LOS ANGELES, June 17, 2003 (PRIMEZONE) -- The law firm of Hennigan, Bennett and Dorman, representing the Official Committee of Unsecured Creditors (the "Committee") of Peregrine Systems, Inc. (OTC:PRGNQ) and Peregrine Remedy, Inc. (together, "Peregrine") is sending a letter to unsecured creditors of Peregrine, unanimously urging them to vote to REJECT the Fourth Amended Plan of Reorganization filed by Peregrine. A copy of that letter, which describes the reasons for the Committee's decision to recommend rejection of the Plan is included below.
OFFICIAL COMMITTEE OF UNSECURED CREDITORS OF PEREGRINE SYSTEMS, INC. AND PEREGRINE REMEDY, INC.
June 17, 2003
Dear Fellow Unsecured Creditors:
The Official Committee of Unsecured Creditors (the "Committee") of Peregrine Systems, Inc. and Peregrine Remedy, Inc. (together, the "Debtors") has made the unanimous decision to object to the Fourth Amended Plan of Reorganization (the "Plan") proposed by the Debtors and sent to all creditors beginning on June 5, 2003. The Committee urges all creditors to VOTE TO REJECT the Plan as it is now constituted.
The Committee was appointed under section 1102 of the Bankruptcy Code as the statutory representative of all unsecured creditors, which includes creditors in both Class 7 and Class 8 of the Plan. It is comprised of four holders of the 5 1/2% Convertible Subordinated Notes due 2007 (the "Notes") issued by Peregrine, and the indenture trustee for these Notes. The Committee has been actively involved in the administration of the case from the beginning, and believes it has acquired a reasonably thorough understanding of the Debtors' business and financial affairs.
During the last half of 2002, the Debtors represented that their assets were insufficient to satisfy their liabilities and, therefore, that creditors were unlikely to be paid 100% of their claims. The Debtors now contend that the value of their assets exceed the total amount of allowed claims and the Plan provides for a large allocation of new common stock (the "New PSI Common Stock") to Peregrine's current shareholders. Notwithstanding this, the Plan does not provide for prompt and full payment of holders of Notes ("Noteholders") in Class 7 or of general unsecured (trade) creditors in Class 8. Treatment of Class 7 Noteholders. Although the Plan purports to pay Class 7 Noteholders in full through a distribution of cash, notes and New PSI Common Stock, a close analysis of the Plan reveals that:
-- The Plan provides for Noteholders in Class 7 to receive 50% of their claims in New PSI Common Stock. The New PSI Common Stock that will be distributed to Noteholders is based on estimates of the Debtors' cash balances and post-bankruptcy liabilities. If these estimates prove to be too low, fewer shares of New PSI Common Stock will be distributed to Noteholders than they ought to receive. The Committee and its professionals believe that the Debtors' estimate of allowable general unsecured claims ($61 million) is unreasonably low, and that $93 million is a more reasonable estimate, particularly since the total unsecured claims filed against the Debtors exceed $2.5 billion. If distributions are based on an estimate of $61 million, and the amount of claims end up totaling $93 million or even higher, the value of the New PSI Common Stock distributed to Noteholders will be significantly reduced.
-- The Plan provides for a tax reserve of only $10 million. This is $20 million less than the tax liabilities reflected on the Debtors' books and records. The effect of understating the tax reserve is to reduce the allocation of New PSI Common Stock to Noteholders. If the Plan tax reserve is inadequate, the actual value of each share of New PSI Common stock issued pursuant to the Plan will be reduced.
-- The current Plan denies all holders of New PSI Common Stock the right to select the board of directors for the reorganized company. It is the Committee's belief that classes of creditors and interest holders receiving New PSI Common Stock pursuant to the Plan should be immediately able to select board members, on a pro forma basis, in proportion to their classes' respective ownership.
The Committee also objects to other Plan provisions that affect Class 7 Noteholders:
-- The Plan provides for a management incentive plan (including options to acquire 15% of the reorganized company) that will dilute New PSI Common Stock. While the Committee believes appropriate management incentives are important, there is a cost associated with such incentives which should be factored into the value of the New PSI Common Stock to be distributed under the Plan.
-- Noteholders will receive 20% of their distribution in the form of new notes (the "New Notes") that will accrue interest at 6 1/2% per annum. The New Notes are worth less than par.
-- The Plan imposes restrictions on the transferability of New PSI Common Stock for new shareholders whose allocation exceed five percent (5%) of the outstanding shares to be issued. These shares cannot be sold without the approval of the Board of Directors of the Debtors. The restriction not only impacts large shareholders but also will prevent third parties from acquiring a significant position in New PSI Common Stock.
Treatment of General Unsecured Class 8 Creditors. Unsecured trade creditors in Class 8 have two choices: accept payments equal to 70% percent of their claims, with only 60% percent to be paid upon emergence and the balance paid in equal installments (without interest) over four years; or payments equal to 100% percent of their claims, with only 20% percent paid upon emergence and the balance paid in equal installments over four years, with interest paid at the federal judgment rate in effect as of the date of each installment payment. (That rate is currently only 1.08%, as of June 6, 2003.) If current shareholders are to receive any distribution under the Plan, the Debtors should not compel general unsecured creditors to choose between waiting four years for payment in exchange for a nominal interest rate or accepting a steep discount on their claims.
Bankruptcy law requires that creditors receive compensation having a value equal to their allowed claims before shareholders receive any consideration. The Committee believes that the Plan should adopt a reasonable and conservative approach that takes into account the risk that allowed claims will exceed Debtors' low estimates or that the Company will not achieve its aggressive projections regarding future performance.
To date, the Debtors have successfully prevented other parties, including the Committee, from filing an alternative chapter 11 plan of reorganization. Given that Peregrine will not pay its creditors in full, and that there are numerous financial, valuation and corporate governance issues not adequately addressed in the Plan which would reduce the value of the distributions proposed to be made to creditors, the Committee believes that it should have an opportunity to submit a competing plan of reorganization. Unless the Plan is rejected by its creditors or not confirmed by the Bankruptcy Court, no alternative plan will ever be considered, and unsecured creditors will have to settle for the inadequate distributions offered under the Plan.
All members of the Committee who are entitled to cast ballots intend to vote to REJECT the Plan, and urge you to join them in casting your ballot to REJECT the Plan. Please note that the deadline by which ballots must be received by the Voting Agent in order to be counted is July 3, 2003. If you are a creditor, and have any questions, please feel free to call Joshua Mester at Hennigan, Bennett & Dorman LLP, at (213) 694-1177.
THE OFFICIAL COMMITTEE OF UNSECURED CREDITORS
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