of products in
different industry segment overlaps. There can be no assurance that
infringement or invalidity claims (or claims for indemnification resulting
from infringement claims) will not be asserted against Integrity or that any
such assertions will not materially adversely affect Integrity's business,
operating results and financial condition. Any such claims, whether with or
without merit, could be time-consuming, result in costly litigation and
diversion of resources, cause product shipment delays or require Integrity to
enter into royalty or licensing agreements. Such royalty or licensing
agreements, if required, may not be available on terms acceptable to Integrity
or at all. In the event of a successful claim of product infringement against
Integrity and failure or inability of Integrity to license the infringed or
similar technology, Integrity's business, operating results and financial
condition could not be materially adversely affected.
Integrity also relies on certain software that it licenses from third
parties, including software that is integrated with internally developed
software and used in Integrity's products to perform key functions. There can
be no assurance that these third-party software licenses will continue to be
available to Integrity on commercially reasonable terms. The loss of or
inability to maintain any of these software licenses could result in delays or
reductions in product shipments until equivalent software could be developed,
identified, licensed and integrated, which would adversely affect Integrity's
business, operating results and financial condition.
HISTORY OF INTEGRITY
Integrity was incorporated in Delaware on November 1, 1995. In January 1996
Integrity sold 2,025,000 shares of Series A Preferred Stock to investors to
cover initial operating and product development expenses. Integrity's
principal administrative, sales, marketing, research and development facility
occupies approximately 4,000 square feet in one building in Campbell,
California. As of November 1, 1996, Integrity employed a total of 11 people.
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INTEGRITY MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
The following discussion of Integrity's plan of operations should be read in
conjunction with the Integrity Financial Statements and the Notes thereto
included elsewhere in this Consent Solicitation Statement/Prospectus. This
discussion contains forward-looking statements that involve risks and
uncertainties. Integrity's actual results could differ materially from those
anticipated in the forward-looking statements as a result of certain factors,
including, but not limited to those discussed herein and elsewhere in this
Consent Solicitation Statement/Prospectus.
OVERVIEW
Since its inception in November 1995, Integrity has been engaged in the
research and development of ASQ software products for use in software
development and design. Integrity's products under development comprise the
components of what is intended to be a suite of ASQ software products. To
date, Integrity has generated no revenues from the sale of its product suite,
and it has been unprofitable since inception.
Integrity began alpha testing its product suite in October 1996 and
currently plans to release a beta version for testing during the first half of
1997. Integrity currently plans to release its product suite for initial
customer shipments during the second half of 1997. Integrity expects to
continue to spend considerable resources in the development of its product
suite for at least the next 12 months. Integrity's plan of operations for the
next 12 months does not include material expenditures for or proceeds from the
purchase or sale of plant or significant equipment. However, Integrity expects
to hire approximately 20 to 25 employees in the next 12 months.
RESULTS OF OPERATIONS--INCEPTION THROUGH SEPTEMBER 30, 1996
Research and Development Expenses. Research and development expenses consist
primarily of personnel costs, consulting fees and software license fees to
support Integrity's software development activities. Integrity's research and
development expenses were $641,800 for the period from inception through
September 30, 1996.
General and Administrative Expenses. General and administrative expenses
consist primarily of personnel costs and professional fees. Integrity's
general and administrative expenses were $548,700 for the period from
inception through September 30, 1996.
Interest Income. Interest income primarily represents interest earned by
Integrity on its cash and short-term investments. Interest income was
approximately $35,500 for the period from inception through September 30,
1996.
Interest Expense. Interest expense represents interest owing on Integrity's
long-term debt. Interest expense was approximately $9,200 for the period from
inception through September 30, 1996.
LIQUIDITY AND CAPITAL RESOURCES
To date, Integrity has financed its operations through the private sale of
equity securities and the use of capitalized leases for equipment financing.
Integrity sold $2.0 million of its redeemable Series A Preferred Stock in
January 1995 and, as of September 30, 1996, Integrity had approximately
$83,000 outstanding under Integrity's equipment lease financing line of
credit. During the period from inception through September 30, 1996, net cash
used in operating activities was approximately $1.1 million, net cash used in
investing activities was $23,400 and net cash provided by financing activities
was approximately $2.1 million. Prior to the execution of the Merger
Agreement, Integrity was in discussions with certain venture capitalists with
regard to another round of financing since Integrity projected that it would
be required to raise additional capital in the first quarter of 1997 through
the private sale of equity securities in order to finance its operations in
1997. There can be no assurance, however, that if the Merger is not
consummated, additional required financing will be available through equity
offerings, bank borrowings, or otherwise, or that if such financing is
available, it will be available on terms favorable to Integrity or its
stockholders.
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<PAGE>
INTEGRITY MANAGEMENT AND EXECUTIVE COMPENSATION
EXECUTIVE OFFICERS AND DIRECTORS
The following table sets forth certain information with respect to the
executive officers and directors of Integrity as of December 31, 1996.
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Stephen J. Kahn 48 Chairman of the Board of Directors, President
and Chief Executive Officer
Robert W. Warfield 35 Director and Vice President of Engineering,
Chief Financial Officer and Chief Technical
Officer
Marc B. Randolph 38 Vice President of Marketing
Stephen L. Domenik 45 Director
Mark P. Gorenberg 41 Director
</TABLE>
MR. KAHN, a co-founder of Integrity, has served as President, Chief
Executive Officer and Chairman of the Board of Directors of Integrity since
its inception in 1995. Prior to founding Integrity, Mr. Kahn was a partner
with Mohr, Davidow Ventures, a venture capital firm, from September 1994 to
November 1995 and held various positions at Borland International ("Borland"),
a software company, from August 1988 to March 1994, including Senior Vice
President and General Manager, Products Division and Vice President of
Marketing. Prior to joining Borland, he held senior management positions at
Lotus Development Corporation, Atari Corporation, Clorox Company, and Procter
& Gamble Company. Mr. Kahn holds an M.B.A. from the University of California
at Berkeley and a B.S. in Chemical Engineering from Rensselaer Polytechnic
Institute.
MR. WARFIELD, a co-founder of Integrity, has served as Vice President of
Engineering, Chief Financial Officer and Chief Technical Officer, and a member
of the Board of Directors of Integrity since its inception in 1995. Prior to
founding Integrity, Mr. Warfield served as Vice President of Desktop
Development at Oracle Corporation, a database software company, from August
1995 to November 1995, Vice President of Engineering at Planning & Logic, a
software company, from November 1994 to February 1995, and Vice President of
Systems and General Partner at New Media Ventures, a venture capital fund,
from November 1993 to June 1994. Prior to joining New Media Ventures, Mr.
Warfield held various positions at Borland from November 1988 to November
1993, including Vice President of Product Planning and Vice President of
Research & Development. Mr. Warfield holds a B.A. in Computer Science from
Rice University.
MR. RANDOLPH has served as Vice President of Marketing since June 1996.
Prior to joining Integrity, Mr. Randolph served as Vice President of Marketing
at Visioneer Communications, a scanner systems company, from May 1995 to March
1996, and held various positions at Borland from October 1988 to April 1995,
including Vice President and General Manager, Consumer Products Division and
Vice President of Direct and Corporate Marketing. Mr. Randolph holds a B.A.
degree in Geology from Hamilton College.
MR. DOMENIK has been a member of Integrity's Board of Directors since
January 1996. Mr. Domenik has served as a General Partner of Sevin Rosen Fund
V from July 1996 to present and has been employed by Sevin Rosen since July
1995. From January 1992 to July 1995, Mr. Domenik served as the Vice President
of Marketing for Cyrix Corporation, a portfolio management company. Mr.
Domenik also serves on the Board of Directors of several privately held
companies. Mr. Domenik received both an A.B. and a M.S.E.E. from the
University of California at Berkeley.
MR. GORENBERG has been a member of Integrity's Board of Directors since
January 1996. Since July 1993, Mr. Gorenberg has been a general partner of
Hummer Winblad Venture Partners II, an investment partnership, and, since July
1990, Mr. Gorenberg has been an associate of Hummer Winblad Equity Partners.
Mr. Gorenberg is also a director of Scopus Technologies, and several privately
held companies. Mr. Gorenberg earned a B.S. degree in Electrical Engineering
from the Massachusetts Institute of Technology, an M.S. degree in Electrical
Engineering from the University of Minnesota and an M.S. degree in Engineering
Management from Stanford University.
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<PAGE>
COMPENSATION OF DIRECTORS
Directors of Integrity receive no compensation for their services as
directors. Directors are eligible for option grants under the Integrity Option
Plan.
SUMMARY COMPENSATION TABLE
The following table sets forth certain information concerning compensation
of Integrity's Chief Executive Officer and two other executive officers who
would have earned salary and bonus in excess of $100,000 for services rendered
in all capacities to Integrity for the fiscal year ended December 31, 1996
(the "Integrity Named Executive Officers").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM
COMPENSATION
AWARDS
------------
ANNUAL COMPENSATION SECURITIES
------------------- UNDERLYING
NAME & PRINCIPAL POSITION YEAR SALARY OPTIONS/SARS
------------------------- ------------------- ------------
<S> <C> <C> <C>
Stephen J. Kahn.......................... 1996 $ 150,000
President and Chief Executive Officer
Robert W. Warfield....................... 1996 $ 150,000
Vice President of Engineering, Chief
Financial
Officer and Chief Technical Officer
Marc B. Randolph......................... 1996 $ 81,250 150,000
Vice President of Marketing
</TABLE>
OPTION GRANTS IN LAST FISCAL YEAR
The following table contains information concerning the stock option grants
made to each of the Integrity Named Executive Officers for the year ended
December 31, 1996.
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
-----------------------
POTENTIAL REALIZABLE
VALUE AT ASSUMED
PERCENT ANNUAL RATES OF
NUMBER OF OF TOTAL STOCK PRICE
SECURITIES OPTIONS APPRECIATION FOR
UNDERLYING GRANTED TO OPTION TERM(3)
OPTIONS EMPLOYEES IN EXERCISE EXPIRATION --------------------
NAME GRANTED(1) FISCAL YEAR PRICE(2) DATE 5% 10%
---- ---------- ------------ -------- ---------- --------- ----------
<S> <C> <C> <C> <C> <C> <C>
Marc B. Randolph........ 150,000 34.8% $0.10 06/16/06 $ 9,433 $ 23,906
</TABLE>
- --------
(1) The option listed in the table is immediately exercisable. The shares
purchasable thereunder are subject to repurchase by Integrity at the
original exercise price paid per share upon the optionee's cessation of
service prior to vesting in such shares. The repurchase right lapses and
the optionee vests as to 25% of the option shares upon completion of one
year of service from the vesting commencement date and the balance in a
series of equal monthly installments over the next 36 months of service
thereafter.
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<PAGE>
(2) The exercise price may be paid in cash, in shares of Integrity's Common
Stock valued at fair market value on the exercise date or through a
cashless exercise procedure involving a same-day sale of the purchased
shares. Integrity may also finance the option exercise by loaning the
optionee sufficient funds to pay the exercise price for the purchased
shares.
(3) The 5% and 10% assumed annual rates of compounded stock price appreciation
are mandated by rules of the Securities and Exchange Commission. There can
be no assurance provided to any executive officer or any other holder of
Integrity's securities that the actual stock price appreciation over the
10-year option term will be at the assumed 5% and 10% levels or at any
other defined level. Unless the market price of the Common Stock
appreciates over the option term, no value will be realized from the
option grants made to the executive officer.
OPTION EXERCISES AND FISCAL YEAR-END VALUES
There were no option or stock appreciation right exercises by the Integrity
Named Executive Officers for the year ended December 31, 1996.
<TABLE>
<CAPTION>
NUMBER OF
SECURITIES UNDERLYING VALUE OF UNEXERCISED
UNEXERCISED OPTIONS AT IN-THE-MONEY OPTIONS
FISCAL YEAR-END AT FISCAL YEAR END(1)
---------------------------- -------------------------
NAME EXERCISABLE(2) UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- -------------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Marc B. Randolph......... 150,000 0 $933,810 0
</TABLE>
- --------
(1) Based on the fair market value of the Integrity's Common Stock at year-end
($6.3254 per share, as determined by the Company's Board of Directors)
less the exercise price payable for such shares.
(2) The option listed in the table is immediately exercisable. The shares
purchasable thereunder are subject to repurchase by Integrity at the
original exercise price paid per share upon the optionee's cessation of
service prior to vesting in such shares. The repurchase right lapses and
the optionee vests as to 25% of the option shares upon completion of one
year of service from the vesting commencement date and the balance in a
series of equal monthly installments over the next 36 months of service
thereafter.
EMPLOYMENT CONTRACTS, TERMINATION OF EMPLOYMENT AND CHANGE-IN-CONTROL
ARRANGEMENTS
Mr. Kahn and Mr. Warfield have each executed Restricted Stock Purchase
Agreements with Integrity, each dated November 20, 1995, pursuant to which 50%
of their respective unvested shares of Integrity Common Stock automatically
vest in connection with certain changes of control of Integrity. Mr. Kahn and
Mr. Warfield have executed Waiver and Amendment Agreements with Integrity and
Pure Atria dated November 17, 1996, pursuant to which they each have agreed to
waive their rights to acceleration of vesting under their respective
Restricted Stock Purchase Agreements in connection with the consummation of
the Merger. The Waiver and Amendment Agreements provide for acceleration of
vesting of all of Mr. Kahn's and Mr. Warfield's respective unvested shares in
the event that the purchaser's employment with Pure Atria following the Merger
is terminated without cause. None of Messrs. Kahn, Warfield and Randolph have
employment agreements with Integrity that restrict Integrity's ability to
terminate their employment at any time.
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<PAGE>
INTEGRITY CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In November 1996, Integrity entered into Indemnification Agreements with
each of its directors and executive officers to give such directors and
officers additional contractual assurances regarding the scope of the
indemnification set forth in Integrity's Bylaws and to provide additional
procedural protections.
In January 1996, Integrity sold an aggregate of 2,025,000 shares of Series A
Preferred Stock to investors, including Sevin Rosen Funds and Hummer Winblad
Venture Partners, at a price of $1.00 per share. Stephen L. Domenik, a partner
with the Sevin Rosen Funds, and Mark P. Gorenberg, a partner with Hummer
Winblad Venture Partners, became directors of Integrity in connection with
this transaction.
Integrity believes that all of the transactions set forth above were made on
terms no less favorable to Integrity than could have been otherwise obtained
from unaffiliated third parties. All future transactions between Integrity and
its officers, directors and principal stockholders and their affiliates will
be approved by a majority of the Board of Directors, including a majority of
the independent and disinterested outside directors of the Board of Directors,
and will be on terms no less favorable to Integrity than could have been
obtained from unaffiliated third parties.
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<PAGE>
INTEGRITY SECURITY OWNERSHIP
The following table sets forth information with respect to beneficial
ownership of shares of Integrity's Common Stock as of November 30, 1996 for
(i) each person who is known by Integrity to own beneficially more than 5% of
the outstanding shares of Common Stock, (ii) the Integrity Named Executive
Officers and each executive officers of Integrity as of December 31, 1996,
(iii) each director of Integrity and (iv) all directors and executive officers
of Integrity as a group.
<TABLE>
<CAPTION>
SHARES
BENEFICIALLY PERCENTAGE
NAME OWNED(1) BENEFICIALLY OWNED
---- ------------ ------------------
<S> <C> <C>
Stephen J. Kahn................................ 1,125,000 26.3%
Robert W. Warfield............................. 1,125,000 26.3%
Entities affiliated with Hummer Winblad Venture
Partners (2).................................. 1,000,000 23.4%
5900 Hollis Street, Suite R
Emeryville, California 94608
Entities affiliated with Sevin Rosen Funds (3). 1,000,000 23.4%
550 Lytton Avenue, Suite 200
Palo Alto, California 94301
Mark P. Gorenberg (2).......................... 1,000,000 23.4%
Stephen L. Domenik (3)......................... 1,000,000 23.4%
Marc B. Randolph (4)........................... 150,000 3.4%
All directors and executive officers as a group
(5 persons) (5)............................... 4,400,000 99.4%
</TABLE>
- --------
(1) Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission and includes voting or investment power
with respect to securities. Percentage of beneficial ownership is based on
2,250,000 shares of Common Stock and 2,025,000 shares of Series A
Preferred Stock outstanding as of November 30, 1996. The number of shares
of Common Stock beneficially owned includes the shares issuable pursuant
to stock options that are exercisable within 60 days of November 30, 1996.
Shares issuable pursuant to stock options are deemed outstanding for
computing the percentage of the person holding such options but are not
deemed outstanding for computing the percentage of any other person.
Unless otherwise indicated, the address for each listed stockholder is c/o
Integrity QA Software, Inc., 1550 South Bascom Avenue, Suite 380,
Campbell, California 95008. Except pursuant to applicable community
property laws, Integrity believes the persons named in the table have sole
voting and investment power with respect to all shares.
(2) Includes 960,000 shares of Series A Preferred Stock held by Hummer Winblad
Venture Partners II, L.P. and 40,000 shares of Series A Preferred Stock
held by Hummer Winblad Technology Fund II, L.P. Mr. Gorenberg is a general
partner of Hummer Winblad Venture Partners II, L.P. and Hummer Winblad
Technology Fund II, L.P. Mr. Gorenberg disclaims beneficial ownership of
shares held by such entities except for his proportional interest therein.
(3) Includes 954,205 shares of Series A Preferred Stock held by Sevin Rosen
Fund V, L.P., 40,795 shares of Series A Preferred Stock held by Sevin
Rosen V Affiliates Fund, L.P. and 5,000 shares of Series A Preferred Stock
held by Sevin Rosen Bayless Management Company (collectively, the "Sevin
Rosen Funds"). Mr. Domenik is a general partner of SRB Associates V L.P.,
the general partner of the Sevin Rosen Funds. Mr. Domenik disclaims
beneficial ownership of shares held by the Sevin Rosen Funds except for
his proportional interest therein.
(4) Consists of 150,000 shares issuable upon exercise of stock options
exercisable within 60 days of November 30, 1996.
(5) Includes 150,000 shares issuable upon exercise of stock options
exercisable within 60 days of November 30, 1996.
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<PAGE>
EXPERTS
The consolidated financial statements of Pure Atria Corporation, as of
December 31, 1994 and 1995, and for each of the years in the three year period
ended December 31, 1995, included in this Consent Solicitation
Statement/Prospectus and Registration Statement, have been audited by KPMG
Peat Marwick LLP, independent auditors, as set forth in their report appearing
elsewhere herein, which is based in part on the report of Ernst & Young LLP,
independent auditors, as set forth in their report appearing elsewhere herein,
relating to the consolidated financial statements of Atria Software, Inc. (not
presented separately herein). The financial statements referred to above are
included in reliance upon such reports given upon the authority of such firms
as experts in accounting and auditing.
The financial statements of Integrity QA Software, Inc. for the period from
inception through September 30, 1996 included in this Prospectus have been so
included in reliance on the report of Price Waterhouse LLP, independent
accountants, given on the authority of said firm as experts in auditing and
accounting.
LEGAL MATTERS
The validity of the Pure Atria Common Stock issuable pursuant to the Merger
and certain other legal matters relating to the Merger and the transactions
contemplated thereby will be passed upon for Pure Atria by Wilson Sonsini
Goodrich & Rosati, Professional Corporation, Palo Alto, California. Gunderson
Dettmer Stough Villeneuve Franklin & Hachigian, LLP ("Gunderson Dettmer"),
Menlo Park, California, is acting as counsel for Integrity in connection with
certain legal matters relating to the Merger and the transactions contemplated
thereby. G&H Partners, an investment partnership of which certain partners of
Gunderson Dettmer are partners, beneficially owns 25,000 shares of Integrity's
Series A Preferred Stock.
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<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Pure Atria Corporation and Subsidiaries (formerly Pure Software, Inc.):
Reports of Independent Auditors......................................... F-2
Consolidated Balance Sheets............................................. F-4
Consolidated Statements of Operations................................... F-5
Consolidated Statements of Redeemable Convertible Preferred Stock and
Stockholders' Equity (Deficit)......................................... F-6
Consolidated Statements of Cash Flows................................... F-7
Notes to Consolidated Financial Statements.............................. F-8
Integrity QA Software, Inc. (a company in the development stage):
Report of Independent Accountants....................................... F-20
Balance Sheet........................................................... F-21
Statement of Operations................................................. F-22
Statement of Stockholders' Equity (Deficit)............................. F-23
Statement of Cash Flows................................................. F-24
Notes to Financial Statements........................................... F-25
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Pure Atria Corporation:
We have audited the accompanying consolidated balance sheets of Pure Atria
Corporation (formerly Pure Software, Inc.) and subsidiaries as of December 31,
1994 and 1995, and the related consolidated statements of operations,
redeemable convertible preferred stock and stockholders' equity (deficit), and
cash flows for each of the years in the three-year period ended December 31,
1995. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits. We did not audit the
consolidated financial statements of Atria Software, Inc., a company acquired
by the Company in a business combination accounted for as a pooling of
interests, as described in Note 11 to the consolidated financial statements,
which statements reflect total assets constituting 68% and 47% as of December
31, 1994 and 1995, respectively, and total revenues constituting 44%, 49%, and
48% in fiscal 1993, 1994, and 1995, respectively, of the related consolidated
totals. The statements of Atria Software, Inc. were audited by other auditors
whose report has been furnished to us, and our opinion, insofar as it relates
to the amounts included for Atria Software, Inc., is based solely upon the
report of the other auditors.
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 and the report of the other
auditors provide a reasonable basis for our opinion.
In our opinion, based on our audits and the report of the other auditors,
the consolidated financial statements referred to above present fairly, in all
material respects, the financial position of Pure Atria Corporation and
subsidiaries as of December 31, 1994 and 1995, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 1995, in conformity with generally accepted accounting
principles.
KPMG Peat Marwick LLP
San Jose, California
January 18, 1996, except as to
Note 2, which is as
of August 26, 1996
F-2
<PAGE>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
THE BOARD OF DIRECTORS AND STOCKHOLDERS
ATRIA SOFTWARE, INC.
We have audited the consolidated balance sheets of Atria Software, Inc. as of
December 31, 1994 and 1995, and the related consolidated statements of
operations, stockholders' equity (deficit), and cash flows for each of the
three years in the period ended December 31, 1995 (not presented separately
herein). Our audits also included the related financial statement schedule for
each of the three years in the period ended December 31, 1995 (not presented
separately herein). These financial statements and schedule 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 consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position
of Atria Software, Inc. at December 31, 1994 and 1995 and the consolidated
results of its operations and its cash flows for each of the three years in the
period ended December 31, 1995, in conformity with generally accepted
accounting principles. Also, in our opinion, the related financial statement
schedule, when considered in relation to the basic financial statements taken
as a whole, presents fairly in all material respects the information set forth
therein.
Ernst & Young LLP
Boston, Massachusetts
January 23, 1996
F-3
<PAGE>
PURE ATRIA CORPORATION AND SUBSIDIARIES
(FORMERLY PURE SOFTWARE, INC.)
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31,
---------------- SEPTEMBER 30,
1994 1995 1996
------- -------- -------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents..................... $20,525 $ 24,294 $ 38,450
Short-term investments........................ 22,007 54,240 55,340
Accounts receivable, net of allowances of
$592, $838, and $2,050 in 1994, 1995, and
1996, respectively........................... 6,817 16,613 21,706
Prepaid expenses and other assets............. 890 1,876 3,198
Deferred tax assets........................... 899 2,220 5,881
------- -------- --------
Total current assets........................ 51,138 99,243 124,575
Property and equipment, net..................... 3,340 8,314 10,566
Other assets, net............................... 238 2,517 1,751
------- -------- --------
Total assets................................ $54,716 $110,074 $136,892
======= ======== ========
LIABILITIES, REDEEMABLE CONVERTIBLE PREFERRED
STOCK,
AND STOCKHOLDERS' EQUITY
Current liabilities:
Bank borrowings and capital lease obligations. $ 619 $ 321 $ --
Accounts payable.............................. 1,206 1,846 2,928
Accrued payroll and related expenses.......... 1,803 5,722 8,338
Accrued merger and integration expenses....... -- 1,887 18,969
Other accrued expenses........................ 3,046 7,139 11,031
Deferred revenue.............................. 7,531 13,945 21,081
Income taxes.................................. 1,064 3,359 1,665
------- -------- --------
Total current liabilities................... 15,269 34,219 64,012
------- -------- --------
Commitments and contingencies
Redeemable convertible preferred stock; $.0001
par value; 6,600,000 shares authorized;
6,057,456 shares issued and outstanding in
1994, no shares authorized, issued, or
outstanding in 1995 and 1996 (liquidation
preference of $6,518 in 1994).................... 6,467 -- --
------- -------- --------
Stockholders' equity:
Preferred stock; $.0001 par value; 2,000,000
shares authorized; no shares issued and
outstanding.................................. -- -- --
Common stock; $.0001 par value; 80,000,000
shares authorized; 29,760,373, 39,086,379,
and 40,204,932 shares issued and outstanding
in 1994, 1995, and 1996, respectively........ 3 4 4
Additional paid-in capital.................... 28,195 78,162 88,802
Cumulative translation adjustment............. -- (146) (517)
Retained earnings (accumulated deficit)....... 4,782 (2,165) (15,409)
------- -------- --------
Total stockholders' equity.................. 32,980 75,855 72,880
------- -------- --------
Total liabilities, redeemable convertible
preferred stock, and stockholders' equity.. $54,716 $110,074 $136,892
======= ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
PURE ATRIA CORPORATION AND SUBSIDIARIES
(FORMERLY PURE SOFTWARE, INC.)
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
------------------------ ------------------
1993 1994 1995 1995 1996
------- ------- -------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues:
Product........................ $16,735 $32,077 $ 62,133 $ 43,373 $ 66,777
Maintenance and other.......... 4,452 10,681 22,052 15,316 27,937
------- ------- -------- -------- --------
Total revenues............... 21,187 42,758 84,185 58,689 94,714
------- ------- -------- -------- --------
Cost of revenues:
Product........................ 560 841 1,909 1,426 1,762
Maintenance and other.......... 1,289 3,141 5,956 4,050 7,957
------- ------- -------- -------- --------
Total cost of revenues....... 1,849 3,982 7,865 5,476 9,719
------- ------- -------- -------- --------
Gross margin................. 19,338 38,776 76,320 53,213 84,995
------- ------- -------- -------- --------
Operating expenses:
Sales and marketing............ 10,298 18,934 39,063 27,133 42,596
Research and development....... 5,101 9,465 15,468 10,826 16,528
General and administrative..... 2,349 4,450 7,791 5,752 7,619
In process research and devel-
opment........................ -- -- 11,600 11,600 --
Merger and integration......... -- -- 2,961 -- 35,255
------- ------- -------- -------- --------
Total operating expenses..... 17,748 32,849 76,883 55,311 101,998
------- ------- -------- -------- --------
Income (loss) from operations.... 1,590 5,927 (563) (2,098) (17,003)
Other income..................... 139 835 2,404 1,621 2,476
------- ------- -------- -------- --------
Income (loss) before income
taxes (benefit)............... 1,729 6,762 1,841 (477) (14,527)
Income taxes (benefit)........... 83 1,335 5,363 2,539 (1,283)
------- ------- -------- -------- --------
Net income (loss).............. $ 1,646 $ 5,427 $ (3,522) $ (3,016) $(13,244)
======= ======= ======== ======== ========
Net loss per share............... $ (0.33)
========
Pro forma net income (loss) per
share:
Income (loss) before income
taxes, as reported............ $ 6,762 $ 1,841 $ (477)
Pro forma income taxes......... 1,630 6,087 3,263
------- -------- --------
Pro forma net income (loss)...... $ 5,132 $ (4,246) $ (3,740)
======= ======== ========
Pro forma net income (loss) per
share........................... $ 0.14 $ (0.11) $ (0.10)
======= ======== ========
Shares used in per share
computations.................... 36,394 37,600 38,852 39,706
======= ======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
PURE ATRIA CORPORATION AND SUBSIDIARIES
(FORMERLY PURE SOFTWARE, INC.)
CONSOLIDATED STATEMENTS OF REDEEMABLE CONVERTIBLE PREFERRED STOCK AND
STOCKHOLDERS' EQUITY (DEFICIT)
(IN THOUSANDS)
<TABLE>
<CAPTION>
REDEEMABLE TOTAL
CONVERTIBLE RETAINED STOCK-
PREFERRED STOCK COMMON STOCK ADDITIONAL CUMULATIVE EARNINGS HOLDERS'
----------------- -------------- PAID-IN TRANSLATION (ACCUMULATED EQUITY
SHARES AMOUNT SHARES AMOUNT CAPITAL ADJUSTMENT DEFICIT) (DEFICIT)
------- -------- ------ ------ ---------- ----------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balances, December 31,
1992................... 5,370 $ 8,553 13,311 $ 1 $ 138 $ -- $ (1,741) $(1,602)
Issuance of Atria Series
B redeemable
convertible preferred
stock.................. 9 50 -- -- -- -- -- --
Repurchase of Pure
Series B redeemable
convertible preferred
stock.................. (48) (39) -- -- -- -- -- --
Exercise of stock
options................ -- -- 1,458 -- 142 -- -- 142
Issuance of common stock
to consultants......... -- -- 4 -- -- -- -- --
Repurchase of common
stock.................. -- -- (419) -- (23) -- -- (23)
Contribution of common
stock by founder....... -- -- (300) -- -- -- -- --
Distributions to
stockholders........... -- -- -- -- -- -- (250) (250)
Net income.............. -- -- -- -- -- -- 1,646 1,646
------- -------- ------ --- ------- ----- -------- -------
Balances, December 31,
1993................... 5,331 8,564 14,054 1 257 -- (345) (87)
Conversion of Atria
preferred stock........ (809) (6,167) 8,959 1 6,166 -- -- 6,167
Issuance of Pure Series
C redeemable
convertible preferred
stock.................. 1,536 4,070 -- -- -- -- -- --
Atria initial public
offering............... -- -- 6,085 1 21,401 -- -- 21,402
Exercise of stock
options................ -- -- 683 -- 202 -- -- 202
Income tax benefit
related to option
plans.................. -- -- -- -- 170 -- -- 170
Distributions to
stockholder............ -- -- -- -- -- -- (300) (300)
Purchase of treasury
stock.................. -- -- (21) -- (1) -- -- (1)
Net income.............. -- -- -- -- -- -- 5,427 5,427
------- -------- ------ --- ------- ----- -------- -------
Balances, December 31,
1994................... 6,058 6,467 29,760 3 28,195 -- 4,782 32,980
Issuance of Pure Series
D redeemable
convertible preferred
stock.................. 788 9,706 -- -- -- -- -- --
Pure initial public
offering............... -- -- 2,000 -- 30,396 -- -- 30,396
Conversion of Pure
preferred stock........ (6,846) (16,173) 6,846 1 16,172 -- -- 16,173
Exercise of stock
options................ -- -- 532 -- 530 -- -- 530
Income tax benefit
related to option
plans.................. -- -- -- -- 800 -- -- 800
Currency translation
adjustment............. -- -- -- -- -- (146) -- (146)
Distributions to
stockholders........... -- -- -- -- -- -- (1,800) (1,800)
Reclassification of
undistributed S
corporation earnings... -- -- -- -- 1,625 -- (1,625) --
Stock issued under stock
purchase plan.......... -- -- 44 -- 453 -- -- 453
Purchase of treasury
stock.................. -- -- (96) -- (9) -- -- (9)
Net loss................ -- -- -- -- -- -- (3,522) (3,522)
------- -------- ------ --- ------- ----- -------- -------
Balances, December 31,
1995................... -- -- 39,086 4 78,162 (146) (2,165) 75,855
Exercise of stock
options (unaudited).... -- -- 969 -- 2,713 -- -- 2,713
Stock issued under stock
purchase plan
(unaudited)............ -- -- 150 -- 2,388 -- -- 2,388
Income tax benefit
related to option plans
(unaudited)............ -- -- -- -- 1,540 -- -- 1,540
Stock compensation
expense (unaudited).... -- -- -- -- 3,999 -- -- 3,999
Currency translation
adjustment (unaudited). -- -- -- -- -- (371) -- (371)
Net income (unaudited).. -- -- -- -- -- -- (13,244) (13,244)
------- -------- ------ --- ------- ----- -------- -------
Balances, September 30,
1996 (unaudited)....... -- $ -- 40,205 $ 4 $88,802 $(517) $(15,409) $72,880
======= ======== ====== === ======= ===== ======== =======
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
PURE ATRIA CORPORATION AND SUBSIDIARIES
(FORMERLY PURE SOFTWARE, INC.)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
--------------------------- ------------------
1993 1994 1995 1995 1996
------- -------- -------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating
activities:
Net income (loss)............ $ 1,646 $ 5,427 $ (3,522) $ (3,016) $(13,244)
Adjustments to reconcile net
income (loss) to net cash
provided by operating
activities:
Depreciation and
amortization............... 750 1,814 3,192 2,469 4,784
Noncash merger and
integration costs.......... -- -- 331 -- 6,512
Tax benefit of stock option
exercises.................. -- 170 800 600 1,540
In process research and
development................ -- -- 11,600 11,600 --
Changes in operating assets
and liabilities:
Accounts receivable........ (2,480) (2,625) (9,250) (6,088) (5,664)
Prepaid expenses and other
current assets............ (376) (307) (766) (349) (1,370)
Deferred tax assets........ (176) (682) (2,236) (86) (3,661)
Accounts payable........... 297 615 622 992 1,082
Accrued payroll and related
expenses.................. 577 985 3,784 2,396 2,466
Accrued merger and
integration expenses...... -- -- 1,887 -- 17,082
Other accrued expenses..... 904 1,841 4,001 3,891 4,163
Deferred revenue........... 1,399 4,101 6,025 3,568 7,146
Income taxes............... 116 813 2,295 292 (1,694)
------- -------- -------- -------- --------
Net cash provided by
operating activities..... 2,657 12,152 18,763 16,269 19,142
------- -------- -------- -------- --------
Cash flows from investing
activities:
Purchases of property and
equipment, net............. (1,445) (3,251) (8,212) (5,577) (7,998)
Other assets................ (164) (118) (395) (415) (94)
Acquisitions, net of cash
acquired................... -- -- (3,137) (2,939) --
Purchases of short-term
investments, net........... -- (22,041) (32,367) (32,249) (1,240)
------- -------- -------- -------- --------
Net cash used in investing
activities............... (1,609) (25,410) (44,111) (41,180) (9,332)
------- -------- -------- -------- --------
Cash flows from financing
activities:
Bank borrowings............. 200 250 -- -- --
Repayments of bank
borrowings and capital
leases..................... -- (93) (298) (67) (321)
S Corporation distributions
to stockholders............ (250) (300) (1,800) (1,297) --
Proceeds from issuance of
common stock............... 120 21,603 31,370 30,719 5,089
Proceeds from issuance of
redeemable convertible
preferred stock............ 50 4,070 -- -- --
------- -------- -------- -------- --------
Net cash provided by
financing activities..... 120 25,530 29,272 29,355 4,768
------- -------- -------- -------- --------
Effect of foreign currency
exchange rate changes on
cash......................... -- -- (155) (119) (422)
------- -------- -------- -------- --------
Net change in cash and cash
equivalents.................. 1,168 12,272 3,769 4,325 14,156
Cash and cash equivalents at
beginning of period.......... 7,085 8,253 20,525 20,525 24,294
------- -------- -------- -------- --------
Cash and cash equivalents at
end of period................ $ 8,253 $ 20,525 $ 24,294 $ 24,850 $ 38,450
======= ======== ======== ======== ========
Supplemental disclosure of
cash flow information:
Cash paid:
Interest.................. $ 37 $ 66 $ 54 $ 41 $ 7
Income taxes.............. $ 283 $ 843 $ 4,517 $ 1,716 $ 3,306
Noncash investing and
financing activities:
Conversion of redeemable
preferred stock.......... $ -- $ 6,167 $ 16,173 $ 16,173 $ --
Redeemable convertible
preferred stock issued in
connection with
acquisition of QualTrak
Corporation.............. $ -- $ -- $ 9,706 $ 9,706 $ --
</TABLE>
See accompanying notes to consolidated financial statements.
F-7
<PAGE>
PURE ATRIA CORPORATION AND SUBSIDIARIES
(FORMERLY PURE SOFTWARE, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION AS OF AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1995 AND 1996
IS UNAUDITED)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Pure Atria Corporation (the Company) develops, markets and supports a
comprehensive, integrated suite of software products that enable the
production of reliable, high-quality software and improves the software
development process.
Basis of Consolidation
The accompanying consolidated financial statements include the accounts of
the Company and its wholly owned subsidiaries. All intercompany accounts and
transactions have been eliminated in consolidation.
Cash and Cash Equivalents and Short-Term Investments
The Company considers all highly liquid instruments with an original
maturity of 90 days or less to be cash equivalents. All of the Company's
investments are classified as available-for-sale and are recorded at cost,
which approximates fair value.
Property and Equipment
Property and equipment are stated at cost, net of accumulated depreciation
and amortization and are depreciated over their estimated useful lives of
three to seven years. Leasehold improvements are recorded at cost and
amortized over the lesser of their useful lives or the term of the related
leases.
Revenue Recognition
The Company's revenues are derived from license fees for its software
products, from software maintenance fees, and from other sources. Product
revenues are derived from product licensing and sublicensing fees. Maintenance
and other revenues are derived from software maintenance fees, from training
fees, and from royalties for technology licenses. The Company recognizes
revenue in accordance with the provisions of the American Institute of
Certified Public Accountants' Statement of Position No. 91-1, Software Revenue
Recognition. Product revenues from the sale of software licenses are
recognized upon shipment to an end user if collection is probable and
remaining vendor obligations are insignificant. Sublicense fee revenue from
sales through distributors and other resellers is recognized in the period in
which the sublicense is reported to the Company. Product returns and sales
allowances are estimated and provided for at the time of sale. Maintenance
revenues from ongoing customer support and product upgrades are recognized
ratably over the term of the maintenance agreement. Payments for maintenance
fees are generally received in advance and are nonrefundable. Revenues from
training are recognized when the services are performed. Revenues from
royalties on technology licenses are recognized when earned and when
collection is probable.
Use of Estimates
Management of the Company has made a number of estimates and assumptions
relating to the reporting of assets and liabilities and the disclosure of
contingent assets and liabilities to prepare these consolidated financial
statements in conformity with generally accepted accounting principles. Actual
results could differ from those estimates.
F-8
<PAGE>
PURE ATRIA CORPORATION AND SUBSIDIARIES
(FORMERLY PURE SOFTWARE, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AS OF AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1995 AND 1996
IS UNAUDITED)
Research and Development Costs
Research and development costs are charged to operations as incurred. To
date, the Company has not capitalized software development costs after
technological feasibility has been established since costs incurred subsequent
to the establishment of technological feasibility have not been material.
Income Taxes
The Company records income taxes using the asset and liability method.
Deferred assets and liabilities are determined based on differences between
financial reporting and tax bases of assets and liabilities and are measured
using the enacted tax rates and laws that will be in effect when the
differences are expected to reverse. Valuation allowances are established when
necessary to reduce deferred tax assets to the amounts expected to be
realized.
Concentrations of Credit Risk
Financial instruments potentially exposing the Company to a concentration of
credit risk principally consist of cash and cash equivalents, short-term
investments, and accounts receivable.
Cash and cash equivalent balances consist of deposits with major commercial
banks, the maturity of which is under nine months from date of purchase.
Short-term investments are placed with high quality financial, government, or
corporate institutions.
The Company sells its products to companies in the software development
industry (end users) and distributors, who remarket the product to end users.
The Company maintains reserves for potential credit losses, but historically
has not experienced any significant losses related to individual customers or
groups of customers in any particular industry or geographic area. No single
customer accounted for 10% or more of total revenues for all periods
presented.
Foreign Currency Translation
The functional currency of the Company's foreign subsidiaries is their local
currency. Accordingly, all assets and liabilities are translated at the
current exchange rate at the end of the period and income and expense accounts
are translated at the average rates in effect during the period. Adjustments
arising from translation of these subsidiaries' financial statements are
reflected as a separate component of stockholders' equity.
Per Share Computations
Pro forma net income (loss) per share is computed using pro forma net income
(loss) and is based on the weighted average number of shares outstanding of
common stock and redeemable convertible preferred stock, on an "as if
converted" basis, and dilutive common equivalent shares from stock options
using the treasury stock method. In accordance with certain Securities and
Exchange Commission (SEC) Staff Accounting Bulletins, such computations for
periods preceding the initial public offerings (IPO) include all common and
common equivalent shares issued within the 12 months preceding the IPO dates
as if they were outstanding for all prior periods presented using the treasury
stock method and the IPO prices.
Pro forma net income (loss) includes a provision for income taxes as if
Performix had been a C corporation, fully subject to federal and state income
taxes. Prior to its acquisition by the Company, Performix had elected S
F-9
<PAGE>
PURE ATRIA CORPORATION AND SUBSIDIARIES
(FORMERLY PURE SOFTWARE, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AS OF AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1995 AND 1996
IS UNAUDITED)
corporation status for income tax purposes and, consequently, historical
results as they relate to Performix do not include a provision for income
taxes.
Net loss per share is computed using the weighted average number of shares
outstanding of common stock.
Recent Accounting Pronouncements
In March 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 121, Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of. SFAS No. 121
is effective for fiscal years beginning after December 15, 1995, and requires
long-lived assets to be evaluated for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. The Company adopted SFAS No. 121 in fiscal 1996 and its
provisions did not have a material effect on the Company's consolidated
results of operations in the year of adoption.
Interim Financial Information
The consolidated financial statements for the nine months ended September
30, 1995 and 1996, are unaudited, but include all adjustments (consisting
solely of normal recurring adjustments), which are, in the opinion of
management, necessary for a fair presentation. The results of operations for
the nine months ended September 30, 1996, are not necessarily indicative of
the results to be expected for the entire year.
(2) ACQUISITIONS
Poolings of Interests
On November 21, 1995, the Company acquired Performix, a provider of
client/server load and performance testing tools. Pursuant to the acquisition,
all of the shares of outstanding common stock of Performix were exchanged for
1,591,475 shares of the Company's common stock. All options to purchase
Performix common stock then outstanding were assumed by the Company. Each
assumed option continues to have, and is subject to, the same terms and
conditions set forth in the respective option agreement applicable to such
option immediately prior to the date of acquisition, subject to adjustment of
the number of shares and exercise price thereof to reflect the exchange ratio
of Performix shares for the Company's shares.
For income tax purposes, Performix was acquired in a tax free
reorganization. Performix was an S corporation for federal income tax purposes
prior to its acquisition. Upon acquisition, the S corporation status
terminated resulting in a one-time deferred tax expense of approximately
$650,000 in the fourth quarter. Also, in connection with the acquisition, the
Company incurred approximately $2,200,000 of costs which are not deductible
for income tax purposes.
On August 26, 1996, the Company acquired Atria, a publicly held company that
develops, markets, and supports software that facilitates the management of
complex software development, enhancement, and maintenance. Pursuant to the
acquisition, all of the shares of outstanding common stock of Atria were
exchanged for 22,238,806 shares of the Company's common stock. In addition,
each outstanding option or right to purchase Atria common stock under Atria's
various stock option and purchase plans were assumed by the Company and became
an option or right to purchase the Company's common stock after giving effect
to the 1.544615 exchange ratio. For income tax purposes, Atria was acquired in
a tax free reorganization.
F-10
<PAGE>
PURE ATRIA CORPORATION AND SUBSIDIARIES
(FORMERLY PURE SOFTWARE, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AS OF AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1995 AND 1996
IS UNAUDITED)
These acquisitions were accounted for as poolings of interests, and
accordingly, the Company's consolidated financial statements and notes thereto
have been restated to include the financial position and results of Atria and
Performix for all periods presented.
Separate results of operations for the period prior to the acquisitions of
Atria and Performix are as follows (in thousands):
<TABLE>
<CAPTION>
NINE MONTHS SIX MONTHS
YEAR ENDED DECEMBER 31, ENDED ENDED
----------------------- SEPTEMBER 30, JUNE 30,
1993 1994 1995 1995 1996
------- ------- ------- ------------- ----------
<S> <C> <C> <C> <C> <C>
Revenues:
Pure........................ $ 8,691 $18,186 $44,042 $25,319 $31,625
Atria....................... 9,262 20,765 40,143 27,842 28,998
Performix................... 3,234 3,807 -- 5,528 --
------- ------- ------- ------- -------
Combined.................. $21,187 $42,758 $84,185 $58,689 $60,623
======= ======= ======= ======= =======
Net income (loss):
Pure........................ $ 123 $ 1,270 $(8,695) $(8,132) $ 1,945
Atria....................... 818 3,380 5,173 3,212 2,432
Performix................... 705 777 -- 1,904 --
------- ------- ------- ------- -------
Combined.................. $ 1,646 $ 5,427 $(3,522) $(3,016) $ 4,377
======= ======= ======= ======= =======
</TABLE>
Purchases
On March 17, 1995, the Company acquired QualTrak, a provider of quality
assurance software tools. Pursuant to the acquisition, all of the shares of
outstanding common stock of QualTrak and options therefor were exchanged for
822,363 shares of the Company's Series D redeemable convertible preferred
stock or options therefor and $2,000,000 in cash or the right to receive cash.
The acquisition was accounted for as a purchase with the results of QualTrak
included from the acquisition date. The total purchase price of $11,904,000
was assigned to the fair value of the net assets acquired, including $543,000
to the net tangible assets acquired, $10,100,000 to in-process research and
development, $591,000 to goodwill, $420,000 to purchased software, and
$250,000 to a royalty arrangement. The value of the in-process research and
development was charged to operations on the acquisition date. Goodwill,
purchased software and prepaid royalties are amortized on a straight-line
basis over 5 years, 18 months, and 3 years, respectively. For income tax
purposes, QualTrak was acquired in a tax free reorganization.
The following summary prepared on an unaudited pro forma basis combines the
consolidated results of operations as if QualTrak had been acquired as of the
beginning of the periods presented (in thousands, except per share data):
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED DECEMBER 31, ENDED
----------------------- SEPTEMBER 30,
1994 1995 1995
----------- ----------- -------------
<S> <C> <C> <C>
Revenues................................. $ 46,000 $ 84,844 $59,348
Pro forma net income before nonrecurring
charge.................................. 5,007 5,770 6,276
Pro forma net income before nonrecurring
charge per share........................ 0.13 0.14 0.15
</TABLE>
F-11
<PAGE>
PURE ATRIA CORPORATION AND SUBSIDIARIES
(FORMERLY PURE SOFTWARE, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AS OF AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1995 AND 1996
IS UNAUDITED)
The pro forma results exclude the $10,100,000 nonrecurring charge for in
process research and development resulting from the acquisition. The pro forma
results are not necessarily indicative of what would have occurred if the
acquisition had been in effect for the periods presented. In addition, they
are not intended to be a projection of future results and do not reflect any
synergies that might be achieved from combined operations.
During the quarter ended September 30, 1995, the Company recorded a pre-tax
charge of $1,500,000 for in process research and development in connection
with the acquisition of technology. This technology is incorporated in a
client/server change request management product that tracks defects and
enhancement requests throughout the software lifecycle. The Company began
shipping this product in the first quarter of 1996.
Subsequent Events (Unaudited)
On November 17, 1996, the Company entered into an Agreement and Plan of
Reorganization (the Agreement) with Integrity QA Software, Inc. (Integrity), a
provider of quality assurance software tools. Under the terms of the
Agreement, each outstanding share of Integrity Series A preferred stock will
be converted into a right to receive (i) $6.50 in cash and (ii) that fraction
of a share of the Company's common stock obtained by dividing $6.50 by the
average of the closing prices of the Company's common stock as quoted on the
Nasdaq National Market for the five trading days immediately preceding the
closing date of the Merger. Each outstanding share of Integrity common stock
will be converted into a right to receive that fraction of a share of the
Company's common stock obtained by dividing $6.3254 by the average of the
closing prices of the Company's common stock as quoted on the Nasdaq National
Market for the five trading days immediately preceding the closing date of the
Merger. Each outstanding warrant to purchase shares of Integrity Preferred
Stock and each outstanding option to purchase Integrity Common Stock will be
assumed by the Company after giving effect to the applicable exchange ratio.
Consummation of the merger contemplated by the Agreement is conditioned upon
the affirmative vote of both companies' stockholders, among other conditions.
(3) SHORT-TERM INVESTMENTS
The Company's portfolio of short-term investments consisted of the following
(in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
---------------
1994 1995
------- -------
<S> <C> <C>
Debt securities (municipal obligations).................. $22,007 $37,840
Auction rate securities.................................. -- 16,400
------- -------
$22,007 $54,240
======= =======
</TABLE>
All short-term investments as of December 31, 1994 and 1995, are classified
as available-for-sale and have maturities of less than one year. Such
investments are recorded at cost, which as of December 31, 1994 and 1995
approximated market value. Realized gains or losses on sales of available-for-
sale securities were immaterial for the years ended December 31, 1994 and
1995.
F-12
<PAGE>
PURE ATRIA CORPORATION AND SUBSIDIARIES
(FORMERLY PURE SOFTWARE, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AS OF AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1995 AND 1996
IS UNAUDITED)
(4) PROPERTY AND EQUIPMENT
Property and equipment consisted of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
--------------
1994 1995
------ -------
<S> <C> <C>
Computer equipment........................................ $5,147 $10,281
Furniture and office equipment............................ 966 2,872
Leasehold improvements.................................... 63 957
------ -------
6,176 14,110
Less accumulated depreciation and amortization............ 2,836 5,796
------ -------
$3,340 $ 8,314
====== =======
</TABLE>
(5) ACCRUED MERGER AND INTEGRATION EXPENSES
On August 26, 1996, the Company acquired Atria (see Note 2) and initiated a
plan to combined the operations of the two companies. During the third quarter
of 1996, the Company recorded a $35,255,000 million charge to operating
expenses related to merger and integration costs.
Merger costs consist principally of transaction fees for investment bankers,
attorneys, accountants, financial printing, and other related charges.
Integration costs include severance and other employee related charges,
elimination of redundant facilities, write-off of excess property and
equipment and certain intangible assets, and other professional fees.
<TABLE>
<CAPTION>
SEVERANCE ASSET WRITE-OFFS
AND OTHER AND CANCELLATION
TRANSACTION EMPLOYEE OF FACILITY
COSTS RELATED LEASES OTHER TOTAL
----------- --------- ---------------- ------ -------
<S> <C> <C> <C> <C> <C>
Provision recorded at
acquisition............ $8,319 $16,538 $5,998 $4,400 $35,255
Noncash write-offs...... -- (3,872) (1,987) (640) (6,499)
Cash payments........... (5,943) (2,215) (44) (1,585) (9,787)
------ ------- ------ ------ -------
Accrued as of September
30, 1996............... $2,376 $10,451 $3,967 $2,175 $18,969
====== ======= ====== ====== =======
</TABLE>
Severance and Other Employee Related Charges
As a result of the merger, certain technical support, customer service,
distribution, sales, marketing, and administrative functions were combined and
reduced. Approximately 20 employees were terminated as a result of this
activity. Affected employees had received notification of their termination by
September 30, 1996 and final assignments are expected to be completed by March
31, 1997. In addition, the Company committed to pay retention bonuses and
commissions and these costs have been included in the accrual.
Asset Write-offs and Lease Cancellations
The Company has consolidated duplicate offices in Europe and will relocate
the North American headquarters to a larger facility. Lease payment resulting
from the planned closure of these facilities are expected to continue through
the lease term or negotiated early termination date, if applicable. Certain
intangibles that
F-13
<PAGE>
PURE ATRIA CORPORATION AND SUBSIDIARIES
(FORMERLY PURE SOFTWARE, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AS OF AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1995 AND 1996
IS UNAUDITED)
will have no benefit to the combined operations were written off. Redundant
property and equipment were either disposed of during the third quarter or
written down to its estimated net realizable value.
Other
Other consists of costs associated with communication of the merger to the
employees, exiting offices in Europe and discontinuance of both the Pure
Vision product line and a relationship with a European distributor. Payments
associated with these activities are expected to be expended through the first
quarter of 1997.
(6) COMMITMENTS AND CONTINGENCIES
The Company has operating leases for its corporate headquarters, field sales
offices and certain office equipment that expire at various dates through
2006. Future minimum lease payments under these leases as of September 30,
1996, were $649,000 due in the three months ended December 31, 1996, with the
remaining obligations for the years ended December 31, as follows (in
thousands):
<TABLE>
<S> <C>
1997............................................................... $4,378
1998............................................................... 4,272
1999............................................................... 4,085
2000............................................................... 3,217
2001............................................................... 2,842
Thereafter......................................................... 10,692
</TABLE>
As of December 31, 1995, the Company had a letter of credit outstanding in
the amount of $250,000 guaranteeing certain rental payments.
Rent expense was $630,000, $1,148,000, and $2,010,000, for the years ended
December 31, 1993, 1994, and 1995, respectively, and $1,508,000 and $2,226,000
for the nine months ended September 30, 1995 and 1996, respectively.
(7) REDEEMABLE CONVERTIBLE PREFERRED STOCK
Prior to July 1995, Pure was authorized to issue 6,600,000 shares of
redeemable convertible preferred stock of which 6,057,456 shares were issued
and outstanding. Pure had 2,000,000 shares of Series A issued and outstanding,
2,521,875 shares of Series B issued and outstanding, and 1,535,581 shares of
Series C issued and outstanding. Each outstanding share of preferred stock
automatically converted into one share of common stock upon the closing of
Pure's IPO in August 1995.
Atria was authorized to issue 1,608,500 shares of redeemable convertible
preferred stock of which 809,242 were issued and outstanding as of December
31, 1993. Atria had 55,834 shares of Series A issued and outstanding and
753,408 shares of Series B issued and outstanding. Each outstanding share of
preferred stock automatically converted at a rate of 77.070 and 6.178 shares
of common stock for each share of Series A and B preferred stock,
respectively, upon the closing of Atria's IPO in 1994.
F-14
<PAGE>
PURE ATRIA CORPORATION AND SUBSIDIARIES
(FORMERLY PURE SOFTWARE, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AS OF AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1995 AND 1996
IS UNAUDITED)
(8) STOCKHOLDERS' EQUITY
Reincorporation
On July 19, 1995, the Company reincorporated as a Delaware corporation. The
articles of incorporation provide for 30,000,000 authorized shares of common
stock with a $.0001 par value per share and for 2,000,000 authorized shares of
preferred stock with a $.0001 par value per share. The accompanying
consolidated financial statements have been retroactively restated to give
effect to the reincorporation.
On May 2, 1996, the stockholders of the Company approved an amendment to the
certificate of incorporation increasing the authorized number of shares of
common stock to 80,000,000.
1992 Stock Option/Stock Issuance and Purchase Plans, and 1995 Stock Option
Plan
On October 15, 1992, the Company's Board of Directors approved the 1992
Stock Option/ Stock Issuance Plan (the Plan) which replaced the 1992 Stock
Purchase Plan (the Purchase Plan). Under the Purchase Plan, the Company issued
shares of stock to employees at fair market value. Stock issued under the
Purchase Plan was subject to repurchase upon termination of employment. The
Company's repurchase right generally lapses for 25% of the shares granted one
year from the date of the grantee's date of hire and ratably over the next 36
months for the remaining shares. Options granted under the Plan may be either
incentive stock options or nonstatutory stock options, as designated by the
Board of Directors. The Plan expires 10 years after adoption.
The Plan provides that (i) the exercise price of an incentive stock option
will be no less than the fair market value of the Company's common stock at
the date of grant; (ii) the option exercise price per share for a nonstatutory
stock option shall not be less than 85% of the fair market value; and (iii)
the exercise price of an incentive stock option for an optionee who possesses
more than 10% of the total combined voting power of all classes of stock shall
not be less than 110% of the fair market value; all as determined by the
Company's Board of Directors. One year from the date of grant, 25% of the
options granted vest. The remaining balance vests ratably over the next 36
months of continuous service.
In May 1995, the Company adopted the 1995 Stock Option Plan (1995 Plan) to
succeed the Plan. Under the 1995 Plan, 3,449,329 shares of common stock have
been reserved for issuance. Beginning in 1996, an additional number of shares
will be reserved on the first trading day of calendar years 1996, 1997, and
1998 equal to 5% of the number of shares of common stock outstanding on the
last day of the preceding calendar year. Under the 1995 Plan, employees
(including officers) and independent consultants may be granted nonstatutory
options to purchase common stock at an exercise price of not less than 85% of
the fair market value at the date of the grant and/or incentive stock options
at an exercise price of no less than the fair market value at the date of
grant.
The 1995 Plan is administered by the Compensation Committee of the Board of
Directors. The Compensation Committee determines which eligible individuals
are to receive option grants, the number of shares subject to each such grant,
the status of any granted option as either an incentive option or a
nonstatutory option under the federal tax laws, the vesting schedule to be in
effect for each option grant and the maximum term for which each granted
option is to remain outstanding.
F-15
<PAGE>
PURE ATRIA CORPORATION AND SUBSIDIARIES
(FORMERLY PURE SOFTWARE, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AS OF AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1995 AND 1996
IS UNAUDITED)
The Company's Board of Directors may amend or modify the 1995 Plan at any
time. The 1995 Plan will terminate on May 15, 2005, unless terminated sooner
by the Board of Directors.
<TABLE>
<CAPTION>
OUTSTANDING OPTIONS
--------------------------
SHARES
AVAILABLE NUMBER OF PRICE
FOR GRANT SHARES PER SHARE
---------- ---------- --------------
<S> <C> <C> <C>
Balances, December 31, 1992............. 3,895,354 1,380,239 $ 0.06 - 2.08
Additional shares reserved.............. 2,162,461 -- --
Options granted......................... (3,197,087) 3,197,087 0.08 - 2.94
Options exercised....................... -- (1,457,937) 0.06 - 0.19
Options canceled........................ 179,456 (179,456) 0.08
---------- ---------- --------------
Balances, December 31, 1993............. 3,040,184 2,939,933 0.06 - 2.94
Additional shares reserved.............. 2,471,384 -- --
Atria options retired................... (1,547,164) -- --
Options granted......................... (1,983,552) 1,983,552 0.08 - 8.90
Options exercised....................... -- (683,383) 0.06 - 2.75
Options canceled........................ 150,420 (150,420) 0.08
---------- ---------- --------------
Balances, December 31, 1994............. 2,131,272 4,089,682 0.06 - 8.90
Additional shares reserved.............. 1,285,354 -- --
Atria options retired................... (54,602) -- --
Options granted......................... (2,170,214) 2,170,214 0.89 - 37.00
Options exercised....................... -- (531,739) 0.06 - 17.16
Options canceled........................ 406,562 (406,562) 0.08 - 37.00
---------- ---------- --------------
Balances, December 31, 1995............. 1,598,372 5,321,595 0.06 - 37.00
Additional shares reserved.............. 3,340,734 -- --
Atria options retired................... (266,473) -- --
Options granted......................... (3,293,234) 3,293,234 21.69 - 40.25
Options exercised....................... -- (968,992) 0.06 - 31.50
Options canceled........................ 473,646 (473,646) 0.08 - 40.25
---------- ---------- --------------
Balances, September 30, 1996............ 1,853,045 7,172,191 0.06 - 40.25
========== ========== ==============
</TABLE>
Of the options outstanding, 2,402,256 and 3,343,489 were exercisable as of
December 31, 1995 and September 30, 1996, respectively. Of the shares sold
under the Purchase Plan, 44,375 were subject to a right of repurchase by the
Company as of December 31, 1995.
Under the 1995 Plan, each individual serving as a nonemployee director
received on the date of the IPO, and each individual who first joins the Board
of Directors as a nonemployee director on or after the effective date of the
1995 Plan, received at that time, an automatic option grant for 15,000 shares
of the Company's common stock. In addition, at each annual stockholders'
meeting, beginning in 1996, each nonemployee director will automatically be
granted at that meeting, a stock option to purchase 5,000 shares of common
stock, provided such individual has served on the Board of Directors for at
least 6 months prior to such meeting. Each option has an exercise price equal
to the fair market value of the common stock on the automatic grant date and a
maximum term of 10 years, subject to earlier termination following the
optionee's cessation of Board of Directors service. The option is immediately
exercisable for all of the shares but the shares are subject to
F-16
<PAGE>
PURE ATRIA CORPORATION AND SUBSIDIARIES
(FORMERLY PURE SOFTWARE, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AS OF AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1995 AND 1996
IS UNAUDITED)
repurchase at original cost. With respect to the 15,000 share option grant,
the right lapses and the optionee vests in a series of 4 equal annual
installments over the optionee's period of Board of Directors service,
beginning one year from the grant date. With respect to each 5,000 share
option grant, the right lapses and the option vests in full on the first
anniversary of such option's date of grant. However, vesting of the shares
will automatically accelerate upon (i) an acquisition of the Company by
merger, consolidation or asset sale; (ii) a hostile take-over of the Company
effected by tender offer for more than 50% of the outstanding voting stock or
proxy contest for Board of Directors membership; or (iii) the death or
disability of the optionee while serving as a Board of Directors member.
In the event that more than 50% of the Company's outstanding voting stock
were to be acquired pursuant to a hostile tender offer, each grant to
nonemployee directors, which has been outstanding for at least six months, may
be surrendered to the Company in return for a cash distribution from the
Company based upon the tender offer price per share of common stock at the
time subject to the surrendered option.
Employee Stock Purchase Plan
The Company's Employee Stock Purchase Plan (the 1995 Purchase Plan) was
adopted by the Company's Board of Directors on May 16, 1995, and approved by
the stockholders on July 17, 1995. The Company has reserved 300,000 shares of
common stock for issuance under the 1995 Purchase Plan. The 1995 Purchase Plan
provides for 24-month offerings with purchases occurring at six-month
intervals, commencing on the effective date of the Company's IPO. The 1995
Purchase Plan is administered by the Compensation Committee of the Board of
Directors. The price of stock purchased under the 1995 Purchase Plan is 85% of
the lower of the fair market value of the common stock at the earlier of the
6-month purchase period in which the participant first joined the plan or on
the applicable semiannual purchase date. The 1995 Purchase Plan will terminate
in June 2005.
(9) INCOME TAXES
Income taxes consisted of the following (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------
1993 1994 1995
------- -------- --------
<S> <C> <C> <C>
Current:
Federal........................................... $ 194 $ 1,580 $ 6,333
State............................................. 65 370 1,259
Foreign........................................... -- 67 7
------ -------- --------
259 2,017 7,599
Deferred:
Federal........................................... (136) (587) (1,923)
State............................................. (40) (95) (313)
------ -------- --------
(176) (682) (2,236)
------ -------- --------
$ 83 $ 1,335 $ 5,363
====== ======== ========
</TABLE>
F-17
<PAGE>
PURE ATRIA CORPORATION AND SUBSIDIARIES
(FORMERLY PURE SOFTWARE, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AS OF AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1995 AND 1996 IS
UNAUDITED)
The components of the net deferred tax assets were as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
------------
1994 1995
----- ------
<S> <C> <C>
Allowances and accrued expenses................................... $ 867 $2,290
Research credits.................................................. 207 --
State income taxes................................................ 13 118
Property, equipment, and intangibles.............................. 105 891
Deferred revenue.................................................. 112 543
Accounts receivable............................................... -- (649)
Prepaid assets.................................................... -- (58)
----- ------
Net deferred tax assets before valuation allowance.............. 1,304 3,135
Less valuation allowance.......................................... 405 --
----- ------
Net deferred assets............................................. $ 899 $3,135
===== ======
</TABLE>
The Company's effective tax rate differs from the statutory federal income
tax rate as shown in the following schedule:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------
1993 1994 1995
-------- ------- --------
<S> <C> <C> <C>
Income tax at statutory rate....................... 34.0% 34.0% 34.0%
State income taxes, net of federal benefit......... 1.0 3.0 33.7
Performix earnings during S corporation status..... (13.9) (3.9) (32.9)
Nondeductible acquisition-related charges.......... -- -- 260.2
Performix acquired deferred tax liability.......... -- -- 35.3
Net operating loss carryforward.................... (16.2) (5.9) --
Research and development credits................... (0.3) (9.1) (25.5)
Other permanent differences........................ 0.2 1.6 (11.4)
Reduction in valuation allowance................... -- -- (2.1)
-------- ------- --------
Effective tax rate................................. 4.8% 19.7% 291.3%
======== ======= ========
</TABLE>
Management believes that it is more likely than not that the results of
future operations will generate sufficient taxable income to realize the net
deferred tax asset.
F-18
<PAGE>
PURE ATRIA CORPORATION AND SUBSIDIARIES
(FORMERLY PURE SOFTWARE, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AS OF AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1995 AND 1996
IS UNAUDITED)
(10) FOREIGN OPERATIONS
Foreign operations consisted of the following (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------
1993 1994 1995
------- ------- --------
<S> <C> <C> <C>
Revenues:
North America...................................... $21,187 $41,689 $ 70,183
Europe............................................. -- 1,069 10,512
Asia Pacific....................................... -- -- 3,490
------- ------- --------
Consolidated....................................... $21,187 $42,758 $ 84,185
======= ======= ========
Income (loss) from operations:
North America...................................... $ 1,590 $ 5,865 $ 971
Europe............................................. -- 62 (1,205)
Asia Pacific....................................... -- -- (329)
------- ------- --------
Consolidated....................................... $ 1,590 $ 5,927 $ (563)
======= ======= ========
Identifiable assets:
North America...................................... $15,234 $54,235 $100,516
Europe............................................. -- 481 7,817
Asia Pacific....................................... -- -- 1,741
------- ------- --------
Consolidated....................................... $15,234 $54,716 $110,074
======= ======= ========
</TABLE>
North America revenue includes export sales of approximately $3,804,000,
$7,157,000, and $7,673,000 in the years ended December 31, 1993, 1994 and
1995, respectively. Export sales have been made primarily to customers in
Europe, Australia and Latin America.
F-19
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of Integrity QA Software, Inc.
In our opinion, the accompanying balance sheet and the related statements of
operations, of common stockholders' equity (deficit) and of cash flows present
fairly, in all material respects, the financial position of Integrity QA
Software, Inc. (a company in the development stage) at September 30, 1996, and
the results of its operations and its cash flows for the period from inception
(November 1, 1995) through September 30, 1996, 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
audit 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 audit provides a reasonable basis for the opinion expressed above.
Price Waterhouse LLP
San Jose, California
November 27, 1996
F-20
<PAGE>
INTEGRITY QA SOFTWARE, INC.
(A COMPANY IN THE DEVELOPMENT STAGE)
BALANCE SHEET
<TABLE>
<CAPTION>
SEPTEMBER 30,
1996
-------------
ASSETS
<S> <C>
Current assets:
Cash........................................................... $ 917,200
Prepaid deposits............................................... 27,600
-----------
Total current assets......................................... 944,800
Property and equipment, net...................................... 159,700
Other assets..................................................... 9,400
-----------
Total assets................................................. $ 1,113,900
===========
<CAPTION>
LIABILITIES, REDEEMABLE SECURITIES AND COMMON STOCKHOLDERS'
EQUITY (DEFICIT)
<S> <C>
Current liabilities:
Accrued liabilities............................................ $ 41,800
Current portion of capitalized lease obligations............... 40,300
Current portion of notes payable............................... 33,000
-----------
Total current liabilities.................................... 115,100
Capitalized lease obligations, net of current portion............ 98,200
Notes payable, net of current portion............................ 49,500
Commitments (Note 9)
Redeemable Series A Preferred Stock; $0.001 par value; 5,000,000
shares authorized, 2,025,000 shares issued and outstanding...... 2,404,900
Redeemable warrants on Series A Preferred Stock.................. 19,400
Common Stock, $0.001 par value; 10,000,000 shares authorized,
2,250,000 shares issued and outstanding......................... 2,200
Deficit accumulated during development stage..................... (1,575,400)
-----------
Total liabilities, redeemable securities and common
stockholders' equity (deficit).............................. $ 1,113,900
===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-21
<PAGE>
INTEGRITY QA SOFTWARE, INC.
(A COMPANY IN THE DEVELOPMENT STAGE)
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
PERIOD FROM
INCEPTION
(NOVEMBER 1,
1995) THROUGH
SEPTEMBER 30,
1996
-------------
<S> <C>
Operating expenses:
Research and development $ 641,800
General and administrative 548,700
-----------
Loss from development stage operations (1,190,500)
Interest expense (9,200)
Interest income 35,500
-----------
Net loss (1,164,200)
Accretion on redeemable Series A Preferred Stock and warrants (411,200)
-----------
Net loss attributable to common stock $(1,575,400)
===========
Per share data (Note 2):
Net loss $ (0.52)
Accretion on redeemable Series A Preferred Stock and warrants (0.18)
-----------
Net loss attributable to common stock $ (0.70)
===========
Weighted average shares outstanding - primary and fully
diluted 2,250,000
===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-22
<PAGE>
INTEGRITY QA SOFTWARE, INC.
(A COMPANY IN THE DEVELOPMENT STAGE)
STATEMENT OF COMMON STOCKHOLDERS' EQUITY (DEFICIT)
PERIOD FROM INCEPTION (NOVEMBER 1, 1995) THROUGH SEPTEMBER 30, 1996
<TABLE>
<CAPTION>
DEFICIT
ACCUMULATED
COMMON STOCK DURING
---------------- DEVELOPMENT
SHARES AMOUNT STAGE
--------- ------ -----------
<S> <C> <C> <C>
Issuance of common stock for cash 2,250,000 $2,200 $ --
Accretion on redeemable Series A Preferred
Stock and warrants -- -- (411,200)
Net loss -- -- (1,164,200)
--------- ------ -----------
Balance at September 30, 1996 2,250,000 $2,200 $(1,575,400)
========= ====== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-23
<PAGE>
INTEGRITY QA SOFTWARE, INC.
(A COMPANY IN THE DEVELOPMENT STAGE)
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
PERIOD FROM
INCEPTION
(NOVEMBER 1,
1995)
THROUGH
SEPTEMBER 30,
1996
-------------
<S> <C>
Cash Flows from Operating Activities:
Net loss........................................................ $(1,164,200)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation and amortization.................................. 30,700
Changes in assets and liabilities:.............................
Prepaid deposits.............................................. (27,600)
Other assets.................................................. (9,400)
Accrued liabilities........................................... 41,800
-----------
Net cash used in operating activities........................ (1,128,700)
-----------
Cash Flows from Investing Activities:
Purchases of property and equipment............................. (23,400)
-----------
Net cash used in investing activities........................ (23,400)
-----------
Cash Flows from Financing Activities:
Net proceeds from issuance of Series A Preferred Stock.......... 1,998,100
Net proceeds from issuance of common stock...................... 2,200
Proceeds from notes payable..................................... 105,200
Principal payments on capital lease obligations................. (13,500)
Principal payments on notes payable............................. (22,700)
-----------
Net cash provided by financing activities.................... 2,069,300
-----------
Net increase in cash............................................. 917,200
Cash at beginning of period...................................... --
-----------
Cash at end of period............................................ $ 917,200
===========
Supplemental Disclosure of Noncash Investing and Financing
activities:
Acquisition of property and equipment through capital leases and
warrants....................................................... $ 167,000
===========
Accretion on redeemable securities.............................. $ 411,200
===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-24
<PAGE>
INTEGRITY QA SOFTWARE, INC.
(A COMPANY IN THE DEVELOPMENT STAGE)
NOTES TO FINANCIAL STATEMENTS
(1) NATURE OF BUSINESS
Integrity QA Software, Inc. (the "Company") was incorporated in Delaware on
November 1, 1995. The Company is developing quality assurance software testing
systems that will automatically detect software defects for Windows based
developers.
Since inception, the Company has devoted most of its efforts to financial
planning, raising capital, acquiring equipment, recruiting personnel and
developing its initial products. Because the Company is in the development
stage, the accompanying financial statements should not be viewed as
representative of a normal period of commercial operations.
As of September 30, 1996, there had been no shipments of software products
or any other form of revenue from operations.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Property and Equipment
Property and equipment are stated at cost. Depreciation is computed using
the straight-line method over estimated useful lives of three to five years.
Software Development Costs
Software development costs are included in research and development and are
expensed as incurred. Statement of Financial Accounting Standards No. 86
requires the capitalization of certain software development costs once
technological feasibility is established. The capitalized cost is then
amortized on a straight-line basis over the estimated product life, or on the
ratio of current revenues to total projected product revenues, whichever is
greater. Technological feasibility has not yet been attained for any of the
Company's products. Accordingly, the Company has not capitalized any software
development costs.
Concentration of Credit Risk
Financial instruments that potentially subject the Company to concentrations
of credit risk consist principally of cash. The Company deposits substantially
all of its cash with a high credit quality financial institution.
Income Taxes
The Company accounts for income taxes using the asset and liability approach
which requires recognition of deferred tax assets and liabilities for the
expected future tax consequences of temporary differences between the carrying
amounts and the tax bases of assets and liabilities.
Impairment of Long-Lived Assets
The Company has adopted Statement of Financial Accounting Standards No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets
to be Disposed of", the effect of which was immaterial. The Company reviews
long-lived assets and will reserve for impairment whenever events or changes
in circumstances indicate the carrying amount of the assets may not be fully
recoverable.
Stock-Based Compensation
The Company has adopted the pro forma disclosure requirements of Statement
of Financial Accounting Standards No. 123 "Accounting for Stock-Based
Compensation" (FAS 123). FAS 123 requires that the Company determine the fair
value of stock-based compensation and either deduct the fair value of stock-
based compensation from the results of operations or disclose pro forma
results of operations as if they had done so.
F-25
<PAGE>
INTEGRITY QA SOFTWARE, INC.
(A COMPANY IN THE DEVELOPMENT STAGE)
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
For statement of operations purposes, the Company has applied the intrinsic
value provisions of APB No. 25 for employee stock-based compensation.
Per Share Data
Per share data for the period from inception through September 30, 1996 does
not include the effect of stock options or convertible preferred stock in the
calculation of weighted average shares outstanding due to their anti-dilutive
impact.
Use of Estimates
The preparation of financial statements in accordance with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the period.
Actual results could differ from those estimates.
(3) PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30,
1996
-------------
<S> <C>
Computer equipment $152,600
Furniture and fixtures 37,800
--------
190,400
Less accumulated depreciation and amortization (30,700)
--------
$159,700
========
</TABLE>
At September 30, 1996, net property and equipment under capital leases
aggregated $138,500.
(4) INCOME TAXES
No provision for federal and state income taxes has been recorded as the
Company has incurred net operating losses from inception through September 30,
1996. As of September 30, 1996, the Company has net operating loss
carryforwards of approximately $1,100,000 for federal and state income tax
purposes. These losses are available to reduce future taxable income and
expire in 2010 and 2003 for federal and state tax purposes, respectively.
Deferred tax assets, consisting primarily of the tax effects of net operating
loss carryforwards of approximately $478,000 at September 30, 1996 are fully
reserved due to the uncertainty of their realization based upon the weight of
currently available information.
Under provisions of the Tax Reform Act of 1986, certain substantial changes
in the Company's ownership may result in an annual limitation on the amount of
net operating loss carryforwards which can be utilized. Due to this potential
annual limitation, the net operating loss carryforwards may expire prior to
their utilization.
F-26
<PAGE>
INTEGRITY QA SOFTWARE, INC.
(A COMPANY IN THE DEVELOPMENT STAGE)
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(5) COMMON STOCK
In November 1995, the Company sold 2,250,000 shares of common stock to its
founders in exchange for $2,200 of cash. Under the terms of the stock purchase
agreements, the Company has the right to repurchase any portion of the
unvested shares of such stock at their original issuance price if for any
reason the founders cease to remain employed by the Company. The repurchase
rights expire for 25% of the shares on December 1, 1996 and for the balance of
the shares ratably over the 36 month period thereafter with acceleration
provisions upon change in control of a majority of the outstanding common
stock.
(6) REDEEMABLE PREFERRED STOCK AND WARRANTS
The Series A Preferred Stock was issued in January 1996 for aggregate gross
proceeds of $2,025,000, less $26,900 of issuance costs. Each share of Series A
Preferred Stock has voting rights equal to one share of Common Stock on an as-
if converted basis, and is convertible into one share of Common Stock at any
time, subject to adjustment for antidilution. The Company has reserved
sufficient shares of Common Stock for issuance upon conversion of the
Preferred Stock.
In the event of any liquidation, merger, dissolution or winding up of the
Company, the holders of Series A Preferred Stock are entitled to receive,
prior and in preference to any distribution to holders of Common Stock, an
amount equal to $1.00 per share plus any declared but unpaid dividends. After
such distribution, the remaining assets of the Company shall be divided pro-
rata among the holders of Preferred Stock and Common Stock on an as-converted
basis, with a catch-up provision for Common Stock after the Preferred Stock
has received $4.00 in total per share plus any declared but unpaid dividends.
Holders of the Series A Preferred Stock are entitled to receive annual
dividends of $0.08 per share, when and if declared by the Company's Board of
Directors. Such dividends are not cumulative. No dividends have been declared
from inception through September 30, 1996. Each share of Preferred Stock will
be automatically converted into Common Stock at (a) the closing of an initial
public offering at a price per share of not less than $5.00 and for aggregate
offering proceeds of not less than $10,000,000 or (b) upon the affirmative
vote of the holders of at least 51% of the outstanding Series A Preferred
Stock.
The Series A Preferred Stock Agreement includes a put provision requiring
the Company to repurchase any or all of the shares outstanding, at the option
of the holders of over two thirds of the Series A Preferred Stock, at the
greater of $1.00 plus any declared but unpaid dividends or its then fair
market value. This redemption feature is effective for outstanding shares as
follows: 50% on or after January 1, 2003 and 100% on or after January 1, 2004.
At September 30, 1996, using the fair value of the underlying stock as
determined by management, the Series A Preferred Stock would accrete to
approximately $6,075,000 payable at their mandatory redemption dates of
January 1, 2003 and 2004 assuming that no dividends are declared prior to that
date.
In April 1996 the Company issued warrants to purchase 30,000 shares of
Series A Preferred Stock to a leasing company for providing equipment lease
financing. The warrants, which were ascribed a fair value of $15,000, enable
the holder to purchase 30,000 shares of Series A Preferred Stock at $1.00 per
share, subject to adjustment for antidilution. A total of 30,000 shares of
Series A Preferred Stock have been reserved for issuance upon exercise of the
warrants. The warrants are exercisable at any time before April 25, 2006.
F-27
<PAGE>
INTEGRITY QA SOFTWARE, INC.
(A COMPANY IN THE DEVELOPMENT STAGE)
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(7) STOCK OPTION PLAN
In January 1996, the Company adopted the 1995 Stock Option Plan ("the
Plan"). The Plan allows for the issuance of incentive and nonqualified stock
options to employees and consultants. Pursuant to the terms of the Plan,
725,000 shares of Common Stock have been reserved for issuance. Under the
plan, incentive stock options may be granted at a price not less than 100% of
the estimated fair value of the stock, as determined by the Board of
Directors, at the date of grant. Nonqualified stock options may be granted at
a price not less than 85% of the estimated fair value of the stock, as
determined by the Board of Directors, at the date of grant. Options generally
vest over a four year period, with 25% of the shares vesting after the
completion of twelve months of service and the balance of the shares vesting
in equal installments over the next thirty-six months of service. The options
generally expire no later than ten years after the date of grant. As of
September 30, 1996 the Board of Directors has granted employees and
consultants options to purchase 431,350 shares and 4,000 shares, respectively,
of common stock at $0.10 per share.
Transactions under the 1995 Stock Option Plan for the period from inception
(November 1, 1995) through September 30, 1996 are summarized as follows:
<TABLE>
<CAPTION>
WEIGHTED AVERAGE
EXERCISE PRICE
SHARES PER SHARE
------- ----------------
<S> <C> <C>
Outstanding at beginning of period.............. -- $ --
Granted......................................... 435,350 0.10
Exercised....................................... -- --
Canceled........................................ -- --
-------
Outstanding at period end....................... 435,350
=======
Options exercisable at period end............... -- --
======= =====
Weighted average fair value of options granted
during the period.............................. $0.14
=====
</TABLE>
Fair Value Disclosures
Had compensation cost for the Company's option plans been determined based
on the fair value at the grant dates, as prescribed in FAS 123, the Company's
net loss and net loss per share for the period from inception (November 1,
1995) through September 30, 1996 would have been as follows:
<TABLE>
<S> <C>
Net loss:
As reported................................................ $(1,164,200)
Pro forma.................................................. $(1,178,900)
Net loss per share:
As reported................................................ $ (0.52)
Pro forma.................................................. $ (0.52)
</TABLE>
The fair value of each option grant is estimated on the date of grant using
the minimum value method with the following assumptions used for grants during
the period: dividend yield of 0.0%; risk-free interest rates of 5.70% to 6.69%
for options granted during the period from inception (November 1, 1995)
through September 30, 1996 and a weighted average expected option term of 4
years.
F-28
<PAGE>
INTEGRITY QA SOFTWARE, INC.
(A COMPANY IN THE DEVELOPMENT STAGE)
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(8) PROFIT SHARING PLAN
The Company has a Profit Sharing Plan pursuant to Section 401(k) of the
Internal Revenue Code which covers substantially all of the Company's
employees. The Company is not required to and did not make any contributions
for the period from inception (November 1, 1995) through September 30, 1996.
(9) COMMITMENTS
Notes Payable
At September 30, 1996, the Company has $82,500 outstanding under Notes
Payable (the "Notes") with a leasing company. Under the terms of the Notes,
the Company may borrow up to $175,000 for the purchase of software, at an
interest rate of 9% per annum. Monthly payments of principal and interest on
the outstanding amount are due through March 1999 with an additional balloon
payment due at the end of the term. The notes payable require compliance with
certain covenants. At September 30, 1996 the Company was in compliance with
these covenants.
Future minimum payments under the notes payable as of September 30, 1996 are
as follows:
<TABLE>
<S> <C>
YEAR ENDING SEPTEMBER 30,
-------------------------
1997 $33,000
1998 41,700
1999 7,800
-------
$82,500
=======
</TABLE>
Royalty Commitments
On May 31, 1996, the Company entered into a software license agreement,
which shall continue from year to year until terminated by the Company, with a
software developer under which the Company agreed to pay royalties in return
for the right to incorporate the software developer's technology into the
Company's products. The royalties are payable at the end of each calendar
quarter and are based upon future net revenues, when and if earned, as
follows:
<TABLE>
<CAPTION>
ROYALTY
NET REVENUES RATE
------------ -------
<S> <C>
$1-- $5,000,000 2.00%
$5,000,001-- $12,000,000 1.00%
$12,000,001-$50,000,000 0.75%
more than $50,000,000 0.00%
</TABLE>
Leases
The Company occupies its present facility under a noncancelable operating
lease which expires in October 1998. The lease terms include a provision for
the landlord to provide additional space at certain dates, at which time the
rent will be increased.
Rent expense for the period from inception (November 1, 1995) through
September 30, 1996 was $46,600.
F-29
<PAGE>
INTEGRITY QA SOFTWARE, INC.
(A COMPANY IN THE DEVELOPMENT STAGE)
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
On April 25, 1996, the Company entered into a master lease agreement with a
leasing company for the acquisition of property and equipment. The agreement
provides for the purchase of equipment up to an aggregate purchase price of
$250,000. During the period from inception (November 1, 1995) through
September 30, 1996, the Company leased approximately $167,000 of property and
equipment under this agreement, consisting primarily of computer equipment.
Future minimum lease payments under all noncancelable operating and capital
leases are as follows:
<TABLE>
<CAPTION>
OPERATING CAPITAL
LEASE LEASES
--------- --------
<S> <C> <C>
Year Ending September 30,
1997.................................................. $ 89,000 $ 54,500
1998.................................................. 142,600 54,500
1999.................................................. 5,900 54,500
Thereafter............................................ -- 18,000
-------- --------
Total $237,500 181,500
========
Less amount representing imputed interest............. (28,000)
Less amount ascribed to warrants...................... (15,000)
--------
Present value of capitalized lease obligation......... 138,500
Less current portion.................................. (40,300)
--------
Non current portion................................... $ 98,200
========
</TABLE>
(10) SUBSEQUENT EVENT
On November 17, 1996 the Company executed an Agreement and Plan of
Reorganization with Pure Atria Corporation ("Pure Atria") and a wholly owned
subsidiary of Pure Atria ("Merger Sub") pursuant to which the Company will
merge with and into Merger Sub and all of the issued and outstanding stock of
the Company will be exchanged for common stock of Pure Atria Corporation
(valued at approximately $30 million) and $13 million in cash.
F-30
<PAGE>
<TABLE>
<S> <C>
ANNEX A--Agreement and Plan of Reorganization, dated as of November 17,
1996, by and among Pure Atria Corporation, Delaware PAI Corp. and
Integrity QA Software, Inc....................................... A-1
ANNEX B--Section 262 of the Delaware General Corporation Law.............. B-1
ANNEX C--Chapter 13 of the California General Corporation Law............. C-1
</TABLE>
<PAGE>
ANNEX A
AGREEMENT AND PLAN OF REORGANIZATION
BY AND AMONG
PURE ATRIA CORPORATION
DELAWARE PAI CORP.
AND
INTEGRITY QA SOFTWARE, INC.
DATED AS OF NOVEMBER 17, 1996
A-i
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
ARTICLE I--THE MERGER........................................................ A-1
1.1 The Merger........................................................... A-1
1.2 Effective Time....................................................... A-1
1.3 Effect of the Merger................................................. A-1
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 Dissenting Shares.................................................... A-4
1.8 Surrender of Certificates............................................ A-4
1.9 No Further Ownership Rights in Company Capital 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-6
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 Subsidiaries......................................................... A-7
2.4 Authority............................................................ A-7
2.5 Company Financial Statements......................................... A-7
2.6 No Undisclosed Liabilities........................................... A-8
2.7 No Changes........................................................... A-8
2.8 Tax and Other Returns and Reports.................................... A-9
2.9 Restrictions on Business Activities.................................. A-10
2.10 Title to Properties; Absence of Liens and Encumbrances............... A-10
2.11 Intellectual Property................................................ A-10
2.12 Agreements, Contracts and Commitments................................ A-11
2.13 Interested Party Transactions........................................ A-12
2.14 Compliance with Laws................................................. A-12
2.15 Litigation........................................................... A-12
2.16 Insurance............................................................ A-13
2.17 Minute Books......................................................... A-13
2.18 Environmental Matters................................................ A-13
2.19 Brokers' and Finders' Fees; Third Party Expenses..................... A-14
2.20 Employee Matters and Benefit Plans................................... A-14
2.21 Employees............................................................ A-16
2.22 Governmental Authorization........................................... A-16
2.23 Third Party Consents................................................. A-16
2.24 Representations Complete............................................. A-16
ARTICLE III--REPRESENTATIONS AND WARRANTIES OF PARENT AND MERGER SUB......... A-17
3.1 Organization, Standing and Power..................................... A-17
3.2 Authority............................................................ A-17
3.3 Capital Structure.................................................... A-17
3.4 SEC Documents; Parent Financial Statements........................... A-18
3.5 Litigation........................................................... A-18
3.6 Restrictions on Business Activities.................................. A-18
3.7 Conduct in the Ordinary Course....................................... A-18
3.8 Representations Complete............................................. A-18
</TABLE>
A-ii
<PAGE>
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
ARTICLE IV--CONDUCT PRIOR TO THE EFFECTIVE TIME.............................. A-19
4.1 Conduct of Business of the Company................................... A-19
4.2 No Solicitation...................................................... A-20
ARTICLE V--ADDITIONAL AGREEMENTS............................................. A-21
5.1 Form S-4 Registration Statement; Other Filings....................... A-21
5.2 Stockholder Approval................................................. A-22
5.3 Access to Information................................................ A-22
5.4 Confidentiality...................................................... A-22
5.5 Expenses............................................................. A-22
5.6 Public Disclosure.................................................... A-22
5.7 Consents............................................................. A-23
5.8 FIRPTA Compliance.................................................... A-23
5.9 Reasonable Efforts................................................... A-23
5.10 Notification of Certain Matters...................................... A-23
5.11 Certain Benefit Plans................................................ A-23
5.12 Affiliate Agreements................................................. A-23
5.13 Additional Documents and Further Assurances.......................... A-23
5.14 Form S-8............................................................. A-24
5.15 Company's Auditors................................................... A-24
5.16 Nasdaq Listing....................................................... A-24
5.17 Voting Agreements.................................................... A-24
5.18 Blue Sky Laws........................................................ A-24
5.19 Indemnification...................................................... A-24
ARTICLE VI--CONDITIONS TO THE MERGER......................................... A-24
6.1 Conditions to Obligations of Each Party to Effect the Merger......... A-24
6.2 Additional Conditions to Obligations of the Company.................. A-25
6.3 Additional Conditions to the Obligations of Parent and Merger Sub.... A-25
ARTICLE VII--TERMINATION, AMENDMENT AND WAIVER............................... A-26
7.1 Termination.......................................................... A-26
7.2 Effect of Termination................................................ A-27
7.3 Termination Fee...................................................... A-27
7.4 Amendment............................................................ A-27
7.5 Extension; Waiver.................................................... A-27
ARTICLE VIII--GENERAL PROVISIONS............................................. A-28
8.1 Notices.............................................................. A-28
8.2 Interpretation....................................................... A-28
8.3 Counterparts......................................................... A-28
8.4 Entire Agreement; Assignment......................................... A-28
8.5 Severability......................................................... A-29
8.6 Other Remedies....................................................... A-29
8.7 Governing Law........................................................ A-29
8.8 Rules of Construction................................................ A-29
8.9 Specific Performance................................................. A-29
</TABLE>
A-iii
<PAGE>
INDEX OF EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION
------- -----------
<C> <S>
Exhibit A Form of Company Affiliate Agreement
Exhibit B Form of Legal Opinion of Counsel to Parent
Exhibit C Form of Legal Opinion of Counsel to the Company
Exhibit D Form of Noncompetition Agreement
Exhibit E Form of Voting Agreement
Exhibit F Form of Employment Offer
Exhibit G Form of Waiver and Amendment Agreement
</TABLE>
A-iv
<PAGE>
INDEX OF SCHEDULES
<TABLE>
<CAPTION>
SCHEDULE DESCRIPTION
-------- -----------
<C> <S>
2.2(a) Stockholder List
2.2(b) Option List
2.4 Governmental and Third Party Consents
2.5 Company Financials
2.6 Undisclosed Liabilities
2.7 No Changes
2.8 Tax Returns and Audits
2.10(a) Leased Real Property
2.10(b) Liens on Property
2.11(a) Intellectual Property
2.11(b) Intellectual Property Licenses
2.12(a) Agreements, Contracts and Commitments
2.12(b) Breaches
2.13 Interested Party Transactions
2.15 Litigation
2.16 Insurance
2.19 Brokers/Finders Fees; Expenses of Transaction
2.20(b) Employee Benefit Plans and Employee Agreements
2.20(d) Employee Plan Compliance
2.20(g) Post Employment Obligations
2.20(h)(i) Effect of Transaction
2.20(h)(ii) Excess Parachute Payments
2.20(j) Labor
2.23 Third Party Consents
4.1(a)(xii) Severance Agreements
5.12 Company Affiliate List
6.3(c) Third Party Consents Required of the Company
6.3(g) Employees Signing Non-Competition Agreements
6.3(j) Employees Accepting Offers of Employment
</TABLE>
A-v
<PAGE>
AGREEMENT AND PLAN OF REORGANIZATION
This Agreement and Plan of Reorganization (this "Agreement") is made and
entered into as of November 17, 1996 among Pure Atria Corporation, a Delaware
corporation ("Parent"), Delaware PAI Corp., a Delaware corporation and a
wholly-owned subsidiary of Parent ("Merger Sub"), and Integrity QA Software,
Inc., a Delaware corporation (the "Company").
RECITALS
A. The Boards of Directors of each of the Company, Parent and Merger Sub
believe it is in the best interests of each company and their respective
stockholders that Parent acquire the Company through the statutory merger of
the Company with and into the Merger Sub (the "Merger") and, in furtherance
thereof, have approved the Merger.
B. Pursuant to the Merger, among other things, and subject to the terms and
conditions of this Agreement, all of the issued and outstanding shares of
capital stock of the Company ("Company Capital Stock") shall be converted into
the right to receive cash and/or shares of voting Common Stock of Parent
("Parent Common Stock") as set forth herein, and all outstanding options and
warrants to acquire or receive shares of Company Capital Stock shall be
converted into the right to receive cash and/or options, as the case may be,
to acquire or receive shares of the Parent Common Stock.
C. The Company, Parent and Merger Sub desire to make certain representations
and warranties and other agreements in connection with the Merger.
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").
Now, Therefore, in consideration of the covenants, promises and
representations set forth herein, and for other good and valuable
consideration, intending to be legally bound hereby, 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 the Delaware General Corporation Law ("Delaware
Law"), the Company shall be merged with and into Merger Sub, the separate
corporate existence of the Company shall cease, and Merger Sub shall continue
as the surviving corporation and as a wholly-owned subsidiary of Parent.
Merger Sub as the surviving corporation after the Merger is hereinafter
sometimes referred to as the "Surviving Corporation."
1.2 Effective Time. Unless this Agreement is earlier terminated pursuant to
Section 7.1, the closing of the Merger (the "Closing") will take place as
promptly as practicable, but no later than five (5) business days, following
satisfaction or waiver of the conditions set forth in Article VI, at the
offices of Wilson, Sonsini, Goodrich & Rosati, 650 Page Mill Road, Palo Alto,
California, unless another place or time is agreed to by Parent and the
Company. The date upon which the Closing actually occurs is herein referred to
as the "Closing Date." On the Closing Date, the parties hereto shall cause the
Merger to be consummated by filing an Agreement of Merger (or like instrument)
with the Secretary of State of the State of Delaware (the "Certificate of
Merger"), in accordance with the relevant provisions of applicable law (the
time of acceptance by the Secretary of State of Delaware of such filing being
referred to herein as the "Effective Time").
1.3 Effect of the Merger. At the Effective Time, the effect of the Merger
shall be as provided in the applicable provisions of Delaware Law. Without
limiting the generality of the foregoing, and subject thereto, at
A-1
<PAGE>
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) Unless otherwise determined by Parent prior to the Effective Time, at
the Effective Time, the Certificate of Incorporation of Merger Sub 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 Integrity QA Software, Inc."
(b) Unless otherwise determined by Parent, 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 directors of Merger Sub immediately prior to
the Effective Time shall be the initial directors of the Surviving
Corporation, each to hold office in accordance with the Certificate of
Incorporation and Bylaws of the Surviving Corporation. 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.
1.6 Effect on Capital Stock. No adjustment shall be made in the number of
shares of Parent Common Stock issued in the Merger as a result of any cash
proceeds received by the Company from the date hereof to the Closing Date
pursuant to the exercise of options or warrants to acquire Company Capital
Stock. Subject to the terms and conditions of this Agreement, as of the
Effective Time, by virtue of the Merger and without any action on the part of
Merger Sub, the Company, the holder of any shares of the Company Capital Stock
or the holder of any options or other rights to acquire or receive shares of
Company Capital Stock, the following shall occur:
(a) CONVERSION OF COMPANY PREFERRED STOCK. Each share of the Series A
Preferred Stock of the Company (the "Company Preferred Stock") issued and
outstanding immediately prior to the Effective Time (other than any shares of
Company Preferred Stock to be canceled pursuant to Section 1.6(c) and any
Dissenting Shares (as defined and to the extent provided in Section 1.7(a))
will be canceled and extinguished and be converted automatically into the
right to receive (i) cash in the amount of $6.50 and (ii) that fraction of a
share of Parent Common Stock obtained by dividing $6.50 by the average of the
closing prices of Parent's Common Stock as quoted on the Nasdaq National
Market for the five trading days immediately preceding the Closing Date (the
"Preferred Exchange Ratio"), upon surrender of the certificate representing
such share of Company Preferred 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) CONVERSION OF COMPANY COMMON STOCK. Each share of the Common Stock,
$0.001 par value, of the Company (collectively, the "Company Common Stock")
issued and outstanding immediately prior to the Effective Time (other than any
shares of Company Common Stock to be canceled pursuant to Section 1.6(c) and
any Dissenting Shares (as defined and to the extent provided in Section
1.7(a)) will be canceled and extinguished and be converted automatically into
the right to receive that fraction of a share of Parent Common Stock obtained
by dividing $6.3254 by the average of the closing prices of Parent's Common
Stock as quoted on the Nasdaq National Market for the five trading days
immediately preceding the Closing Date (the "Common 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).
(c) CANCELLATION OF PARENT-OWNED AND COMPANY-OWNED STOCK. Each share of
Company Capital Stock owned by Merger Sub, Parent, the Company or any direct
or indirect wholly-owned subsidiary of Parent or the
A-2
<PAGE>
Company immediately prior to the Effective Time shall be canceled and
extinguished without any conversion thereof.
(d) STOCK OPTIONS. At the Effective Time, all options to purchase Company
Common Stock then outstanding under the Company's 1995 Stock Option Plan (the
"Option Plan") or otherwise shall be assumed by Parent in accordance with
provisions described below.
(i) At the Effective Time, each outstanding option to purchase shares of
Company Common Stock (each a "Company Option") under the Option Plan or
otherwise, whether vested or unvested, shall be, in connection with the
Merger, assumed by Parent. Each Company Option so assumed by Parent under
this Agreement shall continue to have, and be subject to, the same terms
and conditions set forth in the Option Plan and/or as provided in the
respective option agreements governing such Company Option immediately
prior to the Effective Time, except that (A) such Company Option shall 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 Company Option immediately prior to the
Effective Time multiplied by the Common Exchange Ratio, rounded down (in
the case of Company Options granted under the Option Plan) to the nearest
whole number of shares of Parent Common Stock and (B) the per share
exercise price for the shares of Parent Common Stock issuable upon exercise
of such assumed Company Option shall 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 Common Exchange Ratio, rounded up to the nearest whole cent.
(ii) It is the intention of the parties that the Company Options assumed
by Parent qualify following the Effective Time as incentive stock options
as defined in Section 422 of the Code to the extent the Company Options
qualified as incentive stock options immediately prior to the Effective
Time.
(iii) Promptly following the Effective Time, Parent will issue to each
holder of an outstanding Company Option a document evidencing the foregoing
assumption of such Company Option by Parent.
(iv) With respect to each of the Restricted Stock Purchase Agreements
dated November 20, 1995 between the Company and Stephen J. Kahn and Robert
W. Warfield, respectively (collectively, the "Founders' Agreements"), as of
the Effective Time, the Company hereby assigns its Repurchase Right (as
defined in each of the Founders' Agreements) to Parent in accordance with
the terms of each of the Founders' Agreements. In addition, as of the
Effective Time, the Company hereby assigns to the Parent, in accordance
with the terms of the Option Plan and each Company Option and the related
agreements thereunder, all of the Company's rights to purchase or
repurchase shares issuable upon the exercise of options granted under the
Option Plan.
(e) WARRANTS. Each warrant to purchase shares of Company Preferred Stock
outstanding at the Effective Time shall be, in connection with the Merger,
assumed by Parent. Each warrant so assumed by Parent under this Agreement
shall continue to have, and be subject to, the same terms and conditions set
forth in the warrant agreement governing such warrant immediately prior to the
Effective Time, except that each such warrant shall, following the Effective
Time, be exercisable only for cash and shares of Parent Common Stock, in such
number, and at such exercise price as is determined by applying the Preferred
Exchange Ratio in accordance with the terms of the warrant agreement.
(f) CAPITAL STOCK OF MERGER SUB. None of the shares of capital stock of
Merger Sub issued and outstanding immediately prior to the Effective Time
shall be converted as a result of the Merger, but all of such shares shall
remain issued and outstanding shares of the Surviving Corporation. Each stock
certificate of Merger Sub evidencing ownership of any such shares shall
continue to evidence ownership of such shares of capital stock of the
Surviving Corporation.
(g) ADJUSTMENTS TO EXCHANGE RATIOS. The Preferred Exchange Ratio and the
Common Exchange Ratio shall be adjusted to reflect fully the effect of any
stock split, reverse split, stock dividend (including any dividend or
distribution of securities convertible into Parent Common Stock or Company
Capital Stock), recapitalization
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or other like change without receipt of consideration with respect to Parent
Common Stock or Company Capital Stock occurring after the date hereof and
prior to the Effective Time.
(h) FRACTIONAL SHARES. No fraction of a share of Parent Common Stock will be
issued, but in lieu thereof, each holder of shares of Company Capital 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 to 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, multiplied by (ii) the average closing price of a share of Parent
Common Stock for the five (5) consecutive trading days ending on the trading
day immediately prior to the Closing Date, as reported on the Nasdaq National
Market.
1.7 Dissenting Shares.
(a) Notwithstanding any provision of this Agreement to the contrary, any
shares of Company Capital Stock held by a holder who has demanded and
perfected appraisal or dissenters' rights for such shares in accordance with
Delaware Law and who, as of the Effective Time, has not effectively withdrawn
or lost such appraisal or dissenters' rights ("Dissenting Shares") shall not
be converted into or represent a right to receive the cash consideration
and/or Parent Common Stock pursuant to Section 1.6, but the holder thereof
shall only be entitled to such rights as are granted by Delaware Law.
(b) Notwithstanding the provisions of subsection (a), if any holder of
shares of Company Capital Stock who demands appraisal of such shares under
Delaware 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
and the occurrence of such event, such holder's shares shall automatically be
converted into and represent only the right to receive the cash consideration
and/or Parent Common Stock and fractional shares as provided in Section 1.6,
without interest thereon, upon surrender of the certificate representing such
shares.
(c) The Company shall give Parent (i) prompt notice of any written demands
for appraisal of any shares of Company Capital Stock, withdrawals of such
demands, and any other instruments served pursuant to Delaware Law and
received by the Company and (ii) the opportunity to participate in all
negotiations and proceedings with respect to demands for appraisal under
Delaware 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 the Company Capital 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 designate a
bank or trust company with assets of not less than $500 million to act as
exchange agent (the "Exchange Agent") in the Merger.
(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, the cash and the aggregate number of shares of Parent
Common Stock issuable pursuant to Section 1.6 in exchange for outstanding
shares of Company Capital Stock.
(c) EXCHANGE PROCEDURES. Promptly after the Effective Time, the Surviving
Corporation shall cause to be mailed to each holder of record of a certificate
or certificates (the "Certificates") which immediately prior to the Effective
Time represented outstanding shares of Company Capital Stock and which shares
were converted into the right to receive cash and/or shares of Parent Common
Stock pursuant to Section 1.6, (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 be in such form and have such other provisions as
Parent may reasonably specify) and (ii) instructions for use in effecting the
surrender of the Certificates in exchange for cash and/or certificates
representing shares of Parent Common Stock. Upon surrender of a Certificate
for cancellation to the Exchange Agent or to such other agent or agents as may
be appointed by
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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 the cash payment
and/or a certificate representing the number of whole shares of Parent Common
Stock, plus cash in lieu of fractional shares in accordance with Section
1.6(h), to which such holder is entitled pursuant to Section 1.6, and the
Certificate so surrendered shall forthwith be canceled. Until so surrendered,
each outstanding Certificate that, prior to the Effective Time, represented
shares of Company Capital Stock will be deemed from and after the Effective
Time, for all corporate purposes, other than the payment of dividends, to
evidence the right to receive the cash payment and/or the ownership of the
number of full shares of Parent Common Stock for and into which such shares of
Company Capital Stock shall have been so exchanged and/or 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.
(d) DISTRIBUTIONS WITH RESPECT TO UNEXCHANGED SHARES. No dividends or other
distributions declared or made after the Effective Time with respect to Parent
Common Stock and with a record date after the Effective Time will be paid to
the holder of any unsurrendered Certificate with respect to the shares of
Parent Common Stock represented thereby until the holder of record of such
Certificate shall surrender such Certificate. Subject to applicable law,
following surrender of any such Certificate, there shall be paid to the record
holder of the certificates representing whole shares of Parent Common Stock
issued in exchange therefor, without interest, at the time of such surrender,
the amount of dividends or other distributions with a record date after the
Effective Time theretofore payable with respect to such whole shares of Parent
Common Stock.
(e) TRANSFERS OF OWNERSHIP. If any certificate for 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 person 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 a certificate for 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, the Surviving Corporation or any party hereto
shall be liable to a holder of shares of Parent Common Stock or Company
Capital 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 Capital Stock. The cash
consideration and all shares of Parent Common Stock issued upon the surrender
for exchange of shares of Company Capital Stock in accordance with the terms
hereof (including any cash paid for fractional shares in respect thereof)
shall be deemed to have been issued in full satisfaction of all rights
pertaining to such shares of Company Capital Stock, and there shall be no
further registration of transfers on the records of the Surviving Corporation
of shares of Company Capital 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 canceled and
exchanged as provided in this Article I.
1.10 Lost, Stolen or Destroyed Certificates. In the event any Certificates
evidencing shares of Company Capital Stock shall have been lost, stolen or
destroyed, the Exchange Agent shall deliver in exchange for such lost, stolen
or destroyed Certificates, upon the making of an affidavit of that fact by the
holder thereof, the cash consideration and/or such shares of Parent Common
Stock and cash for fractional shares, if any, as may be required pursuant to
Section 1.6; provided, however, that Parent may, in its discretion and as a
condition precedent to the issuance thereof, require the owner of such lost,
stolen or destroyed Certificates to deliver a bond in such sum as it may
reasonably direct as indemnity against any claim that may be made against
Parent 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 constitute a reorganization within the meaning of Section 368 of the
Internal Revenue Code of 1986, as amended (the "Code").
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1.12 Taking of Necessary Action; Further Action. If, at any time after the
Effective Time, any such 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 name of
their respective corporations or otherwise to take, and will take, all such
lawful and necessary action.
ARTICLE II
Representations and Warranties of the Company
The Company hereby represents and warrants to Parent and Merger Sub, subject
to such exceptions as are specifically disclosed in the disclosure letter
(referencing the appropriate section number) supplied by the Company to Parent
(the "Company Schedules") and dated as of the date hereof, as follows:
2.1 Organization of the Company. The Company is a corporation duly
organized, validly existing and in good standing under the laws of the State
of Delaware. The Company has the corporate power to own its properties and to
carry on its business as now being conducted. The Company is duly qualified to
do business and in good standing as a foreign corporation in the State of
California and in each other jurisdiction in which the failure to be so
qualified would have a Material Adverse Effect on the Company. As used in this
Agreement, the term "Material Adverse Effect" shall mean any effect on, or
change in, the business, assets (including intangible assets), financial
condition, results of operations, properties or liabilities (taken as a whole,
herein referred to as the "Business Condition"), of the party affected thereby
that is, or that would reasonably be expected to be, materially adverse to the
Business Condition of the affected party. The Company has delivered a true and
correct copy of its Certificate of Incorporation and Bylaws, each as amended
to date, to Parent.
2.2 Company Capital Structure.
(a) The authorized capital stock of the Company consists of 10,000,000
shares of authorized Common Stock, of which 2,250,000 shares are issued and
outstanding, and 5,000,000 shares of authorized Preferred Stock, 2,055,000 of
which are designated Series A Preferred Stock, of which 2,025,000 shares are
issued and outstanding. The Company Capital Stock is held of record by the
persons, with the addresses of record and in the amounts set forth on Schedule
2.2(a). All outstanding shares of Company Capital Stock are duly authorized,
validly issued, fully paid and non-assessable and not subject to preemptive
rights created by statute, the Certificate of Incorporation or Bylaws of the
Company or any agreement to which the Company is a party or by which it is
bound.
(b) The Company has reserved 750,000 shares of Common Stock for issuance to
employees and consultants pursuant to the Option Plan, of which 435,350 shares
are subject to outstanding, unexercised options and 314,650 shares remain
available for future grant. Schedule 2.2(b) sets forth for each outstanding
Company Option the name of the holder of such option, the domicile address of
such holder, the number of shares of Common Stock subject to such option, the
exercise price of such option and the vesting schedule for such option,
including the extent vested to date and whether the exercisability of such
option will be accelerated and become exercisable by reason of the
transactions contemplated by this Agreement. All Company options have been
granted pursuant to the forms included in the Option Plan as exhibits thereto.
In addition, there are two outstanding warrants to purchase an aggregate of
30,000 shares of Company Preferred Stock (the "Warrants"). Except for the
Company Options described in Schedule 2.2(b) and the Warrants, there are no
options, warrants, calls, rights, commitments or agreements of any character,
written or oral, to which the Company is a party or by which it is bound
obligating the Company to issue, deliver, sell, repurchase or redeem, or cause
to be issued, delivered, sold, repurchased or redeemed, any shares of the
capital stock of the Company or obligating the Company to grant, extend,
accelerate the vesting of, change the price of, otherwise amend or enter into
any such option, warrant, call, right, commitment or agreement. The holders of
Company Options have been or will be given, or shall
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have properly waived, any required notice prior to the Merger, and all such
rights will be terminated at or prior to the Effective Time.
2.3 Subsidiaries. The Company does not have and has never had any
subsidiaries or affiliated companies and does not otherwise own and has never
otherwise owned any shares of capital stock or any interest in, or control,
directly or indirectly, any other corporation, partnership, association, joint
venture or other business entity.
2.4 Authority. Subject only to the requisite approval of the Merger and this
Agreement by the Company's stockholders, the Company has all requisite
corporate power and authority to enter into this Agreement and to consummate
the transactions contemplated hereby. The vote required of the Company's
stockholders to duly approve the Merger and this Agreement is a majority of
the Company Common Stock and sixty percent (60%) of the Company Preferred
Stock. 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 of the Merger by the Company's stockholders. 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
the valid and binding obligation of the Company, enforceable in accordance
with its terms except (i) as limited by applicable bankruptcy, insolvency,
reorganization, moratorium and other laws of general application affecting
enforcement of creditors' rights generally and (ii) as limited by laws
relating to the availability of specific performance, injunctive relief or
other equitable remedies. Except as set forth on Schedule 2.4, subject only to
the approval of the Merger and this Agreement by the Company's stockholders,
the execution and delivery of this Agreement by the Company does not, and, as
of the Effective Time, the consummation of the transactions contemplated
hereby will not, conflict with, or result in any violation of, or default
under (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 loss
of any benefit under (any such event, a "Conflict") (i) any provision of the
Certificate of Incorporation or Bylaws of the Company; (ii) any mortgage,
indenture, lease, contract or other agreement or instrument, permit,
concession, franchise, license, judgment, order, decree, statute, law,
ordinance, rule or regulation applicable to the Company or its properties or
assets, other than any Conflict that would not have a Material Adverse Effect
on the Company or (iii) any agreement relating to the Company Intellectual
Property Rights, other than End-User Licenses (as each such term is defined in
Section 2.11(a) herein). 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, instrumentality, agency or commission ("Governmental
Entity") or any third party (so as not to trigger any Conflict) is required by
or with respect to the Company in connection with the execution and delivery
of this Agreement or the consummation of the transactions contemplated hereby,
except for (i) the filing of the Agreement of Merger with the Delaware
Secretary of State, (ii) such consents, waivers, approvals, orders,
authorizations, registrations, declarations and filings as may be required
under applicable federal and state securities laws, (iii) such other consents,
waivers, authorizations, filings, approvals and registrations which are set
forth on Schedule 2.4, and (iv) such other consents, waivers, authorizations,
filings, approvals and registrations, the absence of which would not have a
Material Adverse Effect on the Company.
2.5 Company Financial Statements.
(a) Schedule 2.5 sets forth the Company's unaudited balance sheets as of
October 31, 1996 (the "October Balance Sheet") and the related unaudited
statements of profit and loss for the period from the Company's incorporation
through October 31, 1996 (collectively, the "Company Financials"). The Company
Financials have been prepared in accordance with generally accepted accounting
principles ("GAAP") applied on a basis consistent throughout the periods
indicated and consistent with each other, except for the absence of footnotes.
The Company Financials present fairly the financial condition and operating
results of the Company as of the dates and during the periods indicated
therein, subject to normal year-end adjustments, which such adjustments are
not anticipated to be material in amount or significance.
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2.6 No Undisclosed Liabilities. Except as set forth in Schedule 2.6, the
Company does not have any liability, indebtedness, obligation, expense, claim,
deficiency, guaranty or endorsement of any type, whether accrued, absolute,
contingent, matured, unmatured or other (whether or not required to be
reflected in financial statements in accordance with GAAP), which individually
or in the aggregate is in excess of $50,000 and has not been reflected in the
October Balance Sheet.
2.7 No Changes. Except as set forth in Schedule 2.7, since October 31, 1996,
there has not been, occurred or arisen any:
(a) transaction by the Company except in the ordinary course of business
as conducted on the date of the October Balance Sheet and consistent with
past practices;
(b) amendments or changes to the Certificate of Incorporation or Bylaws
of the Company;
(c) capital expenditure or commitment by the Company, either individually
or in the aggregate, exceeding $25,000;
(d) destruction of, damage to or loss of any material assets, business or
customer of the Company (whether or not covered by insurance);
(e) labor trouble or claim of wrongful discharge or other unlawful labor
practice or action;
(f) change in accounting methods or practices (including any change in
depreciation or amortization policies or rates) by the Company;
(g) revaluation by the Company of any of its assets;
(h) declaration, setting aside or payment of a dividend or other
distribution with respect to the capital stock of the Company, or any
direct or indirect redemption, purchase or other acquisition by the Company
of any of its capital stock;
(i) increase in the salary or other compensation payable or to become
payable to any of its officers, directors, employees or advisors, or the
declaration, payment or commitment or obligation of any kind for the
payment of a bonus or other additional salary or compensation to any such
person except as otherwise contemplated by this Agreement;
(j) sale, lease, license or other disposition of any of the assets or
properties of the Company, except in the ordinary course of business as
conducted on that date and consistent with past practices;
(k) amendment or termination of any material contract, agreement or
license to which the Company is a party or by which it is bound;
(l) loan by the Company to any person or entity, incurring by the Company
of any indebtedness, guaranteeing by the Company of any indebtedness,
issuance or sale of any debt securities of the Company or guaranteeing of
any debt securities of others, except for advances to employees for travel
and business expenses in the ordinary course of business, consistent with
past practices;
(m) waiver or release of any right or claim of the Company, including any
write-off or other compromise of any account receivable of the Company;
(n) commencement or notice or threat of commencement of any lawsuit or
proceeding against or investigation of the Company or its affairs;
(o) notice of any claim of ownership by a third party of the Company's
Intellectual Property Rights (as defined in Section 2.11 below) or of
infringement by the Company of any third party's intellectual property
rights;
(p) issuance or sale by the Company of any of its shares of capital
stock, or securities exchangeable, convertible or exercisable therefor, or
of any other of its securities;
(q) change in pricing or royalties set or charged by the Company to its
customers or licensees or in pricing or royalties set or charged by persons
who have licensed Intellectual Property to the Company; or
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(r) negotiation or agreement by the Company or any officer or employees
thereof 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).
2.8 Tax and Other Returns and Reports.
(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. Except as set forth in Schedule 2.8:
(i) The Company as of the Effective Time will have prepared and filed all
required federal, state, local and foreign returns, estimates, information
statements and reports ("Returns") relating to any and all Taxes concerning
or attributable to the Company or its operations and such Returns are
(except to the extent that an adequate reserve has been established on the
October Balance Sheet) true and correct and have been completed in
accordance with applicable law.
(ii) The Company 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, FICA, FUTA and
other Taxes required to be withheld.
(iii) The Company has not been delinquent in the payment of any Tax nor
is there any Tax deficiency outstanding, proposed or assessed against the
Company, nor has the Company executed any 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 is to the
knowledge of the Company currently in progress, nor has the Company been
notified of any request for such an audit or other examination.
(v) The Company does not have any liabilities, whether asserted or
unasserted, contingent or otherwise, for unpaid federal, state, local and
foreign Taxes which have not been accrued or reserved against in accordance
with GAAP on the October Balance Sheet, and the Company has no knowledge of
any basis for the assertion of any such unreserved liability attributable
to the Company, its assets or operations.
(vi) The Company has provided to Parent copies of all federal and state
income and all state sales and use Tax Returns for all periods since the
date of Company's incorporation.
(vii) There are (and as of immediately following the Effective Date there
will be) no liens, pledges, charges, claims, security interests or other
encumbrances of any sort ("Liens") on the assets of the Company relating to
or attributable to Taxes, except for Liens for Taxes not yet due and
payable.
(viii) The Company has no knowledge of any basis for the assertion of any
claim relating or attributable to Taxes which, if adversely determined,
would result in any Lien on the assets of the Company.
(ix) None of the Company's assets are treated as "tax-exempt use
property" within the meaning of Section 168(h) of the Code.
(x) As of the Effective Time, there will not be any contract, agreement,
plan or arrangement, including but not limited to the provisions of this
Agreement, covering any employee or former employee of the Company that,
individually or collectively, could give rise to the payment of any amount
that would not be deductible pursuant to Section 280G of the Code or the
limitations in Sections 162(b) through (l) of the Code.
(xi) The Company has not 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.
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(xii) The Company is not a party to a tax sharing or allocation agreement
nor does the Company owe any amount under any such agreement.
(xiii) The Company is not, and has not been at any time, a "United States
real property holding corporation" within the meaning of Section 897(c)(2)
of the Code.
2.9 Restrictions on Business Activities. There is no agreement (noncompete
or otherwise), commitment, judgment, injunction, order or decree to which the
Company is a party or, to the knowledge of the Company, otherwise binding upon
the Company, which has or reasonably could be expected to have the effect of
prohibiting or impairing any business practice of the Company, any acquisition
of property (tangible or intangible) by the Company or the conduct of business
by the Company. Without limiting the foregoing, the Company has not entered
into any agreement under which the Company is restricted from selling,
licensing or otherwise distributing any of its products to any class of
customers, in any geographic area, during any period of time or in any segment
of the market.
2.10 Title to Properties; Absence of Liens and Encumbrances.
(a) The Company owns no real property, nor has it ever owned any real
property. Attached as Schedule 2.10(a) are copies of all real property leases
to which the Company is a party 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 a default).
(b) The Company has good and valid title to, or, in the case of leased
properties and assets, valid leasehold interests in, all of its tangible
properties and assets, real, personal and mixed, used or held for use in its
business, free and clear of any Liens (as defined in Section 2.8(b)(vii)),
except as reflected in the Company Financials or in Schedule 2.10(b) 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.
2.11 Intellectual Property.
(a) To the knowledge of the Company, the Company owns, or is licensed or
otherwise possesses legally enforceable rights to use, all patents,
copyrights, and any applications therefor, schematics, technology, know-how,
computer software programs or applications (in both source code and object
code form), and tangible or intangible proprietary information or material
that are required for the conduct of business of the Company as currently
conducted or as currently proposed to be conducted by the Company as described
in the Company's Business Plan dated October 17, 1996 (the "Company
Intellectual Property Rights"). The Company has no registered trademarks or
service marks.
(b) Schedule 2.11(a) sets forth a complete list of all patents, registered
copyrights and any applications therefor, included in the Company Intellectual
Property Rights, and specifies, where applicable, the jurisdictions in which
each such Company Intellectual Property Right 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. Schedule 2.11(b) sets forth a complete list of all
material licenses, sublicenses and other agreements to which the Company is a
party and pursuant to which the Company or any other person is authorized to
use any Company Intellectual Property Right (excluding object code end-user
licenses granted to end-users in the ordinary course of business that permit
use of software products without a right to modify, distribute or sublicense
the same ("End-User Licenses")) or trade secret of the Company. The execution
and delivery of this Agreement by the Company, and the consummation of the
transactions contemplated hereby, will neither cause the Company 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. Except as set forth
in Schedules 2.11(a) or 2.11(b), the Company is the sole and exclusive owner
or licensee of, with all right, title and interest in and to (free and clear
of any liens or
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encumbrances), the Company Intellectual Property Rights, 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 products in respect of which the
Company Intellectual Property Rights are being used.
(c) No claims with respect to the Company Intellectual Property Rights have
been asserted or are, to the Company's knowledge after reasonable inquiry
under the circumstances, threatened by any person, nor to the Company's
knowledge after reasonable inquiry under the circumstances, 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
infringes on any copyright, patent issued at least 60 days prior to the date
hereof, trade mark, service mark, trade secret or other proprietary right,
(ii) against the use by the Company of any trademarks, service marks, trade
names, trade secrets, copyrights, maskworks, patents, technology, know-how or
computer software programs and applications used in the Company's business as
currently conducted or as currently proposed to be conducted by the Company,
or (iii) challenging the ownership by the Company, validity or effectiveness
of any of the Company Intellectual Property Rights. To the Company's knowledge
after reasonable inquiry under the circumstances, all registered copyrights
held by the Company are valid and subsisting. To the Company's knowledge after
reasonable inquiry under the circumstances, the Company has not infringed, and
the business of the Company as currently conducted or as currently proposed to
be conducted as described in the Company's business plan dated October 17,
1996 does not infringe, any copyright, patent issued at least 60 days prior to
the date hereof, trade secret or other proprietary right of any third party.
To the Company's knowledge after reasonable inquiry under the circumstances,
there is no material unauthorized use, infringement or misappropriation of any
of the Company Intellectual Property Rights by any third party, including any
employee or former employee of the Company. To the knowledge of the Company
after reasonable inquiry under the circumstances, no Company Intellectual
Property Right or product of the Company or any of its subsidiaries is subject
to any outstanding decree, order, judgment, or stipulation restricting in any
manner the licensing thereof by the Company. Each employee, consultant or
contractor of the Company has executed a proprietary information and
confidentiality agreement substantially in the Company's standard forms. All
software included in the Company Intellectual Property Rights (excluding
agreements listed on Schedule 2.12(b) and End-User Licenses) is original with
the Company and has been either created by employees of the Company on a work-
for-hire basis or by consultants or contractors who have created such software
themselves and have assigned or are under an obligation to assign all rights
they may have had in such software to the Company.
2.12 Agreements, Contracts and Commitments. Except as set forth on Schedule
2.12(a), the Company does not have, is not a party to nor is it bound by:
(i) any collective bargaining agreements,
(ii) any agreements or arrangements that contain any severance pay or
post-employment liabilities or obligations,
(iii) any bonus, deferred compensation, pension, profit sharing or
retirement plans, or any other employee benefit plans or arrangements,
(iv) any employment or consulting agreement, contract or commitment with
an employee or individual consultant or salesperson or any consulting or
sales agreement, contract or commitment under which any firm or other
organization provides services to the Company,
(v) any agreement or plan, including, without limitation, any stock
option plan, stock appreciation rights 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,
(vi) any fidelity or surety bond or completion bond,
(vii) any lease of personal property having a value individually in
excess of $25,000,
(viii) any agreement of indemnification or guaranty,
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(ix) any agreement, contract or commitment containing any covenant
limiting the freedom of the Company to engage in any line of business or to
compete with any person,
(x) any agreement, contract or commitment relating to capital
expenditures and involving future payments in excess of $25,000,
(xi) 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,
(xii) any mortgages, indentures, loans or credit agreements, security
agreements or other agreements or instruments relating to the borrowing of
money or extension of credit, including guaranties referred to in clause
(viii) hereof,
(xiii) any purchase order or contract for the purchase of raw materials
involving $25,000 or more,
(xiv) any construction contracts,
(xv) any distribution, joint marketing or development agreement,
(xvi) any agreement pursuant to which the Company has granted or may
grant in the future, to any party, a source-code license or option or other
right to use or acquire source-code, or
(xvii) any other agreement, contract or commitment that involves $25,000
or more or is not cancelable without penalty within thirty (30) days.
Except for such alleged breaches, violations and defaults, and events that
would constitute a breach, violation or default with the lapse of time, giving
of notice, or both, as are all noted in Schedule 2.12(b), the Company has not
breached, violated or defaulted under, or received notice that it has
breached, violated or defaulted under, any of the terms or conditions of any
(i) agreement, contract or commitment required to be set forth on Schedule
2.12(a) that would result in a Material Adverse Effect on the Company and (ii)
agreement, contract or commitment relating to the Company's Intellectual
Property Rights, other than End-User Licenses (any such agreement, contract or
commitment listed on Schedule 2.11(b) or 2.12(a) shall herein be referred to
as a "Contract"). Each Contract is in full force and effect and, except as
otherwise disclosed in Schedule 2.12(b), is not subject to any default
thereunder of which the Company has knowledge by any party obligated to the
Company pursuant thereto.
2.13 Interested Party Transactions. Except as set forth on Schedule 2.13, no
officer, director or stockholder of the Company (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 or has had an interest), has or
has had, directly or indirectly, (i) an economic interest in any entity which
furnished or sold, or furnishes or sells, services or products that the
Company 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, any goods or services or (iii) a beneficial interest in any contract
or agreement set forth in Schedule 2.12(a) or Schedule 2.11(b); provided, that
ownership of no more than one percent (1%) of the outstanding voting stock of
a publicly traded corporation shall not be deemed an "economic interest in any
entity" for purposes of this Section 2.13.
2.14 Compliance with Laws. To the knowledge of the Company after reasonable
inquiry under the circumstances, the Company has complied in all material
respects with, is not in material violation of, and has not received any
notices of violation with respect to, any foreign, federal, state or local
statute, law or regulation.
2.15 Litigation. Except as set forth in Schedule 2.15, there is no action,
suit or proceeding of any nature pending or to the Company's knowledge
threatened (nor is the Company aware of any reasonable basis therefor) against
the Company, its properties or any of its officers or directors, in their
respective capacities as such. Except as set forth in Schedule 2.15, to the
Company's knowledge, there is no investigation pending or threatened against
the Company, its properties or any of its officers or directors by or before
any Governmental Entity. Schedule 2.15 sets forth, with respect to any pending
or threatened action, suit, proceeding or investigation, the forum, the
parties thereto, the subject matter thereof and the amount of damages claimed
or other remedy requested. To the knowledge of the Company, no Governmental
Entity has at any time challenged or questioned
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the legal right of the Company to manufacture, offer or sell any of its
products in the present manner or style thereof.
2.16 Insurance. Schedule 2.16 lists all insurance policies and fidelity
bonds covering the assets, business, equipment, properties, operations,
employees, officers and directors of the Company, and such insurance policies
and fidelity bonds contain provisions which are, to the knowledge of the
Company, reasonable and customary in the Company's industry, and there is no
claim by the Company pending under any of such policies or bonds as to which
coverage has been questioned, denied or disputed by the underwriters of such
policies or bonds. All premiums due and payable under all such policies and
bonds have been paid and the Company is otherwise in material compliance with
the terms of such policies and bonds (or other policies and bonds providing
substantially similar insurance coverage). The Company has no knowledge of any
threatened termination of, or material premium increase with respect to, any
of such policies.
2.17 Minute Books. The minute books of the Company made available to counsel
for Parent are the only minute books of the Company and contain a reasonably
accurate summary of all meetings of directors (or committees thereof) and
stockholders or actions by written consent since the time of incorporation of
the Company.
2.18 Environmental Matters.
(a) HAZARDOUS MATERIAL. The Company has not operated any underground storage
tanks, and has no knowledge of the existence, at any time, of any underground
storage tank (or related piping or pumps), at any property that the Company
has at any time owned, operated, occupied or leased. The Company has not
released in violation of any law in effect on or before the Effective Time and
applicable to the Company any amount of any substance that has been designated
by any Governmental Entity or by applicable federal, state or local law to be
radioactive, toxic, hazardous or otherwise a danger to health or the
environment, including, without limitation, PCBs, asbestos, oil and petroleum
products, urea-formaldehyde and all substances listed as a "hazardous
substance," "hazardous waste," "hazardous material" or "toxic substance" or
words of similar import, under any law, including but not limited to, the
Comprehensive Environmental Response, Compensation, and Liability Act of 1980,
as amended; the Resource Conservation and Recovery Act of 1976, as amended;
the Federal Water Pollution Control Act, as amended; the Clean Air Act, as
amended, and the regulations promulgated pursuant to said laws, (a "Hazardous
Material"), which would, in either event, result in a Material Adverse Effect
on the Company. No Hazardous Materials are present as a result of the actions
of the Company in, on or under any property, including the land and the
improvements, ground water and surface water thereof, that the Company has at
any time owned, operated, occupied or leased, which would, in either event,
result in a Material Adverse Effect on the Company.
(b) HAZARDOUS MATERIALS ACTIVITIES. The Company has not transported, stored,
used, manufactured, disposed of, released or exposed its employees or others
to Hazardous Materials in violation of any law applicable to the Company and
in effect on or before the Effective Time, nor has the Company disposed of,
transported, sold, or manufactured any product containing a Hazardous Material
(any or all of the foregoing being collectively referred to as "Hazardous
Materials Activities") in violation of any rule, regulation, treaty or statute
promulgated by any Governmental Entity applicable to the Company and in effect
prior to or as of the date hereof to prohibit, regulate or control Hazardous
Materials or any Hazardous Material Activity in a manner, which would, in
either event, result in a Material Adverse Effect on the Company
(c) PERMITS. The Company currently holds all environmental approvals,
permits, licenses, clearances and consents (the "Environmental Permits")
necessary for the conduct of the Company's Hazardous Material Activities and
other businesses of the Company as such activities and businesses are
currently being conducted.
(d) ENVIRONMENTAL LIABILITIES. No action, proceeding, revocation proceeding,
amendment procedure, writ, injunction or claim is pending, or to the Company's
knowledge, threatened concerning any Environmental Permit, Hazardous Material
or any Hazardous Materials Activity of the Company. The Company is not aware
of
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any fact or circumstance which could involve the Company in any environmental
litigation or impose upon the Company any material environmental liability.
2.19 Brokers' and Finders' Fees; Third Party Expenses. Except as set forth
on Schedule 2.19, 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. Schedule 2.19 sets forth the principal terms
and conditions of any agreement, written or oral, with respect to such fees.
Schedule 2.19 sets forth the Company's current reasonable estimate of all
Third Party Expenses (as defined in Section 5.4) expected to be incurred by
the Company in connection with the negotiation and effectuation of the terms
and conditions of this Agreement and the transactions contemplated hereby.
2.20 Employee Matters and Benefit Plans.
(a) DEFINITIONS. With the exception of the definition of "Affiliate" set
forth in Section 2.20(a)(i) below (which definition shall apply only to this
Section 2.20), 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 thereunder;
(ii) "ERISA" shall mean the Employee Retirement Income Security Act of
1974, as amended;
(iii) "Company Employee Plan" shall refer to 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 formal or informal, funded or unfunded
and whether or not legally binding, 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" (as
defined below), and pursuant to which the Company or any Affiliate has or
may have any material liability contingent or otherwise;
(iv) "Employee" shall mean any current, former, or retired employee,
officer, or director of the Company or any Affiliate;
(v) "Employee Agreement" shall refer to 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;
(vi) "IRS" shall mean the Internal Revenue Service;
(vii) "Multiemployer Plan" shall mean any "Pension Plan" (as defined
below) which is a "multiemployer plan", as defined in Section 3(37) of
ERISA; and
(viii) "Pension Plan" shall refer to each Company Employee Plan which is
an "employee pension benefit plan", within the meaning of Section 3(2) of
ERISA.
(b) SCHEDULE. Schedule 2.20(b) contains an accurate and complete list of
each Company Employee Plan and each Employee Agreement, together with a
schedule of all material liabilities, whether or not accrued, under each such
Company Employee Plan or Employee Agreement. The Company does not have any
plan or commitment, whether legally binding or not, to establish any new
Company Employee Plan or Employee Agreement, 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 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 or relating to each Company Employee Plan
and each Employee Agreement including all
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amendments thereto and written interpretations thereof; (ii) the most recent
annual actuarial valuations, if any, prepared for each Company Employee Plan;
(iii) the three most recent annual reports (Series 5500 and all schedules
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
most recent summary of material modifications, if any, required under ERISA
with respect to each Company Employee Plan; (vi) all IRS determination letters
and rulings relating to Company Employee Plans and copies of all applications
and correspondence to or from the IRS or the Department of Labor ("DOL") with
respect to any Company Employee Plan; (vii) 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; and (viii) all registration statements and
prospectuses prepared in connection with each Company Employee Plan.
(d) EMPLOYEE PLAN COMPLIANCE. Except as set forth on Schedule 2.20(d), (i)
the Company has performed in all material respects all obligations required to
be performed by it under 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) no "prohibited transaction", within the meaning of Section 4975
of the Code or Section 406 of ERISA, has occurred with respect to any Company
Employee Plan; (iii) there are no actions, suits or claims pending, or, to the
knowledge of the Company, threatened or anticipated (other than routine claims
for benefits) against any Company Employee Plan or against the assets of any
Company Employee Plan; and (iv) each Company Employee Plan can be amended,
terminated or otherwise discontinued after the Effective Time in accordance
with its terms, without liability to the Company, Parent or any of its
Affiliates (other than ordinary administration expenses typically incurred in
a termination event); (v) there are no 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 (vi) neither the Company nor
any Affiliate is subject to any penalty or tax with respect to any Company
Employee Plan under Section 406(i) of ERISA or Section 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 Part 3 of Subtitle B of Title I of ERISA, 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. Except as set forth in Schedule 2.20(g),
no Company Employee Plan provides, or has any liability to provide, life
insurance, medical or other employee benefits to any Employee upon his or her
retirement or termination of employment for any reason, except as may be
required by statute, 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) that such Employee(s) would be
provided with life insurance, medical or other employee welfare benefits upon
their retirement or termination of employment, except to the extent required
by statute.
(h) EFFECT OF TRANSACTION.
(i) Except as set forth on Schedule 2.20(h)(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,
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forgiveness of indebtedness, vesting, distribution, increase in benefits or
obligation to fund benefits with respect to any Employee.
(ii) Except as set forth on Schedule 2.20(h)(ii), no payment or benefit
which will or may be made by the Company or Parent or any of their
respective 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.
(i) EMPLOYMENT MATTERS. The Company (i) to the knowledge of the Company, 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 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).
(j) LABOR. No work stoppage or labor strike against the Company is pending
or, to the best knowledge of the Company, threatened. Except as set forth in
Schedule 2.20(j), the Company is not involved in or, to the knowledge of the
Company, threatened with, any labor dispute, grievance, or litigation relating
to 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 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 which would, individually or in the
aggregate, directly or indirectly result in a liability to the Company. Except
as set forth in Schedule 2.20(j), 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.
2.21 Employees. To the Company's knowledge after reasonable inquiry under
the circumstances, no employee of the Company (i) is in violation of any term
of any employment contract, patent disclosure agreement, non-competition
agreement, or any restrictive covenant to a former employer relating to the
right of any such employee to be employed by the Company because of the nature
of the business conducted or presently proposed to be conducted by the Company
as described in the Company's business plan dated October 17, 1996 or to the
use of trade secrets or proprietary information of others and (ii) has given
notice to the Company, nor is the Company otherwise aware, that any employee
intends to terminate his or her employment with the Company.
2.22 Governmental Authorization. The Company possesses all material
consents, licenses, permits, grants or other authorizations issued to the
Company by a governmental entity (i) pursuant to which the Company currently
operates or holds any interest in any of its properties or (ii) which is
required for the operation of its business or the holding of any such interest
(herein collectively called "Company Authorizations"), which Company
Authorizations are in full force and effect and constitute all Company
Authorizations required to permit the Company to operate or conduct its
business or hold any interest in its properties or assets.
2.23 Third Party Consents. Except as set forth on Schedule 2.23, no consent
or approval is needed from any person or entity in order to consummate any of
the transactions contemplated by this Agreement.
2.24 Representations Complete. None of the representations or warranties
made by the Company (as modified by the Company Schedules), nor any statement
made in any schedule or certificate furnished by the Company pursuant to this
Agreement, or furnished in or in connection with documents mailed or delivered
to the stockholders of the Company in connection with soliciting their consent
to this Agreement and the Merger (to the extent that such documents were
prepared by or include information provided by the Company), contains or will
contain at the Effective Time, any untrue statement of a material fact, or
omits or will omit at the Effective
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Time to state any material fact necessary in order to make the statements
contained herein or therein, in the light of the circumstances under which
made, not misleading.
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, Standing and Power. 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 Parent and its subsidiaries taken as a
whole. Parent will, prior to the Closing, deliver to the Company a true and
correct copy of its and Merger Sub's Certificate of Incorporation and Bylaws,
respectively, each as amended to date.
3.2 Authority. 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 obligations of Parent and Merger Sub,
enforceable in accordance with its terms except (i) as limited by applicable
bankruptcy, insolvency, reorganization, moratorium and other laws of general
application affecting enforcement of creditors' rights generally and (ii) as
limited by laws relating to the availability of specific performance,
injunctive relief or other equitable remedies. The execution and delivery of
this Agreement by Parent and Merger Sub do not, and, as of the Effective Time,
the consummation of the transactions contemplated hereby will not, conflict
with, or result in any violation of, or default under (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 loss of any benefit under
(i) any provision of the Certificate of Incorporation or Bylaws of Parent or
Merger Sub or (ii) any agreement required to be filed as an exhibit to any
registration statement or report filed with the SEC (as defined below) or any
judgment, order, decree, statute, law, ordinance, rule or regulation
applicable to Parent or Merger Sub, which would have a Material Adverse Effect
on Parent and its subsidiaries taken as a whole. No consent, waiver, approval,
order or authorization of, or registration, declaration or filing with, any
Governmental Entity or any third party (so as not to trigger any conflict), is
required by Parent in connection with the execution and delivery of this
Agreement or the consummation of the transactions contemplated hereby, except
for (i) the filing of the Certificate of Merger with the Delaware Secretary of
State, (ii) such consents, waivers, approvals, orders, authorizations,
registrations, declarations and filings as may be required under applicable
federal and state securities laws and federal, state or foreign anti-trust
laws, (iii) such consents, waivers, authorizations, filings, approvals and
registrations which are required to be obtained by the Company and (iv) such
other consents, waivers, authorizations, filings, approvals and registrations,
the absence of which could not reasonably be expected to have a Material
Adverse Effect on Parent and its subsidiaries taken as a whole.
3.3 Capital Structure.
(a) The authorized stock of Parent consists of 80,000,000 shares of Common
Stock, of which 40,438,696 shares were issued and outstanding as of November
4, 1996, and 2,000,000 shares of Preferred Stock, none of which is issued or
outstanding. The authorized capital stock of Merger Sub consists of 10,000
shares of Common Stock, 1,000 shares of which, as of the date hereof, are
issued and outstanding and are held by Parent. All such shares have been duly
authorized, and all such issued and outstanding shares have been validly
issued, are fully paid and nonassessable and are free of any liens or
encumbrances other than any liens or encumbrances created by or imposed upon
the holders thereof.
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(b) The shares of Parent Common Stock to be issued pursuant to the Merger,
when issued, will be duly authorized, validly issued, fully paid, non-
assessable, and when issued in accordance with the terms of this Agreement,
will be free and clear of any liens, claims, encumbrances or restrictions
other than (i) liens or encumbrances created by or imposed upon the holders
thereof or (ii) other than as required by Rule 145 promulgated under the
Securities Act.
3.4 SEC Documents; Parent Financial Statements. Parent has furnished or made
available to the Company true and complete copies of all reports or
registration statements filed by it with the U.S. Securities and Exchange
Commission (the "SEC") under the Securities Exchange Act of 1934, as amended
(the "Exchange Act") or the Securities Act of 1933, as amended (the
"Securities Act") for all periods since January 1, 1996, all in the form so
filed (all of the foregoing being collectively referred to as the "SEC
Documents"). As of their respective filing dates, the SEC Documents complied
in all material respects with the requirements of the Exchange Act or the
Securities Act, as the case may be, and none of the SEC Documents contained
any untrue statement of a material fact or omitted to state a material fact
required to be stated therein or necessary to make the statements made
therein, in the light of the circumstances in which they were made, not
misleading, except to the extent corrected by a document subsequently filed
with the SEC. The financial statements of Parent, including the notes thereto,
included in the SEC Documents (the "Parent Financial Statements") comply as to
form in all material respects with applicable accounting requirements and with
the published rules and regulations of the SEC with respect thereto, have been
prepared in accordance with GAAP applied on a basis consistent throughout the
periods indicated and consistent with each other (except as may be indicated
in the notes thereto or, in the case of unaudited statements, as permitted by
Form 10-Q of the SEC) and present fairly the consolidated financial position
of Parent at the dates thereof and the consolidated results of its operations
and cash flows for the periods then ended (subject, in the case of unaudited
statements, to normal audit adjustments). There has been no change in Parent
accounting policies except as described in the notes to the Parent Financial
Statements; provided, however, the Parent may have restated or may restate one
or more of the Parent Financial Statements to reflect acquisitions entered
into subsequent to the respective dates thereof.
3.5 Litigation. There is no action, suit, proceeding, claim, arbitration or
investigation pending, or as to which Parent has received any notice of
assertion against Parent, which in any manner challenges or seeks to prevent,
enjoin, alter or materially delay any of the transactions contemplated by this
Agreement. Except as set forth in the SEC Documents or in Schedule 3.5, Parent
is not aware of any other pending or threatened action, suit, proceeding,
investigation or claim, that individually or in the aggregate would reasonably
be expected to have a Material Adverse Effect on Parent and its subsidiaries
taken as a whole.
3.6 Restrictions on Business Activities. To the knowledge of Parent, there
is no agreement, judgment, injunction, order or decree binding upon Parent
that has or could reasonably have the effect of prohibiting or significantly
impairing any business practice of Parent, any acquisition of property by
Parent, or the continuation of the business of Parent and its subsidiaries,
that would have a Material Adverse Effect on Parent and its subsidiaries taken
as a whole.
3.7 Conduct in the Ordinary Course. Since September 30, 1996, there has not
occurred any amendments or changes in the Certificate of Incorporation or
Bylaws of Parent or any agreement or arrangement made by Parent to do the
same, except that the Bylaws were amended in October 1996 to increase the size
of the Parent's Board of Directors by one member.
3.8 Representations Complete. None of the representations or warranties made
by Parent or Merger Sub, nor any statement made in any schedule or certificate
furnished by Parent or Merger Sub pursuant to this Agreement, or furnished in
connection with the Company's Registration Statement on Form S-4 as
contemplated in Section 5.1 herein (to the extent that such documents were
prepared by or include information provided by the Parent or Merger Sub, but
excluding any information provided by the Company), contains or will contain
at the Effective Time, any untrue statement of a material fact, or omits or
will omit at the Effective Time to state any material fact necessary in order
to make the statements contained herein or therein, in the light of the
circumstance under which made, not misleading.
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ARTICLE IV
Conduct Prior to the Effective Time
4.1 Conduct of Business of the Company.
(a) COMPANY CONDUCT. During the period from the date of this Agreement and
continuing until the earlier of the termination of this Agreement and the
Effective Time, the Company agrees (except to the extent that Parent shall
otherwise consent in writing) to carry on its business in the usual, regular
and ordinary course in substantially the same manner as heretofore conducted,
to pay its debts and Taxes when due, to pay or perform other obligations when
due, and, to the extent consistent with such business, to use all reasonable
efforts consistent with past practice and policies to preserve intact its
present business organization, keep available the services of its present
officers and key employees and preserve their relationships with customers,
suppliers, distributors, licensors, licensees, and others having business
dealings with it, all with the goal of preserving unimpaired its goodwill and
ongoing businesses at the Effective Time. The Company shall promptly notify
Parent of any event or occurrence or emergency not in the ordinary course of
its business, and any material event involving or adversely affecting the
Company or its business. Except as expressly contemplated by this Agreement,
the Company shall not, without the prior written consent of Parent:
(i) Enter into any commitment, activity or transaction not in the
ordinary course of business;
(ii) Transfer to any person or entity any rights to any Company
Intellectual Property Rights;
(iii) Enter into or amend any agreements pursuant to which any other
party is granted manufacturing, marketing, distribution or similar rights
of any type or scope with respect to any products of the Company;
(iv) 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;
(v) Commence any litigation;
(vi) Declare, set aside or pay any dividends on or make any other
distributions (whether in cash, stock or property) in respect of any of its
capital stock, or split, combine or reclassify any of its capital stock or
issue or authorize the issuance of any other securities in respect of, in
lieu of or in substitution for shares of capital stock of the Company, or
repurchase, redeem or otherwise acquire, directly or indirectly, any shares
of its capital stock (or options, warrants or other rights exercisable
therefor);
(vii) Except for the issuance of shares of Company Capital Stock upon
exercise or conversion of presently outstanding Company Options or upon
exercise of the Warrants, 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 its 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;
(viii) Cause or permit any amendments to its Certificate of Incorporation
or Bylaws;
(ix) Acquire or agree to acquire by merging or consolidating with, or by
purchasing any assets or equity securities 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;
(x) Sell, lease, license or otherwise dispose of any of its properties or
assets, except in the ordinary course of business and consistent with past
practice;
(xi) Incur any indebtedness for borrowed money or guarantee any such
indebtedness or issue or sell any debt securities of the Company or
guarantee any debt securities of others;
(xii) Grant any severance or termination pay to any director, officer
employee or consultant, except payments made pursuant to standard written
agreements outstanding on the date hereof (which such agreements are
disclosed on Schedule 4.1(a)(xii));
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(xiii) Adopt or amend any employee benefit plan, program, policy or
arrangement, or enter into any employment contract, extend any employment
offer, pay or agree to pay any special bonus or special remuneration to any
director, employee or consultant, or increase the salaries or wage rates of
its employees;
(xiv) 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 and consistent with past
practice;
(xv) Take any action to accelerate the vesting of any restricted stock or
any options, warrants or other rights to acquire shares of the capital
stock of the Company;
(xvi) Except as contemplated by this Agreement, pay, discharge or
satisfy, in an amount in excess of $25,000, in any one case, or $50,000, in
the aggregate, any claim, liability or obligation (absolute, accrued,
asserted or unasserted, contingent or otherwise), other than the payment,
discharge or satisfaction in the ordinary course of business or liabilities
reflected or reserved against in the Company Financial Statements;
(xvii) Make or change any material election in respect of Taxes other
than in the ordinary course of business, 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;
(xviii) Enter into any strategic alliance, joint development or joint
marketing arrangement or agreement;
(xix) Fail to pay or otherwise satisfy its monetary obligations as they
become due, except such as are being contested in good faith;
(xx) Waive or commit to waive any rights with a value in excess of
$10,000, in any one case, or $25,000, in the aggregate;
(xxi) Cancel, materially amend or renew any insurance policy other than
in the ordinary course of business;
(xxii) Alter, or enter into any commitment to alter, its interest in any
corporation, association, joint venture, partnership or business entity in
which the Company directly or indirectly holds any interest on the date
hereof; or
(xxiii) Take, or agree in writing or otherwise to take, any of the
actions described in Sections 4.1(i) through (xxii) above, or any other
action that would prevent the Company from performing or cause the Company
not to perform its covenants hereunder.
(b) PARENT CONDUCT. Parent shall promptly notify the Company of any event or
occurrence which is not in the ordinary course of business of Parent and which
is material and adverse to the business of Parent and its subsidiaries taken
as a whole. Parent agrees to disclose to the Company prior to the Effective
Time any material change in its capitalization as set forth in Section 3.3
hereto.
4.2 No Solicitation. Until the earlier of the Effective Time and the date of
termination of this Agreement pursuant to the provisions of Section 7.1
hereof, the Company will not (nor will the Company permit any of the Company's
officers, directors, stockholders, agents, representatives or affiliates to)
directly or indirectly, take any of the following actions (each, an
"Acquisition Proposal") with any party other than Parent and its designees:
(a) solicit, initiate, entertain, or encourage any proposals or offers from,
or conduct discussions with or engage in negotiations with, any person
relating to any possible acquisition of the Company or any of its subsidiaries
(whether by way of merger, purchase of capital stock, purchase of assets or
otherwise), any material portion of its or their capital stock or assets or
any equity interest in the Company or any of its subsidiaries, (b) provide
information with respect to it to any person, other than Parent, relating to,
or otherwise cooperate with, facilitate or encourage any effort or attempt by
any such person with regard to, any possible acquisition of the Company
(whether by way of merger, purchase of capital stock, purchase of assets or
otherwise), any material portion of its or their capital stock or assets or
any equity interest in the Company or any of its subsidiaries, (c) enter into
an agreement with any person, other than Parent, providing for the acquisition
of the Company (whether by way
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of merger, purchase of capital stock, purchase of assets or otherwise), any
material portion of its or their capital stock or assets or any equity
interest in the Company or any of its subsidiaries, or (d) make or authorize
any statement, recommendation or solicitation in support of any possible
acquisition of the Company or any of its subsidiaries (whether by way of
merger, purchase of capital stock, purchase of assets or otherwise), any
material portion of its or their capital stock or assets or any equity
interest in the Company or any of its subsidiaries by any person, other than
by Parent. The Company shall immediately cease and cause to be terminated any
such contacts or negotiations with third parties relating to any such
transaction or proposed transaction. In addition to the foregoing, if the
Company receives prior to the Effective Time or the termination of this
Agreement any offer or proposal relating to any of the above, the Company
shall immediately notify Parent thereof, including information as to the
identity of the offeror or the party making any such offer or proposal and the
specific terms of such offer or proposal, as the case may be, and such other
information related thereto as Parent may reasonably request. Except as
contemplated by this Agreement, disclosure by the Company of the terms hereof
(other than the prohibition of this section) shall be deemed to be a violation
of this Section 4.2, unless such disclosure has otherwise been made public in
accordance with the terms of this Agreement.
ARTICLE V
Additional Agreements
5.1 Form S-4 Registration Statement; Other Filings.
(a) As promptly as practicable after the execution of this Agreement, Parent
will prepare and file with the SEC a Registration Statement on Form S-4.
Parent will respond to any comments of the SEC, will use its best efforts to
have the Registration Statement declared effective under the Securities Act as
promptly as practicable after such filing. As promptly as practicable after
the date of this Agreement, Parent will prepare and file any other filings
required under the Exchange Act, the Securities Act or any other Federal or
Blue Sky laws relating to the Merger and the transactions contemplated by this
Agreement (the "Other Filings"). Parent will notify the Company promptly upon
the receipt of any comments from the SEC or its staff and of any request by
the SEC or its staff or any other government officials for amendments or
supplements to the Registration Statement, or any Other Filing or for
additional information and will supply the Company with copies of all
correspondence between Parent or any of its representatives, on the one hand,
and the SEC, or its staff or an other government officials, on the other hand,
with respect to the Registration Statement, the Merger or any Other Filing.
The Registration Statement and the Other Filings will 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 Registration Statement or any Other
Filing, Parent will promptly inform the Company of such occurrence and
cooperate in filing with the SEC or its staff or any other government
officials, such amendment or supplement.
(b) In the event that the Parent determines, with the consent of the Company
(which consent shall not be unreasonably withheld), that in lieu of filing a
Registration Statement on Form S-4 as provided above, the exemption from
registration under Section 3(a)(10) of the Securities Act would be available,
Parent and the Company shall prepare the necessary documentation to seek to
obtain a permit (a "3(a)(10) Permit") from the Commissioner of the Department
of Corporations of the State of California (after a hearing before such
Department) pursuant to Section 25121 of the California Corporate Securities
Law of 1968, as amended (the "California Securities Laws") so that the
issuance of Parent Common Stock in the transactions contemplated by this
Agreement shall be exempt from registration under Section 3(a)(10) of the
Securities Act. The Company shall provide to Parent and its counsel for
inclusion in the 3(a)(10) Permit application, in form and substance reasonably
satisfactory to Parent and its counsel, such information concerning the
Company, its operations, capitalization, technology, share ownership and other
material as Parent or its counsel may reasonably request. In the event that a
3(a)(10) Permit is not issued by the California Department of Corporations, or
in the event the SEC has issued a no-action letter or made another
determination in writing to the effect that in the opinion of the SEC the
shares of Parent Common Stock issuable pursuant to the Merger in reliance on
the 3(a)(10) Permit (the
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"Merger Shares") are not tradeable pursuant to Rule 145(d) promulgated under
the Securities Act (without the requirement of any holding period under Rule
144 promulgated under the Securities Act), Parent shall promptly file a
registration statement on Form S-3 to register the Parent Common Stock issued
pursuant to the Merger. Parent will, at its expense (excluding any broker fees
and commissions), use its best efforts to have such registration statement
become effective and to keep such registration statement effective for the
lesser of two (2) years or until all such shares of Parent Common Stock have
been sold, provided that upon notice from Parent to the stockholders of the
Company receiving Parent Common Stock, such stockholders will forthwith
discontinue the sale of their shares of Parent Common Stock for two 90-day
periods during each 12-month period of the effectiveness of such registration
statement.
5.2 Stockholder Approval. Promptly following the effectiveness of the Form
S-4 Registration Statement, or as promptly as practicable after the 3(a)(10)
Permit has been obtained, as the case may be, the Company shall submit this
Agreement and the transactions contemplated hereby to its stockholders for
approval and adoption as provided by Delaware Law and its Certificate of
Incorporation and Bylaws. The Company shall use its best efforts to solicit
and obtain the consent of its stockholders sufficient to approve the Merger
and this Agreement and to enable the Closing to occur as promptly as
practicable. The materials submitted to the Company's stockholders shall be
subject to review and approval by Parent and include information regarding the
Company, the terms of the Merger and this Agreement and the unanimous
recommendation of the Board of Directors of the Company in favor of the Merger
and this Agreement.
5.3 Access to Information. Each party shall afford the others and its
accountants, counsel and other representatives, reasonable access during
normal business hours during the period prior to the Effective Time to (i) all
of its properties, books, contracts, commitments and records, and (ii) all
other information concerning the business, properties and personnel (subject
to restrictions imposed by applicable law) of it as the others may reasonably
request, subject, in the case of Parent, to reasonable limits on access to its
technical and other nonpublic information. No information or knowledge
obtained in any investigation pursuant to this Section 5.3 shall 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 Confidentiality. Each of the parties hereto hereby agrees to keep such
information or knowledge obtained in any investigation pursuant to Section
5.3, or pursuant to the negotiation and execution of this Agreement or the
effectuation of the transactions contemplated hereby, in accordance with the
provisions of the Mutual Nondisclosure Agreement entered into between Parent
and the Company dated as of November 15, 1996.
5.5 Expenses. If the Merger is not consummated, all fees and expenses
incurred in connection with the Merger, including, without limitation, all
legal, accounting, financial advisory, consulting and all other fees and
expenses of third parties ("Third Party Expenses") shall be borne by the party
that incurred such Third Party Expenses. If the Merger is consummated, all
reasonable Third Party Expenses incurred by the Company in connection with the
negotiation and effectuation of the terms and conditions of this Agreement and
the transactions contemplated hereby, and all Third Party Expenses incurred by
Parent or Merger Sub in connection with the negotiation and effectuation of
the terms and conditions of this Agreement and the transactions contemplated
hereby shall be paid by Parent. All parties to this Agreement acknowledge and
agree that the legal fees and expenses of Gunderson Dettmer Stough Villeneuve
Franklin & Hachigian, LLP in connection with the transactions contemplated
hereby are being performed as counsel to the Company and shall be paid by the
Company prior to the closing in the amount of $150,000 plus reasonable out-of-
pocket expenses.
5.6 Public Disclosure. Unless otherwise required by law (including, without
limitation, federal and state securities laws) or, as to Parent, by the rules
and regulations of the NASD, prior to the Effective Time, no disclosure
(whether or not in response to an inquiry) of the subject matter of this
Agreement shall be made by any party hereto unless approved by Parent and the
Company prior to release, provided that such approval shall not be
unreasonably withheld.
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5.7 Consents. The Company shall use its best efforts to obtain the consents,
waivers and approvals under any of the Contracts as may be required in
connection with the Merger (all of such consents, waivers and approvals are
set forth in Company Schedules) so as to preserve all rights of and benefits
to the Company thereunder.
5.8 FIRPTA Compliance. On or prior to the Closing Date, the Company shall
deliver to Parent a properly executed statement in a form reasonably
acceptable to Parent for purposes of satisfying Parent's obligations under
Treasury Regulation Section 1.1445-2(c)(3).
5.9 Reasonable Efforts. Subject to the terms and conditions provided in this
Agreement, each of the parties hereto shall use its reasonable efforts to
ensure that its representations and warranties remain true and correct in all
material respects, and to take promptly, or cause to be taken, all actions,
and to do promptly, or cause to be done, all things necessary, proper or
advisable under applicable laws and regulations to consummate and make
effective the transactions contemplated hereby, to obtain all necessary
waivers, consents and approvals, to effect all necessary registrations and
filings, and to remove any injunctions or other impediments or delays, legal
or otherwise, in order to consummate and make effective the transactions
contemplated by this Agreement for the purpose of securing to the parties
hereto the benefits contemplated by this Agreement; provided that Parent shall
not be required to agree to any divestiture by Parent or the Company or any of
Parent's subsidiaries or affiliates of shares of capital stock or of any
business, assets or property of Parent or its subsidiaries or affiliates or
the Company or its affiliates, 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.
5.10 Notification of Certain Matters. The Company shall give prompt notice
to Parent, and Parent shall give prompt notice to the Company, of (i) the
occurrence or non-occurrence of any event, the occurrence or non-occurrence of
which is likely to cause any representation or warranty of the Company and
Parent, respectively, contained in this Agreement to be untrue or inaccurate
at or prior to the Effective Time and (ii) any failure of the Company or
Parent, as the case may be, to comply with or satisfy any covenant, condition
or agreement to be complied with or satisfied by it hereunder; provided,
however, that the delivery of any notice pursuant to this Section 5.10 shall
not limit or otherwise affect any remedies available to the party receiving
such notice.
5.11 Certain Benefit Plans. Parent shall take such reasonable actions as are
necessary to allow eligible employees of the Company to participate in the
benefit programs of Parent, or alternative benefits programs substantially
comparable to those applicable to employees of Parent on similar terms, as
soon as practicable after the Effective Time. For purposes of satisfying the
terms and conditions of such programs, Parent shall give full credit for
eligibility, vesting or benefit accrual for each participant's period of
service with the Company, provided that, with respect to benefit programs and
plans provided by third parties, the terms of such plans and programs permit
Parent to so credit the participants.
5.12 Affiliate Agreements. Schedule 5.12 sets forth those persons who, in
the Company's reasonable judgment, are or may be "affiliates" of the Company
within the meaning of Rule 145 (each such person an "Affiliate") promulgated
under the Securities Act ("Rule 145"). The Company shall provide Parent such
information and documents as Parent shall reasonably request for purposes of
reviewing such list. The Company shall deliver or cause to be delivered to
Parent, concurrently with the execution of this Agreement (and in any case
prior to the Closing) from each of the Affiliates of the Company, an executed
Affiliate Agreement in the form attached hereto as Exhibit A. Parent shall be
entitled to place appropriate legends on the certificates evidencing any
Parent Common Stock to be received by such Affiliates pursuant to the terms of
this Agreement, and to issue appropriate stop transfer instructions to the
transfer agent for Parent Common Stock, consistent with the terms of such
Affiliate Agreements.
5.13 Additional Documents and Further Assurances. Each party hereto, at the
request of the other party hereto, shall execute and deliver such other
instruments and do and perform such other acts and things as may be necessary
or desirable for effecting completely the consummation of this Agreement and
the transactions contemplated hereby.
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5.14 Form S-8. Parent shall file a registration statement on Form S-8 for
the shares of Parent Common Stock issuable with respect to assumed Company
Options promptly after the Closing Date.
5.15 Company's Auditors. The Company will use its commercially reasonable
efforts to cause its management and its independent auditors to facilitate on
a timely basis (i) the preparation of financial statements (including pro
forma financial statements if required) as required by Parent to comply with
applicable SEC regulations, and (ii) the review of the Company's audit work
papers since incorporation, including the examination of selected interim
financial statements and data.
5.16 Nasdaq Listing. On or before the Closing, Parent shall apply for the
additional listing on the Nasdaq National Market of 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.
5.17 Voting Agreements. Concurrently with the execution of this Agreement,
the Company will cause all Affiliates to execute voting agreements in the form
attached hereto as Exhibit E (the "Voting Agreements"), agreeing, among other
things, to vote in favor of the Merger and against any competing proposals.
5.18 Blue Sky Laws. Parent shall take such steps as may be necessary to
comply with the securities and blue sky laws of all jurisdictions which are
applicable to the issuance of the Parent Common Stock pursuant hereto. The
Company shall use its best efforts to assist Parent as may be necessary to
comply with the securities and blue sky laws of all jurisdictions which are
applicable in connection with the issuance of Parent Common Stock pursuant
hereto.
5.19 Indemnification.
(a) From and after the Effective Time, Parent and the Surviving Corporation
jointly and severally shall indemnify, defend and hold harmless each person
who is now, or has been at any time prior to the date of this Agreement or who
becomes prior to the Effective Time, an officer or director of the Company
(the "Indemnified Parties") in respect of acts or omissions occurring on or
prior to the Effective Time to the extent provided under the Company's
Certificate of Incorporation and Bylaws and Indemnification Agreements in
effect on the date hereof; provided that such indemnification shall be subject
to any limitation imposed from time to time under applicable law. The
provisions of this Section 5.19 are intended to be for the benefit of, and
shall be enforceable by, each Indemnified Party, his or her heirs and
representatives.
(b) If Parent or the Surviving Corporation or any of their respective
successors or assigns (i) consolidates with or merges into any other person or
entity and shall not be the continuing or surviving person of such
consolidation or merger or (ii) transfers all or substantially all of its
properties and assets to any person or entity, then and in each such case,
proper provision shall be made so that such successors or assigns of Parent or
the Surviving Corporation, as the case may be, shall assume the obligations
set forth in this Section 5.19.
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 of the
following conditions:
(a) STOCKHOLDER APPROVAL. This Agreement and the Merger shall have been
approved and adopted by the stockholders of the Company by the requisite
vote under applicable law and the Company's Certificate of Incorporation.
(b) NO INJUNCTIONS OR RESTRAINTS; ILLEGALITY. No temporary restraining
order, preliminary or permanent injunction or other order issued by any
court of competent jurisdiction or other legal or regulatory restraint or
prohibition preventing the consummation of the Merger shall be in effect.
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(c) TAX OPINIONS. Parent and the Company shall each have received
substantially identical written opinions from their counsel, Wilson Sonsini
Goodrich & Rosati, Professional Corporation, and Gunderson Dettmer Stough
Villeneuve Franklin & Hachigian, LLP, respectively, in form and substance
reasonably satisfactory to them, to the effect that the Merger will
constitute a reorganization within the meaning of Section 368(a) of the
Code. The parties to this Agreement agree to make reasonable
representations as requested by such counsel for the purpose of rendering
such opinions.
(d) GOVERNMENTAL APPROVALS. All approvals of governments and governmental
agencies necessary to consummate the transactions hereunder, including the
Parent's Registration Statement on Form S-4 being declared effective by the
SEC, shall have been received.
(e) NASDAQ NATIONAL MARKET LISTING. The shares of Parent Common Stock
issuable to stockholders of the Company pursuant to this Agreement and such
other shares required to be reserved for issuance in connection with the
Merger shall have been authorized for listing on the Nasdaq National Market
upon official notice of issuance.
(f) NO STOP ORDER. The SEC shall not have issued any stop order
preventing the sale or issuance of any Common Stock of Parent.
6.2 Additional Conditions to Obligations of the Company. The obligations of
the Company to consummate the Merger and the transactions contemplated by this
Agreement shall be subject to the satisfaction at or prior to the Closing of
each of the following conditions, any of which may be waived, in writing,
exclusively by the Company:
(a) REPRESENTATIONS AND WARRANTIES. The representations and warranties of
Parent and Merger Sub contained in this Agreement shall be true and correct
in all material respects on and as of the Closing Date, except for changes
contemplated by this Agreement and except for those representations and
warranties which address matters only as of a particular date (which shall
remain true and correct as of such date), with the same force and effect as
if made on and as of the Closing Date, except, in all such cases, for such
breaches, inaccuracies or omissions of such representations and warranties
which do not have a Material Adverse Effect on Parent and Merger Sub as a
whole; and the Company shall have received a certificate to such effect
signed on behalf of Parent and Merger Sub by a duly authorized officer of
each.
(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 Effective Time, and the Company shall have received a
certificate to such effect signed by a duly authorized officer of Parent.
(c) LEGAL OPINION. The Company shall have received a legal opinion from
Wilson Sonsini Goodrich & Rosati, Professional Corporation, counsel to
Parent, in substantially the form attached hereto as Exhibit B.
(d) THIRD PARTY CONSENTS. Parent shall have obtained all consents
required to consummate the transactions contemplated by this Agreement and
all other consents in connection with the transactions contemplated hereby.
6.3 Additional Conditions to the Obligations of Parent and Merger Sub. The
obligations of Parent and Merger Sub to consummate the Merger and the
transactions contemplated by this Agreement shall be subject to the
satisfaction at or prior to the Closing of each of the following conditions,
any of which may be waived, in writing, exclusively by Parent:
(a) REPRESENTATIONS AND WARRANTIES. The representations and warranties of
the Company contained in this Agreement shall be true and correct in all
material respects on and as of the Closing Date, except for changes
contemplated by this Agreement and except for those representations and
warranties which address matters only as of a particular date (which shall
remain true and correct as of such date), with the same force and effect as
if made on and as of the Closing Date, except, in all such cases, for such
breaches, inaccuracies or omissions of such representations and warranties
which do not have a Material Adverse Effect on the Company; and Parent and
Merger Sub shall have received a certificate to such effect signed on
behalf of the Company by the Chief Executive Officer of the Company;
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(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 on or
prior to the Effective Time, and Parent and Merger Sub shall have received
a certificate to such effect signed by a duly authorized officer of the
Company;
(c) THIRD PARTY CONSENTS. Parent shall have been furnished with evidence
satisfactory to it that the Company has obtained the consents, approvals
and waivers set forth in Schedule 6.3(c).
(d) LEGAL OPINION. Parent shall have received a legal opinion from
Gunderson Dettmer Stough Villeneuve Franklin & Hachigian, LLP, legal
counsel to the Company, in substantially the form attached hereto as
Exhibit C.
(e) AFFILIATE AGREEMENTS. Each of the parties identified by the Company
as being an Affiliate of the Company shall have delivered to Parent an
executed Affiliate Agreement in substantially the form of Exhibit A which
shall be in full force and effect.
(f) NO DISSENTERS. No holders of the outstanding shares of Company
Capital Stock as of the date hereof (or any of their successors, assigns or
transferees) shall have exercised, nor shall they have any continued right
to exercise, appraisal, dissenters' or similar rights under applicable law
with respect to their shares by virtue of the Merger.
(g) NON-COMPETITION AGREEMENTS. Each of the persons listed on Schedule
6.3(g) shall have executed and delivered to Parent a Non-Competition
Agreement in substantially the form attached hereto as Exhibit D, and all
of the Non-Competition Agreements shall be in full force and effect.
(h) NO CASH DISTRIBUTIONS OR COMPENSATION ADJUSTMENTS. The Company shall
have made no cash distributions or compensation adjustments since the date
hereof other than such as are approved by the Parent in writing, and Parent
and Merger Sub shall have received a certificate to such effect signed by
the Chief Executive Officer of the Company.
(i) VOTING AGREEMENTS. Each of the Company Affiliates shall, not later
than contemporaneously with the execution and delivery of this Agreement,
have executed and delivered to Parent a Voting Agreement in the form
attached hereto as Exhibit E (the "Voting Agreement") covering all of the
Company Capital Stock held by them.
(j) EMPLOYMENT ACCEPTANCES. Each of the employees of the Company listed
on Part A of Schedule 6.3(j) shall have accepted offers of employment from
the Parent having substantially the form attached hereto as Exhibit F (the
"Offers"), and the Company shall use its best efforts to have the employees
of the Company listed on Part B of Schedule 6.3(j) accept such Offers.
(k) WAIVER AND AMENDMENT AGREEMENT. Each of Stephen J. Kahn and Robert W.
Warfield shall have executed and delivered a Waiver and Amendment Agreement
in substantially the form attached hereto as Exhibit G.
ARTICLE VII
Termination, Amendment and Waiver
7.1 Termination. Except as provided in Section 7.2 below, this Agreement may
be terminated and the Merger abandoned at any time prior to the Effective
Time:
(a) by mutual consent of the Company and Parent;
(b) by Parent or the Company if: (i) the Effective Time has not occurred
before 5:00 p.m. (Pacific time) on February 28, 1997 (provided that the
right to terminate this Agreement under this clause 7.1(b)(i) shall not be
available to any party whose willful failure to fulfill any obligation
hereunder has been the cause of, or resulted in, the failure of the
Effective Time to occur on or before such date); (ii) there shall be a
final nonappealable order of a federal or state court in effect preventing
consummation of the Merger; or
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(iii) there shall be any statute, rule, regulation or order enacted,
promulgated or issued or deemed applicable to the Merger by any
governmental entity that would make consummation of the Merger illegal;
(c) by Parent if there shall be any action taken, or any statute, rule,
regulation or order enacted, promulgated or issued or deemed applicable to
the Merger, by any Governmental Entity, which would: (i) prohibit Parent's
or the Company's ownership or operation of all or any portion of the
business of the Company or (ii) compel Parent or the Company to dispose of
or hold separate all or a portion of the business or assets of the Company
or Parent as a result of the Merger;
(d) by Parent if it is not in material breach of its obligations under
this Agreement and there has been a breach of any representation, warranty,
covenant or agreement contained in this Agreement on the part of the
Company or contained in the Voting Agreements on the part of the Company's
stockholders and (i) such breach has not been cured within twenty (20)
business days after written notice to the Company (provided that, a five-
business-day cure period shall be required for a breach of any Voting
Agreement and no cure period shall be required for a breach which by its
nature cannot be cured), and (ii) as a result of such breach the conditions
set forth in Section 6.3(a) or 6.3(b), as the case may be, would not then
be satisfied;
(e) by the Company if it is not in material breach of its obligations
under this Agreement and there has been a breach of any representation,
warranty, covenant or agreement contained in this Agreement on the part of
Parent or Merger Sub and (i) such breach has not been cured within twenty
(20) business days after written notice to Parent (provided that, no cure
period shall be required for a breach which by its nature cannot be cured),
and (ii) as a result of such breach the conditions set forth in Section
6.2(a) or 6.2(b), as the case may be, would not then be satisfied.
Where action is taken to terminate this Agreement pursuant to this Section
7.1, it shall be sufficient for such action to be authorized by the Board
of Directors (as applicable) of the party taking such action.
7.2 Effect of Termination. In the event of termination of this Agreement as
provided in Section 7.1, this Agreement shall forthwith become void and there
shall be no liability or obligation on the part of Parent, Merger Sub and the
Company, or their respective officers, directors or stockholders, provided
that each party shall remain liable for any breaches of this Agreement prior
to its termination; and provided further that, the provisions of Section 5.4
and Article VII of this Agreement shall remain in full force and effect and
survive any termination of this Agreement.
7.3 Termination Fee.
(a) Parent shall immediately make payment to the Company of $5,000,000 in
cash in the event Parent shall terminate this Agreement for any reason other
than as permitted by paragraphs (a), (b), (c) and (d) of Section 7.1.
(b) The payment of the fee described in 7.3(a) above shall be as liquidated
damages and shall be in lieu of any damages incurred by the Company in the
event of any breach of this Agreement by Parent.
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 the parties hereto.
7.5 Extension; Waiver. At any time prior to the Effective Time, Parent and
Merger Sub, on the one hand, and the Company, on the other, may, to the extent
legally allowed, (i) extend the time for the performance of any of the
obligations of the other party 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.
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ARTICLE VIII
General Provisions
8.1 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 mailed by registered or certified mail (return receipt
requested) or sent via facsimile (with acknowledgment of complete
transmission) to the parties at the following addresses (or at such other
address for a party as shall be specified by like notice):
(a)if to Parent or Merger Sub, to:
Pure Atria Corporation
1309 South Mary Avenue
Sunnyvale, California 94087
Attention: Chuck Bay
Telephone No.: (408) 720-1600
Facsimile No.: (408) 481-4734
with a copy to:
Wilson Sonsini Goodrich & Rosati, P.C.
650 Page Mill Road
Palo Alto, California 94304
Attention: Mark A. Bertelsen, Esq.
Telephone No.: (415) 493-9300
Facsimile No.: (415) 493-6811
(b)if to the Company, to:
Integrity QA Software, Inc.
1550 So. Bascom Avenue, Suite 380
Campbell, California 95008
Attention: Stephen J. Kahn
Telephone No.: (408) 369-2251
Facsimile No.: (408) 369-2255
with a copy to:
Gunderson Dettmer Stough Villeneuve Franklin & Hachigian, LLP
600 Hansen Way, Second Floor
Palo Alto, California 94304
Attention: Steven M. Spurlock
Telephone No.: (415) 843-0500
Facsimile No.: (415) 843-0314
8.2 Interpretation. 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.
8.3 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.
8.4 Entire Agreement; Assignment. This Agreement, the Schedules and Exhibits
hereto, and the documents and instruments and other agreements among the
parties hereto referenced herein: (a) constitute the entire agreement among
the parties with respect to the subject matter hereof and supersede all prior
agreements
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and understandings, both written and oral, among the parties with respect to
the subject matter hereof; (b) are not intended to confer upon any other
person any rights or remedies hereunder; and (c) shall not be assigned by
operation of law or otherwise except as otherwise specifically provided.
8.5 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.
8.6 Other Remedies. 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.
8.7 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 laws
thereof. Each 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.
8.8 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.
8.9 Specific Performance. 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 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.
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In Witness Whereof, Parent, Merger Sub and have executed this Agreement as
of the date first above written.
Integrity QA Software, Inc. Pure Atria Corporation
By: /s/ Stephen J. Kahn By: /s/ Reed Hastings
---------------------------------- ----------------------------------
Name: Stephen J. Kahn Name: Reed Hastings
Title: President and Chief Title: President and Chief
Executive Officer Executive Officer
Delaware PAI Corp.
By: /s/ Charles J. Bay III
----------------------------------
Name: Charles J. Bay III
Title: President
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ANNEX B
SECTION 262
DELAWARE GENERAL CORPORATION LAW
APPRAISAL RIGHTS
262 APPRAISAL RIGHTS. (a) Any stockholder of a corporation of this State who
holds shares of stock on the date of the making of a demand pursuant to
subsection (d) of this section with respect to such shares, who continuously
holds such shares through the effective date of the merger or consolidation,
who has otherwise complied with subsection (d) of this section and who has
neither voted in favor of the merger or consolidation nor consented thereto in
writing pursuant to (S)228 of this title shall be entitled to an appraisal by
the Court of Chancery of the fair value of his shares of stock under the
circumstances described in subsections (b) and (c) of this section. As used in
this section, the word "stockholder" means a holder of record of stock in a
stock corporation and also a member of record of a nonstock corporation; the
words "stock" and "share" mean and include what is ordinarily meant by those
words and also membership or membership interest of a member of a nonstock
corporation; and the words "depository receipt" mean a receipt or other
instrument issued by a depository representing an interest in one or more
shares, or fractions thereof, solely of stock of a corporation, which stock is
deposited with the depository.
(b) Appraisal rights shall be available for the shares of any class or
series of stock of a constituent corporation in a merger or consolidation to
be effected pursuant to (S)251 (other than a merger effected pursuant to
subsection 9 of (S)251), 252, 254, 257, 258, 263 or 264 of this title:
(1) Provided, however, that no appraisal rights under this section shall
be available for the shares of any class or series of stock, which stock,
or depository receipts in respect thereof, at the record date fixed to
determine the stockholders entitled to receive notice of and to vote at the
meeting of stockholders to act upon the agreement of a merger or
consolidation, were either (i) listed on a national securities exchange or
designated as a national market systems security on an interdealer
quotation system by the National Association of Securities Dealers, Inc. or
(ii) held of record by more than 2,000 holders; and further provided that
no appraisal rights shall be available for any shares of stock of the
constituent corporation surviving a merger if the merger did no require for
its approval the vote of the holders of the surviving corporation as
provided in subsection (f) of (S)251 of this title.
(2) Notwithstanding paragraph (1) of this subsection, appraisal rights
under this section shall be available for the shares of any class or series
of stock of a constituent corporation if the holders thereof are required
by the terms of an agreement of merger or consolidation pursuant to
(S)(S)251, 252, 254, 257, 258, 263 and 264 of this title to accept for such
stock anything except:
a. Shares of stock of the corporation surviving or resulting from
such merger or consolidation, or depository receipts in respect
thereof;
b. Shares of stock of any other corporation, or depository receipts
in respect thereof, which shares of stock or depository receipts at the
effective date of the merger or consolidation will be either listed on
a national securities exchange or designated as a national market
system security on an interdealer quotation system by the National
Association of Securities Dealers, Inc. or held of record by more than
2,000 holders;
c. Cash in lieu of fractional shares or fractional depository
receipts described in the foregoing subparagraphs a. and b. of this
paragraph; or
d. Any combination of the shares of stock, depository receipts and
cash in lieu of fractional shares or fractional depository receipts
described in the foregoing subparagraphs a., b. and c. of this
paragraph.
(3) In the event all of the stock of a subsidiary Delaware corporation
party to a merger effected under 253 of this title is not owned by the
parent corporation immediately prior to the merger, appraisal rights shall
be available for the shares of the subsidiary Delaware corporation.
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(c) Any corporation may provide in its certificate of incorporation that
appraisal rights under this section shall be available for the shares of any
class or series of its stock an a result of an amendment to its certificate of
incorporation, any merger or consolidation in which the corporation is a
constituent corporation or the sale of all or substantially all of the assets
of the corporation. If the certificate of incorporation contains such a
provision, the procedures of this section, including those set forth in
subsections (d) and (e) of this section, shall apply as nearly as is
practicable.
(d) Appraisal rights shall be perfected as follows:
(1) If a proposed merger or consolidation for which appraisal rights are
provided under this section is to be submitted for approval at a meeting of
stockholders, the corporation, not less than 20 days prior to the meeting,
shall notify each of its stockholders who was such on the record date for
such meeting with respect to shares for which appraisal rights are
available pursuant to subsections (b) or (c) hereof that appraisal rights
are available for any or all of the shares of the constituent corporations,
and shall include in such notice a copy of this section. Each stockholder
electing to demand the appraisal of his shares shall deliver to the
corporation, before the taking of the vote on the merger or consolidation,
a written demand for appraisal of his shares. Such demand will be
sufficient if it reasonably informs the corporation of the identity of the
stockholder and that the stockholder intends thereby to demand the
appraisal of his shares. A proxy or vote against the merger or
consolidation shall not constitute such a demand. A stockholder electing to
take such action must do so by a separate written demand as herein
provided. Within 10 days after the effective date of such merger or
consolidation, the surviving or resulting corporation shall notify each
stockholder of each constituent corporation who has complied with this
subsection and has not voted in favor of or consented to the merger or
consolidation of the date that the merger or consolidation has become
effective; or
(2) If the merger or consolidation was approved pursuant to (S)228 or
(S)253 of this title, each constituent corporation, either before the
effective date of the merger or consolidation or within ten days
thereafter, shall notify each of the holders of any class or series of
stock of such constituent corporation who are entitled to appraisal rights
of the approval of the merger or consolidation and that appraisal rights
are available for any or all shares of such class or series of stock of
such constituent corporation, and shall include in such notice a copy of
this section; provided that, if the notice is given on or after the
effective date of the merger or consolidation, such notice shall be given
by the surviving or resulting corporation to all such holders of any class
or series of stock of a constituent corporation that are entitled to
appraisal rights. Such notice may, and, if given on or after the effective
date of the merger or consolidation, shall, also notify such stockholders
of the effective date of the merger or consolidation. Any stockholder
entitled to appraisal rights may, within twenty days after the date of
mailing of such notice, demand in writing from the surviving or resulting
corporation the appraisal of such holder's shares. Such demand will be
sufficient if it reasonably informs the corporation of the identity of the
stockholder and that the stockholder intends thereby to demand the
appraisal of such holder's shares. If such notice did not notify
stockholders of the effective date of the merger or consolidation, either
(i) each such constituent corporation shall send a second notice before the
effective date of the merger or consolidation notifying each of the holders
of any class or series of stock of such constituent corporation that are
entitled to appraisal rights of the effective date of the merger or
consolidation or (ii) the surviving or resulting corporation shall send
such a second notice to all such holders on or within 10 days after such
effective date; provided, however, that if such second notice is sent more
than 20 days following the sending of the first notice, such second notice
need only be sent to each stockholder who is entitled to appraisal rights
and who has demanded appraisal of such holder's shares in accordance with
this subsection. An affidavit of the secretary or assistant secretary or of
the transfer agent of the corporation that is required to give either
notice that such notice has been given shall, in the absence of fraud, be
prima facie evidence of the facts stated therein. For purposes of
determining the stockholders entitled to receive either notice, each
constituent corporation may fix, in advance, a record date that shall be
not more than 10 days prior to the date the notice is given; provided that,
if the notice is given on or after the effective date of the merger or
consolidation, the record date shall be such effective date. If no record
date is fixed and the notice is given prior to the effective date, the
record date shall be the close of business on the day next preceding the
day on which the notice is given.
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(e) Within 120 days after the effective date of the merger or consolidation,
the surviving or resulting corporation or any stockholder who has complied
with subsections (a) and (d) hereof and who is otherwise entitled to appraisal
rights, may file a petition in the Court of Chancery demanding a determination
of the value of the stock of all such stockholders. Notwithstanding the
foregoing, at any time within 60 days after the effective date of the merger
or consolidation, any stockholder shall have the right to withdraw his demand
for appraisal and to accept the terms offered upon the merger or
consolidation. Within 120 days after the effective date of the merger or
consolidation, any stockholder who has complied with the requirements of
subsections (a) and (d) hereof, upon written request, shall be entitled to
receive from the corporation surviving the merger or resulting from the
consolidation a statement setting forth the aggregate number of shares not
voted in favor of the merger or consolidation and with respect to which
demands for appraisal have been received and the aggregate number of holders
of such shares. Such written statement shall be mailed to the stockholder
within 10 days after his written request for such a statement is received by
the surviving or resulting corporation or within 10 days after expiration of
the period for delivery of demands for appraisal under subsection (d) hereof,
whichever is later.
(f) Upon the filing of any such petition by a stockholder, service of a copy
thereof shall be upon the surviving or resulting corporation, which shall
within 20 days after such service file in the office of the Register in
Chancery in which the petition was filed a duly verified list containing the
names and addresses of all stockholders who have demanded payment for their
shares and with whom agreements as to the value of their shares have not been
reached by the surviving or resulting corporation. If the petition shall be
filed by the surviving or resulting corporation, the petition shall be
accompanied by such a duly verified list. The Register in Chancery, if so
ordered by the Court, shall give notice of the time and place fixed for the
hearing of such petition by registered or certified mail to the surviving or
resulting corporation and to the stockholders shown on the list at the
addresses therein stated. Such notice shall also be given by one or more
publications at least one week before the day of the hearing, in a newspaper
of general circulation published in the City of Wilmington, Delaware or such
publication as the Court deems advisable. The forms of the notices by mail and
by publication shall be approved by the Court, and the costs thereof shall be
borne by the surviving or resulting corporation.
(g) At the hearing on such petition, the Court shall determine the
stockholders who have complied with this section and who have become entitled
to appraisal rights. The Court may require the stockholders who have demanded
an appraisal for their shares and who hold stock represented by certificates
to submit their certificates of stock to the Register in Chancery for notation
thereon of the pendency of the appraisal proceedings; and if any stockholder
fails to comply with such direction, the Court may dismiss the proceedings as
to such stockholder.
(h) After determining the stockholders entitled to an appraisal, the Court
shall appraise the shares, determining their fair value exclusive of any
element of value arising from the accomplishment or expectation of the merger
or consolidation, together with a fair rate of interest, if any, to be paid
upon the amount determined to be the fair value. In determining such fair
value, the Court shall take into account all relevant factors. In determining
the fair rate of interest, the Court may consider all relevant factors,
including the rate of interest which the surviving or resulting corporation
would have had to pay to borrow money during the pendency of the proceeding.
Upon application by the surviving or resulting corporation or by any
stockholder entitled to participate in the appraisal proceeding, the Court
may, in its discretion, permit discovery or other pretrial proceedings and may
proceed to trial upon the appraisal prior to the final determination of the
stockholder entitled to an appraisal. Any stockholder whose name appears on
the list filed by the surviving or resulting corporation pursuant to
subsection (f) of this section and who has submitted his certificates of stock
to the Register in Chancery, if such is required, may participate fully in all
proceedings until it is finally determined that he is not entitled to
appraisal rights under this section.
(i) The Court shall direct the payment of the fair value of the shares,
together with interest, if any, by the surviving or resulting corporation to
the stockholders entitled thereto. Interest may be simple or compound, as the
Court may direct. Payment shall be so made to each such stockholder, in the
case of holders of uncertificated stock forthwith, and the case of holders of
shares represented by certificates upon the surrender to the corporation
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of the certificates representing such stock. The Court's decree may be
enforced as other decrees in the Court of Chancery may be enforced, whether
such surviving or resulting corporation be a corporation of this State or of
any state.
(j) The costs of the proceeding may be determined by the Court and taxed
upon the parties as the Court deems equitable in the circumstances. Upon
application of a stockholder, the Court may order all or a portion of the
expenses incurred by any stockholder in connection with the appraisal
proceeding, including, without limitation, reasonable attorney's fees and the
fees and expenses of experts, to be charged pro rata against the value of all
the shares entitled to an appraisal.
(k) From and after the effective date of the merger or consolidation, no
stockholder who has demanded his appraisal rights as provided in subsection
(d) of this section shall be entitled to vote such stock for any purpose or to
receive payment of dividends or other distributions on the stock (except
dividends or other distributions payable to stockholders of record at a date
which is prior to the effective date of the merger or consolidation);
provided, however, that if no petition for an appraisal shall be filed within
the time provided in subsection (e) of this section, or if such stockholder
shall deliver to the surviving or resulting corporation a written withdrawal
of his demand for an appraisal and an acceptance of the merger or
consolidation, either within 60 days after the effective date of the merger or
consolidation as provided in subsection (e) of this section or thereafter with
the written approval of the corporation, then the right of such stockholder to
an appraisal shall cease. Notwithstanding the foregoing, no appraisal
proceeding in the Court of Chancery shall be dismissed as to any stockholder
without the approval of the Court, and such approval may be conditioned upon
such terms as the Court deems just.
(l) The shares of the surviving or resulting corporation to which the shares
of such objecting stockholders would have been converted had they assented to
the merger or consolidation shall have the status of authorized and unissued
shares of the surviving or resulting corporation. (Last amended by Ch. 79, L.
95, eff. 7-1-95.)
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ANNEX C
CHAPTER 13
CALIFORNIA GENERAL CORPORATION LAW
DISSENTERS' RIGHTS
SECTION 1300. RIGHT TO REQUIRE PURCHASE--"DISSENTING SHARES" AND "DISSENTING
SHAREHOLDER" DEFINED.
(a) If the approval of the outstanding shares (Section 152) of a corporation
is required for a reorganization under subdivisions (a) and (b) or subdivision
(e) or (f) of Section 1201, each Shareholder of such corporation entitled to
vote on the transaction and each Shareholder of a subsidiary corporation in a
short-form merger may, by complying with this chapter, require the corporation
in which the Shareholder holds shares to purchase for cash at their fair
market value the shares owned by the Shareholder which are dissenting shares
as defined in subdivision (b). The fair market value shall be determined as of
the day before the first announcement of the terms of the proposed
reorganization or short-form merger, excluding any appreciation or
depreciation in consequence of the proposed action, but adjusted for any stock
split, or reverse stock split or share dividend which becomes effective
thereafter.
(b) As used in this chapter, "dissenting shares" means shares which come
within all of the following descriptions:
(1) Which were not immediately prior to the reorganization or short-form
merger either (A) listed on any national securities exchange certified by
the Commissioner of Corporations under subdivision (o) of Section 25100 or
(B) listed on the list of OTC margin stocks issued by the Board of
Governors of the Federal Reserve System, and the notice of meeting of
shareholders to act upon the reorganization summarizes this section and
Sections 1301, 1302, 1303 and 1304; provided, however, that this provision
does not apply to any shares with respect to which there exists any
restriction on transfer imposed by the corporation or by any law or
regulation; and provided, further, that this provision does not apply to
any class of shares described in subparagraph (A) or (B) if demands for
payment are filed with respect to five percent or more of the outstanding
shares of that class.
(2) Which were outstanding on the date for the determination of
shareholders entitled to vote on the reorganization and (A) were not voted
in favor of the reorganization or, (B) if described in subparagraph (A) or
(B) of paragraph (1) (without regard to the provisos in that paragraph),
were voted against the reorganization, or which were held of record on the
effective date of a short-form merger; provided, however, that subparagraph
(A) rather than subparagraph (B) of this paragraph applies in any case
where the approval required by Section 1201 is sought by written consent
rather than at a meeting.
(3) Which the dissenting Shareholder has demanded that the corporation
purchase at their fair market value, in accordance with Section 1302.
(4) Which the dissenting Shareholder has submitted for endorsement, in
accordance with Section 1301.
(c) As used in this chapter, "dissenting Shareholder" means the recordholder
of dissenting shares and includes a transferee of record.
SECTION 1301. DEMAND FOR PURCHASE.
(a) If, in the case of a reorganization, any shareholders of a corporation
have a right under Section 1300, subject to compliance with paragraphs (3) and
(4) of subdivision (b) thereof, to require the corporation to purchase their
shares for cash, such corporation shall mail to each such Shareholder a notice
of the approval of the reorganization by its outstanding shares (Section 152)
within ten (10) days after the date of such approval, accompanied by a copy of
Sections 1300, 1302, 1303, 1304 and this section, a statement of the price
determined by the corporation to represent the fair market value of the
dissenting shares, and a brief description of the
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procedure to be followed if the Shareholder desires to exercise the
Shareholder's right under such sections. The statement of price constitutes an
offer by the corporation to purchase at the price stated any dissenting shares
as defined in subdivision (b) of Section 1300, unless they lose their status
as dissenting shares under Section 1309.
(b) Any Shareholder who has a right to require the corporation to purchase
the Shareholder's shares for cash under Section 1300, subject to compliance
with paragraphs (3) and (4) of subdivision (b) thereof, and who desires the
corporation to purchase such shares shall make written demand upon the
corporation for the purchase of such shares and payment to the Shareholder in
cash of their fair market value. The demand is not effective for any purpose
unless it is received by the corporation or any transfer agent thereof (1) in
the case of shares described in clause (i) or (ii) of paragraph (1) of
subdivision (b) of Section 1300 (without regard to the provisos in that
paragraph), not later than the date of the shareholders' meeting to vote upon
the reorganization, or (2) in any other case within thirty (30) days after the
date on which the notice of the approval by the outstanding shares pursuant to
subdivision (a) or the notice pursuant to subdivision (i) of Section 1110 was
mailed to the Shareholder.
(c) The demand shall state the number and class of the shares held of record
by the Shareholder which the Shareholder demands that the corporation purchase
and shall contain a statement of what such Shareholder claims to be the fair
market value of those shares as of the day before the announcement of the
proposed reorganization or short-form merger. The statement of fair market
value constitutes an offer by the Shareholder to sell the shares at such
price.
SECTION 1302. ENDORSEMENT OF SHARES.
Within thirty (30) days alter the date on which notice of the approval by
the outstanding shares or the notice pursuant to subdivision (i) of Section
1110 was mailed to the Shareholder, the Shareholder shall submit to the
corporation at its principal office or at the office of any transfer agent
thereof, (a) if the shares are certificated securities, the Shareholder's
certificates representing any shares which the Shareholder demands that the
corporation purchase, to be stamped or endorsed with a statement that the
shares are dissenting shares or to be exchanged for certificates of
appropriate denomination so stamped or endorsed or (b) if the shares are
uncertificated securities, written notice of the number of shares which the
Shareholder demands that the corporation purchase. Upon subsequent transfers
of the dissenting shares on the books of the corporation, the new
certificates, initial transaction statement, and other written statements
issued therefor shall bear a like statement, together with the name of the
original dissenting holder of the shares.
SECTION 1303. AGREED PRICE--TIME FOR PAYMENT.
(a) If the corporation and the Shareholder agree that the shares are
dissenting shares and agree upon the price of the shares, the dissenting
Shareholder is entitled to the agreed price with interest thereon at the legal
rate on judgments from the date of the agreement. Any agreements fixing the
fair market value of any dissenting shares as between the corporation and the
holders thereof shall be filed with the secretary of the corporation.
(b) Subject to the provisions of Section 1306, payment of the fair market
value of dissenting shares shall be made within thirty (30) days after the
amount thereof has been agreed or within thirty (30) days after any statutory
or contractual conditions to the reorganization are satisfied, whichever is
later, and in the case of certificated securities, subject to surrender of the
certificates therefor, unless provided otherwise by agreement.
SECTION 1304. DISSENTER'S ACTION TO ENFORCE PAYMENT.
(a) If the corporation denies that the shares are dissenting shares, or the
corporation and the Shareholder fail to agree upon the fair market value of
the shares, then the Shareholder demanding purchase of such shares as
dissenting shares or any interested corporation, within six (6) months after
the date on which notice of the approval by the outstanding shares (Section
152) or notice pursuant to subdivision (i) of Section 1110 was mailed to the
Shareholder, but not thereafter, may file a complaint in the superior court of
the proper county paying the
C-2
<PAGE>
court to determine whether the shares are dissenting shares or the fair market
value of the dissenting shares or both or may intervene in any action pending
on such a complaint.
(b) Two or more dissenting shareholders may join as plaintiffs or be joined
as defendants in any such action and two or more such actions may be
consolidated.
(c) On the trial of the action, the court shall determine the issues. If the
status of the shares as dissenting shares is in issue, the court shall first
determine that issue. If the fair market value of the dissenting shares is in
issue, the court shall determine, or shall appoint one or more impartial
appraisers to determine, the fair market value of the shares.
SECTION 1305. APPRAISER'S REPORT--PAYMENT--COSTS.
(a) If the court appoints an appraiser or appraisers, they shall proceed
forthwith to determine the fair market value per share. Within the time fixed
by the court, the appraisers, or a majority of them, shall make and file a
report in the office of the clerk of the court. Thereupon, on the motion of
any party, the report shall be submitted to the court and considered on such
evidence as the court considers relevant. If the court finds the report
reasonable, the court may confirm it.
(b) If a majority of the appraisers appointed fail to make and file a report
within ten (10) days from the date of their appointment or within such further
time as may be allowed by the court or the report is not confirmed by the
court, the court shall determine the fair market value of the dissenting
shares.
(c) Subject to the provisions of Section 1306, judgment shall be rendered
against the corporation for payment of an amount equal to the fair market
value of each dissenting share multiplied by the number of dissenting shares
which any dissenting Shareholder who is a party, or who has intervened, is
entitled to require the corporation to purchase, with interest thereon at the
legal rate from the date on which judgment was entered.
(d) Any such judgment shall be payable forthwith with respect to
uncertificated securities and, with respect to certificated securities, only
upon the endorsement and delivery to the corporation of the certificates for
the shares described in the judgment. Any party may appeal from the judgment.
(e) The costs of the action, including reasonable compensation to the
appraisers to be fixed by the court, shall be assessed or apportioned as the
court considers equitable, but, if the appraisal exceeds the price offered by
the corporation, the corporation shall pay the costs (including in the
discretion of the court attorneys' fees, fees of expert witnesses and interest
at the legal rate on judgments from the date of compliance with Sections 1300,
1301 and 1302 if the value awarded by the court for the shares is more than
125 percent of the price offered by the corporation under subdivision (a) of
Section 1301).
SECTION 1306. DISSENTING SHAREHOLDER'S STATUS AS CREDITOR.
To the extent that the provisions of Chapter 5 prevent the payment to any
holders of dissenting shares of their fair market value, they shall become
creditors of the corporation for the amount thereof together with interest at
the legal rate on judgments until the date of payment, but subordinate to all
other creditors in any liquidation proceeding, such debt to be payable when
permissible under the provisions of Chapter 5.
SECTION 1307. DIVIDENDS PAID AS CREDIT AGAINST PAYMENT.
Cash dividends declared and paid by the corporation upon the dissenting
shares after the date of approval of the reorganization by the outstanding
shares (Section 152) and prior to payment for the shares by the corporation
shall be credited against the total amount to be paid by the corporation
therefor.
C-3
<PAGE>
SECTION 1308. CONTINUING RIGHTS AND PRIVILEGES OF DISSENTING SHAREHOLDERS.
Except as expressly limited in this chapter, holders of dissenting shares
continue to have all the rights and privileges incident to their shares, until
the fair market value of their shares is agreed upon or determined. A
dissenting Shareholder may not withdraw a demand for payment unless the
corporation consents thereto.
SECTION 1309. TERMINATION OF DISSENTING SHAREHOLDER STATUS.
Dissenting shares lose their status as dissenting shares and the holders
thereof cease to be dissenting shareholders and cease to be entitled to
require the corporation to purchase their shares upon the happening of any of
the following:
(a) The corporation abandons the reorganization. Upon abandonment of the
reorganization, the corporation shall pay on demand to any dissenting
Shareholder who has initiated proceedings in good faith under this chapter
all necessary expenses incurred in such proceedings and reasonable
attorneys' fees.
(b) The shares are transferred prior to their submission for endorsement
in accordance with Section 1302 or are surrendered for conversion into
shares of another class in accordance with the articles.
(c) The dissenting Shareholder and the corporation do not agree upon the
status of the shares as dissenting shares or upon the purchase price of the
shares, and neither files a complaint or intervenes in a pending action as
provided in Section 1304, within six (6) months after the date on which
notice of the approval by the outstanding shares or notice pursuant to
subdivision (i) of Section 1110 was mailed to the Shareholder.
(d) The dissenting Shareholder, with the consent of the corporation,
withdraws the Shareholder's demand for purchase of the dissenting shares.
SECTION 1310. SUSPENSION OF PROCEEDINGS FOR PAYMENT PENDING LITIGATION.
If litigation is instituted to test the sufficiency or regularity of the
votes of the shareholders in authorizing a reorganization, any proceedings
under Sections 1304 and 1305 shall be suspended until final determination of
such litigation.
SECTION 1311. EXEMPT SHARES.
This chapter, except Section 1312, does not apply to classes of shares whose
terms and provisions specifically set forth the amount to be paid in respect
to such shares in the event of a reorganization or merger.
SECTION 1312. ATTACKING VALIDITY OF REORGANIZATION OR MERGER.
(a) No Shareholder of a corporation who has a right under this chapter to
demand payment of cash for the shares held by the Shareholder shall have any
right at law or in equity to attack the validity of the reorganization or
short-form merger, or to have the reorganization or short-form merger set
aside or rescinded, except in an action to test whether the number of shares
required to authorize or approve the reorganization have been legally voted in
favor thereof; but any holder of shares of a class whose terms and provisions
specifically set forth the amount to be paid in respect to them in the event
of a reorganization or short-form merger is entitled to payment in accordance
with those terms and provisions or, if the principal terms of the
reorganization are approved pursuant to subdivision (b) of Section 1202, is
entitled to payment in accordance with the terms and provisions of the
approved reorganization.
(b) If one of the parties to a reorganization or short-form merger is
directly or indirectly controlled by, or under common control with, another
party to the reorganization or short-form merger, subdivision (a) shall not
apply to any Shareholder of such party who has not demanded payment of cash
for such Shareholder's shares pursuant to this chapter; but if the Shareholder
institutes any action to attack the validity of the reorganization or short-
form merger or to have the reorganization or short-form merger set aside or
rescinded, the Shareholder shall not thereafter have any right to demand
payment of cash for the Shareholder's shares pursuant to this
C-4
<PAGE>
chapter. The court in any action attacking the validity of the reorganization
or short-form merger or to have the reorganization or short-form merger set
aside or rescinded shall not restrain or enjoin the consummation of the
transaction except upon ten (10) days' prior notice to the corporation and
upon a determination by the court that clearly no other remedy will adequately
protect the complaining Shareholder or the class of shareholders of which such
Shareholder is a member.
(c) If one of the parties to a reorganization or short-form merger is
directly or indirectly controlled by or under common control with, another
party to the reorganization or short-form merger, in any action to attack the
validity of the reorganization or short-form merger or to have the
reorganization or short-form merger set aside or rescinded, (1) a party to a
reorganization or short-form merger which controls another party to the
reorganization or short-form merger shall have the burden of proving that the
transaction is just and reasonable as to the shareholders of the controlled
party, and (2) a person who controls two or more parties to a reorganization
shall have the burden of proving that the transaction is just and reasonable
as to the shareholders of any party so controlled.
C-5
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 145 of the Delaware General Corporation Law authorizes a court to
award, or a corporation's Board of Directors to grant, indemnification to
directors and officers in terms sufficiently broad to permit such
indemnification under certain circumstances for liabilities (including
reimbursement for expenses incurred) arising under the Securities Act. Article
X of the Registrant's Certificate of Incorporation (Exhibit 3.1 hereto) and
Article VII of the Registrant's Bylaws (Exhibit 3.2 hereto) provide for
indemnification of its directors, officers, employees and other agents to the
maximum extent permitted by Delaware law. In addition, the Registrant has
entered into Indemnification Agreements (Exhibit 10.1 hereto) with its
officers and directors.
Commencing with the effectiveness of the Merger, the Registrant will either
cause Integrity to, or will itself directly indemnify the current officers and
directors of Integrity in accordance with Integrity's Bylaws in effect
immediately before the Merger to any action or inaction by such person prior
to the Merger.
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULE
(A) EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER
-------
<C> <S>
2.1 Agreement and Plan of Reorganization between Registrant and Integrity
QA Software, Inc. ("Integrity") dated as of November 17, 1996
(included as Annex A to the Consent Solicitation Statement/Prospectus
included as a part of this Registration Statement).
2.2 Agreement and Plan of Reorganization among Registrant and QualTrak
Corporation, dated February 17, 1995 (which is incorporated herein by
reference to Registrant's Registration Statement on Form S-1,
Registration No. 33-93254 ("Registrant's 1995 S-1")).
2.3 Agreement and Plan of Reorganization, dated as of October 19, 1995, by
and among Pure Software Inc., a Delaware corporation, Performix, Inc.,
a Maryland corporation, and Empower Acquisition Corp., a California
corporation (which is incorporated herein by reference to Registrant's
Current Report on Form 8-K filed December 5, 1995).
2.4 Agreement of Merger filed on November 21, 1995 between Empower
Acquisition Corp and Performix, Inc. (which is incorporated herein by
reference to Registrant's Current Report on Form 8-K filed December 5,
1995).
2.5 Agreement and Plan of Reorganization dated as of June 6, 1996 among
Registrant, CST Acquisition Corporation and Atria Software, Inc.
(which is incorporated herein by reference to Registrant's Current
Report on Form 8-K filed June 14, 1996).
3.1 Restated Certificate of Incorporation of Registrant, as filed November
21, 1995 (which is incorporated herein by reference to Registrant's
Annual Report on Form 10-K filed March 29, 1996 ("Registrant's 1996
10-K")).
3.2 Bylaws of the Registrant (which is incorporated herein by reference to
Registrant's 1995 S-1).
4.1 Reference is made to Exhibits 3.1 and 3.2.
4.2 Second Amended and Restated Investors' Rights Agreement among
Registrant and the investors and the founders named therein, dated
March 17, 1995 (which is incorporated herein by reference to
Registrant's 1995 S-1).
4.3 Amendment to the Series A Stock Purchase Agreement among Registrant
and the investors named therein, dated March 17, 1995 (which is
incorporated herein by reference to Registrant's 1995 S-1).
4.4 Warrant to Purchase Shares of Common Stock issued to De Anza
Properties, L.P. ("De Anza") (which is incorporated herein by
reference to Registrant's 1995 S-1).
4.5 Specimen Common Stock Certificate (which is incorporated herein by
reference to Registrant's 1995 S-1).
5.1+ Opinion of Wilson Sonsini Goodrich & Rosati, Professional Corporation
8.1+ Form of Tax Opinion of Wilson Sonsini Goodrich & Rosati, Professional
Corporation
8.2+ Form of Tax Opinion of Gunderson Dettmer Stough Villeneuve Franklin &
Hachigian, LLP
</TABLE>
II-1
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER
-------
<C> <S>
10.2 The Registrant's 1992 Stock Option/Stock Issuance Plan (which is
incorporated herein by reference to Registrant's 1995 S-1).
10.3 The Registrant's 1995 Stock Option Plan, as amended (which is
incorporated herein by reference to Registrant's 1995 S-1).
10.4 The Registrant's Employee Stock Purchase Plan (which is incorporated
herein by reference to Registrant's 1995 S-1).
10.5 The Registrant's Management by Objective Incentive Program (which is
incorporated herein by reference to Registrant's 1995 S-1).
10.6 Office Lease, dated July 28, 1992, between Registrant and De Anza and
Amendments to the Office Lease between Registrant and De Anza, dated
January 15, 1993 and March 31, 1995 (which is incorporated herein by
reference to Registrant's 1995 S-1).
10.7* Letter of agreement between Registrant and Empower K.K., dated
November 17, 1994 (which is incorporated herein by reference to
Registrant's 1995 S-1).
10.8* Internal Use Source License Agreement between Registrant and ParcPlace
Systems, Inc., dated January 12, 1994 (which is incorporated herein by
reference to Registrant's 1995 S-1).
10.9* Developer Program Terms and Conditions between Registrant and Silicon
Graphics, Inc. and First Addendum thereto, dated June 20, 1994 (which
is incorporated herein by reference to Registrant's 1995 S-1).
10.10* Wind/U Software License Agreement between Bristol Technology Inc. and
Registrant, dated January 9, 1995 (which is incorporated herein by
reference to Registrant's 1995 S-1).
10.11* Loan Agreement between Registrant and David E. Anderson, dated April
17, 1995 (which is incorporated herein by reference to Registrant's
1995 S-1).
10.12 Form of Shrinkwrap License Agreements (which is incorporated herein by
reference to Registrant's 1995 S-1).
10.13 License Agreement between Registrant and CenterLine Software Inc.,
dated August 8, 1994 (which is incorporated herein by reference to
Registrant's 1995 S-1).
10.14 Credit Terms and Conditions with Addendum, between Registrant and
Imperial Bank and Promissory Note issued by Registrant thereunder, as
amended, dated March 3, 1994 (which is incorporated herein by
reference to Registrant's 1995 S-1).
10.15* Security and Loan Agreement and ancillary documents thereto, between
Registrant and Imperial Bank (which is incorporated herein by
reference to Registrant's 1995 S-1).
10.16* Settlement and License Agreement between Registrant and Sun
Microsystems, Inc., dated July 27, 1995 (which is incorporated herein
by reference to Registrant's 1995 S-1).
10.17 Stock Option Agreements dated as of June 6, 1996 between Registrant
and Atria Software, Inc. (which is incorporated herein by reference to
Registrant's Current Report on Form 8-K filed June 14, 1996).
10.18 Pure Atria Corporation Employee Retention Policy (which is
incorporated herein by reference to Registrant's Registration
Statement on Form S-4, Registration No. 333-08695).
10.19 Office Lease dated October 2, 1996 between Registrant and Tandem
Computers Incorporated (which is incorporated herein by reference to
Registrant's Quarterly Report on Form 10-Q for the quarterly period
ended September 30, 1996 ("Registrant's 1996 Q3 10-Q")).
10.20 Office Lease dated September 23, 1996 between Atria Software, Inc. and
Advent Realty Limited Partnership (which is incorporated herein by
reference to Registrant's 1996 Q3 10-Q).
10.21 Letter Agreement dated August 26, 1996 between the Registrant and Aki
Fukamura (which is incorporated herein by reference to Registrant's
1996 Q3 10-Q).
10.22 Amendment to Office Lease dated September 23, 1996, between Atria
Software, Inc. and Advent Realty Limited Partnership (which is
incorporated herein by reference to Registrant's 1996 Q3 10-Q).
</TABLE>
II-2
<PAGE>
<TABLE>
<C> <S>
EXHIBIT
NUMBER
-------
11.1+ Computation of Pro Forma Net Income (Loss) Per Share.
21.1+ Subsidiaries of the Registrant.
23.1 Report of KPMG Peat Marwick LLP on Schedule and Consent.
23.2 Consent of Ernst & Young LLP.
23.3 Consent of Price Waterhouse LLP.
23.4+ Consent of Wilson Sonsini Goodrich & Rosati, Professional Corporation
(included in Exhibits 5.1 and 8.1).
23.5+ Consent of Gunderson Dettmer Stough Villeneuve Franklin & Hatchigian,
LLP (included in Exhibit 8.2).
24.1+ Power of Attorney (included in page II-4).
99.1+ Form of Written Consent of Stockholders of Integrity.
</TABLE>
- --------
* Confidential treatment has been previously granted for certain portions of
these exhibits.
+ Incorporated by reference to Registrant's original filing of this
Registration Statement on Form S-4, Registration No. 333-19319.
(B) FINANCIAL STATEMENT SCHEDULES
<TABLE>
<S> <C>
Schedule II Valuation and Qualifying Accounts
</TABLE>
All other schedules have been omitted because the information required to be
set forth therein is not applicable or is shown in the financial statements or
the notes thereto.
ITEM 22. UNDERTAKINGS
(a)(1) The undersigned Registrant hereby undertakes as follows: that prior
to any public reoffering of the securities registered hereunder through use of
a prospectus which is a part of this Registration Statement, by any person or
party who is deemed to be an underwriter within the meaning of Rule 145(c),
the Registrant undertakes that such reoffering prospectus will contain the
information called for by the applicable registration form with respect to
reofferings by persons who may be deemed underwriters, in addition to the
information called for by the other Items of the applicable form.
(2) The Registrant undertakes that every prospectus (i) that is filed
pursuant to paragraph (1) immediately preceding or (ii) that purports to meet
the requirements of Section 10(a)(3) of the Securities Act and is used in
connection with an offering of securities subject to Rule 415, will be filed
as a part of an amendment to the Registration Statement and will not be used
until such amendment is effective, and that, for purposes of determining any
liability under the Securities Act, each such post-effective amendment shall
be deemed to be a new Registration Statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
Insofar as the indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities
Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer or controlling
person of the Registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such issue.
(b) The undersigned Registrant hereby undertakes to respond to requests for
information that is incorporated by reference into the Prospectus pursuant to
Items 4, 10(b), 11 or 13 of this Form S-4, within one business day of receipt
of such request, and to send the incorporated documents by first class mail or
other equally prompt means. This includes information contained in documents
filed subsequent to the effective date of the Registration Statement through
the date of responding to the request.
(c) The undersigned Registrant hereby undertakes to supply by means of a
post-effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in the Registration Statement when it became effective.
II-3
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE REGISTRANT
HAS DULY CAUSED THIS AMENDMENT NO. 1 TO THE REGISTRATION STATEMENT ON FORM S-4
TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN
THE CITY OF SUNNYVALE, STATE OF CALIFORNIA, ON THE 23RD DAY OF JANUARY 1997.
PURE ATRIA CORPORATION
By: /s/ Chuck Bay
----------------------------------
CHUCK BAY
VICE PRESIDENT, FINANCE AND CHIEF
FINANCIAL OFFICER AND SECRETARY
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS AMENDMENT
NO. 1 TO THE REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS
ON THE 23RD DAY OF JANUARY 1997 IN THE CAPACITIES INDICATED:
<TABLE>
<CAPTION>
SIGNATURE TITLE
--------- -----
<S> <C>
Reed Hastings* President and Chief Executive
- ------------------------------------- Officer and Director (principal
REED HASTINGS executive officer)
/s/ Chuck Bay Vice President, Finance, Chief
- ------------------------------------- Financial Officer and Secretary
CHUCK BAY (principal accounting and financial
officer)
Paul H. Levine* Chairman of the Board of Directors
- -------------------------------------
PAUL H. LEVINE
Louis J. Volpe* Director
- -------------------------------------
LOUIS J. VOLPE
David A. Litwack* Director
- -------------------------------------
DAVID A. LITWACK
Thomas A. Jermoluk* Director
- -------------------------------------
THOMAS A. JERMOLUK
Larry W. Sonsini* Director
- -------------------------------------
LARRY W. SONSINI
Aki Fujimura* Director
- -------------------------------------
AKI FUJIMURA
*By: /s/ Chuck Bay
------------------------
CHUCK BAY
Attorney-in-Fact
</TABLE>
II-4
<PAGE>
SCHEDULE II
PURE ATRIA CORPORATION AND SUBSIDIARIES (FORMERLY PURE SOFTWARE, INC.)
VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)
<TABLE>
<CAPTION>
BALANCE AT CHARGED TO CHARGED TO BALANCE AT
BEGINNING COSTS AND OTHER END OF
OF PERIOD EXPENSES ACCOUNTS DEDUCTIONS PERIOD
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Year Ended December 31,
1993:
Allowance for doubtful
accounts
and returns........... $ -- 315 -- (3) $ 312
Year Ended December 31,
1994:
Allowance for doubtful
accounts
and returns........... $312 442 -- (162) $ 592
Year Ended December 31,
1995:
Allowance for doubtful
accounts
and returns........... $592 829 -- (583) $ 838
</TABLE>
S-1
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER
-------
<C> <S>
2.1 Agreement and Plan of Reorganization between Registrant and Integrity
QA Software, Inc. ("Integrity") dated as of November 17, 1996
(included as Annex A to the Consent Solicitation Statement/Prospectus
included as a part of this Registration Statement).
2.2 Agreement and Plan of Reorganization among Registrant and QualTrak
Corporation, dated February 17, 1995 (which is incorporated herein by
reference to Registrant's Registration Statement on Form S-1,
Registration No. 33-93254 ("Registrant's 1995 S-1")).
2.3 Agreement and Plan of Reorganization, dated as of October 19, 1995, by
and among Pure Software Inc., a Delaware corporation, Performix, Inc.,
a Maryland corporation, and Empower Acquisition Corp., a California
corporation (which is incorporated herein by reference to Registrant's
Current Report on Form 8-K filed December 5, 1995).
2.4 Agreement of Merger filed on November 21, 1995 between Empower
Acquisition Corp and Performix, Inc. (which is incorporated herein by
reference to Registrant's Current Report on Form 8-K filed December 5,
1995).
2.5 Agreement and Plan of Reorganization dated as of June 6, 1996 among
Registrant, CST Acquisition Corporation and Atria Software, Inc.
(which is incorporated herein by reference to Registrant's Current
Report on Form 8-K filed June 14, 1996).
3.1 Restated Certificate of Incorporation of Registrant, as filed November
21, 1995 (which is incorporated herein by reference to Registrant's
Annual Report on Form 10-K filed March 29, 1996 ("Registrant's 1996
10-K")).
3.2 Bylaws of the Registrant (which is incorporated herein by reference to
Registrant's 1995 S-1).
4.1 Reference is made to Exhibits 3.1 and 3.2.
4.2 Second Amended and Restated Investors' Rights Agreement among
Registrant and the investors and the founders named therein, dated
March 17, 1995 (which is incorporated herein by reference to
Registrant's 1995 S-1).
4.3 Amendment to the Series A Stock Purchase Agreement among Registrant
and the investors named therein, dated March 17, 1995 (which is
incorporated herein by reference to Registrant's 1995 S-1).
4.4 Warrant to Purchase Shares of Common Stock issued to De Anza
Properties, L.P. ("De Anza") (which is incorporated herein by
reference to Registrant's 1995 S-1).
4.5 Specimen Common Stock Certificate (which is incorporated herein by
reference to Registrant's 1995 S-1).
5.1+ Opinion of Wilson Sonsini Goodrich & Rosati, Professional Corporation
8.1+ Form of Tax Opinion of Wilson Sonsini Goodrich & Rosati, Professional
Corporation
8.2+ Form of Tax Opinion of Gunderson Dettmer Stough Villeneuve Franklin &
Hachigian, LLP
10.2 The Registrant's 1992 Stock Option/Stock Issuance Plan (which is
incorporated herein by reference to Registrant's 1995 S-1).
10.3 The Registrant's 1995 Stock Option Plan, as amended (which is
incorporated herein by reference to Registrant's 1995 S-1).
10.4 The Registrant's Employee Stock Purchase Plan (which is incorporated
herein by reference to Registrant's 1995 S-1).
10.5 The Registrant's Management by Objective Incentive Program (which is
incorporated herein by reference to Registrant's 1995 S-1).
10.6 Office Lease, dated July 28, 1992, between Registrant and De Anza and
Amendments to the Office Lease between Registrant and De Anza, dated
January 15, 1993 and March 31, 1995 (which is incorporated herein by
reference to Registrant's 1995 S-1).
10.7* Letter of agreement between Registrant and Empower K.K., dated
November 17, 1994 (which is incorporated herein by reference to
Registrant's 1995 S-1).
10.8* Internal Use Source License Agreement between Registrant and ParcPlace
Systems, Inc., dated January 12, 1994 (which is incorporated herein by
reference to Registrant's 1995 S-1).
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER
-------
<C> <S>
10.9* Developer Program Terms and Conditions between Registrant and Silicon
Graphics, Inc. and First Addendum thereto, dated June 20, 1994 (which
is incorporated herein by reference to Registrant's 1995 S-1).
10.10* Wind/U Software License Agreement between Bristol Technology Inc. and
Registrant, dated January 9, 1995 (which is incorporated herein by
reference to Registrant's 1995 S-1).
10.11* Loan Agreement between Registrant and David E. Anderson, dated April
17, 1995 (which is incorporated herein by reference to Registrant's
1995 S-1).
10.12 Form of Shrinkwrap License Agreements (which is incorporated herein by
reference to Registrant's 1995 S-1).
10.13 License Agreement between Registrant and CenterLine Software Inc.,
dated August 8, 1994 (which is incorporated herein by reference to
Registrant's 1995 S-1).
10.14 Credit Terms and Conditions with Addendum, between Registrant and
Imperial Bank and Promissory Note issued by Registrant thereunder, as
amended, dated March 3, 1994 (which is incorporated herein by
reference to Registrant's 1995 S-1).
10.15* Security and Loan Agreement and ancillary documents thereto, between
Registrant and Imperial Bank (which is incorporated herein by
reference to Registrant's 1995 S-1).
10.16* Settlement and License Agreement between Registrant and Sun
Microsystems, Inc., dated July 27, 1995 (which is incorporated herein
by reference to Registrant's 1995 S-1).
10.17 Stock Option Agreements dated as of June 6, 1996 between Registrant
and Atria Software, Inc. (which is incorporated herein by reference to
Registrant's Current Report on Form 8-K filed June 14, 1996).
10.18 Pure Atria Corporation Employee Retention Policy (which is
incorporated herein by reference to Registrant's Registration
Statement on Form S-4, Registration No. 333-08695).
10.19 Office Lease dated October 2, 1996 between Registrant and Tandem
Computers Incorporated (which is incorporated herein by reference to
Registrant's Quarterly Report on Form 10-Q for the quarterly period
ended September 30, 1996 ("Registrant's 1996 Q3 10-Q")).
10.20 Office Lease dated September 23, 1996 between Atria Software, Inc. and
Advent Realty Limited Partnership (which is incorporated herein by
reference to Registrant's 1996 Q3 10-Q).
10.21 Letter Agreement dated August 26, 1996 between the Registrant and Aki
Fukamura (which is incorporated herein by reference to Registrant's
1996 Q3 10-Q).
10.22 Amendment to Office Lease dated September 23, 1996, between Atria
Software, Inc. and Advent Realty Limited Partnership (which is
incorporated herein by reference to Registrant's 1996 Q3 10-Q).
11.1+ Computation of Pro Forma Net Income (Loss) Per Share.
21.1+ Subsidiaries of the Registrant.
23.1 Report of KPMG Peat Marwick LLP on Schedule and Consent.
23.2 Consent of Ernst & Young LLP.
23.3 Consent of Price Waterhouse LLP.
23.4+ Consent of Wilson Sonsini Goodrich & Rosati, Professional Corporation
(included in Exhibits 5.1 and 8.1).
23.5+ Consent of Gunderson Dettmer Stough Villeneuve Franklin & Hatchigian,
LLP (included in Exhibit 8.2).
24.1+ Power of Attorney (included in page II-4).
99.1+ Form of Written Consent of Stockholders of Integrity.
</TABLE>
- --------
* Confidential treatment has been previously granted for certain portions of
these exhibits.
+ Incorporated by reference to Registrant's original filing of this
Registration Statement on Form S-4, Registration No. 333-19319.
<PAGE>
EXHIBIT 23.1
INDEPENDENT AUDITORS' REPORT ON SCHEDULE AND CONSENT
The Board of Directors
Pure Atria Corporation:
The audits referred to in our report dated January 18, 1996 except as to Note
2, which is as of August 26, 1996, included the related financial statement
schedule for each of the years in the three-year period ended December 31,
1995 included in the registration statement. This financial statement schedule
is the responsibility of the Company's management. Our responsibility is to
express an opinion on this financial statement schedule based on our audits.
In our opinion, based on our audits and the reports of other auditors, such
financial statement schedule, when considered in relation to the basic
consolidated financial statements taken as a whole, presents fairly in all
material respects to the information set forth therein.
We consent to the use of our reports included herein and the references to our
firm under the heading "Experts" in the Consent Solicitation
Statement/Prospectus.
KPMG Peat Marwick LLP
San Jose, California
January 23, 1997
<PAGE>
EXHIBIT 23.2
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and to the
use of our report dated January 23, 1996, included in the Consent Solicitation
Statement of Integrity QA Software, Inc. that is made a part of the Registration
Statement (Amendment No. 1 to Form S-4 No. 333-19319) and Prospectus of Pure
Atria Corporation for the registration of 2,000,000 shares of its common stock.
Ernst & Young LLP
Boston, Massachusetts
January 23, 1997
<PAGE>
EXHIBIT 23.3
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in the Prospectus constituting part of this
Registration Statement on Form S-4 (No. 333-19319) of Pure Atria Corporation
of our report dated November 27, 1996, relating to the financial statements of
Integrity QA Software, Inc., which appears in such Prospectus. We also consent
to the reference to us under the heading "Experts" in such Prospectus.
Price Waterhouse LLP
San Jose, California
January 23, 1997
