<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 30, 1997
REGISTRATION NO. 333-27087
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
AMENDMENT NO. 3
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
----------------
PERITUS SOFTWARE SERVICES, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
----------------
MASSACHUSETTS 7371 04-3126919
(STATE OR OTHER (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
JURISDICTION CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
OF INCORPORATION OR
ORGANIZATION)
304 CONCORD ROAD
BILLERICA, MASSACHUSETTS 01821-3485
(508) 670-0800
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
----------------
ALLEN K. DEARY
VICE PRESIDENT, FINANCE AND CHIEF FINANCIAL OFFICER
PERITUS SOFTWARE SERVICES, INC.
304 CONCORD ROAD
BILLERICA, MASSACHUSETTS 01821-3485
(508) 670-0800
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF AGENT FOR SERVICE)
----------------
COPIES TO:
PETER B. TARR, ESQ. MARK J. MACENKA, ESQ.
HALE AND DORR LLP TESTA, HURWITZ & THIBEAULT, LLP
60 STATE STREET HIGH STREET TOWER
BOSTON, MASSACHUSETTS 02109 125 HIGH STREET
TELEPHONE: (617) 526-6000 BOSTON, MASSACHUSETTS 02110
TELECOPY: (617) 526-5000 TELEPHONE: (617) 248-7000
TELECOPY: (617) 248-7100
----------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date hereof.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [_]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration number of the earlier effective registration statement for the
same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
----------------
CALCULATION OF REGISTRATION FEE
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- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PROPOSED
PROPOSED MAXIMUM
TITLE OF EACH CLASS OF AMOUNT MAXIMUM AGGREGATE AMOUNT OF
SECURITIES TO BE TO BE OFFERING PRICE OFFERING REGISTRATION
REGISTERED REGISTERED(1) PER SHARE(2) PRICE(2) FEE(3)
- ---------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, $.01 par
value per share....... 4,025,000 shares $14.00 $56,350,000 $15,056
- ---------------------------------------------------------------------------------
</TABLE>
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(1) Includes 525,000 shares which the Underwriters have the option to purchase
from certain Selling Stockholders to cover over-allotments, if any. See
"Underwriting."
(2) Estimated solely for the purpose of calculating the amount of the
registration fee pursuant to Rule 457(a) under the Securities Act of 1933.
(3) A registration fee of $12,128 was previously paid in connection with the
original registration of 3,335,000 shares at a per share price of $12.00.
The registration fee ($2,928) for the additional 690,000 shares registered
hereby is based on a per share price of $14.00.
----------------
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>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+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 BE ACCEPTED TO BUY 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 REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF +
+ANY SUCH STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION, DATED JUNE 30, 1997
3,500,000 SHARES
[LOGO OF PERITUS SOFTWARE APPEARS HERE]
COMMON STOCK
Of the 3,500,000 shares of Common Stock offered hereby, 2,800,000 shares are
being sold by the Company and 700,000 shares are being sold by the Selling
Stockholders. The Company will not receive any of the proceeds from the sale of
shares by the Selling Stockholders. See "Principal and Selling Stockholders."
Prior to this offering, there has been no public market for the Common Stock
of the Company. It is currently estimated that the initial public offering
price will be between $12.00 and $14.00 per share. See "Underwriting" for a
discussion of factors to be considered in determining the initial public
offering price. The Common Stock has been approved for quotation on the Nasdaq
National Market under the symbol "PTUS."
SEE "RISK FACTORS" COMMENCING ON PAGE 7 FOR A DISCUSSION OF CERTAIN FACTORS
THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE COMMON STOCK OFFERED
HEREBY.
-----------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
================================================================================
<TABLE>
<CAPTION>
Proceeds to
Price to Underwriting Proceeds to Selling
Public Discount(1) Company(2) Stockholders
- ------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Per Share......... $ $ $ $
Total(3).......... $ $ $ $
</TABLE>
================================================================================
(1) See "Underwriting" for information concerning indemnification of the
Underwriters and other matters.
(2) Before deducting expenses payable by the Company, estimated at $875,000.
(3) Certain Selling Stockholders of the Company have granted to the
Underwriters a 30-day option to purchase up to 525,000 additional shares of
Common Stock solely to cover over-allotments, if any. If the Underwriters
exercise this option in full, the Price to Public will total $ , the
Underwriting Discount will total $ and the Proceeds to Selling
Stockholders will total $ . See "Underwriting."
The shares of Common Stock are offered by the several Underwriters named
herein, subject to receipt and acceptance by them and subject to their right to
reject any order in whole or in part. It is expected that delivery of the
certificates representing such shares will be made against payment therefor at
the offices of Montgomery Securities on or about , 1997.
-----------
MONTGOMERY SECURITIES
WESSELS, ARNOLD & HENDERSON
H.C. WAINWRIGHT & CO., INC.
, 1997
<PAGE>
Inside Front Cover:
The inside front cover depicts a computer screen shot of the Peritus
AutoEnhancer/2000 Software. Underneath the heading is the following text: The
Peritus AutoEnhancer/2000 software automates identification of date-sensitive
variables, correction of source code and generation of programs that convert
data and create bridges. The screen shot labels the tasks (Set Up
Identification; Analyze Data Access; Prepare Seed List; Propagate Seeds; Add
Seeds; Approve Identification Phase), steps (Build Renovation Directory;
PILate; Review PILation Messages; Complete Identification Setup) and functions
(described below) depicted on the screen. There are a number of arrows
emanating from the screen that describe the various functions in the Company's
AutoEnhancer/2000 software:
Segmentation:
-------------
Load the software to be renovated into the renovation center, put it under
source code control and verify its completeness.
Identification:
---------------
Convert the source code to PIL, augment the seed list using the adaptive
seed generator and propagate the seed information through the software to
identify the date-sensitive variables.
Correction:
-----------
Correct the source code according to the correction strategy selected (data
expansion, logic correction or a hybrid).
Bridge:
-------
Build the required bridges by generating wrappers, filters and converters.
Adaptation:
-----------
Identify and annotate the date-sensitive job control and note any record
size changes.
Verification:
-------------
Reconcile the correction audit trail and compare the compile results from
the pre- and post-renovation source code.
Packaging:
----------
Package the renovated source code and generated source code for return to
the client.
The Powered by Peritus logo is in the lower right corner of the page.
Gatefold Graphic
The gatefold graphic is a matrix composed of rows and columns and entitled
"Year 2000 Mass Change Renovation -- Powered by Peritus." The left column of
the matrix identifies each of the four rows: (i) Phases, (ii) Tasks, (iii)
Technology and (iv) Capacity. The first row (Phases) identifies the phases of a
year 2000 renovation: assessment, correction and test. The second row (Tasks)
describes the tasks of each phase: (i) under assessment--perform inventory,
analyze business exposure, resolve dispositions, analyze impact and plan
renovation; (ii) under correction--identify date-sensitive variables, correct
code, generate bridges and generate data converters; and (iii) under test--
perform unit tests, perform system tests and deploy into production. The third
row (Technology) describes the technology with the following text: The
AutoEnhancer/2000 software is designed to be interoperable with third party
assessment and testing tools. The diagram indicates that the technology for an
assessment phase is provided by third party assessment tool providers, the
technology for the correction phase (and part of the assessment and test
phases) resides with Peritus AutoEnhancer/2000 and the technology for the test
phase resides with third party test tool providers. The last row (Capacity)
describes the capacity of a year 2000 renovation with the following text:
Peritus licenses its AutoEnhancer/2000 software directly and indirectly to end
users and value added integrators. As of April 30, 1997, the AutoEnhancer/2000
software was installed in more than 45 installations. The last row of the graph
shows graphical representations of various renovation centers: clients, value
added integrators (VAI's) and Peritus.
----------------
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK
OFFERED HEREBY, INCLUDING THE ENTRY OF STABILIZING BIDS, SYNDICATE COVERING
TRANSACTIONS OR THE IMPOSITION OF PENALTY BIDS. FOR A DESCRIPTION OF THESE
ACTIVITIES, SEE "UNDERWRITING."
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information, including "Risk Factors" and the Consolidated Financial Statements
and the Notes thereto, appearing elsewhere in this Prospectus. Except as
otherwise noted herein, all information in this Prospectus (i) reflects the
filing in May 1997 of Articles of Amendment to the Company's Articles of
Organization redesignating the Company's Class A Voting Common Stock as Common
Stock (the "Common Stock"), (ii) gives effect upon the closing of this offering
to the lapse of the Redeemable Common Stock Right and the conversion of the
Company's Class B Non-Voting Common Stock (the "Class B Common Stock"), Series
A Convertible Preferred Stock and Series B Convertible Preferred Stock
(together, the "Convertible Preferred Stock") into an aggregate of 3,822,903
shares of Common Stock and (iii) assumes no exercise of the Underwriters' over-
allotment option. See "Description of Capital Stock," "Underwriting" and Note
10 of Notes to the Company's Consolidated Financial Statements.
THE COMPANY
Peritus Software Services, Inc. ("Peritus" or the "Company") provides
software products and services that enable organizations to improve the
productivity, quality and effectiveness of their information technology ("IT")
systems maintenance or "software evolution" functions. The Company's solutions,
which employ software tools, methodologies and processes, are designed to
automate the labor-intensive processes involved in conducting "mass change" and
other software maintenance tasks. In 1996, the Company released its first
software product, its AutoEnhancer/2000 software, which is aimed at the most
pressing mass change challenge, the "year 2000 problem." The Company licenses
this software directly to end users as well as through consultants, systems
integrators (together, "value added integrators") and distributors. The Company
also provides software maintenance outsourcing services to large organizations
that seek to enhance the productivity of their IT systems and application
software maintenance functions.
Organizations worldwide are faced with the challenge of modifying, enhancing
and adapting their IT systems and evolving their software to respond to a
changing and more competitive business environment. This challenge has
increased with the broadening complexity of IT and the continued evolution of
mainframe systems, as well as the advent of distributed, client/server
computing and the proliferation of third-party enterprise software
applications. One of the most crucial software evolution challenges facing IT
departments is the cost-effective implementation of mass changes to application
systems and their associated databases. Examples of mass change problems
include the year 2000 problem, which is the inability of certain computer
systems to properly interpret dates for the year 2000 and beyond, the European
Union's expected conversion to the euro currency, the anticipated expansion in
the number of digits in Japan's telephone numbers and the extension of the
number of digits or other characters in zip codes, product codes and account
numbers.
According to its January 1993 ADM Research Note, Gartner Group, Inc.
estimated that, within the established worldwide IT infrastructure, up to 200
billion lines of COBOL software code have been written to support applications,
many of which are mission-critical. In addition, between 60% to 80% of the
average annual IT application development budget is spent on the maintenance of
legacy applications. Although the maintenance function within IT departments
has received little management attention historically, the impending year 2000
problem, with an estimated cost of between $300 and $600 billion to fix,
represents the most significant IT maintenance challenge to date.
The Company's AutoEnhancer/2000 software is designed to automate the critical
correction phase of a year 2000 renovation. The Company has entered into
agreements with a number of leading value added integrators and distributors,
including Bull HN Information Systems Inc., a related party, CIBER, Inc.,
Computer Sciences Corp., IBM Global Services and Keane, Inc., which license the
Company's software tool for use in serving their clients. The Company also
licenses its AutoEnhancer/2000 software tool directly to end users, including
Metropolitan Life Insurance Company and Merrill Lynch, Pierce, Fenner & Smith
Incorporated, which are
3
<PAGE>
employing the tool in-house as part of their year 2000 renovation efforts.
During 1996 and the three months ended March 31, 1997, revenue from the
licensing of the AutoEnhancer/2000 software represented 33.9% and 52.7% of the
Company's total revenue, respectively, and the Company expects that such
license revenue will continue to represent a significant percentage of its
total revenue for the foreseeable future. In June 1997, the Company entered
into a joint marketing agreement with VIASOFT, Inc., a provider of enterprise
application management solutions, to form a joint marketing arrangement that
would combine complementary product and services offerings in a "best practice"
suite of year 2000 solutions.
The Company's software maintenance outsourcing services are provided on a
fixed-fee basis and employ the Company's proprietary software tools,
methodologies and processes to generate productivity gains through the
automation of the software evolution process. Under maintenance outsourcing
engagements, the Company typically assumes responsibility for providing
software maintenance services for the client. Productivity gains can be
realized through contract pricing that guarantees reductions in IT costs and/or
measurable improvements in the quality and throughput of maintenance tasks. The
Company provides its outsourcing services pursuant to multi-year engagements to
a number of large organizations, including Advanced Micro Devices, Inc., Bull
HN Information Systems Inc., a related party, Computervision Corporation,
MicroAge Computer Center, Inc., NYNEX and Stratus Computer, Inc. The Company
also provides its productivity-enhancing maintenance techniques to clients that
maintain their source code in-house through the Company's technology transfer
services.
The Company's objective is to establish leadership in providing solutions
based on software tools and methodologies that significantly enhance the
productivity of the software evolution process. The Company intends to
accomplish this goal by developing additional product extensions from its core
technology that are aimed at specific mass change challenges. In addition, the
Company intends to leverage the relationships developed through its year 2000
products and services into long-term outsourcing engagements and future mass
change sales opportunities.
Peritus is a Massachusetts corporation organized in August 1991. The
Company's principal executive offices are located at 304 Concord Road,
Billerica, Massachusetts 01821-3485, and its telephone number is (508)
670-0800.
THE OFFERING
<TABLE>
<C> <S>
Common Stock offered by the Company................ 2,800,000 shares
Common Stock offered by the Selling Stockholders... 700,000 shares
Common Stock to be outstanding after the offering.. 12,822,304 shares (1)
Use of proceeds.................................... For (i) repayment of
certain existing
indebtedness, (ii)
research and development,
(iii) working capital and
other general corporate
purposes and (iv) possible
acquisitions.
Nasdaq National Market symbol...................... PTUS
</TABLE>
- --------
(1) Based on the number of shares of Common Stock outstanding on June 30, 1997.
Excludes an aggregate of 3,012,957 shares of Common Stock reserved under
the Company's 1992 Long-Term Incentive Plan, all of which shares were
subject to outstanding options as of June 30, 1997 at a weighted average
exercise price of $2.28 per share. Also excludes an aggregate of 2,350,000
shares of Common Stock reserved under the Company's 1997 Stock Incentive
Plan, 1997 Director Stock Option Plan and 1997 Employee Stock Purchase
Plan, 469,500 of which shares were subject to outstanding options as of
June 30, 1997 at an exercise price of $10.00 per share. Also excludes
312,500 shares of Common Stock issuable upon the exercise of outstanding
warrants as of June 30, 1997 at an exercise price of $1.60 per share. See
"Management--Executive Compensation" and Notes 10 through 14 of Notes to
the Company's Consolidated Financial Statements.
4
<PAGE>
SUMMARY CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
------------------------------------ ---------------
1992 1993 1994 1995 1996 1996 1997
----- ------ ------ ------- ------- ------- ------
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Revenue:
Outsourcing services... $ 746 $1,798 $7,130 $16,400 $10,190 $ 2,244 $2,519
License................ -- -- -- -- 6,526 -- 4,144
Other services......... 117 433 742 2,105 2,519 404 1,196
----- ------ ------ ------- ------- ------- ------
Total revenue (1).... 863 2,231 7,872 18,505 19,235 2,648 7,859
Cost of revenue:
Outsourcing services... 517 841 4,700 9,602 8,488 2,234 2,045
License................ -- -- -- -- 162 -- 127
Other services......... 103 306 319 2,421 2,931 506 1,289
----- ------ ------ ------- ------- ------- ------
Total cost of
revenue............. 620 1,147 5,019 12,023 11,581 2,740 3,461
----- ------ ------ ------- ------- ------- ------
Gross profit (loss)...... 243 1,084 2,853 6,482 7,654 (92) 4,398
Total operating
expenses................ 357 889 2,209 6,189 12,398 2,762 3,942
----- ------ ------ ------- ------- ------- ------
Income (loss) from
operations.............. (114) 195 644 293 (4,744) (2,854) 456
Net income (loss)........ $(112) $ 188 $ 305 $ 55 $(4,921) $(2,712) $ 406
Pro forma net income
(loss) per share (2).... $ (0.46) $ 0.03
Weighted average shares
used to compute pro
forma net income (loss)
per share (2)........... 10,695 12,711
</TABLE>
<TABLE>
<CAPTION>
MARCH 31, 1997
------------------------
PRO FORMA
ACTUAL AS ADJUSTED (3)
------- ---------------
<S> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents.............................. $ 5,022 $36,919
Working capital........................................ 8,406 40,303
Total assets........................................... 15,712 47,609
Long-term debt, net of current portion................. 1,476 533
Redeemable stock....................................... 12,546 --
Stockholders' equity (deficit)......................... (3,160) 42,226
</TABLE>
- --------
(1) Revenue (in thousands) from related parties in the years ended December 31,
1992, 1993, 1994, 1995 and 1996 and the three months ended March 31, 1996
and 1997 was $745, $824, $4,317, $10,124, $6,443, $1,179 and $975,
respectively. See the Company's Consolidated Financial Statements.
(2) See Note 2 of Notes to the Company's Consolidated Financial Statements for
an explanation of the determination of pro forma net income (loss) per
share.
(3) Gives effect to (i) the conversion of all outstanding shares of Class B
Common Stock and Convertible Preferred Stock into Common Stock and the
lapse of the Redeemable Common Stock Right upon the closing of this
offering, and (ii) the sale by the Company of the 2,800,000 shares of
Common Stock offered hereby, and the application of a portion of the
estimated net proceeds therefrom to repay certain indebtedness, at an
assumed initial public offering price of $13.00 per share, after deducting
the estimated underwriting discount and offering expenses. See "Use of
Proceeds."
5
<PAGE>
FORWARD-LOOKING STATEMENTS
Information contained in this Prospectus includes "forward-looking
statements" that are based largely on the Company's current expectations and
are subject to a number of risks and uncertainties. The Company faces many
risks and uncertainties, including without limitation those described in this
Prospectus under the caption "Risk Factors." Because of these many risks and
uncertainties, the Company's actual results may differ materially from any
results presented in or implied by the forward-looking statements included in
this Prospectus.
----------------
Peritus is a registered trademark of the Company, Automate: 2000 is a
registered service mark of the Company and AutoEnhancer/2000 is a trademark of
the Company. Other trademarks and service marks used in this Prospectus are the
property of their respective owners.
6
<PAGE>
RISK FACTORS
In addition to the other information in this Prospectus, the following
factors should be considered carefully in evaluating an investment in the
Common Stock offered hereby.
LIMITED OPERATING HISTORY; NET LOSS
The Company was founded in August 1991 and began operations in 1992. Most of
the Company's revenue to date has been attributable to software maintenance
outsourcing and other services, and the Company had no license revenue prior
to 1996. The Company's software maintenance AutoEnhancer/2000 software, which
the Company anticipates will provide the principal source of new license
revenue for the foreseeable future, has a limited history of client acceptance
and use. Accordingly, the Company has only a limited operating history upon
which an evaluation of the Company and its prospects can be based. The
Company's prospects must be considered in light of the risks, expenses and
difficulties frequently encountered by organizations in their early stage of
development, particularly companies in new and rapidly evolving markets. To
address these risks, the Company must, among other things, respond to
competitive developments, continue to attract, retain and motivate qualified
management and other employees, continue to upgrade its technologies and
commercialize products and services that incorporate such technologies and
achieve market acceptance for its products and services. There can be no
assurance that the Company will be successful in addressing such risks. The
Company incurred a net loss of $4,921,000 during 1996, and there can be no
assurance that the Company will achieve or sustain profitability.
POTENTIAL FLUCTUATIONS IN QUARTERLY PERFORMANCE
The Company's revenue and operating results have varied substantially from
quarter to quarter. The Company's quarterly operating results may continue to
fluctuate due to a number of factors, including the timing, size and nature of
the Company's individual outsourcing, technology transfer, insourcing and
licensing transactions; unforeseen difficulties in performing such
transactions; the performance of the Company's value added integrators and
distributors; the timing of the introduction and the market acceptance of new
services, products or product enhancements by the Company or its competitors;
the relative proportions of revenue derived from license fees and professional
services; changes in the Company's operating expenses; personnel changes;
foreign currency exchange rates and fluctuations in economic and financial
market conditions.
The timing, size and nature of individual outsourcing, technology transfer,
insourcing and licensing transactions are important factors in the Company's
quarterly operating results. Many such transactions involve large dollar
amounts, and the sales cycle for these transactions is often lengthy and
unpredictable. In addition, the sales cycle associated with these transactions
is subject to a number of uncertainties, including clients' budgetary
constraints, the timing of clients' budget cycles and clients' internal
approval processes. There can be no assurance that the Company will be
successful in closing such large transactions on a timely basis or at all. In
addition, as the Company begins to derive a greater proportion of total
revenue from license revenue, the Company may realize a disproportionate
amount of its revenue and income in the last month of each quarter and, as a
result, the magnitude of quarterly fluctuations may not become evident until
late in, or at the end of, a given quarter. Accordingly, delays in product
delivery or in the closing of sales near the end of a quarter could cause
quarterly revenue and, to a greater degree, operating results to fall
substantially short of anticipated levels. Most of the Company's outsourcing
engagements are performed on a fixed-price basis and, therefore, the Company
bears the risk of cost overruns and inflation. A significant percentage of the
Company's revenue derived from these engagements is recognized on the
percentage-of-completion method, which requires revenue to be recorded over
the term of a client contract. A loss is recorded at the time when current
estimates of project costs exceed unrecognized revenue. The Company's
operating results may be adversely affected by inaccurate estimates of
contract completion costs.
The Company's expense levels are based, in part, on its expectations as to
future revenue and are fixed, to a large extent, in the short term. As a
result, the Company may be unable to adjust spending in a timely manner to
compensate for any unexpected revenue shortfall. Accordingly, any significant
shortfall in revenue in relation to the Company's expectations would have an
immediate and material adverse effect on the Company's business,
7
<PAGE>
financial condition and results of operations. In addition, the Company plans
to increase operating expenses to expand its research and development, client
technical support and professional services staff, sales force and
administrative infrastructure. The timing of such expansion and the rate at
which new personnel become productive could cause material fluctuations in
quarterly and annual results of operations.
Due to all of the foregoing factors, the Company believes that period-to-
period comparisons of its operating results are not necessarily meaningful and
that such comparisons cannot be relied upon as indicators of future
performance. There can be no assurance that future revenue and operating
results will not vary substantially. It is also possible that in some future
quarter the Company's operating results will be below the expectations of
public market analysts and investors. In either case, the price of the
Company's Common Stock could be materially adversely affected. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
DEPENDENCE ON YEAR 2000 MARKET
The growth in the Company's revenue in 1996 and the three months ended March
31, 1997 resulted primarily from increased demand for the Company's services
and products relating to resolution of the year 2000 problem. Although the
Company believes that the market for products and services relating to the
year 2000 problem will grow as the year 2000 approaches, there can be no
assurance that this market will develop to the extent anticipated by the
Company, if at all. Significant expense for sales and marketing may be
required to inform potential clients of the year 2000 problem and the need for
products and services addressing the problem. There can be no assurance that
the year 2000 solution providers will devote the resources necessary to
effectively inform potential clients of this problem or that potential clients
will understand or acknowledge the problem. In addition, affected
organizations may not be willing or able to allocate the resources, financial
or otherwise, to address the problem in a timely manner. Many organizations
may attempt to resolve the problem internally rather than contract with
outside firms such as the Company and value added integrators to which the
Company licenses its software products. Due to these factors, development of
the market for year 2000 products and services is uncertain and unpredictable.
If the market for year 2000 products and services fails to grow, or grows more
slowly than anticipated, the Company's business, financial condition and
results of operations could be materially adversely affected.
NEED TO DEVELOP ADDITIONAL PRODUCTS AND SERVICES
The Company currently generates significant revenue from, and devotes
significant resources to, products and services that address the year 2000
problem. Although the Company believes that the demand for its products and
services relating to the year 2000 problem will continue to exist for some
time after the year 2000, this demand will diminish significantly over time
and will eventually disappear. There can be no assurance that the Company will
be able to expand successfully its business beyond the year 2000 market.
Specifically, there can be no assurance that mass change markets such as those
associated with Europe's expected conversion to the euro currency or Japan's
anticipated telephone number expansion will develop or reach the size
currently estimated or that the Company will successfully develop or market
products and services capable of handling such mass changes. The failure to
diversify and develop additional products and services would have a material
adverse effect on the Company's business, financial condition and results of
operations.
CONCENTRATION OF CLIENTS AND CREDIT RISK; RELATED PARTY TRANSACTIONS
To date, the Company's revenue has been dependent on a few major clients,
Bull HN Information Systems Inc., a related party ("Bull"), Stratus Computer,
Inc. ("Stratus"), Computervision Corporation ("Computervision"), Metropolitan
Life Insurance Company ("Met Life"), IBM Global Services ("IBM") and Merrill
Lynch, Pierce, Fenner & Smith Incorporated ("Merrill Lynch"). During the three
months ended March 31, 1997, Merrill Lynch, Met Life and IBM represented
approximately 26.1%, 14.0% and 10.6% of the Company's total revenue,
respectively. During 1996, Bull, Merrill Lynch and Stratus represented
approximately 29.0%, 14.6% and 12.1% of the Company's total revenue,
respectively. During 1995, Bull, Stratus and Computervision represented
approximately 50.3%, 12.9% and 11.0% of the Company's total revenue,
respectively. During 1994, Bull and Computervision represented approximately
51.7% and 29.3% of the
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Company's total revenue, respectively. In addition, the Company's ten largest
clients represented approximately 82.2%, 77.9%, 90.5% and 92.1% of the
Company's total revenue in the three months ended March 31, 1997 and the years
ended December 31, 1996, 1995 and 1994, respectively. Most of the Company's
contracts with its clients are terminable at will by either party upon written
notice in accordance with the terms of the contract, at which time payment for
services rendered to date is due. In addition, certain contracts provide for
limited price protection and related notice provisions that could require the
Company to adjust the pricing provisions of these contracts. To date, the
Company has not made any such adjustments. Although the Company's largest
clients have varied from period to period, the Company anticipates that its
results of operations in any given period will continue to depend to a
significant extent upon revenue from a small number of clients. There can be
no assurance that the Company's major clients will continue to purchase
products and services from the Company at current levels, if at all, or that
the Company will be able to replace revenue from such clients with revenue
from other clients. The loss of, or a significant reduction in revenue from,
any of the Company's major clients could have a material adverse effect on the
Company's business, financial condition and results of operations. In
addition, with such a large percentage of the Company's revenue attributable
to a small number of clients, the loss of one or more major clients could have
a material adverse effect on the Company's liquidity. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations--
Liquidity and Capital Resources," "Certain Transactions" and Note 8 of Notes
to the Company's Consolidated Financial Statements.
MANAGEMENT OF GROWTH
The Company's business has grown significantly in size and complexity over
the past three years. Total revenue increased from $7,872,000 in 1994 to
$19,235,000 in 1996. In addition, the number of employees increased from 130
to 229 during the same period, and the Company expects to hire additional
personnel during 1997. The growth in the size and complexity of the Company's
business as well as its client base has placed and is expected to continue to
place a significant strain on the Company's management and operations. Certain
members of the Company's senior management team have been with the Company for
less than a year, and the Company's senior management has had limited
experience in managing publicly traded companies. The Company anticipates that
continued growth, if any, will require it to recruit and hire a substantial
number of new development, managerial, finance, sales and marketing and
support personnel. Competition for such personnel is intense, and there can be
no assurance that the Company will be successful in hiring or retaining such
personnel. The Company's ability to compete effectively and to manage future
growth, if any, will depend on its ability to continue to implement and
improve operational, financial and management information systems on a timely
basis and to expand, train, motivate and manage its work force. There can be
no assurance that the Company's personnel, systems, procedures and controls
will be adequate to support the Company's operations.
DEPENDENCE UPON THIRD-PARTY CHANNELS; POTENTIAL FOR CHANNEL CONFLICT
The Company offers its products and services directly to end users through
its sales force and indirectly through third-party channels, which include
value added integrators and distributors. Although sales through third-party
channels accounted for only 16.6% of the Company's total revenue in the three
months ended March 31, 1997, the Company expects to rely to a significant
degree on its value added integrators and distributors to provide sales and
marketing presence and name recognition, as well as the resources necessary to
offer large-scale, comprehensive software maintenance solutions, including
solutions relating to the year 2000 problem. Although the Company dedicates
significant resources to develop its indirect channels, there can be no
assurance that the Company will be able to attract and retain a sufficient
number of qualified firms to successfully sell and market its products. While
the Company has granted exclusive marketing rights to certain distributors in
defined geographic territories, these firms are not prohibited from entering
into similar arrangements with the Company's competitors. The failure of the
Company to maintain its current third-party channels or develop other third-
party channels, the Company's inability to adequately support the requirements
of its third-party channels, the development of competitive products and
services by the Company's value added integrators and distributors or the
entry by such firms into alliances with competitors of the Company would
substantially limit the Company's ability to provide its products and services
and, accordingly, would have a material adverse effect on the Company's
business, financial condition and results of operations.
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In June 1997, the Company entered into a joint marketing agreement with
VIASOFT, Inc. ("VIASOFT") to form a joint marketing arrangement that would
combine complementary product and service offerings in a "best practice" suite
of year 2000 solutions. There can be no assurance, however, that such
marketing arrangement will yield a suite of year 2000 solutions or that such
solutions will be accepted by the marketplace. There also can be no assurance
that the Company will enter into "best practice" marketing arrangements with
any other firm or that any such arrangements would be successful.
Selling through indirect channels may also limit the Company's contacts with
end users of its products and services. As a result, the Company's ability to
accurately forecast sales, evaluate client satisfaction and recognize emerging
client requirements may be hindered. The Company's strategy of selling its
products directly to end users and indirectly through third-party channels may
result in distribution channel conflicts. The Company's direct sales efforts
may compete with those of its indirect channels and, to the extent different
value added integrators and distributors target the same clients, they may
also come into conflict with each other. There can be no assurance that
channel conflicts will not materially adversely affect its relationship with
existing value added integrators or distributors or adversely affect its
ability to attract new value added integrators and distributors. In addition,
if the Company is successful in increasing product sales through third-party
channels, the Company expects that any material increase in the Company's
indirect sales as a percentage of total revenue may materially adversely
affect the Company's average selling prices and gross margins due to
potentially lower average license fees from indirect channels. See "Business--
Sales and Marketing."
COMPETITION
The market for the Company's products and services is intensely competitive
and is characterized by rapid change in technology and user needs and the
frequent introduction of new products. The anticipated growth in the mass
change and year 2000 industries is expected to attract additional competitors,
some of which may offer additional products and services. There are no
significant barriers to entry in the year 2000 industry. In addition, the
Company faces competition in the software maintenance outsourcing services
market. A number of the Company's competitors are more established, benefit
from greater name recognition and have substantially greater financial,
technical and marketing resources than those of the Company and certain of the
Company's value added integrators and distributors. As a result, there can be
no assurance that the Company's products and services, including the solutions
offered by the Company's value added integrators and distributors, will
compete effectively with those of their respective competitors. The Company's
value added integrators and distributors may also offer or develop products
and services that compete with the Company's products and services. There can
be no assurance that such value added integrators and distributors will not
give higher priority to the sales of these or other competitive products and
services. See "Business--Competition."
COMPETITIVE MARKET FOR TECHNICAL PERSONNEL
The future success of the Company's growth strategy will depend to a
significant extent on its ability to attract, train, motivate and retain
highly skilled software professionals, particularly project managers, software
engineers and other senior technical personnel. The Company believes that
there is a shortage of, and significant competition for, software development
professionals with the skills and experience necessary to perform the services
offered by the Company. The Company's ability to maintain and renew existing
engagements and obtain new business depends, in large part, on its ability to
hire and retain technical personnel with the IT skills that keep pace with
continuing changes in software evolution, industry standards and technologies
and client preferences. The inability to hire additional qualified personnel
could impair the Company's ability to satisfy its growing client base,
requiring an increase in the level of responsibility for both existing and new
personnel. There can be no assurance that the Company will be successful in
retaining current or future employees.
FIXED-PRICE, FIXED-TIME FRAME CONTRACTS
As a core element of its business philosophy, the Company's strategy is to
offer its outsourcing and technology transfer services on fixed-price, fixed-
time frame contracts, rather than contracts in which payment to the Company is
determined solely on a time-and-materials basis. These contracts are
terminable by either party
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generally upon prior written notice. Although the Company uses its proprietary
tools and methodologies and its past project experience to reduce the risks
associated with estimating, planning and performing the fixed-price projects,
the Company's standard outsourcing and technology transfer agreements provide
for a fixed-fee based on projected reductions in a client's maintenance costs
and increases in a client's maintenance productivity. The Company's failure to
estimate accurately the resources, costs and time required for a project or
its failure to complete its contractual obligations within the time frame
committed could have a material adverse effect on the Company's business,
financial condition and results of operations.
POTENTIAL FOR CONTRACT LIABILITY
The Company's products and services relating to software maintenance,
especially solutions addressing the year 2000 problem, involve key aspects of
its clients' computer systems. A failure in a client's system could result in
a claim for substantial damages against the Company, regardless of the
Company's responsibility for such failure. The Company attempts to limit
contractually its liability for damages arising from negligent acts, errors,
mistakes or omissions in rendering its products and services. Despite this
precaution, there can be no assurance that the limitations of liability set
forth in its contracts would be enforceable or would otherwise protect the
Company from liability for damages. Additionally, the Company maintains
general liability insurance coverage, including coverage for errors and
omissions. However, there can be no assurance that such coverage will continue
to be available on acceptable terms, or will be available in sufficient
amounts to cover one or more large claims, or that the insurer will not
disclaim coverage as to any future claim. The successful assertion of one or
more large claims against the Company that exceed available insurance coverage
or changes in the Company's insurance policies, including premium increases or
the imposition of large deductible or co-insurance requirements, could have a
material adverse effect on the Company's business, financial condition and
results of operations. Furthermore, litigation, regardless of its outcome,
could result in substantial cost to the Company and divert management's
attention from the Company's operations. Any contract liability claim or
litigation against the Company could, therefore, have a material adverse
effect on the Company's business, financial condition and results of
operations.
SOFTWARE ERRORS OR BUGS
The Company's software products and tools are highly complex and
sophisticated and could from time to time contain design defects or software
errors that could be difficult to detect and correct. Errors, bugs or viruses
may result in loss of or delay in market acceptance, a failure in a client's
system or loss or corruption of client data. Although the Company has not
experienced material adverse effects resulting from any software defects or
errors, there can be no assurance that, despite testing by the Company and its
clients, errors will not be found in new products, which errors could have a
material adverse effect upon the Company's business, financial condition and
results of operations.
INTEGRATION OF ACQUISITIONS
In January 1996, the Company acquired Vista Technologies Incorporated, a
developer of computer-aided engineering software. Although the Company has no
existing commitments or agreements regarding any acquisitions, it may in the
future seek acquisitions of businesses, products and technologies that are
complementary to those of the Company. There can be no assurance that the
Company will ultimately effect any such acquisition, or that the Company will
be able to integrate successfully into its operations any business that it may
acquire. The process of integrating an acquired company's business into the
Company's operations may result in ongoing and extraordinary operating
difficulties and expenditures, may absorb significant management attention
that would otherwise be available for the ongoing development of the Company's
business and may result in charges to operating results. In addition, future
acquisitions by the Company could result in potentially dilutive issuances of
equity securities, the incurrence of debt and contingent liabilities and
amortization expenses related to goodwill and other intangible assets, any of
which could have a material adverse effect on the Company's business,
financial condition and results of operations. Acquisitions also involve other
risks, including entering markets in which the Company has limited or no
direct prior experience and the potential loss of key employees. There can be
no assurance that a given acquisition, whether or not consummated, would not
have a material adverse effect on the Company's business, financial condition
and results of operations.
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LIMITED PROTECTION OF PROPRIETARY RIGHTS
The Company relies on a combination of patent, copyright, trademark and
trade secret laws and license agreements to establish and protect its rights
in its software products and proprietary technology. In addition, the Company
currently requires its employees and consultants to enter into nondisclosure
and assignment of invention agreements to limit use of, access to and
distribution of its proprietary information. There can be no assurance that
the Company's means of protecting its proprietary rights in the United States
or abroad will be adequate. The laws of some foreign countries may not protect
the Company's proprietary rights as fully or in the same manner as do the laws
of the United States. Also, despite the steps taken by the Company to protect
its proprietary rights, it may be possible for unauthorized third parties to
copy aspects of the Company's products, reverse engineer, develop similar
technology independently or obtain and use information that the Company
regards as proprietary. Furthermore, there can be no assurance that others
will not develop technologies similar or superior to the Company's technology
or design around the proprietary rights owned by the Company.
The Company has entered into license agreements with a limited number of
clients that allow these clients access to and use of the Company's
AutoEnhancer/2000 software source code for certain purposes. Access to the
Company's source code may increase the likelihood of misappropriation or
misuse by third parties.
The Company has filed two patent applications with the United States Patent
and Trademark Office (the "PTO") pertaining to technologies, processes and
methodologies with respect to the Company's software. Neither of these patents
has been granted and there can be no assurance that a patent will be issued
pursuant to either of these applications or that, if granted, such patent
would survive a legal challenge to its validity or provide meaningful or
significant protection to the Company. Some competitors of the Company have
announced the filing with the PTO of patent applications relating to fixing
and assessing the year 2000 problem. The Company expects that the risk of
infringement claims against the Company might increase because its competitors
might successfully obtain patents for software products and processes or
because new and overlapping processes and methodologies used in such services
will become more pervasive, increasing the likelihood of infringement. There
can be no assurance that third parties will not assert infringement claims
against the Company in the future, that the assertion of such claims will not
result in litigation or that the Company would prevail in such litigation or
be able to obtain a license for the use of any infringed intellectual property
from a third party on commercially reasonable terms, if at all. Furthermore,
litigation, regardless of its outcome, could result in substantial cost to the
Company and divert management's attention from the Company's operations. Any
infringement claim or litigation against the Company could, therefore, have a
material adverse effect on the Company's business, financial condition and
results of operations.
The Company maintains trademarks and service marks to identify its various
service offerings, products and software. Although the Company has registered
one trademark and one service mark with the PTO and has several trademark and
service mark applications pending in the United States and foreign
jurisdictions, not all of the applications have been granted and, even if
granted, there can be no assurance that a particular trademark or service mark
will survive a legal challenge to its validity or provide meaningful or
significant protection to the Company. In some cases, entities other than the
Company are using certain trademarks and service marks, either in
jurisdictions in which the Company has not filed an application or in which
the Company is using a mark in a different manner than a third party. There
may be some risk of infringement claims against the Company in the event that
a service or product of the Company is too similar to that of another entity
that is using a similar mark.
DEPENDENCE ON THIRD-PARTY TECHNOLOGY
The Company's proprietary software is currently designed, and may in the
future be designed, to work on or in conjunction with certain third-party
hardware and/or software products. If any of these current or future third-
party vendors were to discontinue making their products available to the
Company or to licensees of the Company's software or to increase materially
the cost to the Company or its licensees to acquire, license or purchase the
third-party vendors' products, or if a material problem were to arise in
connection with the ability of the Company to design its software to properly
use or operate with third-party hardware and/or software products, the Company
would be required to redesign its software to function with or on alternative
third-party
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products or attempt to develop internally a replacement for the third-party
products. In such an event, interruptions in the availability or functioning
of the Company's software and delays in the introduction of new products and
services may occur until equivalent technology is obtained. There can be no
assurance that an alternative source of suitable technology would be available
or that the Company would be able to develop an alternative product in
sufficient time or at a reasonable cost. The failure of the Company to obtain
or develop alternative technologies or products on a timely basis and at a
reasonable cost could have a material adverse effect on the Company's
business, financial condition and results of operations.
RAPID TECHNOLOGICAL CHANGE
The market for the Company's products and services is characterized by
rapidly changing technology, evolving industry standards and new product
introductions and enhancements that may render existing products obsolete. As
a result, the Company's market position could erode rapidly due to unforeseen
changes in the features and functionality of competing products. The Company's
future success will depend in part upon its ability to enhance its existing
products and services and to develop and introduce new products and services
to meet changing client requirements. The process of developing products and
services such as those offered by the Company is extremely complex and is
expected to become increasingly complex and expensive in the future with the
introduction of new platforms and technologies. There can be no assurance that
the Company will successfully complete the development of new products in a
timely fashion or that the Company's current or future products will satisfy
the needs of its target market.
DEPENDENCE ON KEY MANAGEMENT PERSONNEL
The Company's business depends on a small number of key managerial
personnel. The loss of any of these key individuals could have a material
adverse effect on the Company's operations. In particular, the Company's
operations, particularly its research and development efforts, are dependent
on Dr. Dominic K. Chan, the Company's Chairman and Chief Executive Officer.
Dr. Chan is not subject to an employment agreement with the Company. See
"Management--Employment Agreements."
RISKS ASSOCIATED WITH INTERNATIONAL OPERATIONS
Although the Company's international revenue represented only 9.4% of total
revenue during 1996, the Company has subsidiaries in Spain and India and
distributors in Canada, Italy and Japan, and intends to expand its
international sales activities as part of its business strategy. To date,
substantially all of the Company's international revenue has been attributable
to revenue generated by the Company's majority-owned Spanish subsidiary,
Persist, S.A. In order to expand international sales, the Company must
establish additional foreign operations, hire additional personnel and
establish relationships with additional value added integrators and
distributors. This will require significant management attention and financial
resources and could have a material adverse effect on the Company's business,
financial condition and results of operations. In addition, there can be no
assurance that the Company will be able to address international market demand
for the Company's products and services. The Company's international sales are
primarily denominated in U.S. dollars. An increase in the value of the U.S.
dollar relative to foreign currencies could make the Company's products more
expensive and, therefore, potentially less competitive in those markets. In
addition, the Company's international business may be subject to a variety of
risks, including difficulties in collecting international accounts receivable
or obtaining U.S. export licenses, potentially longer payment cycles,
increased costs associated with maintaining international marketing efforts,
the introduction of non-tariff barriers and higher duty rates and difficulties
in enforcement of contractual obligations and intellectual property rights.
There can be no assurance that such factors will not have a material adverse
effect on the Company's future international sales and, consequently, on the
Company's business, financial condition or results of operations.
DEPENDENCE ON INDIA OFFSHORE SOFTWARE DEVELOPMENT CENTER
The Company has recently established an offshore software development center
in Bangalore, India that is intended to provide the Company with a cost
advantage as well as the ability to provide 24-hour coverage for its
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outsourcing services clients. To provide its service delivery model, the
Company must maintain communications between its offices, the offices of its
clients in the U.S. and the Bangalore offshore software development facility.
Any loss of the Company's ability to transmit voice and data through satellite
communications to India could have a material adverse effect on the Company's
business, financial condition and results of operations. In the past, India
has experienced significant inflation, low growth in gross domestic product
and shortages of foreign exchange. India also has experienced civil unrest and
terrorism and, in the past, has been involved in conflict with neighboring
countries. No assurance can be given that the Company will not be adversely
affected by changes in inflation, interest rates, taxation, social stability
or other political, economic or diplomatic developments in or affecting India
in the future. In addition, the Indian government has exercised and continues
to exercise significant influence over many aspects of the Indian economy, and
Indian government actions concerning the economy could have material adverse
effect on private sector entities, including the Company. During recent years,
India's government has provided significant tax incentives and relaxed certain
regulatory restrictions in order to encourage foreign investment in specified
sectors of the economy, including the software development industry. Certain
of those benefits that directly affect the Company include, among others, tax
holidays, liberalized import and export duties and preferential rules on
foreign investment and repatriation. Notwithstanding these benefits, however,
India's central and state governments remain significantly involved in the
Indian economy. The elimination of any of the benefits realized by the Company
from its Indian operations could have a material adverse effect on the
Company's business financial condition and results of operations.
IMMIGRATION ISSUES
The Company believes that its success in part has resulted from its ability
to attract and retain persons with technical and project management skills
from other countries. As of May 31, 1997, approximately four of the Company's
U.S.-based employees were working for the Company in the H-1B, non-immigrant
work permitted visa classification. There is a limit on the number of new H-1B
petitions that the Immigration and Naturalization Service may approve in any
government fiscal year, and in years in which this limit is reached, the
Company may be unable to obtain H-1B visas necessary to bring critical foreign
employees to the U.S. Compliance with existing U.S. immigration laws, or
changes in such laws making it more difficult to hire foreign nationals or
limiting the ability of the Company to retain H-1B employees in the U.S.,
could require the Company to incur additional unexpected labor costs and
expenses. Any such restrictions or limitations on the Company's hiring
practices could have a material adverse effect on the Company's business,
financial condition and results of operations.
DEPENDENCE ON GOVERNMENT CONTRACTS
One of the Company's strategies is to sell its products and services
directly or indirectly to state, federal and foreign government agencies. Any
failure to obtain a contract award, or a delay on the part of a government
agency in making the award or of ordering products and services under an
awarded contract, could have a material adverse effect on the financial
performance of the Company within a given period. Other risks involved in
government sales are the larger discounts (and thus lower margins) typically
involved in government sales, the dependence of the Company on the ability of
the prime contractor to obtain the award, the unpredictability of funding for
various government programs, the ability of the government agency to
unilaterally terminate the prime contract, and the dependence on the
creditworthiness of the prime contractor (some of which are relatively small
organizations without substantial funds). The Company anticipates that
government sales may constitute a significant but fluctuating portion of its
revenue in the future.
CONTROL BY DIRECTORS AND OFFICERS
Upon completion of this offering, the Company's officers and directors, and
their affiliates, will beneficially own approximately 51.4% of the Company's
outstanding Common Stock. These stockholders, if acting together, would have
the ability to elect the Company's directors and may have the ability to
determine the outcome of corporate actions requiring stockholder approval,
irrespective of how other stockholders of the Company may vote. This
concentration of ownership may have the effect of delaying or preventing a
change in control of the Company. See "Management" and "Principal and Selling
Stockholders."
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BROAD DISCRETION AS TO USE OF PROCEEDS
The Company intends to use a portion of the net proceeds from this offering
to repay outstanding subordinated indebtedness. The remaining net proceeds
will be used, as determined by management in its sole discretion, for research
and development, working capital and general corporate purposes, as well as
for the possible acquisition of additional businesses and technologies that
are complementary to the current or future business of the Company. However,
the Company has not determined the specific allocation of the remaining net
proceeds among the various uses described above. Accordingly, investors in
this offering will rely upon the judgment of the Company's management with
respect to the use of proceeds, with only limited information concerning
management's specific intentions. See "Use of Proceeds."
NO PUBLIC MARKET
Prior to this offering, there has been no public market for the Common
Stock, and there can be no assurance that an active trading market will
develop or be sustained after this offering or that the market price of the
Common Stock will not decline below the initial public offering price. The
initial public offering price will be determined by negotiations among the
Company and the Representatives of the Underwriters. See "Underwriting" for a
discussion of the factors to be considered in determining the initial public
offering price. Investors should be aware that market prices for securities of
software companies such as the Company are highly volatile.
DIVIDENDS
No cash dividends have been paid on the Common Stock to date and the Company
does not anticipate paying dividends in the foreseeable future. See "Dividend
Policy."
DILUTION
Purchasers of shares of Common Stock in this offering will suffer an
immediate and substantial dilution in the net tangible book value of the
Common Stock from the initial public offering price. See "Dilution."
SHARES ELIGIBLE FOR FUTURE SALE; REGISTRATION RIGHTS
Sales of substantial amounts of shares of Common Stock in the public market
following this offering could adversely affect the market price of the Common
Stock. On the date of this Prospectus, in addition to the 3,500,000 shares
offered hereby, approximately 174,252 shares of Common Stock, which are not
subject to 180-day lock-up agreements (the "Lock-Up Agreements") with the
Representatives of the Underwriters, will be eligible for immediate sale in
the public market pursuant to Rule 144(k) under the Securities Act of 1933, as
amended (the "Securities Act"). Approximately 139,387 additional shares of
Common Stock, which are not subject to the Lock-Up Agreements, will be
eligible for sale in the public market in accordance with Rule 144 or Rule 701
under the Securities Act beginning 90 days after the date of this Prospectus.
Upon expiration of the Lock-Up Agreements 180 days after the date of this
Prospectus (and assuming no exercise of outstanding options), approximately
9,008,665 additional shares of Common Stock will be available for sale in the
public market, subject to the provisions of Rule 144 under the Securities Act.
Promptly following the consummation of this offering, the Company intends to
register an aggregate of 400,000 shares of Common Stock issuable under its
1997 Director Stock Option Plan and 1997 Employee Stock Purchase Plan. In
addition, the Company intends to register approximately 4,962,957 shares of
Common Stock issuable under its 1992 Long-Term Incentive Plan and 1997 Stock
Incentive Plan following the 90th day after the date of this Prospectus.
Holders of approximately 10,107,071 shares of Common Stock (including
1,068,406 shares of Common Stock that may be acquired pursuant to the exercise
of vested options held by them and exercisable within 60 days of June 30,
1997) have agreed, pursuant to the Lock-Up Agreements, not to sell, offer,
contract or grant any option to sell, pledge, transfer, establish an open put
equivalent position or otherwise dispose of such shares for 180 days after the
date of the final Prospectus. The Company is unable to predict the effect that
sales made under Rule 144, or otherwise, may have on the then prevailing
market price of the Common Stock. The holders of approximately 5,459,112
shares of Common Stock are entitled to certain piggyback and demand
registration rights with respect to such
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shares. By exercising their registration rights, such holders could cause a
large number of shares to be registered and sold in the public market. Sales
pursuant to Rule 144 or other exemptions from registration, or pursuant to
registration rights, may have an adverse effect on the market price for the
Common Stock and could impair the Company's ability to raise capital through
an offering of its equity securities. See "Description of Capital Stock,"
"Shares Eligible for Future Sale" and "Underwriting."
POTENTIAL ADVERSE EFFECTS OF ANTI-TAKEOVER PROVISIONS; POSSIBLE ISSUANCE OF
PREFERRED STOCK
The Company's Amended and Restated Articles of Organization and Amended and
Restated By-laws contain provisions that may make it more difficult for a
third party to acquire, or discourage acquisition bids for, the Company. For
instance, the Company's Amended and Restated By-laws provide that special
meetings of stockholders may be called only by the President, the Board of
Directors or the holders of at least 80% of the voting securities of the
Company. In addition, the Massachusetts General Laws provide that stockholders
may take action without a meeting only by the unanimous written consent of all
stockholders. The Company's Board of Directors is also divided into three
classes, as nearly equal in size as possible, with staggered three-year terms.
Upon completion of this offering, the Company will be subject to an anti-
takeover provision of the Massachusetts General Laws which prohibits, subject
to certain exceptions, a holder of 5% or more of the outstanding voting stock
of the Company from engaging in certain activities with the Company, including
a merger, stock or asset sale. The foregoing provisions could limit the price
that certain investors might be willing to pay in the future for shares of the
Company's Common Stock. In addition, shares of the Company's Preferred Stock
may be issued in the future without further stockholder approval and upon such
terms and conditions, and having such rights, privileges and preferences, as
the Board of Directors may determine. The rights of the holders of Common
Stock will be subject to, and may be adversely affected by, the rights of any
holders of Preferred Stock that may be issued in the future. The issuance of
Preferred Stock, while providing desirable flexibility in connection with
possible acquisitions and other corporate purposes, could have the effect of
making it more difficult for a third party to acquire, or discouraging a third
party from acquiring, a majority of the outstanding voting stock of the
Company. The Company has no present plans to issue any shares of Preferred
Stock. See "Description of Capital Stock."
16
<PAGE>
USE OF PROCEEDS
The net proceeds to the Company from the sale of shares of Common Stock
offered by the Company hereby are estimated to be $32,977,000, assuming an
initial public offering price of $13.00 per share and after deducting the
estimated underwriting discount and offering expenses. The Company will not
receive any of the net proceeds from the sale of shares by the Selling
Stockholder. "See Principal and Selling Stockholders."
The Company intends to use approximately $1,080,000 of the net proceeds from
this offering to repay in full the outstanding indebtedness, and the related
prepayment premiums, outstanding under a certain Secured Subordinated Note due
June 30, 2002 (the "MCRC Note") issued to Massachusetts Capital Resource
Company and bearing interest at a rate of 10% per annum. The Company used the
proceeds from the MCRC Note for working capital purposes.
The Company plans to use the balance of the net proceeds from this offering
for research and development, working capital and other general corporate
purposes. The Company may also use a portion of the net proceeds of this
offering to fund acquisitions of complementary businesses, products or
technologies, although there are currently no commitments or agreements with
respect to any such acquisitions.
Pending use of the net proceeds, the Company intends to invest the net
proceeds from this offering in short-term, investment-grade, interest-bearing
instruments. Other than the portion of the proceeds to be used to repay
outstanding indebtedness, the Company does not believe it can accurately
estimate the amounts to be used for each purpose at this time. See "Risk
Factors--Broad Discretion as to Use of Proceeds."
DIVIDEND POLICY
The Company has never declared or paid any cash dividends on its shares of
Common Stock. The Company currently intends to retain all of its earnings, if
any, to finance future growth and therefore does not anticipate paying cash
dividends in the foreseeable future. Under the terms of the Company's credit
agreements there are certain restrictions on the Company's ability to declare
and pay dividends. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Liquidity and Capital Resources" and
Notes 6 and 7 of Notes to the Company's Consolidated Financial Statements.
17
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company as of March
31, 1997 on an actual, pro forma and pro forma as adjusted basis. The
information set forth in the table below should be read in conjunction with
the Company's Consolidated Financial Statements and Notes thereto appearing
elsewhere in this Prospectus. See "Use of Proceeds."
<TABLE>
<CAPTION>
MARCH 31, 1997
----------------------------------------------------------
PRO FORMA
ACTUAL PRO FORMA(1) AS ADJUSTED(1)(2)
--------------- ---------------- ---------------------
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<S> <C> <C> <C>
Capital lease obligations..... $ 170 $ 170 $ 170
Long-term debt, net of current
portion...................... 1,306 1,306 363
--------------- --------------- ---------------
Total long-term debt...... 1,476 1,476 533
--------------- --------------- ---------------
Redeemable convertible
preferred stock, no par
value;
Series A--1,903,525 shares
authorized, issued and
outstanding actual; none
issued and outstanding pro
forma and pro forma as
adjusted.................... 6,094 -- --
Series B--1,818,182 shares
authorized, issued and
outstanding actual; none
issued and outstanding pro
forma and pro forma as
adjusted.................... 6,158 -- --
Redeemable common stock
right........................ 294 -- --
--------------- --------------- ---------------
Total redeemable stock.... 12,546 -- --
--------------- --------------- ---------------
Stockholders' equity
(deficit):
Common stock, $.01 par value;
50,000,000 shares authorized
pro forma and pro forma as
adjusted; 9,979,023 shares
issued and outstanding pro
forma; 12,779,023 shares
issued and outstanding pro
forma as adjusted (3)....... -- 100 128
Class A common stock, no par
value; 13,295,000 shares
authorized; 6,156,114 shares
issued and outstanding
actual; no shares issued and
outstanding pro forma and
pro forma as adjusted....... 2,209 -- --
Class B common stock, no par
value; 275,000 shares
authorized; 101,196 shares
issued and outstanding
actual; no shares issued and
outstanding pro forma and
pro forma as adjusted....... 164 -- --
Additional paid-in capital... -- 14,819 47,768
Accumulated deficit.......... (5,446) (5,446) (5,583)
Note receivable from
stockholder................. (58) (58) (58)
Cumulative translation
adjustment.................. (29) (29) (29)
--------------- --------------- ---------------
Total stockholders' equity
(deficit)................ (3,160) 9,386 42,226
--------------- --------------- ---------------
Total capitalization.... $ 10,862 $ 10,862 $ 42,759
=============== =============== ===============
</TABLE>
- --------
(1) Gives effect to (i) the filing of an amendment to the Company's Articles
of Organization in May 1997 redesignating the Company's Class A Common
Stock as Common Stock, $.01 par value, and increasing the number of
authorized shares of Common Stock to 50,000,000, (ii) the lapse of the
Redeemable Common Stock Right and the conversion of all outstanding shares
of the Company's Class B Common Stock and Convertible Preferred Stock into
an aggregate of 3,822,903 shares of Common Stock upon the closing of this
offering, and (iii) the filing of an amendment to the Company's Articles
of Organization upon the closing of this offering to eliminate the
Company's Class B Common Stock and existing series of Convertible
Preferred Stock and to authorize 5,000,000 shares of undesignated
Preferred Stock.
(2) Reflects the issuance and sale by the Company of 2,800,000 shares of
Common Stock offered hereby and the application of a portion of the net
proceeds therefrom to repay certain indebtedness, at an assumed initial
public offering price of $13.00 per share after deducting the estimated
underwriting discount and offering expenses.
(3) Excludes an aggregate of 3,056,238 shares of Common Stock reserved under
the Company's 1992 Long-Term Incentive Plan, all of which shares were
subject to outstanding options as of March 31, 1997 at a weighted average
exercise price of $2.26 per share. Also excludes an aggregate of 2,350,000
shares of Common Stock, which includes 469,500 shares that were subject to
outstanding options at June 30, 1997 at an exercise price of $10.00 per
share, reserved under the Company's 1997 Stock Incentive Plan, 1997
Director Stock Option Plan and 1997 Employee Stock Purchase Plan, which
plans were adopted by the Board of Directors and approved by the
stockholders of the Company in May 1997. Also excludes 312,500 shares of
Common Stock issuable upon the exercise of outstanding warrants as of
March 31, 1997 at an exercise price of $1.60 per share. See "Management--
Executive Compensation" and Notes 10 through 14 of Notes to the Company's
Consolidated Financial Statements.
18
<PAGE>
DILUTION
The pro forma net tangible book value of the Company as of March 31, 1997
was $8,960,000, or $0.90 per share of Common Stock. Pro forma net tangible
book value per share is determined by dividing the Company's tangible net
worth (tangible assets less liabilities) by the number of shares of Common
Stock outstanding, after giving effect to the mandatory conversion of the
Company's Class B Common Stock and Convertible Preferred Stock and the lapse
of the Redeemable Common Stock Right upon the completion of this offering.
After giving effect to the sale of the shares of Common Stock offered by the
Company hereby at an assumed initial public offering price of $13.00 per share
and after deducting the estimated underwriting discount and offering expenses,
the pro forma net tangible book value of the Company as of March 31, 1997
would have been $41,800,000, or $3.27 per share. This represents an immediate
increase in such pro forma net tangible book value of $2.37 per share to
existing stockholders and an immediate dilution of $9.73 per share to new
investors purchasing shares in this offering. If the initial public offering
price is higher or lower, the dilution to the new investors will be greater or
less, respectively. The following table illustrates the per share dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share............... $13.00
Pro forma net tangible book value per share as of March 31,
1997....................................................... $0.90
Increase per share attributable to this offering............ 2.37
-----
Pro forma net tangible book value per share after this
offering..................................................... 3.27
------
Dilution per share to new investors........................... $ 9.73
======
</TABLE>
The following table summarizes, on a pro forma basis as of March 31, 1997,
the total number of shares of Common Stock purchased from the Company, the
total consideration paid and the average consideration paid per share by the
existing stockholders and by the new investors assuming the sale by the
Company of 2,800,000 shares at an assumed initial public offering price of
$13.00 per share (before deducting the estimated underwriting discount and
offering expenses):
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
------------------ -------------------
AVERAGE
PRICE PER
NUMBER PERCENT AMOUNT PERCENT SHARE
---------- ------- ----------- ------- ---------
<S> <C> <C> <C> <C> <C>
Existing stockholders(1).. 9,979,023 78.1% $14,388,000 28.3% $1.44
New investors............. 2,800,000 21.9 36,400,000 71.7 13.00
---------- ----- ----------- -----
Total................... 12,779,023 100.0% $50,788,000 100.0%
========== ===== =========== =====
</TABLE>
- --------
(1) Sales by the Selling Stockholders in this offering will reduce the number
of shares held by existing stockholders to 9,279,023, or 72.6% of the
total number of shares of Common Stock outstanding after this offering (or
8,754,023 shares and 68.5% if the Underwriters' over-allotment option is
exercised in full), and will increase the number of shares held by new
investors to 3,500,000, or 27.4% of the total number of shares of Common
Stock outstanding after this offering (or 4,025,000 shares and 31.5% if
the Underwriters' over-allotment option is exercised in full).
19
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated financial data set forth below for the three years
ended December 31, 1996, and as of December 31, 1995 and 1996, are derived
from the Company's Consolidated Financial Statements, which appear elsewhere
in this Prospectus and which have been audited by Price Waterhouse LLP,
independent accountants. The selected financial data set forth below as of
December 31, 1994 are derived from the Company's audited financial statements,
which are not included in this Prospectus. The selected financial data as of
and for the years ended December 31, 1992 and 1993 are derived from the
Company's unaudited financial statements, which are not included in this
Prospectus. The selected consolidated financial data for the three months
ended March 31, 1996 and 1997, and as of March 31, 1997, are derived from the
Company's unaudited consolidated financial statements which appear elsewhere
in this Prospectus. In the opinion of management, the unaudited financial
statements have been prepared on a basis consistent with the Consolidated
Financial Statements which appear elsewhere in this Prospectus and include all
adjustments, consisting only of normal recurring adjustments, necessary for a
fair statement of the financial position and results of operations for these
unaudited periods. The operating results for the three months ended March 31,
1997 are not necessarily indicative of the results to be expected for the full
year ending December 31, 1997. The data set forth below should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the Company's Consolidated Financial
Statements, including the Notes thereto, included elsewhere in this
Prospectus.
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
---------------------------------------- ----------------
1992 1993 1994 1995 1996 1996 1997
------ ------ ------ ------- -------- -------- ------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Revenue:
Outsourcing services... $ 746 $1,798 $7,130 $16,400 $ 10,190 $ 2,244 $2,519
License................ -- -- -- -- 6,526 -- 4,144
Other services......... 117 433 742 2,105 2,519 404 1,196
------ ------ ------ ------- -------- -------- ------
Total revenue (1)..... 863 2,231 7,872 18,505 19,235 2,648 7,859
------ ------ ------ ------- -------- -------- ------
Cost of revenue:
Outsourcing services... 517 841 4,700 9,602 8,488 2,234 2,045
License................ -- -- -- -- 162 -- 127
Other services......... 103 306 319 2,421 2,931 506 1,289
------ ------ ------ ------- -------- -------- ------
Total cost of
revenue.............. 620 1,147 5,019 12,023 11,581 2,740 3,461
------ ------ ------ ------- -------- -------- ------
Gross profit (loss).... 243 1,084 2,853 6,482 7,654 (92) 4,398
------ ------ ------ ------- -------- -------- ------
Operating expenses:
Sales and marketing.... 76 265 366 2,129 3,116 654 1,383
Research and
development........... 7 196 560 1,703 6,033 1,360 1,634
General and
administrative........ 274 428 1,283 2,357 3,249 748 925
------ ------ ------ ------- -------- -------- ------
Total operating
expenses............. 357 889 2,209 6,189 12,398 2,762 3,942
------ ------ ------ ------- -------- -------- ------
Income (loss) from
operations............ (114) 195 644 293 (4,744) (2,854) 456
Interest income
(expense), net........ 2 -- (63) (203) (296) (38) 27
------ ------ ------ ------- -------- -------- ------
Income (loss) before
income taxes, minority
interest and equity in
loss of less than
majority-owned
company............... (112) 195 581 90 (5,040) (2,892) 483
Provision (benefit) for
estimated income
taxes................. -- 7 179 (8) (143) (142) 48
------ ------ ------ ------- -------- -------- ------
Income (loss) before
minority interest and
equity in loss of less
than majority-owned
company............... (112) 188 402 98 (4,897) (2,750) 435
Minority interest in
consolidated
subsidiary............ -- -- -- (43) (24) 38 (29)
Equity in loss of less
than majority-owned
company............... -- -- (97) -- -- -- --
------ ------ ------ ------- -------- -------- ------
Net income (loss)...... $ (112) $ 188 $ 305 $ 55 $ (4,921) $ (2,712) $ 406
====== ====== ====== ======= ======== ======== ======
Pro forma net income
(loss) per share (2).. $ (0.46) $ 0.03
======== ======
Weighted average shares
used to compute pro
forma net income
(loss) per share(2)... 10,695 12,711
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------
MARCH 31,
1992 1993 1994 1995 1996 1997
---- ------ ------ ------ ------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents....... $-- $ 2 $ 339 $ 264 $ 7,388 $ 5,022
Working capital (deficit)....... (19) 338 1,267 2,218 8,218 8,406
Total assets.................... 540 1,075 2,924 7,179 17,725 15,712
Long-term debt, net of current
portion........................ 224 491 777 1,792 1,538 1,476
Redeemable stock................ -- -- -- -- 12,287 12,546
Stockholders' equity (deficit).. 202 498 867 1,802 (3,302) (3,160)
</TABLE>
- -------
(1) Revenue (in thousands) from related parties in the years ended December
31, 1992, 1993, 1994, 1995 and 1996 and the three months ended March 31,
1996 and 1997 was $745, $824, $4,317, $10,124, $6,443, $1,179 and $975,
respectively. See the Company's Consolidated Financial Statements.
(2) See Note 2 of Notes to the Company's Consolidated Financial Statements for
an explanation of the determination of pro forma net income (loss) per
share.
20
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSISOF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The following discussion contains certain forward-looking statements. Actual
results could differ materially. See "Risk Factors."
OVERVIEW
Peritus was founded in 1991 to address the growing market for managing and
maintaining the installed base of software in organizations. The Company
focused its efforts on the delivery of software maintenance outsourcing
services until 1995, when it began to devote significant resources to the
development of software tools addressing the problems associated with mass
changes to application systems and their associated databases, particularly
the year 2000 problem. In 1996, the Company began licensing its
AutoEnhancer/2000 software, which was designed to address the year 2000
problem, to value added integrators and directly to end users. In 1996, the
Company expanded its research and development efforts through the acquisition
of Vista Technologies Incorporated, a developer of computer-aided engineering
software ("Vista").
The Company derives its revenue from software maintenance outsourcing
services, software and methodology licensing and other services sold directly
to end users or indirectly via value added integrators and distributors, and
its clients include primarily Fortune 1000 companies and similarly sized
business and government organizations worldwide. The Company's products and
services are marketed through its direct sales force, both domestically and in
Spain, through value added integrators operating worldwide and through
international distributors in Canada, Italy and Japan.
Revenue Recognition Policies
The Company's outsourcing services are generally offered under multi-year,
fixed-price, fixed-time frame contracts. In connection with the delivery of
its outsourcing services, the Company assesses a client's IT costs and agrees
to provide services at a price generally below the internal costs of the
client. Revenue under these contracts is recognized using the percentage-of-
completion method and is based on the ratio that labor-hours incurred to date
bear to estimated total labor-hours at completion, provided that collection of
the related receivable is probable. Because the labor-hours associated with
the Company's outsourcing services are typically higher in the early phases of
the contract, revenue is also typically higher in such phases and declines
over the term of the contract. Under the percentage-of-completion method, the
Company updates on a quarterly basis its completion estimates of each contract
to reflect changes in projected completion costs or dates. The cumulative
impact of any revision in estimates is reflected in each quarterly financial
reporting period in which the change in the estimate becomes known. When the
revised estimates indicate a loss on the contract, such loss is provided for
currently in its entirety. As the Company bears the risk of cost overruns and
inflation associated with multi-year, fixed-price, fixed-time frame contracts,
the Company's operating results may be adversely affected by inaccurate
estimates of contract completion costs and dates. These contracts may be
revised by the Company and the client when a significant change in the scope
or cost of a project arises that neither the Company nor the client had
anticipated. These contracts are terminable at will by either party upon
written notice in accordance with the terms of the contract, at which time
payment for services rendered to date is due.
The Company licenses its software products and methodologies directly and
indirectly (via distributors) to end users and to value added integrators for
their use in serving their clients. License fees charged to end users are
fixed, with the amount of the fee based on the estimated total lines of code
to be processed. Revenue from end-user licenses is recognized when software
and methodologies have been delivered to the end user, all significant
contractual obligations have been met and collection of the related receivable
is probable. License fees charged to value added integrators and distributors
are generally royalties based on lines of code processed or to be processed.
Revenue derived from these usage-based licenses is recognized when licensed
software has been delivered, the fee is fixed or determinable, all significant
contractual obligations have been met and collection of the related receivable
is probable.
21
<PAGE>
Other services provided by the Company include technology transfer
engagements (including insourcing engagements expected to begin in 1997),
product training, value added integrator and distributor sales training,
consulting services and software product maintenance. Other services also
include direct delivery contracts, in which the Company provides full year
2000 renovations and pilot year 2000 renovations for clients using the
Company's AutoEnhancer/2000 software. Pilot projects are generally priced to
the client at the Company's estimated cost of providing such services. Revenue
from direct delivery contracts is recognized over the duration of such
contracts as work is performed and defined milestones are attained. Any
estimated losses on direct delivery contracts are recorded in their entirety
in the period in which they become known. Revenue from technology transfer
engagements, product and sales training and consulting services is billed on a
time-and-materials basis and is recognized as the services are provided. With
respect to the Company's proposed insourcing services, the Company intends to
charge a royalty for client productivity gains resulting from such services,
the revenue from which will be recognized as such gains are realized by the
client. Revenue from software product maintenance contracts on the Company's
licensed products, including client support bundled with the initial license
fee, is deferred and recognized ratably over the contractual periods during
which the services are provided.
Client Concentration
During the past several years, the Company's revenue has been dependent on a
few major clients. During the three months ended March 31, 1997, revenue from
three clients accounted for 26.1%, 14.0% and 10.6% of the Company's total
revenue, respectively. During 1996, revenue from three clients accounted for
29.0%, 14.6% and 12.1% of the Company's total revenue. During 1995, revenue
from three clients accounted for 50.3%, 12.9% and 11.0% of the Company's total
revenue, and in 1994 revenue from two clients accounted for 51.7% and 29.3% of
the Company's total revenue. The largest client in each of 1996, 1995 and 1994
was a related party of the Company. See Note 8 of Notes to the Company's
Consolidated Financial Statements. The Company's ten largest clients in the
three months ended March 31, 1997 and each of 1996, 1995 and 1994 accounted
for approximately 82.2%, 77.9%, 90.5% and 92.1% of the Company's total
revenue, respectively. The Company anticipates that this concentration of
clients as a percentage of the Company's total revenue will diminish in the
future but that the Company will continue to depend to a significant extent
upon revenue from a small number of clients. See "Risk Factors--Concentration
of Clients and Credit Risk; Related Party Transactions."
Capitalized Software Costs
In accordance with Statement of Financial Accounting Standards ("SFAS") 86,
Accounting for the Costs of Computer Software to be Sold, Leased or Otherwise
Marketed, the Company is required to capitalize software development costs
incurred after the establishment of the technological feasibility of a
product. Costs incurred prior to the establishment of technological
feasibility are charged to research and development expense. As releases of
the Company's products over the three years ended December 31, 1996 have
generally occurred soon after technological feasibility has been established,
the costs subject to capitalization have not been material and thus have not
been capitalized. In January 1996, the Company acquired Vista for total
consideration of $815,000 in a transaction accounted for under the purchase
method of accounting. Approximately $150,000 of the acquisition price was
allocated to software technology and is being amortized over three years to
cost of revenue. See Note 2 of Notes to the Company's Consolidated Financial
Statements.
Spanish Subsidiary
In September 1994, the Company, along with two other investors, established
Persist, S.A. ("Persist") to provide software maintenance services in Spain
and Portugal. The Company's initial equity position in Persist was 40.0%. In
1995, Persist signed two outsourcing agreements and increased staff to deliver
these contracts. Also in 1995, the Company acquired a majority interest in
Persist and, accordingly, began to consolidate the financial statements of
Persist with those of the Company. Persist continues to provide outsourcing
services to clients and has also begun to license the AutoEnhancer/2000
software in Spain and Portugal. See Note 3 of Notes to the Company's
Consolidated Financial Statements.
22
<PAGE>
RESULTS OF OPERATIONS
The following table sets forth for the periods indicated the percentage of
total revenue of certain line items included in the Company's consolidated
statement of operations:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
-------------------------- ---------------------
1994 1995 1996 1996 1997
------- ------- -------- ---------- ---------
<S> <C> <C> <C> <C> <C>
Revenue:
Outsourcing services....... 90.6% 88.6% 53.0% 84.7% 32.1%
License.................... -- -- 33.9 -- 52.7
Other services............. 9.4 11.4 13.1 15.3 15.2
------- ------- -------- ---------- --------
Total revenue (1)........ 100.0 100.0 100.0 100.0 100.0
------- ------- -------- ---------- --------
Cost of revenue:
Outsourcing services....... 59.7 51.9 44.1 84.4 26.0
License.................... -- -- 0.8 -- 1.6
Other services............. 4.1 13.1 15.3 19.1 16.4
------- ------- -------- ---------- --------
Total cost of revenue.... 63.8 65.0 60.2 103.5 44.0
------- ------- -------- ---------- --------
Gross profit (loss).......... 36.2 35.0 39.8 (3.5) 56.0
------- ------- -------- ---------- --------
Operating expenses:
Sales and marketing........ 4.6 11.5 16.2 24.7 17.6
Research and development... 7.1 9.2 31.4 51.4 20.8
General and administra-
tive...................... 16.3 12.7 16.9 28.2 11.8
------- ------- -------- ---------- --------
Total operating ex-
penses.................. 28.0 33.4 64.5 104.3 50.2
------- ------- -------- ---------- --------
Income (loss) from
operations................ 8.2 1.6 (24.7) (107.8) 5.8
Interest income (expense),
net......................... (0.8) (1.1) (1.5) (1.4) 0.3
------- ------- -------- ---------- --------
Income (loss) before income
taxes, minority interest
and equity in loss of less
than majority-owned
company................... 7.4 0.5 (26.2) (109.2) 6.1
Provision (benefit) for
estimated income taxes...... 2.3 -- (0.7) (5.4) 0.6
------- ------- -------- ---------- --------
Income (loss) before
minority interest and
equity in loss of less
than majority-owned
company................... 5.1 0.5 (25.5) (103.8) 5.5
Minority interest in
consolidated subsidiary..... -- (0.2) (0.1) 1.4 (0.4)
Equity in loss of less than
majority-owned company...... (1.2) -- -- -- --
------- ------- -------- ---------- --------
Net income (loss).......... 3.9% 0.3% (25.6)% (102.4)% 5.1%
======= ======= ======== ========== ========
</TABLE>
- --------
(1) Revenue from related parties in the years ended December 31, 1994, 1995
and 1996 and the three months ended March 31, 1996 and 1997 represented
54.8%, 54.7%, 33.5%, 44.5% and 12.4% of total revenue, respectively.
THREE MONTHS ENDED MARCH 31, 1997 COMPARED TO THREE MONTHS ENDED MARCH 31,
1996
REVENUE
Total revenue increased 196.8% to $7,859,000 in the three months ended March
31, 1997 from $2,648,000 in the three months ended March 31, 1996. This
increase was primarily due to the initial licensing of the Company's
AutoEnhancer/2000 software, as well as from increases in other services
revenue and, to a lesser
23
<PAGE>
extent, outsourcing services revenue. International revenue increased 273.5%
to $732,000 in the three months ended March 31, 1997 from $196,000 in the
three months ended March 31, 1996. As a percentage of total revenue,
international revenue increased to 9.3% in the three months ended March 31,
1997 from 7.4% in the three months ended March 31, 1996. Substantially all of
the Company's international revenue for the three months ended March 31, 1997
and 1996 was attributable to revenue generated by Persist.
Outsourcing Services. Outsourcing services revenue increased 12.3% to
$2,519,000 in the three months ended March 31, 1997 from $2,244,000 in the
three months ended March 31, 1996. As a percentage of total revenue,
outsourcing services revenue decreased to 32.0% in the three months ended
March 31, 1997 from 84.7% in the three months ended March 31, 1996. The
increase in outsourcing services revenue in absolute dollars was primarily
attributable to the addition of two new outsourcing contracts in late 1996 and
was partially offset by the recognition of lesser amounts of revenue under the
percentage-of-completion method on existing contracts that were in their later
phases. The decrease in outsourcing services revenue as a percentage of total
revenue reflects the contribution of license revenue to total revenue during
the three months ended March 31, 1997. Outsourcing services remain a major
component of the solutions offered by the Company, and the Company anticipates
that such services will continue to account for a significant portion of total
revenue for the foreseeable future.
License. License revenue was $4,144,000 in the three months ended March 31,
1997, or 52.7% of total revenue. The Company recognized no license revenue in
the three months ended March 31, 1996. The Company's license revenue in the
three months ended March 31, 1997 was primarily attributable to the delivery
of licensed software to two end users and to license fees from value added
integrators.
Other Services. Other services revenue increased 196.0% to $1,196,000 in the
three months ended March 31, 1997 from $404,000 in the three months ended
March 31, 1996. As a percentage of total revenue, other services revenue was
15.2% in the three months ended March 31, 1997 compared to 15.3% in the three
months ended March 31, 1996. The increase in other services revenue in
absolute dollars was primarily attributable to an increase in consulting,
training and client support services relating to the Company's year 2000
products and services. This increase was partially offset by a decrease in
direct delivery services for one significant pilot year 2000 renovation.
COST OF REVENUE
Cost of Outsourcing Services Revenue. Cost of outsourcing services revenue
consists primarily of salaries, benefits and overhead costs associated with
delivering outsourcing services to clients. The cost of outsourcing services
revenue decreased 8.5% to $2,045,000 in the three months ended March 31, 1997
from $2,234,000 in the three months ended March 31, 1996. Cost of outsourcing
services revenue decreased as a percentage of outsourcing services revenue to
81.2% in the three months ended March 31, 1997 from 99.6% in the three months
ended March 31, 1996. The decrease in the cost of outsourcing services revenue
as a percentage of outsourcing services revenue was due primarily to the re-
deployment in late 1996 of underutilized resources to research and development
and support activities, partially offset by the addition of resources
necessary to provide services under the two new outsourcing contracts.
Cost of License Revenue. Cost of license revenue consists primarily of
salaries, benefits and related overhead costs associated with materials
packaging and freight. Cost of license revenue was $127,000 in the three
months ended March 31, 1997, or 3.1% of license revenue. There was no cost of
license revenue in the three months ended March 31, 1996. These costs were
attributable to the licensing of the Company's AutoEnhancer/2000 software.
Cost of Other Services Revenue. Cost of other services revenue consists
primarily of salaries, benefits and related overhead costs associated with
delivering other services to clients. Cost of other services revenue increased
154.7% to $1,289,000 in the three months ended March 31, 1997 from $506,000 in
the three months ended March 31, 1996. Cost of other services revenue as a
percentage of other services revenue decreased to
24
<PAGE>
107.8% in the three months ended March 31, 1997 from 125.2% in the three
months ended March 31, 1996. Costs exceeded revenue in the three months ended
March 31, 1996 primarily as a result of expected cost overruns on one
significant pilot engagement, which subsequently became a significant product
license. Costs exceeded revenue in the three months ended March 31, 1997 due
to increased staffing in the Company's client support, training and consulting
organizations in anticipation of future revenue primarily related to the
introduction of the Company's year 2000 products and services.
OPERATING EXPENSES
Sales and Marketing. Sales and marketing expenses consist primarily of
salaries, commissions and related overhead costs for Company personnel; sales
referral fees to third parties; advertising programs; and other promotional
activities. Sales and marketing expenses increased 111.5% to $1,383,000 in the
three months ended March 31, 1997 from $654,000 in the three months ended
March 31, 1996. As a percentage of total revenue, sales and marketing expenses
decreased to 17.6% in the three months ended March 31, 1997 from 24.7% in the
three months ended March 31, 1996. The increase in expenses in absolute
dollars was primarily attributable to increased staffing, commissions,
including an increase in sales referral fees to third parties, and promotional
activities in conjunction with the launch of the Company's AutoEnhancer/2000
software. The Company intends to increase the amount of expenditures for sales
and marketing in 1997, both domestically and internationally. There can be no
assurance that these expenditures will result in increased revenue.
Research and Development. Research and development expenses consist
primarily of salaries, benefits and related overhead costs for engineering and
technical personnel and outside engineering consulting services associated
with developing new products and enhancing existing products. Research and
development expenses increased 20.1% to $1,634,000 in the three months ended
March 31, 1997 from $1,360,000 in the three months ended March 31, 1996. As a
percentage of total revenue, research and development expenses decreased to
20.8% in the three months ended March 31, 1997 from 51.4% in the three months
ended March 31, 1996. The increase in research and development expenses in
absolute dollars was primarily attributable to increased staffing for the
product development efforts for the Company's year 2000 products and services
and mass change technologies, including an increase in staffing effected
through new hires and internal transfers. The Company intends to employ
additional research and development staff and therefore anticipates that
research and development expenses will increase in absolute dollars in 1997.
General and Administrative. General and administrative expenses consist
primarily of salaries and related costs for the finance and accounting, human
resources, legal services, information systems and other administrative
departments of the Company, as well as legal and accounting expenses and the
amortization of goodwill associated with the Vista acquisition. General and
administrative expenses increased 23.7% to $925,000 in the three months ended
March 31, 1997 from $748,000 in the three months ended March 31, 1996. As a
percentage of total revenue, general and administrative expenses decreased to
11.8% in the three months ended March 31, 1997 from 28.3% in the three months
ended March 31, 1996. The increase in general and administrative expenses in
absolute dollars was primarily due to additions to the Company's
administrative staff to support growth, higher professional fees and increases
in other general corporate expenses. The Company anticipates that general and
administrative expenses will increase in absolute dollars in 1997 in part due
to increased costs associated with becoming a publicly held company.
Interest Income (Expense), Net. Interest income (expense), net is primarily
composed of interest income from cash balances and interest expense on debt.
Interest income, net of $27,000 in the three months ended March 31, 1997
compares to interest expense, net of $38,000 in the three months ended March
31, 1996. This change was primarily attributable to decreased interest expense
on lesser borrowings by the Company as well as increased interest income from
increased cash balances.
Provision (Benefit) for Income Taxes. The Company recorded an income tax
provision of $48,000 in the three months ended March 31, 1997, versus a
benefit of $142,000 in the three months ended March 31, 1996.
25
<PAGE>
The provision was the result of an increase in taxable income, which was
partially offset by the Company's expected utilization in 1997 of previously
generated net operating loss carryforwards. The usage of these net operating
loss carryforwards may be limited due to a change in Company ownership that
resulted from sales of the Company's Convertible Preferred Stock.
Minority Interest in Consolidated Subsidiary. The minority interest in
consolidated subsidiary represents the equity interest in the operating
results of Persist, the Company's majority-owned Spanish subsidiary, held by
stockholders of Persist other than the Company. The minority interest in
consolidated subsidiary increased to income of $29,000 in the three months
ended March 31, 1997 from a loss of $38,000 in the three months ended March
31, 1996. This change was the result of the increased profitability of
Persist. At March 31, 1997, the Company held a 63.7% equity interest in
Persist compared to a 69.5% equity interest at March 31, 1996.
YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995
REVENUE
Total revenue increased 3.9% to $19,235,000 in 1996 from $18,505,000 in
1995. This increase was primarily due to the initial licensing of the
Company's AutoEnhancer/2000 software in 1996, as well as from an increase in
other services revenue, which was offset by a significant decrease in
outsourcing services revenue. International revenue increased 66.8% to
$1,800,000 in 1996 from $1,079,000 in 1995. As a percentage of total revenue,
international revenue increased to 9.4% in 1996 from 5.8% in 1995.
Substantially all of the Company's international revenue during 1995 and 1996
was attributable to revenue generated by Persist.
Outsourcing Services. Outsourcing services revenue decreased 37.9% to
$10,190,000 in 1996 from $16,400,000 in 1995. As a percentage of total
revenue, outsourcing services revenue decreased to 53.0% in 1996 from 88.6% in
1995. The decrease in outsourcing services revenue was primarily attributable
to the recognition of lesser amounts of revenue under the percentage-of-
completion method on two significant contracts that were in their later
phases. In addition, as the Company began to focus more of its efforts in 1996
on the licensing of its AutoEnhancer/2000 software, the Company did not add a
sufficient number of new outsourcing contracts to offset this decline in
outsourcing services revenue.
License. License revenue was $6,526,000 in 1996, or 33.9% of total revenue.
License revenue was generated in 1996 from the introduction of the Company's
AutoEnhancer/2000 software and was primarily attributable to three licenses,
one of which was with a related party.
Other Services. Other services revenue increased 19.7% to $2,519,000 in 1996
from $2,105,000 in 1995. As a percentage of total revenue, other services
revenue increased to 13.1% in 1996 from 11.4% in 1995. The increase in other
services revenue was primarily attributable to an increase in technology
transfer revenue as well as the introduction of consulting and product
training services for the Company's AutoEnhancer/2000 software. These
increases were partially offset by a decrease in direct delivery services for
one significant pilot year 2000 renovation.
COST OF REVENUE
Cost of Outsourcing Services Revenue. Cost of outsourcing services revenue
decreased 11.6% to $8,488,000 in 1996 from $9,602,000 in 1995. Cost of
outsourcing services revenue increased as a percentage of outsourcing services
revenue to 83.3% in 1996 from 58.5% in 1995. Although cost of outsourcing
services revenue declined in absolute dollars from 1995 to 1996, the decline
did not keep pace with the decreases in outsourcing services revenue. The
increase in cost of outsourcing services revenue as a percentage of
outsourcing services revenue was due primarily to the underutilization of
personnel resulting from the lack of significant new outsourcing contracts in
1996, and, to a lesser extent, to cost overruns associated with a significant
contract. In the third and fourth quarters of 1996, the Company re-deployed
resources dedicated to outsourcing services from the delivery of those
services to client support, consulting support and research and development.
26
<PAGE>
Cost of License Revenue. Cost of license revenue was $162,000 in 1996, or
2.5% of license revenue. There was no cost of license revenue in 1995. These
costs were attributable to the introduction of the Company's AutoEnhancer/2000
software.
Cost of Other Services Revenue. Cost of other services revenue increased
21.1% to $2,931,000 in 1996 from $2,421,000 in 1995. Cost of other services
revenue also increased as a percentage of other services revenue to 116.4% in
1996 from 115.0% in 1995. Costs exceeded revenue in both years as a result of
expected cost overruns for one significant pilot direct delivery client, which
subsequently became a product licensee, as well as the increase in staffing of
both client support and product training in anticipation of future revenue.
OPERATING EXPENSES
Sales and Marketing. Sales and marketing expenses increased 46.4% to
$3,116,000 in 1996 from $2,129,000 in 1995. As a percentage of total revenue,
sales and marketing expenses increased to 16.2% in 1996 from 11.5% in 1995.
The increase in sales and marketing expenses during 1996 was primarily
attributable to increased staffing, commissions, including an increase of
approximately $350,000 in sales referral fees to third parties, and
promotional activities in conjunction with the launch of the Company's
AutoEnhancer/2000 software, as well as increased staffing to build third-party
channels for the Company's products and services.
Research and Development. Research and development expenses increased 254.3%
to $6,033,000 in 1996 from $1,703,000 in 1995. As a percentage of total
revenue, research and development expenses increased to 31.4% in 1996 from
9.2% in 1995. The increase in research and development expenses was primarily
attributable to significant product development efforts relating to the
Company's year 2000 products and services and mass change technologies,
including an increase in staffing effected through new hires, the acquisition
of Vista in January 1996 and internal transfers. At December 31, 1996, there
were 59 full-time employees in research and development compared to 17 at
December 31, 1995.
General and Administrative. General and administrative expenses increased
37.8% to $3,249,000 in 1996 from $2,357,000 in 1995. As a percentage of total
revenue, general and administrative expenses increased to 16.9% in 1996 from
12.7% in 1995. The increase in general and administrative expenses was
primarily due to additions to the Company's administrative staff to support
growth, higher professional fees and increases in other general corporate
expenses.
Interest Income (Expense), Net. Interest expense, net, increased 45.8% to
$296,000 in 1996 from $203,000 for 1995. The increase was primarily
attributable to increased average borrowings by the Company.
Provision (Benefit) for Income Taxes. The Company's benefit for estimated
income taxes increased to $143,000 in 1996 from $8,000 in 1995. The increase
was the result of an increase in gross deferred tax assets, caused primarily
by additional net operating loss carryforwards and tax credit carryforwards,
which resulted in the reversal of the net deferred tax liability recorded as
of December 31, 1995.
Minority Interest in Consolidated Subsidiary. The minority interest in
consolidated subsidiary decreased 44.2% to $24,000 in 1996 from $43,000 in
1995. The decrease was the result of the decreased profitability of Persist,
partially offset by a decrease in the Company's equity interest in Persist. At
December 31, 1996, the Company held a 63.7% equity interest in Persist
compared to a 69.5% equity interest at December 31, 1995.
YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER 31, 1994
REVENUE
Total revenue increased 135.1% to $18,505,000 in 1995 from $7,872,000 in
1994. This increase in revenue was primarily due to increased outsourcing
services revenue as well as an increase in other services revenue related to
one direct delivery client. International revenue increased 180.3% to
$1,079,000 in 1995 from $385,000 in 1994. As a percentage of total revenue,
international revenue increased to 5.8% in 1995 from 4.8% in 1994.
Substantially all of the Company's international revenue in 1995 was
attributable to revenue generated by the Company's Spanish subsidiary.
27
<PAGE>
Outsourcing Services. Outsourcing services revenue increased 130.0% to
$16,400,000 in 1995 from $7,130,000 in 1994. As a percentage of total revenue,
outsourcing services revenue decreased to 88.6% in 1995 from 90.6% in 1994.
The increase in outsourcing services revenue in absolute dollars was primarily
attributable to the addition of two significant outsourcing contracts that
commenced in the fourth quarter of 1994.
Other Services. Other services revenue increased 183.7% to $2,105,000 in
1995 from $742,000 in 1994. As a percentage of total revenue, other services
revenue increased to 11.4% in 1995 from 9.4% in 1994. The increase was
primarily attributable to the addition of a significant year 2000 pilot direct
delivery contract.
COST OF REVENUE
Cost of Outsourcing Services Revenue. Cost of outsourcing services revenue
increased 104.3% to $9,602,000 in 1995 from $4,700,000 in 1994. Cost of
outsourcing services revenue decreased as a percentage of outsourcing services
revenue to 58.5% in 1995 from 65.9% in 1994. The increase in costs was
primarily attributable to increased staffing to meet the demands of two new
outsourcing contracts. As part of one of these contracts, the Company agreed
to hire 58 of the client's employees in September 1994 to help deliver
services under this contract. The decrease in costs as a percentage of
outsourcing services revenue was primarily attributable to increased technical
staff productivity, which was partially offset by cost overruns on one
contract.
Cost of Other Services Revenue. Cost of other services revenue increased
658.9% to $2,421,000 in 1995 from $319,000 in 1994. Cost of other services
revenue increased as a percentage of other services revenue to 115.0% in 1995
from 43.0% in 1994. The increase in costs was primarily attributable to
increased staffing necessary to service a new year 2000 pilot direct delivery
contract entered into in the first quarter of 1995 and the expected cost
overruns associated with such contract.
OPERATING EXPENSES
Sales and Marketing. Sales and marketing expenses increased 481.7% to
$2,129,000 in 1995 from $366,000 in 1994. As a percentage of total revenue,
sales and marketing expenses increased to 11.5% in 1995 from 4.7% in 1994. The
increase in sales and marketing expenses was primarily attributable to
increased staffing, commissions and promotional activities to support the
Company's rapid growth.
Research and Development. Research and development expenses increased 204.1%
to $1,703,000 in 1995 from $560,000 in 1994. As a percentage of total revenue,
research and development expenses increased to 9.2% in 1995 from 7.1% in 1994.
The increase in research and development expenses was primarily attributable
to an increase in staffing in 1995.
General and Administrative. General and administrative expenses increased
83.7% to $2,357,000 in 1995 from $1,283,000 in 1994. As a percentage of total
revenue, general and administrative expenses decreased to 12.7% in 1995 from
16.3% in 1994. The increase in general and administrative expenses in absolute
dollars was primarily the result of additions to the Company's finance,
administrative and support staff as well as increases in professional fees and
other general corporate expenses to support the Company's growth.
Interest Income (Expense), Net. Interest expense, net increased 222.2% to
$203,000 in 1995 from $63,000 in 1994. The increase was primarily attributable
to increased average borrowings by the Company.
Provision (Benefit) for Income Taxes. The Company's benefit for estimated
income taxes increased to $8,000 in 1995 from a tax provision of $179,000 in
1994. The change was a result of lower income before provision for income
taxes in 1995, along with an increase in gross deferred tax assets, caused
primarily by an increase in tax credit carryforwards.
Equity in Loss of Less Than Majority-Owned Company; Minority Interest in
Consolidated Subsidiary. In 1994, the equity in loss of less than majority-
owned company was $97,000. This amount represented the Company's 40.0% share
of net losses realized by Persist. In 1995, the Company obtained a majority
ownership interest in Persist, requiring the Company to consolidate the entire
results of operations of Persist with the results of the Company.
Consequently, the share of net income of Persist attributable to its minority
stockholders, which was $43,000 in 1995, was included under the heading
"Minority Interest in Consolidated Subsidiary."
28
<PAGE>
QUARTERLY RESULTS
The following tables set forth a summary of the Company's unaudited
quarterly consolidated operating results for each of the five quarters in the
period ended March 31, 1997. This information has been derived from unaudited
interim consolidated financial statements that, in the opinion of management,
have been prepared on a basis consistent with the Consolidated Financial
Statements contained elsewhere in this Prospectus and include all adjustments,
consisting of only normal recurring adjustments, necessary for a fair
statement of such information when read in conjunction with the Company's
Consolidated Financial Statements and Notes thereto. The operating results for
any quarter are not necessarily indicative of results for any future period.
<TABLE>
<CAPTION>
QUARTER ENDED
-----------------------------------------------
MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31,
1996 1996 1996 1996 1997
-------- --------- --------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Revenue:
Outsourcing services........... $ 2,244 $ 2,514 $2,611 $2,821 $2,519
License........................ -- 45 2,424 4,057 4,144
Other services................. 404 701 610 804 1,196
------- ------- ------ ------ ------
Total revenue (1).............. 2,648 3,260 5,645 7,682 7,859
------- ------- ------ ------ ------
Cost of revenue:
Outsourcing services........... 2,234 2,199 1,977 2,077 2,045
License........................ -- -- 40 122 127
Other services................. 506 672 816 938 1,289
------- ------- ------ ------ ------
Total cost of revenue.......... 2,740 2,871 2,833 3,137 3,461
------- ------- ------ ------ ------
Gross profit (loss)............. (92) 389 2,812 4,545 4,398
------- ------- ------ ------ ------
Operating expenses:
Sales and marketing............ 654 729 668 1,065 1,383
Research and development....... 1,360 1,401 1,506 1,766 1,634
General and administrative..... 748 707 763 1,031 925
------- ------- ------ ------ ------
Total expenses................. 2,762 2,837 2,937 3,862 3,942
------- ------- ------ ------ ------
Income (loss) from operations.. (2,854) (2,448) (125) 683 456
Interest expense, net........... (38) (61) (77) (120) 27
------- ------- ------ ------ ------
Income (loss) before income
taxes and minority interest... (2,892) (2,509) (202) 563 483
Provision (benefit) for esti-
mated income taxes............. (142) (62) (1) 62 48
------- ------- ------ ------ ------
Income (loss) before minority
interest...................... (2,750) (2,447) (201) 501 435
Minority interest in consoli-
dated subsidiary............... 38 (18) (5) (39) (29)
------- ------- ------ ------ ------
Net income (loss).............. $(2,712) $(2,465) $ (206) $ 462 $ 406
======= ======= ====== ====== ======
</TABLE>
<TABLE>
<CAPTION>
QUARTER ENDED
-----------------------------------------------
MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31,
1996 1996 1996 1996 1997
-------- -------- --------- -------- --------
<S> <C> <C> <C> <C> <C>
Revenue:
Outsourcing services........... 84.7% 77.1% 46.3% 36.7% 32.1%
License........................ -- 1.4 42.9 52.8 52.7
Other services................. 15.3 21.5 10.8 10.5 15.2
------ ----- ----- ----- -----
Total revenue (1).............. 100.0 100.0 100.0 100.0 100.0
------ ----- ----- ----- -----
Cost of revenue:
Outsourcing services........... 84.4 67.5 35.0 27.0 26.0
License........................ -- -- 0.7 1.6 1.6
Other services................. 19.1 20.6 14.5 12.2 16.4
------ ----- ----- ----- -----
Total cost of revenue.......... 103.5 88.1 50.2 40.8 44.0
------ ----- ----- ----- -----
Gross profit (loss)............. (3.5) 11.9 49.8 59.2 56.0
------ ----- ----- ----- -----
Operating expenses:
Sales and marketing............ 24.7 22.4 11.8 13.9 17.6
Research and development....... 51.4 43.0 26.7 23.0 20.8
General and administrative..... 28.2 21.6 13.5 13.4 11.8
------ ----- ----- ----- -----
Total expenses................. 104.3 87.0 52.0 50.3 50.2
------ ----- ----- ----- -----
Income (loss) from operations.. (107.8) (75.1) (2.2) 8.9 5.8
Interest expense, net........... (1.4) (1.9) (1.4) (1.6) 0.3
------ ----- ----- ----- -----
Income (loss) before income
taxes and minority interest... (109.2) (77.0) (3.6) 7.3 6.1
Provision (benefit) for esti-
mated income taxes............. (5.4) (1.9) -- 0.8 0.6
------ ----- ----- ----- -----
Income (loss) before minority
interest...................... (103.8) (75.1) (3.6) 6.5 5.5
Minority interest in consoli-
dated subsidiary............... 1.4 (0.5) -- (0.5) (0.4)
------ ----- ----- ----- -----
Net income (loss).............. (102.4)% (75.6)% (3.6)% 6.0% 5.1%
====== ===== ===== ===== =====
</TABLE>
- --------
(1) Revenue (in thousands) from related parties in each of the five quarters
in the period ended March 31, 1997 was $1,179, $1,327, $2,753, $1,184 and
$975, respectively, which represents 44.5%, 40.7%, 48.8%, 15.4% and 12.4%
of total revenue, respectively. See the Company's Consolidated Financial
Statements.
29
<PAGE>
The Company's quarterly revenue, expenses and operating results have varied
significantly in the past and are likely to vary significantly from quarter to
quarter in the future. A significant portion of the Company's revenue in any
quarter is typically derived from a limited number of large client
transactions. In addition, the sales cycle associated with these transactions
is lengthy and is subject to a number of uncertainties, including clients'
budgetary constraints, the timing of clients' budget cycles and clients'
internal approval processes. Accordingly, the timing of significant
transactions is unpredictable and, as a result, the Company's revenue and
results of operations for any particular period are subject to significant
variability. The complexity of certain projects and the requirements of
generally accepted accounting principles can also result in a deferral of
revenue recognition, in whole or in part, on a particular contract during a
quarter, even though the contract has been executed or payment has actually
been received by the Company. Quarterly fluctuations may also result from
other factors such as new product and service introductions or announcements
of new products and services by the Company's competitors, changes in the
Company's or its competitors' pricing policies, changes in the mix of
distribution channels through which the Company's products and services are
sold, the timing and nature of sales and marketing expenses, changes in
operating expenses, the financial stability of major clients, changes in the
demand for software maintenance products and services, foreign currency
exchange rates and general economic conditions. See "Certain Transactions--
Potential Fluctuations in Quarterly Performance."
LIQUIDITY AND CAPITAL RESOURCES
The Company has experienced significant growth since 1992, with its revenue
growing from $863,000 in 1992 to $19,235,000 in 1996. During this period, the
Company financed its operations and capital expenditures primarily with the
proceeds from sales of the Company's Convertible Preferred Stock and Common
Stock, borrowings, advance payments for services from clients and internally
generated cash flows. The Company's cash balances were $5,022,000, $7,388,000,
$264,000 and $339,000 at March 31, 1997 and December 31, 1996, 1995 and 1994,
respectively. The Company's working capital was $8,406,000, $8,218,000,
$2,218,000 and $1,267,000 at March 31, 1997 and December 31, 1996, 1995 and
1994, respectively.
The Company's operating activities used cash of $1,851,000, $2,342,000 and
$1,097,000 during the three months ended March 31, 1997 and the years ended
December 31, 1996 and 1995, respectively, and provided $41,000 during the year
ended December 31, 1994. The Company's use of cash during the three months
ended March 31, 1997 was primarily caused by a decrease in deferred revenue of
$2,356,000 and a reduction of other accrued expenses and current liabilities
of $485,000. These decreases were partially offset by net income of $406,000,
plus non-cash depreciation and amortization expense of $262,000. The Company's
use of cash in 1996 was primarily caused by operating losses of $4,921,000,
net of $854,000 of non-cash depreciation and amortization expense, and a net
increase in accounts receivable and unbilled revenue totaling $3,090,000.
These uses of cash during 1996 were offset somewhat by an increase in deferred
revenue of $3,262,000 and an increase in other accrued expenses and current
liabilities of $949,000. The use of cash in 1995 was principally caused by an
increase in accounts receivable and in net costs and earnings in excess of
billings on uncompleted contracts of $2,480,000, which was partially offset by
net income of $55,000, plus non-cash depreciation and amortization expense of
$443,000 and an increase in operating liabilities of $958,000. The cash
provided by operations during 1994 was attributable to net income of $305,000,
plus non-cash depreciation and amortization expense of $228,000, an increase
in operating liabilities of $519,000 and an increase in deferred taxes of
$179,000. These increases were partially offset by an increase in accounts
receivable and in net costs and earnings in excess of billings on uncompleted
contracts totaling $1,295,000.
The Company used cash of $448,000, $1,059,000, $972,000 and $125,000 for
investing activities during the three months ended March 31, 1997 and the
years ended December 31, 1996, 1995 and 1994, respectively. Investing
activities have consisted principally of the acquisition of property and
equipment, most notably computer equipment and software to support the growing
employee base and corporate infrastructure. Although the Company has no
significant commitments for capital expenditures in 1997, the Company expects
to continue
30
<PAGE>
to purchase property and equipment to further develop its infrastructure. The
Company's cash flows from investing activities in 1996 also included net cash
of $174,000 provided by the acquisition of Vista.
The Company's financing activities used cash of $60,000 during the three
months ended March 31, 1997 and provided cash of $10,555,000, $1,994,000 and
$421,000, during the years ended December 31, 1996, 1995 and 1994,
respectively. In March and October 1996, the Company raised aggregate net
proceeds of $11,684,000 in private placements of the Company's Convertible
Preferred Stock and Common Stock. Net proceeds from the sales of such shares
were used for the Company's general working capital needs, to make scheduled
debt payments and for treasury stock acquisitions. In 1995 and 1994, financing
activities consisted primarily of borrowings from banks and other lending
institutions.
In May 1995, the Company issued a secured subordinated note payable for
approximately $924,000 with a face value of $1,000,000 and interest payable at
10% per annum. The note is subordinate to any bank debt and is collateralized
by a second security interest in all of the assets of the Company. In
addition, the note carries a prepayment premium and contains various
restrictive covenants including, but not limited to, minimum earnings and
limitations on certain interest coverage, debt and equity ratios. The note
also included warrants with an ascribed value of approximately $76,000 for the
purchase of up to 312,500 shares of Common Stock for $1.60 per share. The
warrants expire on June 30, 2000. The Company intends to use a portion of the
net proceeds of this offering to repay in full the note. See "Certain
Transactions" and "Use of Proceeds."
In September 1996, the Company obtained a revolving line of credit facility
from a bank which bears interest at the bank's prime rate plus 0.5% (9.0% at
March 31, 1997). The maximum borrowing under this line of credit is $3,500,000
and is limited to 75% of certain receivables plus 50% of costs and estimated
earnings in excess of billings on uncompleted contracts, as defined by the
line of credit agreement. The line of credit, which was extended on June 20,
1997, expires and all borrowings are payable in full on June 30, 1998. In
addition to this line of credit, the Company also entered into an equipment
financing agreement in September 1996. Under this agreement, the bank agreed
to provide up to $1,500,000 for the purchase of certain equipment (as defined
by the agreement) through June 30, 1997. Ratable principal and interest
payments are payable during the period July 1, 1997 through June 1, 2000, and
bear interest at the bank's prime rate plus 1% (9.5% at March 31, 1997). Both
of these agreements require the Company to comply with certain financial
covenants and are secured by all of the assets of the Company. As of March 31,
1997, there were no borrowings outstanding under the revolving credit facility
and $562,000 was outstanding, and $825,000 remained available, under the
equipment financing agreement.
To date, the Company has not invested in derivative securities or any other
financial instruments that involve a high level of complexity or risk. Cash
has been and the Company contemplates that it will continue to be invested in
interest-bearing, investment grade securities.
The Company believes that the net proceeds from the sale of Common Stock
offered by this Prospectus, together with cash generated from operations and
existing cash balances and advances available under its credit line agreements
will be adequate to finance its capital requirements for at least the next
twelve months. To the extent that such amounts are insufficient to finance the
Company's capital requirements, the Company will be required to raise
additional funds through equity or debt financing. No assurance can be given
that such financing will be available on terms acceptable to the Company, and,
if available, such financing may result in further dilution to the Company's
stockholders and higher interest expense.
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ACCOUNTING PRONOUNCEMENTS
In February 1997, the Financial Accounting Standards Board issued SFAS 128,
Earnings per Share. SFAS 128 specifies modifications to the calculation of
earnings per share from those currently utilized by the Company. Under SFAS
128, "basic" earnings per share will be calculated based upon the weighted
average number of common shares actually outstanding, and "diluted" earnings
per share will be calculated based upon the weighted average number of common
shares and dilutive potential common shares. SFAS 128 is effective in the
Company's fourth quarter of 1997 and will be adopted at that time. The
adoption of SFAS 128 will have no effect on the reporting of the Company's
results of operations, as the Company has not been required to report
historical earnings per share. In addition, the adoption of SFAS 128 will have
no effect on the Company's financial position or cash flows.
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BUSINESS
OVERVIEW
The Company provides software products and services that enable
organizations to improve the productivity, quality and effectiveness of their
IT systems maintenance or software evolution functions. The Company's
solution, which employs software tools, methodologies and processes, is
designed to automate the typically labor-intensive processes involved in
conducting mass change and other software maintenance tasks. In 1996, the
Company released its first commercially available product, its
AutoEnhancer/2000 software, which is aimed at the industry's most pervasive
mass change challenge, the year 2000 problem. The Company also provides on a
fixed-fee basis software maintenance outsourcing services that employ the
Company's proprietary software tools, methodologies and processes to generate
productivity gains through the automation of the software evolution process.
The Company has entered into agreements with a number of leading value added
integrators and distributors, including Bull, a related party, CIBER, Inc.,
Computer Sciences Corp., IBM Global Services and Keane, Inc., which license
the Company's software tool for use in serving their clients. In addition, the
Company licenses its AutoEnhancer/2000 software directly to end users, which
include Met Life and Merrill Lynch. Representative outsourcing clients of the
Company include Advanced Micro Devices, Inc., Computervision, MicroAge
Computer Center, Inc., NYNEX and Stratus. In June 1997, the Company entered
into a joint marketing agreement with VIASOFT to form a joint marketing
arrangement that would combine complementary product and services offerings in
a "best practice" suite of year 2000 solutions.
INDUSTRY BACKGROUND
With the globalization of markets and increased competitive pressures to
reduce operating costs, shorten time to market, improve product quality and
increase customer responsiveness, large organizations throughout the world
have become increasingly dependent on IT to organize and manage their
businesses and serve their customers. Many of these organizations utilize
large mainframe computer systems, client/server systems or a combination
thereof for the information processing requirements of their enterprises.
These IT systems contain the core knowledge and processes that support
mission-critical operations, and maintaining the investment in these IT
systems is a requirement for organizations worldwide.
A key challenge facing organizations has been to modify, update and adapt
their IT systems and evolve their software to respond to a changing and more
competitive business environment. This challenge has increased with the
broadening complexity of IT and the continued evolution of mainframe systems,
as well as the advent of distributed, client/server computing and the
proliferation of third-party enterprise software applications. At the same
time, the pace of change in business environments has accelerated, requiring
organizations to continually evolve their IT systems and environments to adapt
to changing business conditions and processes. This software evolution process
is typically time-consuming, labor-intensive and expensive, and consists not
only of fixing bugs and maintaining the current level of software performance
and functionality, but also making enhancements, implementing mass changes to
the code and migrating applications to new computing platforms.
According to its January 1993 ADM Research Note, Gartner Group, Inc.
estimated that, within the established worldwide IT infrastructure, up to 200
billion lines of COBOL software code have been written to support
applications, many of which are mission-critical. In addition, between 60% to
80% of the average annual IT application development budget is spent on the
maintenance of legacy systems. Although the maintenance function within IT
departments has received little management attention historically, the
impending year 2000 problem, with an estimated cost of between $300 and $600
billion to fix, represents the most significant IT maintenance challenge to
date.
One of the most crucial software evolution challenges currently facing IT
departments is the cost-effective implementation of mass changes to
application systems and their associated databases. A mass change software
modification initiative is the process of effecting a change to the way a
basic variable is interpreted and acted
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upon by a computer program and associated databases in which the variable may
appear or be used thousands, or even millions, of times. The primary goal of a
mass change initiative is to allow organizations to evolve their applications
to accommodate changes in business practices or conditions by modifying
frequently occurring variables without altering or impacting the underlying
logic or function of the program. In large mainframe computing environments, a
typical mass change initiative may involve sorting through hundreds of
millions of lines of code to locate and then correct the targeted variables.
Mass change problems have become more acute for businesses with the increase
in the complexity and volume of computer data, coupled with the use of
disparate IT platforms, operating systems and languages.
Examples of mass change problems include the year 2000 problem, which is the
inability of certain computer systems to properly interpret dates for the year
2000 and beyond; the European Union's expected conversion to the euro
currency; the anticipated increase in the number of digits in Japan's
telephone numbers; the increase in the number of characters in Australia's
medical account classification codes; and the extension of the number of
digits or other characters in zip codes, product codes for manufactured goods
and account numbers for service providers. Additional mass change needs are
being driven by internationalization and localization requirements, weights
and measures standardization, identity-code changes, mergers and acquisitions
and privatization of government agencies.
Presently, the most pervasive mass change problem is the year 2000 problem,
which will affect IT systems in organizations worldwide. To make mission-
critical applications "year 2000 compliant," organizations will be required
over the next several years to devote considerable IT resources, including
investment in software tools and processes, personnel, time and other
resources, to undertake large-scale mass change initiatives.
A typical year 2000 renovation project includes: an ASSESSMENT PHASE, where
an enterprise performs an inventory of its code, analyzes the impact and
exposure of the year 2000 problem on its business and plans the renovation of
the affected code; a CORRECTION PHASE, which entails the implementation of
source code renovation, including the identification of all date-sensitive
variables, correction of the code, and generation of bridges and data
converters so the corrected code will still function with non-compliant code,
and verification of the corrected code; and a TESTING PHASE, which ensures the
integrity of a year 2000 renovation by performing unit and systems tests prior
to re-deploying the code into production. To date, most large organizations
that have begun to address the year 2000 problem have focused on the initial
assessment phase, and relatively few have begun the more critical correction
and testing phases. The Company's AutoEnhancer/2000 software focuses on the
correction phase of a year 2000 renovation project with links to third-party
assessment tools on the front of the process and third-party testing tools on
the back.
To respond to the foregoing challenges in software evolution, many large
organizations are seeking to improve the software evolution process. With the
lack of internal resources to incorporate new and developing technologies,
select and train personnel and develop efficient methodologies to improve IT
applications, many large organizations are seeking ways to outsource their IT
requirements, particularly on a fixed-price, fixed-time frame basis in order
to minimize the risks and costs associated with such large-scale technology
requirements. In addition, industry analysts acknowledge that there is a
growing shortage of IT professionals, which is being exacerbated by the year
2000 problem. These trends have resulted in increased demand for automated
software tools that supplement traditional, mostly manual, maintenance methods
that are often tedious, time-consuming and error-prone.
Historically, software development tools have been targeted to address the
front end of the software development cycle--the analysis, design and coding
of an application--rather than on the maintenance or evolution of the
application. Existing tools and processes to address the software evolution
and mass change needs of organizations typically provide limited
functionality, lack a high degree of automation and are not designed to
address the full scope of the maintenance process. In addition, many existing
solutions do not emphasize productivity and do not address the broad range of
requirements needed to manage the software evolution process across
heterogeneous computing environments.
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With software evolution becoming an increasing burden in the operation of
mission-critical systems, organizations are actively seeking solutions that:
(i) provide comprehensive software evolution capabilities to accommodate
continually changing business needs; (ii) automate and streamline the software
evolution function; (iii) provide a comprehensive solution to mass change
initiatives, including the year 2000 problem; (iv) are compatible with
multiple platforms, operating systems and programming languages; and (v)
provide measurable productivity gains.
PERITUS SOLUTIONS
Peritus offers comprehensive products and services that enable organizations
to improve the productivity, effectiveness and quality of the software
evolution process. The Company's solutions employ a combination of tools,
processes, skilled professionals and methodologies. The Company's underlying
technology consists of its Peritus Intermediate Language ("PIL") and
proprietary tools that can be implemented to address mass change or other
software maintenance challenges.
MASS CHANGE SOLUTIONS
Proven Technology for Mass Change. The Company's Mass Change Engine, which
is based on PIL and other proprietary technologies, converts source code from
a variety of programming languages into PIL in order to perform analysis,
correction and testing on the code during mass change maintenance initiatives.
The Mass Change Engine is designed to automate the labor-intensive code
maintenance function, thereby increasing productivity, and can be customized
to provide function-specific mass change capabilities. The Mass Change Engine
operates across multiple platforms, languages and operating systems.
Comprehensive Year 2000 Renovation Tool. The Company's year 2000 products
and services provide a comprehensive renovation solution for organizations
seeking to address the year 2000 problem. The Company's AutoEnhancer/2000
software, which is based on its Mass Change Engine, is also designed to
provide flexibility in addressing the critical identification, correction and
verification components of a year 2000 renovation. The AutoEnhancer/2000
software is designed to be interoperable with third-party assessment,
extraction and testing tools.
SERVICE OFFERING COMPONENTS
Comprehensive Software Evolution Services. The Company's service offerings
are designed to address software evolution needs through tools and processes
that provide productivity gains by automating and improving the software
evolution process. These services are generally offered on a fixed-fee basis,
and the client can realize the resulting productivity gains in the form of
reductions in internal IT costs, increases in throughput, improved turn-around
time and/or improved software quality. The Company's current service offerings
include outsourcing, in which Peritus assumes responsibility for the evolution
of a client's software, and technology transfer services, in which Peritus
provides its methodologies and tools to clients in-house, enabling them to
implement enhanced, repeatable processes for software evolution.
Team-Based Process Methodologies. The Company employs team-based
methodologies in its service offerings. Teams typically consist of both
Company and client employees, with a Company project manager supervising the
process. In the delivery of its services, the Company combines concepts from
disciplines such as scientific inquiry, operations research and psychology
with engineering "best practices" (such as formal inspections, cross
functional teams and quality initiatives) to create a workflow paradigm that
optimizes a team's ability to leverage its combined talent, knowledge and
experience.
Advanced Technology Platform. The Company has developed its core
technologies through the use of advanced mathematical algorithms and
techniques. To achieve productivity gains, the Company utilizes proprietary
tools that better enable maintenance teams to rapidly locate and fix bugs and
provide software enhancements. These tools include a software maintenance
assistance tool designed to automate the process of logical code analysis, a
business rules extraction tool and a groupware tool designed to facilitate
workflow coordination.
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STRATEGY
The Company's objective is to establish leadership in providing tools,
processes and services that significantly increase productivity and quality in
software evolution. The Company's strategy includes the following key
elements:
Establish Leadership in Software Evolution Technology. The Company intends
to continue to develop its core technologies by enhancing its Peritus
Intermediate Language and related technologies in the areas of mass change,
business rules extraction, verification, testing and code analysis. The
Company is currently developing specific versions of its Mass Change Engine to
address mass change market opportunities in addition to the year 2000 problem.
Leverage Year 2000 Opportunities. The Company has focused a significant
portion of its recent research and development expenditures on enhancing
current products and technologies designed to address year 2000 market
opportunities. The Company intends to continue marketing its year 2000
products and services through both direct and indirect channels. The Company
believes that the year 2000 problem has heightened industry concerns regarding
software maintenance. The Company anticipates that these concerns will serve
as a catalyst in helping organizations to view software maintenance as a
dynamic, evolutionary process capable of addressing mass change problems and
enabling organizations to improve the productivity, effectiveness and quality
of their software maintenance. In addition, the Company intends to leverage
the relationships developed through its year 2000 products and services into
long-term outsourcing engagements and future mass change sales opportunities.
Develop Multiple Distribution Channels. The Company currently markets its
products through a combination of direct and indirect channels. The Company
believes that indirect channels are an important part of its distribution
strategy and plans to continue to develop these channels. Currently, the
Company has agreements with 22 value added integrators and distributors that
license its AutoEnhancer/2000 software. The Company's value added integrators
operate on a worldwide basis, and its distributors are currently located in
the United States, Canada, Italy and Japan. During 1997, the Company expects
to enter into additional value added integrator and distribution agreements,
including agreements with additional government systems integrators to
penetrate state, federal and foreign government agencies. The Company also
intends to work with several complementary software and services providers to
create a "best practice" suite of year 2000 solutions. In June 1997, the
Company entered into a joint marketing agreement with VIASOFT to form a joint
marketing arrangement that would combine complementary product and service
offerings. The Company also intends to continue to expand its direct sales
organization.
Leverage Existing Client Base. The Company has established strong long-term
client relationships, which often involve multiple contracts over several
years. The Company intends to leverage existing client relationships by cross-
selling other products and services to its clients. For example, the Company
believes that clients that purchase year 2000 products and services will
likely have other mass change and software evolution needs, which the Company
intends to target.
Continue to Expand Service Offerings. The Company intends to expand its
service offerings by introducing insourcing services to organizations
interested in retaining the maintenance function in-house and by continuing to
offer outsourcing and technology transfer services. Through its resources in
the United States, Spain and India, the Company has developed "virtual"
outsourcing teams that provide outsourcing coverage and support 24 hours a
day. The Company intends to increase productivity and capacity among its
virtual outsourcing teams by hiring additional overseas personnel during 1997.
Pursue Strategic Opportunities. Although the Company's growth to date has
occurred principally through internally developed products and services, the
Company is pursuing additional strategic alliances with value added
integrators to enhance the scope of the products and services offered to end
users. In addition, the Company believes that the opportunity exists to expand
its products and services through the acquisition of complementary businesses
and technologies. Although the Company currently has no commitments or
agreements with respect to any such acquisition, management intends to analyze
potential acquisitions and to pursue those opportunities that complement or
supplement its business strategy.
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TECHNOLOGY
The Company's core technologies consist of its Peritus Intermediate
Language, its Mass Change Engine, other computer-based tools and formal
mathematical techniques.
The Peritus Intermediate Language. The Company has developed its Peritus
Intermediate Language to support accurate diagnosis of why a program functions
incorrectly. PIL is based on the mathematical theory that all computations can
be expressed in a small number of abstract instructions into which existing
computer languages can be translated. PIL consists of 13 abstract
instructions, and currently the COBOL, RPG, C and PL/1 programming languages
have been translated by the Company into PIL. When data enter a computer
program, their paths can be traced by the values assigned to them by the
instructions in that program. In contrast, PIL can be used to trace the paths
of all data that fall into mathematically describable classes. As a result, if
the data are in a certain state when a program completes or aborts, it is
possible, using PIL, to determine the initial conditions of these data before
the program was executed. In addition, the use of PIL allows tools to be built
that can verify that a program is logically correct by specifying pre and post
conditions of classes of data rather than relying on the traditional method of
testing, which is based on trial and error using selected data points.
Mass Change Engine. The Company's Mass Change Engine is designed to address
mass changes to IT systems (such as expansion of data fields or changes in
product or part identifiers) by accepting as input the identified data
structure and desired rules of transformation. The Mass Change Engine then
examines the entire set of computer programs to trace all related data and
instructions, computes the necessary changes that are the result of that
simple change requirement and makes corresponding adjustments in all programs
and data so that only the desired change occurs without impacting the
underlying logic. These tasks are accomplished through the use of an adaptive
seed generator based on neural network technology, the creation of a
repository of relationships between the data and instructions using PIL and
the use of propagations that determine the relationship between variables and
seeds using a set of identification rules and information embedded in the
repository. The Company's Mass Change Engine can be adapted to address
specific mass change needs. The Company's AutoEnhancer/2000 software is an
example of an extension of the Mass Change Engine.
Other Computer-Based Tools. The Company's software maintenance tools have
been specifically designed to address the needs of the software maintenance
practitioner and are used primarily by the Company's outsourcing teams. The
Company anticipates that certain of its tools may be released as commercial
products in the future. The Company's current computer-based tools include:
. Peritus Code Analyzer ("PCA")--PCA is a software maintenance assistance
tool designed to automate the process of logical code analysis. The tool
is used to discover and correct defects, implement enhancements, verify
properties of software (such as database integrity or security
properties), migrate from one language to another and update systems or
programs and data for specific enhancements (such as those required by
the year 2000 problem).
. Business Rules Extraction--The Company's business rules extraction tool
analyzes complex data structures and computer instructions within an
information system and determines and distills the business rules that
are embedded throughout the system. The extraction of business rules
decreases the effort involved in porting, migrating, reengineering,
simplifying and evolving software.
. Peritus Control System ("PCS")--PCS is a workflow and productivity-
enhancing groupware tool designed to support the Peritus model for
workflow coordination and accumulation of maintenance-related knowledge
and experience.
Formal Mathematical Techniques. Peritus has developed a discipline that
makes the analysis of software a more reliable activity based on the technique
of logical code analysis. Logical code analysis facilitates the understanding
of unfamiliar code and the isolation of the code specifically related to the
maintenance task and executes the required changes without impacting the
underlying logic. The Company's formal mathematical techniques are an integral
component of its core technologies and serve as the basis for the automation
capabilities of those technologies.
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PRODUCTS AND SERVICES
The Company's products and services are designed to deliver increased
productivity through tools, processes, skilled professionals and
methodologies. The Company initially provides clients with process and
methodology before introducing its products and technologies, thus laying the
foundation for the successful use of the Company's products. The Company's
current product offering includes its AutoEnhancer/2000 software, and its
current and proposed service offerings include software maintenance
outsourcing, technology transfer and insourcing services.
AutoEnhancer/2000 Software
The Company's AutoEnhancer/2000 software is a comprehensive solution
designed to address the correction phase of a year 2000 renovation. This
software tool currently processes COBOL, PL/1 and RPG computer languages. It
contains a user-friendly graphical user interface ("GUI") and can be easily
modified to interoperate with third-party assessment and testing tools. In
1996, the Company began licensing a COBOL version of this product to end users
and value added integrators. During 1996 and the three months ended March 31,
1997, revenue from the licensing of the AutoEnhancer/2000 software represented
33.9% and 52.7% of the Company's total revenue, respectively, and the Company
expects that such license revenue will continue to represent a significant
percentage of its total revenue for the foreseeable future. As of April 30,
1997, the AutoEnhancer/2000 software was installed in more than 45
installations.
Through a series of integrated and automated functions, the Company's
AutoEnhancer/2000 software identifies date-sensitive variables and corrects
the source code using date-field expansion or windowing techniques. In
addition, the tool generates bridges, wrappers, and data conversion programs
that enable the modified code to interface with remaining non-renovated
programs and data. The modifications are then verified through the use of
logical code analysis techniques to facilitate the extensive testing
requirements.
In order to increase the accurate identification of lines of affected
software code, the AutoEnhancer/2000 software traces and propagates variables
that a user has identified as date-sensitive to identify interrelated
variables. The AutoEnhancer/2000 software also uses a pattern matching program
that identifies variables that were named by a user in such a manner as to
suggest that they may be date-sensitive variables. This pattern matching
program uses "neural net" concepts, logical principles, user input and user
feedback to attempt to learn and adjust the patterns searched so as to improve
accuracy in determining which variations to encompass as variables of
interest. Quantifying the speed at which the Company's AutoEnhancer/2000
software (or other conversion tools) performs data conversion or the accuracy
at which the software identifies lines of affected software code is not easily
accomplished as results vary based on a large number of variables, including:
(i) the user-determined qualitative degree of accuracy of identification and
correction of errors; (ii) the nature and type of the identification and
correction methods; (iii) the computer languages used in the code being
corrected; (iv) whether the computer code contains a mixture of various
languages or involves proprietary aspects specific to the client; and (v) the
specific coding practices used by programmers in creating programs and
generating computer code. Among software tools designed for data correction of
the year 2000 problem, there is no mutually agreed upon standard benchmark of
comparison with regard to speed and accuracy.
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The following table highlights the various steps in which the
AutoEnhancer/2000 software addresses the correction phase of a year 2000
renovation:
AUTOENHANCER/2000 SOFTWARE
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
FUNCTION FEATURES BENEFITS
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
SEGMENTATION .Load source code into program . EBCDIC to ASCII encoded accurately and recoverably
.Perform pre-renovation compile . Strict source code control environment established
.Establish source code boundary . Source code completeness verified
.Identify print and display outputs . Source code compliability validated
.Perform dataset name unification . Data synonyms established
- ------------------------------------------------------------------------------------------------------------------------------------
IDENTIFICATION . Convert source code into PIL . Logic of code unraveled for automated analysis
. Perform record name unification . Record synonyms established
. Select bridging strategies . Bridging strategies specified
. Find the date-sensitive items through . Date-sensitive variables and constants identified
propagation . Procedure-division uses of date-sensitive items
. Resolve ambiguous identification conditions identified
. Facilitate identification completeness using . Accuracy and completeness of identification verified
Adaptive Seed Generator
- ------------------------------------------------------------------------------------------------------------------------------------
CORRECTION . Create and apply correction transactions . Source code corrected
. Create and apply harmonization transactions . Redefines realigned
. Resolve correction warnings . All identified uses of date-sensitive items corrected
- ------------------------------------------------------------------------------------------------------------------------------------
BRIDGE . Generate bridge programs by building wrappers, . Interoperability of renovated and unrenovated code
filters and converters established
- ------------------------------------------------------------------------------------------------------------------------------------
ADAPTATION . Identify Job Control Language (JCL) date- . Date-sensitive JCL identified and corrections suggested
sensitive issues
. Identify record size changes
. Create JCL correction plan
- ------------------------------------------------------------------------------------------------------------------------------------
VERIFICATION . Reconcile planned and implemented corrections . Intended and actual changes reconciled
. Perform post-renovation compile and compare to . Verification to ensure that changes do not impact
pre-renovation compile compiler results
- ------------------------------------------------------------------------------------------------------------------------------------
PACKAGING . Package renovated source code and generated source . Source code returned to facilitate replacement and
code for return to client testing
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
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Peritus offers extensive training and support to its software licensees. The
licensee's renovation engineers participate in both formal and on-the-job
training supported by the Company's expert renovation engineers. This training
and support facilitates successful implementation and deployment of
AutoEnhancer/2000 software in the licensee's environment. The Company also
provides licensees with client technical support as well as on-site or remote
consulting.
The Company licenses its AutoEnhancer/2000 software directly and indirectly
(via distributors) to end users and to value added integrators for their use
in addressing the year 2000 needs of their clients. License fees to end users
are fixed, with the amount of the fee based on the estimated total lines of
code to be processed, and license fees to value added integrators and
distributors are generally royalties based on lines of code processed or to be
processed.
Outsourcing Services
The Company offers customized software maintenance outsourcing services to
clients. In an outsourcing project, the Company assumes responsibility for the
evolution of a client's software, including bug fixing, enhancements,
applications migration and porting. The Company's outsourcing services address
the maintenance needs of application software, system software, embedded
software and software products and are designed to provide productivity gains
regardless of platform, operating system, language or software function. In
the delivery of its outsourcing services, the Company uses a number of
proprietary technologies. Compared to traditional software maintenance
methods, the Company's technologies allow faster de-bugging by identifying and
excluding irrelevant variables and by tracing the cause of errors from the
known output resulting from such errors. In addition, the Company may from
time to time directly provide year 2000 renovation services for its clients.
Outsourcing services are performed at both Company and client locations with
a team of Company employees, or a team comprising Company and client
employees. Formal training, support and continuous improvement are part of
every outsourcing service offering. The Company's self-directed outsourcing
teams understand and exploit organizational dynamics, workflow management and
proprietary technology to enhance the productivity, responsiveness and quality
of the software evolution process. Individual team members develop a deep and
broad understanding of many programming languages and applications, as well as
maintenance technologies and de-bugging methodologies.
In connection with the delivery of its outsourcing services, the Company
assesses the IT costs of a client and in general agrees to provide IT services
at a price targeted at 30% below the client's IT costs that are identified
during a detailed upfront assessment. This savings is often realized in the
first year. In addition, the Company's outsourcing services are designed to:
. Re-deploy key resources to mission-critical applications
. Enhance control of the maintenance function
. Improve turnaround time and quality of response
. Reduce dependency on specific individuals and specific domain knowledge
A typical outsourcing engagement represents a multi-million dollar, multi-
year, fixed-price contract that specifies service rather than staffing levels.
Technology Transfer Services
The Company offers technology transfer services to assist organizations that
seek to increase the productivity of their software evolution activities while
keeping their software maintenance activities in-house. This technology
transfer program transfers the organizational model and workflow methodology
of the Company's software maintenance outsourcing solutions to enable clients
to implement enhanced, repeatable processes for software evolution.
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With respect to technology transfer services, the Company targets an
increase in client productivity of 25% within six months. Productivity gains
are measured against pre-determined metrics that are established during a
detailed upfront assessment of the client's applications and workflow. A
typical technology transfer engagement consists of training multiple teams of
client personnel in the Company's methodology. Engagements have a duration of
four to six months with approximately 14 days of on-site delivery and
coaching.
During 1997, the Company plans to introduce insourcing services, which will
combine the Company's technology transfer services with on-site management of
the Peritus-trained client teams. In an insourcing engagement, the Company
will participate with the client management to ensure that the teams
accurately implement the Company's approach and perform at expected
productivity levels. Typical insourcing engagements are expected to have two
revenue components: a fee for services and a royalty tied to the client's
productivity gains.
SALES AND MARKETING
The Company offers its products and services to clients through both direct
and indirect channels, which include relationships with value added
integrators that use the Company's technology as an integral part of their
overall solutions, as well as domestic and international distributors. As of
May 31, 1997, the Company had 18 full-time employees in sales and marketing.
Direct Sales
The Company sells and supports its products and services directly through
its sales force located in Billerica, Massachusetts; Trumbull, Connecticut;
Schaumburg, Illinois; Denver, Colorado; Ontario, Canada and Barcelona, Spain.
The Company plans a significant expansion of its sales force through regional
offices in the Northeast, Mid-Atlantic, West and Midwest regions of the United
States.
Indirect Sales
The Company currently has agreements with 22 value added integrators and
distributors. The Company's value added integrators include large systems
integrators, IT consulting organizations and other providers of IT services
and solutions that use the Company's AutoEnhancer/2000 software to perform
year 2000 renovation projects for their clients. The Company regularly offers
sales training to its value added integrators. The Company's distributors are
located in the United States, Canada, Italy and Japan and are authorized by
Peritus to sublicense the Company's products and/or services to end users or
system integrators in their respective territories. In June 1997, the Company
entered into a joint marketing agreement with VIASOFT to form a joint
marketing arrangement that would combine complementary product and service
offerings in a "best practice" suite of year 2000 solutions. See "Risk
Factors--Dependence on Third-Party Channels; Potential for Channel Conflict."
Below is a list of the Company's value added integrators and distributors
with which the Company has agreements as of June 15, 1997:
Analyst International Corporation Integris, a Bull Company
ACTC Technologies, Inc. I-NET, Inc.
Bell Communications Research, Inc. Japan Third Party Co., Ltd.
BFL Software Limited Keane, Inc.
CIBER, Inc. LGS Group, Inc.
Complete Business Solutions, Inc. MCSI Technologies, Inc.
Computer Sciences Corp. Netsiel S.p.A.
Comtex Information Systems, Inc. PKS Systems Integration, Inc.
Coritel, S.L. PRT Corp. of America
Datamatics Ltd. Stratagem, Inc.
IBM Global Services Vital Computer Service International, Inc.
41
<PAGE>
Marketing
The Company's marketing organization works closely with the sales
organization in the development of Company marketing literature, market
research to assist in strategic planning and tactical decision making, trade
show programs and exhibit planning, advertising and public relations support.
In 1997, the Company began "Powered by Peritus," a new marketing and
advertising campaign. It comprises several programs, including a direct mail
initiative aimed at potential year 2000 end-user licensees, new channel
candidates and outsourcing prospects. The Company is also conducting a
significant advertising campaign for its year 2000 products.
CLIENTS
The Company offers its products and services to end users in a number of
industries. Below is a partial list of the Company's clients, each of which has
accounted for at least $200,000 of revenue since January 1, 1995:
Advanced Micro Devices, Inc. Metropolitan Life Insurance
Bell Communications Research, Inc. Company
Bull HN Information Systems Inc. MicroAge Computer Center, Inc.
Computervision Corporation Microcom, Inc.
The First National Bank of Boston NYNEX
Jostens Learning Corporation Prudential Life Insurance
Merrill Lynch, Pierce, Fenner Stratus Computer, Inc.
& Smith Incorporated
To date, the Company's revenue has been dependent on a few major clients,
including Bull, Stratus, Computervision, Met Life, IBM and Merrill Lynch.
During the three months ended March 31, 1997, Merrill Lynch, Met Life and IBM
represented approximately 26.1%, 14.0% and 10.6% of the Company's total
revenue, respectively. During 1996, Bull, Merrill Lynch and Stratus represented
approximately 29.0%, 14.6% and 12.1% of the Company's total revenue,
respectively. During 1995, Bull, Stratus and Computervision represented
approximately 50.3%, 12.9% and 11.0% of the Company's total revenue,
respectively. During 1994, Bull and Computervision represented approximately
51.7% and 29.3% of the Company's total revenue, respectively. In addition, the
Company's ten largest clients represented approximately 82.2%, 77.9%, 90.5% and
92.1% of the Company's total revenue in the three months ended March 31, 1997
and the years ended December 31, 1996, 1995 and 1994, respectively. See "Risk
Factors--Concentration of Clients and Credit Risk."
The Company has entered into agreements to provide software consulting
services and software maintenance services with each of Computervision, Stratus
and Bull. These agreements expire, subject to extension, on December 31, 2000,
February 16, 1999 and February 3, 1998, respectively.
The Company has also entered into a license agreement with Bull that expires
on December 31, 2001. This agreement grants to Bull certain use rights,
sublicensing rights and the right to make certain derivative works with regard
to proprietary software programs of the Company. In the event that the Company
fails to fulfill any of its obligations under the Bull license agreement for a
period of 90 days, Bull has the option, upon notice to the Company, to elect in
lieu of termination to assume performance of the Company's obligations and to
have access to source code of the Company's licensed software to perform such
assumed obligations. See "Certain Transactions."
The Company and Merrill Lynch have entered into a master license agreement
granting to Merrill Lynch the right to use certain proprietary software of the
Company on a non-exclusive, perpetual use basis to address year 2000 issues.
The Company has also entered into a license agreement with Met Life that
provides for the purchase by Met Life of several non-exclusive, worldwide
licenses of certain of the Company's proprietary software. The Met Life
agreement is terminable by Met Life upon 90 days' written notice. Such
termination may result in a partial refund of sums paid to the Company under
the agreement.
While each client engagement differs, the following examples illustrate the
types of business needs the Company has addressed:
42
<PAGE>
Merrill Lynch--AutoEnhancer/2000 Licensee. Merrill Lynch, a global financial
services concern, evaluated the Company's AutoEnhancer/2000 software in 1996
as part of its process of developing a comprehensive solution to its year 2000
renovation efforts. Along with a number of other vendors, Peritus was invited
to conduct two pilot programs, which were designed to demonstrate the tool's
ability to automate the identification and correction tasks of a year 2000
conversion. In December 1996, Merrill Lynch entered into a direct end-user
license for the AutoEnhancer/2000 software to support its data expansion
renovation efforts. Merrill Lynch notified the Company that the tool was among
those selected based upon the accuracy of its identification function and the
level of automation provided. Merrill Lynch has established a renovation
center in New York that provides divisions with remote access to perform the
renovations, and Peritus has trained more than 35 of Merrill Lynch's
renovation engineers.
Computer Sciences Corp.--AutoEnhancer/2000 Value Added Integrator. Computer
Sciences Corp. ("CSC"), an international provider of IT services, provides a
dedicated national practice that addresses the year 2000 problem. CSC's
Catalyst 2000(R) service includes a renovation center designed to process
large amounts of code through the correction phase. To achieve the desired
throughput, the CSC renovation center sought tools that would automate the
process. After evaluating several tools and technologies, CSC chose the
Company's AutoEnhancer/2000 software for its center and signed a strategic
agreement that provided for a usage-based license. Since the initiation of the
agreement, Peritus has trained CSC renovation engineers to work with the
Peritus technology in this renovation center. See "Certain Transactions."
NYNEX--Outsourcing Engagement. In mid-1995, NYNEX began exploring ways to
reduce costs and improve the process of maintaining its IT applications.
Peritus was invited to bid on an outsourcing engagement that involved the
maintenance of a budget and planning application. After a competitive process,
NYNEX awarded the contract to Peritus for a number of reasons, including the
fixed-price nature of the bid and the commitment to improved productivity. In
April 1996, NYNEX extended the contract to include additional applications.
CLIENT TECHNICAL SUPPORT
In connection with the licensing of its products, the Company provides its
clients with technical support and advice, including problem resolution,
installation assistance, error corrections and product enhancements released
during maintenance. The Company believes that a high level of service and
support is critical to its success and represents an important competitive
advantage. Furthermore, the Company believes that a close and active service
and support relationship is important to client satisfaction and provides the
Company with important information regarding evolving client requirements. The
Company provides each of its significant clients with a dedicated client
technical support representative whose primary responsibility is to resolve
questions and concerns and act as a liaison between the client and the
Company. In addition, the Company provides toll-free telephone support, as
well as access to electronic bulletin boards and other forms of electronic
communication to provide clients with the latest information regarding the
Company's products and services. Client technical support fees related to the
Company's year 2000 products are typically 15% of license fees and are capped
at $200,000 annually per direct licensee. As of May 31, 1997, the Company's
client technical support organization consisted of 12 full-time employees.
RESEARCH AND PRODUCT DEVELOPMENT
The Company believes that its future success depends 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 client requirements. The Company plans to continue to enhance its products
and develop new products, including the development of new versions of its
mass change software and the commercialization of its internally used
outsourcing tools and methodologies.
As of May 31, 1997, the Company's research and development organization
consisted of 56 full-time employees, 15 of whom were located at the Company's
facility in Schaumburg, Illinois and 41 of whom were
43
<PAGE>
located at the Company's Billerica, Massachusetts headquarters. In January
1997, the Company began research and development activities in Bangalore,
India. The Company's research and development expenses were $6,033,000,
$1,703,000 and $560,000, or 31.4%, 9.2% and 7.1% of total revenue, for the
years ended December 31, 1996, 1995 and 1994, respectively.
The Company has generally relied on internal efforts and resources to
develop its software and methodologies. However, in some limited cases, the
Company has contracted with various firms, certain of which are located in
India and Canada, to develop materials, processes, software or portions of
software for and on behalf of the Company. In January 1996, the Company
acquired Vista to gain additional technologies in user interface and software
behavior modeling.
COMPETITION
The market for the Company's software products and services, including its
solutions for the year 2000 problem, is intensely competitive and
characterized by rapid changes in technology and user needs and the frequent
introduction of new products. The Company's competitors include year 2000
software vendors, year 2000 service providers and outsourcing service
providers.
Vendors of year 2000 software products generally focus on a particular phase
of a year 2000 renovation, such as assessment, correction or testing. The
Company's AutoEnhancer/2000 software primarily addresses the correction phase
of a year 2000 renovation. The Company believes that the principal competitive
factors affecting competition in the year 2000 software market include product
functionality, degree of automation, speed of throughput, product performance
and reliability, ability to respond to changing client needs, ease of use,
training, quality of support and price. The Company's principal and potential
competitors in the market for year 2000 software include Computer Associates
International, Inc., Compuware Corporation, Micro Focus Group Public Limited
Company, Platinum Technology, Inc., SEEC, Inc. and VIASOFT.
The Company provides year 2000 services primarily through its relationships
with value added integrators. Peritus believes that these value added
integrators compete on the basis of service, the expertise and experience of
the service personnel, the ability of such personnel to provide solutions to
application problems and price. Principal competitors in this market include
AMDAHL, Cap Gemini America, Computer Horizons Corp. and Information Management
Resources, Inc. Many smaller local and regional organizations also compete in
the year 2000 services market.
The Company also faces competition in the provision of its software
maintenance outsourcing services. The Company believes that the principal
competitive factors in the market for outsourcing services include price, the
ability to provide productivity guarantees, strong client relationships,
comprehensive delivery methodologies, responsiveness to client needs, depth of
technical skills and reputation. The Company's principal competitors in this
market include not only in-house IT departments and systems integrators such
as the Big Six accounting firms but also outsourcing service providers such as
Computer Sciences Corp., Electronic Data Systems Corporation, IBM Global
Services, Keane, Inc. and PKS.
A number of the Company's competitors are more established, benefit from
greater name recognition and have substantially greater financial, technical
and marketing resources than the Company and certain of the Company's value
added integrators and distributors. Moreover, other than the need for
technical expertise, there are no significant proprietary or other barriers to
entry in the year 2000 industry. There can be no assurance that the Company's
products and services or the solutions offered by the Company's value added
integrators and distributors will compete effectively with those of their
respective competitors. The Company's value added integrators and distributors
may also offer or develop products and services that compete with the
Company's products and services. There can be no assurance that those clients
will not give higher priority to the sales of these or other competitive
products and services.
44
<PAGE>
INTELLECTUAL PROPERTY
The Company relies on a combination of copyright, trade secret, patent,
service mark, and trademark laws and license agreements to protect its
proprietary rights in technology. In addition, the Company currently requires
its employees and consultants to enter into nondisclosure and assignment of
invention agreements to limit use of, access to and distribution of its
proprietary information.
The Company's business includes the maintenance, evolution, repair and
development of software applications, system software and other deliverables,
including written specifications and documentation in connection with specific
client engagements. Ownership of software and associated deliverables created
for clients is generally retained by or assigned to the client, and the
Company does not retain an interest in such software or deliverables. The
source code for the Company's proprietary software is generally protected as
trade secrets and as unpublished copyrighted works. However, the Company has
entered into source code escrow agreements with a limited number of its
licensees requiring release of source code in certain circumstances. Such
source code escrow agreements usually limit the use and disclosure of such
source code in the event that it is released.
In addition, the Company has entered into license agreements with a limited
number of clients that allow these clients access to and use of the Company's
AutoEnhancer/2000 software source code for certain purposes. Access to the
source code may increase the likelihood of misappropriation or misuse by third
parties.
The Company's business also includes licensing of the Company's proprietary
software, methodologies and related services to end users, as well as to value
added integrators and distributors authorized to provide services to third
parties. In general, such licensing of the Company's proprietary software,
methodologies and related services to a licensee is a limited term, limited
use, non-exclusive license that contains restrictions on copying, disclosure,
usage, decompiling and transferability. In particular cases, however, a
license agreement may have certain provisions that are exclusive in some
manner. Within these licensing agreements the Company seeks to avoid
disclosure of its trade secrets, including, but not limited to, generally
requiring those persons with access to the Company's proprietary information
to execute confidentiality agreements restricting use of and access to the
Company's confidential information.
The Company generally relies on internal efforts in order to develop its
software and methodologies. However, in some limited cases the Company has
contracted with various firms, certain of which are located in India and
Canada, to develop software or portions of software for and on behalf of the
Company. Software development by a contractor for the Company is done pursuant
to agreements that generally assign all rights to the Company and contain
nondisclosure provisions. Such software developed by a contractor may be
merged with software that the Company has developed using its internal
employees. In January 1996, the Company acquired Vista and was assigned all of
Vista's intellectual property rights, consisting mainly of unregistered
copyrights.
The Company has filed two patent applications with the United States Patent
and Trademark Office pertaining to technologies, processes and methodologies
used by the Company's software. Neither of these patents has been granted and
there can be no assurance that a patent will be issued pursuant to either of
these applications or that, if granted, such patent would survive a legal
challenge to its validity or provide meaningful or significant protection to
the Company. Some competitors of the Company have announced the filing with
the United States Patent and Trademark Office of patent applications relating
to fixing and assessing the year 2000 problem. The Company expects that the
risk of infringement claims against the Company might increase because its
competitors might successfully obtain patents for software products and
processes or because as the number of competitors providing software and
software related services addressing year 2000 problem increases, new and
overlapping processes and methodologies used in such services will become more
pervasive, increasing the likelihood of infringement.
There can be no assurance that the Company's means of protecting its
proprietary rights in the United States or abroad will be adequate. The laws
of some foreign countries may not protect the Company's proprietary rights
45
<PAGE>
as fully or in the same manner as do the laws of the United States. Also,
despite the steps taken by the Company to protect its proprietary rights, it
may be possible for unauthorized third parties to copy aspects of the
Company's products, reverse engineer, develop similar technology
independently, or obtain and use information that the Company regards as
proprietary. Furthermore, there can be no assurance that others will not
develop technologies similar or superior to the Company's technology or design
around the proprietary rights owned by the Company. However, the Company
believes that, because of the rapid pace of technological change in the
software industry, patent, trade secret and copyright protection is less
significant to the Company's competitive position than factors such as the
knowledge, ability and experience of its personnel, new product development,
frequent product enhancements, name recognition and ongoing product
maintenance support with regard to developing, establishing and maintaining a
technology leadership position.
EMPLOYEES
As of May 31, 1997, the Company employed 263 full-time employees, including
56 in research and development, 18 in sales and marketing, 165 in professional
services and support and 24 in finance, administration and corporate support.
The success of the Company depends on its continued ability to attract and
retain highly skilled and qualified personnel. Competition for such personnel
is intense in the computer software industry, particularly for software
developers, service consultants, and sales and marketing personnel. There can
be no assurance that the Company will be able to attract and retain qualified
personnel in the future.
The Company's employees are not represented by any labor unions. The Company
considers its relations with its employees to be good.
FACILITIES
The Company is headquartered in Billerica, Massachusetts, where it leases
approximately 45,000 square feet under a lease expiring in January 1999. In
addition, the Company leases office space of approximately 8,000 square feet
in Trumbull, Connecticut, which it currently uses to provide some outsourcing
and software evolution services and approximately 23,000 square feet in
Westboro, Massachusetts, where the Company also provides outsourcing and
software evolution services. These leases expire in January 1999 and December
1999, respectively.
The Company also maintains a research and development facility in
Schaumburg, Illinois, of approximately 5,000 square feet, the lease for which
expires in September 1998. The Company leases additional facilities and
offices in Phoenix, Arizona; Denver, Colorado; Ontario, Canada and Bangalore,
India. The Company's majority-owned subsidiary, Persist, leases facilities in
Barcelona, Spain. The Company believes its facilities are in good condition.
The Company expects that additional space will be required as it expands its
business. It believes it will be able to obtain suitable space as needed.
LEGAL PROCEEDINGS
The Company is not a party to any material legal proceedings.
46
<PAGE>
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The executive officers and directors of the Company as of May 31, 1997 are
as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Dominic K. Chan......... 48 Chairman of the Board of Directors and Chief Executive Officer
Douglas A. Catalano..... 46 President, Chief Operating Officer and Director
Allen K. Deary.......... 38 Vice President, Finance, Chief Financial Officer, Clerk and Director
Adarsh K. Arora......... 44 Vice President, Research and Development
Andrea C. Campbell...... 45 Vice President, Outsourcing Operations
Leonard Miller.......... 57 Vice President, Strategic Programs
Robert D. Savoia........ 54 Vice President, Business Development and Marketing
John E. MacPhee......... 36 Director of Finance and Treasurer
Arthur Carr(1).......... 65 Director
John Giordano(2)........ 40 Director
W. Michael Humphreys(1). 45 Director
Axel Leblois(2)......... 48 Director
Henry F. McCance(1)..... 54 Director
Roland Pampel(2)........ 62 Director
</TABLE>
- --------
(1) Member of Compensation Committee.
(2) Member of Audit Committee.
Dr. Chan co-founded Peritus in 1991 and served as its President and a
director from inception to December 1996. Since December 1996, Dr. Chan has
served as the Company's Chief Executive Officer and Chairman of the Board of
Directors. Prior to co-founding the Company, Dr. Chan held the position of
Executive Vice President of Research and Development for Bull, a manufacturer
of computer products. He holds a patent for a voice and data integration
device. Dr. Chan received a B.S. in Mathematics from Wake Forest University
and an M.S. and a Ph.D. in Mathematics from the University of Wisconsin.
Mr. Catalano joined Peritus in December 1996 as President and Chief
Operating Officer and as a director. From November 1982 to December 1996, Mr.
Catalano held various positions at Computer Sciences Corp., a company which
provides systems integration services, where he most recently served as
President of CSC Consulting, Inc. ("CSC"). Mr. Catalano holds a B.S. in
Finance from Northeastern University.
Mr. Deary co-founded Peritus in 1991, and has served as its Vice President,
Finance and Chief Financial Officer and as a director since inception. Mr.
Deary previously served as Director, Product Life Cycle Process at Bull, where
his primary focus was to develop and implement worldwide cross-functional
product teams. Mr. Deary received his B.S. in Accounting from Northeastern
University.
Dr. Arora joined Peritus in January 1996 as Vice President, Research and
Development. Prior to joining Peritus, he co-founded and served as President
and Chief Executive Officer from January 1986 to January 1996 of Vista
Technologies Incorporated, a manufacturer of high-end computer aided
engineering and computer aided software engineering products. Dr. Arora
received a B.S. in Mathematics at Lucknow University in India, and an M.S. and
a Ph.D. in Computer Science at Northwestern University.
47
<PAGE>
Ms. Campbell co-founded Peritus and served as Vice President, Consulting and
Technology Transfer Services from September 1992 to June 1996. Since June
1996, Ms. Campbell has served as Vice President, Outsourcing Operations. Ms.
Campbell was previously employed as Human Resources Director at Bull Worldwide
Information Services, Inc., a manufacturer of computer products, from March
1990 to August 1992. Ms. Campbell received her B.A. from Kalamazoo College and
her M.A. in Psychology from Western Michigan University.
Mr. Miller joined Peritus in September 1996 as Vice President, Strategic
Programs. Mr. Miller was previously employed from January 1964 to August 1996
at Metropolitan Life Insurance Company, most recently as its Chief Information
Officer of Individual Business. He received a B.A. in Business Management from
Boston University.
Mr. Savoia joined Peritus in January 1997 as Vice President, Business
Development and Marketing. Prior to joining Peritus, he served as Vice
President and Managing Partner of CSC from 1989 to December 1996. During his
eight years at CSC, he was a member of the Operating and Executive Committees,
Vice President of Business Development, and was the partner in charge of the
New York consulting practice. Mr. Savoia received a B.S. in Management Science
from Northeastern University.
Mr. MacPhee joined Peritus in July 1996 as Director of Finance and as
Treasurer. Prior to joining Peritus, Mr. MacPhee served as Corporate
Controller at Bachman Information Systems, Inc., a manufacturer of computer
aided software engineering products, from April 1986 to June 1996. He received
a B.A. in Management and Accounting from the University of Massachusetts,
Amherst.
Mr. Carr has served on the Board of Directors of the Company since November
1995. Mr. Carr has been a private investor since December 1993. From 1991 to
November 1993, Mr. Carr served as Chairman, President and Chief Executive
Officer of Bytex Corporation, a manufacturer of data communications equipment.
He is a director of Bay Networks, Inc., a manufacturer of computer network
systems.
Mr. Giordano has served on the Board of Directors of the Company since March
1997. Mr. Giordano has been employed at Bull since 1978, most recently as Vice
President, Chief Financial Officer and Treasurer since February 1997. He
received a B.S. in Business Administration from Boston College.
Mr. Humphreys has served on the Board of Directors of the Company since
March 1996. Mr. Humphreys has been a partner of Matrix Partners, a private
venture capital firm, since 1982. Prior to his association with Matrix
Partners, he was a general partner of Hellman, Ferri Investment Associates, a
private venture capital partnership. Mr. Humphreys is a director of GeoTel
Communications Corporation, a developer of telecommunications software, as
well as several privately held companies. He received a B.S. from the
University of Oregon and an M.B.A. from the Harvard Graduate School of
Business Administration.
Mr. Leblois has served on the Board of Directors of the Company since
February 1995. Since January 1996, Mr. Leblois has served as the Chairman of
World Times Inc., a publishing company. From May 1991 to December 1995, he
served as President and Chief Executive Officer of Bull. Mr. Leblois is a
director of Wang Laboratories, Inc., a software and services provider, and
Boston Private Bank & Trust Company, a private banking and asset management
firm. He received a BAC in Science and Politics from IEP Paris, an M.B.A. from
the European Institute of Business Administration and a License de Philosophie
from the University of Paris.
Mr. McCance has served on the Board of Directors of the Company since March
1996. Mr. McCance has been a general partner of Greylock, a private venture
capital firm, since 1973. He is Chairman of the Board, President and Secretary
of Greylock Management Corporation, the service organization to the Greylock
venture capital partnerships. Mr. McCance is a director of Shiva Corporation,
a manufacturer of remote access products, and of several privately held
companies. He received a B.A. in Economics from Yale University and an M.B.A.
from the Harvard Graduate School of Business Administration.
48
<PAGE>
Mr. Pampel has served on the Board of Directors of the Company since
November 1995. Mr. Pampel is recently retired. From March 1994 to January
1997, Mr. Pampel held the positions of President, Chief Executive Officer and
director of Microcom, Inc. ("Microcom"), a manufacturer of computer equipment.
Prior to joining Microcom, Mr. Pampel was President and Chief Executive
Officer of Nicolet Instrument Inc., a manufacturer of medical instruments,
from October 1991 to September 1993. He currently serves on the Board of
Directors of Microcom, Infinium Software, Inc., a provider of client-server
business software applications, and Cayenne Software, Inc., a provider of
computer-aided software engineering products. Mr. Pampel holds a B.S. in
Electrical Engineering from the University of Connecticut.
Following this offering, the Board of Directors will be divided into three
classes, each of whose members will serve for a staggered three-year term. The
Board will consist of three Class I Directors (Messrs. Catalano, Giordano and
McCance), three Class II Directors (Messrs. Deary, Humphreys and Pampel) and
three Class III Directors (Messrs. Carr, Chan and Leblois). At each annual
meeting of stockholders, a class of directors will be elected for a three-year
term to succeed the directors or director of the same class whose terms are
then expiring. The terms of the Class I Directors, Class II Directors and
Class III Directors expire upon the election and qualification of successor
directors at the annual meeting of stockholders held during the calendar years
1998, 1999 and 2000, respectively.
On May 29, 1992, the Company entered into an agreement (the "1992 Bull
Agreement") with Bull, a principal stockholder of the Company, in which the
Company issued Bull 575,000 shares of Common Stock in exchange for the
transfer and assignment by Bull of certain items of equipment and other
personal property. Under the 1992 Bull Agreement, the Company agrees to use
its best efforts to elect one representative of Bull to the Board of Directors
for so long as Bull holds 50% of the shares of Common Stock purchased under
the 1992 Bull Agreement, and that in the event no representative of Bull is
elected to the Board of Directors, Bull has a right of representation at
meetings of the Board for so long as Bull holds 25% of the shares of Common
Stock purchased under the 1992 Bull Agreement. To date, Bull has not sold any
of the shares of Common Stock acquired by it under the 1992 Bull Agreement,
and, after giving effect to this offering and assuming the Underwriters' over-
allotment option is exercised in full, Bull will still hold over 50% of the
shares of Common Stock acquired by it under such agreement. Pursuant to the
1992 Bull Agreement, the Company is also obligated to hold meetings of its
Board of Directors at least four times per year. John Giordano, the Vice
President, Chief Financial Officer and Treasurer of Bull, currently serves as
Bull's representative on the Board of Directors. See "Principal and Selling
Stockholders" and "Certain Transactions."
Each officer serves at the discretion of the Board of Directors. There are
no family relationships among any of the directors and executive officers of
the Company.
COMMITTEES OF THE BOARD OF DIRECTORS
The Board of Directors has a Compensation Committee composed of Messrs.
Carr, Humphreys and McCance, which makes recommendations concerning salaries
and incentive compensation for employees of and consultants to the Company and
administers and grants stock options pursuant to the Company's stock option
plans, and an Audit Committee composed of Messrs. Giordano, Leblois and
Pampel, which reviews the results and scope of the audit and other services
provided by the Company's independent public accountant.
DIRECTOR COMPENSATION
All of the directors are reimbursed for expenses incurred in connection with
their attendance at Board and committee meetings. See "--Executive
Compensation--1997 Director Stock Option Plan."
49
<PAGE>
EXECUTIVE COMPENSATION
The following table sets forth the total compensation paid or accrued for the
year ended December 31, 1996 for the Company's Chief Executive Officer and its
three other most highly compensated executive officers in 1996 (the Chief
Executive Officer and such other executive officers are hereinafter referred to
as the "Named Executive Officers"):
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
------------------
ANNUAL COMPENSATION AWARDS
-------------------- ------------------
NAME AND SECURITIES ALL OTHER
PRINCIPAL POSITION(1) SALARY BONUS UNDERLYING OPTIONS COMPENSATION(2)
--------------------- ---------- --------- ------------------ ---------------
<S> <C> <C> <C> <C>
Dominic K. Chan ........ $ 202,613 $ 40,000 -- $3,131
Chairman of the Board
and
Chief Executive Officer
Allen K. Deary.......... 147,903 40,000 14,200 3,002
Vice President, Finance
and
Chief Financial Officer
Adarsh Arora............ 120,891 40,000 51,192 1,395
Vice President,
Research
and Development
Andrea C. Campbell...... 111,499 40,000 17,085 2,112
Vice President,
Outsourcing Operations
</TABLE>
- --------
(1) Douglas A. Catalano joined the Company as President and Chief Operating
Officer in December 1996. See "--Employment Agreements."
(2) Consists of the Company's matching contributions to the Company's 401(k)
Plans.
50
<PAGE>
The following table sets forth grants of stock options to each of the Named
Executive Officers during the year ended December 31, 1996. No stock
appreciation rights ("SARs") were granted during the year ended December 31,
1996.
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
---------------------------------------------------
POTENTIAL
REALIZABLE VALUE
NUMBER OF PERCENT OF TOTAL AT ASSUMED
SECURITIES OPTIONS ANNUAL RATES OF
UNDERLYING GRANTED TO EXERCISE OR STOCK PRICE
OPTIONS EMPLOYEES IN BASE PRICE EXPIRATION APPRECIATION FOR
NAME GRANTED FISCAL YEAR PER SHARE(1) DATE OPTION TERM(2)
---- ---------- ---------------- ------------ ---------- -----------------
5% 10%
-- ---
<S> <C> <C> <C> <C> <C> <C>
Dominic K. Chan......... -- -- -- -- -- --
Allen K. Deary.......... 14,200 0.9% $2.80 11/22/2006 $ 25,005 $ 63,367
Adarsh Arora............ 51,192 3.3 2.80 11/22/2006 90,144 228,443
Andrea C. Campbell...... 2,885 0.2 2.80 10/17/2006 5,080 12,874
14,200 0.9 2.80 11/22/2006 25,005 63,367
</TABLE>
- --------
(1) All options were granted pursuant to the Company's Long-Term Incentive
Plan at fair market value as determined by the Board of Directors of the
Company on the date of the grant.
(2) Amounts reported in these columns represent amounts that may be realized
upon exercise of the options immediately prior to the expiration of their
term assuming the specified compound rates of appreciation (5% and 10%) on
the market value of the Common Stock on the date of option grant over the
term of the options. These numbers are calculated based on rules
promulgated by the Securities and Exchange Commission and do not reflect
the Company's estimate of future stock price growth. Actual gains, if any,
on stock option exercises and Common Stock holdings are dependent on the
timing of such exercise and the future performance of the Common Stock.
There can be no assurance that the rates of appreciation assumed in this
table can be achieved or that the amounts reflected will be received by
the individuals.
The following table sets forth certain information regarding stock options
exercised during 1996 and stock options held by each of the Named Executive
Officers on December 31, 1996.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTIONS VALUES
<TABLE>
<CAPTION>
NUMBER OF SHARES
NUMBER OF UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
SHARES OPTIONS AT FISCAL IN-THE-MONEY OPTIONS
ACQUIRED YEAR-END AT FISCAL YEAR-END
ON VALUE ------------------------- ----------------------------
NAME EXERCISE REALIZED(1) EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE(1)
---- --------- ----------- ------------------------- ----------------------------
<S> <C> <C> <C> <C>
Dominic K. Chan......... -- -- 18,750/-- $46,875/$ --
Allen K. Deary.......... -- -- 286,983/24,802 894,530/14,522
Adarsh Arora............ -- -- --/51,192 --/25,596
Andrea C. Campbell...... 5,000 $16,006 165,673/75,979 518,969/182,645
</TABLE>
- --------
(1) Represents the difference between the exercise price and the fair market
value of the Common Stock on the date of exercise or at fiscal year end,
as the case may be, as determined by the Board of Directors of the
Company.
STOCK PLANS
1997 Director Stock Option Plan
The Company's 1997 Director Stock Option Plan (the "Director Plan") was
adopted by the Board of Directors and approved by the stockholders of the
Company in May 1997. Under the terms of the Director Plan, directors of the
Company who are not employees of the Company or any subsidiary of the Company
are eligible
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to receive nonstatutory options to purchase shares of Common Stock. A total of
200,000 shares of Common Stock may be issued upon exercise of options granted
under the Director Plan.
Pursuant to the Director Plan, each non-employee director at the time of the
effective date of this offering (each, an "IPO Director") will receive an
option to purchase 15,000 shares of Common Stock at a price per share
equivalent to the initial public offering price. In addition, each IPO
Director will receive an option to purchase 3,000 shares of Common Stock at
the annual meeting of stockholders to be held in 1998, and at each annual
meeting of stockholders thereafter, at an exercise price per share equal to
the closing price of a share of Common Stock on the date of grant. Each
director, other than the IPO Directors, will receive an option to purchase
15,000 shares of Common Stock on the date of his or her initial election to
the Board of Directors and an option to purchase 3,000 shares of Common Stock
on the date of each annual meeting of stockholders after his or her election.
The exercise price per share of such options will be the closing price of a
share of Common Stock on the date of the grant. All options granted under the
Director Plan vest at a rate of one-third of the shares per year over a period
of three years from the date of grant so long as the optionee remains a
director of the Company.
1992 Long-Term Incentive Plan and 1997 Stock Incentive Plan
The Company's Long-Term Incentive Plan (the "Long-Term Incentive Plan") was
adopted by the Board of Directors and approved by the stockholders of the
Company on January 24, 1992. Amendments to the Long-Term Incentive Plan
increased the number of authorized shares under the Plan to 4,409,820 shares
of Common Stock as of February 1997. As of June 30, 1997, options to purchase
3,012,957 shares of Common Stock at a weighted average exercise price of $2.28
per share were outstanding under the Long-Term Incentive Plan. No additional
option grants will be granted under the Long-Term Incentive Plan after May 28,
1997.
The Company's 1997 Stock Incentive Plan (the "Incentive Plan") was adopted
by the Board of Directors and approved by the stockholders of the Company in
May 1997. The Incentive Plan is intended to replace the Company's Long-Term
Incentive Plan. Up to 1,950,000 shares of Common Stock (subject to adjustment
in the event of stock splits and other similar events) may be issued pursuant
to awards granted under the Incentive Plan. As of June 30, 1997, options to
purchase 469,500 shares of Common Stock at an exercise price of $10.00 per
share were outstanding under the Incentive Plan.
The Incentive Plan provides for the grant of incentive stock options
intended to qualify under Section 422 of the Internal Revenue Code of 1986, as
amended (the "Code"), nonstatutory stock options, restricted stock awards and
other stock-based awards, including the grant of shares based upon certain
conditions, the grant of securities convertible into Common Stock and the
grant of stock appreciation rights (collectively, "Awards").
Officers, employees, directors, consultants and advisors of the Company and
its subsidiaries are eligible to be granted Awards under the Incentive Plan.
Under present law, however, incentive stock options may only be granted to
employees. The maximum number of shares with respect to which an Award may be
granted to any participant under the Incentive Plan may not exceed 1,000,000
shares per calendar year.
Optionees may receive the right to purchase a specified number of shares of
Common Stock at a specified option price and subject to such other terms and
conditions as are specified in connection with the option grant. Options may
be granted at an exercise price which may be less than, equal to or greater
than the fair market value of the Common Stock on the date of grant. Under
present law, incentive stock options and options intended to qualify as
performance-based compensation under Section 162(m) of the Code may not be
granted at an exercise price less than the fair market value of the Common
Stock on the date of grant (or less than 110% of the fair market value in the
case of incentive stock options granted to optionees holding more than 10% of
the voting power of the Company). The Incentive Plan permits the Board to
determine the manner of payment of the exercise price of options, including
through payment by cash, check or in connection with a "cashless exercise"
through a broker, by surrender to the Company of shares of Common Stock, by
delivery to the Company of a promissory note, or by any combination of the
permitted forms of payment.
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<PAGE>
As of May 31, 1997, approximately 269 persons were eligible to receive
Awards under the Incentive Plan, including the Company's eight executive
officers and six non-employee directors. The granting of Awards under the
Incentive Plan is discretionary.
The Incentive Plan is administered by the Board of Directors. The Board has
the authority to adopt, amend and repeal the administrative rules, guidelines
and practices relating to the Incentive Plan and to interpret the provisions
thereof. Pursuant to the terms of the Incentive Plan, the Board of Directors
may delegate authority under the Incentive Plan to one or more committees of
the Board, and subject to certain limitations, to one or more executive
officers of the Company. The Board has authorized the Compensation Committee
to administer the Incentive Plan, including the granting of options to
executive officers. Subject to any applicable limitations contained in the
Incentive Plan, the Board of Directors, the Compensation Committee, or any
other committee or executive officer to whom the Board delegates authority, as
the case may be, selects the recipients of Awards, may amend, modify or
terminate any outstanding Award and determines (i) the number of shares of
Common Stock covered by options and the dates upon which such options become
exercisable, (ii) the exercise price of options, (iii) the duration of
options, and (iv) the number of shares of Common Stock subject to any
restricted stock or other stock-based Awards and the terms and conditions of
such Awards, including conditions for repurchase, issue price and repurchase
price.
In the event of a merger, liquidation or other Acquisition Event (as defined
in the Incentive Plan), the Board of Directors is authorized to provide for
outstanding options or other stock-based Awards to be assumed or substituted
for, to accelerate the Awards to make them fully exercisable prior to
consummation of the Acquisition Event.
No Award may be made under the Incentive Plan after May 2007, but Awards
previously granted may extend beyond that date. The Board of Directors may at
any time amend, suspend or terminate the Incentive Plan, except that no Award
designated as subject to Section 162(m) of the Code by the Board of Directors
after the date of such amendment shall become exercisable, realizable or
vested (to the extent such amendment was required to grant such Award) unless
and until such amendment is approved by the Company's stockholders.
1997 Employee Stock Purchase Plan
The Company's 1997 Employee Stock Purchase Plan (the "Purchase Plan") was
adopted by the Board of Directors and approved by the stockholders of the
Company in May 1997. The Purchase Plan authorizes the issuance of up to a
total of 200,000 shares of Common Stock to participating employees.
All employees of the Company, including directors of the Company who are
employees, and all employees of any participating subsidiaries, whose
customary employment is more than 20 hours per week are eligible to
participate in the Purchase Plan. Employees who would immediately after the
grant own 5% or more of the total combined voting power or value of the stock
of the Company or any subsidiary are not eligible to participate. As of May
31, 1997, approximately 260 of the Company's employees would have been
eligible to participate in the Purchase Plan.
On the first day of a designated payroll deduction period (the "Offering
Period"), the Company will grant to each eligible employee who has elected to
participate in the Purchase Plan an option to purchase shares of Common Stock
as follows: the employee may authorize an amount (a whole percentage from 1%
to 10% of such employee's base pay) to be deducted by the Company from such
pay during the Offering Period. On the last day of the Offering Period, the
employee is deemed to have exercised the option, at the option exercise price,
to the extent of accumulated payroll deductions. Under the terms of the
Purchase Plan, the option price is an amount equal to 85% of the average
market price (as defined) per share of the Common Stock on either the first
day or the last day of the Offering Period, whichever is lower. In no event
may an employee purchase in any one Offering Period a number of shares which
exceeds the number of shares determined by dividing $12,500 by the average
market price of a share of Common Stock on the commencement date of the
Offering Period. The Purchase Plan provides for four consecutive six-month
Offering Periods beginning with the six-month period extending from October 1,
1997 through March 31, 1998.
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<PAGE>
If an employee is not a participant on the last day of the Offering Period,
such employee is not entitled to exercise any option, and the amount of such
employee's accumulated payroll deductions will be refunded. An employee's
rights under the Purchase Plan terminate upon voluntary withdrawal from the
Purchase Plan at any time, or when such employee ceases employment for any
reason, except that upon termination of employment because of death, the
employee's beneficiary has certain rights to elect to exercise the option to
purchase the shares which the accumulated payroll deductions in the
participant's account would purchase at the date of death.
Because participation in the Purchase Plan is voluntary, the Company cannot
now determine the number of shares of Common Stock to be purchased by any
particular current executive officer, by all current executive officers as a
group or by non-executive employees as a group.
EMPLOYMENT AGREEMENTS
The Company entered into an employment agreement with Mr. Catalano on
December 30, 1996, pursuant to which Mr. Catalano will serve as President and
Chief Operating Officer of the Company. Although the employment agreement has
no set term, it is terminable (i) by the Company or Mr. Catalano without cause
upon 45 days' prior notice, (ii) by either party pursuant to a breach of the
employment agreement by the other party and failure to remedy the breach by
such party after 30 days' prior notice, or (iii) immediately by the Company
with cause (as defined). The agreement provides that Mr. Catalano is entitled
to receive a base salary of $250,000 in 1997 and is eligible to receive a
bonus in an amount to be determined by the Board of Directors, an appropriate
committee or a designee thereof. Mr. Catalano's base salary will be reviewed
annually thereafter. The Company granted Mr. Catalano, and Mr. Catalano
subsequently exercised, an option to purchase 151,515 shares of Common Stock
at an exercise price of $3.30 per share. The Company also granted Mr. Catalano
an incentive stock option to purchase an additional 149,212 shares of Common
Stock (the "ISO"), which was exercised as to 27,999 shares on the date of
grant, and a nonstatutory stock option to purchase an additional 630,788
shares of Common Stock (the "NSO"), both at an exercise price of $3.30 per
share. The ISO and NSO will become exercisable as to 30,303 and 157,697 shares
of common stock, respectively, on December 30, 1997. The ISO and NSO will then
both vest as to the remaining shares in 12 equal portions, the first of which
will become exercisable on the last day of the first calendar quarter of 1998,
and the remaining of which will become exercisable on the last day of each
succeeding calendar quarter. Mr. Catalano's options will be fully vested as of
the fourth anniversary of the employment agreement. If his employment is
terminated by the Company without cause (as defined), Mr. Catalano will be
entitled to receive severance compensation for 52 weeks thereafter in an
amount equal to the base salary which would otherwise be payable to Mr.
Catalano during that period. In addition, upon any such termination, the ISO
and NSO options will become exercisable as to that number of shares which
would have become exercisable if Mr. Catalano's employment had terminated one
year after the actual date of termination. Throughout the term of this
employment agreement, the Chairman of the Board of the Company agrees to
nominate Mr. Catalano as a candidate for election to the Board of Directors of
the Company. The Agreement also contains a non-solicitation covenant and a
non-competition covenant pursuant to which Mr. Catalano is prohibited, during
the term of his employment, from engaging in any business activity that would
compete directly or indirectly with the products or services of the kind or
type developed by the Company. The non-competition covenant extends for a one-
year period after termination, but is limited during this period to prohibit
Mr. Catalano from engaging in business activities competitive with the
Company's products or services related to the Company's year 2000 business
activities.
In January 1997, the Company and Mr. Savoia entered into an employment
agreement providing for the employment of Mr. Savoia as a Vice President of
the Company. Although the employment agreement has no set term, it is
terminable (i) by the Company or Mr. Savoia without cause upon 45 days' prior
notice, (ii) by either party pursuant to a breach of the employment agreement
by the other party and failure to remedy the breach by such party upon 30
days' prior notice, or (iii) immediately by the Company with cause (as
defined). The agreement provides for an annual base salary of $200,000 as well
as annual incentive compensation in an amount determined by the Board of
Directors of the Company, an appropriate committee or a designee thereof. If
his employment is terminated by the Company without cause (as defined), Mr.
Savoia will be entitled to receive
54
<PAGE>
severance compensation for 52 weeks in an amount equal to the base salary
otherwise payable to Mr. Savoia during such period. In addition, upon any such
termination any options to purchase shares of Common Stock granted to Mr.
Savoia within six months of January 27, 1997 will become exercisable as to
that number of shares which would have become exercisable if Mr. Savoia's
employment had terminated one year after the actual date of termination. This
employment agreement also contains a non-solicitation covenant and a non-
competition covenant pursuant to which Mr. Savoia, during the term of his
employment, is prohibited from engaging in any business activity that would
compete directly or indirectly with products or services of the kind or type
developed by the Company. The non-competition covenant extends for a one-year
period after termination, but is limited during this period to prohibit Mr.
Savoia from engaging in business activities competitive with the Company's
products or services related to the Company's year 2000 business activities.
On August 15, 1996, the Company entered into a letter agreement with Leonard
Miller providing for the employment of Mr. Miller in accordance with the terms
of the letter agreement. Pursuant to the letter agreement, the term of Mr.
Miller's employment extends from September 1, 1996 through August 31, 2000.
The letter agreement provides for an annual base salary of $200,000 as well as
an annual bonus to be determined in accordance with the Company's policies. In
connection with the commencement of his employment, the Company granted Mr.
Miller an option to purchase 200,000 shares of Common Stock at an exercise
price of $2.80 per share. The option was exercisable with respect to 50,000
shares on the date of commencement of Mr. Miller's employment and is
exercisable as to an additional 50,000 shares on each of August 31, 1997, 1998
and 1999. In the event that Mr. Miller's employment by the Company is
terminated without cause, any of the 200,000 shares subject to this option
that remain unvested as of the date of termination will vest immediately upon
termination. In addition, upon termination without cause Mr. Miller shall
receive severance compensation paid biweekly for a period of one year
thereafter in an amount equal to one year's base salary at the time of the
letter agreement. In the event that the Company is liquidated, all of Mr.
Miller's unvested options will vest immediately prior to liquidation.
In connection with the issuance and sale of shares of the Company's Series A
Convertible Preferred Stock and Common Stock, the Company entered into a Non-
Competition Agreement with Dominic K. Chan which commenced on March 15, 1996
and terminates on the first anniversary of the date on which Mr. Chan's
employment with the Company terminates. The Non-Competition Agreement provides
for severance payments to Mr. Chan in quarterly installments over a one-year
period following termination, in an aggregate amount not to exceed the amount
paid to Mr. Chan by the Company in combined salary and bonus for the 12-month
period immediately preceding the date of termination. The Company's obligation
to pay such severance is conditional upon Mr. Chan's continued compliance with
the terms of the Non-Competition Agreement. The Non-Competition Agreement
prohibits Mr. Chan, during the term thereof, from engaging in any business
activity that is directly or indirectly competitive in the United States with
any of the products or services being developed or otherwise provided by the
Company at the date of his termination.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The current members of the Company's Compensation Committee are Messrs.
Carr, Humphreys and McCance. No executive officer of the Company has served as
a director or member of the compensation committee (or other committee serving
an equivalent function) of any other entity, whose executive officers served
as a director of or member of the Compensation Committee of the Company.
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<PAGE>
CERTAIN TRANSACTIONS
On May 29, 1992, the Company entered into an agreement (the "1992 Bull
Agreement") with Bull, a principal stockholder of the Company, in which the
Company issued Bull 575,000 shares of Common Stock in exchange for the
transfer and assignment by Bull of certain items of equipment and other
personal property. Under the 1992 Bull Agreement, the Company agrees to use
its best efforts to elect one representative of Bull to the Board of Directors
for so long as Bull holds 50% of the shares of Common Stock purchased under
the 1992 Bull Agreement, and that in the event no representative of Bull is
elected to the Board of Directors, Bull has a right of representation at
meetings of the Board for so long as Bull holds 25% of the shares of Common
Stock purchased under the 1992 Bull Agreement. To date, Bull has not sold any
of the shares of Common Stock acquired by it under the 1992 Bull Agreement,
and, after giving effect to this offering and assuming the Underwriters' over-
allotment option is exercised in full, Bull will still hold over 50% of the
shares of Common Stock acquired by it under such agreement. Pursuant to the
1992 Bull Agreement, the Company is also obligated to hold meetings of its
Board of Directors at least four times per year. John Giordano, the Vice
President, Chief Financial Officer and Treasurer of Bull, currently serves as
Bull's representative on the Board of Directors. Other than the Board seat,
right of representation and meeting requirements described above, the
Company's obligations under the 1992 Bull Agreement will terminate upon
consummation of this offering. See "Principal and Selling Stockholders."
Pursuant to a follow-on agreement dated September 1, 1994, the Company
granted Bull, among other things, an option to purchase up to 15% of the
authorized shares of Common Stock of the Company before December 31, 1995 at a
price not to exceed $1.48 per share. On October 31, 1995, Bull exercised this
option and acquired 512,500 shares of Common Stock at a price of $1.48 per
share. The September 1, 1994 agreement was amended and restated in its
entirety by an Agreement of Amendment between the Company and Bull, dated
March 15, 1996, pursuant to which Bull received certain rights of
participation and the right to request that the Company assign its rights and
obligations under a certain Master Services Agreement between the Company and
Bull, to a third party in the event that a direct competitor of Bull or of any
of its affiliates acquired a controlling interest in all or substantially all
of the assets of the Company. The Agreement of Amendment terminates upon the
consummation of this offering. Prior to co-founding the Company, Dominic K.
Chan, the Company's Chairman of the Board and Chief Executive Officer, was
employed by Bull, most recently in the position of Executive Vice President of
Research and Development, and Allen K. Deary, the Company's Vice President,
Finance and Chief Financial Officer, was employed by Bull as its Director of
Product Life Cycle Process. Axel Leblois, a director of the Company, was
President and Chief Operating Officer of Bull from May 1991 to December 1995.
See "Management--Executive Officers and Directors."
On February 3, 1992, the Company entered into a Master Software Services
Agreement with Bull pursuant to which the Company agreed to provide
maintenance and professional services to Bull in accordance with certain
Statements of Work entered into between the parties. The Company derived
revenue of $4,069,741, $9,313,118 and $4,079,375 from the agreement in 1994,
1995 and 1996, respectively. On July 29, 1996, the Company licensed its
AutoEnhancer/2000 software to Bull, by and through Bull's Integris division,
pursuant to a License Agreement, as amended September 27, 1996, pursuant to
which Bull acts as both a value added integrator and distributor. With regard
to Bull's use of the Company's software, the License Agreement, as amended,
provides for various scheduled payments during 1996 and 1997 which result in a
fully paid-up royalty of $1,500,000. Additional royalties are due to the
Company from Bull upon any sublicensing by Bull pursuant to the License
Agreement. See Note 8 of Notes to the Company's Consolidated Financial
Statements.
In connection with the establishment by the Company of certain credit
facilities in the aggregate amount of $942,000 with Danvers Savings Bank on
August 16, 1993, April 28, 1994 and August 5, 1994, Dominic K. Chan gave an
unlimited guaranty of all of the Company's obligations to Danvers Savings
Bank. Mr. Chan's guaranty was secured by a pledge of Mr. Chan's life insurance
policy in the amount of $200,000. On September 13, 1996, in connection with
the establishment of credit facilities with Fleet National Bank, the Company
repaid all outstanding principal and interest on the Danvers Savings Bank
Loans, and Danvers Savings Bank released Mr. Chan's guaranty.
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On November 18, 1994, the Company entered into a DOS Engineering Development
Agreement with Microcom, Inc. ("Microcom") pursuant to which the Company
provides certain software enhancement and maintenance services to Microcom.
The Company derived revenue of $110,891, $402,354 and $136,755 from the
Agreement in 1994, 1995 and 1996, respectively. Roland Pampel, a director of
the Company, held the positions of President, Chief Executive Officer and
director of Microcom from March 1994 to January 1997.
On January 3, 1995, the Company entered into a General Computer Consulting
Services Agreement, with Met Life pursuant to which the Company provided
certain software conversion services to Met Life. In connection with the
General Computer Consulting Services Agreement, the Company entered into two
Authorization Letters with Met Life, dated January 3, 1995 and November 27,
1995, respectively. On October 1, 1996, the Company entered into a License
Agreement with Met Life providing for the grant of non-exclusive licenses to
use certain proprietary software products developed by the Company, as
specified in certain subsequent purchase orders entered into between the
Company and Met Life. Leonard Miller, the Company's Vice President, Strategic
Programs, was previously employed at Met Life from January 1964 to August
1996, most recently in the position of Chief Information Officer of Individual
Business. The Company derived revenue of $162,000, $1,716,901 and $1,501,434
from Met Life in 1994, 1995 and 1996, respectively.
Under a Note and Warrant Purchase Agreement dated May 30, 1995 (the "Warrant
Agreement"), the Massachusetts Capital Resource Company ("MCRC") loaned
$1,000,000 to the Company, evidenced by a Secured Subordinated Note (the "MCRC
Note"). The aggregate indebtedness under the MCRC Note was $1,000,000 on April
30, 1997, and the interest rate on the MCRC Note is 10% per annum. The MCRC
Note matures on June 30, 2002, subject to the Company's option to prepay
subject to certain prepayment premiums, in whole or in part, the principal
amount of the MCRC Note and the accrued interest thereunder at any time after
July 1, 1996. Beginning on September 30, 1998, and on the last day of
December, March, June and September in each year thereafter, up to and
including June 30, 2002, the Company is required to redeem, without premium,
$62,500 in principal amount of the MCRC Note, together with interest thereon.
The Company's obligations under the MCRC Note are secured by equipment,
inventory and certain other intangible personal property of the Company
pursuant to a Security Agreement of the same date between the Company and
MCRC. The Security Agreement terminates upon repayment of the MCRC Note in
full. The Company currently intends to use a portion of the proceeds of this
offering to repay in full the MCRC Note. See "Use of Proceeds."
Upon execution of the Warrant Agreement, MCRC received a warrant (the
"Warrant") to purchase 312,500 shares of Common Stock, as adjusted for stock
splits, distributions and other dilutive actions taken by the Company, at an
exercise price of $1.60 per share. The Warrant may be exercised until the
later of (i) June 30, 2002 or (ii) repayment of the MCRC Note. MCRC currently
does not intend to exercise the Warrant prior to the commencement of this
offering. On May 30, 1995, the Company also entered into a Voting Agreement
with Dominic K. Chan and MCRC (the "MCRC Voting Agreement") pursuant to which
MCRC agrees to vote as directed by Mr. Chan with respect to the election of
members of the Board of Directors of the Company. The MCRC Voting Agreement
will terminate upon the consummation of this offering.
The Company issued an unsecured promissory note, dated September 1991, in
the amount of $62,000 payable to Vista Technologies Incorporated ("Vista"), an
entity of which Adarsh K. Arora, the Company's Vice President, Research and
Development, was the principal owner. The note incurred interest at 7% per
annum. In July 1995, the Company repaid all outstanding principal and interest
on the note.
On January 29, 1996, the Company entered into an Agreement and Plan of
Merger (the "Merger Agreement") with Vista and its stockholders, including its
President and Chief Executive Officer and principal stockholder, Adarsh K.
Arora, pursuant to which Vista merged with and into the Company. Upon
consummation of the merger, each share of capital stock of Vista was converted
into 0.5437 shares of Common Stock of the Company (the "Conversion Ratio").
Mr. Arora, as the duly appointed representative of the Vista stockholders, and
Mr. Chan, the Company's President and Chief Executive Officer at the time of
the merger, determined the Conversion Ratio and other terms of the Merger
Agreement. In determining the terms of the Merger Agreement, the Company
conducted its own analysis of Vista, including a review of the financial
condition of Vista and the
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strategic value of Vista to the Company. At the time of the Merger Agreement,
Mr. Arora was unaffiliated with the Company. In connection with the Merger
Agreement, the Company employed certain employees of Vista, including Mr.
Arora.
On March 15, 1996, the Company issued an aggregate of 1,903,525 shares of
Series A Convertible Preferred Stock (described below) to nine purchasers at a
price of $2.80 per share. Of these shares, Matrix Partners IV, L.P. and Matrix
IV Entrepreneurs Fund, L.P., of which W. Michael Humphreys, a director of the
Company, is a general partner, purchased 795,761 and 41,882 shares,
respectively; Greylock Equity Limited Partnership, of which Henry F. McCance,
a director of the Company, is a general partner, purchased 837,643 shares;
Arthur Carr, a director of the Company, purchased 18,300 shares; MCRC
purchased 196,083 shares; Thomas Deary and Therese Deary, the parents of Allen
K. Deary, purchased 1,830 shares; Michael Deary and Lauri Deary, the brother
and sister-in-law of Allen K. Deary, purchased 3,660 shares; and James Carroll
and Mary Carroll, the father-in-law and mother-in-law of Allen K. Deary,
purchased 1,830 shares. On the same date, the Company issued 71,775 shares of
Common Stock to MCRC for consideration in the amount of $200,970. In
connection with the sale of Series A Convertible Preferred Stock, the Company
entered into a Voting Agreement (the "Voting Agreement") with Matrix Partners
IV, L.P., Matrix IV Entrepreneurs Fund, L.P., Greylock Equity Limited
Partnership and MCRC providing, among other things, that one representative of
Matrix Partners IV, L.P. and one representative of Greylock Equity Limited
Partnership would be elected by the holders of the Series A Convertible
Preferred Stock to the Board of Directors of the Company. The Voting Agreement
will terminate upon the consummation of this offering. In addition, the
Company entered into a Stock Restriction Agreement with Dominic K. Chan and
his wife, Marsha C. Chan (together, the "Chans"), Bull, Matrix Partners IV,
L.P., Matrix IV Entrepreneurs Fund, L.P., Greylock Equity Limited Partnership
and MCRC (together, the "Investors") providing, among other things, that the
Chans would execute a lock-up agreement in the event of an underwritten public
offering of Common Stock and grant a right of first refusal in favor of the
Company and a right of participation in favor of the Investors with respect to
any sale of shares of Common Stock held by the Chans. The Stock Restriction
Agreement will terminate upon consummation of this offering. Also in
connection with this financing, on March 15, 1996, the Company repurchased
159,588 shares of Common Stock at a price of $2.80 per share from certain
stockholders of the Company and sold 71,775 shares of Common Stock to certain
purchasers of the Series A Convertible Preferred Stock for consideration of
$200,970. Also in connection with this financing, Dominic K. Chan sold 625,000
shares of the Company's Common Stock to certain purchasers of the Series A
Convertible Preferred Stock, and the Company granted certain redemption rights
in connection with the shares of Common Stock sold by the Company and Dr.
Chan. In conjunction with any redemption of the Series A Convertible Preferred
Stock by the Company, holders of the Series A Convertible Preferred Stock must
surrender for redemption, at a redemption price equal to $2.80 per share,
0.366 shares of the Common Stock acquired by such holders in this financing.
See Note 10 of Notes to the Company's Consolidated Financial Statements.
In the event of any liquidation, dissolution or winding up of the Company,
the holders of Series A Convertible Preferred Stock are entitled to receive,
on a pro-rata basis, $3.825 per share, plus all accrued and unpaid dividends.
In addition to voting with the holders of Common Stock, the holders of Series
A Convertible Preferred Stock, voting separately as a class, are entitled to
elect two members of the Board of Directors of the Company, and the Company
may not, without the consent of at least two-thirds of the outstanding Series
A Convertible Preferred Stock, increase the size of the Board of Directors in
excess of nine members. The holders of Series A Convertible Preferred Stock
are entitled to receive cumulative annual dividends in the amount of $0.3825
per share, plus 10% of previously accrued and unpaid dividends, whether or not
such dividends are declared by the Board of Directors. These dividends are
payable upon liquidation, dissolution or winding up of the Company, or upon
redemption of the Series A Convertible Preferred Stock. In addition, the
holders of Series A Convertible Preferred Stock have a right of redemption
exercisable on March 15 of each of the years 2001, 2002 and 2003, pursuant to
which the Company is required to redeem 33 1/3%, 50% and 100% of the Series A
Convertible Preferred Stock at a redemption price equal to $2.80 per share,
plus accrued and unpaid dividends through the redemption date. All shares of
Series A Convertible Preferred Stock will convert into shares of Common Stock
upon the closing of this offering.
58
<PAGE>
On March 15, 1996, the Company entered into a Stock Option Agreement with
the Chans granting the Company the right to purchase, upon the death of
Dominic K. Chan, a certain percentage of the shares of Common Stock held by
the Chans as set forth in the Stock Option Agreement. The Stock Option
Agreement will terminate upon the consummation of this offering.
Pursuant to a Registration Rights Agreement, dated March 15, 1996, between
the Company and certain persons and entities (the "Rightsholders"), including
Matrix IV Partners, L.P., Matrix IV Entrepreneurs Fund, L.P., Greylock Equity
Limited Partnership, Bull, Arthur Carr, Virginia L. Carr, Thomas Deary and
Therese Deary, Michael Deary and Lauri Deary and MCRC, the Rightsholders are
entitled to certain rights with respect to registration under the Securities
Act of 1933, as amended, of certain shares of Common Stock, including shares
of Common Stock that may be acquired pursuant to the conversion of Convertible
Preferred Stock or the exercise of warrants. For a description of such rights,
see "Shares Eligible for Future Sale."
On May 1, 1996, the Company entered into a License and Alliance Agreement
with CSC providing for the grant of a non-exclusive license to CSC to use the
Company's AutoEnhancer/2000 software and related services, and for the
collaboration of the Company and CSC in connection with providing year 2000
services to CSC's clients. The Company derived revenue of $190,000 in 1996
under the License and Alliance Agreement. The initial term of the License and
Alliance Agreement terminated May 1, 1997. On March 15 and June 25, 1997, the
Company executed Amendments to the License and Alliance Agreement--Agreement
for the Purchase of a Special Inventory Package providing for the grant of a
$2,500,000 usage-based license payable by CSC during 1997. Prior to joining
the Company as President and Chief Operating Officer and as a director, Mr.
Catalano was employed by CSC from November 1982 to December 1996, and most
recently served as its President. Mr. Savoia served as Vice President and
Managing Partner of CSC from 1989 to December 1996 before joining the Company
in the position of Vice President, Business Development and Marketing.
On October 28, 1996, the Company issued an aggregate of 1,818,182 shares of
Series B Convertible Preferred Stock to 25 purchasers at a price of $3.30 per
share, including the sale of 8,000 shares to Axel Leblois, 10,000 shares to
Arthur Carr and 10,000 shares to Virginia L. Carr, the wife of Arthur Carr.
The Company entered into an Amendment No. 1 to the Stock Restriction Agreement
and an Amendment No. 1 to the Registration Rights Agreement to provide that
the purchasers of the Series B Convertible Preferred Stock would become
parties to such agreements. Messrs. Leblois and Carr are directors of the
Company.
For a description of certain employment and other arrangements between the
Company and its executive officers, see "Management--Executive Compensation--
Employment Agreements."
The Company has adopted a policy providing that all material transactions
between the Company and its officers, directors and other affiliates must (i)
be approved by a majority of the members of the Company's Board of Directors
and by a majority of the disinterested members of the Company's Board of
Directors and (ii) be on terms no less favorable to the Company than could be
obtained from unaffiliated third parties.
59
<PAGE>
PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of the Common Stock of the Company as of June 30, 1997, and as
adjusted to reflect the sale of the shares of Common Stock offered hereby, by
(i) each of the directors of the Company, (ii) each of the Named Executive
Officers, (iii) each person or entity known to the Company to own beneficially
more than 5% of the Company's Common Stock, (iv) all directors and executive
officers as a group and (v) each of the other Selling Stockholders. Except as
indicated below, none of these entities has a relationship with the Company or,
to the knowledge of the Company, any Underwriters of this offering or their
respective affiliates. Unless otherwise indicated, each person or entity named
in the table has sole voting power and investment power (or shares such power
with his or her spouse) with respect to all shares of capital stock listed as
owned by such person or entity.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY
OWNED PRIOR TO NUMBER OF BENEFICIAL OWNERSHIP
OFFERING(1) SHARES AFTER OFFERING(1)(2)
-------------------- BEING --------------------
NAME OF BENEFICIAL OWNER NUMBER PERCENTAGE OFFERED(3) NUMBER PERCENTAGE
- ------------------------ --------- ---------- ---------- --------- ----------
<S> <C> <C> <C> <C> <C>
Dominic K. Chan(4)....... 3,013,763 30.0% 300,000 2,713,763 21.1%
c/o Peritus Software
Services, Inc.
304 Concord Road
Billerica, MA 01821-3485
Greylock Equity Limited
Partnership(5)........... 1,144,258 11.4% -- 1,144,258 8.9%
One Federal Street
Boston, MA 02110
Henry F. McCance(5)...... 1,144,258 11.4% -- 1,144,258 8.9%
c/o Greylock Equity
Limited Partnership
One Federal Street
Boston, MA 02110
Matrix Partners IV,
L.P.(6)................. 1,144,258 11.4% -- 1,144,258 8.9%
Bay Colony Corp. Center
1000 Winter Street
Suite 4500
Waltham, MA 02154
W. Michael Humphreys(7).. 1,144,258 11.4% -- 1,144,258 8.9%
c/o Matrix Partners IV,
L.P.
Bay Colony Corp. Center
1000 Winter Street
Suite 4500
Waltham, MA 02154
Bull HN Information
Systems Inc.(8)......... 1,087,500 10.9% 360,000 727,500 5.7%
300 Concord Road
Billerica, MA 01821
John Giordano(8)......... 1,087,500 10.9% 360,000 727,500 5.7%
c/o Bull HN Information
Systems Inc.
300 Concord Road
Billerica, MA 01821
Y2K Partners, Ltd.(9).... 606,061 6.0% -- 606,061 4.7%
c/o EFO Holdings, Inc.
1111 West Mockingbird
Lane
Suite 1400
Dallas, TX 75247
Douglas A. Catalano...... 179,515 1.8% -- 179,515 1.4%
Arthur Carr(10).......... 30,625 * -- 30,625 *
Axel Leblois(11)......... 11,125 * -- 11,125 *
Roland Pampel(12)........ 80,212 * -- 80,212 *
Allen K. Deary(13)....... 386,247 3.8% 20,000 366,247 2.8%
Adarsh K. Arora.......... 148,808 1.5% -- 148,808 1.2%
Andrea C. Campbell(14)... 250,986 2.5% 20,000 230,986 1.8%
All executive officers
and directors, as
a group (14
persons)(15)............ 7,577,297 71.7% 700,000 6,877,297 51.4%
</TABLE>
- --------
60
<PAGE>
* Less than 1% of outstanding Common Stock.
(1) The number of shares beneficially owned by each stockholder is determined
under rules promulgated by the Securities and Exchange 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 60 days of June 30, 1997 through the exercise of any
stock option, warrant or other right. The inclusion herein of such
shares, however, does not constitute an admission that the named
stockholder is a direct or indirect beneficial owner of such shares.
(2) Assumes no exercise of the Underwriters' over-allotment option.
(3) In the event that the over-allotment option is exercised in full, Dominic
K. Chan, Bull, Allen K. Deary, Andrea C. Campbell and Adarsh K. Arora
will offer to sell 200,000, 265,000, 30,000, 10,000 and 20,000 shares of
Common Stock, respectively, to the Underwriters. As a result of such
exercise, Dominic K. Chan, Bull, Allen K. Deary, Andrea C. Campbell and
Adarsh K. Arora will beneficially own 2,513,763, 462,500, 336,247,
220,986 and 128,808 shares of Common Stock, or 19.6%, 3.6%, 2.6%, 1.7%
and 1.0% of the outstanding shares, respectively, after this offering.
(4) Includes 18,750 shares of Common Stock subject to outstanding stock
options which are exercisable within 60 days of June 30, 1997; 2,795,013
shares of Common Stock held jointly with his wife, Marsha C. Chan; and
200,000 shares of Common Stock held in the name of the Chan Family
Irrevocable Trust of which Julian Chan, Marsha C. Chan and Theodore
Tedeschi are trustees and of which Dominic K. Chan's present and future
offspring are beneficiaries and as to which shares Dominic K. Chan
disclaims beneficial ownership. Julian Chan is Dominic Chan's son.
(5) Mr. McCance, a general partner of Greylock Equity GP Limited Partnership
("Greylock"), the general partner of Greylock Equity Limited Partnership,
is a director of the Company. Mr. McCance, together with the other
general partners of Greylock, shares voting and investment power with
respect to the shares owned by Greylock. Mr. McCance does not own any
shares of the Company in his individual capacity and disclaims beneficial
ownership of the shares held by Greylock Equity Limited Partnership,
except to the extent of his pecuniary interest therein. See "Certain
Transactions."
(6) Includes 57,213 shares held by Matrix IV Entrepreneurs Fund, L.P.
(7) Mr. Humphreys, a general partner of Matrix IV Management Co. L.P., the
general partner of Matrix Partners IV, L.P. ("Matrix") and the general
partner of Matrix IV Entrepreneurs Fund, L.P., is a director of the
Company. Mr. Humphreys, together with the other managing members of
Matrix, shares voting and investment power with respect to the shares
owned by Matrix. Mr. Humphreys does not own any shares of the Company in
his individual capacity and disclaims beneficial ownership of shares
owned by Matrix, except to the extent of his pecuniary interest therein.
See "Certain Transactions."
(8) Mr. Giordano is a director of the Company and Vice President, Chief
Financial Officer and Treasurer of Bull. Mr. Giordano, together with
certain other officers of Bull, shares investment and voting power with
respect to the shares owned by Bull. Mr. Giordano does not own any shares
of the Company in his individual capacity and disclaims beneficial
ownership of shares owned by Bull, except to the extent of his pecuniary
interest therein. See "Certain Transactions."
(9) GPW Partners Limited is the general partner of Y2K Partners, Ltd. John P.
Watters, the President and Chairman of Cross Matrix Corporation, the
general partner of GPW Partners Limited, has sole investment and voting
power over the shares held by Y2K Partners, Ltd., as to which shares Mr.
Watters disclaims beneficial ownership.
(10) Includes 3,125 shares of Common Stock subject to outstanding stock
options which are exercisable within 60 days of June 30, 1997. Also
includes 10,000 shares of Common Stock held by Virginia L. Carr, Mr.
Carr's wife, and 5,000 shares of Common Stock held by a trust, of which
Virginia L. Carr is sole trustee, as to which shares Mr. Carr disclaims
beneficial ownership.
(11) Includes 3,125 shares of Common Stock subject to outstanding stock
options which are exercisable within 60 days of June 30, 1997.
(12) Includes 28,125 shares of Common Stock subject to outstanding stock
options which are exercisable within 60 days of June 30, 1997.
(13) Includes 186,983 shares of Common Stock subject to outstanding stock
options which are exercisable within 60 days of June 30, 1997. Also
includes 10,713 shares held by Mr. Deary's wife and two children, as to
which Mr. Deary disclaims beneficial ownership.
(14) Includes 206,298 shares of Common Stock subject to outstanding stock
options which are exercisable within 60 days of June 30, 1997. Also
includes 1,563 shares of Common Stock held by Ms. Campbell's husband and
13,125 shares of Common Stock subject to outstanding stock options which
are exercisable by her husband within 60 days of June 30, 1997, as to
which Ms. Campbell disclaims beneficial ownership.
(15) Includes an aggregate of 546,406 shares of Common Stock subject to
outstanding options which are exercisable within 60 days of June 30,
1997.
61
<PAGE>
DESCRIPTION OF CAPITAL STOCK
After giving effect to the amendment and restatement of the Company's
Articles of Organization (the "Restated Articles") to be effected upon the
closing of this offering, the authorized capital stock of the Company will
consist of 50,000,000 shares of Common Stock, $.01 par value per share, and
5,000,000 shares of Preferred Stock, $.01 par value per share. As of June 30,
1997 (assuming the conversion of all outstanding shares of Convertible
Preferred Stock and Class B Common Stock into Common Stock), there were
outstanding (i) 10,022,304 shares of Common Stock held by 137 stockholders of
record, (ii) stock options for the purchase of 3,482,457 shares of Common
Stock and (iii) warrants for the purchase of 312,500 shares of Common Stock.
COMMON STOCK
Holders of Common Stock are entitled to one vote for each share held on all
matters submitted to a vote of stockholders and do not have cumulative voting
rights. Accordingly, holders of a majority of the shares of Common Stock
entitled to vote in any election of directors may elect all of the directors
standing for election. Holders of Common Stock are entitled to receive ratably
such dividends, if any, as may be declared by the Board of Directors out of
funds legally available therefor, subject to any preferential dividend rights
of outstanding Preferred Stock. Upon the liquidation, dissolution or winding
up of the Company, the holders of Common Stock are entitled to receive ratably
the net assets of the Company available after the payment of all debts and
other liabilities and subject to the prior rights of any outstanding Preferred
Stock. Holders of Common Stock have no preemptive, subscription, redemption or
conversion rights. The outstanding shares of Common Stock are, and the shares
offered by the Company in this offering will be, when issued and paid for,
fully paid and nonassessable. The rights, preferences and privileges of
holders of Common Stock are subject to, and may be adversely affected by, the
rights of the holders of shares of any series of Preferred Stock which the
Company may designate and issue in the future. Certain holders of Common Stock
have the right to require the Company to effect the registration of their
shares of Common Stock in certain circumstances. The shares of Common Stock
have been approved for quotation on the Nasdaq National Market under the
symbol "PTUS." See "Shares Eligible for Future Sale."
PREFERRED STOCK
Under the terms of the Restated Articles, the Board of Directors is
authorized, subject to any limitations prescribed by law, without stockholder
approval, to issue such shares of Preferred Stock in one or more series. Each
such series of Preferred Stock shall have such rights, preferences, privileges
and restrictions, including voting rights, dividend rights, conversion rights,
redemption privileges and liquidation preferences, as shall be determined by
the Board of Directors.
The purpose of authorizing the Board of Directors to issue Preferred Stock
and determine its rights and preferences is to eliminate delays associated
with a stockholder vote on specific issuances. The rights of the holders of
Common Stock will be subject to the rights of holders of any shares of
Preferred Stock issued in the future. The issuance of Preferred Stock, while
providing desirable flexibility in connection with possible acquisitions and
other corporate purposes, could have the effect of making it more difficult
for a third party to acquire, or of discouraging a third party from acquiring,
a majority of the outstanding voting stock of the Company. The Company has no
present plans to issue any shares of Preferred Stock.
WARRANTS
As of June 30, 1997, the Company had an outstanding warrant to purchase an
aggregate of 312,500 shares of Common Stock at an exercise price of $1.60 per
share. This warrant expires on the later of (i) June 30, 2002 or (ii) upon the
payment in full of the principal amount of the MCRC Note and the interest due
thereon. See "Certain Transactions."
62
<PAGE>
MASSACHUSETTS LAW AND CERTAIN PROVISIONS OF THE COMPANY'S RESTATED ARTICLES
OF ORGANIZATION AND AMENDED AND RESTATED BY-LAWS
The Restated Articles provide that the Company will be subject to Chapter
110F of the Massachusetts General Laws, an anti-takeover law, following this
offering. In general, this statute prohibits a publicly held Massachusetts
corporation from engaging in a "business combination" with an "interested
stockholder" for a period of three years after the date of the transaction in
which the person becomes an interested stockholder, unless (i) the interested
stockholder obtains the approval of the Board of Directors prior to becoming
an interested stockholder, (ii) the interested stockholder acquires 90% of the
outstanding voting stock of the corporation (excluding shares held by certain
affiliates of the corporation) at the time it becomes an interested
stockholder, or (iii) the business combination is approved by both the Board
of Directors and the holders of two-thirds of the outstanding voting stock of
the corporation (excluding shares held by the interested stockholder). An
"interested stockholder" is a person who, together with affiliates and
associates, owns (or at any time within the prior three years did own) 5% or
more of the outstanding voting stock of the corporation. A "business
combination" includes a merger, a stock or asset sale, and certain other
transactions resulting in a financial benefit to the interested stockholder.
Massachusetts General Laws Chapter 156B, Section 50A generally requires that
publicly held Massachusetts corporations have a classified board of directors
consisting of three classes as nearly equal in size as possible, unless the
corporation elects to opt out of the statute's coverage. The Company's
Restated By-Laws contain provisions which give effect to Section 50A. See
"Management--Executive Officers and Directors."
The Restated By-Laws include a provision excluding the Company from the
applicability of Massachusetts General Laws Chapter 110D, entitled "Regulation
of Control Share Acquisitions." In general, this statute provides that any
stockholder of a corporation subject to this statute who acquires 20% or more
of the outstanding voting stock of a corporation may not vote such stock
unless the stockholders of the corporation so authorize. The Board of
Directors may amend the Company's Restated By-Laws at any time to subject the
Company to this statute prospectively.
The Restated By-Laws require the Company to call a special stockholders
meeting at the request of stockholders holding at least 80% of the voting
power of the Company. Any stockholder seeking to solicit requests to call a
special meeting of stockholders (the "Call") must notify the Company by notice
in writing setting forth the reasons for the Call and the purposes of such
special meeting. No solicitation of stockholder requests for a Call may be
made before the record date determining those stockholders entitled to request
a Call, or during the period of 90 days following the most recent meeting of
stockholders of the Company. All requests for a Call shall be delivered to the
Company no later than the 30th day (the "Delivery Date") after the record date
for the Call request. If, in response to a Call solicitation, the holders of
record of at least 80% of the voting power submit requests for a Call, the
Board of Directors must call a special meeting no earlier than 60 days and no
later than 90 days after the Delivery Date. The Board of Directors is not
obligated to fix a meeting date or to hold any meeting of stockholders within
60 days of the next scheduled meeting of the stockholders of the Company.
The Restated Articles provide that the directors and officers of the Company
shall be indemnified by the Company to the fullest extent authorized by
Massachusetts law, as it now exists or may in the future be amended, against
all expenses and liabilities reasonably incurred in connection with service
for or on behalf of the Company. In addition, the Restated Articles provide
that the directors of the Company will not be personally liable for monetary
damages to the Company for breaches of their fiduciary duty as directors,
unless they violated their duty of loyalty to the Company or its stockholders,
acted in bad faith, knowingly or intentionally violated the law, authorized
legal dividends or redemptions or derived an improper personal benefit from
their action as directors.
The Restated Articles provide that any amendment to the Restated Articles,
the sale, lease or exchange of all or substantially all of the Company's
property and assets, or the merger or consolidation of the Company into or
with any other corporation may be authorized by the approval of the holders of
a majority of the shares of
63
<PAGE>
each class of stock entitled to vote thereon, rather than by two-thirds as
otherwise provided by statute, provided that the transactions have been
authorized by a majority of the members of the Board of Directors and the
requirements of any other applicable provisions of the Restated Articles have
been met.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Common Stock is BankBoston, N.A.
64
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Prior to this offering, there has been no public market for the securities
of the Company. Upon completion of this offering, based upon the number of
shares outstanding at June 30, 1997, there will be 12,822,304 shares of Common
Stock of the Company outstanding (assuming no exercise of the Underwriters'
over-allotment option or options outstanding under the Company's stock option
plans). Of these shares, the 3,500,000 shares sold in this offering will be
freely tradeable without restriction or further registration under the
Securities Act of 1933, as amended (the "Securities Act"), except that any
shares purchased by "affiliates" of the Company, as that term is defined in
Rule 144 ("Rule 144") under the Securities Act ("Affiliates"), may generally
only be sold in compliance with the limitations of Rule 144 described below.
SALES OF RESTRICTED SHARES
The remaining 9,322,304 shares of Common Stock are deemed "restricted
securities" under Rule 144. Of the restricted securities, approximately
174,252 shares of Common Stock, which are not subject to the 180-day lock-up
agreements (the "Lock-Up Agreements") with the Representatives of the
Underwriters, will be eligible for immediate sale in the public market
pursuant to Rule 144(k) under the Securities Act. Approximately 139,387
additional shares of Common Stock, which are not subject to Lock-Up
Agreements, will be eligible for sale in the public market in accordance with
Rule 144 or Rule 701 under the Securities Act beginning 90 days after the date
of this Prospectus. Upon expiration of the Lock-Up Agreements 180 days after
the date of this Prospectus (and assuming no exercise of any outstanding
options), approximately 9,008,665 additional shares of Common Stock will be
available for sale in the public market, subject to the provisions of Rule 144
under the Securities Act.
The officers and directors of the Company, and certain securityholders,
which executive officers, directors and securityholders in the aggregate hold
approximately 10,707,071 shares of Common Stock (including 1,068,406 shares of
Common Stock that may be acquired pursuant to the exercise of vested options
held by them and exercisable within 60 days of June 30, 1997) on the date of
this Prospectus, have agreed that, for a period of 180 days after the date of
this Prospectus, they will not sell, offer, contract or grant any option to
sell, pledge, transfer, establish an open put equivalent position or otherwise
dispose of any shares of Common Stock, any options to purchase shares of
Common Stock or any shares convertible into or exchangeable for shares of
Common Stock, owned directly by such persons or with respect to which they
have the power of disposition, without the prior written consent of Montgomery
Securities.
In general, under Rule 144 as currently in effect, beginning 90 days after
the effective date of the Registration Statement of which this Prospectus is a
part, a stockholder, including an Affiliate, who has beneficially owned his or
her restricted securities (as that term is defined in Rule 144) for at least
one year from the later of the date such securities were acquired from the
Company or (if applicable) the date they were acquired from an Affiliate is
entitled to sell, within any three-month period, a number of such shares that
does not exceed the greater of 1% of the then outstanding shares of Common
Stock (128,223 shares immediately after this offering) or the average weekly
trading volume in the Common Stock during the four calendar weeks preceding
the date on which notice of such sale was filed under Rule 144, provided
certain requirements concerning availability of public information, manner of
sale and notice of sale are satisfied. In addition, under Rule 144(k), if a
period of at least two years has elapsed between the later of the date
restricted securities were acquired from the Company or (if applicable) the
date they were acquired from an Affiliate of the Company, a stockholder who is
not an Affiliate of the Company at the time of sale and has not been an
Affiliate of the Company for at least three months prior to the sale is
entitled to sell the shares immediately without compliance with the foregoing
requirements under Rule 144.
Securities issued in reliance on Rule 701 (such as shares of Common Stock
acquired pursuant to the exercise of certain options granted under the
Company's stock plans) are also restricted securities and, beginning 90 days
after the effective date of the Registration Statement of which this
Prospectus is a part, may be sold by stockholders other than Affiliates of the
Company subject only to the manner of sale provisions of Rule 144 and by
Affiliates under Rule 144 without compliance with its one-year holding period
requirement.
65
<PAGE>
OPTIONS
The Company intends to file registration statements on Form S-8 under the
Securities Act to register all shares of Common Stock issuable under the Long-
Term Incentive Plan, Incentive Plan, Director Plan and Purchase Plan. The
Company intends to file registration statements on Form S-8 with respect to
the shares of Common Stock issuable under the Director Plan and the Purchase
Plan promptly following the consummation of this offering, but has agreed with
the Underwriters that it will not file any registration statements on Form S-8
relating to the Long-Term Incentive Plan and the Incentive Plan until at least
90 days after the effective date of the Registration Statement of which this
Prospectus is a part. Shares issued upon the exercise of stock options after
the effective date of the Form S-8 registration statements will be eligible
for resale in the public market without restriction, subject to Rule 144
limitations applicable to Affiliates and the Lock-up Agreements noted above,
if applicable.
REGISTRATION RIGHTS
Pursuant to a Registration Rights Agreement, dated March 15, 1996, between
the Company and certain persons and entities (the "Rightsholders"), including
Matrix IV Partners, L.P., Matrix IV Entrepreneurs Fund, L.P., Greylock Equity
Limited Partnership, Bull and MCRC, are entitled to certain rights with
respect to the registration under the Securities Act of a total of
approximately 5,459,112 shares of Common Stock (the "Registerable Stock"). The
Registration Rights Agreement generally provides that, in the event the
Company proposes to register any of its securities under the Securities Act,
the Rightsholders shall be entitled to include Registerable Stock in such
registration, subject to the right of the managing underwriter of any
underwritten offering to limit for marketing reasons the number of shares of
Registerable Stock included in such "piggyback" registration.
The Rightsholders have the right, exercisable upon the request of holders of
at least 40% of the aggregate outstanding shares of Registerable Stock, to
require the Company to prepare and file registration statements under the
Securities Act with respect to Registerable Stock at any time after the
earliest of (i) six months after the effective date of any registration
statement covering a public offering of securities of the Company, other than
on Form S-8, (ii) six months after the Company becomes a reporting company
under Section 12 of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), or (iii) June 30, 1997; provided, however, that (a) such
demand requests the registration of Registerable Stock representing at least
20% of the aggregate outstanding shares of Registerable Stock if the
Rightsholder requests the registration of less than all the shares of
Registerable Stocks (b) the Company need only effect one such demand
registration and (c) the Company is not required to file a demand registration
statement if the previous registration with respect to which the Rightsholders
were entitled to registration pursuant to their piggyback or Form S-3
registration rights became effective less than 180 days prior to such request.
EFFECT OF SALES OF SHARES
Prior to this offering, there has been no public market for the Common Stock
of the Company, and no prediction can be made as to the effect, if any, that
market sales of shares of Common Stock or the availability of shares for sale
will have on the market price of the Common Stock prevailing from time to
time. Nevertheless, sales of significant numbers of shares of the Common Stock
in the public market could adversely affect the market price of the Common
Stock and could impair the Company's future ability to raise capital through
an offering of its equity securities.
66
<PAGE>
UNDERWRITING
The underwriters named below (the "Underwriters"), represented by Montgomery
Securities, Wessels, Arnold & Henderson, L.L.C. and H.C. Wainwright & Co.,
Inc. (the "Representatives"), have severally agreed, subject to the terms and
conditions set forth in the Underwriting Agreement, to purchase from the
Company and the Selling Stockholders the number of shares of Common Stock
indicated below opposite their respective names at the initial public offering
price less the underwriting discount set forth on the cover page of this
Prospectus. The Underwriting Agreement provides that the obligations of the
Underwriters are subject to certain terms and conditions precedent and that
the Underwriters are committed to purchase all of such shares, if any are
purchased.
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITER SHARES
----------- ---------
<S> <C>
Montgomery Securities..............................................
Wessels, Arnold & Henderson, L.L.C.................................
H.C. Wainwright & Co., Inc.........................................
---------
Total............................................................ 3,500,000
=========
</TABLE>
The Representatives have advised the Company and the Selling Stockholders
that the Underwriters initially propose to offer the Common Stock to the
public on the terms set forth on the cover page of this Prospectus. The
Underwriters may allow to selected dealers a concession of not more than $
per share, and the Underwriters may allow, and any such dealers may reallow, a
concession of not more than $ per share to certain other dealers. After the
initial public offering, the offering price and other selling terms may be
changed by the Representatives. The Common Stock is offered subject to receipt
and acceptance by the Underwriters and to certain other conditions, including
the right to reject orders in whole or in part.
Certain Selling Stockholders have granted an option to the Underwriters,
exercisable during the 30-day period after the date of this Prospectus, to
purchase up to a maximum of 525,000 additional shares of Common Stock to cover
over-allotments, if any, at the same price per share as the initial shares to
be purchased by the Underwriters. To the extent the Underwriters exercise this
option, each of the Underwriters will be committed, subject to certain
conditions, to purchase such additional shares in approximately the same
proportion as set forth in the above table. The Underwriters may purchase such
shares only to cover over-allotments made in connection with this offering.
Each director and officer of the Company and certain other of its
stockholders prior to this offering, as well as certain other holders of
options, warrants or other rights to purchase Common Stock, who immediately
following this offering (assuming no exercise of the over-allotment option)
collectively will beneficially own 10,107,071 shares of Common Stock, have
agreed not to directly or indirectly sell, offer, contract or grant any option
to sell, pledge, transfer, establish an open put equivalent position or
otherwise dispose of any rights with respect to any shares of Common Stock,
any options or warrants to purchase Common Stock, or any securities
convertible or exchangeable for Common Stock, owned directly by such holders
or with respect to which they have the power of disposition for a period of
180 days after the date of this Prospectus without the prior written consent
of Montgomery Securities. Montgomery Securities may, in its sole discretion
and at any time without notice, release all or any portion of the securities
subject to these lock-up agreements. In addition, the Company has agreed not
to sell, offer to sell, contract to sell or otherwise sell or dispose of any
shares of Common Stock or any rights to acquire Common Stock, other than
pursuant to its stock plans or upon the exercise of outstanding options and
warrants, for a period of 180 days after the date of this Prospectus without
the prior consent of Montgomery Securities. See "Shares Eligible for Future
Sale."
67
<PAGE>
The Underwriting Agreement provides that the Company and the Selling
Stockholders will indemnify the Underwriters against certain liabilities,
including civil liabilities, under the Securities Act, or will contribute to
payments the Underwriters may be required to make in respect thereof.
In connection with this offering, the Underwriters may engage in
transactions that stabilize, maintain or otherwise affect the price of the
Common Stock, including over-allotment, stabilization, syndicate covering
transactions and imposition of penalty bids. In an over-allotment, the
Underwriters would allot more shares of Common Stock to their customers in the
aggregate than are available for purchase by the Underwriters under the
Underwriting Agreement. Stabilizing means the placing of any bid, or the
effecting of any purchase, for the purpose of pegging, fixing or maintaining
the price of a security. In a syndicate covering transaction, the Underwriters
would place a bid or effect a purchase to reduce a short position created in
connection with this offering. Pursuant to a penalty bid, Montgomery
Securities, on behalf of the Underwriters, would be able to reclaim a selling
concession from an Underwriter if shares of Common Stock originally sold by
such Underwriter are purchased in syndicate covering transactions. These
transactions may result in the price of the Common Stock being higher than the
price that might otherwise prevail in the open market. These transactions may
be effected on the Nasdaq National Market, in the over-the-counter market or
otherwise, and, if commenced, may be discontinued at any time.
The Representatives have informed the Company that they do not expect to
make sales to accounts over which they exercise discretionary authority in
excess of 5% of the number of shares of Common Stock offered hereby.
Prior to this offering, there has been no public market for the Common Stock
of the Company. Consequently, the initial public offering price will be
determined through negotiations among the Company and the Representatives.
Among the factors to be considered in such negotiations will be the history
of, and prospects for, the Company and the industry in which it competes, an
assessment of the Company's management, the present state of the Company's
development, the prospects for future earnings of the Company, the prevailing
market conditions at the time of this offering, market valuations of publicly
traded companies that the Company and the Representatives believe to be
comparable to the Company, and other factors deemed relevant.
LEGAL MATTERS
The validity of the shares of Common Stock offered by the Company hereby
will be passed upon for the Company by Hale and Dorr LLP, Boston,
Massachusetts. Certain legal matters in connection with this offering will be
passed upon for the Underwriters by Testa, Hurwitz & Thibeault, LLP, Boston,
Massachusetts.
EXPERTS
The Company's financial statements as of December 31, 1995 and 1996, and for
each of the three years in the period ended December 31, 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.
68
<PAGE>
ADDITIONAL INFORMATION
The Company has filed with the Commission a Registration Statement (which
term shall include all amendments, exhibits, schedules and supplements
thereto) on Form S-1 under the Securities Act with respect to the shares of
Common Stock offered hereby. This Prospectus, which constitutes a part of the
Registration Statement, does not contain all of the information set forth in
the Registration Statement, certain parts of which are omitted in accordance
with the rules and regulations of the Commission, to which Registration
Statement reference is hereby made. Statements made in this Prospectus as to
the contents of any contract, agreement or other document referred to are not
necessarily complete. With respect to each such contract, agreement or other
document filed as an exhibit to the Registration Statement, reference is made
to the exhibit for a more complete description of the matter involved, and
each such statement shall be deemed qualified in its entirety by such
reference. The Registration Statement and the exhibits thereto may be
inspected and copied at prescribed rates at the public reference facilities
maintained by the Commission at Room 1024, Judiciary Plaza, 450 Fifth Street,
N.W., Washington, D.C. 20549 and at the regional offices of the Commission
located at Seven World Trade Center, 13th Floor, New York, New York 10048 and
500 West Madison Street, Suite 1400, Chicago, Illinois 60661. In addition, the
Company is required to file electronic versions to these documents with the
Commission through the Commission's Electronic Data Gathering, Analysis, and
Retrieval (EDGAR) system. The Commission maintains a World Wide Web site at
http://www.sec.gov that contains reports, proxy and information statements and
other information regarding registrants that file electronically with the
Commission.
The Company intends to distribute to its stockholders annual reports
containing audited consolidated financial statements. The Company also intends
to make available to its stockholders, within 45 days after the end of each
fiscal quarter, reports for the first three quarters of each fiscal year
containing interim unaudited financial information.
69
<PAGE>
PERITUS SOFTWARE SERVICES, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Report of Independent Accountants......................................... F-2
Consolidated Balance Sheet as of December 31, 1995 and 1996, March 31,
1997 (unaudited) and pro forma March 31, 1997 (unaudited)................ F-3
Consolidated Statement of Operations for the three years ended December
31, 1996, and the three months ended March 31, 1996 and 1997
(unaudited).............................................................. F-4
Consolidated Statement of Changes in Stockholders' Equity for the three
years ended December 31, 1996 and the three months ended March 31, 1997
(unaudited).............................................................. F-5
Consolidated Statement of Cash Flows for the three years ended December
31, 1996 and the three months ended March 31, 1996 and 1997 (unaudited).. F-6
Notes to Consolidated Financial Statements................................ F-8
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of Peritus Software Services, Inc.
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of operations, of changes in stockholders' equity and
of cash flows present fairly, in all material respects, the financial position
of Peritus Software Services, Inc. and its subsidiary at December 31, 1995 and
1996, and the results of their operations and their cash flows for each of the
three years in the period ended December 31, 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 audits. We conducted our
audits of these statements in accordance with generally accepted auditing
standards which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management,
and evaluating the overall financial statement presentation. We believe that
our audits provide a reasonable basis for the opinion expressed above.
Price Waterhouse LLP
Boston, Massachusetts
May 14, 1997
F-2
<PAGE>
PERITUS SOFTWARE SERVICES, INC.
CONSOLIDATED BALANCE SHEET
(IN THOUSANDS, EXCEPT SHARE-RELATED DATA)
<TABLE>
<CAPTION>
DECEMBER 31, PRO FORMA
--------------- MARCH 31, MARCH 31,
1995 1996 1997 1997
------ ------- --------- ---------
(NOTE 10)
(UNAUDITED)
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................ $ 264 $ 7,388 $ 5,022
Accounts receivable, net of allowance for
doubtful accounts of $30, $30 and $30
and including amounts receivable from
related parties of $1,131, $260 and
$341, respectively...................... 2,325 4,163 4,661
Costs and estimated earnings in excess of
billings on uncompleted contracts,
including amounts on uncompleted
contracts with related parties of
$1,369, $562 and $431, respectively..... 2,696 2,195 1,962
Unbilled license revenue from related
parties................................. -- 1,400 1,200
Prepaid expenses and other current
assets.................................. 266 119 238
------ ------- -------
Total current assets..................... 5,551 15,265 13,083
Property and equipment, net............... 1,340 1,970 2,042
Other assets.............................. 288 490 587
------ ------- -------
$7,179 $17,725 $15,712
====== ======= =======
LIABILITIES, REDEEMABLE STOCK AND
STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Line of credit........................... $ 400 $ -- $ --
Demand notes payable..................... 150 -- --
Current portion of capital lease
obligations............................. 112 74 74
Current portion of long-term debt........ 115 225 225
Accounts payable......................... 708 497 856
Billings in excess of costs and estimated
earnings on uncompleted contracts....... 710 902 1,014
Deferred revenue......................... -- 3,262 906
Other accrued expenses and current
liabilities............................. 1,138 2,087 1,602
------ ------- -------
Total current liabilities................ 3,333 7,047 4,677
Capital lease obligations................. 231 201 170
Long-term debt............................ 1,561 1,337 1,306
Deferred income taxes..................... 186 -- --
------ ------- -------
Total liabilities........................ 5,311 8,585 6,153
------ ------- -------
Minority interest in consolidated
subsidiary............................... 66 155 173
------ ------- -------
Commitments (Note 17)..................... -- -- --
------ ------- -------
Redeemable convertible preferred stock, no
par value:
Series A--1,903,525 shares authorized,
issued and outstanding at issuance cost
plus accretion and accrued dividends
(liquidation preference $7,281,000) at
December 31, 1996 and March 31, 1997; 0
shares authorized, issued and
outstanding pro forma March 31, 1997.... -- 5,912 6,094 $ --
Series B--1,818,182 shares authorized,
issued and outstanding at issuance cost
plus accretion and accrued dividends
(liquidation preference $6,000,000) at
December 31, 1996 and March 31, 1997;
0 shares authorized, issued and
outstanding pro forma March 31, 1997.... -- 6,107 6,158 --
Redeemable common stock right............. -- 268 294 --
------ ------- ------- -------
-- 12,287 12,546 --
------ ------- ------- -------
Stockholders' equity (deficit):
Class A common stock, no par value;
13,295,000 shares authorized; 5,525,075,
6,033,614, 6,156,114 and 0 shares issued
and 5,523,288, 6,033,614, 6,156,114 and
0 shares outstanding, respectively...... 1,216 2,207 2,209 --
Class B non-voting common stock, no par
value; 275,000 shares authorized;
99,912, 101,196, 101,196 and 0 shares
issued and 99,287, 101,196, 101,196 and
0 shares outstanding, respectively...... 160 164 164 --
Common stock, $.01 par value; 50,000,000
shares authorized; 9,979,023 shares
issued and outstanding, pro forma March
31, 1997................................ -- -- -- 100
Additional paid-in capital............... -- -- -- 14,819
Accumulated earnings (deficit)........... 430 (5,593) (5,446) (5,446)
Note receivable from stockholder......... -- (58) (58) (58)
Treasury stock, at cost, 1,787 shares and
625 shares of Class A and Class B common
stock, respectively..................... (4) -- -- --
Cumulative translation adjustment........ -- (22) (29) (29)
------ ------- ------- -------
Total stockholders' equity (deficit)..... 1,802 (3,302) (3,160) $ 9,386
------ ------- ------- -------
$7,179 $17,725 $15,712
====== ======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
<PAGE>
PERITUS SOFTWARE SERVICES, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE-RELATED DATA)
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
---------------------------- -------------------
1994 1995 1996 1996 1997
------ ------- ----------- ------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenue:
Outsourcing services,
including $3,951,
$10,114, $4,943,
$1,179 and $975 from
related parties,
respectively.......... $7,130 $16,400 $ 10,190 $ 2,244 $ 2,519
License, including
$1,500 from related
parties for 1996...... -- -- 6,526 -- 4,144
Other services,
including $366, $10,
$0, $0 and $0 from
related parties,
respectively.......... 742 2,105 2,519 404 1,196
------ ------- ----------- ------- ----------
Total revenue.......... 7,872 18,505 19,235 2,648 7,859
------ ------- ----------- ------- ----------
Cost of revenue:
Cost of outsourcing
services including
$1,428, $3,318,
$1,984, $482 and $373
from related parties,
respectively.......... 4,700 9,602 8,488 2,234 2,045
License, including $6
from related parties
for 1996.............. -- -- 162 -- 127
Cost of other services
including $153, $3,
$0, $0 and $0 from
related parties,
respectively.......... 319 2,421 2,931 506 1,289
------ ------- ----------- ------- ----------
Total cost of revenue.. 5,019 12,023 11,581 2,740 3,461
------ ------- ----------- ------- ----------
Gross profit (loss)..... 2,853 6,482 7,654 (92) 4,398
------ ------- ----------- ------- ----------
Operating expenses:
Sales and marketing.... 366 2,129 3,116 654 1,383
Research and
development........... 560 1,703 6,033 1,360 1,634
General and
administrative........ 1,283 2,357 3,249 748 925
------ ------- ----------- ------- ----------
Total operating
expenses.............. 2,209 6,189 12,398 2,762 3,942
------ ------- ----------- ------- ----------
Income (loss) from
operations............ 644 293 (4,744) (2,854) 456
Interest income......... 3 18 48 22 73
Interest expense........ (66) (221) (344) (60) (46)
------ ------- ----------- ------- ----------
Income (loss) before
income taxes, minority
interest and equity in
loss of less than
majority-owned
company............... 581 90 (5,040) (2,892) 483
Provision (benefit) for
estimated income
taxes.................. 179 (8) (143) (142) 48
------ ------- ----------- ------- ----------
Income (loss) before
minority interest and
equity in loss of less
than majority-owned
company............... 402 98 (4,897) (2,750) 435
Minority interest in
consolidated
subsidiary............. -- (43) (24) 38 (29)
Equity in loss of less
than majority-owned
company................ (97) -- -- -- --
------ ------- ----------- ------- ----------
Net income (loss)...... $ 305 $ 55 (4,921) $(2,712) 406
====== ======= =======
Accrual of dividends on
Series A and B
preferred stock........ (689) (233)
Accretion to redemption
value of redeemable
stock.................. (413) (26)
----------- ----------
Net income (loss)
available for common
stockholders........... $ (6,023) $ 147
=========== ==========
Unaudited pro forma net
income (loss) per share
assuming conversion of
convertible preferred
stock (Note 2)......... $ (0.46) $ 0.03
=========== ==========
Shares used in computing
unaudited pro forma net
income (loss) per
share.................. 10,695,276 12,711,198
=========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE>
PERITUS SOFTWARE SERVICES, INC.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE-RELATED DATA)
<TABLE>
<CAPTION>
CLASS A CLASS B
COMMON STOCK COMMON STOCK TOTAL
----------------- ---------------- RECEIVABLE CUMULATIVE STOCKHOLDERS'
NUMBER NUMBER ACCUMULATED TREASURY FROM TRANSLATION EQUITY
OF SHARES AMOUNT OF SHARES AMOUNT DEFICIT STOCK STOCKHOLDER ADJUSTMENT (DEFICIT)
--------- ------ --------- ------ ----------- -------- ----------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31,
1993................... 4,865,950 $ 428 -- $-- $ 70 $ -- $-- $-- $ 498
Issuance of common
stock.................. 145,375 64 64
Net income.............. 305 305
--------- ------ ------- ---- ------- ----- ---- ---- -------
Balance, December 31,
1994................... 5,011,325 492 -- -- 375 -- -- -- 867
Purchase of 95,537
shares of Class A
common stock for
treasury............... (153) (153)
Issuance of common
stock.................. 4,375 7 7
Sale of common stock
pursuant to employee
stock purchase plan.... 95,537 153 153
Purchase of 625 shares
of Class B common stock
for treasury........... (1) (1)
Effect of accelerating
vesting of certain
common stock options... 36 36
Issuance of common stock
warrants............... 76 76
Sale of common stock
pursuant to
stock agreement........ 512,500 758 758
Sale of common stock
pursuant to exercise of
stock options.......... 1,250 (146) 150 4
Net income.............. 55 55
--------- ------ ------- ---- ------- ----- ---- ---- -------
Balance, December 31,
1995................... 5,525,075 1,216 99,912 160 430 (4) -- -- 1,802
Purchase of 189,588
shares of Class A
common stock for
treasury............... (531) (531)
Issuance of common
stock.................. 431,515 1,027 201 1,228
Exercise of employee
stock options,
including related
receivable
from stockholder....... 36,250 58 (58) --
Effect of accelerating
vesting of certain
common stock options... 118 118
Sale of common stock
pursuant to exercise of
stock options.......... 158,587 118 1,909 5 3 126
Retirement of treasury
stock.................. (117,813) (330) (625) (1) 331 --
Accrual of cumulative
dividends on redeemable
convertible preferred
stock and accretion to
redemption value on
redeemable stock....... (1,102) (1,102)
Cumulative translation
adjustment............. (22) (22)
Net loss................ (4,921) (4,921)
--------- ------ ------- ---- ------- ----- ---- ---- -------
Balance, December 31,
1996................... 6,033,614 2,207 101,196 164 (5,593) -- (58) (22) (3,302)
Sale of common stock
pursuant to exercise of
stock options
(unaudited)............ 122,500 2 2
Accrual of cumulative
dividends on redeemable
convertible preferred
stock and accretion to
redemption value on
redeemable stock
(unaudited)............ (259) (259)
Cumulative translation
adjustment
(unaudited)............ (7) (7)
Net income (unaudited).. 406 406
--------- ------ ------- ---- ------- ----- ---- ---- -------
Balance at March 31,
1997 (unaudited)....... 6,156,114 $2,209 101,196 $164 $(5,446) $ -- $(58) $(29) $(3,160)
========= ====== ======= ==== ======= ===== ==== ==== =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE>
PERITUS SOFTWARE SERVICES, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(IN THOUSANDS, EXCEPT SHARE-RELATED DATA)
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
------------------------- ---------------
INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS 1994 1995 1996 1996 1997
- ------------------------------------ ------- ------- ------- ------- ------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net income (loss)....................... $ 305 $ 55 $(4,921) $(2,712) $ 406
Adjustments to reconcile net income
(loss) to net cash provided by (used
for) operating activities:
Non-cash sale of services and other
non-cash expenses.................... (7) 12 -- -- --
Depreciation and amortization......... 228 443 854 137 262
Minority interest in consolidated
subsidiary........................... -- 43 24 (38) 18
Equity in loss of less than
majority-owned company............... 97 -- -- -- --
Non-cash employee compensation........ 37 83 118 118 --
Changes in assets and liabilities, net
of effects from acquisitions:
Accounts receivable................. (435) (1,354) (1,690) (536) (498)
Costs and estimated earnings in
excess of billings on uncompleted
contracts.......................... (1,061) (1,635) 501 871 233
Unbilled license revenue from
related parties.................... -- -- (1,400) -- 200
Prepaid expenses and other current
assets............................. (22) (218) 184 (45) (119)
Other assets........................ -- -- (7) (29) 17
Accounts payable.................... 202 226 (222) (90) 359
Billings in excess of costs and
earnings on uncompleted contracts.. 201 509 192 (25) 112
Deferred revenue.................... -- -- 3,262 116 (2,356)
Other accrued expenses and current
liabilities........................ 317 732 949 (36) (485)
Deferred income taxes............... 179 7 (186) (57) --
------- ------- ------- ------- ------
Net cash provided by (used for)
operating activities............. 41 (1,097) (2,342) (2,326) (1,851)
------- ------- ------- ------- ------
Cash flows from investing activities:
Acquisition of business for cash, net of
cash acquired.......................... -- (43) -- -- --
Cash of business acquired for common
stock, net of costs paid in cash....... -- -- 174 174 --
Investment in less than majority-owned
company................................ (32) -- -- -- (161)
Partial sale of investment in consoli-
dated subsidiary....................... -- -- 8 -- --
Purchases of property and equipment..... (93) (824) (1,240) (250) (287)
Acquisition of patents.................. -- (105) (1) -- --
------- ------- ------- ------- ------
Net cash used in investing
activities....................... (125) (972) (1,059) (76) (448)
------- ------- ------- ------- ------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<PAGE>
PERITUS SOFTWARE SERVICES, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS--(CONTINUED)
(IN THOUSANDS, EXCEPT SHARE-RELATED DATA)
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED DECEMBER ENDED
31, MARCH 31,
--------------------- ---------------
1994 1995 1996 1996 1997
---- ------ ------- ------ -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from financing activities:
Proceeds from (principal payments on)
short-term borrowings, net........... -- 550 (440) (400) --
Proceeds from long-term debt.......... 500 1,000 450 -- --
Principal payments on long term debt.. (65) (198) (686) (162) (31)
Principal payments on capital lease
obligations.......................... (14) (110) (107) (19) (31)
Proceeds from exercise of stock op-
tions................................ -- 4 126 6 2
Proceeds from sale of common stock
pursuant to purchase agreement....... -- 746 -- -- --
Proceeds from sale of redeemable
convertible preferred stock and
redeemable common stock.............. -- -- 11,184 5,408 --
Proceeds from sale of common stock.... -- 156 500 -- --
Proceeds from sale of subsidiary com-
mon stock............................ -- -- 59 -- --
Treasury stock acquired............... -- (154) (531) (531) --
---- ------ ------- ------ -------
Net cash provided by (used for)
financing activities........... 421 1,994 10,555 4,302 (60)
---- ------ ------- ------ -------
Effects of exchange rates on cash and
cash equivalents....................... -- -- (30) (13) (7)
---- ------ ------- ------ -------
Net increase (decrease) in cash and cash
equivalents............................ 337 (75) 7,124 1,887 (2,366)
Cash and cash equivalents, beginning of
period................................. 2 339 264 264 7,388
---- ------ ------- ------ -------
Cash and cash equivalents, end of peri-
od..................................... $339 $ 264 $ 7,388 $2,151 $ 5,022
==== ====== ======= ====== =======
SUPPLEMENTAL DISCLOSURE OF CASH FLOWS:
Cash paid for income taxes............ $ 11 $ 31 $ -- $ -- $ --
Cash paid for interest................ 57 227 327 60 46
</TABLE>
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
In the years ended December 31, 1994, 1995 and 1996, the Company incurred
capital lease obligations of $52, $399 and $39, respectively.
In the year ended December 31, 1996, the Company issued 280,005 shares of
Class A common stock valued at $728 and paid cash of $87 to acquire all of the
outstanding shares of Vista Technologies Incorporated (Note 3).
In the year ended December 31, 1996, the Company issued 36,250 shares of
common stock to a stockholder in exchange for a note receivable of $58 from
the stockholder.
The accompanying notes are an integral part of these consolidated financial
statements.
F-7
<PAGE>
PERITUS SOFTWARE SERVICES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
1. NATURE OF THE BUSINESS
Peritus Software Services, Inc. (the "Company") was incorporated in
Massachusetts in August, 1991. The Company provides software products and
services that enable organizations to improve the productivity, quality and
effectiveness of their information technology systems maintenance, or
"software evolution," functions.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The consolidated financial statements include the accounts of the Company
and its majority-owned subsidiary, Persist, S.A. ("Persist"), a Spanish
software services entity (Note 3). All significant intercompany balances and
transactions are eliminated.
Revenue Recognition
Revenue associated with performance under contracts to provide outsourced
software maintenance, reengineering and development services is recognized
utilizing the percentage-of-completion method in the ratio that labor-hours
incurred to date bear to estimated total labor-hours at completion, provided
that collection of the related receivable is probable. Adjustments to contract
cost estimates are made in the periods in which the facts which require such
revisions become known. When the revised estimates indicate a loss, such loss
is provided for currently in its entirety. The costs of providing warranties
and follow-on customer support related to services performed are not
significant and have been accrued. Costs and estimated earnings in excess of
billings on uncompleted contracts represent revenue recognized in excess of
amounts billed. Billings in excess of costs and estimated earnings on
uncompleted contracts represent billings in excess of revenue recognized.
Revenue from end-user licenses is recognized when an agreement has been
executed, software and methodologies have been delivered, all significant
contractual obligations have been met and collection of the related receivable
is probable. Revenue from usage-based licenses is recognized when licensed
software has been delivered, the fee is fixed or determinable, all significant
contractual obligations have been met and collection of the related receivable
is probable.
Post contract customer support revenue, including that bundled with initial
license fees, is deferred and recognized ratably over the contractual periods
the services are provided. Revenue from consulting and training services is
recognized as the services are provided.
Significant Customers
Revenue from two customers accounted for 52% and 29% of the Company's total
revenue for the year ended December 31, 1994. Revenue from three customers
accounted for 50%, 13% and 11% of the Company's total revenue for the year
ended December 31, 1995. At December 31, 1995, the Company had amounts
receivable from the first customer, a related party, of $991,000 for billed
accounts receivable and $1,291,000 for costs and estimated earnings in excess
of billings on uncompleted contracts (Note 8). At December 31, 1995, the
Company had amounts receivable from the second customer of $52,000 for billed
accounts receivable and $439,000 for costs and estimated earnings in excess of
billings on uncompleted contracts, and from the third customer of $133,000 for
billed accounts receivable and $856,000 for costs and estimated earnings in
excess of billings on uncompleted contracts.
Revenue from three customers accounted for 29%, 15% and 12% of the Company's
total revenue for the year ended December 31, 1996. At December 31, 1996, the
Company had amounts receivable from the first
F-8
<PAGE>
PERITUS SOFTWARE SERVICES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
customer, a related party, of $123,000 for billed accounts receivable,
$501,000 for costs and estimated earnings in excess of billings on uncompleted
contracts and $1,400,000 for unbilled license revenue (Note 8). At December
31, 1996, the Company had amounts receivable from the second customer of
$115,000 for billed accounts receivable and from the third customer of $17,000
for billed accounts receivable and $797,000 for costs and estimated earnings
in excess of billings on uncompleted contracts.
Concentration of Credit Risk
Financial instruments which potentially expose the Company to concentrations
of credit risk include trade accounts receivable. The Company primarily sells
to Fortune 1000 companies and therefore, generally does not require
collateral. Reserves for potential credit losses are maintained and such
losses, in the aggregate, have not exceeded management's expectations.
Fair Value of Financial Instruments
The Company's financial instruments consist of cash, line of credit
borrowings, demand notes payable, long-term debt and redeemable convertible
preferred stock. The carrying amounts of these instruments at December 31,
1996 approximate their fair values.
Cash and Cash Equivalents
The Company considers all highly liquid debt instruments purchased with an
original maturity of three months or less to be cash equivalents. The Company
invests its excess cash primarily in money market accounts. Accordingly, these
investments are subject to minimal credit and market risk. The Company had no
cash equivalents in any period presented except for the three months ended
March 31, 1997.
Property and Equipment
Property and equipment are stated at cost less accumulated depreciation and
amortization. Depreciation of property and equipment is provided using the
straight-line method over the estimated useful lives of the assets or, where
applicable, over the lease term.
Software Development Costs
The Company capitalizes qualifying software development costs after
technological feasibility of the software has been established. Costs incurred
prior to the completion of a working model, which is the Company's basis for
determining technological feasibility, are charged to research and development
expense. Capitalized software costs are amortized ratably over the estimated
useful life of the software, generally three years, and are charged to cost of
revenue. During the years ended December 31, 1994, 1995 and 1996, costs
subject to capitalization were not significant and therefore, were not
capitalized. At December 31, 1996, the Company had $104,000 in acquired
unamortized capitalized software costs obtained in the Vista Technologies
Incorporated ("Vista") acquisition (Note 3). Amortization expense related to
capitalized software costs for the years ended December 31, 1994 and 1995 was
$63,000 in each year. Amortization expense related to capitalized software
costs for the year ended December 31, 1996 was $108,000, including $45,000
related to the capitalized software acquired from Vista.
Patent Costs
Costs associated with obtaining patents are capitalized as incurred and will
be amortized using the straight-line method over their estimated economic
lives beginning when each patent is issued. Pending such issuance, the Company
did not record amortization expense relating to capitalized patent costs
during the years ended December 31, 1994, 1995 or 1996.
F-9
<PAGE>
PERITUS SOFTWARE SERVICES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Accounting for Impairment of Long-Lived Assets
In accordance with Statement of Financial Accounting Standards No. 121,
"Accounting for the Impairment of Long-Lived Assets and Long-Lived Assets to
be Disposed Of," the Company records impairment losses on long-lived assets
used in operations when indicators of impairment are present and the
undiscounted cash flows estimated to be generated by those assets are less
than the assets' carrying amount. No such significant impairments have
occurred through December 31, 1996.
Foreign Currency
Assets and liabilities of the Company's majority-owned foreign subsidiary
are translated into U.S. dollars at exchange rates in effect at the balance
sheet date. Income and expense items are translated at average exchange rates
for the period. Accumulated net translation adjustments are included in
stockholders' equity.
Accounting for Stock-Based Compensation
Awards under the Company's employee stock option plans are accounted for in
accordance with Accounting Principles Board Opinion No. 25 and related
interpretations ("APB 25"). In January 1996, the Company adopted the
disclosure requirements of Statement of Financial Accounting Standards No.
123, ("SFAS 123"), "Accounting for Stock-Based Compensation" (Note 14).
Unaudited Pro Forma Net Income (Loss) Per Share
Unaudited pro forma net income (loss) per share is determined by dividing
the net income (loss) attributable to common stockholders by the weighted
average number of shares of common stock and common stock equivalents
outstanding during the period, assuming the conversion of all convertible
preferred stock and the redeemable common stock right which will occur upon
the closing of a qualified public offering of the Company's common stock (Note
10).
Pursuant to Securities and Exchange Commission Staff Accounting Bulletin No.
83, common stock equivalents, regardless of their anti-dilutive impact, issued
at prices below the offering price per share during the twelve months
preceding the initial filing of the Company's Registration Statement and
through the effective date of the initial public offering of the Company's
common stock have been included in the calculation of unaudited pro forma net
income (loss) per share using the treasury stock method as if outstanding
since the beginning of each period presented.
Historical net income (loss) per share has not been presented on the basis
that it is irrelevant due to the significant change in the Company's capital
structure and resultant earnings or loss per share which will result upon
conversion of the convertible preferred stock. Supplemental net income (loss)
per share, giving effect to the use of a portion of the net proceeds of this
offering to repay the secured subordinated note payable, is not presented
since it does not differ materially from unaudited pro forma net income (loss)
per share.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make certain 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
reporting period. Areas particularly subject to estimation include revenue
based on percentage-of-completion and the valuation allowance on deferred tax
assets. Actual amounts could differ from those estimates.
F-10
<PAGE>
PERITUS SOFTWARE SERVICES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Interim Financial Data
The interim financial data as of March 31, 1997 and for the three months
ended March 31, 1996 and 1997 are unaudited; however, in the opinion of the
Company, the interim data include all adjustments, consisting only of normal
recurring adjustments, necessary for a fair statement of the financial
position and results of operations for the interim periods. The operating
results for the three months ended March 31, 1997 are not necessarily
indicative of the results to be expected for the full year ending December 31,
1997.
3. ACQUISITIONS
At December 31, 1994, the Company owned a 40% voting interest in Persist, a
Spanish corporation which provides software maintenance services, and used the
equity method to account for the investment. In 1995, the Company made
additional investments in Persist in the form of cash of $11,000 and
forgiveness by the Company of accounts receivable owed by Persist of $180,000,
of which $123,000 related to 1995 billings and $57,000 related to 1994
billings. Consequently, the Company's ownership was increased to approximately
69%, resulting in a change in financial reporting from the equity method to
consolidation beginning January 1, 1995. As a result of equity transactions
during 1996, the Company's ownership was reduced to approximately 64%.
The Persist acquisition was accounted for under the purchase method of
accounting in 1995. Accordingly, the purchase price was allocated based on the
estimated fair value of assets purchased and liabilities assumed upon
acquisition. The excess of cost over the fair value of net assets acquired of
$74,000 is being amortized over five years. The Company's results of
operations for the years ended December 31, 1995 and 1996 include the
operating results of Persist.
In January 1996, the Company issued 280,005 shares of its Class A common
stock valued at $728,000 and incurred $87,000 for transaction costs in
exchange for all of the outstanding shares of Vista. Vista is a developer of
computer-aided engineering software.
The Vista merger has been accounted for under the purchase method.
Accordingly, the purchase price was allocated based on the estimated fair
value of the assets purchased and liabilities assumed upon acquisition. No
value was allocated to in-process research and development. The excess of cost
over fair value of the net assets acquired of $173,000 is being amortized over
three years. Pro forma results of operations have not been presented because
the effect of this acquisition was not significant.
4. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
ESTIMATED
USEFUL LIVES
(YEARS) 1995 1996
------------ ---------- ----------
<S> <C> <C> <C>
Equipment............................... 3-7 $1,369,000 $2,406,000
Furniture and fixtures.................. 5-7 577,000 787,000
Leasehold improvements.................. 5 89,000 149,000
---------- ----------
2,035,000 3,342,000
Less: Accumulated depreciation and amor-
tization............................... 695,000 1,372,000
---------- ----------
$1,340,000 $1,970,000
========== ==========
</TABLE>
Equipment under capital leases at December 31, 1995 and 1996 was $200,000
and $239,000, respectively, with related accumulated depreciation of $72,000
and $151,000, respectively. Furniture and fixtures under capital leases at
December 31, 1995 and 1996 was $271,000, with related accumulated depreciation
of $26,000 and $77,000, respectively. Depreciation expense related to assets
under capital leases was $11,000, $79,000 and
F-11
<PAGE>
PERITUS SOFTWARE SERVICES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
$130,000 for the years ended December 31, 1994, 1995 and 1996, respectively.
Depreciation expense on all fixed assets amounted to $228,000, $376,000 and
$677,000 for the years ended December 31, 1994, 1995 and 1996, respectively.
5. OTHER ACCRUED EXPENSES AND CURRENT LIABILITIES
Other accrued expenses and current liabilities consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1995 1996
---------- ----------
<S> <C> <C>
Accrued bonus and commissions......................... $ 434,000 $1,280,000
Other accrued expenses and current liabilities........ 704,000 807,000
---------- ----------
$1,138,000 $2,087,000
========== ==========
</TABLE>
6. BORROWINGS
Revolving Line of Credit
In September 1996, the Company repaid a revolving line of credit facility
with a bank with proceeds obtained from the Company's new line of credit
described below. The repaid line of credit allowed for a maximum borrowing of
$1,500,000, payable on demand, and would have expired on May 30, 1997.
Interest was payable monthly in arrears at the bank's prime rate plus 1%.
In September 1996, the Company entered into a new revolving line of credit
facility (the "Revolver") with a bank which bears interest at the bank's prime
rate plus 0.5% (8.75% at December 31, 1996). The maximum borrowing under the
Revolver is $3,500,000 and is limited to 75% of certain receivables plus 50%
of costs and estimated earnings in excess of billings as defined in the
Revolver agreement. Borrowings are collateralized by all of the assets of the
Company. Interest is payable monthly in arrears. The Revolver expires and all
outstanding amounts thereunder are payable on June 30, 1997. Under the
Revolver agreement, the Company is required to comply with certain financial
covenants. There were no borrowings outstanding, and $3,500,000 was available,
under the Revolver at December 31, 1996. The Company and the bank are
negotiating an extension of the line of credit agreement beyond June 30, 1997.
Equipment Line of Credit
In September 1996, the Company entered into an equipment financing agreement
(the "Equipment Line") with a bank to provide financing of up to $1,500,000
for the purchase through June 30, 1997 of certain equipment as defined in the
Equipment Line. Ratable principal and interest payments on any borrowings
under the Equipment Line are payable during the period July 1, 1997 through
June 1, 2000. Borrowings under the Equipment Line bear interest at the bank's
prime rate plus 1% (9.25% at December 31, 1996). Borrowings are collateralized
by the assets of the Company. Under the Equipment Line, the Company is
required to comply with certain financial covenants. Borrowings under the
Equipment Line were $619,000, and $825,000 remained available, at December 31,
1996.
Demand Note Payable
In September 1995, the Company obtained $150,000 of financing through a
demand note payable from a bank. Interest was payable monthly in arrears at
the bank's prime rate plus 1.0%. In January 1996, the Company repaid all
outstanding principal and interest on this note.
F-12
<PAGE>
PERITUS SOFTWARE SERVICES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
7. LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1995 1996
---------- ----------
<S> <C> <C>
Notes payable to bank in monthly principal installments
with interest at prime plus 2.5%, due in August 2000
through August 2001, secured by all assets of the
Company, the personal guarantee of the largest
stockholder, and the guarantee of the U.S. Small
Business Administration. These notes were retired in
September 1996......................................... $ 746,000 $ --
Secured subordinated note payable to bank (described
further below), with interest only payable quarterly
through June 30, 1998 at 10% per annum. Beginning
September 30, 1998, principal installments of $63,000
plus interest are payable quarterly through June 30,
2002................................................... 930,000 943,000
Term loan payable to bank in monthly principal
installments of $18,750, with interest at prime plus 1%
(9.25% at December 31, 1996), through September 1999,
secured by all assets of the Company. Under the term
loan, the Company is required to comply with certain
financial covenants. The Company was in violation of
certain of these covenants at December 31, 1996,
however, a waiver of the violations was granted by the
creditor............................................... -- 619,000
---------- ----------
1,676,000 1,562,000
Less--Current portion................................... 115,000 225,000
---------- ----------
$1,561,000 $1,337,000
========== ==========
</TABLE>
Secured Subordinated Note Payable
In May 1995, the Company issued a secured subordinated note payable for
$924,000, having a face value of $1,000,000 with interest payable at 10% per
annum. The note is subordinate to the bank debt and is collateralized by a
second security interest in all assets of the Company. In addition, the note
contains various restrictive covenants including, but not limited to, minimum
earnings and limitations on certain interest coverage, debt and equity ratios.
The Company was in violation of certain of these covenants at December 31,
1995 and 1996, however, a waiver of the violations was granted by the note
holder.
The note also included detachable warrants with an ascribed value of $76,000
for purchase of up to 312,500 shares of common stock for $1.60 per share. The
warrants expire on the later of June 30, 2000 or the repayment of the Note.
The Company has reserved 312,500 shares of common stock in the event of
exercise of the warrants. The warrant value was recorded as a discount from
the face value of the note. Amortization of this discount for the years ended
December 31, 1995 and 1996 was $6,000 and $13,000, respectively, which amounts
are included in interest expense.
F-13
<PAGE>
PERITUS SOFTWARE SERVICES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Maturities
The future aggregate annual principal payments on long-term debt for each of
the years ended December 31 are as follows:
<TABLE>
<S> <C>
1997................................................................. $ 225,000
1998................................................................. 342,000
1999................................................................. 406,000
2000................................................................. 241,000
2001................................................................. 245,000
Thereafter........................................................... 103,000
----------
$1,562,000
==========
</TABLE>
8. RELATED PARTY TRANSACTIONS
For the years ended December 31, 1994, 1995 and 1996, the Company recorded
revenue of $4,070,000, $9,313,000 and $5,579,000, respectively, related to
outsourcing and license agreements with a corporation, Bull HN Information
Systems Inc. ("Bull"), owning 18% of the outstanding stock of the Company at
December 31, 1996. At December 31, 1995 and 1996, $991,000 and $123,000,
respectively, is included in accounts receivable from related parties with
respect to this stockholder, and $1,291,000 and $501,000, respectively, is
included in costs and estimated earnings in excess of billings on uncompleted
contracts with related parties; also, at December 31, 1996, $1,400,000 is
included in unbilled license revenue. Bull also had certain stock purchase
rights (Note 17).
For the years ended December 31, 1994, 1995 and 1996, the Company recorded
revenue of $111,000, $402,000 and $137,000, respectively, related to software
services to a customer. A director of the Company was also an officer and
director of the customer from 1994 through 1996.
For the years ended December 31, 1994, 1995 and 1996, the Company recorded
revenue of $162,000, $1,717,000 and $1,501,000, respectively, related to
software services and licensing to a customer. An employee and officer of the
Company, hired in September 1996, was previously employed by the customer as
an employee and officer until August 1996.
For the year ended December 31, 1996, the Company recorded license revenue
of $190,000 from a customer. An employee and officer of the Company, hired in
December 1996, was previously employed by the customer as an employee and
officer until December 1996.
The Company had an unsecured note payable with a balance outstanding at
December 31, 1994 of $62,000 due to an entity whose principal owner is a
stockholder of the Company. In addition, the Company had an unsecured note
payable with a balance of $34,000 due to its largest stockholder. Each note
incurred interest at 7%. On July 1, 1995, the Company repaid all outstanding
principal and interest on these notes.
During the year ended December 31, 1996, Persist recorded revenue of
$776,000 related to outsourcing services to a corporation owning 27% of the
outstanding stock of Persist at December 31, 1996 (Note 3). During the year
ended December 31, 1994, the Company recorded revenue of $71,000 related to
consulting work performed on behalf of Persist, 40% of which was owned at that
time by the Company (Note 3).
In February 1996, the Company accepted a $58,000 note receivable from an
employee of the Company in connection with the exercise of employee stock
options. This note matures on February 6, 2001, and is secured by the assets
of the now former employee. Interest is payable quarterly in arrears and
accrues on all outstanding principal plus previously accrued but unpaid
interest at the prime rate.
F-14
<PAGE>
PERITUS SOFTWARE SERVICES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
9. INCOME TAXES
The components of income (loss) before income taxes are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------
1994 1995 1996
-------- -------- -----------
<S> <C> <C> <C>
Domestic..................................... $581,000 $(45,000) $(5,141,000)
Foreign...................................... -- 135,000 101,000
-------- -------- -----------
$581,000 $ 90,000 $(5,040,000)
======== ======== ===========
</TABLE>
The provision (benefit) for estimated income taxes consists of the following:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------
1994 1995 1996
-------- -------- -----------
<S> <C> <C> <C>
Current:
Federal.................................... $ -- $(14,000) $ --
State...................................... -- (1,000) --
Foreign.................................... -- -- 43,000
-------- -------- -----------
-- (15,000) 43,000
-------- -------- -----------
Deferred:
Federal.................................... $147,000 $ 3,000 $(1,798,000)
State...................................... 32,000 4,000 (435,000)
-------- -------- -----------
179,000 7,000 (2,233,000)
Deferred tax asset valuation allowance...... -- -- 2,047,000
-------- -------- -----------
179,000 7,000 (186,000)
-------- -------- -----------
$179,000 $ (8,000) $ (143,000)
======== ======== ===========
</TABLE>
No current federal or state income taxes were payable in the years ended
December 31, 1994, 1995 and 1996 as a result of losses incurred.
The components of deferred tax assets and liabilities follow:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1995 1996
--------- -----------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards................... $ 423,000 $ 2,641,000
Tax credit carryforwards........................... 102,000 531,000
Deferred revenue................................... -- 238,000
Nondeductible accrued expenses..................... 51,000 64,000
Unexercised stock options.......................... 56,000 56,000
Other.............................................. 44,000 11,000
--------- -----------
Gross deferred tax assets........................... 676,000 3,541,000
--------- -----------
Deferred tax liabilities:
Estimated earnings on uncompleted contracts........ (862,000) (1,317,000)
Capitalized research and development costs, net.... -- (46,000)
--------- -----------
Gross deferred tax liabilities..................... (862,000) (1,363,000)
--------- -----------
Net deferred tax (liabilities) assets............... (186,000) 2,178,000
Deferred tax asset valuation allowance.............. -- (2,178,000)
--------- -----------
$(186,000) $ --
========= ===========
</TABLE>
F-15
<PAGE>
PERITUS SOFTWARE SERVICES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
A reconciliation between the amount of reported income tax provision
(benefit) and the amount determined by applying the U.S. federal statutory
rate of 34% to the income (loss) before income taxes, minority interest and
equity in loss of less than majority owned company follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1994 1995 1996
-------- -------- -----------
<S> <C> <C> <C>
Income (loss) at statutory rate........... $198,000 $ 31,000 $(1,699,000)
Federal research and development credits.. -- (53,000) (251,000)
Income (losses) of foreign subsidiary not
subject to taxation...................... (36,000) 13,000 --
Permanent differences and other, net...... (4,000) (3,000) 70,000
State tax benefit, net of federal effect.. 21,000 4,000 (310,000)
Change in deferred tax asset valuation
allowance................................ -- -- 2,047,000
-------- -------- -----------
$179,000 $ (8,000) $ (143,000)
======== ======== ===========
</TABLE>
At December 31, 1996, the Company has provided a valuation allowance for the
full amount of the net deferred tax assets, since the realization of these
future benefits is not sufficiently assured. If the Company achieves
profitability, these deferred tax assets may be available to offset future
income tax liabilities and expense.
At December 31, 1996, the Company had available net operating loss
carryforwards of approximately $6,659,000 and $6,286,000 for federal and state
income tax reporting purposes, respectively. At December 31, 1996, the Company
had research and development credit carryforwards of $186,000 and $171,000
available to offset future federal tax and state tax, respectively. The
Company also has federal foreign tax credit carryforwards of $175,000. These
carryforwards will expire in the years 1999 through 2011 if not utilized.
In accordance with certain provisions of the Internal Revenue Code, a change
in ownership of greater than 50% within a three-year period will place an
annual limitation on the Company's ability to utilize its existing federal net
operating loss and research and development tax credit carryforwards. The
change in ownership that may result from an initial public offering could
result in such a limitation.
10. REDEEMABLE CONVERTIBLE PREFERRED STOCK
Issuances
During March and October 1996, the Company issued 1,903,525 shares of Series
A redeemable convertible preferred stock and 1,818,182 shares of Series B
redeemable convertible preferred stock ("Series A and B preferred stock") for
cash proceeds of $5,207,000 and $5,776,000, respectively, net of issuance
costs of $123,000 and $224,000, respectively.
Conversion
Each preferred share is convertible into one common share at the option of
the preferred stockholder or automatically upon the closing of an initial
public offering of the Company's common stock in which proceeds from the
public equal or exceed $15,000,000.
At December 31, 1996, Series A and B preferred stock are convertible into a
total of 3,721,707 common shares. The conversion rates are to be adjusted for
certain dilutive and anti-dilutive events. The Company has reserved 1,903,525
and 1,818,182 shares of common stock for the conversion of Series A and B
preferred stock, respectively.
F-16
<PAGE>
PERITUS SOFTWARE SERVICES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Liquidation
In the event of any liquidation, dissolution or winding up of the Company,
the holders of Series A and B preferred stock are entitled to receive, on a
pro-rata basis, $3.825 and $3.30 per share, plus all accrued and unpaid
dividends, respectively.
Voting
The holders of Series A and B preferred stock are entitled to vote, together
with the holders of common stock on all matters submitted to stockholders for
a vote. Each preferred stockholder is entitled to the number of votes equal to
the number of shares of common stock into which each Series A and B share is
convertible at the time of such vote.
Dividends
The holders of the Series A and B preferred stock are entitled to receive
cumulative annual dividends in the amount of $0.3825 and $0.33 per share plus
10% of previously accrued and unpaid dividends, respectively, whether or not
declared by the Board of Directors. These dividends are payable upon
liquidation, dissolution or winding-up of the Company, or upon redemption of
the respective preferred stock. Cumulative and unpaid dividends on the Series
A and B preferred stock at December 31, 1996 were $582,000 and $107,000,
respectively.
Redemption
On each of the fifth, sixth and seventh anniversaries of the applicable
series closing date, the Company is required to redeem 33 1/3 percent of the
Series A and B preferred stock at a redemption price equal to $2.80 and $3.30
per share, respectively, plus accrued and unpaid dividends through the
redemption date. During 1996, the Company recorded a charge to accumulated
deficit of $347,000 to reflect the accretion of Series A and B preferred stock
to redemption value. The carrying value of the Series A and B preferred stock
reflects the original issuance price, net of issuance costs, plus accrued and
unpaid dividends and accretion to redemption value.
Redeemable Common Stock Right
In connection with the 1996 issuance of Series A preferred stock, the
Company sold from treasury 71,775 shares of its Class A common stock to
certain purchasers of the Series A preferred stock for cash proceeds of
$201,000. Also in connection with this issuance, an officer of the Company
sold 625,000 shares of the Company's Class A common stock to certain
purchasers of the Series A preferred stock. In conjunction with any redemption
of the Series A preferred stock, the holders of the Series A preferred stock
must redeem, at a redemption price equal to $2.80 per share, 0.366 shares of
Class A common stock for each redeemed share of the Series A preferred stock.
The Company incurred during 1996 a charge to accumulated deficit of $66,000 to
reflect the accretion of this Class A common stock to redemption value. The
carrying value of the redeemable common stock right reflects the cash proceeds
to the Company for the underlying Class A common stock, plus accretion to
redemption value.
Future Redemptions
Required redemption amounts for the Series A and B preferred stock and the
redeemable common stock right, excluding any cumulative and unpaid dividends,
are as follows:
<TABLE>
<CAPTION>
REDEMPTION
YEAR AMOUNT
---- ----------
<S> <C>
2001........................................................... $4,427,000
2002........................................................... 4,427,000
2003........................................................... 4,427,000
</TABLE>
F-17
<PAGE>
PERITUS SOFTWARE SERVICES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Unaudited Pro Forma Balance Sheet
Upon the closing of the Company's initial public offering, all of the
outstanding shares of Series A and B preferred stock will automatically
convert into 3,721,707 shares of common stock. In addition, the redeemable
common stock right also automatically terminates upon the closing of the
Company's initial public offering, as its redemption feature is directly
associated to the redemption of the Series A preferred stock. These
conversions have been reflected in the unaudited pro forma balance sheet as of
March 31, 1997.
In connection with the initial public offering, the Company expects to file
Articles of Amendment to the Articles of Organization which will (i) authorize
50,000,000 shares of common stock, $.01 par value, (ii) authorize 5,000,000
shares of Preferred Stock, $.01 par value, under terms that allow the Board of
Directors to designate one or more classes of preferred stock and to designate
rights, privileges, preferences and limitations of each class, and (iii)
redesignate each share of its Class A common stock into one share of Common
Stock. The effects of this amendment to the Articles of Organization have been
reflected in the unaudited pro forma balance sheet as of March 31, 1997.
11. COMMON STOCK
In April and March 1995, the Company amended its Articles of Organization to
create two classes of common stock, Class A and Class B, with 6,250,000 and
100,000 shares authorized, respectively. Class A and Class B shares maintain
identical rights in all respects except that Class B shares are non-voting and
convert to Class A common stock upon the closing of an initial public offering
with proceeds greater than $10,000,000. Upon adoption of the amended Articles
of Organization, each share of common stock then outstanding was converted to
one share of Class A common stock.
In March 1996, the Company effected a two-and-one-half-for-one stock split
of the Company's Class A and Class B common stock in the form of a 150% stock
dividend. Share amounts in these financial statements have been retroactively
adjusted to reflect this stock split.
On December 31, 1996, the Company retired all Class A and Class B common
stock remaining in treasury as a result of various previous repurchases.
12. DIRECTOR STOCK OPTION PLAN
In May 1997, the Board of Directors authorized the 1997 Director Stock
Option Plan (the "Director Plan"). The Director Plan authorizes the grant of
up to 200,000 options to purchase Common Stock of the Company. Under the
Director Plan, each non-employee director of the Company at the time of the
effective date of the Company's initial public offering will receive options
to purchase 15,000 shares of common stock. Any director elected after the
Company's initial public offering will receive an option to purchase 15,000
shares of the Company's common stock upon his or her election to the Board of
Directors. In addition, each director will receive an option to purchase 3,000
shares of the Company's common stock at each annual meeting of the
stockholders beginning with the 1998 annual meeting. All option grants made
under the Director Plan have exercise prices equivalent to the fair market
value on the date grant, and will vest in three annual installments beginning
on the anniversary date of the grant, so long as the optionee remains a
director of the Company.
13. EMPLOYEE STOCK PURCHASE PLANS
In February 1995, the Company adopted the 1995 Employee Stock Purchase Plan
("1995 Plan") for all employees of the Company. The 1995 Plan allows for the
repurchase of up to 100,000 shares of Class A voting common stock from
existing stockholders at $1.60 per share and the subsequent issuance of Class
B non-voting
F-18
<PAGE>
PERITUS SOFTWARE SERVICES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
common stock. In March 1995, the Company repurchased 95,537 shares of Class A
common stock from existing shareholders at $1.60 per share and maintained
these shares in treasury at cost. In order to provide substantially all
employees an opportunity for equity participation, the Company then sold
95,537 shares of Class B common stock at $1.60 per share to those employees
electing to subscribe. The 1995 Plan was no longer effective at December 31,
1995.
In May 1997, the Board of Directors authorized the 1997 Employee Stock
Purchase Plan (the "1997 Plan"). The 1997 Plan authorizes the issuance of up
to 200,000 shares of the Company's common stock to eligible employees. Under
the 1997 Plan, the Company is authorized to make four consecutive six month
offerings during which employees may purchase shares of the Company's common
stock through payroll deductions made over the term of the offering. The per
share purchase price of each offering is equal to the lesser of 85% of the
fair market value at the beginning or end of the offering period (as defined
by the 1997 Plan). The first offering period will commence on October 1, 1997.
14. LONG TERM INCENTIVE PLAN
In January 1992, the Board of Directors established a Long Term Incentive
Plan (the "Plan") which allows for the grant of awards in the form of
incentive and non-qualified stock options, stock units, restricted common
stock and stock appreciation rights to employees, directors, independent
contractors and consultants. In 1996, the Board of Directors authorized the
issuance of both Class A and Class B common stock under the Plan. The total
number of shares which have been reserved under the Plan is 3,388,820,
comprised of 3,046,695 shares of Class A and 342,145 shares of Class B common
stock. Incentive stock options are granted at an exercise price equal to the
fair market value of the Company's common stock as determined by the Board of
Directors at the grant date (or no less than 110% of the fair market value in
the case of optionees holding more than 10% of the voting stock of the
Company) and expire 10 years from the date of grant or upon termination of
employment. Non-qualified stock options are granted at an exercise price
determined by the Board of Directors and expire 10 years from the date of
grant. Both the incentive and non-qualified stock options are exercisable at
various dates as determined by the Board of Directors. At December 31, 1995
and 1996, no stock units, restricted stock or stock appreciation rights were
issued under the Plan. In May 1997, the Board of Directors authorized the 1997
Stock Incentive Plan (the "Incentive Plan"). The Incentive Plan is intended to
replace the Company's Long Term Incentive Plan and provides for the issuance
of up to 1,950,000 shares of Common Stock.
Transactions for stock options under the Plan during the years ended
December 31, 1994, 1995 and 1996 and the three months ended March 31, 1997 are
summarized as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------------------------
THREE MONTHS ENDED
1994 1995 1996 MARCH 31, 1997
------------------- ------------------- ------------------- -------------------
WEIGHTED WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE SHARES PRICE
--------- -------- --------- -------- --------- -------- --------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Outstanding at beginning
of period.............. 1,071,575 $0.10 1,356,700 $0.23 1,606,025 $0.64 2,925,667 $1.88
Granted................. 297,875 0.72 455,250 1.96 1,558,292 3.04 255,000 5.67
Exercised............... -- -- (95,000) 0.05 (198,533) 0.92 (122,500) 0.01
Forfeited............... (12,750) 0.08 (110,925) 1.58 (40,117) 1.20 (1,923) 2.60
--------- --------- --------- ---------
Outstanding at end of
period................. 1,356,700 0.23 1,606,025 0.64 2,925,667 1.88 3,056,244 2.27
========= ========= ========= =========
Options exercisable at
end of period.......... 454,927 0.07 692,462 0.21 1,030,036 0.47 982,991 0.75
========= ========= ========= =========
</TABLE>
F-19
<PAGE>
PERITUS SOFTWARE SERVICES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The following summarizes information regarding stock options outstanding
under the Plan at December 31, 1996:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
---------------------------------
WEIGHTED
AVERAGE WEIGHTED
REMAINING AVERAGE
NUMBER CONTRACTUAL EXERCISE
RANGE OF EXERCISE PRICES OUTSTANDING LIFE (YEARS) PRICE
------------------------ ----------- ------------ --------
<S> <C> <C> <C>
$0.01-0.10............................... 675,875 5.9 $0.07
0.15-0.24............................... 174,075 6.5 0.23
0.48-0.80............................... 291,900 7.5 0.66
1.60.................................... 93,750 8.2 1.60
2.60-3.30............................... 1,690,067 9.8 3.00
---------
2,925,667 1.88
=========
</TABLE>
<TABLE>
<CAPTION>
OPTIONS EXERCISABLE
---------------------------------
WEIGHTED
AVERAGE WEIGHTED
REMAINING AVERAGE
NUMBER CONTRACTUAL EXERCISE
RANGE OF EXERCISE PRICES EXERCISABLE LIFE (YEARS) PRICE
------------------------ ----------- ------------ --------
<S> <C> <C> <C>
$0.01-0.10............................... 577,125 5.8 $0.07
0.15-0.24............................... 174,075 6.5 0.23
0.48-0.80............................... 155,888 7.5 0.65
1.60.................................... 28,125 8.1 1.60
2.60-3.30............................... 94,823 9.3 2.70
---------
1,030,036 0.47
=========
</TABLE>
The following summarizes information regarding stock options outstanding
under the Plan at March 31, 1997 (unaudited):
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
---------------------------------
WEIGHTED
AVERAGE WEIGHTED
REMAINING AVERAGE
NUMBER CONTRACTUAL EXERCISE
RANGE OF EXERCISE PRICES OUTSTANDING LIFE (YEARS) PRICE
------------------------ ----------- ------------ --------
<S> <C> <C> <C>
$0.01-0.10............................... 553,375 5.6 $0.08
0.15-0.24............................... 174,075 6.2 0.23
0.48-0.80............................... 291,900 7.2 0.66
1.60.................................... 93,750 7.9 1.60
2.60-3.30............................... 1,693,144 9.5 3.00
4.65.................................... 175,000 9.8 4.65
8.20.................................... 75,000 9.8 8.20
---------
3,056,244 2.27
=========
</TABLE>
F-20
<PAGE>
PERITUS SOFTWARE SERVICES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
<TABLE>
<CAPTION>
OPTIONS EXERCISABLE
---------------------------------
WEIGHTED
AVERAGE WEIGHTED
REMAINING AVERAGE
NUMBER CONTRACTUAL EXERCISE
RANGE OF EXERCISE PRICES EXERCISABLE LIFE (YEARS) PRICE
------------------------ ----------- ------------ --------
<S> <C> <C> <C>
$0.01-0.10............................... 454,625 5.5 $0.08
0.15-0.24............................... 174,075 6.2 0.23
0.48-0.80............................... 167,644 7.2 0.66
1.60.................................... 40,625 7.8 1.60
2.60-3.30............................... 102,272 9.0 2.70
4.65.................................... 43,750 9.8 4.65
8.20.................................... -- 9.8 --
-------
982,991 0.75
=======
</TABLE>
In accordance with APB 25, the Company recognized $83,000 and $118,000 in
compensation expense under the Plan for the years ended December 31, 1995 and
1996, respectively. Had compensation cost for the Plan been determined based
upon the fair value of options at their grant dates, as prescribed in SFAS
123, the Company's net income (loss) would have been as follows:
<TABLE>
<CAPTION>
YEAR ENDED THREE MONTHS ENDED
DECEMBER 31, MARCH 31, 1997
------------------- ------------------
1995 1996
------- ----------- (UNAUDITED)
<S> <C> <C> <C>
As reported.......................... $55,000 $(4,921,000) $406,000
Pro forma............................ 36,000 (5,049,539) 196,000
</TABLE>
The fair value of options at date of grant was estimated using the minimum
value method with the following weighted average assumptions:
<TABLE>
<CAPTION>
YEAR ENDED THREE MONTHS ENDED
DECEMBER 31, MARCH 31, 1997
-------------- ------------------
1995 1996
------ ------ (UNAUDITED)
<S> <C> <C> <C>
Expected life (years).................... 5 5 5
Risk-free interest rate.................. 7.37% 6.25% 6.20%
Dividend yield........................... 0% 0% 0%
Fair value of option grants--exercise
price equal to the fair value of the
related stock........................... $ 0.35 $ 0.52 $1.88
Fair value of option grants--exercise
price less than the fair value of the
related stock........................... $ 0.14 $ -- $ --
</TABLE>
Because options vest over several years and additional option grants are
expected to be made in future years, the above pro forma results applying the
provisions of SFAS 123 are not representative of pro forma results for future
years.
15. DEFINED CONTRIBUTION PLAN
The Company maintains a defined contribution plan under Section 401(k) of
the Internal Revenue Code covering substantially all employees. Under the
plan, employees may contribute the lower of up to 20% of their salaries or a
dollar amount prescribed by the Internal Revenue Code. The Board of Directors
may elect to make a discretionary contribution to the plan. Vesting with
respect to the Company's discretionary contribution occurs four years from the
date the employee is admitted to the plan. There were no contributions made by
the Company to the Plan during the years ended December 31, 1994, 1995 and
1996.
F-21
<PAGE>
PERITUS SOFTWARE SERVICES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
16. INDUSTRY SEGMENT AND GEOGRAPHIC INFORMATION
The Company operates in a single industry segment: software maintenance,
tools and services.
The Company operates in diverse geographic areas. Intercompany sales and
transfers between geographical areas are accounted for at prices which are
designed to be representative of unaffiliated party transactions. Information
by geographic area at December 31, 1995 and 1996, and for the years then
ended, is summarized below; the Company operated only in North America during
the year ended December 31, 1994.
<TABLE>
<CAPTION>
GEOGRAPHIC AREAS
------------------------
NORTH AMERICA EUROPE ELIMINATIONS TOTAL
------------- ---------- ------------ -----------
<S> <C> <C> <C> <C>
1995
Revenue to unaffiliated
customers................. $17,426,000 $1,079,000 $ -- $18,505,000
Intercompany revenue....... 159,000 -- (159,000) --
----------- ---------- --------- -----------
Total revenue............ 17,585,000 1,079,000 (159,000) 18,505,000
Income from operations..... 164,000 129,000 -- 293,000
Identifiable assets........ 6,977,000 430,000 (228,000) 7,179,000
Capital expenditures....... 804,000 20,000 -- 824,000
Depreciation and
amortization.............. 441,000 2,000 -- 443,000
1996
Revenue to unaffiliated
customers................. $17,435,000 $1,800,000 $ -- $19,235,000
Intercompany revenue....... -- 84,000 (84,000) --
----------- ---------- --------- -----------
Total revenue............ 17,435,000 1,884,000 (84,000) 19,235,000
Income (loss) from
operations................ (4,821,000) 77,000 -- (4,744,000)
Identifiable assets........ 16,635,000 1,575,000 (485,000) 17,725,000
Capital expenditures....... 1,227,000 13,000 -- 1,240,000
Depreciation and
amortization.............. 850,000 4,000 -- 854,000
</TABLE>
17. COMMITMENTS
Stock Purchase Agreement
Pursuant to a stock purchase agreement between a stockholder, Bull (the
Company's largest customer--Note 8), and the Company dated May 29, 1992, and a
follow-on agreement dated September 1, 1994, the Company granted to the
stockholder certain rights and privileges. Among these is the right of first
refusal to purchase a pro rata portion of any new securities issued by the
Company through the date of closing of the first public offering of the
Company's common stock, the right of first refusal to acquire a majority
voting interest in the Company should any third party seek to acquire such an
interest during the period through September 1, 1999, an option to purchase up
to 15% of the authorized common shares of the Company before December 31, 1995
at a price not to exceed $1.48 per share, and the right to purchase at the
then fair market value a greater than 15% voting interest if the Company
grants to any third party the right to acquire such an interest during the
period through September 1, 1999. Under this agreement, in October 1995, the
stockholder acquired 512,500 shares of Class A common stock at $1.48 per share
resulting in proceeds, net of interest costs of $12,000, of $746,000 to
increase their interest in the Company at that time to 15% of the authorized
shares.
F-22
<PAGE>
PERITUS SOFTWARE SERVICES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Operating and Capital Leases
The Company leases its operating facilities and certain equipment under
noncancelable operating and capital lease agreements. Rent expense for the
years ended December 31, 1994, 1995 and 1996 was $282,000, $839,000 and
$999,000, respectively. Future minimum lease payments under noncancelable
leases as of December 31, 1996 are as follows:
<TABLE>
<CAPTION>
YEAR ENDING OPERATING CAPITAL
DECEMBER 31, LEASES LEASES
------------ ---------- --------
<S> <C> <C>
1997.................................................... $1,022,000 $ 94,000
1998.................................................... 952,000 73,000
1999.................................................... 51,000 133,000
2000.................................................... -- 9,000
2001.................................................... -- 6,000
---------- --------
$2,025,000 315,000
==========
Less--Amount representing interest...................... 40,000
--------
Present value of minimum lease payments................. $275,000
========
</TABLE>
F-23
<PAGE>
================================================================================
No dealer, sales representative or any other person has been authorized to
give any information or to make any representations in connection with this
offering other than those contained in this Prospectus, and, if given or made,
such information or representations must not be relied upon as having been
authorized by the Company or the Underwriters. This Prospectus does not
constitute an offer to sell or a solicitation of an offer to buy any
securities other than the shares of Common Stock to which it relates or an
offer to, or a solicitation of, any person in any jurisdiction where such an
offer or solicitation would be unlawful. Neither the delivery of this
Prospectus nor any sale made hereunder shall, under any circumstances, create
any implication that there has been no change in the affairs of the Company or
that the information contained herein is correct as of any time subsequent to
the date hereof.
-------------------
TABLE OF CONTENTS
-------------------
<TABLE>
<CAPTION>
Page
----
<S> <C>
Prospectus Summary....................................................... 3
Risk Factors............................................................. 7
Use of Proceeds.......................................................... 17
Dividend Policy.......................................................... 17
Capitalization........................................................... 18
Dilution................................................................. 19
Selected Consolidated Financial Data..................................... 20
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 21
Business................................................................. 33
Management............................................................... 47
Certain Transactions..................................................... 56
Principal and Selling Stockholders....................................... 60
Description of Capital Stock............................................. 62
Shares Eligible for Future Sale.......................................... 65
Underwriting............................................................. 67
Legal Matters............................................................ 68
Experts.................................................................. 68
Additional Information................................................... 69
Index to Consolidated Financial Statements............................... F-1
</TABLE>
-------------------
Until , 1997 (25 days after the date of this Prospectus), all dealers
effecting transactions in the registered securities, whether or not
participating in this distribution, may be required to deliver a Prospectus.
This is in addition to the obligation of dealers to deliver a Prospectus when
acting as Underwriters and with respect to their unsold allotments or
subscriptions.
================================================================================
================================================================================
3,500,000 SHARES
[LOGO OF PERITUS SOFTWARE APPEARS HERE]
COMMON STOCK
---------------
PROSPECTUS
---------------
Montgomery Securities
Wessels, Arnold &
Henderson
H.C. Wainwright & Co., Inc.
, 1997
================================================================================
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the various expenses, all of which will be
borne by the Registrant, in connection with the sale and distribution of the
securities being registered, other than the underwriting discounts and
commissions. All amounts shown are estimates except for the Securities and
Exchange Commission registration fee and the NASD filing fee.
<TABLE>
<S> <C>
SEC registration fee............................................ $ 15,056
NASD filing fee................................................. 5,468
Nasdaq National Market listing fee.............................. 50,000
Blue Sky fees and expenses...................................... 15,000
Transfer Agent and Registrar fees............................... 10,000
Accounting fees and expenses.................................... 200,000
Legal fees and expenses......................................... 250,000
Director and Officer Liability Insurance........................ 200,000
Printing and mailing expenses................................... 100,000
Miscellaneous................................................... 29,476
--------
Total....................................................... $875,000
========
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 67 of Chapter 156B of the Massachusetts General Laws ("Section 67")
provides that a corporation may indemnify its directors and officers to the
extent specified in or authorized by (i) the articles of organization, (ii) a
by-law adopted by the stockholders or (iii) a vote adopted by the holders of a
majority of the shares of stock entitled to vote on the election of directors.
In all instances, the extent to which a corporation provides indemnification
to its directors and officers under Section 67 is optional. In its Articles of
Organization, the Registrant has elected to commit to provide indemnification
to its directors and officers in specified circumstances. Generally, Article 6
of the Registrant's Articles of Organization indemnifies directors and
officers of the Registrant against liabilities and expenses arising out of
legal proceedings brought against them by reason of their status or service as
directors or officers or by reason of their agreeing to serve, at the request
of the Registrant, as a director or officer of, or in a similar capacity with,
another organization or in any capacity with respect to any employee benefit
plan of the Registrant. Under this provision, a director or officer of the
Registrant shall be indemnified by the Registrant for all expenses, judgments,
fines and amounts paid in settlement of such proceedings, even if he or she is
not successful on the merits, if he or she acted in good faith and in a manner
he or she reasonably believed to be in the best interests of the Registrant.
The Registrant's Articles of Organization establish the presumption that the
director or officer has met the applicable standard of conduct required for
indemnification. The indemnification above shall be made unless the Registrant
determines that the applicable standard of conduct has not been met. Such a
determination may be made by a majority of a quorum of the directors,
independent legal counsel, a court of competent jurisdiction or a majority
vote of a quorum of the outstanding shares of stock (which quorum shall
consist of stockholders who are not parties to the suit). The Board of
Directors shall authorize advancing litigation expenses to a director or
officer at his request upon receipt of an undertaking by such director or
officer to repay such expenses if it is ultimately determined that he or she
is not entitled to indemnification for such expenses.
The Registrant's Articles of Organization also provide that, in the event of
a determination by the Registrant that a director or officer did not meet the
standard of conduct required for indemnification, or if the Registrant fails
to make an indemnification payment or an advance of expenses within 60 days
after such payment is claimed by a director or officer, such director or
officer may petition a court to make an independent determination of whether
such director or officer is entitled to indemnification. The Registrant's
Articles of Organization explicitly provide for partial indemnification of
costs and expenses in the event that a director of officer is not entitled to
full indemnification.
II-1
<PAGE>
Article 6 of the Registrant's Articles of Organization also eliminates the
personal liability of the Registrant's directors to the Registrant or its
stockholders for monetary damages for breach of a director's fiduciary duty,
except to the extent such elimination or limitation is prohibited by Chapter
156B of the Massachusetts General Laws.
The Registrant has purchased and maintains insurance coverage under a policy
insuring directors and officers of the Registrant against certain liabilities
which they may incur as directors or officers of the Registrant.
Under Section 8 of the Underwriting Agreement, the Underwriters are
obligated, under certain circumstances, to indemnify directors and officers of
the Registrant against certain liabilities, including liabilities under the
Securities Act. Reference is made to the form of Underwriting Agreement filed
as Exhibit 1 hereto.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
Set forth in chronological order is information regarding the number of
shares of Common Stock and Preferred Stock issued, and the number of options
granted, by the Registrant since April 1994. All numbers relating to shares of
Common Stock reflect (i) a two-and-one-half-for-one split effective March 15,
1996, (ii) the redesignation of the Registrant's Class A Voting Common Stock
as Common Stock prior to the effective date of this Registration Statement and
(iii) the conversion of the Registrant's Class B Non-Voting Common Stock into
Common Stock upon the closing of the Registrant's initial public offering.
Further included is the consideration, if any, received by the Registrant for
such shares and options and information relating to the section of the
Securities Act of 1933, as amended (the "Securities Act"), or rule of the
Securities and Exchange Commission under which exemption from registration was
claimed.
1. On April 25, 1995, the Registrant issued an aggregate of 95,537 shares of
Common Stock at a purchase price per share of $1.60 to certain of its
employees in connection with the Registrant's 1995 Employee Stock Purchase
Plan.
2. On May 30, 1995, the Registrant issued a warrant to purchase 312,500
shares of Common Stock for an aggregate exercise price of $500,000 to
Massachusetts Capital Resource Company.
3. On October 31, 1995, the Registrant issued 512,500 shares of Common Stock
to Bull HN Information Systems Inc. for an aggregate purchase price of
$758,500.
4. On January 29, 1996, the Registrant issued 280,005 shares of its Common
Stock valued at $728,000 to certain stockholders of Vista Technologies
Incorporated ("Vista") in connection with an Agreement and Plan of Merger
entered into between the Registrant and Vista.
5. On March 15, 1996, the Registrant issued an aggregate of 1,903,525 shares
of Series A Convertible Preferred Stock for an aggregate consideration of
$5,329,870 to the following investors: (i) Matrix Partners IV, L.P., (ii)
Matrix IV Entrepreneurs Fund, L.P., (iii) Greylock Equity Limited Partnership,
(iv) Massachusetts Capital Resource Company, (v) Wendy Caplan, (vi) Thomas
Deary and Therese Deary, (vii) James Carroll and Mary Carroll, (viii) Arthur
Carr and (ix) Michael Deary and Lauri Deary.
6. On March 15, 1996, the Registrant issued 71,775 shares of Common Stock
for consideration of $200,970 to Massachusetts Capital Resource Company.
7. On October 28, 1996, the Registrant issued an aggregate of 1,818,182
shares of Series B Convertible Preferred Stock to 25 investors for aggregate
consideration of $6,000,000.
8. On December 30, 1996, the Registrant issued 151,515 shares of Common
Stock to Douglas A. Catalano at a price per share of $3.30 pursuant to an
Employment Agreement, dated December 30, 1996, between the Registrant and Mr.
Catalano.
II-2
<PAGE>
9. During 1994, 1995, 1996 and the four months ended April 30, 1997, the
Registrant granted, pursuant to its 1992 Long-Term Incentive Plan, options to
purchase an aggregate of 2,566,417 shares of Common Stock at various exercise
prices ranging from $0.48 to $8.20 per share to certain employees of the
Registrant. These options were granted pursuant to option agreements subject
to certain vesting requirements.
As of June 30, 1997, options to purchase 3,012,957 shares of Common Stock
granted by the Registrant pursuant to the 1992 Long-Term Incentive Plan were
outstanding.
The Registrant's 1997 Stock Incentive Plan, 1997 Employee Stock Purchase
Plan and 1997 Director Stock Option Plan were adopted by the Board of
Directors and approved by the stockholders of the Company in May 1997. As of
June 30, 1997, options to purchase an aggregate of 469,500 shares of Common
Stock at an exercise price of $10.00 per share had been granted under these
plans.
The securities issued in the foregoing transactions were either (i) offered
and sold in reliance upon exemptions from Securities Act registration set
forth in Sections 3(b) and 4(2) of the Securities Act, or any regulations
promulgated thereunder, relating to sales by an issuer not involving any
public offering, or (ii) in the case of certain options to purchase shares of
Common Stock and shares of Common Stock issued upon the exercise of such
options, such offers and sales were made in reliance upon an exemption from
registration under Rule 701 of the Securities Act. No underwriters were
involved in the foregoing sales of securities.
II-3
<PAGE>
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(A) EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- -----------
<C> <S>
**1 Form of Underwriting Agreement.
*3.1 Articles of Organization of the Registrant, as amended.
*3.2 Restated Articles of Organization of the Registrant, to be
effective upon the closing of this offering.
*3.3 By-Laws of the Registrant, as amended.
*3.4 Amended and Restated By-Laws of the Registrant, to be effective
upon the closing of this offering.
*4 Specimen Certificate for shares of Common Stock.
**5 Opinion of Hale and Dorr LLP.
*10.1 Long-Term Incentive Plan (1992).
*10.2 1997 Stock Incentive Plan.
*10.3 1997 Director Stock Option Plan.
*10.4 1997 Employee Stock Purchase Plan.
*10.5 Lease dated February 1, 1995, as amended, between Wang
Laboratories, Inc. and the Registrant.
*10.6 Common Stock Purchase Agreement dated May 29, 1992 between the
Registrant and Bull HN Information Systems Inc.
*10.7 Agreement of Amendment dated as of March 15, 1996 between the
Registrant and Bull HN Information Systems Inc.
*10.8 Note and Warrant Purchase Agreement dated as of May 30, 1995
between the Registrant and Massachusetts Capital Resource Company.
*10.9 Common Stock Purchase Warrant, due May 30, 1995.
*10.10 Secured Subordinated Note due 2002, dated May 30, 1995.
*10.11 Voting Agreement dated as of May 30, 1995 among the Registrant,
Dominic K. Chan and Massachusetts Capital Resource Company.
*10.12 Security Agreement dated as of May 30, 1995 between the Registrant
and Massachusetts Capital Resource Company.
*10.13 Series A Convertible Preferred Stock and Class A Common Stock
Purchase Agreement dated as of March 15, 1996 among the Registrant
and the purchasers named in Schedule I thereto.
*10.14 Registration Rights Agreement dated as of March 15, 1996, as
amended, among the Registrant and the stockholders listed on the
signature pages thereto.
*10.15 Stock Restriction Agreement dated as of March 15, 1996, as
amended, among the Registrant, Dominic K. Chan and Marsha C. Chan
and the stockholders listed on the signature pages thereto.
*10.16 Voting Agreement dated as of March 15, 1996 among the Registrant
and the stockholders listed in the signature pages thereto.
*10.17 Stock Option Agreement dated as of March 15, 1996 among the
Registrant, Dominic K. Chan and Marsha C. Chan.
*10.18 Non-Competition Agreement dated as of March 15, 1996 between the
Registrant and Dominic K. Chan.
*10.19 Series B Convertible Preferred Stock Purchase Agreement dated as
of October 28, 1996 among the Registrant and the purchasers named
in Schedule I thereto.
*10.20 Employment Agreement dated as of December 30, 1996 between the
Registrant and Douglas A. Catalano.
*10.21 Employment Agreement dated as of January 27, 1997 between the
Registrant and Robert D. Savoia.
*10.22 Letter Agreement dated as of August 15, 1996 between the
Registrant and Leonard Miller.
</TABLE>
II-4
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- -----------
<C> <S>
**+10.23 Master Software Services Agreement dated as of February 3, 1992
between the Registrant and Bull HN Information Systems Inc.
**+10.24 License Agreement dated as of July 29, 1996 between the Registrant
and Bull HN Information Inc., as amended.
*+10.25 Master License Agreement dated as of October 21, 1996, as amended,
between the Registrant and Merrill Lynch, Pierce, Fenner & Smith
Incorporated.
*+10.26 Engineering Consultant Services Agreement, as amended, between
Stratus Computer, Inc. and the Registrant, dated November 30,
1993.
*10.27 Letter Agreement dated September 6, 1996 between the Registrant
and Fleet National Bank.
*10.28 Promissory Note between the Registrant and Fleet National Bank in
the amount of $3,500,000, dated September 6, 1996.
*10.29 Promissory Note between the Registrant and Fleet National Bank in
the amount of $675,000, dated September 6, 1996.
*10.30 Promissory Note between the Registrant and Fleet National Bank in
the amount of $825,000, dated September 6, 1996.
*10.31 Inventory, Accounts Receivable and Intangibles Security Agreement
between the Registrant and Fleet National Bank, dated September 6,
1996.
*10.32 Supplemental Security Agreement between the Registrant and Fleet
National Bank, dated September 6, 1996.
*10.33 Security Agreement (Trademarks) between the Registrant and Fleet
National Bank, dated September 6, 1996.
*10.34 Security Agreement (Patents) between the Registrant and Fleet
National Bank, dated September 6, 1996.
*10.35 Subordination Agreement between Massachusetts Capital Resource
Company and Fleet National Bank, dated September 6, 1996.
**+10.36 License and Alliance Agreement dated as of May 1, 1996, as
amended, between the Registrant and CSC Consulting, Inc., as
amended.
*10.37 Agreement and Plan of Merger among the Registrant, Vista
Technologies Incorporated and its stockholders, dated January 29,
1996.
*+10.38 Letter of Intent dated May 9, 1997 between the Registrant and
VIASOFT, Inc.
*+10.39 Joint Marketing Agreement effective as of June 12, 1997 between
the Registrant and VIASOFT, Inc.
10.40 Letter Agreement dated March 30, 1997 between the Registrant and
Fleet National Bank.
10.41 Letter Agreement dated June 20, 1997 between the Registrant and
Fleet National Bank.
**11 Computation of earnings per common share.
**21 Subsidiaries of the Registrant.
23.1 Consent of Price Waterhouse LLP.
*23.2 Consent of Hale and Dorr LLP (included in Exhibit 5).
*24 Power of Attorney.
*27 Financial Data Schedule.
</TABLE>
- --------
* Previously filed.
** Superseding exhibit.
+ Confidential treatment requested as to certain portions, which portions are
omitted and filed separately with the Securities and Exchange Commission.
(B) FINANCIAL STATEMENT SCHEDULES
All financial statement schedules have been omitted because they are not
required or because the required information is given in the Registrant's
Consolidated Financial Statements or Notes thereto.
II-5
<PAGE>
ITEM 17. UNDERTAKINGS
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the provisions contained in the Restated Articles of
Organization of the Registrant and the laws of the Commonwealth of
Massachusetts, 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.
The undersigned Registrant hereby undertakes to provide to the Underwriters
at the closing specified in the Underwriting Agreement certificates in such
denominations and registered in such names as required by the Underwriters to
permit prompt delivery to each purchaser.
The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act,
the information omitted form the form of prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in a form
of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Securities Act shall be deemed to be part of this
Registration Statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act, each post-effective amendment that contains a form of prospectus 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.
II-6
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE REGISTRANT
HAS DULY CAUSED THIS AMENDMENT TO THE REGISTRATION STATEMENT TO BE SIGNED ON
ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN BILLERICA,
MASSACHUSETTS, ON THIS 30TH DAY OF JUNE, 1997.
Peritus Software Services, Inc.
By: /s/ Allen K. Deary
---------------------------------
ALLEN K. DEARY VICE PRESIDENT,
FINANCE AND CHIEF FINANCIAL
OFFICER
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS AMENDMENT
TO THE REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE
CAPACITIES AND ON THE DATES INDICATED.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
* Chairman of the
- ------------------------------------- Board and Chief June 30, 1997
DOMINIC K. CHAN Executive Officer
(Principal
Executive Officer)
* President, Chief
- ------------------------------------- Operating Officer June 30, 1997
DOUGLAS A. CATALANO and Director
/s/ Allen K. Deary Vice President,
- ------------------------------------- Finance, Chief June 30, 1997
ALLEN K. DEARY Financial Officer
and Director
(Principal
Financial Officer)
* Director of Finance
- ------------------------------------- and Treasurer June 30, 1997
JOHN E. MACPHEE (Principal
Accounting Officer)
* Director
- ------------------------------------- June 30, 1997
ARTHUR CARR
* Director
- ------------------------------------- June 30, 1997
JOHN GIORDANO
</TABLE>
II-7
<PAGE>
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
* Director
- ------------------------------------- June 30, 1997
W. MICHAEL HUMPHREYS
* Director
- ------------------------------------- June 30, 1997
AXEL LEBLOIS
* Director
- ------------------------------------- June 30, 1997
HENRY MCCANCE
* Director
- ------------------------------------- June 30, 1997
ROLAND PAMPEL
</TABLE>
*By: /s/ Allen K. Deary
--------------------------------
ALLEN K. DEARY
ATTORNEY-IN-FACT
II-8
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- -----------
<C> <S>
**1 Form of Underwriting Agreement.
*3.1 Articles of Organization of the Registrant, as amended.
*3.2 Restated Articles of Organization of the Registrant, to be
effective upon the closing of this offering.
*3.3 By-Laws of the Registrant, as amended.
*3.4 Amended and Restated By-Laws of the Registrant, to be effective
upon the closing of this offering.
*4 Specimen Certificate for shares of Common Stock.
**5 Opinion of Hale and Dorr LLP.
*10.1 Long-Term Employee Incentive Plan (1992).
*10.2 1997 Stock Incentive Plan.
*10.3 1997 Director Stock Option Plan.
*10.4 1997 Employee Stock Purchase Plan.
*10.5 Lease dated February 1, 1995, as amended, between Wang
Laboratories, Inc. and the Registrant.
*10.6 Common Stock Purchase Agreement dated May 29, 1992 between the
Registrant and Bull HN Information Systems Inc.
*10.7 Agreement of Amendment dated as of March 15, 1996 between the
Registrant and Bull HN Information Systems Inc.
*10.8 Note and Warrant Purchase Agreement dated as of May 30, 1995
between the Registrant and Massachusetts Capital Resource Company.
*10.9 Common Stock Purchase Warrant, due May 30, 1995.
*10.10 Secured Subordinated Note due 2002, dated May 30, 1995.
*10.11 Voting Agreement dated as of May 30, 1995 among the Registrant,
Dominic K. Chan and Massachusetts Capital Resource Company.
*10.12 Security Agreement dated as of May 30, 1995 between the Registrant
and Massachusetts Capital Resource Company.
*10.13 Series A Convertible Preferred Stock and Class A Common Stock
Purchase Agreement dated as of March 15, 1996 among the Registrant
and the purchasers named in Schedule I thereto.
*10.14 Registration Rights Agreement dated as of March 15, 1996, as
amended, among the Registrant and the stockholders listed on the
signature pages thereto.
*10.15 Stock Restriction Agreement dated as of March 15, 1996, as
amended, among the Registrant, Dominic K. Chan and Marsha C. Chan
and the stockholders listed on the signature pages thereto.
*10.16 Voting Agreement dated as of March 15, 1996 among the Registrant
and the stockholders listed in the signature pages thereto.
*10.17 Stock Option Agreement dated as of March 15, 1996 among the
Registrant, Dominic K. Chan and Marsha C. Chan.
*10.18 Non-Competition Agreement dated as of March 15, 1996 between the
Registrant and Dominic K. Chan.
*10.19 Series B Convertible Preferred Stock Purchase Agreement dated as
of October 28, 1996 among the Registrant and the purchasers named
in Schedule I thereto.
*10.20 Employment Agreement dated as of December 30, 1996 between the
Registrant and Douglas A. Catalano.
*10.21 Employment Agreement dated as of January 27, 1997 between the
Registrant and Robert D. Savoia.
*10.22 Letter Agreement dated as of August 15, 1996 between the
Registrant and Leonard Miller.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- -----------
<C> <S>
**+10.23 Master Software Services Agreement dated as of February 3, 1992
between the Registrant and Bull HN Information Systems Inc.
**+10.24 License Agreement dated as of July 29, 1996 between the Registrant
and Bull HN Information Inc., as amended.
*+10.25 Master License Agreement dated as of October 21, 1996, as amended,
between the Registrant and Merrill Lynch, Pierce, Fenner & Smith
Incorporated.
*+10.26 Engineering Consultant Services Agreement, as amended, between
Stratus Computer, Inc. and the Registrant, dated November 30,
1993.
*10.27 Letter Agreement dated September 6, 1996 between the Registrant
and Fleet National Bank.
*10.28 Promissory Note between the Registrant and Fleet National Bank in
the amount of $3,500,000, dated September 6, 1996.
*10.29 Promissory Note between the Registrant and Fleet National Bank in
the amount of $675,000, dated September 6, 1996.
*10.30 Promissory Note between the Registrant and Fleet National Bank in
the amount of $825,000, dated September 6, 1996.
*10.31 Inventory, Accounts Receivable and Intangibles Security Agreement
between the Registrant and Fleet National Bank, dated September 6,
1996.
*10.32 Supplemental Security Agreement between the Registrant and Fleet
National Bank, dated September 6, 1996.
*10.33 Security Agreement (Trademarks) between the Registrant and Fleet
National Bank, dated September 6, 1996.
*10.34 Security Agreement (Patents) between the Registrant and Fleet
National Bank, dated September 6, 1996.
*10.35 Subordination Agreement between Massachusetts Capital Resource
Company and Fleet National Bank, dated September 6, 1996.
**+10.36 License and Alliance Agreement dated as of May 1, 1996, as
amended, between the Registrant and CSC Consulting, Inc., as
amended.
*10.37 Agreement and Plan of Merger among the Registrant, Vista
Technologies Incorporated and its stockholders, dated January 29,
1996.
*+10.38 Letter of Intent dated May 9, 1997 between the Registrant and
VIASOFT, Inc.
*+10.39 Joint Marketing Agreement effective as of June 12, 1997 between
the Registrant and VIASOFT, Inc.
10.40 Letter Agreement dated March 30, 1997 between the Registrant and
Fleet National Bank.
10.41 Letter Agreement dated June 20, 1997 between the Registrant and
Fleet National Bank.
**11 Computation of earnings per common share.
**21 Subsidiaries of the Registrant.
23.1 Consent of Price Waterhouse LLP.
*23.2 Consent of Hale and Dorr LLP (included in Exhibit 5).
*24 Power of Attorney.
*27 Financial Data Schedule.
</TABLE>
- --------
* Previously filed.
** Superseding exhibit.
+ Confidential treatment requested as to certain portions, which portions are
omitted and filed separately with the Securities and Exchange Commission.
2
<PAGE>
Draft of June 27, 1997
3,500,000 Shares
Peritus Software Services, Inc.
Common Stock
Underwriting Agreement
dated __________________, 1997
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
<S> <C>
Section 1. Representations and Warranties. ......................................................... 2
A. Representations and Warranties of the Company and the Selling Shareholders....................... 2
B. Representations and Warranties of the Selling Shareholders....................................... 9
C. Representations and Warranties of Certain Selling Shareholders................................... 11
Section 2. Purchase, Sale and Delivery of the Common Shares.......................................... 11
Section 3. Additional Covenants...................................................................... 14
A. Covenants of the Company.......................................................................... 14
B. Covenants of the Selling Shareholders............................................................. 17
Section 4. Payment of Expenses....................................................................... 17
Section 5. Conditions of the Obligations of the Underwriters......................................... 18
Section 6. Reimbursement of Underwriters' Expenses................................................... 22
Section 7. Effectiveness of this Agreement........................................................... 22
Section 8. Indemnification........................................................................... 22
Section 9. Contribution.............................................................................. 26
Section 10. Default of One or More of the Several Underwriters....................................... 27
Section 11. Termination of this Agreement............................................................ 28
Section 12. Representations and Indemnities to Survive Delivery...................................... 29
Section 13. Notices.................................................................................. 29
Section 14. Successors............................................................................... 30
Section 15. Partial Unenforceability................................................................. 30
Section 16. Governing Law Provisions................................................................. 30
Section 17. Failure of One or More of the Selling Shareholders to Sell and Deliver Common Shares..... 31
Section 18. General Provisions....................................................................... 31
</TABLE>
-i-
<PAGE>
Underwriting Agreement
[Date]
MONTGOMERY SECURITIES
WESSELS, ARNOLD & HENDERSON, L.L.C.
H.C. WAINWRIGHT & CO., INC.
As Representatives of the several Underwriters
c/o MONTGOMERY SECURITIES
600 Montgomery Street
San Francisco, California 94111
Ladies and Gentlemen:
Introductory. Peritus Software Services, Inc., a Massachusetts corporation
(the "Company"), proposes to issue and sell to the several underwriters named in
Schedule A (the "Underwriters") an aggregate of 2,800,000 shares of its Common
- ----------
Stock, par value $.01 per share (the "Common Stock"); and certain of the
shareholders of the Company named in Schedule B (the "Primary Selling
----------
Shareholders") propose to sell to the Underwriters an aggregate of 700,000
shares of Common Stock, with each Primary Selling Shareholder selling up to the
amount set forth opposite such Primary Selling Shareholder's name in Schedule B
----------
under the column entitled "Primary Shares to be Sold." The 2,800,000 shares of
Common Stock to be sold by the Company and the 700,000 shares of Common Stock to
be sold by the Primary Selling Shareholders are collectively called the "Firm
Common Shares." In addition, the Selling Shareholders named in Schedule B
----------
(collectively, together with the Primary Selling Shareholders, the "Selling
Shareholders") have severally granted to the Underwriters an option to purchase
up to an additional 525,000 shares (the "Optional Common Shares") of Common
Stock, as provided in Section 2, with each Selling Shareholder selling up to the
amount set forth opposite such Selling Shareholder's name in Schedule B under
----------
the column entitled "Secondary Shares to be Sold." The Firm Common Shares and,
if and to the extent such option is exercised, the Optional Common Shares are
collectively called the "Common Shares." Montgomery Securities, Wessels, Arnold
& Henderson, L.L.C. and H.C. Wainwright & Co., Inc. have agreed to act as
representative of the several Underwriters (in such capacity, the
"Representatives") in connection with the offering and sale of the Common
Shares.
The Company has prepared and filed with the Securities and Exchange
Commission (the "Commission") a registration statement on Form S-1 (File No.
333-27087), which contains a form of prospectus to be used in connection with
the public offering and sale of the Common Shares. Such registration statement,
as amended, including the financial statements, exhibits and schedules thereto,
in the form in which it was declared effective by the Commission under the
Securities Act of 1933 and the rules and regulations promulgated thereunder
(collectively, the "Securities Act"), including any information deemed to be a
part thereof at the time of
<PAGE>
effectiveness pursuant to Rule 430A or Rule 434 under the Securities Act, is
called the "Registration Statement." Any registration statement filed by the
Company pursuant to Rule 462(b) under the Securities Act is called the "Rule
462(b) Registration Statement," and from and after the date and time of filing
of the Rule 462(b) Registration Statement the term "Registration Statement"
shall include the Rule 462(b) Registration Statement. Such prospectus, in the
form first used by the Underwriters to confirm sales of the Common Shares, is
called the "Prospectus"; provided, however, if the Company has, with the consent
of Montgomery Securities, elected to rely upon Rule 434 under the Securities
Act, the term "Prospectus" shall mean the Company's prospectus subject to
completion (each, a "preliminary prospectus") dated June 4, 1997 (such
preliminary prospectus is called the "Rule 434 preliminary prospectus"),
together the applicable term sheet (the "Term Sheet") prepared and filed by the
Company with the Commission under Rules 434 and 424(b) under the Securities Act
and all references in this Agreement to the date of the Prospectus shall mean
the date of the Term Sheet. All references in this Agreement to the Registration
Statement, the Rule 462(b) Registration Statement, a preliminary prospectus, the
Prospectus or the Term Sheet, or any amendments or supplements to any of the
foregoing, shall include any copy thereof filed with the Commission pursuant to
its Electronic Data Gathering, Analysis and Retrieval System ("EDGAR").
The Company and each of the Selling Shareholders hereby confirm their
respective agreements with the Underwriters as follows:
Section 1. Representations and Warranties.
A. Representations and Warranties of the Company. The Company hereby
represents, warrants and covenants to each Underwriter as follows:
(a) Compliance with Registration Requirements. The Registration Statement
and any Rule 462(b) Registration Statement have been declared effective by the
Commission under the Securities Act. The Company has complied to the
Commission's satisfaction with all requests of the Commission for additional or
supplemental information. No stop order suspending the effectiveness of the
Registration Statement or any Rule 462(b) Registration Statement is in effect
and no proceedings for such purpose have been instituted or are pending or, to
the best knowledge of the Company, are contemplated or threatened by the
Commission.
Each preliminary prospectus and the Prospectus when filed complied in all
material respects with the Securities Act and, if filed by electronic
transmission pursuant to EDGAR (except as may be permitted by Regulation S-T
under the Securities Act), was identical to the copy thereof delivered to the
Underwriters for use in connection with the offer and sale of the Common Shares.
Each of the Registration Statement, any Rule 462(b) Registration Statement and
any post-effective amendment thereto, at the time it became effective and at all
subsequent times up to and at the First Closing Date (as defined below) or the
Second Closing Date (as defined below), as the case may be, complied and will
comply in all material respects with the Securities Act and did not and will not
contain any untrue statement of a material fact or omit to state a material fact
required to be stated therein or necessary to make the statements therein not
misleading. The Prospectus, as amended or supplemented, as of its date and at
all subsequent
-2-
<PAGE>
times up to and at the First Closing Date or the Second Closing Date, as the
case may be, did not and will not contain any untrue statement of a material
fact or omit to state a material fact necessary in order to make the statements
therein, in the light of the circumstances under which they were made, not
misleading. The representations and warranties set forth in the two immediately
preceding sentences do not apply to statements in or omissions from the
Registration Statement, any Rule 462(b) Registration Statement, or any post-
effective amendment thereto, or the Prospectus, or any amendments or supplements
thereto, made in reliance upon and in conformity with information relating to
any Underwriter furnished to the Company in writing by the Representatives
expressly for use therein. There are no contracts or other documents required to
be described in the Prospectus or to be filed as exhibits to the Registration
Statement which have not been described or filed as required.
(b) Offering Materials Furnished to Underwriters. The Company has
delivered to each of the Representatives one complete manually signed copy of
the Registration Statement and of each consent and certificate of experts filed
as a part thereof, and conformed copies of the Registration Statement (without
exhibits) and preliminary prospectuses and the Prospectus, as amended or
supplemented, in such quantities and at such places as the Representatives have
reasonably requested for each of the Underwriters.
(c) Distribution of Offering Material By the Company. The Company has not
distributed and will not distribute, prior to the later of the Second Closing
Date (as defined below) and the completion of the Underwriters' distribution of
the Common Shares, any offering material in connection with the offering and
sale of the Common Shares other than a preliminary prospectus, the Prospectus or
the Registration Statement.
(d) The Underwriting Agreement. This Agreement has been duly authorized,
executed and delivered by, and is a valid and binding agreement of, the Company,
enforceable against it in accordance with its terms, except as rights to
indemnification hereunder may be limited by applicable law and except as the
enforcement hereof may be limited by bankruptcy, insolvency, reorganization,
moratorium or other similar laws relating to or affecting the rights and
remedies of creditors or by general equitable principles.
(e) Authorization of the Common Shares. The Common Shares to be purchased
by the Underwriters from the Company have been duly authorized for issuance and
sale pursuant to this Agreement, and, when issued and delivered by the Company
pursuant to this Agreement, will be validly issued, fully paid and
nonassessable.
(f) No Applicable Registration or Other Similar Rights. There are no
persons with registration or other similar rights to have any equity or debt
securities registered for sale under the Registration Statement or included in
the offering contemplated by this Agreement, except for such rights as have been
duly waived.
(g) No Material Adverse Change. Except as otherwise disclosed in the
Prospectus, subsequent to the respective dates as of which information is given
in the Prospectus: (i) there has been no material adverse change, or any
development that could reasonably be expected to result in a material adverse
change, in the financial condition, or in the earnings, business,
-3-
<PAGE>
operations or prospects, whether or not arising from transactions in the
ordinary course of business, of the Company and its subsidiaries, considered as
one entity (any such change is called a "Material Adverse Change"); (ii) the
Company and its subsidiaries, considered as one entity, have not incurred any
material liability or obligation, indirect, direct or contingent, not in the
ordinary course of business nor entered into any material transaction or
agreement not in the ordinary course of business; and (iii) there has been no
dividend or distribution of any kind declared, paid or made by the Company or,
except for dividends paid to the Company or other subsidiaries, any of its
subsidiaries on any class of capital stock or repurchase or redemption by the
Company or any of its subsidiaries of any class of capital stock.
(h) Independent Accountants. Price Waterhouse LLP, who have expressed
their opinion with respect to the financial statements (which term as used in
this Agreement includes the related notes thereto) filed with the Commission as
a part of the Registration Statement and included in the Prospectus, are
independent public or certified public accountants as required by the Securities
Act.
(i) Preparation of the Financial Statements. The financial statements filed
with the Commission as a part of the Registration Statement and included in the
Prospectus present fairly the consolidated financial position of the Company and
its subsidiaries as of and at the dates indicated and the results of their
operations and cash flows for the periods specified. Such financial statements
have been prepared in conformity with generally accepted accounting principles
as applied in the United States applied on a consistent basis throughout the
periods involved, except as may be expressly stated in the related notes
thereto. No other financial statements or supporting schedules are required to
be included in the Registration Statement. The financial data set forth in the
Prospectus under the captions "Prospectus Summary--Summary Consolidated
Financial Data," "Selected Consolidated Financial Data" and "Capitalization"
fairly present the information set forth therein on a basis consistent with that
of the audited financial statements contained in the Registration Statement.
(j) Incorporation and Good Standing of the Company and its Subsidiaries.
Each of the Company and its subsidiaries has been duly incorporated and is
validly existing as a corporation in good standing under the laws of the
jurisdiction of its incorporation and has corporate power and authority to own,
lease and operate its properties and to conduct its business as described in the
Prospectus and, in the case of the Company, to enter into and perform its
obligations under this Agreement. Each of the Company and its subsidiaries is
duly qualified as a foreign corporation to transact business and is in good
standing in each jurisdiction in which such qualification is required, whether
by reason of the ownership or leasing of property or the conduct of business,
except for such jurisdictions where the failure to so qualify or to be in good
standing would not, individually or in the aggregate, result in a Material
Adverse Change. Except (i) as otherwise disclosed in the Prospectus, (ii) for
security interests held by Fleet National Bank and Massachusetts Capital
Resource Company and (iii) that the Company has a 99.8% equity interest in
Peritus Software Services (India) Private Limited, all of the issued and
outstanding capital stock of each subsidiary has been duly authorized and
validly issued, is fully paid and nonassessable and is owned by the Company,
directly or through subsidiaries, free and clear of any security interest,
mortgage, pledge, lien, encumbrance or claim. The Company does
-4-
<PAGE>
not own or control, directly or indirectly, any corporation, association or
other entity other than the subsidiaries listed in Exhibit 21 to the
Registration Statement.
(k) Capitalization and Other Capital Stock Matters. The authorized, issued
and outstanding capital stock of the Company is as set forth in the Prospectus
under the caption "Capitalization" (other than for subsequent issuances, if any,
pursuant to employee benefit plans described in the Prospectus or upon exercise
of outstanding options or warrants described in the Prospectus). The Common
Stock (including the Common Shares) conforms in all material respects to the
description thereof contained in the Prospectus. All of the issued and
outstanding shares of Common Stock (including the shares of Common Stock owned
by Selling Shareholders) have been duly authorized and validly issued, are fully
paid and nonassessable and have been issued in compliance with federal and state
securities laws. None of the outstanding shares of Common Stock were issued in
violation of any preemptive rights, rights of first refusal or other similar
rights to subscribe for or purchase securities of the Company. There are no
authorized or outstanding options, warrants, preemptive rights, rights of first
refusal or other rights to purchase, or equity or debt securities convertible
into or exchangeable or exercisable for, any capital stock of the Company or any
of its subsidiaries other than those accurately described in the Prospectus and
other than those rights that terminate upon consummation of the Company's
initial public offering or upon payment in full of the Secured Subordinated Note
due June 30, 2002 issued by the Company to Massachusetts Capital Resource
Company (the "MCRC Note"). The description of the Company's stock option, stock
bonus and other stock plans or arrangements, and the options or other rights
granted thereunder, set forth in the Prospectus accurately and fairly presents
the information required to be shown with respect to such plans, arrangements,
options and rights.
(l) Stock Exchange Listing. The Common Shares have been approved for
listing on the Nasdaq National Market, subject only to official notice of
issuance.
(m) Non-Contravention of Existing Instruments; No Further Authorizations or
Approvals Required. Neither the Company nor any of its subsidiaries is in
violation of its charter or by-laws or is in default (or, with the giving of
notice or lapse of time, would be in default) ("Default") under any indenture,
mortgage, loan or credit agreement, note, contract, franchise, lease or other
instrument to which the Company or any of its subsidiaries is a party or by
which it or any of them may be bound (including, without limitation, the MCRC
Note or the related purchase and security agreements and the Revolving Credit
Facility with Fleet National Bank), or to which any of the property or assets of
the Company or any of its subsidiaries is subject (each, an "Existing
Instrument"), except for such Defaults as would not, individually or in the
aggregate, result in a Material Adverse Change. The Company's execution,
delivery and performance of this Agreement and consummation of the transactions
contemplated hereby (i) have been duly authorized by all necessary corporate
action and will not result in any violation of the provisions of the charter or
by the by-laws of the Company or any subsidiary, (ii) will not conflict with or
constitute a breach of, or Default under, or result in the creation or
imposition of any lien, charge or encumbrance upon any property or assets of the
Company or any of its subsidiaries pursuant to, or require the consent of any
other part to, any Existing Instrument, except for such conflicts, breaches,
Defaults, liens, charges or encumbrances as would not,
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individually or in the aggregate, result in a Material Adverse Change and (iii)
will not result in any violation of any law or administrative regulation
applicable to the Company or any subsidiary or any administrative or court
decree specifically naming the Company or any subsidiary. No consent, approval,
authorization or other order of, or registration or filing with, any court or
other governmental or regulatory authority or agency, is required for the
Company's execution, delivery and performance of this Agreement and consummation
of the transactions contemplated hereby, except such as have been obtained or
made by the Company and are in full force and effect and except for such
additional steps as may be required under the Securities Act, applicable state
securities or blue sky laws and the rules and regulations of the National
Association of Securities Dealers, Inc. (the "NASD") and the Nasdaq National
Market.
(n) No Material Actions or Proceedings. There are no legal or governmental
actions, suits or proceedings pending or, to the best of the Company's
knowledge, threatened (i) against the Company or any of its subsidiaries, (ii)
which has as the subject thereof any officer or director of, or property owned
or leased by, the Company or any of its subsidiaries or (iii) relating to
environmental or discrimination matters against the Company or its subsidiaries,
where in any such case (A) there is a reasonable possibility that such action,
suit or proceeding might be determined adversely to the Company or such
subsidiary and (B) any such action, suit or proceeding, if so determined
adversely, would reasonably be expected to result in a Material Adverse Change
or adversely affect the consummation of the transactions contemplated by this
Agreement. No material labor dispute with the employees of the Company or any of
its subsidiaries exists or, to the best of the Company's knowledge, is
threatened or imminent.
(o) Intellectual Property Rights. The Company and its subsidiaries own or
possess sufficient trademarks, trade names, patent rights, copyrights, licenses,
approvals, trade secrets and other similar rights (collectively, "Intellectual
Property Rights") reasonably necessary to conduct their businesses as now
conducted; and the expected expiration of any of such Intellectual Property
Rights would not result in a Material Adverse Change. Neither the Company nor
any of its subsidiaries has received any notice of infringement or conflict with
asserted Intellectual Property Rights of others, which infringement or conflict,
if the subject of an unfavorable decision, would result in a Material Adverse
Change. The Company has duly and properly filed or caused to be filed with the
United States Patent and Trademark Office (the "PTO") and applicable foreign and
international patent authorities all patent applications described or referred
to in the Prospectus, and believes it has complied with the PTO's duty of candor
and disclosure for each of the United States patent and patent applications
described or referred to in the Prospectus; the Company is unaware of any facts
which would preclude the grant of a patent from each of the patent applications
described or referred to in the Prospectus; and the Company has no knowledge of
any facts which would preclude it from having clear title to its patent
applications referenced in the Registration Statement. Except as disclosed in
the Prospectus, the Company is not aware of the granting of any patents to third
parties or the filing of patent applications by third parties or any other
rights of third parties to any of the Intellectual Property Rights.
(p) All Necessary Permits, etc. The Company and each subsidiary possess
such valid and current certificates, authorizations or permits issued by the
appropriate state, federal or
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foreign regulatory agencies or bodies necessary, to conduct their respective
businesses, and neither the Company nor any subsidiary has received any notice
of proceedings relating to the revocation or modification of, or noncompliance
with, any such certificate, authorization or permit which, singly or in the
aggregate, if the subject of an unfavorable decision, ruling or finding, could
result in a Material Adverse Change.
(q) Title to Properties. Except as described in the Prospectus, the Company
and each of its subsidiaries has good and valid title to all the properties and
assets reflected as owned in the financial statements referred to in Section
1(A)(i) above (or elsewhere in the Prospectus), in each case free and clear of
any security interests, mortgages, liens, encumbrances, equities, claims and
other defects, except such as do not materially and adversely affect the value
of such property and do not materially interfere with the use made or proposed
to be made of such property by the Company or such subsidiary. The real
property, improvements, equipment and personal property held under lease by the
Company or any subsidiary are held under valid and enforceable leases, with such
exceptions as are not material and do not materially interfere with the use made
or proposed to be made of such real property, improvements, equipment or
personal property by the Company, or such subsidiary.
(r) Tax law Compliance. The Company and its consolidated subsidiaries have
filed all necessary federal, state and foreign income and franchise tax returns
and have paid all taxes required to be paid by any of them and, if due and
payable, any related or similar assessment, fine or penalty levied against any
of them, except for assessments, fines or penalties contested in good faith for
which adequate reserves have been provided to the extent required by generally
accepted accounting principles. The Company has made adequate charges, accruals
and reserves in the applicable financial statements referred to in Section
1(A)(i) above in respect of all federal, state and foreign income and franchise
taxes for all periods as to which the tax liability of the Company or any of its
consolidated subsidiaries has not been finally determined.
(s) Company Not an "Investment Company." The Company is not, and after
receipt of payment for the Common Shares will not be, an "investment company"
within the meaning of Investment Company Act of 1940 as amended (the "Investment
Company Act"), and will conduct its business in a manner so that it will not
become subject to the Investment Company Act.
(t) Insurance. Each of the Company and its subsidiaries are insured by
financially sound and reputable institutions with policies in such amounts and
with such deductibles and covering such risks as are generally deemed adequate
and customary for their businesses including, but not limited to, policies
covering real and personal property owned or leased by the Company and its
subsidiaries against theft, damage, destruction and acts of vandalism. The
Company has no reason to believe that it or any subsidiary will not be able (i)
to renew its existing insurance coverage as and when such policies expire or
(ii) to obtain comparable coverage from similar institutions as may be necessary
or appropriate to conduct its business as now conducted and at a cost that would
not result in a Material Adverse Change. Neither the Company nor any subsidiary
has been denied any insurance coverage which it has sought or for which it has
applied.
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(u) No Price Stabilization or Manipulation. The Company has not taken and
will not take, directly or indirectly, any action designed to or that might be
reasonably expected to cause or result in stabilization or manipulation of the
price of the Common Stock to facilitate the sale or resale of the Common Shares.
(v) Related Party Transactions. There are no outstanding loans, advances
(except normal advances for business expenses in the ordinary course of
business) or guarantees of indebtedness by the Company to or for the benefit of
any of the executive officers or directors of the Company or any of the members
of the families of any of them, except as disclosed in the Registration
Statement and the Prospectus.
(w) No Unlawful Contributions or Other Payments. Neither the Company nor
any of its subsidiaries nor, to the best of the Company's knowledge, any
employee of the Company or any subsidiary, has made any contribution or other
payment to any official of, or candidate for, any federal, state or foreign
office in violation of any law.
(x) Company's Accounting System. The Company maintains a system of
accounting controls sufficient to provide reasonable assurances that (i)
transactions are executed in accordance with management's general or specific
authorization; (ii) transactions are recorded as necessary to permit preparation
of financial statements in conformity with generally accepted accounting
principles as applied in the United States and to maintain accountability for
assets; (iii) access to assets is permitted only in accordance with management's
general or specific authorization; and (iv) the recorded accountability for
assets is compared with existing assets at reasonable intervals and appropriate
action is taken with respect to any differences.
(y) ERISA Compliance. The Company and its subsidiaries and any "employee
benefit plan" (as defined under the Employee Retirement Income Security Act of
1974, as amended. and the regulations and published interpretations thereunder
(collectively, "ERISA")) established or maintained by the Company, its
subsidiaries or their "ERISA Affiliates" (as defined below) are in compliance in
all material respects with ERISA. "ERISA Affiliate" means, with respect to the
Company or a subsidiary, any member of any group of organizations described in
Sections 414(b),(c),(m) or (o) of the Internal Revenue Code of 1986, as amended,
and the regulations and published interpretations thereunder (the "Code") of
which the Company or such subsidiary is a member. No "reportable event" (as
defined under ERISA) has occurred or is reasonably expected to occur with
respect to any "employee benefit plan" established or maintained by the Company,
its subsidiaries or any of their ERISA Affiliates. No "employee benefit plan"
established or maintained by the Company, its subsidiaries or any of their ERISA
Affiliates, if such "employee benefit plan" were terminated, would have any
"amount of unfunded benefit liabilities" (as defined under ERISA). Neither the
Company, its subsidiaries nor any of their ERISA Affiliates has incurred or
reasonably expects to incur during the 18-month period beginning on the date
hereof any liability under (i) Title IV of ERISA with respect to termination of,
or withdrawal from, any "employee benefit plan" or (ii) Sections 412, 4971, 4975
or 4980B of the Code. Each "employee benefit plan" established or maintained by
the Company, its subsidiaries or any of their ERISA Affiliates that is intended
to be qualified
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under Section 401 (a) of the Code is so qualified and nothing has occurred,
whether by action or failure to act, which would cause the loss of such
qualification.
Any certificate signed by an officer of the Company and delivered to the
Representatives or to counsel for the Underwriters shall be deemed to be a
representation and warranty by the Company to each Underwriter as to the matters
set forth therein.
B. Representations and Warranties of the Selling Shareholders. Each
Selling Shareholder severally represents, warrants and covenants to each
Underwriter as follows:
(a) The Underwriting Agreement. This Agreement has been duly authorized,
executed and delivered by or on behalf of such Selling Shareholder and is a
valid and binding agreement of such Selling Shareholder, enforceable against it
in accordance with its terms, except as rights to indemnification hereunder may
be limited by applicable law and except as the enforcement hereof may be limited
by bankruptcy, insolvency, reorganization, moratorium or other similar laws
relating to or affecting the rights and remedies of creditors or by general
equitable principles.
(b) The Custody Agreement and Power of Attorney. Each of the (i) Custody
Agreement signed by such Selling Shareholder and appointing Peritus Software
Services, Inc., as custodian (the "Custodian"), relating to the deposit of the
Common Shares to be sold by such Selling Shareholder (the "Custody Agreement")
and (ii) Power of Attorney appointing certain individuals named therein as such
Selling Shareholder's attorneys-in-fact (each, an "Attorney-in-Fact") to the
extent set forth therein relating to the transactions contemplated hereby and by
the Prospectus (the "Power of Attorney"), of such Selling Shareholder has been
duly authorized, executed and delivered by such Selling Shareholder and is a
valid and binding agreement of such Selling Shareholder, enforceable against it
in accordance with its terms, except as rights to indemnification thereunder may
be limited by applicable law and except as the enforcement thereof may be
limited by bankruptcy, insolvency, reorganization, moratorium or other similar
laws relating to or affecting the rights and remedies of creditors or by general
equitable principles.
(c) Title to Common Shares to be Sold; All Authorizations Obtained. Such
Selling Shareholder has, and on the First Closing Date and the Second Closing
Date will have, good and valid title to all of the Common Shares which may be
sold by such Selling Shareholder pursuant to this Agreement on such date and the
legal right and power, and all authorizations and approvals required by law and
under its charter or by-laws, partnership agreement, trust agreement or other
organizational documents to enter into this Agreement and its Custody Agreement
and Power of Attorney, to sell, transfer and deliver all of the Common Shares
which may be sold by such Selling Shareholder pursuant to this Agreement and to
comply with its other obligations hereunder and thereunder.
(d) Delivery of the Common Shares to be Sold. Delivery of the Common
Shares which are sold by such Selling Shareholder pursuant to this Agreement
will pass good and valid title to such Common Shares, free and clear of any
security interest, mortgage, pledge, lien, encumbrance or other claim.
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(e) Non-Contravention; No Further Authorizations or Approvals Required.
The execution and delivery by such Selling Shareholder of this Agreement, the
Custody Agreement and the Power of Attorney, and the performance by such Selling
Shareholder of the transactions contemplated hereby and thereby, will not
contravene or conflict with, result in a breach of, or constitute a Default
under, or require the consent of any other party to, the charter or by-laws,
partnership agreement, trust agreement or other organizational documents of such
Selling Shareholder or any other agreement or instrument to which such Selling
Shareholder is a party or by which it is bound or under which it is entitled to
any right or benefit, any provision of law or regulation applicable to such
Selling Shareholder or any judgment, order or decree specifically naming such
Selling Shareholder of any court, regulatory body, administrative agency,
governmental body or arbitrator having jurisdiction over such Selling
Shareholder. No consent, approval, authorization or other order of, or
registration or filing with, any court or other governmental authority or
agency, is required for the consummation by such Selling Shareholder of the
transactions contemplated in this Agreement, except such as have been obtained
or made and are in full force and effect and except for such additional steps as
may be required under the Securities Act, applicable state securities or blue
sky laws, and the rules and regulations of the NASD and the Nasdaq National
Market.
(f) No Registration or Other Similar Rights. Such Selling Shareholder does
not have any registration or other similar rights to have any additional equity
or debt securities registered for sale by the Company under the Registration
Statement or included in the offering contemplated by this Agreement, except for
such rights as are described in the Prospectus under "Shares Eligible for Future
Sale."
(g) No Further Consents, etc. Except for the (i) exercise by such Selling
Shareholder of certain registration rights pursuant to the Registration Rights
Agreement dated as of March 15, 1996 (which registration rights have been duly
exercised pursuant thereto), (ii) consent of such Selling Shareholder to the
respective number of Common Shares to be sold by all of the Selling Shareholders
pursuant to this Agreement and (iii) waiver by certain other holders of Common
Stock of certain registration rights pursuant to such Registration Rights
Agreement, no consent, approval or waiver is required under any instrument or
agreement to which such Selling Shareholder is a party or by which it is bound
or under which it is entitled to any right or benefit, in connection with the
offering, sale, or purchase by the Underwriters of any of the Common Shares
which may be sold by such Selling Shareholder under this Agreement or the
consummation by such Selling Shareholder of any of the other transactions
contemplated hereby.
(h) Disclosure Made Such Selling Shareholder in the Prospectus. All
information furnished by or on behalf of such Selling Shareholder in writing
expressly for use in the Registration Statement and Prospectus is, and on the
First Closing Date and the Second Closing Date will be, true, correct and
complete in all material respects, and does not, and on the First Closing Date
and the Second Closing Date will not, contain any untrue statement of a material
fact or omit to state any material fact necessary to make such information, in
light of the circumstances in which it was made, not misleading. Such Selling
Shareholder confirms as accurate the number of shares of Common Stock set forth
opposite such Selling Shareholder's
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name in the Prospectus under the caption "Principal and Selling Stockholders"
(both prior to and after giving effect to the sale of the Common Shares).
(i) No Price Stabilization or Manipulation. Such Selling Shareholder has
not taken and will not take, directly or indirectly, any action designed to or
that might be reasonably expected to cause or result in stabilization or
manipulation of the price of the Common Stock to facilitate the sale or resale
of the Common Shares.
Any certificate signed by or on behalf of any Selling Shareholder and
delivered to the Representatives or to counsel for the Underwriters shall be
deemed to be a representation and warranty by such Selling Shareholder to each
Underwriter as to the matters covered thereby.
C. Representations and Warranties of Certain Selling Shareholders. In
addition to the representations, warranties and covenants set forth in Section
1(B), each of the Selling Shareholders indicated with an asterisk on Schedule B
----------
(the "Significant Shareholders") hereby represents, warrants and covenants to
each Underwriter as follows:
Each of the Registration Statement, any Rule 462(b) Registration Statement
and any post-effective amendment thereto, at the time it became effective and at
all subsequent times up to and at the First Closing Date or the Second Closing
Date, as the case may be, complied and will comply in all material respects with
the Securities Act and did not and will not contain any untrue statement of a
material fact or omit to state a material fact required to be stated therein or
necessary to make the statements therein not misleading. The Prospectus, as
amended or supplemented, as of its date and at all subsequent times up to and at
the First Closing Date or the Second Closing Date, as the case may be, did not
and will not contain any untrue statement of a material fact or omit to state a
material fact necessary in order to make the statements therein, in the light of
the circumstances under which they were made, not misleading. The
representations and warranties set forth in the two immediately preceding
sentences do not apply to statements in or omissions from the Registration
Statement, any Rule 462(b) Registration Statement, or any post-effective
amendment thereto, or the Prospectus, or any amendments or supplements thereto,
made in reliance upon and in conformity with information relating to any
Underwriter furnished to the Company in writing by the Representatives expressly
for use therein. There are no contracts or other documents required to be
described in the Prospectus or to be filed as exhibits to the Registration
Statement which have not been described or filed as required.
Section 2. Purchase, Sale and Delivery of the Common Shares.
The Firm Common Shares. Upon the terms herein set forth, (i) the Company
agrees to issue and sell to the several Underwriters an aggregate of 2,800,000
Firm Common Shares and (ii) the Primary Selling Shareholders agree to sell to
the several Underwriters an aggregate of 700,000 Firm Common Shares. On the
basis of the representations, warranties and agreements herein contained, and
upon the terms but subject to the conditions herein set forth, the Underwriters
agree, severally and not jointly, to purchase from the Company and the Primary
Selling Shareholders the respective number of Firm Common Shares set forth
opposite their names on Schedule A. The purchase price per Firm Common Share to
----------
be paid by the several Underwriters to the Company and the Primary Selling
Shareholders shall be $[__________] per share.
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The First Closing Date. Delivery of certificates for the Firm Common
Shares to be purchased by the Underwriters and payment therefor shall be made at
the offices of Montgomery Securities, 600 Montgomery Street, San Francisco,
California (or such other place as may be agreed to by the Company and the
Representatives) at 6:00 a.m. San Francisco time, on [__________], or such other
time and date not later than 10:30 a.m. San Francisco time , on [________] as
the Representatives shall designate by notice to the Company (the time and date
of such closing are called the "First Closing Date"). The Company and the
Primary Selling Shareholders hereby acknowledge that circumstances under
which the Representatives may provide notice to postpone the First Closing Date
as originally scheduled include, but are in no way limited to, any determination
by the Company, the Primary Selling Shareholders or the Representatives
to recirculate to the public copies of an amended or supplemented Prospectus or
a delay as contemplated by the provisions of Section 10.
The Optional Common Shares; the Second Closing Date. In addition, on the
basis of the representations, warranties and agreements herein contained, and
upon the terms but subject to the conditions herein set forth, the Selling
Shareholders hereby grant an option to the several Underwriters to purchase,
severally and not jointly, up to an aggregate of 525,000 Optional Common
Shares from the Selling Shareholders at the purchase price per share to be paid
by the Underwriters for the Firm Common Shares. The option granted hereunder is
for use by the Underwriters solely in covering any over-allotments in connection
with the sale and distribution of the Firm Common Shares. The option granted
hereunder may be exercised at any time (but not more than once) upon notice by
the Representatives to the Selling Shareholders (with a copy to the Company),
which notice may be given at any time within 30 days from the date of this
Agreement. Such notice shall set forth (i) the aggregate number of Optional
Common Shares as to which the Underwriters are exercising the option, (ii) the
names and denominations in which the certificates for the Optional Common Shares
are to be registered and (iii) the time, date and place at which such
certificates will be delivered (which time and date may be simultaneous with,
but not earlier than, the First Closing Date; and in such case the "First
Closing Date" shall refer to the time and date of delivery of certificates for
the Firm Common Shares and the Optional Common Shares). Such time and date of
delivery, if subsequent to the First Closing Date, is called the "Second Closing
Date" and shall be determined by the Representatives and shall not be earlier
than three nor later than five full business days after delivery of such notice
of exercise. If any Optional Common Shares are to be purchased, (a) each
Underwriter agrees, severally and not jointly, to purchase the number of
Optional Common Shares (subject to such adjustments to eliminate fractional
shares as the Representatives may determine) that bears the same proportion to
the total number of Optional Common Shares to be purchased as the number of Firm
Common Shares set forth on Schedule A opposite the name of such Underwriter
----------
bears to the total number of Firm Common Shares, (b) each Selling Shareholder
agrees, severally and not jointly, to sell up to the number of Optional Common
Shares set forth in Schedule B opposite the name of such Selling Shareholder and
----------
(c) the Underwriters and Selling Shareholders agree that if any Optional Common
Shares are to be purchased, the Optional Common Shares to be sold by Bull HN
Information Systems Inc. ("Bull") shall be purchased first and if after all
such Optional Common Shares have been purchased, additional Optional Common
Shares are to be purchased ("Additional Optional Common Shares"), the remaining
Selling Shareholders shall sell the number of Optional Common Shares (subject to
adjustments to eliminate fractional shares as the
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Representative may determine) that bears the same proportion to the total number
of Additional Optional Common Shares to be sold as the number of Optional Common
Shares set forth in Schedule B opposite the name of such remaining Selling
----------
Shareholder bears to the total number of Additional Optional Common Shares. The
Representatives may cancel the option at any time prior to its expiration by
giving written notice of such cancellation to the Company and the Selling
Shareholders.
Public Offering of the Common Shares. The Representatives hereby advise
the Company and the Selling Shareholders that the Underwriters intend to offer
for sale to the public, as described in the Prospectus, their respective
portions of the Common Shares as soon after this Agreement has been executed and
the Registration Statement has been declared effective as the Representatives,
in their sole judgment, have determined is advisable and practicable.
Payment for the Common Shares. Payment for the Common Shares to be sold by
the Company shall be made at the First Closing Date (and, if applicable, at the
Second Closing Date) by wire transfer of immediately available funds to the
order of the Company. Payment for the Common Shares to be sold by the Selling
Shareholders shall be made at the First Closing Date and, if applicable, at the
Second Closing Date, by wire transfer of immediately available funds to the
order of the Custodian.
It is understood that the Representatives have been authorized, for their
own account and the accounts of the several Underwriters, to accept delivery of
and receipt for, and make payment of the purchase price for, the Firm Common
Shares and any Optional Common Shares the Underwriters have agreed to purchase.
Montgomery Securities, individually and not as a Representative of the
Underwriters, may (but shall not be obligated to) make payment for any Common
Shares to be purchased by any Underwriter whose funds shall not have been
received by the Representatives by the First Closing Date or the Second Closing
Date, as the case may be, for the account of such Underwriter, but any such
payment shall not relieve such Underwriter from any of its obligations under
this Agreement.
The Company hereby agrees that it will pay all stock transfer taxes, stamp
duties and other similar taxes, if any, payable upon the sale or delivery of the
Common Shares to be sold by the Selling Shareholders, to the several
Underwriters, or otherwise in connection with the performance of the Selling
Shareholders obligations hereunder.
Delivery of the Common Shares. The Company and the Primary Selling
Shareholders shall deliver, or cause to be delivered, to the
Representatives for the accounts of the several Underwriters certificates for
the Firm Common Shares to be sold by them at the First Closing Date, against the
irrevocable release of a wire transfer of immediately available funds for the
amount of the purchase price therefor. The Selling Shareholders shall also
deliver, or cause to be delivered, to the Representatives for the accounts of
the several Underwriters certificates for the Optional Common Shares the
Underwriters have agreed to purchase at the First Closing Date or the Second
Closing Date, as the case may be, against the irrevocable release of a wire
transfer of immediately available funds for the amount of the purchase price
therefor. The certificates for the Common Shares shall be in definitive form
and registered in such names and denominations
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as the Representatives shall have requested at least two full business days
prior to the First Closing Date (or the Second Closing Date, as the case may be)
and shall be made available for inspection on the business day preceding the
First Closing Date (or the Second Closing Date, as the case may be) at a
location in New York City as the Representatives may designate. Time shall be of
the essence, and delivery at the time and place specified in this Agreement is a
further condition to the obligations of the Underwriters.
Delivery of Prospectus to the Underwriters. Not later than 12:00 p.m.
Eastern Standard Time on the second business day following the date the Common
Shares are released by the Underwriters for sale to the public, the Company
shall deliver or cause to be delivered copies of the Prospectus in such
quantities and at such places as the Representatives shall request.
Section 3. Additional Covenants.
A. Covenants of the Company. The Company further covenants and agrees
with each Underwriter as follows:
(a) Representatives' Review of Proposed Amendments and Supplements. During
such period beginning on the date hereof and ending on the later of the First
Closing Date or such date, as in the opinion of counsel for the Underwriters,
the Prospectus is no longer required by law to be delivered in connection with
sales by an Underwriter or dealer (the "Prospectus Delivery Period"), prior to
amending or supplementing the Registration Statement (including any registration
statement filed under Rule 462(b) under the Securities Act) or the Prospectus,
the Company shall furnish to the Representatives for review a copy of each such
proposed amendment or supplement, and the Company shall not file any such
proposed amendment or supplement to which the Representatives reasonably object.
(b) Securities Act Compliance. After the date of this Agreement, the
Company shall promptly advise the Representatives in writing (i) of the receipt
of any comments of, or requests for additional or supplemental information from,
the Commission, (ii) of the time and date of any filing of any post-effective
amendment to the Registration Statement or any amendment or supplement to any
preliminary prospectus or the Prospectus, (iii) of the time, and date that any
post-effective amendment to the Registration Statement becomes effective and
(iv) of the issuance by the Commission of any stop order suspending the
effectiveness of the Registration Statement or any post-effective amendment
thereto or of any order preventing or suspending the use of any preliminary
prospectus or the Prospectus, or of any proceedings to remove, suspend or
terminate from listing or quotation the Common Stock from any securities
exchange upon which it is listed for trading or included or designated for
quotation, or of the threatening or initiation of any proceedings for any of
such purposes. If the Commission shall enter any such stop order at any time,
the Company will use its best efforts to obtain the lifting of such order at the
earliest possible moment. Additionally, the Company agrees that it shall comply
with the provisions of Rules 424(b), 430A and 434, as applicable, under the
Securities Act and will use its reasonable efforts to confirm that any filings
made by the Company under such Rule 424(b) were received in a timely manner by
the Commission.
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(c) Amendments and Supplements to the Prospectus and Other Securities Act
Matters. If, during the Prospectus Delivery Period, any event shall occur or
condition exist as a result of which it is necessary to amend or supplement the
Prospectus in order to make the statements therein, in the light of the
circumstances when the Prospectus is delivered to a purchaser, not misleading,
or if in the opinion of the Representatives or counsel for the Underwriters it
is otherwise necessary to amend or supplement the Prospectus to comply with law,
the Company agrees to promptly prepare (subject to Section 3(A)(a) hereof), file
with the Commission and furnish at its own expense to the Underwriters and to
dealers, amendments or supplements to the Prospectus so that the statements in
the Prospectus as so amended or supplemented will not, in the light of the
circumstances when the Prospectus is delivered to a purchaser, be misleading or
so that the Prospectus, as amended or supplemented, will comply with law.
(d) Copies of any Amendments and Supplements to the Prospectus. The
Company agrees to furnish the Representatives, without charge, during the
Prospectus Delivery Period, as many copies of the Prospectus and any amendments
and supplements thereto as the Representatives may reasonably request.
(e) Blue Sky Compliance. The Company shall cooperate with the
Representatives and counsel for the Underwriters to qualify or register the
Common Shares for sale under (or obtain exemptions from the application of)
state securities or blue sky laws or Canadian provincial securities laws of
those jurisdictions reasonably designated by the Representatives, shall comply
with such laws and shall continue such qualifications, registrations and
exemptions in effect so long as required for the distribution of the Common
Shares. The Company shall not be required to qualify as a foreign corporation
or to take any action that would subject it to general service of process in any
such jurisdiction where it is not presently qualified or where it would be
subject to taxation as a foreign corporation. The Company will advise the
Representatives promptly of the suspension of the qualification or registration
of (or any such exemption relating to) the Common Shares for offering, sale or
trading in any jurisdiction or any initiation or threat of any proceeding for
any such purpose, and in the event of the issuance of any order suspending such
qualification, registration or exemption, the Company shall use its best efforts
to obtain the withdrawal thereof at the earliest possible moment.
(f) Use of Proceeds. The Company shall apply the net proceeds from the
sale of the Common Shares sold by it in the manner described under the caption
"Use of Proceeds" in the Prospectus.
(g) Transfer Agent. The Company shall engage and maintain, at its expense,
a registrar and transfer agent for the Common Stock.
(h) Earnings Statement. As soon as practicable, the Company will make
generally available to its security holders and to the Representatives an
earnings statement (which need not be audited) covering the twelve-month period
ending June 30, 1998 satisfies the provisions of Section 11(a) of the Securities
Act.
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(i) Periodic Reporting Obligations. During the Prospectus Delivery Period
the Company shall file, on a timely basis, with the Commission and the Nasdaq
National Market all reports and documents required to be filed under the
Securities Exchange Act of 1934 and the rules and regulations promulgated
thereunder (the "Exchange Act"). Additionally, the Company shall file with the
Commission all reports on Form SR as may be required under Rule 463 under the
Securities Act.
(j) Agreement Not To Offer or Sell Additional Securities. During the
period of 180 days following the date of the Prospectus, the Company will not,
without the prior written consent of Montgomery Securities (which consent may be
withheld at the sole discretion of Montgomery Securities), directly or
indirectly, sell, offer, contract or grant any option to sell, pledge, transfer
or establish an open "put equivalent position" within the meaning of Rule 16a-
1(h) under the Exchange Act, or otherwise dispose of or transfer, or announce
the offering of, or file any registration statement under the Securities Act in
respect of, any shares of Common Stock, options or warrants to acquire shares of
the Common Stock or securities exchangeable or exercisable for or convertible
into shares of Common Stock (other than as contemplated by this Agreement with
respect to the Common Shares); provided, however, that the Company may issue
shares of its Common Stock or options to purchase its Common Stock, or Common
Stock upon exercise of outstanding warrants or options pursuant to any stock
option, stock bonus or other stock plan or arrangement described in the
Prospectus; and provided further, however, that the Company may file (a) at any
time, Registration Statements on Form S-8 relating to shares of Common Stock
issuable under the Company's 1997 Employee Stock Purchase Plan and 1997 Director
Stock Option Plan and (b) at any time after the period of 90 days commencing on
the effective date of the Registration Statement, Registration Statements on
Form S-8 relating to shares of Common Stock issuable under the Company's 1992
Long-Term Incentive Plan and 1997 Stock Incentive Plan.
(k) Future Reports to the Representatives. During the period of five years
after the date hereof the Company will furnish to the Representatives at Two
International Place, Boston, MA 02110 Attention: M. Benjamin Howe: (i) as soon
as practicable after the end of each fiscal year, copies of the Annual Report of
the Company containing the balance sheet of the Company as of the close of such
fiscal year and statements of income, shareholders' equity and cash flows for
the year then ended and the opinion thereon of the Company's independent public
or certified public accountants; (ii) as soon as practicable after the filing
thereof, copies of each proxy statement, Annual Report on Form 10-K, Quarterly
Report on Form 10-Q, Current Report on From 8-K or other report filed by the
Company with the Commission, the NASD or any securities exchange; and (iii) as
soon as available, copies of any report or communication of the Company mailed
generally to holders of its capital stock.
B. Covenants of the Selling Shareholders. Each Selling Shareholder
further covenants and agrees with each Underwriter:
(a) Agreement Not to Offer or Sell Additional Securities. Such Selling
Shareholder will not, without the prior written consent of Montgomery Securities
(which consent may be withheld in its sole discretion), directly or indirectly,
sell, offer, contract or grant any option to
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sell (including without limitation any short sale), pledge, transfer, establish
an open "put equivalent position" within the meaning of Rule 16a-1(h) under the
Exchange Act, or otherwise dispose of any shares of Common Stock (other than the
Common Shares offered hereby), options or warrants to acquire shares of Common
Stock, or securities exchangeable or exercisable for or convertible into shares
of Common Stock currently or hereafter owned either of record or beneficially
(as defined in Rule 13d-3 under the Exchange Act) by the undersigned, or
publicly announce the undersigned's intention to do any of the foregoing, for a
period commencing on the date hereof and continuing through the close of trading
on the date 180 days after the date of the Prospectus. Notwithstanding the
foregoing, such Selling Shareholder does not need to obtain the prior written
consent of Montgomery Securities to transfer any securities (i) by gift, will or
intestacy, (ii) as a distribution, without receipt of consideration, to limited
partners or shareholders of such Selling Shareholder, (iii) in the event such
Selling Shareholder is an individual, to his or her immediate family or to a
trust the beneficiaries of which are exclusively the undersigned and/or a member
or members of his or her immediate family; provided, however, that the
transferee execute an agreement stating that the transferee is receiving and
holding the securities subject to the provisions of this Agreement and there
shall be no further transfer of such securities except in accordance with this
Section 3B(a).
(b) Delivery of Forms W-8 and W-9. To deliver to the Representatives prior
to the First Closing Date a properly completed and executed United States
Treasury Department Form W-8 (if the Selling Shareholder is a non-United States
person) or Form W-9 (if the Selling Shareholder is a United States Person).
Montgomery Securities, on behalf of the several Underwriters, may, in its
sole discretion, waive in writing the performance by the Company or any Selling
Shareholder or any one or more of the foregoing covenants or extend the time for
their performance.
Section 4. Payment of Expenses. The Company agrees to pay all costs, fees
and expenses incurred in connection with the performance of its obligations
hereunder and in connection with the transactions contemplated hereby, including
without limitation (i) all expenses incident to the issuance and delivery of the
Common Shares (including all printing and engraving costs), (ii) all fees and
expenses of the registrar and transfer agent of the Common Stock, (iii) all
necessary issue, transfer and other stamp taxes in connection with the issuance
and sale of the Common Shares to the Underwriters, (iv) all fees and expenses of
the Company's counsel, independent public or certified public accountants and
other advisors, (v) all costs and expenses incurred in connection with the
preparation, printing, filing, shipping and distribution of the Registration
Statement (including financial statements, exhibits, schedules, consents and
certificates of experts), each preliminary prospectus and the Prospectus, and
all amendments and supplements thereto, and this Agreement, (vi) all filing
fees, attorneys' fees and expenses incurred by the Company or the Underwriters
in connection with qualifying or registering (or obtaining exemptions from the
qualification or registration of) all or any part of the Common Shares for offer
and sale under the state securities or blue sky laws or the provincial
securities laws of Canada, and, if requested by the Representatives, preparing
and printing a "Blue Sky Survey" or memorandum, and any supplements thereto,
advising the Underwriters of such qualifications, registrations and exemptions,
(vii) the filing fees incident to, and the reasonable
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fees and expenses of counsel for the Underwriters in connection with, the NASD's
review and approval of the Underwriters' participation in the offering and
distribution of the Common Shares, (viii) the fees and expenses associated with
listing the Common Shares on the Nasdaq National Market, and (ix) all other
fees, costs and expenses referred to in Part II of the Registration Statement.
Except as provided in this Section 4, Section 6, Section 8 and Section 9 hereof,
the Underwriters shall pay their own expenses, including the fees and
disbursements of their counsel.
The Company further agrees with each Underwriter to pay (directly or by
reimbursement) all fees and expenses incident to the performance of the
obligations of the Selling Shareholders under this Agreement which are not
otherwise specifically provided for herein, including but not limited to (i)
fees and expenses of counsel and other advisors for such Selling Shareholders,
(ii) fees and expenses of the Custodian and (iii) expenses and taxes incident to
the sale and delivery of the Common Shares to be sold by such Selling
Shareholders to the Underwriters hereunder (which taxes, if any, may be deducted
by the Custodian under the provisions of Section 2 of this Agreement). To the
extent, if at all, that any Selling Shareholder engages special legal counsel to
represent it in connection with the offering contemplated by this Agreement, the
fees and expenses of such counsel shall be borne by such Selling Shareholder.
This Section 4 shall not affect or modify any separate, valid agreement
relating to the allocation of payment of expenses between the Company, on the
one hand, and the Selling Shareholders, on the other hand.
Section 5. Conditions of the Obligations of the Underwriters. The
obligations of the several Underwriters to purchase and pay for the Common
Shares as provided herein on the First Closing Date and, with respect to the
Optional Common Shares, the Second Closing Date, shall be subject to the
accuracy of the representations and warranties on the part of the Company and
the Selling Shareholders set forth in Section 1 hereof as of the date hereof and
as of the First Closing Date as though then made and, with respect to the
Optional Common Shares, as of the Second Closing Date as though then made, to
the timely performance by the Company and the Selling Shareholders of their
respective covenants and other obligations hereunder, and to each of the
following additional conditions:
(a) Accountants' Comfort Letter. On the date hereof, the Representatives
shall have received from Price Waterhouse LLP, independent public or certified
public accountants for the Company, a letter dated the date hereof addressed to
the Underwriters, in form and substance satisfactory to the Representatives,
containing statements and information of the type ordinarily included in
accountant's "comfort letters" to underwriters, delivered according to Statement
of Auditing Standards No. 72 (or any successor bulletin), with respect to the
audited and unaudited financial statements and certain financial information
contained in the Registration Statement and the Prospectus (and the
Representatives shall have received an additional four conformed copies of
such accountants' letter for each of the several Underwriters).
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<PAGE>
(b) Compliance with Registration Requirements; No Stop Order; No Objection
from NASD. For the period from and after effectiveness of this Agreement and
prior to the First Closing Date and, with respect to the Optional Common Shares,
the Second Closing Date:
(i) the Company shall have filed the Prospectus with the Commission
(including the information required by Rule 430A under the Securities Act) in
the manner and within the time period required by Rule 424(b) under the
Securities Act; or the Company shall have filed a post-effective amendment to
the Registration Statement containing the information required by such Rule
430A, and such post-effective amendment shall have become effective; or, if the
Company elected to rely upon Rule 434 under the Securities Act and obtained the
Representatives' consent thereto, the Company shall have filed a Term Sheet with
the Commission in the manner and within the time period required by such Rule
424(b);
(ii) no stop order suspending the effectiveness of the Registration
Statement, any Rule 462(b) Registration Statement, or any post-effective
amendment to the Registration Statement, shall be in effect and no proceedings
for such purpose shall have been instituted or threatened by the Commission; and
(iii) the NASD shall have raised no objection to the fairness and
reasonableness of the underwriting terms and arrangements.
(c) No Material Adverse Change or Ratings Agency Change. For the period
from and after the date of this Agreement and prior to the First Closing Date
and, with respect to the Optional Common Shares, the Second Closing Date:
(i) in the judgment of the Representatives there shall not have
occurred any Material Adverse Change; and
(ii) there shall not have occurred any downgrading, nor shall any
notice have been given of any intended or potential downgrading or of any review
for a possible change that does not indicate the direction of the possible
change, in the rating accorded any securities of the Company or any of its
subsidiaries by any "nationally recognized statistical rating organization" as
such term is defined for purposes of Rule 436(g)(2) under the Securities Act.
(d) Opinions of Counsel for the Company. On each of the First Closing Date
and the Second Closing Date the Representatives shall have received the opinion
of Hale and Dorr LLP, counsel for the Company, dated as of such Closing Date,
the form of which is attached as Exhibit A (and the Representatives shall have
---------
received an additional four conformed copies of such counsel's legal opinion for
each of the several Underwriters). On each of the First Closing Date and the
Second Closing Date the Representatives shall have received the opinion of
Uria & Menendez counsel for the Company, dated as of such Closing Date, the
form of which is attached as Exhibit D (and the Representatives shall have
---------
received an additional four conformed copies of such counsel's legal opinion for
each of the several Underwriters). On each of the First Closing Date and the
Second Closing Date the Representatives shall have received the opinion of
P.M. Vasudev counsel for the Company, dated as of such Closing Date, the
form of which is attached as Exhibit E (and the Representatives shall have
---------
received an additional four conformed
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<PAGE>
copies of such counsel's legal opinion for each of the several Underwriters). On
each of the First Closing Date and the Second Closing Date the Representatives
shall have received the favorable opinion of Hale and Dorr LLP and Perkins,
Smith & Cohen, LLP, patent counsel for the Company, dated as of such Closing
Date, the form of which is attached as Exhibit F (and the Representatives
---------
shall have received an additional four conformed copies of such counsel's
legal opinion for each of the several Underwriters).
(e) Opinion of Counsel for the Underwriters. On each of the First Closing
Date and the Second Closing Date the Representatives shall have received such
opinion or opinions of Testa, Hurwitz & Thibeault, LLP, counsel for the
Underwriters, with respect to the incorporation of the Company, the sufficiency
of all corporate proceedings and other legal matters relating to this Agreement,
the validity of the Common Shares, the Registration Statement and the Prospectus
and other related matters as the Underwriters may reasonably require, and the
Company and the Selling Shareholders shall have furnished to such counsel such
documents and shall have exhibited to them such papers and records as they may
reasonably request for the purpose of enabling them to pass upon such matters
(and the Representatives shall have received an additional four conformed copies
of such counsel's legal opinion for each of the several Underwriters).
(f) Officer's Certificate. On each of the First Closing Date and the
Second Closing Date the Representatives shall have received a written
certificate executed by the Chief Executive Officer or President of the Company
and the Chief Financial Officer or Chief Accounting Officer of the Company,
dated as of such Closing Date, to the effect set forth in subsections (b)(ii)
and (c)(ii) of this Section 5, and further to the effect that:
(i) for the period from and after the date of this Agreement and prior
to such Closing Date, there has not occurred any Material Adverse Change;
(ii) the representations, warranties and covenants of the Company set
forth in Section 1 (A) of this Agreement are true and correct with the same
force and effect as though expressly made on and as of such Closing Date; and
(iii) the Company has complied with all the agreements and satisfied
all the conditions on its part to be performed or satisfied at or prior to such
Closing Date.
(g) Bring-down Comfort Letter. On each of the First Closing Date and the
Second Closing Date the Representatives shall have received from Price
Waterhouse LLP, independent public or certified public accountants for the
Company, a letter dated such date, in form and substance satisfactory to the
Representatives, to the effect that they reaffirm the statements made in the
letter furnished by them pursuant to subsection (a) of this Section 5, except
that the specified date referred to therein for the carrying out of procedures
shall be no more than three business days prior to the First Closing Date or
Second Closing Date, as the case may be (and the Representatives shall have
received an additional four conformed copies of such accountants' letter for
each of the several Underwriters).
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(h) Opinion of Counsel for the Selling Shareholders. On each of the First
Closing Date and the Second Closing Date the Representatives shall have received
opinions of Hale and Dorr, LLP, counsel for the Selling Shareholders other than
Bull, and of Thomas J. Gallagher, counsel for Bull, each dated as
of such Closing Date, the form of which is attached as Exhibit B (and the
---------
Representatives shall have received an additional four conformed copies of such
counsels' legal opinions for each of the several Underwriters).
(i) Selling Shareholders' Certificate. On each of the First Closing Date
and the Second Closing Date the Representatives shall have received a written
certificate executed by the Attorney-in-Fact of each Selling Shareholder, dated
as of such Closing Date, to the effect that:
(i) the representations, warranties and covenants of such Selling
Shareholder set forth in Section 1 of this Agreement are true and correct with
the same force and effect as though expressly made by such Selling Shareholder
on and as of such Closing Date; and
(ii) such Selling Shareholder has complied with all the agreements and
satisfied all the conditions on its part to be performed or satisfied at or
prior to such Closing Date.
(j) Selling Shareholders' Documents. On the date hereof, the Company and
the Selling Shareholders shall have furnished to the Representatives copies of
the Powers of Attorney and Custody Agreements executed by each of the Selling
Shareholders and such further information, certificates and documents as the
Representatives may reasonably request.
(k) Lock-Up Agreement from Certain Shareholders of the Company Other
Than Selling Shareholders. On the date hereof, the Company shall have furnished
to the Representatives an agreement in the form of Exhibit C hereto from each
---------
director, officer and each beneficial owner (other than those individuals listed
on Schedule C hereto) of at least 10,000 shares of Common Stock (as defined and
----------
determined according to Rule 13d-3 under the Exchange Act, except that a one
hundred eighty day period shall be used rather than the sixty day period set
forth therein), and such agreement shall be in full force and effect on each of
the First Closing Date and the Second Closing Date.
(l) Additional Documents. On or before each of the First Closing Date
and the Second Closing Date, the Representatives and counsel for the
Underwriters shall have received such information, documents and opinions as
they may reasonably require for the purposes of enabling them to pass upon the
issuance and sale of the Common Shares as contemplated herein, or in order to
evidence the accuracy of any of the representations and warranties, or the
satisfaction of any of the conditions or agreements, herein contained.
If any condition specified in this Section 5 is not satisfied when and
as required to be satisfied, this Agreement may be terminated by the
Representatives by notice to the Company and the Selling Shareholders at any
time on or prior to the First Closing Date and, with respect to the Optional
Common Shares, at any time prior to the Second Closing Date, which termination
shall be without liability on the part of any party to any other party, except
that Section 4,
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Section 6, Section 8 and Section 9 shall at all times be effective and shall
survive such termination.
Section 6. Reimbursement of Underwriters' Expenses'. If this
Agreement is terminated by the Representatives pursuant to Section 5, Section 7,
Section 10, Section 11 or Section 17, or if the sale to the Underwriters of the
Common Shares on the First Closing Date is not consummated because of any
refusal, inability or failure on the part of the Company or the Selling
Shareholders to perform any agreement herein or to comply with any provision
hereof, the Company agrees to reimburse the Representatives and the other
Underwriters (or such Underwriters as have terminated this Agreement with
respect to themselves), severally, upon demand for all out-of-pocket expenses
that shall have been reasonably incurred by the Representatives and the
Underwriters in connection with the proposed purchase and the offering and sale
of the Common Shares, including but not limited to fees and disbursements of
counsel, printing expenses, travel expenses, postage, facsimile and telephone
charges.
Section 7. Effectiveness of this Agreement.
This Agreement shall not become effective until the later of (i) the
execution of this Agreement by the parties hereto and (ii) notification by the
Commission to the Company and the Representatives of the effectiveness of the
Registration Statement under the Securities Act.
Prior to such effectiveness, this Agreement may be terminated by any
party by notice to each of the other parties hereto, and any such termination
shall be without liability on the part of (a) the Company or the Selling
Shareholders to any Underwriter, except that the Company and the Selling
Shareholders shall be obligated to reimburse the expenses of the Representatives
and the Underwriters pursuant to Sections 4 and 6 hereof, (b) of any Underwriter
to the Company or the Selling Shareholders, or (c) of any party hereto to any
other party except that the provisions of Section 8 and Section 9 shall at all
times be effective and shall survive such termination.
Section 8. Indemnification.
(a) Indemnification of the Underwriters. Each of the Company and each
of the Selling Shareholders, jointly and severally, agrees to indemnify and hold
harmless each Underwriter, its officers and employees, and each person, if any,
who controls any Underwriter within the meaning of the Securities Act and the
Exchange Act against any loss, claim, damage, liability or expense, as incurred,
to which such Underwriter or such controlling person may become subject, under
the Securities Act, the Exchange Act or other federal or state statutory law or
regulation, or at common law or otherwise (including in settlement of any
litigation, if such settlement is effected with the written consent of the
Company), insofar as such loss, claim, damage, liability or expense (or actions
in respect thereof as contemplated below) arises out of or is based (i) upon any
untrue statement or alleged untrue statement of a material fact contained in the
Registration Statement, or any amendment thereto, including any information
deemed to be a part thereof pursuant to Rule 430A or Rule 434 under the
Securities Act, or the omission or alleged omission therefrom of a material fact
required to be stated therein or necessary to make the statements therein not
misleading; or (ii) upon any untrue statement or alleged untrue
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statement of a material fact contained in any preliminary prospectus or the
Prospectus (or any amendment or supplement thereto), or the omission or alleged
omission therefrom of a material fact necessary in order to make the statements
therein, in the light of the circumstances under which they were made, not
misleading; and to reimburse each Underwriter and each such controlling person
for any and all expenses (including the reasonable fees and disbursements of
counsel chosen by Montgomery Securities) as such expenses are reasonably
incurred by such Underwriter or such controlling person in connection with
investigating, defending, settling, compromising or paying any such loss, claim,
damage, liability, expense or action; provided, however, that the foregoing
indemnity agreement shall not apply to any loss, claim, damage, liability or
expense to the extent, but only to the extent, arising out of or based upon any
untrue statement or alleged untrue statement or omission or alleged omission
made in reliance upon and in conformity with written information furnished to
the Company and the Selling Shareholders by the Representatives expressly for
use in the Registration Statement, any preliminary prospectus or the Prospectus
(or any amendment or supplement thereto); and provided, further, that with
respect to any preliminary prospectus, the foregoing indemnity agreement shall
not inure to the benefit of any Underwriter from whom the person asserting any
loss, claim, damage, liability or expense purchased Common Shares, or any person
controlling such Underwriter, if copies of the Prospectus were timely delivered
to the Underwriter pursuant to Section 2 and a copy of the Prospectus (as then
amended or supplemented if the Company shall have furnished any amendments or
supplements thereto) was not sent or given by or on behalf of such Underwriter
to such person, if required by law so to have been delivered, at or prior to the
written confirmation of the sale of the Common Shares to such person, and if the
Prospectus (as so amended or supplemented) would have cured the defect giving
rise to such loss, claim, damage, liability or expanse. The indemnity agreement
set forth in this Section 8(a) with respect to Bull, Adarsh K. Arora and Andrea
C. Campbell shall apply only to the extent that any such loss, claim, damage,
liability or expense arises out or is based upon any untrue statement or alleged
untrue statement or omission or alleged omission made in reliance upon and in
conformity with written information furnished to the Company by such Selling
Shareholder expressly for use in the Registration Statement, any preliminary
prospectus or the Prospectus (or amendment or supplement thereto). The
Underwriters and Bull hereby acknowledge that the only written information that
Bull has furnished to the Underwriters expressly for use in the Registration
Statement, the preliminary prospectus or the Prospectus (or any amendment or
supplement thereto) are the statements in the seventeenth paragraph under
"Management-Executive Officers and Directors," the first, second and third
(except the second sentence thereof) paragraphs under "Certain Transactions,"
and footnote 8 of the "Principal and Selling Stockholders" table.
Notwithstanding the foregoing, the aggregate liability of any Selling
Shareholder pursuant to the provisions of this Section 8(a) shall be limited to
an amount equal to the net proceeds received by such Selling Shareholder from
the Underwriters in the offering contemplated by this Agreement. Payment shall
not be required from a Selling Shareholder pursuant to this Section 8 until
demand for payment has been made by the Underwriters first upon the Company and
such payment is not made by the Company within 90 days of such demand; provided,
however, that this provision shall not apply to any Selling Shareholder in the
event and to the extent the demand for payment relates to any loss, claim,
damage, liability or expense arising out of or based upon any untrue statement
or alleged untrue statement or omission or alleged omission made in reliance
upon and in conformity with written information furnished to the Company by such
Selling Shareholder expressly for use in
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the Registration Statement, any preliminary prospectus or the Prospectus (or
amendment or supplement thereto). The indemnity agreement set forth in this
Section 8(a) shall be in addition to any liabilities that the Company and the
Selling Shareholders may otherwise have.
(b) Indemnification of the Company, its Directors and Officers and the
Selling Shareholders. Each Underwriter agrees, severally and not jointly, to
indemnify and hold harmless the Company, each of its directors, each of its
officers who signed the Registration Statement, the Selling Shareholders and
each person, if any, who controls the Company or any Selling Shareholder within
the meaning of the Securities Act or the Exchange Act, against any loss, claim,
damage, liability or expense, as incurred, to which the Company, or any such
director, officer, Selling Shareholder or controlling person may become subject,
under the Securities Act, the Exchange Act, or other federal or state statutory
law or regulation, or at common law or otherwise (including in settlement of any
litigation, if such settlement if effected with the written consent of such
Underwriter), insofar as such loss, claim, damage, liability or expense (or
actions in respect thereof as contemplated below) arises out of or is based upon
any untrue or alleged untrue statement of a material fact contained in the
Registrant Statement, any preliminary prospectus or the Prospectus (or any
amendment or supplement thereto), or arises out of or is based upon the omission
or alleged omission to state therein a material fact required to be stated
therein or necessary to make the statements therein not misleading, in each case
to the extent, but only to the extent, that such untrue statement or alleged
untrue statement or omission or alleged omission was made in the Registration
Statement, any preliminary prospectus, the Prospectus (or any amendment or
supplement thereto), in reliance upon and in conformity with written information
furnished to the Company and the Selling Shareholders by the Representatives
expressly for use therein; and to reimburse the Company, or any such director,
officer, Selling Shareholder or controlling person for any legal and other
expense reasonably incurred by the Company, or any such director, officer,
Selling Shareholder or controlling person in connection with investigating,
defending, settling, compromising or paying any such loss, claim, damage,
liability, expense or action. Each of the Company and each of the Selling
Shareholders, hereby acknowledges that the only written information that the
Underwriters have furnished to the Company and the Selling Shareholders
expressly for use in the Registration Statement, any preliminary prospectus or
the Prospectus (or any amendment or supplement thereto) are the statements set
forth (A) in the last paragraph of the cover page of the Prospectus, (B) in the
last paragraph on the inside front cover page of the Prospectus and (C) in the
table in the first paragraph and in the second, sixth, seventh and eighth
paragraphs under the caption "Underwriting" in the Prospectus; and the
Underwriters confirm that such statements are correct. The indemnity agreement
set forth in this Section 8(b) shall be in addition to any liabilities that each
Underwriter may otherwise have.
(c) Notifications and Other Indemnification Procedures. Promptly after
receipt by an indemnified party under this Section 8 of notice of the
commencement of any action, such indemnified party will, if a claim in respect
thereof is to be made against an indemnifying party under this Section 8, notify
the indemnifying party in writing of the commencement thereof, but the omission
so to notify the indemnifying party will not relieve it from any liability which
it may have to any indemnified party for contribution or otherwise than under
the indemnity agreement contained in this Section 8 or to the extent it is not
prejudiced as a proximate result of
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such failure. In case any such action is brought against any indemnified party
and such indemnified party seeks or intends to seek indemnity from an
indemnifying party, the indemnifying party will be entitled to participate in,
and, to the extent that it shall elect, jointly with all other indemnifying
parties similarly notified, by written notice delivered to the indemnified party
promptly after receiving the aforesaid notice from such indemnified party, to
assume the defense thereof with counsel reasonably satisfactory to such
indemnified party; provided, however, if the defendants in any such action
include both the indemnified party and the indemnifying party and the
indemnified party shall have reasonably concluded that a conflict may arise
between the positions of the indemnifying party and the indemnified party in
conducting the defense of any such action or that there may be legal defense
available to it and/or other indemnified parties which are different from or
additional to those available to the indemnifying party, the indemnified party
or parties shall have the right to select separate counsel to assume such legal
defenses and to otherwise participate in the defense of such action on behalf of
such indemnified party or parties. Upon receipt of notice from the indemnifying
party to such indemnified party of such indemnifying party's election so to
assume the defense of such action and approval by the indemnified party of
counsel, the indemnifying party will not be liable to such indemnified party
under this Section 8 for any legal or other expenses subsequently incurred by
such indemnified party in connection with the defense thereof unless (i) the
indemnified party shall have employed separate counsel in accordance with the
proviso to the next preceding sentence (it being understood, however, that the
indemnifying party shall not be liable for the expenses of more than one
separate counsel (together with local counsel), approved by the indemnifying
party (Montgomery Securities in the case of Section 8(b) and Section 9),
representing the indemnified parties who are parties to such action) or (ii) the
indemnifying party shall not have employed counsel satisfactory to the
indemnified party to represent the indemnified party within a reasonable time
after notice of commencement of the action, in each of which cases the fees and
expenses of counsel shall be at the expense of the indemnifying party.
(d) Settlements. The indemnifying party under this Section 8 shall
not be liable for any settlement of any proceeding effected without its written
consent, but if settled with such consent or if there be a final judgment for
the plaintiff, the indemnifying party agrees to indemnify the indemnified party
against any loss, claim, damage, liability or expense by reason of such
settlement of judgment. Notwithstanding the foregoing sentence, if at any time
an indemnified party shall have requested an indemnifying party to reimburse the
indemnified party for fees and expenses of counsel as contemplated by Section
8(c) hereof, the indemnifying party agrees that it shall be liable for any
settlement of any proceeding effected without its written consent if (i) such
settlement is entered into more than 30 days after receipt by such indemnifying
party of the aforesaid request and (ii) such indemnifying party shall not have
reimbursed the indemnified party in accordance with such request prior to the
date of such settlement. No indemnifying party shall, without the prior written
consent of the indemnified party, effect any settlement, compromise or consent
to the entry of judgment in any pending or threatened action, suit or proceeding
in respect of which any indemnified party is or could have been a party and
indemnity was or could have been sought hereunder by such indemnified party,
unless such settlement, compromise or consent includes an unconditional release
of such
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<PAGE>
indemnified party from all liability on claims that are the subject matter of
such action, suit or proceeding.
Section 9. Contribution. If the indemnification provided for in
Section 8 is for any reason held to be unavailable to or otherwise insufficient
to hold harmless an indemnified party in respect of any losses, claims, damages,
liabilities or expenses referred to therein, then each indemnifying party shall
contribute to the aggregate amount paid or payable by such indemnified party, as
incurred, as a result of any losses, claims, damages, liabilities or expenses
referred to therein (i) in such proportion as is appropriate to reflect the
relative benefits received by the Company and the Selling Shareholders, on the
one hand, and the Underwriters, on the other hand, from the offering of the
Common Shares pursuant to this Agreement or (ii) if the allocation provided by
clause (i) above is not permitted by applicable law, in such proportion as is
appropriate to reflect not only the relative benefits referred to in clause (i)
above but also the relative fault of the Company and the Selling Shareholders,
on the one hand, and the Underwriters, on the other hand, in connection with the
statement or omissions or inaccuracies in the representations and warranties
herein which resulted in such losses, claims, damages, liabilities or expenses,
as well as any other relevant equitable considerations. The relative benefits
received by the Company and the Selling Shareholders, on the one hand, and the
Underwriters, on the other hand, in connection with the offering of the Common
Shares pursuant to this Agreement shall be deemed to be in the same respective
proportions as the total net proceeds from the offering of the Common Shares
pursuant to this Agreement (before deducting expenses) received by the Company
and the Selling Shareholders, and the total underwriting discount received by
the Underwriters, in each case as set forth on the front cover page of the
Prospectus (or, if Rule 434 under the Securities Act is used, the corresponding
location on the Term Sheet) bear to the aggregate initial public offering price
of the Common Shares as set froth on such cover. The relative fault of the
Company and the Selling Shareholders, on the one hand, and the Underwriters, on
the other hand, shall be determined by reference to, among other things, whether
any such untrue or alleged untrue statement of a material fact or omission or
alleged omission to state a material fact or any such inaccurate or alleged
inaccurate representations or warranty relates to information supplied by the
Company or the Selling Shareholders, on the one hand, or the Underwriters, on
the other hand, and the parties' relative intent, knowledge, access to
information and opportunity to correct or prevent such statement of omission.
The amount paid or payable by a party as a result of the losses, claims,
damages, liabilities and expenses referred to above shall be deemed to include,
subject to the limitations set forth in Section 8(c), any legal or other fees or
expenses reasonably incurred by such party in connection with investigating or
defending any action or claim. The provisions set forth in Section 8(c) with
respect to notice of commencement of any action shall apply if a claim for
contribution is to be made under this Section 9; provided, however, that no
additional notice shall be required with respect to any action for which notice
has been given under Section 8(c) for purposes of indemnification.
The Company, the Selling Shareholders and the Underwriters agree that
it would not be just and equitable if contribution pursuant to this Section 9
were determined by pro rata allocation (even if the Underwriters were treated as
one entity for such purpose) or by any other
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<PAGE>
method of allocation which does not take account of the equitable considerations
referred to in this Section 9.
Notwithstanding the provisions of this Section 9, (i) no Underwriter shall
be required to contribute any amount in excess of the underwriting commissions
received by such Underwriter in connection with the Common Shares underwritten
by it and distributed to the public and (ii) no Selling Shareholder shall be
required to contribute any amount in excess of the net proceeds received by such
Selling Shareholder from the Underwriters in the offering contemplated by this
Agreement. No person guilty of fraudulent misrepresentation (within the meaning
of Section 11(f) of the Securities Act) shall be entitled to contribution from
any person who was not guilty of such fraudulent misrepresentation. The
Underwriters' obligations to contribute pursuant to this Section 9 are several,
and not joint, in proportion to their respective underwriting commitments as set
forth opposite their names in Schedule A. For purposes of this Section 9, each
---------
officer and employee of an Underwriter and each person, if any, who controls an
Underwriter within the meaning of the Securities Act and the Exchange Act shall
have the same rights to contribution as such Underwriter, and each director of
the Company, each officer of the Company who signed the Registration Statement,
and each person, if any, who controls the Company with the meaning of the
Securities Act and the Exchange Act shall have the same rights to contribution
as the Company.
Section 10. Default of One or More of the Several Underwriters. If,
on the First Closing Date or the Second Closing Date, as the case may be, any
one or more of the several Underwriters shall fail or refuse to purchase Common
Shares that it or they have agreed to purchase hereunder on such date, and the
aggregate number of Common Shares which such defaulting Underwriter or
Underwriters agreed but failed or refused to purchase does not exceed 10% of the
aggregate number of the Common Shares to be purchased on such date, the other
Underwriters shall be obligated, severally, in the proportions that the number
of Firm Common Shares set forth opposite their respective names on Schedule A
----------
bears to the aggregate number of Firm Common Shares set forth opposite the names
of all such non-defaulting Underwriters, or in such other proportions as may be
specified by the Representatives with the consent of the non-defaulting
Underwriters, to purchase the Common Shares which such defaulting Underwriter or
Underwriters agreed but failed or refused to purchase on such date. If, on the
First Closing Date or the Second Closing Date, as the case may be, any one or
more of the Underwriters shall fail or refuse to purchase Common Shares and the
aggregate number of Common Shares with respect to which such default occurs
exceeds 10% of the aggregate number of Common Shares to be purchased on such
date, and arrangements satisfactory to the Representatives and the Company for
the purchase of such Common Shares are not made within 48 hours after such
default, this Agreement shall terminate without liability of any party to any
other party except that the provisions of Section 4, Section 6, Section 8 and
Section 9 shall at all times be effective and shall survive such termination.
In any such case either the Representatives or the Company shall have the right
to postpone the First Closing Date or the Second Closing Date, as the case may
be, but in no event for longer than seven days in order that the required
changes, if any, to the Registration Statement and the Prospectus or any other
documents or arrangements may be effected.
As used in this Agreement, the term "Underwriter" shall be deemed to
include any person substituted for a defaulting Underwriter under this Section
10. Any action taken under this
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<PAGE>
Section 10 shall not relieve any defaulting Underwriter from liability in
respect of any default of such Underwriter under this Agreement.
Section 11. Termination of this Agreement. Prior to the First Closing Date
this Agreement may be terminated by the Representatives by notice given to the
Company and the Selling Shareholders if at any time (i) trading or quotation in
any of the Company's securities shall have been suspended or limited by the
Commission or by the Nasdaq Stock Market, or trading in securities generally on
either the Nasdaq Stock Market or the New York Stock Exchange shall have been
suspended or limited, or minimum or maximum prices shall have been generally
established on any of such stock exchanges by the Commission or the NASD; (ii) a
general banking moratorium shall have been declared by any of federal, New York
or California authorities; (iii) there shall have occurred any outbreak or
escalation of national or international hostilities or any crisis or calamity,
or any change in the United States or international financial markets, or any
substantial change or development involving a prospective substantial change in
the United States' or international political, financial or economic conditions,
as in the judgment of the Representatives is material and adverse and makes it
impracticable to market the Common Shares in the manner and on the terms
described in the Prospectus or to enforce contracts for the sale of securities;
(iv) in the judgment of the Representatives there shall have occurred any
Material Adverse Change; or (v) the Company shall have sustained a loss by
strike, fire, flood, earthquake, accident or other calamity of such character as
in the judgment of the Representatives may interfere materially with the conduct
of the business and operations of the Company regardless of whether or not such
loss shall have been insured. Any termination pursuant to this Section 11 shall
be without liability on the part of (a) the Company or the Selling Shareholders
to any Underwriter, except that the Company and the Selling Shareholder shall be
obligated to reimburse the expenses of the Representatives and the Underwriters
pursuant to Section 4 and 6 hereof, (b) any Underwriter to the Company or any
Selling Shareholder, or (c) of any party hereto to any other party except that
the provisions of Section 8 and Section 9 shall at all times be effective and
shall survive such termination.
Section 12. Representations and Indemnities to Survive Delivery. The
respective indemnities, agreements, representations, warranties and other
statements of the Company, of its officers, of the Selling Shareholders and of
the several Underwriters set forth in or made pursuant to this Agreement will
remain in full force and effect, regardless of any investigation made by or on
behalf of any Underwriter or the Company or any of its or their partners,
officers or directors or any controlling person, or the Selling Shareholders, as
the case may be, and will survive delivery of and payment for the Common Shares
sold hereunder and any termination of this Agreement.
Notwithstanding any other provision of this Agreement, this Agreement shall
terminate as to Adarsh K. Arora (the "Option Selling Stockholder"), and such
Option Selling Stockholder shall have no further obligations hereunder, if the
over-allotment option granted under Section 2 hereof is not exercised in
accordance with such Section. Any such termination shall be without liability of
the Option Selling Stockholder to the Underwriters and without liability of the
Underwriters to the Option Selling Stockholder; provided, however, that in the
event of any such termination, the Option Selling Stockholder agrees to
indemnify and hold harmless the Underwriters from all costs or expenses incident
to the performance of the obligations of the Option Selling Stockholder under
this Agreement, including any costs and expenses payable by such Option Selling
Stockholder pursuant to Section 4 hereof.
Section 13. Notices. All communications hereunder shall be in
writing and shall be mailed, hand delivered or telecopied and confirmed to the
parties hereto as follows:
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<PAGE>
If to the Representatives:
Montgomery Securities
600 Montgomery Street
San Francisco, California 94111
Facsimile: (415) 249-5558
Attention: Richard A. Smith
with a copy to:
Montgomery Securities
600 Montgomery Street
San Francisco, California 94111
Facsimile: (415) 249-5553
Attention: David A. Baylor, Esq.
If to the Company:
Peritus Software Services, Inc.
304 Concord Road
Billerica, MA 01821
(508) 670-0800
Facsimile: (508) 670-1172
Attention: President
If to the Selling Shareholders:
Peritus Software Services, Inc., as Custodian
304 Concord Road
Billerica, MA 01821
(508) 670-0800
Facsimile: (508) 670-11720
Any party hereto may change the address for receipt of communications by giving
written notice to the others.
Section 14. Successors. This Agreement will inure to the benefit of
and binding upon the parties hereto, including any substitute Underwriters
pursuant to Section 10 hereof, and to the benefit of the employees, officers and
directors and controlling persons referred to in Section 8 and Section 9, and in
each case their respective successors, and no other person will have any right
or obligation hereunder. The term "successors" shall not include any purchaser
of the Common Shares as such from any of the Underwriters merely by reason of
such purchase.
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<PAGE>
Section 15. Partial Unenforceability. The invalidity or
unenforceability of any Section, paragraph or provision of this Agreement shall
not affect the validity or enforceability of any other Section, paragraph or
provision hereof. If any Section, paragraph or provision of this Agreement is
for any reason determined to invalid or unenforceable, there shall be deemed to
be made such minor changes (and only such minor changes) as are necessary to
make it valid and enforceable.
Section 16. (a) Governing Law Provisions. THIS AGREEMENT SHALL BE
GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE INTERNAL LAWS OF THE STATE OF
NEW YORK APPLICABLE TO AGREEMENTS MADE AND TO BE PERFORMED IN SUCH STATE.
(b) Consent to Jurisdiction. Any legal suit, action or proceeding
arising out of or based upon this Agreement or the transactions contemplated
hereby ("Related Proceedings") may be instituted in the federal courts of the
United States of America located in the City of San Francisco (collectively, the
"Specified Courts"), and each party irrevocably submits to the exclusive
jurisdiction (except for proceedings instituted in regard to the enforcement of
a judgment of any such court (a "Related Judgment"), as to which such
jurisdiction is non-exclusive) of such courts in any such suit, action or
proceeding. Service of any process, summons, notice or document by mail to such
party's address set forth above shall be effective service of process for any
suit, action or other proceeding brought in any such court. The parties
irrevocably and unconditionally waive any objection to the laying of venue of
any suit, action or other proceeding in the Specified Courts and irrevocably and
unconditionally waive and agree not to plead or claim in any such court that any
such suit, action or other proceeding brought in any such court has been brought
in an inconvenient forum.
Section 17. Failure of One or More of the Selling Shareholders to
Sell and Deliver Common Shares. If one or more of the Selling Shareholders
shall fail to sell and deliver to the Underwriters the Common Shares to be sold
and delivered by such Selling Shareholder at the First Closing Date pursuant to
this Agreement, then the Underwriters may at their option, by written notice
from the Representatives to the Company and the Selling Shareholders, either (i)
terminate this Agreement without any liability on the part of any Underwriter
or, except as provided in Sections 4, 6, 8, and 9 hereof, the Company or the
Selling Shareholders, or (ii) purchase the shares which the Company and other
Selling Shareholders have agreed to sell and deliver in accordance with the
terms hereof. If one or more of the Selling Shareholders shall fail to sell and
deliver to the Underwriters the Common Shares to be sold and delivered by such
Selling Shareholder pursuant to this Agreement at the First Closing Date, then
the Underwriters shall have the right, by written notice from the
Representatives to the Company and the Selling Shareholders, to postpone the
First Closing Date, but in no event for longer than seven days in order that the
required changes, if any, to the Registration Statement and Prospectus or any
other documents or arrangement may be effected.
Section 18. General Provisions. This Agreement constitutes the
entire agreement of the parties to this Agreement and supersedes all prior
written or oral and all contemporaneous oral agreements, understandings and
negotiations with respect to the subject matter hereof. This
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<PAGE>
Agreement may be executed in two or more counterparts, each one of which shall
be an original, with the same effect as if the signatures thereto and hereto
were upon the same instrument. This Agreement may not be amended or modified
unless in writing by all of the parties hereto, and no condition herein (express
or implied) may be waived unless waived in writing by each party whom the
condition is meant to benefit. The Table of Contents and the Section headings
herein are for the convenience of the parties only and shall not affect the
construction or interpretation of this Agreement.
Each of the parties hereto acknowledges that it is a sophisticated
business person who was adequately represented by counsel during negotiations
regarding the provisions hereof, including, without limitation, the
indemnification provisions of Section 8 and contribution provisions of Section
9, and is fully informed regarding said provisions. Each of the parties hereto
further acknowledges that the provisions of Sections 8 and 9 hereto fairly
allocate the risks in light of the ability of the parties to investigate the
Company, its affairs and its business in order to assure that adequate
disclosure has been made in the Registration Statement, any preliminary
prospectus and the Prospectus (and any amendments and supplements thereto), as
required by the Securities Act and the Exchange Act.
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<PAGE>
If the foregoing is in accordance with your understanding of our
agreement, kindly sign and return to the Company and Custodian the enclosed
copies hereof, whereupon this instrument, along with all counterparts hereof,
shall become a binding agreement in accordance with its terms.
Very truly yours,
PERITUS SOFTWARE SERVICES, INC.
By:
-------------------------------------------
Name:
Title:
SELLING SHAREHOLDERS
By:
-------------------------------------------
(Attorney-in-fact)
The foregoing Underwriting Agreement is hereby confirmed and accepted by
the Representatives in San Francisco, California as of the date first above
written.
MONTGOMERY SECURITIES
WESSELS, ARNOLD & HENDERSON, L.L.C.
H.C. WAINWRIGHT & CO., INC.
Acting as Representatives of the
several Underwriters named in the
attached Schedule A.
By: MONTGOMERY SECURITIES
By:
--------------------------------
Name:
Title:
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<PAGE>
SCHEDULE A
<TABLE>
<CAPTION>
Underwriters Number of
Firm Common
Shares to be Purchased
<S> <C>
Montgomery Securities................ [ ]
Wessels, Arnold & Henderson, L.L.C. [ ]
H.C. Wainwright & Co., Inc. .........
[_____].............................. [ ]
[_____].............................. [ ]
[_____].............................. [ ]
[_____].............................. [ ]
[_____].............................. [ ]
Total.......................... 3,500,000
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
Schedule B
Names and Addresses of Certificates Primary Shares Secondary Shares
------------
Selling Shareholders Deposited to be Sold to be Sold
-------------------- --------- ----------
<S> <C> <C> <C>
Bull HN Information
Systems Inc. 360,000 265,000
300 Concord Road
Billerica, MA 01821
Dominic K. Chan* 300,000 200,000
c/o Peritus Software
Services, Inc.
304 Concord Road
Billerica, MA 01821
Allen K. Deary* 20,000 30,000
c/o Peritus Software
Services, Inc.
304 Concord Road
Billerica, MA 01821
Andrea C. Campbell 20,000 10,000
c/o Peritus Software
Services, Inc.
304 Concord Road
Billerica, MA 01821
Adarsh K. Arora 20,000
c/o Peritus Software
Services, Inc.
304 Concord Road
Billerica, MA 01821
</TABLE>
*Denotes Significant Shareholder.
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<PAGE>
Schedule C
----------
Leon Stevens
Bernard Jordan
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<PAGE>
EXHIBIT A
The final opinion in draft form will be attached as Exhibit A at the time this
Agreement is executed.
Opinion of counsel for the Company to be delivered pursuant to
Section 5(d) of the Underwriting Agreement.
References to the Prospectus in this Exhibit A include any supplements
---------
thereto at the Closing Date.
(i) The Company has been duly incorporated and is validly existing
as a corporation in good standing under the laws of the Commonwealth of
Massachusetts.
(ii) The Company has corporate power and authority to own and lease
its properties and to conduct its business, as such properties and business
are described in the Prospectus and to enter into and consummate the
transactions contemplated by the Underwriting Agreement.
(iii) The Company is duly qualified as a foreign corporation to
transact business and is in good standing in each jurisdiction listed on
Schedule A to the opinion.
----------
(iv) Peritus Software Services Securities Corporation (the "U.S.
Subsidiary") has been duly incorporated and is validly existing as a
corporation in good standing under the laws of the Commonwealth of
Massachusetts and has corporate power and authority to own and lease its
properties (as known to such counsel) and to conduct its business as
described in the Prospectus.
(v) All of the issued and outstanding capital stock of the U.S.
Subsidiary has been duly authorized and validly issued, is fully paid and
non-assessable and is owned of record by the Company. To the knowledge of
such counsel, the outstanding shares of capital stock of the U.S.
Subsidiary are owned free and clear or any security interest, mortgage,
pledge, lien, encumbrance or any pending or threatened claim.
(vi) The authorized, issued and outstanding Common Stock of the
Company conforms, or when issued, delivered and paid for in accordance with
the terms of the Underwriting Agreement will conform, in all material
respects to the description thereof set forth in the Prospectus. All of
the outstanding shares of Common Stock (including the shares of Common
Stock owned by Selling Shareholders) have been duly authorized and validly
issued, are fully paid and nonassessable. The form of certificate used to
evidence the Common Stock, assuming it is in the form filed with the
Commission, is in due and proper form and complies with all applicable
requirements of the charter and by-laws of
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<PAGE>
the Company and the Business Corporation Laws of the Commonwealth of
Massachusetts.
(vii) Except as described in the Prospectus, no shareholder of the
Company or any other person has any preemptive right, right of first
refusal or other similar right to subscribe for or purchase securities of
the Company arising (i) by operation of the charter or by-laws of the
Company or the Business Corporation Laws of the Commonwealth of
Massachusetts or (ii) to the knowledge of such counsel, otherwise, except
such rights that have been satisfied or waived.
(viii) The Underwriting Agreement has been duly authorized, executed
and delivered by the Company.
(ix) The Common Shares to be purchased by the Underwriters from the
Company have been duly authorized for issuance and sale pursuant to the
Underwriting Agreement and, when certificates evidencing the Common Shares
have been duly countersigned by the Company's transfer agent and registrar
and delivered to the Underwriters, or upon the order of the Underwriters,
against payment of the agreed consideration therefor in accordance with the
provisions of the Underwriting Agreement, will be validly issued, fully
paid and nonassessable.
(x) Each of the Registration Statement and the Rule 462(b)
Registration Statement, if any, has been declared effective by the
Commission under the Securities Act. To the knowledge of such counsel, no
stop order suspending the effectiveness of either of the Registration
Statement or the Rule 462(b) Registration Statement, if any, has been
issued under the Securities Act and no proceedings for such purpose have
been instituted or are pending or are threatened by the Commission. Any
required filing of the Prospectus and any supplement thereto pursuant to
Rule 424(b) under the Securities Act has been made in the manner and within
the time period required by such Rule 424(b).
(xi) The Registration Statement, including any Rule 462(b)
Registration Statement, the Prospectus, and each amendment or supplement to
the Registration Statement and the Prospectus, as of their respective
effective or issue dates (other than the financial statements, including
the notes and schedules thereto, or any other financial, statistical or
accounting information, or information relating to the Underwriters or the
method of distribution of the Common Shares by the Underwriters, included
therein, as to which no opinion need be rendered) complied as to form in
all material respects with the applicable requirements of the Securities
Act. In passing upon the form of such documents, such counsel is not
passing upon the statements made therein and takes no responsibility
therefor.
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<PAGE>
(xii) The statements in the Prospectus under the captions "Risk
Factors--Shares Eligible for Future Sale; Registration Rights," "Risk
Factors--Potential Adverse Effects of Anti-Takeover Provisions; Possible
Issuance of Preferred Stock," "Description of Capital Stock," "Shares
Eligible for Future Sale," "Management--Employment Agreements," and
"Management--Stock Plans," insofar as such statements constitute matters of
law or legal conclusions, have been reviewed by such counsel and are
correct in all material respects.
(xiii) To the knowledge of such counsel, there are no legal or
governmental actions, suits or proceedings pending or threatened which are
required to be described in the Registration Statement which are not
described as required.
(xiv) To the knowledge of such counsel, there are no contracts or
documents required to be described in the Registration Statement or to be
filed as exhibits thereto other than those described therein or filed as
exhibits thereto.
(xv) No consent, approval, authorization or other order of, or
registration or filing with, any court or other governmental authority or
agency, is required for the Company's execution and delivery of the
Underwriting Agreement and consummation of the transactions contemplated
thereby (other than as may be required under the Securities Act, applicable
state or provincial securities or blue sky laws and from the NASD) except
such as have been obtained or made.
(xvi) The execution and delivery of the Underwriting Agreement by
the Company and the consummation by the Company of the transactions
contemplated thereby (i) have been duly authorized by all necessary
corporate action on the part of the Company; (ii) will not result in any
violation of the provisions of the charter or by-laws of the Company; or
(iii) will not constitute a breach of, or Default under, or result in the
creation or imposition of any lien, charge or encumbrance upon any property
or assets of the Company under any agreement or instrument to which the
Company is a party which is listed as an exhibit to the Registration
Statement.
(xvii) The Company is not, and will not become, as a result of the
consummation of the transactions contemplated by the Underwriting
Agreement, and application of the net proceeds therefrom as described in
the Prospectus, required to register as an "investment company" within the
meaning of Investment Company Act.
(xviii) Except as disclosed in the Prospectus, to the knowledge of
such counsel, there are no persons with registration or other similar
rights to have any equity or debt securities registered for sale under the
Registration Statement or included in the offering contemplated by the
Underwriting Agreement, except for such rights as have been duly waived or
satisfied.
In addition, such counsel shall state that they have participated in
conferences with officers and other representatives of the Company,
representatives of the independent public or certified public accountants
for the Company and with
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<PAGE>
representatives of the Underwriters at which the contents of the
Registration Statement and the Prospectus, and any supplements or
amendments thereto, and related matters were discussed and, although the
limitations inherent in the independent verification of factual matters and
the character of determinations involved in the registration process are
such that such counsel is not passing upon and does not assume any
responsibility for the accuracy, completeness or fairness of the statements
contained in the Registration Statement or the Prospectus (other than as
specified in paragraph 12 above), and subject to the foregoing and based on
such participation, nothing has come to their attention which would lead
them to believe that either the Registration Statement or any amendments
thereto, at the time the Registration Statement or such amendments became
effective, contained an untrue statement of a material fact or omitted to
state a material fact required to be stated therein or necessary to make
the statements therein not misleading or that the Prospectus, as of its
date or at the First Closing Date or the Second Closing Date, as the case
may be, contained an untrue statement of a material fact or omitted to
state a material fact necessary in order to make the statements therein, in
the light of the circumstances under which they were made, not misleading
(it being understood that such counsel need express no belief as to the
financial statements, including the notes and schedules thereto, or any
other financial, statistical or accounting information, or information
relating to the Underwriters or the method of distribution of the Shares by
the Underwriters included in the Registration Statement or the Prospectus
or any amendments or supplements thereto).
In rendering such opinion, such counsel may rely (A) as to matters
involving the application of laws of any jurisdiction other than the Business
Corporation Laws of the Commonwealth of Massachusetts or the federal law of the
United States, to the extent they deem proper and specified in such opinion,
upon the opinion (which shall be dated the First Closing Date or the Second
Closing Date, as the case may be, shall be satisfactory in form and substance to
the Underwriters, shall expressly state that the Underwriters may rely on such
opinion as if it were addressed to them and shall be furnished to the
Representatives) of other counsel of good standing whom they believe to be
reliable and who are satisfactory to counsel for the Underwriters; provided,
however, that such counsel shall further state that they believe that they and
the Underwriters are justified in relying upon such opinion of other counsel,
and (B) as to matters of fact, to the extent they deem proper, on certificates
of responsible officers of the Company and public officials.
-39-
<PAGE>
EXHIBIT B
The final opinion in draft form will be attached as Exhibit B at the time this
Agreement is executed.
The opinion of such counsel pursuant to Section 5(h) shall be rendered to
the Representatives at the request of the Company and shall so state therein.
References to the Prospectus in this Exhibit B includes any supplements thereto
---------
at the Closing Date.
(i) The Underwriting Agreement has been duly authorized, executed and
delivered by or on behalf of such Selling Shareholder.
(ii) The execution and delivery by such Selling Shareholder of, and the
consummation by such Selling Shareholder of the transactions contemplated by,
the Underwriting Agreement, and its Custody Agreement and its Power of Attorney
will not contravene or conflict with, result in a breach of, or constitute a
default under, the charter or by-laws, partnership agreement, trust agreement or
other organizational documents, as the case may be, of such Selling Shareholder,
or, to such counsel's knowledge, violate or contravene any provision of law or
regulation applicable to such Selling Shareholder, or violate, result in a
breach of or constitute a default under the terms of any other agreement or
instrument known to such counsel to which such Selling Shareholder is a party or
by which it is bound, or any judgment, order or decree known to such counsel and
specifically naming such Selling Shareholder of any court or any other
governmental authority or agency having jurisdiction over such Selling
Shareholder.
(iii) To the knowledge of such counsel, such Selling Shareholder has good
and valid title to all of the Common Shares which may be sold by such Selling
Shareholder under the Underwriting Agreement and has the legal right and power,
and all authorizations and approvals required [under its charter and by-laws,]
[partnership agreement,] [trust agreement] [or other organizational documents,
as the case may be,] to enter into the Underwriting Agreement and its Custody
Agreement and its Power of Attorney, to sell, transfer and deliver all of the
Common Shares which may sold by such Selling Shareholder under the Underwriting
Agreement and to consummate the transactions contemplated by the Underwriting
Agreement, its Custody Agreement and its Power of Attorney.
(iv) Each of the Custody Agreement and Power of Attorney of such Selling
Shareholder has been duly authorized, executed and delivered by such Selling
Shareholder and is a valid, irrevocable instrument legally sufficient for the
purposes intended.
In rendering such opinion, such counsel may rely (A) as to matters
involving the application of laws of any jurisdiction other than the Business
Corporation Laws of the Commonwealth of Massachusetts or the federal law of the
United States, to the extent they deem proper and specified in such opinion,
upon the opinion (which shall be dated the First Closing
-40-
<PAGE>
Date or the Second Closing Date, as the case may be, shall be satisfactory in
form and substance to the Underwriters, shall expressly state that the
Underwriters may rely on such opinion as if it were addressed to them and shall
be furnished to the Representatives) of other counsel of good standing whom they
believe to be reliable and who are satisfactory to counsel for the Underwriters;
provided, however, that such counsel shall further state that they believe that
they and the Underwriters are justified in relying upon such opinion of other
counsel, and (B) as to matters of fact, to the extent they deem proper, on
certificates of responsible officers of the Company and public officials and, in
the case of Selling Shareholders that are natural persons, on representations
made by such Selling Shareholders (including without limitation the
representations of the Selling Shareholders in the Underwriting Agreement and
their respective Custody Agreements).
-41-
<PAGE>
EXHIBIT C
__________, 1997
Montgomery Securities
Wessels, Arnold & Henderson, L.L.C.
H.C. Wainwright & Co., Inc.
As Representatives of the Several Underwriters
c/o Montgomery Securities
600 Montgomery Street
San Francisco, California 94111
RE: Peritus Software Services, Inc. (the "Company")
--------------------------------
Ladies & Gentlemen:
The undersigned is an owner of record or beneficially of certain shares of Class
A Common Stock and/or Class B Common Stock of the Company (these securities,
along with the shares constituting the common stock of the Company after the
consummation of the Offering (as defined herein), shall be hereinafter referred
to as the "Common Stock") or securities convertible into or exchangeable or
exercisable for Common Stock. The Company proposes to carry out a public
offering of Common Stock (the "Offering") for which you will act as the
representatives of the underwriters. The undersigned recognizes that the
Offering will be of benefit to the undersigned and will benefit the Company by,
among other things, raising additional capital for its operations. The
undersigned acknowledges that you and the other underwriters are relying on the
representations and agreements of the undersigned contained in this letter in
carrying out the Offering and in entering into an underwriting arrangement with
the Company with respect to the Offering (the "Underwriting Agreement").
In consideration of the foregoing, the undersigned hereby agrees that the
undersigned will not, without the prior written consent of Montgomery Securities
(which consent may be withheld in its sole discretion), directly or indirectly,
sell, offer, contract or grant any option to sell (including without limitation
any short sale), pledge, transfer, establish an open "put equivalent position"
within the meaning of Rule 16a-1(h) under the Securities Exchange Act of 1934,
or otherwise dispose of any shares of Common Stock, options or warrants to
acquire shares of Common Stock, or securities exchangeable or exercisable for or
convertible into shares of Common Stock currently or hereafter owned either of
record or beneficially (as defined in Rule 13d-3 under the Securities Exchange
Act of 1934) by the undersigned (collectively, "Securities"), or publicly
announce the undersigned's intention to do any of the foregoing, for a period
commencing on the date hereof and continuing through the close of trading on the
date 180 days after the date of the Prospectus (as defined in the Underwriting
Agreement. The undersigned also agrees and consents to the entry of stop
transfer instructions with the Company's transfer agent and registrar against
the transfer of shares of Common Stock or securities convertible into or
exchangeable or exercisable for Common Stock held by the undersigned except in
compliance with the foregoing restrictions.
-42-
<PAGE>
Notwithstanding the foregoing, the undersigned does not need to obtain the prior
written consent of Montgomery Securities to transfer any or all of the
Securities (i) included in the Registration Statement filed in connection with
the Offering, (ii) by gift, will or intestacy, (iii) as a distribution, without
receipt of consideration, to limited partners or shareholders or members (in the
case of a limited liability company) of the undersigned, (iv) in the event the
undersigned is an individual, to his or her immediate family or to a trust the
beneficiaries of which are exclusively the undersigned and/or a member or
members of his or her immediate family; provided, however, that in the case of
transfers under clauses (ii), (iii) and (iv), it shall be a condition to the
transfer that the transferee execute an agreement stating that the transferee is
receiving and holding the Securities subject to the provisions of this
agreement, and there shall be no further transfer of such Securities except in
accordance with this agreement.
It is understood that, if the Underwriting Agreement between the underwriters
and the Company does not become effective by May 1, 1998, or if the Underwriting
Agreement (other than the provisions thereof which survive termination) shall
terminate or be terminated prior to payment for and delivery of the shares of
Common Stock, you will release the undersigned from the obligations under this
letter agreement.
This agreement is irrevocable and will be binding on the undersigned and the
respective successors, heirs, personal representatives, and assigns of the
undersigned.
- ----------------------------
Printed Name of Holder
By
--------------------------
Signature
- ----------------------------
Printed Name of Person Signing
(and indicate capacity of person signing if
signing as custodian, trustee, or on behalf
of an entity)
Representatives
-43-
<PAGE>
EXHIBIT D
The final opinion in draft form will be attached as Exhibit D at the time this
Agreement is executed.
Opinion of counsel for the Company to be delivered pursuant to Section 5(d)
of the Underwriting Agreement.
References to the Prospectus in this Exhibit D include any supplements
---------
thereto at the Closing Date.
(i) Persist Service's Software, S.A. ("Persist") has been duly
incorporated and is validly existing as a corporation in good standing
under the laws of ________________.
(ii) Persist has corporate power and authority to own and, lease and
operate its properties and to conduct its business, as such properties and
business are described in the Prospectus.
(iii) Persist is duly qualified as a foreign corporation to transact
business and is in good standing in each jurisdiction in which such
qualification is required, whether by reason or the ownership or leasing or
property or the conduct of business, except for such jurisdictions where
the failure to so qualify or to be in good standing would not, individually
or in the aggregate, result in a Material Adverse Change.
(iv) Except as described in the Prospectus, all of the issued and
outstanding capital stock of Persist has been duly authorized and validly
issued, is fully paid and non-assessable and is owned of record by the
Company. To the knowledge of such counsel, the outstanding shares of
capital stock of Persist are owned free and clear or any security interest,
mortgage, pledge, lien, encumbrance or any pending or threatened claim.
-44-
<PAGE>
EXHIBIT E
The final opinion in draft form will be attached as Exhibit E at the time this
Agreement is executed.
Opinion of counsel for the Company to be delivered pursuant to Section 5(d)
of the Underwriting Agreement.
References to the Prospectus in this Exhibit E include any supplements
---------
thereto at the Closing Date.
(i) Peritus Software Services (India) Private Ltd. ("Peritus
(India)") has been duly incorporated and is validly existing as a
corporation in good standing under the laws of ________________.
(ii) Peritus (India) has corporate power and authority to own and,
lease and operate its properties and to conduct its business, as such
properties and business are described in the Prospectus.
(iii) Peritus (India) is duly qualified as a foreign corporation to
transact business and is in good standing in each jurisdiction in which
such qualification is required, whether by reason or the ownership or
leasing or property or the conduct of business, except for such
jurisdictions where the failure to so qualify or to be in good standing
would not, individually or in the aggregate, result in a Material Adverse
Change.
(iv) Except as described in the Prospectus, all of the issued and
outstanding capital stock of Peritus (India) has been duly authorized and
validly issued, is fully paid and non-assessable and is owned of record by
the Company. To the knowledge of such counsel, the outstanding shares of
capital stock of Peritus (India) are owned free and clear or any security
interest, mortgage, pledge, lien, encumbrance or any pending or threatened
claim.
-45-
<PAGE>
EXHIBIT F
The final opinion in draft form will be attached as Exhibit F at the time this
Agreement is executed.
Opinion of patent counsel for the Company to be delivered pursuant to
Section 5(d) of the Underwriting Agreement.
Such counsel is unaware of any facts which would preclude the Company from
having clear title to U.S. Patent Application Serial No. ______, except as
described in the Prospectus. Such counsel is unaware of any facts that indicate
that the Company has not complied with the required duty of candor and good
faith in dealing with the Patent and Trademark Office in connection with the
prosecution of U.S. Patent Application Serial No. ______, including the duty to
disclose to the PTO all information believed to be material to the patentability
of such pending application. Such counsel has no knowledge of any patents or
patent applications of third parties, which, if issued, would limit or prohibit
the business now conducted or proposed to be conducted by the Company as
described in the Prospectus, except as described therein.
-46-
<PAGE>
EXHIBIT 5
[LETTERHEAD OF HALE AND DORR LLP APPEARS HERE]
June 30, 1997
Peritus Software Services, Inc.
304 Concord Road
Billerica, MA 01821
Re: Registration Statement on Form S-1
----------------------------------
Ladies and Gentlemen:
This opinion is furnished to you in connection with a Registration
Statement on Form S-1 (File No. 333-27087), together with Amendments No. 1, 2
and 3 thereto (the "Registration Statement"), filed with the Securities and
Exchange Commission (the "Commission") under the Securities Act of 1933, as
amended (the "Securities Act"), for the registration of 4,025,000 shares of
Common Stock, $.01 par value per share (the "Shares"), of Peritus Software
Services, Inc., a Massachusetts corporation (the "Company"), of which (i)
2,800,000 Shares will be issued and sold by the Company and (ii) up to 1,225,000
Shares will be sold by certain stockholders of the Company (the "Selling
Stockholders") (including 525,000 Shares issuable upon the exercise of an over-
allotment option granted by the Selling Stockholders).
The Shares are to be sold by the Company and the Selling Stockholders
pursuant to an underwriting agreement (the "Underwriting Agreement") to be
entered into by and among the Company, the Selling Stockholders and Montgomery
Securities, Wessels, Arnold & Henderson, L.L.C. and H.C. Wainwright & Co., Inc.,
as representatives of the several underwriters named in the Underwriting
Agreement, the form of which has been filed as Exhibit 1 to the Registration
Statement.
We are acting as counsel for the Company in connection with the sale by the
Company and the Selling Stockholders of the Shares. We have examined signed
copies of the Registration Statement as filed with the Commission. We have
<PAGE>
also examined and relied upon the Underwriting Agreement, minutes of meetings of
the stockholders and the Board of Directors of the Company as provided to us by
the Company, stock record books of the Company as provided to us by the Company,
the Articles of Organization and By-Laws of the Company, each as restated and/or
amended to date, and such other documents as we have deemed necessary for
purposes of rendering the opinions hereinafter set forth.
In our examination of the foregoing documents, we have assumed the
genuineness of all signatures, the authenticity of all documents submitted to us
as originals, the conformity to original documents of all documents submitted to
us as copies, the authenticity of the originals of such latter documents and the
legal competence of all signatories to such documents.
We assume that the appropriate action will be taken, prior to the offer and
sale of the Shares in accordance with the Underwriting Agreement, to register
and qualify the Shares for sale under all applicable state securities or "blue
sky" laws.
We express no opinion herein as to the laws of any state or jurisdiction
other than the state laws of the Commonwealth of Massachusetts and the federal
laws of the United States of America.
Based upon and subject to the foregoing, we are of the opinion that (i) the
Shares to be issued and sold by the Company have been duly authorized for
issuance and, when such Shares are issued and paid for in accordance with the
terms and conditions of the Underwriting Agreement, such shares will be validly
issued, fully paid and nonassessable and (ii) the Shares to be sold by the
Selling Stockholders have been duly authorized and are validly issued, fully
paid and nonassessable.
It is understood that this opinion is to be used only in connection with
the offer and sale of the Shares while the Registration Statement is in effect.
Please note that we are opining only as to the matters expressly set forth
herein, and no opinion should be inferred as to any other matters.
We hereby consent to the filing of this opinion with the Commission as an
exhibit to the Registration Statement in accordance with the requirements of
Item 601(b)(5) of Regulation S-K under the Securities Act and to the use of our
name therein and in the related Prospectus under the caption "Legal Matters."
In giving
2
<PAGE>
such consent, we do not hereby admit that we are in the category of persons
whose consent is required under Section 7 of the Securities Act or the rules and
regulations of the Commission.
Very truly yours,
/s/ Hale and Dorr LLP
HALE AND DORR LLP
3
<PAGE>
EXHIBIT 10.23
Confidential materials omitted and filed separately
with the Securities and Exchange Commission.
Asterisks denote such omissions.
MASTER SOFTWARE SERVICES AGREEMENT
BETWEEN
PERITUS SOFTWARE SERVICES, INC.
AND
BULL HN INFORMATION SYSTEMS INC.
DATED
AS OF FEBRUARY 3, 1992
<PAGE>
TABLE OF CONTENTS
-----------------
MASTER SOFTWARE SERVICES AGREEMENT
BETWEEN
PERITUS SOFTWARE SERVICES, INC.
AND
BULL HN INFORMATION SYSTEMS INC.
DATED
FEBRUARY 3, 1992
<TABLE>
<CAPTION>
Section Heading Page No.
- ------- ------- --------
<S> <C> <C>
1. Definitions..............................................................................................4
-----------
2. Term.....................................................................................................9
----
3. Services to be Provided by Peritus/Additional Obligations of Peritus....................................10
--------------------------------------------------------------------
4. Limitation on Services; Availability of Additional Services.............................................13
-----------------------------------------------------------
5. Charges.................................................................................................15
-------
6. Obligations of Bull.....................................................................................15
-------------------
7. Non-Solicitation and Non-Competition....................................................................17
------------------------------------
8. Property Rights and Confidentiality.....................................................................18
-----------------------------------
9. Contract Management.....................................................................................21
-------------------
10. Additional Remedies Under Certain Circumstances.........................................................22
-----------------------------------------------
11. Warranties and Indemnification; Including Limitation of Liability and
---------------------------------------------------------------------
Remedies................................................................................................27
--------
12. Force Majeure...........................................................................................29
-------------
13. Headings................................................................................................30
--------
14. Successors and Assigns..................................................................................30
----------------------
15. Notices.................................................................................................30
-------
</TABLE>
-2-
<PAGE>
<TABLE>
<S> <C> <C>
16. Entire Agreement........................................................................................30
----------------
17. Governing Law...........................................................................................31
-------------
18. Time of the Essence.....................................................................................31
-------------------
19. Due Incorporation, Valid Existence, Good Standing and Due
---------------------------------------------------------
Authorization...........................................................................................31
-------------
20. Severability............................................................................................32
------------
</TABLE>
-3-
<PAGE>
MASTER SOFTWARE SERVICES AGREEMENT
Agreement made effective as of the 3rd day of February, 1992 (the
"Effective Date") by and between Peritus Software Services, Inc., a
Massachusetts corporation having a business address of 55 Cambridge Street,
Suite 202, Burlington, MA 01803 ("Peritus"), and Bull HN Information Systems
Inc., a Delaware corporation having a business address of Technology Park,
Billerica, MA 01821 ("Bull"). Peritus and Bull agree that, except as the parties
may agree from time-to-time, in individual project Statements of Work (as
hereinafter defined), the general terms and conditions set forth in this
Agreement shall apply to all software services to be provided by Peritus to Bull
during the term of this Agreement. In the event of any inconsistency between a
Statement of Work, signed by authorized representatives of the parties, and this
Agreement, this Agreement shall prevail, provided however that if a provision in
a Statement of Work expressly refers to this Agreement and specifically sets
forth the extent to which it is intended to modify this Agreement, then, for
purposes of such Statement of Work, such provision in the Statement of Work
shall prevail.
1. Definitions - The following definitions shall apply to this Agreement
-----------
and all Statements of Work agreed to by the parties.
(a) Assigned Component. A Software Component assigned to Peritus for
------------------
on-going maintenance support pursuant to a Statement of Work.
(b) Overdue Backlog. STARs and ISNs that have not been resolved within
---------------
the specified time period for the relevant priority (see definition of
"Performance Criteria" at subsection (n) below). For purposes of calculating
Backlog, each STAR/ISN shall be counted as an equivalent unit.
(c) Bull Software Maintenance Group. The Bull organization that is
-------------------------------
responsible for the generation of corrections to System Technical Action
Requests (STARs) and Internal Software Notifications (ISNs).
(d) Bull Software Support Group. The Bull organization that is
---------------------------
responsible for communicating software maintenance priorities in response to
critical situations reported by external sales networks.
(e) Bull Systems Products. The Bull engineering organization
---------------------
responsible for the complete life cycle of a Software Component.
(f) Continuation and Fix (C & F). The process by which the life of a
----------------------------
Software Component is usefully extended. This function comprises the following
tasks:
-1-
<PAGE>
Confidential materials omitted and filed separately
with the Securities and Exchange Commission.
Asterisks denote such omissions.
(i) analysis and Resolution of Reported Defects (as defined in
subsection (p) below);
(ii) giving necessary assistance to users of the Software
Component as to how to obtain the maximum utility from the Software Component in
situations where the Software Specifications are unclear or ambiguous;
(iii) necessary assistance to users in the recovery of lost data
where data is lost due to a defect in either the Software Component or the
clarity of the end-user documentation;
(iv) evaluation of System Change Proposals (SCP) and
implementation of selected System Change Proposals; and
(v) implementation of Minor Enhancements. These may include SCP,
changes to improve supportability, maintainability, performance, to reduce
ambiguity in implementation. or to reduce impact on customers of ambiguity of
the Software Specification as in (ii) above.
(g) Correction. A Correction prepared by Peritus in response to a
----------
STAR/ISN shall be provided in the form of both source code and object code,
and/or to the extent appropriate in the form of suggested changes (in terms of
substance rather than final text) to be made in end user documentation, in
formats and on media as required by Bull policies then in effect; all corrected
files supplied by Peritus will include all previous Corrections therein.
(h) Enhancement. A modification to a Software Component that results in
-----------
a new feature being made available to the user of the Software Component, or an
improvement in the implementation of an existing feature. An example of a new
feature is the addition of a new command or option to an existing Software
Component. An example of an improved implementation is the redesign or
reimplementation to reduce the run-time resource utilization in either terms of
memory usage or time taken to execute.
(i) ****************************. The
************************************************ ************* of the fixed
annual maintenance fee that shall be **************** from the next or any
subsequent invoice from Peritus under a Statement of Work after a determination
*********************************************************** during any
Performance Measurement Period.
-2-
<PAGE>
Confidential materials omitted and filed separately
with the Securities and Exchange Commission.
Asterisks denote such omissions.
(j) ISN. Abbreviation for Bull "Internal Software Notification," which
---
is the vehicle by which problems and enhancement requests are communicated to
the relevant Bull engineering organization by the Bull Level 2, Level 3 and
Level 4 QA organizations and other engineering organizations.
(k) Major Enhancement. An enhancement that requires 60 or more than 60
-----------------
person hours' worth of effort for design, design review, implementation, Level 1
and Level 2 testing, inspections and development of any necessary documentation.
(l) Minor Enhancement. An enhancement that requires less than 60 person
-----------------
hours' worth of effort for design, design review, implementation, Level 1 and
Level 2 testing, inspections and development of any necessary documentation.
(m) PRS. The Bull problem reporting system now or hereafter used for
---
management of STARs and ISNs.
(n) Performance Criteria. The criteria to be applied in determining
--------------------
Peritus' compliance with goals for responses to STARs/ISNs are as follows,
except as expressly modified in a Statement of Work:
(i) STAR/ISN
Completion Period in Calendar Days
----------------------------------
<TABLE>
<CAPTION>
Priority Current Release Prior Releases
- -------- --------------- --------------
<S> <C> <C>
A/1 ************** **************
B/2 ************** **************
C/3, 4 ************** **************
</TABLE>
and, in addition,
(ii) Overdue Backlog not to exceed *** of average monthly intake of
STARs/ISNs during a Performance Measurement Period.
(o) Performance Measurement Period. A rolling period of six (6)
------------------------------
consecutive whole calendar months, commencing monthly, during the term of a
Statement of Work. For example, if the first Performance Measurement Period
during the term of a Statement of Work is from January through June, the second
-3-
<PAGE>
Performance Measurement Period will be the period from February through July of
the same year.
(p) Resolution of Reported Defects. STARs/ISNs and enhancement
------------------------------
requests may be resolved in any of the following manners:
(i) A valid defect was reported and a correction has been
generated.
(ii) A valid defect was reported and a correction has not been
generated because the correction is not feasible within the constraints of the
design and/or implementation. This disposition is valid only with the documented
consent of the author of the defect report.
(iii) The Software Component conforms to specification and need
not be changed.
(iv) The Software Component conforms to specification and the
defect report will be treated as an enhancement and will be considered for
future implementation.
(v) The Software Component conforms to specification and will
not be changed, but the end-user documentation will be clarified.
(vi) The reported defect is caused by a hardware malfunction.
This disposition is valid only with the documented consent of the author of the
defect report.
(vii) The reported defect has only occurred once and could not
be repeated.
(viii) Any other disposition permitted by Bull's PRS.
(q) Software Component. A specific computer program (i.e., an
------------------
individual software product identified by a single Bull Software Technical
Identifier) and associated documentation marketed or utilized by Bull on or
after the effective date of the applicable Statement of Work and any functional
or maintenance updates delivered with respect thereto during the term of such
Statement of Work. A functional update shall mean new functionality and
significant changes to a Software Component, including major and minor bug fixes
and error corrections. A maintenance update shall mean major and minor bug fixes
and error corrections to a Software Component.
(r) Software Maintenance Period. A period of twelve consecutive
---------------------------
months commencing on the effective date of a Statement of Work or an anniversary
thereof.
-4-
<PAGE>
(s) Software Specification. A formal description of the
----------------------
externally visible behavior of Software Components. From a customer's
perspective, a Software Specification is either explicitly or implicitly
contained in the software documentation provided to the customer by Bull.
(t) STAR. Abbreviation for Bull "System Technical Action Request,"
----
which is the vehicle by which problems and enhancement requests are communicated
from the sales networks to the relevant Bull engineering organizations. For
purposes of this Agreement, ISNs and STARs are synonymous.
(u) STAR Coordinator. The employees designated from time to time
----------------
by the Bull Software Support Group and Peritus, respectively, pursuant to a
Statement of Work to be such respective organization's point of contact and
representative responsible for addressing STAR/ISN assignments and transfers
within the subject area covered by such Statement of Work.
(v) Statement of Work. A written statement, executed and delivered
-----------------
by authorized representatives of the parties pursuant to this Agreement,
identifying one or more Software Components as Assigned Components and
containing the agreed term for such Statement of Work and such other details as
the parties shall agree upon for purposes of such Statement of Work. It is
intended that a Statement of Work shall contain only the particular business and
technical details relevant to the project described in the Statement of Work,
and that except to the extent modified or superseded by the terms of a Statement
of Work or otherwise, the general terms and conditions contained in this
Agreement shall be deemed incorporated by reference therein without further
action by the parties. Ordinarily, in addition to identifying the Assigned
Component and the term, a Statement of Work should include:
(i) the names, telephone numbers and locations of STAR
Coordinators,
(ii) the fixed and other charges for services under such
Statement of Work,
(iii) any equipment and systems to be provided or made
available to Peritus by Bull or to which Peritus otherwise shall have access for
purposes of such Statement of Work, and
(iv) any provisions intended to modify, supersede or
supplement the terms and conditions of this Agreement that otherwise would be
incorporated by reference into such Statement of Work in accordance with the
terms hereof.
-5-
<PAGE>
(w) System Change Proposals (SCP). Change requests submitted to Bull
-----------------------------
from the various Bull Users' Societies.
(x) Quality Management System. A documented Bull quality system to
-------------------------
insure that a product conforms to specified requirements which (i) includes
documented quality procedures and instructions, and (ii) is applicable to and
implemented by the cognizant Bull Software Maintenance Group.
2. Term.
----
(a) This Agreement. The term of this Agreement shall commence on the
--------------
Effective Date and, unless sooner terminated as otherwise provided in this
Agreement or by the mutual agreement of the parties, shall continue in effect
for three years from the Effective Date and from year to year thereafter until
terminated by either party's giving written notice of termination to the other
not less than one hundred eighty (180) days prior to the effective date of
termination. The expiration or termination of this Agreement shall not operate
to terminate any Statement of Work executed and delivered by the parties during
the term of this Agreement, and each such Statement of Work (including without
limitation the terms and conditions of this Agreement which are deemed to have
been incorporated therein by reference) shall continue in full force and effect
until its expiration or termination in accordance with its terms, unless
otherwise provided herein.
(b) Statements of Work.
------------------
(i) Commencement. Peritus shall promptly begin and
------------
diligently provide software service for Assigned Components on the effective
date of the Statement of Work applicable thereto.
(ii) Continuation. With respect to each Assigned Component,
------------
Statement of Work shall remain in effect for successive Software Maintenance
Periods until terminated by notice from one party to the other in accordance
with subsection 2(iii) below or as otherwise expressly provided in such
Statement of Work.
(iii) Termination. Except as otherwise provided herein,
-----------
(1) Without Cause. Either party may terminate the
-------------
term of a Statement of Work as of the end of such
Software Maintenance Period as may be specified therein
by giving written notice to the other, such notice to
be given by Peritus or Bull not later than one hundred
eighty (180) days before the end of such Software
Maintenance Period.
-6-
<PAGE>
(2) For Cause. Except as otherwise provided in
---------
Section 10, in the event of any failure by either party
to perform any of its obligations under a Statement of
Work, continuing for 60 days after written notice
specifying such failure in reasonable detail, without
being cured, or cure thereof commenced and diligently
prosecuted at all times thereafter, or in the event
that a party ceases to carry on its business, a
receiver or similar officer is appointed for a party
and is not discharged within 30 days, a party becomes
insolvent, admits in writing its inability to pay debts
as they mature, is adjudicated bankrupt, or makes an
assignment for the benefit of its creditors or another
arrangement of similar import, or proceedings under any
bankruptcy or insolvency law are commenced by or
against a party and are not dismissed within 30 days,
the other party may at its election by written notice
terminate such Statement of Work as of any date
thereafter, and such termination shall remain effective
notwithstanding any cure of the effect of such failure
prior to the effective date thereof.
3. Services to be Provided by Peritus/Additional Obligations of Peritus.
--------------------------------------------------------------------
Peritus shall provide the following services to Bull, and in doing so,
shall adhere to or exceed the Quality Management System implemented by Bull at
the time of the delivery of the services to Bull; Peritus shall also be
responsible for the following additional obligations to Bull during the term of
a Statement of Work:
(a) Software C & F. Peritus shall use all technically feasible means to
--------------
provide C & F for an Assigned Component when problems are reported to Peritus.
The following procedures shall apply:
(i) Assignment by Bull. Each assignment of a software defect
------------------
requiring resolution by Peritus shall be in the form of a STAR/ISN, as currently
utilized by Bull, and shall be reported and monitored as such. Without
limitation of the foregoing, each assignment shall specify the Performance
Criteria Priority assigned to the STAR/ISN and shall be accompanied by all
relevant documents and records relating to the problem to be resolved,
including, but not limited to, the designation of the Assigned Component and
release level, the sequence of operations that produced the problem and the
exact text of any error messages. In the event that Peritus objects to the
Performance Criteria Priority assigned by Bull, Peritus shall nevertheless
process the STAR/ISN at the higher priority assigned by Bull unless Bull
otherwise agrees. To facilitate transmission and receipt of STARs/ISNs, Peritus
shall be assigned a PRS coordinator queue, which Peritus shall scan at least
twice each business day for incoming STARs/ISNs. A STAR/ISN shall be deemed
assigned to
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<PAGE>
Peritus at the time of its entry into the Peritus queue by Bull regardless of
when Peritus actually accesses the same.
(ii) Processing and Response by Peritus. Following receipt
----------------------------------
by Peritus through appropriate channels of a STAR/ISN acknowledged by Peritus to
pertain solely to one or more Assigned Components, Peritus shall promptly
analyze the STAR/ISN and such other available information as Peritus determines
to be relevant and shall:
(1) Provide the designated Bull software integration
department with a Correction, with simultaneous
notification thereof, through the PRS, to the author
of the STAR/ISN, it being understood and agreed that
Corrections shall be inspected by Peritus prior to
Level 1 testing (as defined in the Bull SEPA
document) and that after satisfactory inspection and
Level 1 testing, Level 2 testing with an appropriate
set of systems shall promptly be performed by
Peritus. Any further testing will be the
responsibility of Bull;
(2) Notify the Bull Software Support Group STAR
Coordinator that Peritus has concluded that the
Assigned Component conforms to its Software
Specifications and that no Correction is necessary;
(3) Notify the Bull Software Support Group STAR
Coordinator that Peritus has concluded that the
Assigned Component conforms to its Software
Specifications but that the end-user documentation
will be clarified;
(4) Notify the Bull Software Support Group STAR
Coordinator that Peritus has concluded that the
Assigned Component conforms to its Software
Specifications and that the STAR constitutes a Major
Enhancement request;
(5) Notify the Bull Software Support Group STAR
Coordinator that Peritus has concluded that
correction of the problem is not feasible within the
constraints of the design and/or implementation,
specifying in reasonable detail in such notice the
reasons for such conclusion, and requesting the Bull
Software Support Group STAR Coordinator's concurrence
or further guidance, it being agreed that this
response shall be valid only upon the consent of the
author of the STAR/ISN;
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<PAGE>
(6) Notify the Bull Software Support Group STAR
Coordinator that the reported defect is caused by a
hardware malfunction;
(7) Notify the Bull Software Support Group STAR
Coordinator that the reported defect has occurred
only once and cannot be repeated, specifying in
reasonable detail in such notice the reasons for such
conclusion, and requesting the Bull Software Support
Group STAR Coordinator's concurrence or further
guidance; and/or
(8) Respond with any PRS response code valid as of
the Effective Date (or as the parties may otherwise
agree).
The time of transmission by Peritus to Bull of any of the foregoing responses
shall be the relevant time for purposes of determining Peritus' compliance with
the Performance Criteria. Any incoming STARs/ISNs that do not obviously (to
Peritus) pertain solely to Assigned Components shall be referred for disposition
to the next Bull STAR screening meeting, and shall be processed thereafter as
mutually determined by the parties.
(iii) Releases (Updates and/or Adjustments). Upon request from
-------------------------------------
Bull from time to time, Peritus shall notify Bull of all Corrections required to
be included in maintenance releases, updates or adjustments for Assigned
Components, which releases, updates or adjustments shall, unless otherwise
agreed, include all fixes up to a cut-off date mutually determined by Bull and
Peritus. Peritus shall send its input for such releases, updates or adjustments
to the Bull Software Maintenance Group.
(iv) Tools and Utilities. Peritus shall, without additional
-------------------
charge, provide Bull (solely for internal use, by or for Bull, in Bull's and
other Group Bull companies' business and not for disclosure, transfer or
licensing by Bull or such companies to third parties) with copies of all tools
and utilities, and all modifications, enhancements and improvements with respect
thereto, which Peritus develops during the term of this Agreement for the
purpose of developing and testing Corrections to Assigned Components; PROVIDED,
HOWEVER, THAT THE PARTIES UNDERSTAND AND AGREE THAT SUCH TOOLS AND UTILITIES
SHALL BE PROVIDED "AS IS" AND WITHOUT ANY REPRESENTATION OR WARRANTY OF ANY
KIND, EXPRESS OR IMPLIED, INCLUDING, WITHOUT LIMITATION, ANY WARRANTIES OF
MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE. In those cases where such
tools and utilities are used by third parties for the benefit of Bull or other
Group Bull companies, such third parties shall have entered into a
confidentiality agreement consistent with the provisions of subsection 8.(b) of
this Agreement. The rights and obligations under this subsection shall survive
any termination or expiration of this Agreement.
-9-
<PAGE>
Confidential materials omitted and filed separately
with the Securities and Exchange Commission.
Asterisks denote such omissions.
(v) Ownership of Corrections. Ownership of and all right and
------------------------
title in and to Corrections and the intellectual property comprised thereby
(including without limitation the source code, object code and all related
documentation) shall be in Bull. Peritus agrees that, except with the express
written consent of Bull, which may be withheld without liability, Peritus shall
maintain the confidentiality of all source code and related documentation owned
by Bull and to which Peritus is given access, shall use the same only in
connection with Statements of Work and shall not disclose any part thereof to
any third party (other than such disclosure to third parties as may be necessary
or useful in the performance of a Statement of Work, and then on terms requiring
each such third party similarly to maintain the confidentiality thereof).
(b) STARs Unresolved as of the Effective Date of a Statement of Work.
----------------------------------------------------------------
The backlog of STARs existing and unresolved prior to the effective date of a
Statement of Work shall be addressed by Peritus in accordance with a schedule
and priority (and, in the case of STARs constituting Major Enhancement requests,
for compensation) to be mutually determined by the parties as soon as reasonably
practicable after such effective date.
(c) Additional Obligations of Peritus. In addition to Peritus's
---------------------------------
obligations under Section 8, for purposes of this Agreement, Peritus agrees with
the following conditions in order to preserve the security of Bull information
and systems:
(i) Bull shall have the right to locate the telecommunications
equipment identified in Schedule E, subject to change as reasonably required by
Bull, at Peritus's place of business, for which Peritus shall provide Bull with
reasonable access in order to enable Bull to configure and maintain such
equipment, and for which Peritus shall provide the required electrical power
********************;
(ii) Peritus shall reconfigure, at Bull's request
************************, the applicable equipment and software in order to be
operable with such telecommunications equipment;
(iii) Peritus shall not connect any other communications
facility, including any modem or network, to the network of the systems used to
access other Bull systems, except with the prior written consent of Bull in each
instance;
(iv) Peritus, at Bull's request, shall allow Bull ********
*******************************************************************************
****** to be
-10-
<PAGE>
Confidential materials omitted and filed separately
with the Securities and Exchange Commission.
Asterisks denote such omissions.
maintained by Peritus for a period of at least ************ from the date of
generation thereof; and
(v) Peritus shall provide a communications coordinator for the
purpose of immediately investigating any network security breaks, which
coordinator shall be available for such purpose *******************************
****************************.
4. Limitation on Services; Availability of Additional Services.
-----------------------------------------------------------
(a) Limitation on Services. The services contemplated by Section 3
----------------------
above pertain only to Assigned Components being used in their proper
environments and being run on operating system releases and hardware platforms
which have been certified by Bull to correctly operate with the Assigned
Components. Peritus shall not be obligated to provide support for any operating
systems or operating systems functions or components which are not specifically
provided for in a Statement of Work. The services to be provided by Peritus
pursuant to Section 3 above do not include services such as application design,
consulting (other than as necessary in connection with the performance of
Continuation and Fix with respect to Assigned Components), custom configuration,
Major Enhancement of the Assigned Components or recovery of lost data (other
than as necessary in connection with the performance of Continuation and Fix
with respect to Assigned Components). Such services, however, may be provided by
Peritus, at Peritus' then published prices for such support, subject to (i) a
schedule agreeable to Peritus and Bull and (ii) the availability of Peritus
personnel.
(b) Availability of Additional Services. Without limitation of the
-----------------------------------
foregoing, upon request by Bull from time to time, Peritus may provide
supplemental software engineering services on the basis of bid prices, time and
materials, or such other basis as the parties shall agree upon, for Major
Enhancements to Assigned Components in each of the following cases, subject to
prior written approval of the senior Bull employee identified in subsection
9.(b):
(i) STARs mutually determined to be requests for Major
Enhancements;
(ii) Major Enhancements requested by Bull;
(iii) Major Enhancements identified by Peritus and agreed
to by Bull; and
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<PAGE>
Confidential materials omitted and filed separately
with the Securities and Exchange Commission.
Asterisks denote such omissions.
(iv) Major Enhancements requested by third parties through Bull
(regardless of whether such third parties may contribute to Bull any or all of
the funding for such Major Enhancement).
In each of such cases, ownership of and all right and title in and to the Major
Enhancement and the intellectual property comprised thereby (including without
limitation the source code, object code and all related documentation) shall be
in Bull. Peritus agrees that, except with the express written consent of Bull,
which may be withheld without liability, Peritus shall maintain the
confidentiality of all source code and related documentation, shall use the same
only in connection with Statements of Work and shall not disclose any part
thereof to any third party (other than such disclosure to third parties as may
be necessary or useful in the performance of a Statement of Work, and then on
terms requiring each such third party similarly to maintain the confidentiality
thereof).
5. Charges.
-------
(a) Payment. Bull agrees to pay Peritus the charges for software services
-------
and other fees set forth in each Statement of Work. Except as otherwise provided
in this Agreement, no invoice under any Statement of Work shall be subject to
credit for any period of non-use by Bull for any reason, including defects in
any Assigned Component. Peritus shall invoice Bull for the fixed portion of the
annual maintenance fees under each Statement of Work on a quarterly basis in
advance at the beginning of each quarter during a Software Maintenance Period.
Other fees and charges shall be invoiced monthly or as otherwise agreed. All
invoices, issued by either Peritus or Bull, shall be payable within 45 days. If
Bull fails to pay any charges when due and payable, Bull agrees that Peritus
shall have the right to invoice and Bull shall pay a late payment charge equal
to the then existing prime rate of interest at the Bank of Boston, plus one
point, monthly, prorated on the unpaid balance. If Peritus fails to pay any
charges when due and payable, Peritus agrees that Bull shall have the right to
invoice and Peritus shall pay a late payment charge equal to the then existing
prime rate of interest at the Bank of Boston, plus one point, monthly, prorated
on the unpaid balance.
(b) Changes. Except for the fixed portion of the annual maintenance charges
-------
specified in a Statement of Work for the maintenance services to be performed by
Peritus pursuant thereto, Peritus may change the charges specified in a
Statement of Work ************************* for all or any services by giving at
least ************************************* to Bull prior to the effective date
of the change. The
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<PAGE>
Confidential materials omitted and filed separately
with the Securities and Exchange Commission.
Asterisks denote such omissions.
adjusted charges will not exceed Peritus' list price to commercial customers on
the effective date of such adjustment.
(c) Taxes. Unless Bull provides satisfactory evidence of exemption to
-----
Peritus from such taxes, all charges and fees are exclusive of all federal,
state, municipal or other political subdivision excise, sales, use, property,
occupational, or like taxes now in force or enacted in the future and are
therefore subject to an increase equal to any such taxes Peritus may be required
to collect or pay upon the sale or shipment or use of any product or service
provided hereunder, except taxes based exclusively on Peritus' net income, and
use or personal property taxes levied on tangible personal property used by
Peritus in performing software services under this Agreement.
6. Obligations of Bull.
-------------------
Without limitation of any other obligations provided for elsewhere in this
Agreement or in any Statement of Work, Bull shall at all times during the term
of this Agreement and any Statement of Work, solely at Bull's cost and expense
and without charge to Peritus:
(a) Provide Peritus a PRS coordinator queue and, in the event that the
method of reporting STARs and ISNs should be changed, provide Peritus with
appropriate access, software licenses and training for the replacement method so
as to permit Peritus to continue to perform its obligations under Statements of
Work;
(b) Provide Peritus (at Peritus' site) with necessary access, via
electronic means, to all systems within Bull which contain STAR/ISN
documentation relevant to Assigned Components, subject, however, to the
implementation of such appropriate security measures as reasonably required by
Bull in order to prevent unauthorized access, which measures may include,
without limitation, the assignment to Peritus of a separate password or
passwords; and provided, further, that in no event shall Peritus be provided
access to Bull customer sites or systems without the prior written consent of
Bull; in addition, Peritus will be responsible for and pay all charges for
communication lines between Peritus and Bull; and, further, Bull shall be
responsible for and pay the planned current charge of ********* for a
communications node which may be required to establish communications between
Peritus and Bull. Should the ******** communications node charge increase
substantially following the Effective Date, then Peritus, upon request by Bull,
agrees to discuss an equitable alternative with Bull or a
******************************************.
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<PAGE>
(c) Provide Peritus (solely for Peritus' use in Peritus' business in
connection with Statements of Work and not for licensing by Peritus to third
parties) with copies of all tools and utilities, existing on the Effective Date
or created thereafter, and all modifications, enhancements and improvements with
respect thereto, which Bull has legal right to provide to Peritus and which are
necessary or useful in the development or testing of Corrections; provided,
however, that the parties understand and agree that Bull shall have no
obligation to Peritus under this provision affirmatively to expend funds or
allocate resources to the development or improvement of any such tools or
utilities; and provided further, that all right title and interest to any
modifications, enhancements and improvements made by Peritus to such tools and
utilities, whether made at Bull's, Peritus's or any other party's expense, shall
be solely in Bull and shall be subject to the provisions of Section 8.
(d) Use its best efforts to provide Peritus with reasonable access to Bull
development and software maintenance personnel (including personnel in France)
for purposes of limited consultation from time to time as necessary to permit
Peritus to perform its obligations under Statements of Work;
(e) Provide Peritus personnel with contractor status access to designated
Bull sites, and provide at each such site a secure area for Peritus personnel
and equipment, as necessary to permit Peritus to perform its obligations under
Statements of Work;
(f) Provide Peritus with access, on both a read and write basis, to
specifically agreed to source codes for Assigned Components, and on a read-only
basis to such other source code as specifically agreed to and as necessary or
useful to Peritus in the performance of its obligations under Statements of
Work;
(g) Provide Peritus (at Peritus' home office), for use solely in connection
with Statements of Work, with the items of equipment (on maintenance contracts
complying with the terms specified in a Statement of Work), software,
documentation, licenses, specifications, maintenance documents and other items
specified in each Statement of Work;
(h) Provide Peritus with access to specifically agreed to support,
development and test environments necessary to permit Peritus to perform its
obligations under Statements of Work based on the priority scheduling determined
jointly by Bull and Peritus STAR Coordinators;
(i) Provide Peritus with reasonable access to Bull Software Maintenance
Group systems as necessary in connection with any Statement of Work based on
priority scheduling determined jointly by Bull and Peritus STAR Coordinators;
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<PAGE>
(j) Provide Peritus with the name and telephone number of each STAR
Coordinator assigned under a Statement of Work by each of Bull Software
Maintenance Group and Bull Software Support Group;
(k) Conduct STAR screening meetings on a weekly basis (or with such other
frequency as the parties may agree), keep Peritus advised of the schedule
therefor and permit Peritus personnel to attend such meetings if and when
Peritus should elect to do so, or require Peritus personnel to attend such
meetings at Bull's request; and
(l) To the extent necessary to permit Peritus to perform its obligations
under any Statement of Work, coordinate with Peritus and with Bull customer
personnel regarding information required by Peritus in connection with such
Statement of Work; provided, however, that in no event shall Peritus make direct
contact with any Bull customer for such purpose without the prior written
consent of Bull.
7. Non-Solicitation and Non-Competition.
------------------------------------
In consideration of the sensitive and confidential nature of the
information and access provided by Bull to Peritus and the sensitive and
confidential nature of the services to be performed by Peritus under this
Agreement;
(a) Each of the parties agrees that it shall not, directly or indirectly,
solicit or induce, or attempt to solicit or induce, other than through normal
public advertising for employees, any person who is then an employee of the
other to leave such employment for any reason whatsoever, or hire any person who
is then an employee of the other; and
(b) Peritus agrees that it shall not, directly or indirectly, solicit,
divert or accept any business from any person, firm or entity who at the time is
a direct customer of Bull, otherwise than expressly permitted pursuant to a
Statement of Work or as otherwise expressly agreed by Bull in writing. Requests
for permission, in each case, shall be made by Peritus in accordance with the
provisions of Section 15. In response to each such request, Bull will respond
within thirty (30) days from the date of receipt with an approval or a
disapproval. The failure of Bull to respond within such thirty (30) day period
shall constitute an approval by Bull of the request by Peritus. Any disapproval
shall not be subject to challenge by Peritus. The senior employee of Peritus may
contact the senior employee of Bull, in accordance with the provisions of
subsection 9.(b), in order to further explain the reasons and purposes of the
request. This subsection 7.(b) shall be limited in time and geographical scope
to (i) a period of five (5) years from the Effective Date of this Agreement or
for the term of an applicable Statement of Work, whichever is longer; and (ii)
the United States and Canada.
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<PAGE>
8. Property Rights and Confidentiality
-----------------------------------
(a) Peritus Obligations. In view of the confidential relations
-------------------
contemplated hereunder between Peritus and Bull and the payments to be made to
Peritus as herein set forth, Peritus agrees:
(i) that Peritus and its employees shall communicate promptly and
fully in writing to Bull all inventions, designs, including mask works, ideas,
processes, discoveries, improvements and inventions and technical or business
innovations (hereinafter "Developments") conceived or made by Peritus or its
personnel and all writings, software, firmware, databases or other works of
authorship (hereinafter "Works") created by Peritus or its personnel during the
term of this Agreement and for six months thereafter, (whether or not patentable
or copyrightable and whether made solely by Peritus or its personnel, or jointly
with others) which result from or are suggested by any work which Peritus or its
personnel may do pursuant to this Agreement or which result from information
derived from Bull or its employees;
(ii) that such Developments shall be deemed the sole and exclusive
property of and owned by Bull or its nominees whether or not patentable, and
that Peritus assigns all right, title and interest in and to the same to Bull
and without regard to any termination of this Agreement; that Peritus agrees
that any Work created by Peritus or its employees in the performance of services
for Bull during the term of this Agreement has been commissioned by Bull and
that such commissioned Work shall be deemed a "work made for hire" under the
U.S. Copyright Laws. If any Work is determined by a court of competent
jurisdiction not to be "a work made for hire" under the U.S. Copyright Laws,
this Agreement shall operate as an irrevocable assignment by Peritus of the
copyright in such Work, including all rights of every kind in such Work for the
entire duration of such copyright, and that no rights are reserved to Peritus;
(iii) that Peritus will assist Bull (or its successors, assigns or
nominees) in every proper way during and subsequent to the term of this
Agreement (entirely at Bull's expense) to perfect Bull's or its nominees' right,
title, and interest in any developments, patents, patent applications (including
continuations, continuations-in-part and divisions), copyrights of any and all
types or other forms of legal protection for such Developments and Works in any
and all countries of the world, by executing and delivering all papers and
instruments, including assignment forms, and to perform such further acts,
including giving testimony or furnishing evidence relating to such interests, as
may be deemed necessary by Bull (or its successors, assigns or nominees);
-16-
<PAGE>
(iv) that Peritus will maintain adequate and current written
records of all such Developments and Works, in the form of notes, sketches,
drawings or reports relating thereto, which records shall be available to Bull
at all times and such written records shall be turned over to Bull at the end of
the term of this Agreement or upon termination of the Agreement, whichever
occurs earlier;
(v) that except as an authorized representative of Bull may
otherwise consent in writing, Peritus shall maintain in confidence and not
disclose at any time either during or subsequent to the term of this Agreement,
any information, software, knowledge or data of Bull which Peritus or its
employees may receive, acquire or obtain during the Term, relating to such
Developments or Works being conducted under this Agreement or business plans and
information systems, or other proprietary matters, including that prepared,
produced or developed by Peritus or its employees in the performance of this
Agreement, and that Peritus and its personnel shall not use such information,
knowledge or data outside this Agreement except as an authorized representative
of Bull may otherwise consent in writing, unless Peritus can demonstrate to the
satisfaction of Bull that such information was actually known to Peritus prior
to this Agreement, or was properly obtained or developed by Peritus
independently of such information and apart from any connection with Bull or its
employees, directly or indirectly, all without breach of any confidential
relationship, or became publicly available through no act of Peritus or its
employees;
(vi) all data, designs, drawings, plans, layouts,
specifications, software, etc. and any and all other tangible information or
works, including, but not limited to, any and all information, written or
otherwise, which may be or has been furnished to Peritus or its personnel shall
remain the exclusive property of Bull. Peritus shall not make copies of any such
materials, except to the extent reasonably required to enable Peritus or its
personnel to perform the services specified under this Agreement. Upon the
termination or completion of the services hereunder or upon earlier request by
Bull (subject to the provisions of Sections 3 and 6 of this Agreement), any and
all materials referred to in this Section 8, together with all copies and
reproductions in Peritus's possession, custody, or control, shall be promptly
delivered to Bull, and Peritus shall make no further use or utilization, either
directly or indirectly, of any such materials;
(vii) that with respect to any information, software,
knowledge, or data disclosed to Bull hereunder, Peritus shall inform Bull in
writing if the services being performed by Peritus or its personnel, in the
opinion of Peritus, are likely to infringe any patent, copyright, trade secret,
trademark or other proprietary right of a third party or of Peritus. Peritus
agrees that it shall not furnish or make use of any patent, copyright, trade
secret, trademark or other proprietary right in the performance of this
Agreement without the prior written consent of Bull and, as provided in Section
11, Peritus agrees to indemnify and hold harmless Bull as to any claim of
infringement or alleged infringement resulting therefrom. A failure to
-17-
<PAGE>
provide Bull with such advance written notice concerning the likeliness of the
infringement of Peritus's property rights shall confer upon Bull the
unrestricted right to use or to publish any and all information, software,
knowledge, or data disclosed to Bull by Peritus under Peritus's applicable
patents, copyrights, trade secrets or trademarks;
(viii) that Peritus shall not communicate or otherwise
disclose to Bull or its employees any confidential or trade secret information
of any third party; and
(ix) that all tools and materials necessary for the
performance of the services of Peritus shall, except as provided in this
Agreement, be supplied by Peritus. Any tools or materials supplied by Bull to
Peritus during the term of this Agreement shall at all times remain the property
of Bull and be returned to Bull upon demand (subject to the provisions of
Sections 3 and 6 of this Agreement) or at the end of the term of this Agreement.
(b) Bull Obligations In view of the confidential relations
----------------
contemplated hereunder,
(i) except as an authorized representative of Peritus may
otherwise consent in writing, Bull shall maintain in confidence and not disclose
at any time either during or subsequent to the term of this Agreement, any
information, software, knowledge or data of Peritus which Bull or its employees
may receive, acquire or obtain during the term of this Agreement from Peritus
and that Bull and its employees shall not use such information, software,
knowledge or data outside this Agreement except as an authorized representative
of Peritus may otherwise consent in writing, unless Bull can demonstrate to the
satisfaction of Peritus that such information was actually known to Bull prior
to this Agreement, or was properly obtained or developed by Bull independently
of such information and apart from any connection with Peritus or its employees,
directly or indirectly, all without breach of any confidential relationship, or
became publicly available through no act of Bull or its employees; and
(ii) Bull shall not communicate or otherwise disclose to
Peritus or its employees any confidential or trade secret information of any
third party.
(c) Peritus Further Obligations In view of the extremely sensitive
---------------------------
nature of the Bull computer systems and the information therein which systems
Peritus will be allowed to access on a worldwide basis, Peritus agrees that it
will access only that information which it must necessarily access in order to
perform its obligations under any Statement of Work, that it will hold Bull
access codes in strict confidence and shall not provide any such codes to any of
its employees except those authorized to perform under any Statement of Work,
that it will keep a log of the persons so given such access codes and the date,
and the computer system each and every time so
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<PAGE>
accessed, and that Peritus will comply with such other security measures which
Bull may reasonably require. Peritus understands and agrees that any
unauthorized access of such computer systems or any Bull sensitive information
may cause irreparable harm to Bull and its affiliated companies and their
customers. Should Peritus suspect that there has been any such unauthorized
access, Peritus shall immediately take all steps to limit the consequences
thereof and shall immediately inform Bull in writing identifying the specific
details of such unauthorized access. Peritus shall cooperate with Bull, at
Peritus expense, in order to enforce Bull's rights hereunder.
(d) Survival. This Section 8 shall survive any termination or
--------
expiration of this Agreement.
9. Contract Management.
-------------------
(a) Day-to-Day Management. Bull and Peritus will each assign an
---------------------
employee to coordinate the day-to-day management of issues arising between the
parties under this Agreement and Statements of Work hereunder. The parties have
initially designated for this purpose the employees identified below:
Peritus: Christopher Bailey
Telephone: (617) 272-4405
Facsimile: (617) 221-7122
Bull: Robert Willard
Telephone: (508) 294-2673
Facsimile: (508) 294-5948
(b) Resolution of Serious Problems. Bull and Peritus will each assign a
------------------------------
senior employee to act as its representative for purposes of resolving disputes
that are not resolved by the persons designated in subsection (a) above. Either
of such senior employees may request a meeting with his or her counterpart
whenever he or she determines that it is necessary or appropriate to do so in
order to resolve a matter of significance to either party's performance under a
Statement of Work, and in such event both parties shall endeavor in good faith
to arrive at a practical solution consistent with both the requirements of the
Statement of Work and the reasonable expectations of both parties to the maximum
extent possible. The parties have initially designated for this purpose the
senior employees identified below:
Peritus: Dominic Chan
55 Cambridge St.
Burlington, Mass. 01803
Telephone: (617) 221-0400
Facsimile: (617) 221-7122
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<PAGE>
Confidential materials omitted and filed separately
with the Securities and Exchange Commission.
Asterisks denote such omissions.
Bull: David Devoy
300 Concord Rd.
Billerica, Mass. 01821
Telephone: (508) 294-3837
Facsimile: (508) 294-3940
The parties also agree that the senior employees shall endeavor to meet at least
quarterly to review generally performance under Statements of Work then in
effect and other issues of mutual interest.
(c) Notice of Change. Each party shall give notice to the other of
----------------
any change in the persons designated by it for purposes of this Section 9.
10. Additional Remedies Under Certain Circumstances.
-----------------------------------------------
(a) Financial Penalties. Compliance with the Performance Criteria shall
-------------------
be determined with respect to each Performance Measurement Period. The parties
agree that Bull's sole and exclusive remedy for any failure by Peritus to meet
the Performance Criteria during any one or more Performance Measurement Periods
shall be as provided in this Section 10. The parties agree that, subject to a
review of these provisions to be conducted in good faith before the first
anniversary of the Effective Date, the following shall be the Financial
Penalty Percentages applicable during the term of this Agreement:
(i) Overdue Backlog for STARs/ISNs
(1) If Overdue Backlog during a Performance
Measurement Period
**********************************************************
********** shall be *** unless Overdue Backlog shall
have ************ during each of the *** immediately
preceding Performance Measurement Periods, in which
case the
*****************************************;
(2) If Overdue Backlog during a Performance
Measurement Period ****************************************
***********************;
(3) If Overdue Backlog during a Performance
Measurement Period ****************************************
************************;
-20-
<PAGE>
Confidential materials omitted and filed separately
with the Securities and Exchange Commission.
Asterisks denote such omissions.
(4) If Overdue Backlog during a Performance
Measurement Period ****************************************
***********************; and
(5) If Overdue Backlog during a Performance
Measurement Period ***********, the parties shall, at
the request of either party, meet as promptly as
reasonably practicable to determine and discuss the
causes for such level of performance, specific
measures to ensure improvement and whether the
Statement of Work should be terminated or modified.
(ii) Completion of STAR/ISN Priorities
(1) If during a Performance Measurement Period,
completion of STAR/ISN response goals for priority
A/1 and B/2 as defined in the Performance Criteria
(hereinafter "STAR Priority") is
***********************************************************
***********************, unless the STAR Priority
completion is less than *** during each of the ***
immediately preceding Performance Measurement
Periods, in which case the **********
******************************;
(2) If during a Performance Measurement Period, STAR
Priority completion is ************************************
***********************************************;
(3) If during a Performance Measurement Period, STAR
Priority completion is ************************************
******************************************;
(4) If during a Performance Measurement Period, STAR
Priority completion is ********************************
**************************************************; and
(5) If during a Performance Measurement Period, STAR
Priority completion is *************, the parties
shall, at the request of either party, meet as
promptly as reasonably practicable to determine and
discuss the causes for such level of performance,
-21-
<PAGE>
Confidential materials omitted and filed separately
with the Securities and Exchange Commission.
Asterisks denote such omissions.
specific measures to ensure improvement and whether the
Statement of Work should be terminated or modified;
(iii) Penalties Not Cumulative - Notwithstanding the above, in no
event shall Financial Penalty Percentages for Overdue Backlog and STAR Priority
be cumulative and exceed the highest applicable penalty for one category. In
addition, for purposes of determining the Financial Penalty Percentage for
Overdue Backlog, the STAR Priorities A, B and C shall be summed to provide a
STAR Overdue Backlog Percentage, and the ISN Priorities 1, 2, 3 and 4 shall be
summed to provide an ISN Overdue Backlog Percentage. The least satisfactory
percentage of such two measurements, i.e., the STAR Overdue Backlog Percentage
and the ISN Overdue Backlog Percentage, shall be used in determining the
financial penalty for Overdue Backlog as provided in subsection 10. (a)(i)
above. Further, for purposes of determining the Financial Penalty Percentage for
completion of STAR/ISN Priorities, the completion percentages for STAR
Priorities A and B shall be weighted equally to provide an Average STAR Priority
Percentage and the completion percentages for ISN Priorities 1 and 2 shall be
weighted equally to provide an Average ISN Priority Percentage. The least
satisfactory percentage of such two measurements, i.e., the Average STAR
Priority Percentage and the Average ISN Priority Percentage, shall be used in
determining the financial penalty for STAR/ISN Priorities as provided in
subsection 10. (a)(ii) above.
(iv) Preexisting STARs/ISNs - For purposes of this subsection,
"Overdue Backlog" and "STAR Priority" shall not include those STARs/ISNs
existing prior to the effective date of the Statement of Work unless otherwise
agreed in such Statement of Work.
(v) Detailed Description of Calculations
(1) Calculation of STAR Overdue Backlog Percentage -The
******************** Percentage shall be calculated as follows:
The number of STARs, irrespective of priority, that constitute
the STAR Overdue Backlog on the last day of a Performance
Measurement Period will be ************************************
********** during the Performance Measurement Period. This
result will be ***************** to generate the *************
*****************. The average monthly intake is the *********
********************, irrespective of priority, during a
Performance Measurement Period ******************.
-22-
<PAGE>
Confidential materials omitted and filed separately
with the Securities and Exchange Commission.
Asterisks denote such omissions.
(2) Calculation of ISN Overdue Backlog Percentage -The ISN
Overdue Backlog Percentage shall be calculated as follows: The
number of ISNs, irrespective of priority, that constitute the
******************* on the last day of a Performance
Measurement Period will be ************************************
********* during the Performance Measurement Period. This
result will be ***************** to generate the *************
*****************. The average monthly intake is the total
number of *************, irrespective of priority, during a
Performance Measurement Period ******************.
(3) Calculation of Average STAR Priority Percentage -The
Average STAR Priority Percentage shall be calculated as
follows:
For each Performance Measurement Period the following will be
counted for STARs of priority A:
Item Description
---- -----------
(A) ************************.
(B) ******************************************
******************.
(C) **************************************.
(D) ******************************************
***************
The STAR priority completion percentage for priority A
STARs shall be the number counted in item ************** the
result of *********** the number obtained in item *** from the
*** of the number counted in items *********** with the result
***********************.
For each Performance Measurement Period the following will be
counted for STARs of priority B:
Item Description
---- -----------
(A) ************************.
(B) ********************************************
********************.
-23-
<PAGE>
Confidential materials omitted and filed separately
with the Securities and Exchange Commission.
Asterisks denote such omissions.
(C) ****************************************.
(D) **********************************************
*******************.
The STAR priority completion percentage for priority B
STARs shall be the number counted in item *********** by the
result of *********** the number obtained in item *** from the
*** of the numbers counted in items *********** with the result
***********************.
The two percentages calculated above shall then be averaged
(summed and divided by two (2)) to determine the Average STAR
Priority Percentage.
(4) Calculation of Average ISN Priority Percentage -The Average
ISN Priority Percentage shall be calculated as follows:
For each Performance Measurement Period the following will be
counted for ISNs of priority 1:
Item Description
---- -----------
(A) ***********************.
(B) ***************************************
*********************.
The ISN priority completion percentage for ISNs of
priority 1 shall be the number counted in item *********** by
the number counted in item *** and the result
*****************.
For each Performance Measurement Period the following
will be counted for ISNs of priority 2:
Item Description
---- -----------
(A) ***********************.
(B) **********************************************
**************.
-24-
<PAGE>
Confidential materials omitted and filed separately
with the Securities and Exchange Commission.
Asterisks denote such omissions.
The ISN priority completion percentage for ISNs of
priority 2 shall be the number counted in item *********** by
the number counted in item *** and the result
*****************.
The two percentages calculated above shall then be averaged
(summed and divided by two (2)) to determine the ISN Priority
Completion Percentage.
(b) Right to Designate Management. In the event that, due to a serious
-----------------------------
failure of Peritus to perform its obligations under a Statement of Work, which
failure continues unremedied after 60 days' written notice by Bull specifying
such failure in reasonable detail, Bull should suffer severe disruption in
Bull's daily operations and material damage to Bull's customer goodwill and
reputation, or in the event that prior to the expiration of thirty months from
the Effective Date Dominic Chan, for any reason other than temporary physical or
mental disability, shall cease to be a senior executive officer of Peritus with
responsibilities including oversight of Peritus' performance under Statements of
Work executed and delivered pursuant to this Agreement, then Bull shall have the
right, at its option, exercisable by written notice to Peritus, to designate one
or more qualified senior executive managers to function as the chief executive
and chief operating officers of the unit or units of Peritus having
responsibility for Statements of Work. For purposes of this subsection a
"serious failure" shall not include a failure to achieve the Performance
Criteria, unless Overdue Backlog shall have *********************** successive
Performance Measurement Periods. Unless Bull expressly consents in writing, any
employee of Bull who transfers to become an employee of Peritus shall work at
Peritus only in performance of services under this Agreement on behalf of Bull.
(c) Right to Audit. Bull shall have the right upon reasonable notice
--------------
to Peritus to audit, or have audited through an independent accounting firm, the
books and records of Peritus, at Bull's expense, to verify performance of
Peritus under this Agreement and all Statements of Work. Such books and records
shall be maintained and made available by Peritus for the term of the applicable
Statement of Work *****************.
-25-
<PAGE>
11. Warranties and Indemnification, Including Limitation of Liability and
---------------------------------------------------------------------
Remedies.
- --------
(a) Warranties and Indemnification:
------------------------------
(i) PERITUS REPRESENTS AND WARRANTS THAT THE WORK PRODUCT AND
SERVICES TO BE PROVIDED UNDER THIS AGREEMENT SHALL CONFORM TO THE DESCRIPTION
AND SOFTWARE SPECIFICATIONS THEREFOR, AND THAT THE OPERATION OF SUCH WORK
PRODUCT SHALL EQUAL OR EXCEED THE PERFORMANCE LEVEL(S) SET FORTH IN THE
APPLICABLE SOFTWARE SPECIFICATIONS. PERITUS'S SOLE LIABILITY AND BULL'S SOLE
REMEDY FOR FAILURE TO MEET THE REPRESENTATIONS AND WARRANTIES IS FOR PERITUS TO
REMEDY ANY DEFECTS AS PROVIDED IN SECTION 3, THE IMPOSITION OF FINANCIAL
PENALTIES, AS MAY BE APPLICABLE, AS PROVIDED IN SECTION 10, AND TERMINATION FOR
CAUSE AS PROVIDED IN SUBSECTION 2. (b)(iii)(2).
(ii) PERITUS FURTHER REPRESENTS AND WARRANTS THAT PERITUS HAS
GOOD AND CLEAR TITLE OR RIGHT TO THE WORK PRODUCT TO BE PROVIDED HEREUNDER, AND
TO ALL RIGHT, TITLE AND LICENSES WITH RESPECT THERETO GRANTED TO BULL. PERITUS
FURTHER WARRANTS THAT PERITUS HAS NOT MADE AND WILL NOT MAKE ANY COMMITMENTS TO
OTHERS INCONSISTENT WITH OR IN DEROGATION OF THE RIGHT, TITLE AND LICENSES
GRANTED TO BULL, AND THAT PERITUS IS FREE OF ANY OBLIGATION THAT WOULD PREVENT
IT FROM ENTERING INTO THIS AGREEMENT.
(iii) PERITUS FURTHER WARRANTS THAT, TO THE BEST OF ITS
KNOWLEDGE, THE WORK PRODUCT TO BE PROVIDED UNDER THIS AGREEMENT DOES NOT
INFRINGE ANY PATENT, COPYRIGHT, TRADE SECRET, TRADEMARK OR OTHER LEGAL OR
EQUITABLE RIGHTS OF ANY THIRD PARTY.
(iv) PERITUS AGREES TO INDEMNIFY, HOLD HARMLESS AND DEFEND
BULL, ITS DISTRIBUTORS AND THEIR CUSTOMERS FROM AND AGAINST ANY AND ALL SUITS,
PROCEEDINGS AT LAW OR IN EQUITY, AND ANY AND ALL LIABILITY, LOSS, CLAIMS, COSTS,
DAMAGES OR EXPENSES, INCLUDING REASONABLE ATTORNEY'S FEES, ARISING OUT OF OR IN
CONNECTION WITH ANY CLAIM BY ANY PERSON THAT THE EXERCISE OF ANY RIGHT GRANTED
BY PERITUS HEREUNDER TO SUCH WORK PRODUCT TO BE PROVIDED UNDER THIS AGREEMENT
INFRINGES ANY RIGHT, TITLE OR INTEREST, INCLUDING PATENT, COPYRIGHT, TRADE
SECRET, TRADEMARK OR OTHER PROPRIETARY RIGHTS OF THIRD PARTIES. BULL SHALL
PROMPTLY NOTIFY PERITUS IF BULL BECOMES AWARE OF ANY SUCH
-26-
<PAGE>
ALLEGED INFRINGEMENT OR CLAIM. IF THE CLAIM HAS OCCURRED OR IN PERITUS'S OPINION
IS LIKELY TO OCCUR, PERITUS MAY AT ITS ELECTION AND EXPENSE EITHER OBTAIN FOR
BULL THE RIGHT TO CONTINUE USING SUCH WORK PRODUCT OR REPLACE OR MODIFY SUCH
WORK PRODUCT SO THAT IT IS NOT INFRINGING SO LONG AS THE PERFORMANCE OF SUCH
REPLACEMENT OR MODIFIED WORK PRODUCT EQUALS OR EXCEEDS THE PERFORMANCE OF THE
ORIGINAL WORK PRODUCT. PERITUS IS NOT LIABLE IF ANY INFRINGEMENT CLAIM IS BASED
UPON (i) SPECIFIC DETAILED DESIGN SPECIFICATIONS PROVIDED BY BULL TO PERITUS FOR
THE PURPOSE OF PERITUS IMPLEMENTATION OF A WORK PRODUCT SO LONG AS SUCH
INFRINGING IMPLEMENTATION WAS NECESSITATED BY SUCH DETAILED DESIGN
SPECIFICATIONS, (ii) THE INTERCONNECTION, OPERATION OR USE OF THE WORK PRODUCT
IN COMBINATION WITH EQUIPMENT, SOFTWARE OR OTHER DEVICES WITH WHICH SUCH WORK
PRODUCT WAS NOT INTENDED TO OPERATE, (iii) USE OR OPERATION OF THE WORK PRODUCT
IN A MANNER FOR WHICH IT WAS NOT DESIGNED OR RECOMMENDED BY PERITUS, OR (iv)
ALTERATION, ADAPTATION OR MODIFICATION OF THE WORK PRODUCT OTHER THAN BY
PERITUS. PERITUS SHALL PAY DAMAGES FINALLY AWARDED OR FOR ANY SETTLEMENT MADE
WITH PERITUS'S PRIOR WRITTEN AUTHORIZATION.
(b) Limitation of Remedy. IF PERITUS FAILS TO FULFILL ITS
--------------------
OBLIGATIONS UNDER A STATEMENT OF WORK, EXCEPT AS PROVIDED IN THIS AGREEMENT,
BULL'S SOLE AND EXCLUSIVE REMEDIES SHALL BE THOSE EXPRESSLY PROVIDED FOR IN SUCH
STATEMENTS OF WORK (BY INCORPORATION BY REFERENCE OR OTHERWISE). UPON ANY
TERMINATION OF SUCH STATEMENT OF WORK, PERITUS SHALL NOT HAVE ANY OBLIGATION TO
REFUND ANY FEES PAID TO IT UNDER THE TERMS THEREOF EXCEPT AS OTHERWISE EXPRESSLY
PROVIDED THEREIN.
(c) Limitation of Damages. EXCEPT FOR THE WILLFUL MISCONDUCT OR
---------------------
GROSS NEGLIGENCE OF A PARTY HERETO, IN NO EVENT SHALL EITHER PARTY BE LIABLE FOR
ANY INDIRECT, CONSEQUENTIAL, INCIDENTAL OR TORT DAMAGES EVEN IF IT HAS BEEN
ADVISED OF THE POSSIBILITY OF SUCH, INCLUDING BUT NOT LIMITED TO LOSS OF
REVENUE, LOSS OF PROFITS, OR LOSS OF USE. IN ANY EVENT, EXCEPT AS PROVIDED IN
THE IMMEDIATELY PRECEDING SENTENCE HEREOF AND EXCEPT AS PROVIDED IN SUBSECTION
11. (a)(iv), EACH PARTY'S MAXIMUM LIABILITY UNDER ANY STATEMENT OF WORK SHALL BE
LIMITED TO THE AMOUNTS ACTUALLY PAID BY BULL TO PERITUS THEREUNDER DURING THE
THEN CURRENT SOFTWARE MAINTENANCE PERIOD.
(d) Mutual Disclaimer. EXCEPT AS OTHERWISE STATED IN THIS AGREEMENT,
-----------------
OR A STATEMENT OF WORK, NEITHER BULL NOR PERITUS
-27-
<PAGE>
MAKES ANY WARRANTIES WITH RESPECT TO THIS AGREEMENT OR THE PRODUCTS OR SERVICES
PROVIDED HEREUNDER, INCLUDING ANY WARRANTY OF MERCHANTABILITY OR FITNESS FOR A
PARTICULAR PURPOSE.
12. Force Majeure. If the whole or any part of the performance by either
-------------
party of any part of their respective obligations hereunder is prevented or
delayed by causes, circumstances or events beyond the control of such party,
specifically limited to the following: delays of third parties in
transportation, strikes, labor troubles, floods, fires, earthquakes, riots,
explosions, wars, hostilities, acts of government, custom barriers, the
bankruptcy or other insolvency of subcontractors, or other causes of like
character beyond the control of such party, then to the extent such party shall
be prevented or delayed from performing all or any part of its obligations
hereunder by reason thereof despite due diligence and reasonable efforts to do
so notwithstanding such causes, circumstances or events, then such party shall
be excused from performance hereunder for so long as such causes, circumstances
or events shall continue to prevent or delay such performance, so long as such
party shall, promptly after the commencement of any such delay, give the other
party written notice specifying such delay and estimating the duration thereof.
13. Headings. Section headings contained in this Agreement are for
--------
convenient reference only and do not constitute part of this Agreement and shall
not affect the interpretation hereof.
14. Successors and Assigns. This Agreement and each Statement of Work
----------------------
hereunder shall be binding upon and inure to the benefit of the parties hereto
and thereto and their respective successors and assigns, but neither Bull nor
Peritus may assign a Statement of Work or its rights or obligations thereunder
without the prior written consent of the other.
15. Notices. Any notice, request or other communication required or
-------
permitted to be sent under this Agreement or any Statement of Work shall be
delivered by hand or mailed by registered or certified mail, return receipt
requested, or by fax subject to return fax acknowledgement of receipt, to the
respective addresses of the parties as set forth in subsection 9.(b) of this
Agreement, with a copy to the other party's legal counsel. Notice shall be
deemed effective when received. The address of each party's legal counsel is as
follows:
Peritus: Paul Gupta, Esq.
Nutter, McClennen & Fish
One International Place
Boston, Mass. 02110-2699
Telephone: (617) 439-2459
Facsimile: (617) 973-9748
-28-
<PAGE>
Bull: Thomas Gallagher, Esq.
Bull HN Information Systems Inc.
Technology Park MA02-408N
Billerica, Mass. 01821
Telephone: (508) 294-5023
Facsimile: (508) 294-5836
16. Entire Agreement. This Agreement, including any Statement of Work
----------------
attached hereto and a part hereof, contains the entire understanding and
agreement of the parties with respect to the subject matter of this Agreement
superseding all prior proposal and communications and there are no promises,
covenants or undertakings other than those expressly set forth herein. This
Agreement may not be modified except by a Statement of Work or another writing
signed by authorized representatives of both parties.
17. Governing Law. This Agreement shall be governed by and construed in
-------------
accordance with the laws of the Commonwealth of Massachusetts (without reference
to its law of conflicts-of-law).
18. Time of the Essence. The parties agree that time is of the essence of
-------------------
this Agreement.
19. Due Incorporation, Valid Existence, Good Standing and Due Authorization:
-----------------------------------------------------------------------
(a) Peritus, by its execution and delivery of this Agreement and by
its execution and delivery of each Statement of Work hereunder, hereby and
thereby represents and warrants to Bull that it is a corporation duly organized,
validly existing and in good standing under the laws of the jurisdiction of its
incorporation and duly qualified and in good standing as a foreign corporation
in each other jurisdiction where a failure to be so qualified and in such
standing would have a material adverse effect upon its business, assets or
prospects or upon its ability to perform its obligations under this Agreement or
any Statement of Work, and that the execution and delivery of this Agreement or
such Statement of Work, as the case may be, has been duly authorized by all
necessary corporate action on its part, requires no approval or consent of any
other party or any governmental authority that has not been obtained, does not
and with the passage of time, the giving of notice, or both, will not,
constitute a violation or breach of, or give rise to the creation of any lien or
encumbrance upon any of the properties or assets of Peritus under any contract,
agreement or instrument to which it is a party or by which it is bound, or any
judgment, order or decree of any court or any law, rule or regulation of any
governmental authority having jurisdiction, and is the valid and binding
obligation of Peritus, enforceable against it in accordance with its terms.
-29-
<PAGE>
(b) Bull, by its execution and delivery of this Agreement and by its
execution and delivery of each Statement of Work hereunder, hereby and thereby
represents and warrants to Peritus that it is a corporation duly organized,
validly existing and in good standing under the laws of the jurisdiction of its
incorporation and duly qualified and in good standing as a foreign corporation
in each other jurisdiction where a failure to be so qualified and in such
standing would have a material adverse effect upon its business, assets or
prospects or upon its ability to perform its obligations under this Agreement or
any Statement of Work, and that the execution and delivery of this Agreement or
such Statement of Work, as the case may be, has been duly authorized by all
necessary corporate action on its part, requires no approval or consent of any
other party or any governmental authority that has not been obtained, does not
and with the passage of time, the giving of notice, or both, will not,
constitute a violation or breach of, or give rise to the creation of any lien or
encumbrance upon any of the properties or assets of Bull under any contract,
agreement or instrument to which it is a party or by which it is bound, or any
judgment, order or decree of any court or any law, rule or regulation of any
governmental authority having jurisdiction, and is the valid and binding
obligation of Bull, enforceable against it in accordance with its terms.
(c) Peritus represents and warrants to Bull that it has reviewed and
will carefully review the services to be performed under this Agreement and each
Statement of Work, and that each Peritus employee is qualified and experienced
in education, training and knowledge to perform such work, it being understood
and agreed by Peritus that Bull has an independent reputation in the software
service industry and with its customers which must be preserved.
20. Severability. If any term or provision of this Agreement or a Statement
------------
of Work or the application thereof shall be determined to be invalid or
unenforceable, the same shall not affect the enforceability of any other
provision contained herein or therein. In addition, if one or more of the
provisions in this Agreement or a Statement of Work shall for any reason be held
to be unenforceable, such provision or provisions shall be construed by limiting
it or them so as to be enforceable to the full extent then permitted by
applicable law.
WITNESS the execution and delivery hereof as an instrument under seal as of the
date first above written.
PERITUS SOFTWARE SERVICES, INC.
By: /s/Dominic K. Chan
----------------------------------
Its
-30-
<PAGE>
Bull HN INFORMATION SYSTEMS, INC.
By: illegible
----------------------------------
Its
-31-
<PAGE>
SCHEDULE E
List of Bull Telecommunications Equipment to be Installed at Peritus for the
Benefit of Bull (see subsection 3.(c)(i))
- ----------------------------------------------------------------------------
- -- One (1) Telematics CPNet ACP30 PAD with 4 synchronous and
8 asynchronous ports
- -- One (1) CSU/DSU Datatel 56kb modem
<PAGE>
EXHIBIT 10.24
Confidential materials omitted and filed separately
with the Securities and Exchange Commission.
Asterisks denote such omissions.
LICENSE AGREEMENT
This License Agreement ("Agreement") is by and between Bull HN Information
Systems Inc., a Delaware corporation, with offices at 300 Concord Road,
Billerica, Massachusetts 01821 by and through its Integris division ("Bull HN")
and Peritus Software Services Inc., a Massachusetts corporation with offices at
304 Concord Road, Billerica, Massachusetts 01821-3485 ("Peritus") and is
effective as of July 29, 1996 (the "Effective Date").
Peritus is the owner of certain software sometimes referred to as Auto
Enhancer/2000 and certain processes and methodologies sometimes referred to as
Automate:2000.
Bull HN desires a license to use and to market such software, processes and
methodologies to provide Year 2000 Services to GCOS 7 Customers and GCOS 8
Customers;
Bull HN has developed or will develop certain software sometimes referred to as
GCOS 7 and GCOS 8 Front Ends; and
Peritus desires a license to use and to market such GCOS 8 Front Ends.
In consideration of the foregoing and the mutual covenants contained herein,
Bull HN and Peritus agree as follows:
ARTICLE 1 - DEFINITIONS
As used in this Agreement, the following terms shall have the following
respective meanings:
1.1 "Bull" shall mean Compagnie des Machines Bull, a French company and all of
its subsidiaries, regardless of tier.
1.2 "Bull Intellectual Property Rights" shall mean all rights, title and
interests, including patent, trade secret, trademark, mask works and copyright
rights which Bull has or acquires in the Bull HN Licensed Products.
1.3 "Changes" shall mean improvements, enhancements, modifications, upgrades,
corrections, alterations, revisions, adaptations, updates, translations,
versions, releases, derivations and extensions which are made to Licensed
Products or to Peritus Licensed Technology.
<PAGE>
1.4 "Computer Program(s)" shall mean an ordered series of instructions or
statements, in any form, for controlling the operation of a data processor to
execute a process to be performed on data, including all data associated
therewith.
1.4.1 "Customer Computer Program" shall mean Computer Programs treated or
processed by Bull, Peritus or a Distributor using the Peritus Licensed
Products and/or the Peritus Licensed Technology.
1.5 "Customer" shall mean (i) an end-user or a prospective end-user of Licensed
Products marketed by Bull, Peritus or a Distributor or (ii) an end-user or
prospective end user of Computer Programs for whom Bull, Peritus or a
Distributor provides or offers to provide Year 2000 Services.
1.5.1 "GCOS 8 Customer" shall mean a Customer who operates a mainframe
computer running Bull's GCOS 8 operating system.
1.5.2 "GCOS 7 Customer" shall mean a Customer who operates a mainframe
computer running Bull's GCOS 7 operating system.
1.6 "Distributor" shall mean any legal entity or person who during the Term has
been granted a sublicense (i) by Bull to use or market the Peritus Licensed
Products and/or Peritus Licensed Technology and/or to provide Year 2000 Services
or (ii) by Peritus to use or market the Licensed Products and/or Peritus
Licensed Technology or to provide Year 2000 Services.
1.7 "Front Ends" shall mean software programs and modules that convert a
particular type of software code into PIL, which is utilized by the Peritus
Licensed Software.
1.8 "Licensed Products" shall mean Bull HN Licensed Products and Peritus
Licensed Products.
1.8.1 "Bull HN Licensed Products" shall mean Bull HN Licensed Software
and Bull HN Related Materials collectively.
1.8.2 "Peritus Licensed Products" shall mean Peritus Licensed Software and
Peritus Related Materials collectively.
1.9 "Licensed Software" shall mean the Computer Program(s) described in Exhibits
A1 and A2. Such Licensed Software includes, but is not limited to, any version
running on any computer system, in source code and object code forms on magnetic
media and in human readable form, and all Changes to Licensed Software developed
or acquired by the licensor hereunder during the Term. Licensed Software shall
also include Computer Program(s) which are developed or acquired by the licensor
hereunder to provide equivalent or added functionality, to supplement or to
replace the Computer Program(s)
- 2 -
<PAGE>
in whole or in part which comprise the Licensed Software and any Changes made
thereto.
1.9.1 "Bull HN Licensed Software" shall mean the Computer Programs
described in Exhibit A2.
1.9.2 "Peritus Licensed Software" shall mean the Computer Programs
described in Exhibit A1.
1.10 "LOC" or "Lines of Code" shall mean an 80 character string of computer
software code that is not solely a comment or is not solely a blank line. A LOC
shall be counted only once regardless of how may times it is treated or
processed using the Peritus Licensed Products and/or the Peritus Licensed
Technology.
1.11 "Party" in singular or plural usage, shall mean Bull HN and/or Peritus as
indicated by the context.
1.12 "Peritus Intellectual Property Rights" shall mean all rights, title and
interests, including patent, trade secret, trademark, mask works and copyright
rights which Peritus has or acquires in the Peritus Licensed Products and the
Peritus Licensed Technology.
1.13 "Peritus Intermediate Language" or "PIL" shall mean the computer software
language used by the Peritus Licensed Software to treat or process Computer
Programs.
1.14 "Peritus Licensed Technology" shall mean the Automate:2000 Requirements
Specifications, the Automate:2000 Factory Flow Chart and other Peritus processes
and methodologies set forth on Exhibit A3.
1.15 "Related Materials" shall mean information in written or documentary form,
human readable form or machine readable form in any media, used or useful in or
relating to the installation, use, operation, testing, debugging, support,
maintenance, demonstration or marketing of the Licensed Software or the Peritus
Licensed Technology, all of which are more completely identified in Exhibit B of
this Agreement.
1.16 "Subsidiary" shall mean a corporation, company, or other entity, regardless
of tier, 50% or more of whose outstanding securities representing the right,
other than as affected by events of default, to vote for the election of
directors or other governing authorities, which are now or hereafter owned or
controlled, directly or indirectly, by Peritus or Bull or by another Subsidiary
of Peritus or Bull regardless of tier; but such corporation, company, or other
entity shall be deemed to be a Subsidiary only so long as such ownership or
control exists.
- 3 -
<PAGE>
1.17 "Term" shall mean the period commencing on the Effective Date and
continuing until December 31, 2001 unless otherwise extended by mutual written
agreement of the Parties or until this Agreement is otherwise terminated in
accordance with its provisions.
1.18 "Year 2000 Services" shall mean services provided by Bull HN, Bull, Peritus
or Distributors to Customers using Peritus Licensed Products and Peritus
Licensed Technology that identify portions of Customer Computer Programs that
may cause Year 2000 type errors and/or correcting such identified portions so as
so prevent the occurrence of Year 2000 type errors.
ARTICLE 2 - LICENSE GRANTS, DELIVERY AND YEAR 2000 SERVICES
2.1 Peritus Licensed Products and Peritus Licensed Technology
2.1.1 Peritus hereby grants to Bull, under Peritus' Intellectual
Property Rights, a license to use the Peritus Licensed Products and
Peritus Licensed Technology in connection with mainframe computers
running GCOS 7 or GCOS 8 operating systems. Such license to use shall
include (i) the rights to utilize for internal business purposes,
market, make Changes, copy, display, demonstrate and prepare
derivative works, (ii) the right to sublicense the Peritus Licensed
Products and Peritus Technology to Customers for their own internal
use and (iii) the right to provide Year 2000 Services to Customers.
2.1.1.1 All derivative works prepared by Bull hereunder shall
be owned by Bull, provided however that Peritus shall retain all
of its right, title and interest in the Peritus Licensed
Products and the Peritus Licensed Technology.
2.1.1.2 Bull agrees to and hereby grants to Peritus a non-
exclusive, non-transferable, perpetual, fully paid up, royalty
free license for such derivative works.
2.1.2 Bull's right to grant sublicenses set forth in Article 2.1.1
shall include the right to grant sublicenses to Distributors of the
same or lesser scope as the license granted to Bull, provided however
that Distributors shall have no right to the following:
2.1.2.1 Make Changes.
2.1.2.2 Transfer or provide the Peritus Licensed Products or
Peritus Licensed Technology to anyone other than
Customers for their own internal use.
2.1.2.3 Have access to source code.
- 4 -
<PAGE>
Confidential materials omitted and filed separately
with the Securities and Exchange Commission.
Asterisks denote such omissions.
2.1.3 The licenses granted in Article 2.1.1 shall be worldwide and
exclusive as to all GCOS 7 Customers and all GCOS 8 Customers except
for those GCOS 8 Customers in Spain where such licenses shall be
nonexclusive.
2.1.4 All sublicenses granted to Distributors and/or Customers shall be in
writing signed by such Distributor or Customer, as applicable. Such
sublicenses shall be on terms and conditions substantially similar to the
terms and conditions upon which Bull licenses its own products.
2.1.4.1 Prior to sublicensing the Peritus Licensed Products and/or
Peritus Licensed Technology to Distributors or Customers in India,
Turkey or China, Bull will provide written notice to Peritus
including the name of the proposed Distributor or Customer, the
location of such Distributor or Customer and the terms of the
agreement applicable to the protection of intellectual property
rights. Peritus will notify Bull in writing ************
************** following receipt of such notice if it objects to the
licensing of the Peritus Licensed Products and/or Peritus Licensed
Technology in such country under the terms proposed. The Parties will
use reasonable efforts to negotiate a resolution of any such
objections within **************** following Bull's receipt of
Peritus' notice of objection. If Peritus does not provide any notice
of objection within such ******************* period, Bull shall have
the right to sublicense the Peritus Licensed Products and/or Peritus
Licensed Technology to the distributor or Customer under the proposed
terms.
2.1.5 Peritus will deliver the Peritus Licensed Products and the Peritus
Licensed Technology to Bull HN at the address set forth above within ten
(10) days following the Effective Date. Peritus shall also promptly deliver
to Bull HN, at no charge, all Changes to the Peritus Licensed Products and
Peritus Licensed Technology made or acquired by Peritus during the Term.
2.1.5.1 In the event that Peritus and Bull mutually agree that
Peritus incorporates Changes to the Peritus Licensed Products and/or
the Peritus Licensed Technology that prevent Bull from using the
Peritus Licensed Products and/or the Peritus Licensed Technology to
provide Year 2000 Services to GCOS 7 Customers or GCOS 8 Customers as
contemplated by this Agreement and as Bull had been providing such
Year 2000 Services prior to the incorporation of such Changes, Bull
will so notify Peritus in writing, and Peritus will within
******************** following receipt of such notice, deliver to
Bull a complete copy of the source code version of the
- 5 -
<PAGE>
Peritus Licensed Products and the Peritus Licensed Technology which
do not incorporate such Changes. Bull shall have the right and
Peritus hereby grants to Bull a license to use such source code
version to exercise all of its rights hereunder and perform its
obligations to its Customers.
2.2 Bull HN Licensed Products
2.2.1 Bull HN hereby grants to Peritus, under Bull's Intellectual
Property Rights, a royalty-free license to use the Bull HN Licensed
Products. Such license to use shall include (i) the rights to utilize
for internal business purposes, market, make Changes, copy, display,
demonstrate and prepare derivative works including the right to
incorporate the Bull HN Licensed Products into the Peritus Licensed
Products, (ii) the right to sublicense the Bull HN Licensed Products
to GCOS 8 Customers in Spain for their own internal use and (iii) the
right to provide Year 2000 Services to GCOS 8 Customers in Spain.
2.2.2 Peritus' right to grant sublicenses set forth in Article 2.2.1
shall include the right to grant sublicenses to Distributors,
regardless of tier, of the same or lesser scope as the license
granted to Peritus, provided however that Distributors shall have no
right to prepare derivative works of the Bull HN Licensed Products.
2.2.3 All sublicenses granted to Distributors and/or Customers shall
be in writing signed by such Distributor or Customer, as applicable.
Such sublicenses shall be on terms and conditions substantially
similar to the terms and conditions upon which Peritus licenses its
own products.
2.2.4 Bull HN will deliver to Peritus the Bull HN Licensed Products
at the address set forth above, upon availability of the Bull HN
Licensed Products for alpha and/or beta testing. Bull HN shall
promptly deliver to Peritus, at no charge, all Changes to the Bull HN
Licensed Products made or acquired by Bull HN during the Term at the
address set forth above.
2.3 Year 2000 Services
2.3.1 Bull will provide Year 2000 Services to Customers, either
directly or through Distributors only under the terms of a written
agreement executed by the Customer. Such agreement will include
provisions legally sufficient to (i) disclaim any warranties on
behalf of Peritus and Bull, including without limitation the implied
warranties of merchantability and fitness for a particular purpose
and (ii) disclaim liability for any consequential, incidental or
special damages.
2.3.2 As part of its Year 2000 Services, Bull or its Distributors
will maintain, or will require the Customer to maintain a copy of the
Customer's unmodified source code.
- 6 -
<PAGE>
Confidential materials omitted and filed separately
with the Securities and Exchange Commission.
Asterisks denote such omissions.
ARTICLE 3 - ROYALTIES
3.1 In consideration of the licenses granted in Article 2.1, Bull shall
during the Term make payments to Peritus as set forth in Exhibit C.
3.2 Only licenses to Customers shall be royalty bearing and consequently
there shall be no obligation to pay royalties for rights granted to Distributors
for their right to sublicense the Peritus Licensed Products and/or Peritus
Licensed Technology.
3.3 There are ****************************************.
3.3.1 Sublicenses. Royalties for sublicenses of Peritus Licensed
Products and Peritus Licensed Technology to Customers are earned by
Peritus at the time of the grant of such sublicense by Bull to Customers
and are payable to Peritus pursuant to Article 4.
3.3.2 Year 2000 Services. Fees for the use by Bull or Distributors of
the Peritus Licensed Products and/or the Peritus Licensed Technology to
provide Year 2000 Services or for Distributors' internal use are earned
by Peritus when a Customer accepts in writing the Customer Computer
Programs for final integration and acceptance testing and are payable to
Peritus pursuant to Article 4.
3.4 Except as otherwise mutually agreed in writing by the Parties, there
shall be ********************** for upgrades and/or new releases of the Peritus
Licensed Products or Peritus Licensed Technology.
3.5 There shall be ******************** payable to Peritus for Bull's or
Distributors' use of the Peritus Licensed Products or Peritus Licensed
Technology for demonstration use.
3.6 Each sublicense for the Peritus Licensed Products and/or Peritus
Licensed Technology granted to Customers shall become fully paid-up as to
Peritus upon payment made to Peritus pursuant to Paragraph 3.1 above.
3.7 Upon written approval of Peritus, such approval not to be unreasonably
withheld, any of the Bull entities may at its option report and make payments
directly to Peritus, or to a Subsidiary of Peritus. Any additional requirements
related to such direct payments shall be negotiated directly between such Bull
entity and Peritus.
-7-
<PAGE>
3.8 Peritus shall be responsible for all income related-taxes imposed on, or
withheld from, royalty payments earned by Peritus pursuant to this Agreement. In
the event that payments to Peritus pursuant to this Agreement originate from a
different country than that country where payments are to be made the following
shall apply:
(i) Payments shall be made by Bull to Peritus net of withholding
taxes due under the originating country's law. Any reduced rates of
withholding provided by a tax treaty will be applied after receiving the
approval of the authorities of the local country, if required.
(ii) Peritus agrees to supply Bull, in due time, with the duly signed
tax forms which are required to take advantage of the reduced
withholding tax rate provided for by any such tax treaties. Such tax
forms shall be supplied once a calendar year prior to any payment to be
made hereunder during such calendar year.
(iii) Should Peritus not supply in due time the tax forms referred to
under subparagraph (ii) above, Bull shall be entitled to withhold from
gross payment, the domestic withholding tax at source provided for by
the then applicable domestic law, with regard to this type of payment.
ARTICLE 4 - REPORTING AND PAYMENT REQUIREMENTS
4.1 Bull and Peritus shall keep, and shall require Distributors to keep,
true and accurate records relating to the Licensed Products and the Peritus
Licensed Technology to the extent necessary for making reports and payments
required by the terms of this Agreement. Such records shall be open for
inspection by a mutually agreed-upon Certified Public Accountant (or the
equivalent) during the Term and for one (1) year after termination of this
Agreement, during usual business hours, but not more often than once a year.
Such audit shall relate only to the current and immediately preceding calendar
year.
4.2 Within 45 days after the end of each month for each year during which
payments are due under this Agreement, Bull shall furnish written reports to
Peritus setting forth (i) for sublicenses granted to Customers, the payments due
Peritus during the preceding calendar month and (ii) for Year 2000 Services
provided to Customers, (1) the LOC treated or processed by Bull or a Distributor
during the preceding calendar month and (2) the date upon which any Customer
accepted in writing the Customer Computer Programs for final integration and
acceptance testing. All reports shall be in the format set forth in Exhibit C.
Except as provided in this Article and in Article 4.3, such reports shall
include a remittance covering the payments then due. If a Bull entity exercises
the option specified in Paragraph 3.7, such Bull entity shall also furnish a
report to Peritus or a Subsidiary of Peritus, if applicable, setting forth the
payments due Peritus during the
-8-
<PAGE>
preceding calendar month pursuant to this Agreement in each such Bull entity
marketing territory. Each report from such Bull entity reporting directly to
Peritus shall include a remittance covering the payments then due from that
particular Bull entity.
Such reports shall be sent to Peritus at the following address:
Peritus Software Services Inc.
Contract Administrator
304 Concord Road
Billerica, Massachusetts 01821-3485
4.3 Unless otherwise mutually agreed to in writing, all payments required
under this Agreement shall be made in United States dollars. If a currency
conversion is necessary the conversion rate shall be that rate quoted in the
Wall Street Journal (i) on the first business day following the calendar month
for which royalty payments are being made and (ii) on the date of Peritus'
invoice for all other payments.
4.4 Within 45 days after the end of each month for each year during the Term
of this Agreement, Peritus shall furnish written reports to Bull HN setting
forth (i) for sublicenses of Bull HN Licensed Products granted to Customers
during the preceding calendar month, the name and location of such Customers and
(ii) for Year 2000 Services provided to Customers, the name and location of such
Customer.
4.5 Information obtained from the records and reports provided under this
Article 4 shall be held in confidence by the receiving Party, and such Certified
Public Accountant, and is not to be used for any other purpose except to verify
the accuracy of the reports, royalties and fees paid hereunder.
ARTICLE 5 - MARKETING
5.1 It is specifically agreed that Bull and Distributors may use but are not
obligated to use any of Peritus' trademarks in marketing the Peritus Licensed
Products, Peritus Licensed Technology and the Year 2000 Services.
5.2 Although Bull intends to use reasonable efforts in marketing the Peritus
Licensed Products, Peritus Licensed Technology and the Year 2000 Services, the
extent and nature of any such marketing efforts shall be determined solely by
Bull in the exercise of its business judgment. It is understood that there are
no minimum marketing obligations under this Agreement.
ARTICLE 6 - RESERVED
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<PAGE>
Confidential materials omitted and filed separately
with the Securities and Exchange Commission.
Asterisks denote such omissions.
ARTICLE 7 - SUPPORT AND MAINTENANCE OF LICENSED SOFTWARE
7.1 Peritus Licensed Products and Peritus Licensed Technology
7.1.1 Peritus will provide technical support to Bull from 8:00 am to
5:00 p.m. EST/EDT.
7.1.2 Peritus agrees that during the Term, Peritus shall, at Peritus'
expense, maintain, at a minimum, the current and the immediately
preceding release of the Peritus Licensed Software. Should Peritus
become aware of any errors or be notified by Bull of any errors in the
Peritus Licensed Software, Peritus shall promptly take appropriate
measures to correct such errors in accordance with the schedule set
forth below. Bull may also request technical advice concerning the
installation or the operation of Peritus Licensed Products or Peritus
Licensed Technology, or may propose modification(s) thereto. Peritus
will categorize and prioritize the request for support according to the
Request Table below.
Peritus will assign, within the "Assignment Time" listed below, a technically
qualified person to address the request for support. Peritus does not guarantee
that a problem or concern that is the subject matter of a request can be
resolved. However, Peritus will make reasonable efforts to resolve all errors
and defects and address Bull's concerns arising from the request in accordance
with Article 7.1.3. Notwithstanding the foregoing, Peritus in its sole
discretion, may decide whether to seek to attempt to resolve or address a
request for an enhancement (i.e. a priority 4 request). Peritus shall maintain
records of all support requests and the responses thereto, which shall be open
for inspection by Bull.
<TABLE>
<CAPTION>
Request Table
-------------
Priority Definition Assignment Time
-------- ---------- ---------------
<S> <C> <C>
1 ************************* *******
2 ************************* *******
3 ********************* *******
4 ******************* *******
</TABLE>
7.1.3 Peritus will use its best efforts to resolve errors and defects in
accordance with the following:
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<PAGE>
Confidential materials omitted and filed separately
with the Securities and Exchange Commission.
Asterisks denote such omissions.
(i) Priority 1: Peritus will use its best efforts to provide a work
around solution within ************** after becoming aware of such
problems, and provide a permanent correction to Bull within
***************************.
(ii) Priority 2: Peritus will use all reasonable efforts to provide
the work around within *************** after becoming aware of such
problem and provide a permanent correction within *********************
or at a later time as may be agreed to in writing by Bull.
(iii) Priority 3 and 4: Peritus will verify and respond to such
problems within **************** after becoming aware of such problem
and a correction by Peritus shall be provided in its next release or
update of the Peritus Licensed Software or Peritus Licensed Technology,
as applicable.
7.1.4 Peritus will provide update releases to the Peritus Licensed Products
and Peritus Licensed Technology which may include some or all of the following;
(i) defect (bug) fixes, (ii) new or modified functionality, or (iii) new Front-
Ends. Peritus will also provide release notes documenting changes. Peritus will
provide Bull with at least ******************************** of any new releases
or upgrades that contain new or modified functionality to the Peritus Licensed
Products and/or the Peritus Licensed Technology.
7.1.5 The support of the Peritus Licensed Software sublicensed to Distributors
or Customers shall be provided as follows:
(i) Bull shall be responsible for providing First Level Support. For
the purposes of this Paragraph "First Level Support" shall mean direct
contact with the Distributors and/or Customers as applicable, handling
inquiries, routine problem diagnosis and resolution or, in the event a
problem cannot be resolved, the obtaining of appropriate documentation
of such inquiry or problem for referral to Peritus.
(ii) Peritus shall be responsible for providing Second Level Support.
For purposes of this paragraph "Second Level Support" shall mean the
provision of personnel with such special training and experience as may
be, on a best efforts basis, appropriate to handle Distributor or
Customer inquiries, non-routine problem diagnosis and resolution, etc.,
upon referral by Bull's First Level Support personnel. Second Level
Support may also mean, if requested by Bull, direct contact with a
Distributor or Customer in certain instances.
-11-
<PAGE>
Confidential materials omitted and filed separately
with the Securities and Exchange Commission.
Asterisks denote such omissions.
7.1.6 Peritus shall, throughout the Term, make such Changes to the
Licensed Software as may be necessary to make it competitive with other
vendors' Computer Programs which are functionally equivalent to the
Licensed Software.
7.1.7 There shall be ******************** to Bull for the maintenance
and support set forth herein.
7.2 Bull HN Licensed Products
7.2.1 Bull HN will provide reasonable maintenance and support to
Peritus for the Bull HN Licensed Products Monday to Friday 8:00 am to
5:00 p.m. MST, except for Bull HN scheduled holidays.
7.2.2 Should Bull HN become aware of any errors or be notified by
Peritus of any errors in the Bull HN Licensed Software, Bull HN will
take appropriate measures to correct such errors in a reasonable time.
Such decision as to when or whether to correct errors will be in Bull
HN's sole discretion. Bull HN will respond to reasonable inquiries
regarding the installation and/or operation of the Bull HN Licensed
Products.
7.2.3 The support of the Bull HN Licensed Software sublicensed to
Distributors or Customers shall be provided as follows:
(i) Peritus shall be responsible for providing First Level Support.
For the purposes of this Paragraph "First Level Support" shall mean
direct contact with the Distributors and/or Customers as applicable,
handling inquiries, routine problem diagnosis and resolution or, in the
event a problem cannot be resolved, the obtaining of appropriate
documentation of such inquiry or problem for referral to Bull.
(ii) Bull shall be responsible for providing Second Level Support.
For purposes of this paragraph "Second Level Support" shall mean the
provision of personnel with such special training and experience as may
be, on a reasonable efforts basis, appropriate to handle Distributor or
Customer inquiries, non-routine problem diagnosis and resolution, etc.,
upon referral by Peritus' First Level Support personnel.
7.2.4 There shall be ********* for maintenance and support of the Bull
HN Licensed Products.
-12-
<PAGE>
Confidential materials omitted and filed separately
with the Securities and Exchange Commission.
Asterisks denote such omissions.
ARTICLE 8 - TRAINING
8.1 Peritus shall provide to Bull HN the training described in Exhibit D
***********************. Such training shall be at Peritus' facilities and
Peritus shall supply all equipment, software and training materials and other
supplies required for such training. Such training may be part of regular
classes offered by Peritus. Bull shall be responsible for the travel and living
expenses of its personnel, if any. Additional training during the Term shall
also be promptly provided following written request by Bull, at Peritus' then
current most favorable rates.
ARTICLE 9 - WARRANTIES
9.1 Peritus represents and warrants that Peritus has good and clear title to
the Peritus Licensed Products and Peritus Licensed Technology free and clear of
all liens and encumbrances, and to all rights and licenses with respect thereto
granted to hereunder. Peritus further warrants that Peritus has not made and
will not make any commitments to others inconsistent with or in derogation of
the rights and licenses granted to herein, and that Peritus is free of any
obligation that would prevent it from entering into this Agreement.
9.2 Peritus further warrants that the Peritus Licensed Products and Peritus
Licensed Technology do not infringe any patent, copyright, trade secret, mask
work, trademark or other legal or equitable rights of any third party.
9.3 Peritus agrees to indemnify, hold harmless and defend Bull HN, Bull,
Distributors and Customers from and against any and all suits, proceedings at
law or in equity, and any and all liability, loss, claims, costs, damages or
expenses, including reasonable attorney's fees, arising out of or in connection
with any claim by any person that the exercise of any right granted by Peritus
hereunder to the Peritus Licensed Products or Peritus Licensed Technology
infringes any right, title, or interest, including patent, copyright, trade
secret, trademark, mask work or other proprietary rights of third parties,
provided however that Bull promptly notifies Peritus of any such claim and
provides Peritus with reasonable assistance and cooperation.
9.4 EXCEPT AS SPECIFICALLY PROVIDED HEREIN, PERITUS MAKES NO WARRANTIES AND
HEREBY DISCLAIMS ALL OTHER WARRANTIES, EXPRESS OR IMPLIED, INCLUDING WITHOUT
LIMITATION, THE IMPLIED WARRANTIES OF MERCHANTABILITY AND FITNESS FOR A
PARTICULAR PURPOSE WITH REGARD TO THE PERITUS LICENSED PRODUCTS, THE PERITUS
LICENSED
-13-
<PAGE>
TECHNOLOGY, ANY SERVICES PROVIDED HEREUNDER OR THIS AGREEMENT. IN NO EVENT SHALL
PERITUS BE LIABLE FOR CONSEQUENTIAL, INCIDENTAL OR SPECIAL DAMAGES RESULTING
FROM THE PERITUS LICENSED PRODUCTS, THE PERITUS LICENSED TECHNOLOGY, ANY
SERVICES PROVIDED HEREUNDER OR THIS AGREEMENT.
9.5 Bull HN represents and warrants that Bull has good and clear title to
the Bull HN Licensed Products free and clear of all liens and encumbrances, and
to all rights and licenses with respect thereto granted to hereunder. Bull HN
further warrants that Bull HN has not made and will not make any commitments to
others inconsistent with or in derogation of the rights and licenses granted to
herein, and that Bull HN is free of any obligation that would prevent it from
entering into this Agreement.
9.6 THE BULL HN LICENSED PRODUCTS ARE PROVIDED AS IS. EXCEPT AS SPECIFICALLY
PROVIDED HEREIN, BULL HN MAKES NO WARRANTIES AND HEREBY DISCLAIMS ALL OTHER
WARRANTIES, EXPRESS OR IMPLIED, INCLUDING WITHOUT LIMITATION, THE IMPLIED
WARRANTIES OF MERCHANTABILITY AND FITNESS FOR A PARTICULAR PURPOSE WITH REGARD
TO THE BULL HN LICENSED PRODUCTS, ANY SERVICES PROVIDED HEREUNDER OR THIS
AGREEMENT. IN NO EVENT SHALL BULL HN BE LIABLE FOR CONSEQUENTIAL, INCIDENTAL OR
SPECIAL DAMAGES RESULTING FROM THE BULL HN LICENSED PRODUCTS, ANY SERVICES
PROVIDED HEREUNDER OR THIS AGREEMENT.
ARTICLE 10 - TERM AND TERMINATION OF AGREEMENT
10.1 The initial Term of this Agreement shall be as set forth in Article
1.18. The Parties may agree to extend the Term of this Agreement by written
amendment in accordance with Article 14.11.
10.2 If either Party hereto shall fail to perform or observe adequately any
of the terms and conditions to be performed or observed under this Agreement,
the other Party may, (subject to the provisions of Article 14.7), give written
notice to the defaulting Party specifying the respects in which the defaulting
Party has so failed to perform or observe the terms and conditions of this
Agreement, and in the event that any defaults so indicated shall not be remedied
by the defaulting Party within 90 days after such notice, (or if such default
cannot be remedied during such ninety (90) day period then the defaulting Party
shall have commenced the remedy and proceeded diligently within 90 days after
such notice), the Party not in default within 30 days thereafter may by written
notice to the defaulting Party terminate this Agreement, and, except as provided
herein, this Agreement and all the rights herein granted to the defaulting Party
shall terminate 5 days after the defaulting Party's receipt of such notice of
Termination. No waiver of any breach of any provision of this Agreement shall
constitute a waiver of any other breach
-14-
<PAGE>
of the same or other provisions of this Agreement, and no waiver shall be
effective unless made in writing.
10.3 If a Bull entity shall fail to perform or observe adequately any of the
terms and conditions to be performed or observed under this Agreement, Peritus
may (subject to the provisions of Article 14.7) give written notice to such Bull
entity specifying the respects in which such Bull entity has so failed to
perform or observe the terms and conditions of this Agreement, and in the event
that any defaults so indicated shall not be remedied by such Bull entity (or if
such default cannot be remedied during such ninety (90) day period then such
Bull entity shall have commenced the remedy and proceeded diligently within 90
days after such notice), then Peritus within 30 days thereafter may by written
notice to such Bull entity terminate this Agreement with respect to such Bull
entity and, except as provided herein, this Agreement and all the rights herein
granted to such Bull entity shall terminate 5 days after receipt of such notice
of Termination. Any such Termination of this Agreement with respect to an
individual Bull entity pursuant to this paragraph 10.3 shall not affect the
rights or obligations of Bull HN or any other Bull entity under this Agreement.
10.4 All sublicenses granted to Customers pursuant to this Agreement, and
all obligations, including royalty obligations with respect thereto, shall
survive any termination of this Agreement. Bull and Distributors may continue to
use the Peritus Licensed Products and Peritus Licensed Technology internally
following termination of this Agreement provided the appropriate royalty has
been paid to Peritus.
10.5 Notwithstanding any termination of this Agreement, (i) Bull and
Distributors shall continue to have those rights and licenses including the
right to retain those Peritus Licensed Products and Peritus Licensed Technology
and (ii) Peritus shall continue to have those rights and licenses including the
right to retain those Bull HN Licensed Products, only as are reasonably
necessary for to fulfill obligations to Customers under contracts entered into
up to and including the date of such termination.
10.6 Notwithstanding the provisions of Article 10.2, in the event of
Peritus' failure to fulfill any of its obligations hereunder, including without
limitation its obligations for support and maintenance pursuant to Article 7.1,
within 90 days after written notification to Peritus of such failure, Bull may
elect upon written notice to Peritus, in lieu of terminating the Agreement and
in addition to any other remedy it may have, at its sole option, to perform
Peritus' obligations and to reduce or suspend as appropriate the payments to
Peritus to reflect Peritus' failure to perform such obligations. Peritus agrees,
therefore, should Bull so elect to perform Peritus' obligations hereunder, to
provide Bull with the source code of the Peritus Licensed Software as well as
any other tool, provided that such source code or tool is reasonably necessary
for the particular Peritus' obligations that Bull has so elected to perform, and
Bull shall have such rights with respect to such source code
-15-
<PAGE>
and tools. Peritus shall, at Bull's expense, and within 30 days following the
Effective Date of this Agreement and during the Term of this Agreement, as such
source code is Changed in accordance with the terms and conditions of this
Agreement, place such source code in safekeeping with an escrow agent mutually
agreeable to both parties, which escrow agent shall be instructed to provide
such source code to Bull in accordance with the terms and conditions of this
Agreement, and an escrow agent agreement substantially in the form as attached
as Exhibit E. Peritus agrees to provide Bull HN with an updated list of the
materials placed in escrow and to allow Bull HN to audit such placements.
ARTICLE 11 - CONFIDENTIALITY
11.1 A Party receiving Confidential and Proprietary Information from the
other Party shall maintain such Confidential Proprietary Information in
confidence during the Term and for a period of 5 years following the Term. The
receiving Party shall treat the Confidential and Proprietary Information
received hereunder with the same care the receiving Party uses in the protection
of the receiving Party's own Confidential and Proprietary Information and take
reasonable precautions to limit the disclosure of such Confidential and
Proprietary Information only to its employees, employees of its Subsidiaries,
and in the case of Bull HN, to employees of Bull, contractors and consultants
with a need to know to fulfill the receiving Party's rights and obligations
pursuant to this Agreement. The receiving Party shall not otherwise copy such
Confidential and Proprietary Information in whole or in part, or make any other
use of such Confidential and Proprietary Information without the prior written
consent of the transmitting Party except as may be necessary to exercise its
rights and fulfill its obligations pursuant to this Agreement. The receiving
Party shall not divulge, in whole or in part, such Confidential and Proprietary
Information to any other third party except as provided herein without the prior
written consent of the transmitting Party and shall reproduce and include the
transmitting Party's copyright and trade secret notices on all copies of such
confidential and proprietary information.
11.2 Confidential and Proprietary Information shall mean information in
documented form or oral form the substance of which is promptly reduced to
writing and marked thereon as Confidential and Proprietary. Such Confidential
and Proprietary Information shall not include:
(a) information which was in the public domain at the time of
disclosure hereunder, or
(b) information which was rightfully in the receiving Party's
possession without binder of secrecy prior to the time of its
disclosure hereunder, or
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<PAGE>
(c) information which, though originally confidential and proprietary
information, subsequently becomes part of the public knowledge or
literature through no fault of the receiving Party, as of the date of
its becoming part of the public knowledge or literature, or
(d) information which, though originally confidential and proprietary
information, subsequently is received by the receiving Party from a
third party who has disclosed the information without binder of
secrecy, as of the date of such third party disclosure, or
(e) information independently developed by the receiving Party's
employees or agents who can be shown to have had no access to
Confidential and Proprietary Information received hereunder.
Confidential and Proprietary Information disclosed under this Agreement shall
not be deemed to be within the foregoing exceptions merely because such
information is embraced by more general information in the public domain or
within the receiving Party's possession.
11.3 All other information transmitted between the Parties shall be
maintained in accordance with the copyright laws; provided that the transmitting
Party shall mark such information with a proper copyright notice and the
transmitting Party shall reproduce such copyright notice on all copies of such
information.
ARTICLE 12 - RESERVED
ARTICLE 13 - DEVELOPMENT OF SOFTWARE BY BULL COMPANIES
13.1 Nothing contained in this Agreement shall prevent Bull from developing,
acquiring or marketing, either through the use of its own personnel or through
third parties, products similar to the Peritus Licensed Products. Nothing herein
shall be construed to grant Peritus any rights in any such similar products so
developed or acquired, or any rights to the revenues of any portion thereof
derived by Bull from the use, sale, lease, sublicense or other disposal of any
such products.
13.2 Bull shall have complete right, title and interest in any Changes to
Peritus Licensed Products or Peritus Licensed Technology which Bull makes or
acquires from any third party.
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ARTICLE 14 - GENERAL
14.1 No Assignment. This Agreement shall be binding upon and inure to the
-------------
benefit of any corporation or other legal entity with which Bull HN may be
merged or consolidated, or to the benefit of the assignee of the entire assets
of either Party to which this Agreement relates. This Agreement shall not
otherwise be assignable without the prior written consent of the other Party.
14.2 No Agency. This Agreement shall not constitute either Party the legal
---------
representative, employee, partner, joint venturer or agent of the other, nor
shall either Party have the right or authority to assume, create, or incur any
liability or any obligation of any kind, expressed or implied, against, or in
the name of or on behalf of the other Party.
14.3 No Publicity. Neither Party shall publicize the existence or terms of
------------
this Agreement, without the prior written approval of the other Party. Further,
each Party shall use its best efforts not to disclose the terms and conditions
of this Agreement to any third party, except as required by law, or by
governmental regulation, requirement or order, or as may be necessary to
establish or assert its rights hereunder, provided however, that Peritus and
Bull shall have the right to disclose the terms and conditions of this Agreement
to Distributors.
14.4 Export Control. If Peritus or Bull exports, either directly or
--------------
indirectly, Licensed Products to any country for which the United Sates
government (or any agency thereof) requires an export control license or other
approval, Peritus or Bull, as applicable, shall first obtain such license or
approval.
14.5 Notices. Any and all written notices, communications and deliveries
-------
between Peritus and Bull HN with reference to this Agreement shall be
sufficiently made (i) on the date of mailing if sent by registered or certified
mail to the respective designated representatives, (ii) on the date following
transmission if sent by fax and followed by an original sent by US mail and
(iii) on the date of delivery if sent by express mail or personal delivery, if
sent to the addresses below, subject to change upon written notice in accordance
with this provision:
In the case of Bull: In the case of Peritus:
Bull HN Information Systems Inc. Peritus Software Services Inc.
President, Integris President
300 Concord Road 304 Concord Road
Billerica, Massachusetts 01821 Billerica, Massachusetts 01821-3485
with a copy to Legal Department at the same address.
-18-
<PAGE>
14.6 Governing Law. The validity, interpretation and performance of this
-------------
Agreement shall in all respects be governed by the laws of the Commonwealth of
Massachusetts.
14.7 Disputes. If there is a dispute between the Parties, the Party alleging
--------
such dispute shall serve upon the other Party written notice setting forth the
nature of the dispute. If the dispute relates to a breach alleged under
paragraph 10.2, the Party receiving notice of breach shall give the other Party
written notice of the dispute within 10 days of receipt of the notice of breach.
If any dispute is not resolved to the satisfaction of the Party giving the
notice of dispute within 30 days of such notice, then such Party may, by written
notice to the other Party within an additional 30 days thereafter, request a
meeting of representatives of senior management of the Parties to occur within
30 days of such written request.
14.8 Headings. The Article headings in this Agreement are for convenience
--------
only and are not to be used to interpret this Agreement.
14.9 Force Majeure. Neither Party shall be responsible for any failure or
-------------
delay in performance due to acts of God or other causes beyond its reasonable
control.
14.10 Severability. If any term, provision, covenant or condition of this
------------
Agreement is held invalid or unenforceable for any reason, the remainder of the
provisions shall continue in full force and effect as if this Agreement had been
executed with the invalid portion thereof eliminated.
14.11 Entire Agreement. This Agreement including Exhibits A through E, sets
----------------
forth the complete and exclusive statement of the Agreement between the Parties
relating to the subject matter contained herein, and merges all prior
discussions and communications between them. Neither Party shall be bound by any
definition, condition, warranty or representation other than as expressly set
forth in this Agreement, or in an amendment subsequently set forth in writing
signed by the Parties hereto.
IN WITNESS WHEREOF, the Parties hereto have duly executed this Agreement,
including Exhibits A through E, which are incorporated herein and made a part
hereof, in duplicate, by their respective duly authorized officers to be
effective as of the Effective Date.
Peritus Bull HN Information Systems Inc
BY: /s/ Allen Deary BY: /s/ Jonathan J. Burbank
-------------------------------- --------------------------------
NAME: Allen Deary NAME: Jonathan J. Burbank
------------------------------ -------------------------------
TITLE: VP Finance TITLE: President Integris
----------------------------- ------------------------------
DATE: 8/9/96 DATE: 8/8/96
------------------------------- -------------------------------
-19-
<PAGE>
Confidential materials omitted and filed
separately with the Securities and Exchange Commission.
Asterisks denote such omissions.
EXHIBIT A1 - PERITUS LICENSED SOFTWARE DESCRIPTION
1. AutoEnhancer/2000 R2, Version 5 (or currently supported release[s]) of this
product with the following functionality:
** ******************************************************
**************************************************************
*********************************************************
*************************************************************
**********************************************************.
** *******************************************************.
** *************************************************************
**************.
** **********************************************.
** **************************************************************
***********************.
** *************************************************** ******
** **************************************************************
*************************.
2. Peritus Front-Ends (with the following functionality):
*******************************************************************
**************************************************************
***********************:
** *************
** *************
** ***************
** ***************
** ****************
** ***********
-20-
<PAGE>
Confidential materials omitted and filed
separately with the Securities and Exchange Commission.
Asterisks denote such omissions.
EXHIBIT A2 - BULL HN LICENSED SOFTWARE DESCRIPTION
********************************************************************************
********************************************************************
*********************************.
******************************************************************************
*************************************************************************
*****************************.
-21-
<PAGE>
EXHIBIT A3 - PERITUS LICENSED TECHNOLOGY
Peritus Year 2000 Mass Change Processes and Methodologies Peritus Year 2000 Mass
Change Processes and Methodologies:
Automate: 2000 Requirements Specifications
Automate: 2000 Factory Flow Chart
-22-
<PAGE>
EXHIBIT B - RELATED MATERIALS DESCRIPTION
1. Peritus Licensed Products
a. Documentation. The publications, in written and/or electronic
form which describe the Peritus Licensed Products and/or Services are
included within the respective product and/or service.
1. Installing AutoEnhancer:2000
2. Using AutoEnhancer:2000
3. Version X Server Flow, AutoEnhancer:2000
4. Version X Release notes, AutoEnhancer:2000
2. Peritus Licensed Technology
a. Automate:2000 Requirements Specifications, Revision 0
b. Automate:2000 Factory Flow Charts, Revision 2.1
3. Bull HN Licensed Products
The publications, in written and/or electronic form which describe the Bull HN
Licensed Products and which are or will be included in Bull's standard offering.
-23-
<PAGE>
Confidential materials omitted and filed
separately with the Securities and Exchange Commission.
Asterisks denote such omissions.
EXHIBIT C - PAYMENTS
A. GCOS 8 and GCOS 7
1. The royalties payable to Peritus for use by Bull of the Peritus
Licensed Products and Peritus Licensed Technology to provide Year 2000 Services
for GCOS 8 and GCOS 7 Customers shall be as follows:
Cost per line of Code:
<TABLE>
<CAPTION>
Annual LOC* Fee per LOC
----------- -----------
<S> <C>
********** *****
************* *****
**************** *****
*********** *****
</TABLE>
*For the purposes of this Exhibit C, each LOC shall be counted one time,
regardless of how may times such LOC shall have been processed or treated.
2. The royalties payable to Peritus for the sublicense of the Peritus
Licensed Products and Peritus Licensed Technology to Customers shall be as
follows:
Fully Paid Up Royalties as follows:
For Sublicenses granted in 1996 $1.5 million
For Sublicenses granted in 1997 and beyond: $2.0 million
B. Other Computer Programs
In the event that Bull HN or Bull prepares derivative work(s) of the Peritus
Licensed Products or Peritus Licensed Technology that permits the treatment or
processing of Computer Programs other than GCOS 7 and GCOS 8 Computer Programs,
Bull HN and Peritus will mutually agree in writing on Fees per LOC for use by
Bull of such derivative work and on one-time royalties for sublicenses to
Customers of such derivative work.
C. Report Format
<TABLE>
<CAPTION>
Sublicenses:
-----------
Customer Amount
-------- ------
<S> <C>
</TABLE>
-24-
<PAGE>
<TABLE>
<S> <C>
XXX
YYY ----
Subtotal $XXX
</TABLE>
<TABLE>
<CAPTION>
Year 2000 Services: LOC LOC Rate Amount
------------------- --- -------- ------
<S> <C> <C> <C>
Bull:
----
Customer, location
Distributors:
Customer, location -----
Subtotal $ XXX
Total Payment Due $ XXX
</TABLE>
-25-
<PAGE>
Confidential materials omitted and filed
separately with the Securities and Exchange Commission.
Asterisks denote such omissions.
EXHIBIT D - TRAINING
Peritus will provide the following classes:
1. Product Training: ******** class for up to ***** Bull employees. This
class will be offered one time. Maximum of ***** student days.
2. Technical Training: *** day class for up to ***** Bull HN employees.
This class will be offered one time. Maximum of *** student days.
3. Marketing Training: *** day class for up to ****** Bull HN employees.
This class will be offered up to two times. Maximum of ***** student days.
4. Additional training: As available at Peritus' then current rates to
Bull, Distributors and Customers.
5. Certification: Following classroom training and monitored delivery of
pilot/renovation activity, a certifying exam will be administered by Peritus.
This exam will take place in an Automate:2000 service lab environment, which
will include tools and sample code. As part of the exam, the persons seeking to
be certified will be asked to complete one or more of the following phases:
a) Assessments;
b) Look Ahead;
c) Identification;
d) Correction;
e) Verification;
f) Testing (Q. A.).
In each phase, the exam will test and review knowledge and ability to deliver
and utilize all aspects of Automate:2000 service and the AutoEnhancer/2000,
including but not limited to understanding the user interface, error messages
and file formats.
In the event that modifications, updates and enhancements to the Peritus
Licensed Products and/or Peritus Licensed Technology are provided, further
certification exams may be conducted at regularly scheduled intervals.
Peritus reserves the right to promulgate reasonable changes in the certification
testing described herein. Peritus will provide Bull with reasonable written
notice of any such changes.
-26-
<PAGE>
AMENDMENT NUMBER 1
This is Amendment Number I to the License Agreement (the "Agreement") by and
between Bull HN Information Systems Inc. through its Integris division ("Bull
HN") and Peritus Software Services Inc. ("Peritus") effective July 29, 1996.
This Amendment Number 1 is effective as of September 27, 1996
Capitalized terms not otherwise defined herein shall have the meaning set forth
in the Agreement.
1. ARTICLE 1.3 IS AMENDED TO READ IN ITS ENTIRETY AS FOLLOWS:
"Changes" shall mean improvements, enhancements, modifications, upgrades,
corrections, alterations, revisions, adaptations, updates, translations,
versions, releases, derivations and extensions which are made to Licensed
Products or to Peritus Licensed Technology. Changes shall include any such
improvements, enhancements, modifications, upgrades, corrections,
alterations, revisions, adaptations, updates, translations, versions,
releases, derivations and extensions which allow the Peritus Licensed
Products or Peritus Licensed Technology to be used to provide Services
other than Year 2000 Services.
2. ARTICLE 1.5 IS AMENDED TO READ IN ITS ENTIRETY AS FOLLOWS:
"Customer" shall mean (i) an end-user or a prospective end-user of Licensed
Products marketed by Bull, Peritus or a Distributor or (ii) an end-user or
prospective end user of Computer Programs for whom Bull, Peritus or a
Distributor provides or offers to provide Services.
3. ARTICLE 1.6 IS AMENDED TO READ IN ITS ENTIRETY AS FOLLOWS:
1.6 "Distributor" shall mean any legal entity or person who during the
Term has been granted a sublicense (i) by Bull to use or market the Peritus
Licensed Products and/or Peritus Licensed Technology and/or to provide
Services or (ii) by Peritus to use or market the Licensed Products and/ or
Peritus Licensed Technology or to provide Year 2000 Services.
4. ARTICLE 1.14 IS AMENDED TO READ IN ITS ENTIRETY AS FOLLOWS:
1.14 "Peritus Licensed Technology" shall mean the Automate:2000
Requirements Specifications, the Automate:2000 Factory Flow Chart and other
Peritus processes and methodologies set forth on Exhibit A3 and all Changes
thereto.
5. ARTICLE 1.19 IS ADDED AS FOLLOWS:
1.19 "Services" shall mean services provided by Bull HN, Bull, Peritus or
Distributors to Customers using Licensed Products and/or Peritus Licensed
Technology. Services shall include Year 2000 Services.
<PAGE>
6. ARTICLE 2.1.1 IS AMENDED TO READ IN ITS ENTIRETY AS FOLLOWS:
2.1.1 Peritus hereby grants to Bull, under Peritus' Intellectual Property
Rights, a license to use the Peritus Licensed Products and Peritus Licensed
Technology. Such license to use shall include (i) the rights to utilize
for internal business purposes, market, make Changes, copy, display,
demonstrate and prepare derivative works, (ii) the right to sublicense the
Peritus Licensed Products and Peritus Technology to GCOS 7 Customers or
GCOS 8 Customers for their own internal use, (iii) the right to provide
Services to Customers.
2.1.1.1 All derivative works prepared by Bull hereunder shall be owned by
Bull, provided however that Peritus shall retain all of its right, title
and interest in the Peritus Licensed Products and the Peritus Licensed
Technology.
2.1.1.2 Bull agrees to and hereby grants to Peritus a non-exclusive, non-
transferable, perpetual, fully paid up, royalty free license for such
derivative works.
7. ARTICLE 2.1.3 IS AMENDED TO READ IN ITS ENTIRETY AS FOLLOWS:
2.1.3 The licenses granted in Article 2.1.1 shall be worldwide, perpetual
(subject to the provisions of Article 10.2. 1) and (i) exclusive as to all
GCOS 7 Customers and all GCOS 8 Customers except that Peritus may provide
Year 2000 Services to GCOS 8 Customers in Spain and (ii) non-exclusive as
to all other Customers.
8. ARTICLE 2.1.5.1 IS AMENDED TO READ IN ITS ENTIRETY AS FOLLOWS:
2.1.5.1 In the event that Peritus and Bull mutually agree that Peritus
incorporates Changes to the Peritus Licensed Products and/or the Peritus
Licensed Technology that prevent Bull from using the Peritus Licensed
Products and/or the Peritus Licensed Technology to provide Services to GCOS
7 Customers or GCOS 8 Customers as contemplated by this Agreement and as
Bull had been providing such Services prior to the incorporation of such
Changes, Bull will so notify Peritus in writing, and Peritus will within
forty five (45) days following receipt of such notice, deliver to Bull a
complete copy of the source code version of the Peritus Licensed Products
and the Peritus Licensed Technology which do not incorporate such Changes.
Bull shall have the right and Peritus hereby grants to Bull a license to
use such source code version to exercise all of its rights hereunder and
perform its obligations to its Customers.
9. ARTICLE 2.3 IS AMENDED TO READ IN ITS ENTIRETY AS FOLLOWS:
2.3 Services
2.3.1 Bull will provide Services to Customers, either directly or
through Distributors only under the terms of a written agreement
executed by the Customer. Such agreement will include provisions
legally sufficient to (i) disclaim any warranties on behalf of Peritus
and Bull, including without limitation the implied warranties of
merchantability and fitness for a particular purpose and (ii) disclaim
liability for any consequential, incidental or special damages.
<PAGE>
2.3.2 As part of its Services, Bull or its Distributors will
maintain, or will require the Customer to maintain a copy of the
Customer's unmodified source code.
10. ARTICLE 3.3 IS AMENDED TO READ IN ITS ENTIRETY AS FOLLOWS:
3.3 Except as provided in Exhibit C to this Amendment Number 1, there are
no guaranteed minimum payments hereunder.
3.3.1 Sublicenses. Royalties for sublicenses of Peritus Licensed
Products and Peritus Licensed Technology to Customers are earned by
Peritus at the time of the grant of such sublicense by Bull to
Customers and are payable to Peritus pursuant to Article 4.
3.3.2 Services. Except as set forth in Exhibit C, there shall be no
royalties or fees for the use by Bull or Distributors of the Peritus
Licensed Products and/or the Peritus Licensed Technology to provide
Services.
11. ARTICLE 3.5 IS AMENDED TO READ IN ITS ENTIRETY AS FOLLOWS:
3.5 Except as set forth in Exhibit C, there shall be no royalties or fees
payable to Peritus for Bull's or Distributors' use of the Peritus Licensed
Products or Peritus Licensed Technology for demonstration use.
12. ARTICLE 4.2 IS AMENDED TO READ IN ITS ENTIRETY AS FOLLOWS:
4.2 Within 45 days after the end of each month for each year during which
payments are due under this Agreement, Bull shall furnish written reports
to Peritus setting forth the payments due Peritus during the preceding
calendar month for sublicenses granted to Customers. Except as provided in
this Article and in Article 3.7, such reports shall include a remittance
covering the payments then due. If a Bull entity exercises the option
specified in Paragraph 3.7, such Bull entity shall also furnish a report to
Peritus or a Subsidiary of Peritus, if applicable, setting forth the
payments due Peritus during the preceding calendar month pursuant to this
Agreement in each such Bull entity marketing territory. Each report from
such Bull entity reporting directly to Peritus shall include a remittance
covering the payments then due from that particular Bull entity.
Such reports shall be sent to Peritus at the following address:
Peritus Software Services Inc.
Contract Administrator
304 Concord Road
Billerica, Massachusetts 01821-3485
<PAGE>
13. ARTICLE 5 IS AMENDED TO READ IN ITS ENTIRETY AS FOLLOWS:
5.1 It is specifically agreed that Bull and Distributors may use but are
not obligated to use any of Peritus' trademarks in marketing the Peritus
Licensed Products, Peritus Licensed Technology and the Services.
5.2 Although Bull intends to use reasonable efforts in marketing the
Peritus Licensed Products, Peritus Licensed Technology and Services, the
extent and nature of any such marketing efforts shall be determined solely
by Bull in the exercise of its business judgment. It is understood that
there are no minimum marketing obligations under this Agreement.
5.3 Peritus shall make reasonable efforts to include Bull and Integris
brand names; logos; descriptions as provided in writing, files, images or
original artwork; reference to territories, technology and exclusivity per
Article 2.1.3 of the Agreement; and other materials or information on which
the parties may agree in writing from time to time in its marketing
collateral.
5.4 Peritus shall provide to Bull, at Peritus' expense, any available
sales and promotional literature, brochures, demonstration packages and
general collateral marketing materials as may from time to time be
reasonably required.
14. THE FOLLOWING PROVISIONS ARE ADDED TO THE END OF ARTICLE 7.1.3:
In the event that Peritus fails to resolve at least 80% of the errors and
defects notified by Bull, within the time frames set forth in this Article
7.1.3 during any two consecutive calendar quarters, Bull and Peritus will
negotiate a reduction in the annual maintenance fees to be paid for the
applicable year. Such reduction may include a refund of maintenance fees
already paid by Bull in accordance with Article 7.1.7 or a reduction in the
fees payable for the upcoming calendar year.
15. ARTICLE 7.1.7 IS AMENDED TO READ IN ITS ENTIRETY AS FOLLOWS:
For the maintenance and support services provided by Peritus in accordance
with this Article 7. 1, Bull shall pay an annual maintenance fee of
$75,000. Such maintenance fee shall be invoiced to Bull by Peritus on or
about January 1 of each calendar year during the term of this Agreement,
beginning January 1, 1997 and Bull shall pay such fees within forty-five
(45) days of receipt of such invoice. There shall be no maintenance fee
due Peritus for maintenance during the remainder of calendar year 1996.
Invoices shall be sent to:
Accounts Payable
Integris
300 Concord Road
Billerica, MA 01821
16. ARTICLE 7.1.8 IS ADDED AS FOLLOWS:
7.1.8 For each of the first two non-GCOS Customers for whom Bull provides
Year 2000 Services, Peritus will assign at no charge to Bull, for a maximum
period of four
<PAGE>
months, one person to assist Bull in providing delivery support to such
Customers. Peritus, in its sole discretion, may provide additional delivery
support to Bull.
17. ARTICLE 10.2.1 IS ADDED AS FOLLOWS:
In the event of a material default by Bull with respect to Article 2.1 or
Article 11 of this Agreement which has not been remedied in accordance
with Article 10.2, Peritus may in addition to terminating this Agreement,
also terminate the license granted under the terms of Article 2.1 in
accordance with the procedures set forth in Article 10.2 above.
18. EXHIBIT C IS AMENDED TO DELETED AND REPLACED BY EXHIBIT C ATTACHED TO THIS
AMENDMENT NUMBER 1.
Except as specifically provided in this Amendment Number 1, all other terms and
conditions of the Agreement remain in full force and effect.
IN WITNESS WHEREOF, the Parties hereto have duly executed this Amendment Number
1, including Exhibit C which is incorporated herein and made a part hereof, in
duplicate, by their respective duly authorized officers to be effective as of
the date set forth above.
PERITUS SOFTWARE SERVICES INC. BULL HN INFORMATION SYSTEMS INC.
By: /s/Allen K. Deary By: /s/Donald Zereski
----------------- -----------------
Name: Allen K. Deary Name: Donald Zereski
--------------- ---------------
Title: VP Finance Title: President & CEO
-------------- ---------------
Date: September 30, 1996 Date: September 30, 1996
------------------ ------------------
<PAGE>
EXHIBIT C
TO
AMEENDMENT NUMBER I
Payments
1. Bull shall pay to Peritus $1,500,000 as a fully paid up royalty for use by
Bull of the Peritus Licensed Products and Peritus Licensed Technology to provide
Year 2000 Services to Customers and to provide any other Services to GCOS 7
Customers and GCOS 8 Customers. There shall be no additional fees (except
maintenance fees as set forth in Article 7.1.7) payable to Peritus for such use
by Bull.
The $1,500,000 shall be payable as follows:
$100,000 on or before December 31, 1996
$200,000 on or before March 31, 1997
$200,000 on or before June 30, 1997
$1,000,000 on or before September 30, 1997
Such amounts shall be invoiced to Bull by Peritus at least forty-five (45) days
prior to the dates set forth above. Invoices shall be sent to the following
address:
Accounts Payable
Integris
300 Concord Road
Billerica, MA 01821
Royalties payable for Bull's use of the Peritus Licensed Products and/or Peritus
Licensed Technology to provide Services to provide non-Year 2000 to non-GCOS 7
and non-GCOS 8 Customers shall be negotiated in good faith between the parties.
2. In addition to the fully paid up royalties described in paragraph 1 above
Bull shall pay the following royalty for a fully paid up sublicense of the
Peritus Licensed Products and Peritus Licensed Technology to Distributors or
Customers:
35% of the revenue to Bull for each such fully paid up sublicense to
Distributors or Customers.
<PAGE>
EXHIBIT 10.36
Confidential materials omitted and filed separately
with the Securities and Exchange Commission.
Asterisks denote such omissions.
LICENSE AND ALLIANCE AGREEMENT
------------------------------
This LICENSE AND ALLIANCE AGREEMENT (the "Agreement") is made as of May 1, 1996
by and between CSC Consulting, Inc., a Massachusetts corporation with its
principal place of business at University Office Park, 29 Sawyer Road, Waltham,
Massachusetts 02154 ("CSC") and Peritus Software Services, Inc. a Massachusetts
corporation with its principal place of business at 304 Concord Road, Billerica,
Massachusetts 01821 ("Peritus").
BACKGROUND
CSC and Peritus possess complementary skills and offerings,
and they believe that together they can provide Year 2000
("Y2000") solutions to their clients and customers through
engaging in certain joint activities under the terms set out
below with the objective of developing new business for each
of the parties. In consideration of the foregoing recitals and
the mutual covenants set forth herein, the parties agree as
follows:
1. SCOPE
- --------------
1.1 This Agreement sets forth the general terms of the relationship between
the parties. Specific activities of the parties under the terms of this
Agreement will be set forth in Schedules to this Agreement. Each Schedule
executed by the parties shall be incorporated in and made a part of this
Agreement. In the event of an inconsistency between the terms of a Schedule and
the terms of this Agreement, the terms of the Schedule shall take precedence to
the extent of the inconsistency.
1.2 Except as otherwise expressly provided herein or in a Schedule, CSC and
Peritus agree that this Agreement is non-exclusive, and neither party shall be
prevented hereby from entering into similar arrangements with other parties.
2. CERTAIN DEFINITIONS
- ----------------------------
2.1 Automate:2000. The Peritus services utilizing Peritus processes,
methodologies, and technology for renovating computer software code to provide
Y2000 compatibility.
2.2 AutoEnhancer/2000. A Peritus Y2000 conversion product, based on the
Peritus Code Analyzer, which can be used to identify, correct and verify date-
field processing
<PAGE>
in mainframe computer application systems including program source code,
production Job Control Language ("JCL") files and data files.
2.3 Licensed Software. All software, together with related documentation,
comprising Automate:2000 and Auto/Enhancer 2000, which is licensed to CSC
herein.
3. OVERVIEW OF RELATIONSHIP
- ---------------------------------
3.1 The parties will co-operate with each other in order to identify,
develop and exploit new business opportunities for each party, as more
specifically provided in a Schedule.
3.2 Each party will provide the other with information and support as may
be requested and mutually agreed in a Schedule, in order to enable the parties
to pursue mutually beneficial business opportunities, joint bids or other
initiatives specified in Schedules.
3.3 Each party will promote the services, products and offerings of the
other in accordance with the Schedules.
3.4 Each party will facilitate contacts and the dissemination of
information between the parties by providing the other with opportunities to
present and demonstrate its offerings at the appropriate sales and marketing,
technical and other such meetings and conferences as may be mutually agreed.
4. CONFIDENTIALITY
- ------------------------
4.1 It is anticipated that each of the parties will disclose to the other
proprietary and confidential information which is identified as proprietary and
confidential at the time of disclosure or which can reasonably be regarded as
confidential ("Information"). Information shall include software programs,
technical data, customer information and business information of the parties.
4.2 Each party shall be a "Disclosing Party" with respect to Information
which that party discloses to the other and shall be a "Receiving Party" with
respect to Information which that party receives from the other. A Disclosing
Party shall not identify as Information any information which the Disclosing
Party does not, in good faith, consider to be proprietary and/or confidential.
4.3 The Receiving Party shall employ diligent efforts to maintain the
secrecy and confidentiality of all Information. Such diligent efforts shall be
at least equivalent to that degree of care which Receiving Party normally
exercises with regard to its own property that it maintains secret and
confidential, but in any event no less than a reasonable degree of care.
-2-
<PAGE>
4.4 The Information may be disclosed only for purposes of the joint
activity with Disclosing Party and only to the Receiving Party's employees with
a need to know, provided that each such employee has previously been advised of
the confidentiality obligations of this Agreement.
4.5 The disclosure of Information shall not be construed to grant to the
Receiving Party any ownership or other proprietary interest in the Information.
The Receiving Party agrees that it does not acquire any title, ownership, or
other intellectual property right or license by virtue of such disclosure.
4.6 A Receiving Party has no obligation with respect to any Information
disclosed hereunder which: (a) was in Receiving Party's possession before
receipt from Disclosing Party other than through prior disclosure by Disclosing
Party; or (b) is or becomes a matter of general public knowledge through no
breach of this Agreement; or (c) is rightfully received by Receiving Party from
a third party without an obligation of confidentiality; or (d) is independently
developed by Receiving Party; or (e) is disclosed under operation of law,
governmental regulation, or court order, provided Receiving Party first gives
Disclosing Party notice and a reasonable opportunity to secure confidential
protection of such Information.
4.7 Upon termination of this Agreement, the Receiving Party shall (a)
immediately cease using the Information, (b) promptly return to the Disclosing
Party all tangible embodiments of the Information, and (c) promptly certify in
writing Receiving Party's compliance with this paragraph. The confidentiality
obligations of a Receiving Party under this Agreement shall survive any
cancellation, expiration or termination hereof.
4.8 In the event that a Receiving Party breaches the provisions of this
Article 4, the damage to the Disclosing Party will be irreparable. Therefore, in
the event of a breach or threat of breach, Disclosing Party shall be entitled to
equitable relief to restrain such breach or threat of breach, in addition to any
other relief available at law or in equity.
5. INTELLECTUAL PROPERTY RIGHTS
- -------------------------------------
5.1 Except as expressly provided herein or in a Schedule, nothing in this
Agreement shall be construed to grant to either party any ownership or other
interest in the intellectual property of the other.
5.2 (a) Subject to the terms of this Agreement and the attached Schedules,
Peritus hereby grants and CSC hereby accepts a non-exclusive license to use the
Licensed Software in connection with providing Year 2000 services during the
term of this Agreement. Payment for such license shall be made in accordance
with the terms set forth in the Schedules.
-3-
<PAGE>
Confidential materials omitted and filed separately
with the Securities and Exchange Commission.
Astericks denote such omissions.
(b) Subject to the terms of this Agreement and the attached Schedules,
Peritus hereby grants to CSC a non-exclusive license to use Peritus trademarks
and service marks in accordance with good trademark and service mark practices.
CSC shall comply with any reasonable practices promulgated by Peritus concerning
the use of such marks. In the event that Peritus reasonably determines that CSC
is using such marks in violation of the aforementioned practices, Peritus shall
have the right to terminate the license to use such marks upon thirty days
written notice, if the violation is not cured within the thirty-day notice
period.
5.3 Peritus shall, at its own expense, deposit and maintain a copy of the
source code and documentation for the Licensed Software ("Deposit Materials") in
escrow with Data Securities International, Inc., as Escrow Agent, pursuant to a
Source Code Escrow Agreement in the form of Exhibit A attached hereto. For
purposes of the Source Code Escrow Agreement, this Agreement shall be considered
a License Agreement. In the event of an inconsistency between the Source Code
Escrow Agreement and this Agreement, the terms of this Agreement shall prevail
to the extent of the inconsistency.
5.4 Peritus shall maintain in escrow the latest version of the Licensed
Software and documentation.
5.5 CSC's use of the Deposit Materials shall be subject to the terms and
conditions of this Agreement.
6. PUBLICITY
- ------------------
Neither party shall issue a press release or make any public announcement of the
terms of this Agreement or the activities hereunder without the prior written
consent of the other party.
7. TERM AND TERMINATION
- -----------------------------
7.1 This Agreement shall become effective upon execution from the date
first set forth above and shall continue in full force and effect for a period
of one (1) year unless extended pursuant to the terms hereof.
7.2 If during the first year of this Agreement, CSC shall have paid Peritus
license fees in the amount of at least ************************* Dollars, then
this Agreement will renew automatically for an additional one (1) year term
commencing upon the expiration of the
-4-
<PAGE>
Confidential materials omitted and filed separately
with the Securities and Exchange Commission.
Asterisks denote such omissions.
initial term. If, during the second and subsequent years of this Agreement, CSC
shall have paid Peritus license fees in the amount of at least
********************* Dollars per year, then in each such year this Agreement
will renew automatically for an additional one (1) year term commencing upon the
expiration of the previous term. CSC may cancel automatic renewal and thereby
terminate this Agreement by giving written notice thereof to Peritus no later
than forty-five (45) days prior to the end of the current term.
7.3 CSC may terminate this Agreement at any time upon three (3) months
written notice to Peritus, for any reason or for no reason.
7.4 Either party may terminate this Agreement for breach upon thirty (30)
days written notice in the event that the other party fails to cure the breach
within said thirty (30) days. A failure of CSC to make timely payment of any
amounts owed to Peritus hereunder shall constitute a material breach.
7.5 Either party may, by giving written notice thereof to the other party,
terminate this Agreement as of a date specified in such notice in the event that
the other party (a) terminates or suspends its business; (b) becomes a debtor in
a bankruptcy or insolvency proceeding under federal or state statute; (c)
becomes insolvent or becomes subject to direct control by a trustee, receiver or
similar authority; or (d) is acquired by a competitor of, or acquires a
controlling interest in a competitor of, the party giving notice. In the event
of any such termination, the license granted to CSC hereunder shall remain in
effect as to work under proposals accepted and projects begun during the term
hereof, until the completion of all such work.
7.6 The parties may, in an attached Schedule, agree upon liquidated damages
to be paid by either of them in the event of termination of this Agreement for
breach.
8. WARRANTY; INDEMNITY; LIMITATION OF LIABILITY
- -----------------------------------------------------
8.1 Each party warrants that materials furnished by such party hereunder
will not infringe any United States intellectual property rights, including but
not limited to patents, copyrights and trademarks, of any third party. The
furnishing party shall indemnify and defend the other party from and against any
claim that materials furnished hereunder infringe any such intellectual property
right, shall take all reasonable action for settlement or compromise of the
claim or any action based thereon, and shall pay any and all settlements reached
or costs and damages awarded, including reasonable attorney's fees.
-5-
<PAGE>
8.2 EXCEPT AS EXPRESSLY SET FORTH HEREIN, NEITHER PARTY MAKES ANY EXPRESS
OR IMPLIED REPRESENTATIONS OR WARRANTIES INCLUDING BUT NOT LIMITED TO IMPLIED
WARRANTIES OF MERCHANTABILITY AND FITNESS FOR A PARTICULAR PURPOSE.
8.3 Neither party shall be liable hereunder for special, indirect,
consequential or incidental losses or damages of any kind or nature whatsoever,
including but not limited to lost profits, lost savings, or other costs,
charges, penalties, or liquidated damages, regardless of whether arising from
breach of contract, warranty, tort, strict liability or otherwise, even if
advised of the possibility of such loss or damage, or if such loss or damage
could have been reasonably foreseen. A party's liability shall not be so limited
with respect to injuries to persons or damage to tangible property arising out
of the negligence or wilful misconduct of such party or its employees.
9. ASSIGNMENT
- -------------------
Neither party may assign its rights or delegate its obligations hereunder
without the prior written consent of the other, which consent shall not be
unreasonably withheld. Any assignment in violation of this provision is void.
10. EMPLOYEE SOLICITATION
- ------------------------------
Each party agrees that, during the term of this Agreement and for a period of
one hundred eighty (180) days thereafter, each party will not hire any employee
of the other party who has been directly involved in the performance of this
Agreement, without the express written consent of the other party. Additionally,
each party agrees not to contract for the services of any individual who has
been directly involved in the performance of this Agreement as an employee of
the other party, during the term of this Agreement and for a period of one
hundred eighty (180) days thereafter.
11. INDEPENDENT CONTRACTORS; COSTS
- ---------------------------------------
The parties shall at all times be independent parties. Neither party is an
employee, joint venturer, agent, or partner of the other; neither party is
authorized to assume or create any obligations or liabilities, express or
implied, on behalf of or in the name of the other. The employees, methods,
facilities and equipment of each party shall at all times be under the exclusive
direction and control of that party. Except as otherwise expressly agreed in a
Schedule, each of the parties shall bear its own costs and expenses incurred in
connection with its performance hereunder.
12. DISPUTE RESOLUTION
- ---------------------------
-6-
<PAGE>
The parties shall attempt, in good faith, to resolve any controversy, claim, or
dispute arising out of this Agreement through negotiations. Any dispute shall be
referred promptly to the level of management of each party authorized to resolve
the dispute.
13. FORCE MAJEURE
- ----------------------
Neither party shall be considered in default in the performance of any
obligation hereunder to the extent that the performance of such obligation is
prevented or delayed by fire, flood, explosion, strike, war, insurrection,
embargo, government requirement, civil or military authority, act of God, or any
other event, occurrence or condition which is not caused, in whole or in part,
by that party, and which is beyond the reasonable control of that party. The
parties shall take all reasonable action to minimize the effects of any such
event, occurrence or condition.
14. SEVERABILITY
- ---------------------
If any provision of this Agreement is found invalid or unenforceable by a court
of competent jurisdiction, the remainder of this Agreement shall continue in
full force and effect.
15. RESERVATION OF RIGHTS
- ------------------------------
A delay or failure in enforcing any right or remedy afforded hereunder or by law
shall not prejudice or operate to waive that right or remedy or any other right
or remedy, including any remedy for a failure breach of this Agreement, whether
of a like or different character.
16. ENTIRE AGREEMENT
- -------------------------
This Agreement, together with every Schedule executed by the parties,
constitutes the entire agreement of the parties, superseding any and all
previous agreements and understandings whether oral or written. No modification
or waiver of the provisions of this Agreement shall be valid or binding on
either party unless in writing and signed by both parties.
17. HEADINGS
- -----------------
The headings used in this Agreement are intended for convenience only. They are
not a part of the written understanding between the parties. They shall not
affect the construction and interpretation of this Agreement.
18. NOTICES
- ----------------
-7-
<PAGE>
Every notice and demand required or permitted under the terms of this Agreement
shall be in writing and shall be sent by certified mail, return receipt
requested, or by other means of delivery requiring a signed receipt, to the
other party's address first set forth above. All notices shall be effective upon
receipt. A party may change its address by giving written notice to the other
party in accordance with this Article. All notices shall be sent to the
following:
TO CSC TO PERITUS
------ ----------
Tom McAndrew Allen K. Deary
Managing Director Vice President
CSC Consulting, Inc. Peritus Software Services, Inc.
29 Sawyer Road 304 Concord Road
Waltham, MA 02154 Billerica, MA 01821
19. GOVERNING LAW
- ----------------------
This Agreement shall be governed by and construed in accordance with the
domestic laws of the Commonwealth of Massachusetts, excluding its conflicts of
laws principles.
(The remainder of this page is intentionally left blank.)
-8-
<PAGE>
IN WITNESS WHEREOF the parties have caused this License and Alliance Agreement
to be executed in counterparts by their authorized representatives as of the
date first set forth above.
PERITUS SOFTWARE SERVICES, CSC CONSULTING, INC.
INC.
/s/ Allen K. Deary /s/ Tom McAndrew
- --------------------------------------- --------------------------------
AUTHORIZED SIGNATURE AUTHORIZED SIGNATURE
Allen K. Deary Tom McAndrew
- --------------------------------------- --------------------------------
NAME NAME
Vice President Managing Director
- --------------------------------------- --------------------------------
TITLE TITLE
- --------------------------------------- --------------------------------
DATE DATE
-9-
<PAGE>
SCHEDULE NO. 1
--------------
This Schedule is incorporated in and made a part of the License and Alliance
Agreement of CSC and Peritus dated May 1, 1996 (the "Agreement"). All defined
terms used herein shall have the same meanings set forth in the Agreement.
1. Additional Definitions
- -------------------------------
1.1 Front End. Software that makes a modification of a target computer
language dialect and embedded calls to other packages so that the language may
be converted into Peritus Intermediate Language and subsequently processed
through the Peritus technologies.
1.2 Mass Change Factory. The Automate:2000 renovation facility including
the hardware, software, methodology, and process used in Y2000 conversions.
1.3 Competency Center. A virtual facility from which an entire Y2000
renovation can be completed. A Competency Center shall be staffed with
individuals competent in the following areas: sales, marketing, global
assessment, identification, correction and verification, testing, and project
management.
1.4 Pilot Renovation. A conversion of a subset of a client's code
(approximately 20,000 to 200,000 lines of software code) to demonstrate the
effectiveness of the Licensed Software.
1.5 Technical Support. Level 1, 2, or 3 response to user inquiries
regarding the use of Peritus' Automate:2000, AutoEnhancer/2000 and Mass Change
Factory technologies and processes, as specified in Attachment A, which is
incorporated herein and made a part hereof.
2. Activities
- -------------------
2.1 Peritus and CSC will establish a unique and specific technical
direction and strategy for Y2000 solutions. Peritus will share with CSC its
current road map for Front End development to ensure that required Front Ends
are prioritized to meet CSC's market needs.
2.2 [Deleted.]
2.3 CSC will develop its Y2000 services to be based upon the Peritus
Automate:2000 technology.
2.4 Peritus and CSC may jointly develop new products and technologies for
Y2000 solutions for their exclusive use under the terms hereof. A development
road map and
-10-
<PAGE>
subsequent Schedules will be developed and made a part of this Agreement within
forty-five (45) days of the effective date hereof. Peritus and CSC will meet at
least once in each calendar quarter to update and to agree upon the development
road map, including priorities. Where there is not an agreement on the timing or
prioritization of the road map, Peritus and CSC may, separately or in
conjunction with other entities, develop the initiative(s) in question.
Technologies developed jointly by Peritus and CSC, pursuant to Statements of
Work following the road map, will be available exclusively to Peritus and CSC
for a period of twelve (12) months from general release of specific
functionality unless otherwise provided in the applicable Statement of Work. CSC
shall have the right to use any enhancement of the Peritus technologies
developed by a third party, whenever Peritus has the right to re-license or to
sublicense such enhancement.
2.5 The current Peritus development road map includes Front Ends for PL/1,
Assembler, RPG, and C. Upon the completion by Peritus of white papers and
development strategies for these Front Ends, Peritus will review Front End
strategies with CSC and, at its discretion, may jointly develop and license
these Front Ends with CSC.
2.6 After twelve (12) months from the effective date hereof, both Peritus and
CSC may elect to re-license technologies in which Peritus and CSC have exclusive
rights under Section 2.4 above, pursuant to separate license agreements.
2.7 If a Peritus licensee approaches Peritus with a specific technology need for
Year 2000 outside of the current Peritus-CSC road map, then Peritus shall have
the right to develop new technologies outside of this Agreement. In these cases,
the technologies developed by Peritus shall be made available to CSC no later
than twelve (12) months after development.
2.8 It is the intention of the parties that Peritus and CSC will jointly seek to
exploit new technology opportunities not expressly mentioned herein. Whenever
Peritus is seeking to form a strategic relationship for the development of new
technologies during the term of this Agreement, CSC shall have a right of first
refusal to participate in the relationship. CSC may accept participation in the
relationship by providing written notice within thirty days after receipt of
written notice from Peritus proposing the relationship. Cost and revenue sharing
in connection with such relationship will be based upon each company's
contribution to the development project and will be subject to a separate
agreement of the parties.
2.9 CSC will be the exclusive provider of Year 2000 renovation services to
Peritus, provided that CSC has sufficient resources to meet demand. CSC must
provide sufficient resources to initiate renovations within sixty (60) days of
execution of a service contract and to complete renovation services in a timely
manner.
-11-
<PAGE>
Confidential materials omitted and filed separately
with the Securities and Exchange Commission.
Asterisks denote such omissions.
2.10 Peritus and CSC will review the current Peritus strategy for use of
India-based resources in the delivery of Year 2000 services. India-based
services may be incorporated into a future capacity-and-delivery strategy, by
mutual agreement of the parties.
3. Responsibilities of Peritus
- ------------------------------------
3.1 Technologies to be furnished by Peritus hereunder include all current and
future versions of the AutoEnhancer/2000, collateral materials and associated
user documentation.
3.2 Peritus shall provide such training in sales, marketing, and technical
support as is available as of the effective date of this Agreement and
thereafter. Peritus shall provide technical training at its facilities in
Billerica, Massachusetts, or at an agreed CSC facility, for up to ***********
CSC marketing and sales resources and up to *********** CSC engineers,
programmers, and analysts, in the understanding and use of Peritus technologies.
The training will include the following, in accordance with Attachment B, which
is incorporated herein and made a part hereof:
(a) Core Technology: Peritus will train CSC in all aspects of
Automate:2000 and AutoEnhancer/2000 including underlying theory and execution
logic, and identification, correction and verification of source code. Peritus
will train CSC in techniques associated with creating and modifying "CLPS" Rules
for identification and correction of source code. Included are the use of pilots
and quick pass analyses as proof of concept strategies. Up to *********** for
CSC technical resources will be provided. Peritus will develop the materials for
these classes with input and agreement from CSC. CSC will ensure that
train-the-trainer resources will be included in these classes allowing them to
deliver independently in the future. The training contemplated by this paragraph
will be completed on or before December 31, 1996.
(b) Mass Change Factory: Process and automation steps inside factory.
User interface process and technology. Use of UNIX-based factory tools and third
party tools.
(c) Sales and Marketing Product Training: Product features and
specifications as well as their associated benefits and differentiation in the
Y2000 marketplace. Up to *********** for CSC marketing and sales resources.
Peritus will develop the materials for this class with input and agreement from
CSC. CSC will ensure that train-the-trainer resources will be included in these
classes allowing CSC to deliver these classes independently in the future.
-12-
<PAGE>
Confidential materials omitted and filed separately
with the Securities and Exchange Commission.
Asterisks denote such omissions.
3.3 The training outlined in Section 3.2 above and in Attachment B shall be
available at Peritus locations or on-site at current or future CSC facilities.
3.4 Peritus will have primary responsibility for the first wave of technical and
training support of CSC personnel. By following a Train-the-Trainer process, the
parties will prepare CSC for, and CSC will assume primary responsibility for,
technical and training support of its personnel. CSC will develop and support
Competency Centers to train its personnel. Peritus will remain available as
needed for ongoing technical and training support of the CSC trainers in
accordance with Attachment B.
3.5 Peritus will provide up to *********** engineers, programmers, and analysts
as dedicated resources in support of the above activities as long as CSC is
maintaining the minimum revenue volumes identified herein. These resources shall
be available to participate in trade shows, executive conferences, and other
marketing events on dates and locations mutually agreed to by both parties. In
addition, these resources shall be available for customer demonstrations and
presentations, pilots, Front End development, training, renovation support,
factory development and support. The resources shall be available remotely for
reasonable periods of time, as required by CSC, to allow for on-site support of
CSC clients.
3.6 Peritus shall participate in a benchmarking pilot, in which the parties
shall attempt to renovate up to two hundred thousand (200,000) lines of software
code, to establish a business case for an automated tool over a manual process.
4. Responsibilities of CSC
- --------------------------------
4.1 CSC shall use its best efforts to integrate the Peritus technologies and
processes into a complete offering of Y2000 services. In addition to Peritus
technologies and services, CSC's Y2000 services will include global assessment,
testing, and project management services. CSC will recommend and use the Peritus
technologies exclusively in its Y2000 services offering, except in the event
that a client expressly requests otherwise. CSC may, at any time, include
non-competitive products of a third party in its Y2000 services offering.
4.2 CSC shall provide adequate resources, as required in Attachment B, to be
trained and certified in the Peritus technologies and in the processes for
identification, correction and verification of code renovated for Y2000. In
addition, CSC shall provide adequate
-13-
<PAGE>
Confidential materials omitted and filed separately
with the Securities and Exchange Commission.
Asterisks denote such omissions.
facilities, equipment and software to equip a Mass Change Factory appropriate to
CSC's business requirements. CSC shall use its best efforts to meet Peritus
demand for Y2000 services, in accordance with Peritus's monthly estimates of its
annual volumes.
4.3 CSC will assign personnel certified by Peritus training procedures for the
delivery of all Automate:2000 services.
4.4 CSC will provide project and account management resources and will be
responsible for all client contact in connection with Automate:2000 services.
4.5 CSC hereby designates Tom McAndrew, of CSC Consulting & Systems Integration,
as CSC's primary contact with Peritus for all Y2000 services to be furnished by
CSC. All divisions of CSC which provide services hereunder shall comply with the
terms of this Agreement. Peritus may directly contact individuals within CSC
other than Tom McAndrew, but only with his knowledge and assent.
5. Payment
- ----------------
5.1 The Pricing Schedule attached hereto as Attachment C is incorporated in and
made a part of this Agreement.
5.2 In the event **************************************************************
************************************************, Peritus shall immediately so
notify CSC in writing and ******************************************** pursuant
to terms, conditions and restrictions substantially identical
*********************************.
5.3 CSC will provide Peritus a monthly reconciliation and payment for lines of
software code ("LOC") completed and processed hereunder. Payment shall be due
when the code has finished the correction and verification phases of the Peritus
technologies and is available to the end user for Systems Testing in the
mainframe environment. Peritus shall have the right, at its cost, at reasonable
times and upon reasonable notice, to review CSC's records pertaining to LOC
completed and processed and payments therefor to Peritus, to ensure CSC's
compliance with reporting and payment provisions.
5.4 The parties shall measure LOC by counting each line processed through the
Peritus technologies. The lines are considered completed when they pass from the
Peritus technologies into integration testing. Commented lines are not included.
JCL and copybooks are counted only one time. CSC shall be entitled to a refund
of all payments
-14-
<PAGE>
made for completed LOC that fail to perform, as a result of a deficiency in the
Licensed Software, in integration testing or otherwise during the warranty
period.
5.5 For Pilot Renovations, the parties may agree upon pricing which varies from
the formula herein. The agreed pricing shall accommodate the inability otherwise
to make the Pilot Renovation cost-effective due to the small amount of code
renovated and the need for intensive interaction with the end user in such an
effort. Peritus will work with CSC to aggressively price specific opportunities
of strategic importance to CSC, so as to ensure the best opportunity for
business success.
5.6 Each of Peritus and CSC will introduce the other in Y2000 renovation
opportunities. In any instance where either party introduces the other to a
client opportunity (as demonstrable by correspondence of the parties confirming
the introduction), and the client engages the party introduced, but not the
party making the introduction, then the party making the introduction shall be
compensated according to Attachment C.
6. Warranty
- -----------------
Peritus warrants that converted and completed LOC shall not fail to perform as a
result of any deficiency in the Licensed Software, for a period of ninety (90)
days after each conversion has entered into production. If CSC is required by a
client to correct any converted and completed lines of code before a Peritus
correction is available, Peritus will refund all license fees paid by CSC for
conversion of the affected code. Defects caused by Licensed Software will be
classified and resolved in an order of priority based on criticality. If Peritus
is unable to resolve a defect in the Licensed Software, it will refund to CSC
the fees paid for the renovation of the LOC that fail to perform as a result of
the defect.
7. Limitation of Liability and Damages
- --------------------------------------------
The liability of either party to the other or to any third party for damages due
to defects in Licensed Software shall be limited to amounts paid to such party
for the renovation of the LOC that fail to perform due to such defects.
8. Intellectual Property
- ------------------------------
8.1 Peritus retains the exclusive right to make modifications to the back-end
engine in the Licensed Software. Any and all Front End enhancements made by
Peritus will be the property of Peritus, and CSC shall have a non-exclusive
license to use such Front End enhancements in connection with its Y2000
services.
-15-
<PAGE>
Confidential materials omitted and filed separately
with the Securities and Exchange Commission.
Asterisks denote such omissions.
8.2 Any and all Front End enhancements made by CSC will be the property of
CSC, and Peritus shall have a non-exclusive license to use, but not to re-
license or sublicense, such Front End enhancements in connection with Y2000
renovations. CSC will use such enhancements in conjunction with Peritus Y2000
technologies only for Y2000 renovation services.
8.3 Each tool developed by either party hereunder and used for connecting
Licensed Software to other products used by CSC in providing Y2000 services will
be owned by the developing party, and the other party shall have a non-exclusive
license to use, but not to re-license or sublicense, each such tool in
connection with Y2000 renovations, without a separate agreement.
9. Use of Name
- -------------------
CSC will knowledge the use of Peritus technologies and will refer to
Automate:2000 and AutoEnhancer/2000 as Peritus Technologies or Peritus services
in its presentations, demonstrations, and marketing and sales literature
concerning Y2000 services.
ACKNOWLEDGED AND ACCEPTED BY
PERITUS SOFTWARE SERVICES, CSC CONSULTING, INC.
INC.
/s/ Allen K. Deary /s/ Tom McAndrew
- -------------------------------- -------------------------------
Authorized Signature & Date Authorized Signature & Date
-16-
<PAGE>
Confidential materials omitted and filed separately
with the Securities and Exchange Commission.
Asterisks denote such omissions.
ATTACHMENT A
TO SCHEDULE NO. 1
Product Technical Support
Standard Product Technical Support:
- ----------------------------------
Standard Product Technical Support will be provided by Peritus to Licensee for
the term of the contract as follows:
Hours of Support: 8:00 am. to 5:00 p.m. Eastern Time
- ----------------
In the event that there is a defect in, CSC needs technical advice concerning
the installation or the operation of, or CSC desires a modification to, the
Licensed Software, CSC may seek Product Technical Support from Peritus. Peritus
will categorize and prioritize the request for support according to nature of
the request, as determined by the "Definition" of the request in the Request
Table below.
Peritus will then assign, within the "Response Time" associated with the
priority of the request, a technically qualified person to address the concern.
Peritus does not guarantee that a problem or concern that is the subject matter
of a request can be resolved. However, Peritus will make reasonable efforts to
resolve all defects and address CSC's concerns arising from the request.
Notwithstanding the foregoing, Peritus, in its sole discretion, may decide
whether to seek to attempt to resolve or address a request for an enhancement
(i.e., a Priority 4 Request).
Request Table
-------------
<TABLE>
<CAPTION>
Priority Definition Response Time
-------- ---------- -------------
<S> <C> <C>
1 ********************** ***********
2 ********************** ***********
3 ********************** ***********
4 ********************** ***********
</TABLE>
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<PAGE>
Confidential materials omitted and filed separately
with the Securities and Exchange Commission.
Asterisks denote such omissions.
Peritus will provide update releases to the Licensed Software which may include
some or all of the following: i) defect (bug) fixes, ii) new or modified
functionality, or iii) new Peritus Front Ends. Peritus will also provide release
notes documenting changes.
-18-
<PAGE>
Confidential materials omitted and filed separately
with the Securities and Exchange Commission.
Asterisks denote such omissions.
ATTACHMENT B
TO SCHEDULE NO. 1
Training
Core Training:
*********** class for up to*********** CSC employees. This class will be offered
up to ******* *** times. Maximum of *********** student days.
Factory Training:
*********** class for up to *********** CSC employees. This class will be
offered up to *********** times. Maximum of *********** student days.
Marketing/Product Training:
*********** class for up to *********** CSC employees. This class will be
offered up to *** ***times. Maximum of *********** student days.
Other Training:
Additional training will be available as mutually agreed or as developed and
defined by Peritus (i.e., factory manager HW, SW LAN, configuration, etc.).
These classes will be offered at a *********** discount from Peritus commercial
prices then in effect.
-19-
<PAGE>
Confidential materials omitted and filed separately
with the Securities and Exchange Commission.
Asterisks denote such omissions.
ATTACHMENT C
TO SCHEDULE NO. 1
Pricing and Volumes
<TABLE>
<CAPTION>
<S> <C>
Cost Per Line of Code LOC
Open Market
-----------
*********** ***********
*********** ***********
*********** ***********
*********** ***********
* Million Lines of Code
</TABLE>
This pricing is for CSC in aggregate per year across all divisions so long as
CSI is recognized as the point. These prices are targets for 1996 and subject to
the following: Productivity measurements - expected is **********************
through the factory.
If actual productivity is lower, then the impact on Peritus pricing will be
reviewed.
-20-
<PAGE>
Confidential materials omitted and filed separately
with the Securities and Exchange Commission.
Asterisks denote such omissions.
Pilots Peritus flat fee per pilot of up to *********************************
- ------ ***********
Pricing for Peritus use of CSC Factory
Cost Per Line of Code
<TABLE>
<CAPTION>
<S> <C>
Peritus Use
Excluding License fee
*********** ***********
*********** ***********
*********** ***********
*********** ***********
<CAPTION>
<S> <C> <C>
Referral Fee *********** **********************
***********
*********** **********************
***********
</TABLE>
-21-
<PAGE>
EXHIBIT A
SOURCE CODE ESCROW AGREEMENT
This Agreement (the "Agreement") is made as of November 15, 1996 among
Peritus Software Services, Inc., a Massachusetts corporation having its
principal place of business at 304 Concord Road, Billerica, MA 01821-3485
("Peritus" or "Licensor") and Data Securities International, Inc. ("Escrow
Agent"), with the respective addresses set forth in Exhibit A attached hereto,
---------
and Licensor's customers who become parties to this Agreement pursuant to
Section 16 below ("Licensees").
1. Background. Licensor has licensed or will license the Licensed Program
----------
(as defined below) to each Licensee pursuant to a written software license
agreement (a "License Agreement"). Licensor has agreed to place in escrow the
Source Code (as defined below) for the Licensed Program, to be released to
Licensees upon the occurrence of certain events as hereinafter described.
2. Certain Definitions. As used in this Agreement, the following terms
-------------------
shall have the following respective meanings:
(a) Licensed Program. The computer program(s), consisting of a series of
----------------
instructions or statements in machine readable, object code form only, licensed
to Licensees by Licensor pursuant to License Agreements.
(b) Source Code. The version of the source code used by Licensor to
-----------
generate the Licensed Program, contained on one or more magnetic tapes or other
media, together with a print-out of the source code listing.
(c) Documentation. Explanatory information, whether in machine-readable
-------------
form or otherwise, which would assist a software engineer in understanding the
structure, purpose and operation of the Source Code.
(d) Information. The Source Code and the Documentation, collectively.
-----------
(e) Update Event. The delivery to a Licensee of any new release of the
------------
Licensed Program to which the Licensee is entitled pursuant to the applicable
License Agreement.
(f) Update Information. All information including without limitation
------------------
additional and/or replacement Source Code and Documentation, necessary to bring
the Information in escrow prior to an Update Event into compliance with the
definition of Information contained in Section 2(d) after the occurrence of such
Update Event. The
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<PAGE>
term "Information" shall be deemed to include any such Update Information for
the purposes of this Agreement
(g) License Agreement. A License Agreement refers to the applicable
-----------------
agreement between a particular Licensee and the Licensor under which the
Licensee receives a license from Licensor in regard to the Licensed Program. In
order for an agreement to be considered a License Agreement for the purposes of
this Agreement, Peritus and Licensee must agree in writing that a particular
agreement is to be considered a License Agreement.
3. Appointment of Escrow Agent. Escrow Agent is hereby appointed and
---------------------------
accepts appointment to act as escrow agent hereunder.
4. Fees of Escrow Agent.
--------------------
(a) All fees of Escrow Agent in connection with its duties hereunder
shall be paid by and shared equally by all parties who are Licensees at the time
such fees become due or, if there are no Licensees at any such time; by
Licensor.
(b) Escrow Agent's fees for the initial year of service are due in full
within sixty (60) days after the execution of this Agreement. Annual renewal
fees will be due in full upon the receipt of invoice unless otherwise specified
by the invoice. Late payments are subject to interest at the rate of one and
one-half percent per month (18% per annum) from the due date.
(c) Escrow Agent's fees will be as specified in its standard fee
schedule as modified from time to time. Escrow Agent shall notify Licensor and
each Licensee at least ninety (90) days prior to any increase in its fees. For
any service not listed on its standard fee schedule, Escrow Agent shall provide
a price quotation prior to rendering such service.
5. DISCLAIMER OF WARRANTY AND LIABILITY. THE INFORMATION, IF RELEASED
------------------------------------
TO A LICENSEE HEREUNDER, IS BEING PROVIDED "AS IS" AND WITHOUT WARRANTY OF ANY
KIND, WHETHER EXPRESS OR IMPLIED, WRITTEN OR ORAL. LICENSOR DISCLAIMS ALL
WARRANTIES WITH RESPECT TO THE INFORMATION, INCLUDING ANY WARRANTY OF
MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE. IN NO EVENT SHALL LICENSOR
BE LIABLE FOR DIRECT, SPECIAL, INCIDENTAL OR CONSEQUENTIAL DAMAGES, INCLUDING,
BUT NOT LIMITED TO, LOSS OF PROFITS, LOSS OF DATA OR LOSS OF USE DAMAGES,
ARISING OUT OF OR WITH RESPECT TO THIS AGREEMENT OR THE INFORMATION.
6. Deposit of Information into Escrow. Within thirty (30) days after the
----------------------------------
execution of this Agreement by Licensor and Escrow Agent, Licensor shall deliver
to
-23-
<PAGE>
Escrow Agent one copy of the Information in one or more sealed packages (a
"Deposit"), each of which shall bc separately labeled and accompanied by a
separate written list of its contents in the form of Exhibit B attached hereto
---------
(an "Exhibit B"). Thereafter, within thirty (30) days after the occurrence of
---------
any Update Event, Licensor shall deliver one copy of the Update information in a
sealed package to Escrow Agent accompanied by an Exhibit B. Each Exhibit B shall
--------- ---------
be signed by Licensor prior to submission to Escrow Agent. Upon the delivery of
any Update Information to Escrow Agent; Licensor may instruct Escrow Agent to
return to it any previously delivered Information (other than the most recent
and one previous versions of the Information) which is no longer necessary to
satisfy Licensor's obligations wider this Agreement.
7. Acceptance and Storage of Information.
-------------------------------------
(a) Upon receipt of any Information hereunder, Escrow Agent shall
visually match the accompanying Exhibit B to the labels on the Deposit. Escrow
---------
Agent shall not be responsible for verifying the contents of the Deposit or
validating the accuracy of Licensor's labeling of the Deposit. If Escrow Agent
determines that there is a discrepancy between the Exhibit B and the labels on
---------
the Deposit, Escrow Agent shall notify Licensor within five (5) days after
receipt thereof, and Licensor shall promptly correct such discrepancy.
Acceptance of the Information shall occur when Escrow Agent determines that the
Exhibit B matches the labels on the Deposit. Upon acceptance, Escrow Agent shall
- ---------
sign the Exhibit B and mail copies thereof to Licensor and each Licensee.
---------
(b) After acceptance, Escrow Agent shall store and maintain the
Information in such an environment or facility as Escrow Agent determines, in
its discretion, is suitable for the safekeeping of the Information. Escrow Agent
shall not permit any person to have access to the Information other than in
accordance with this Agreement, and shall maintain security measures, in
accordance with reasonable professional standards, to prevent unauthorized
access to the Information. Escrow Agent shall not release the Information except
in accordance with the provisions of this Agreement.
8. Inspection of Information. Each Licensee shall have the right at its
-------------------------
sole expense from time to time during the term of this Agreement, upon
reasonable notice to Escrow Agent and Licensor, to designate a representative to
inspect, test and review the Information in the presence of a representative of
Escrow Agent and a representative of Licensor, if Licensor so chooses, during
normal business hours for the purpose of determining the completeness and
adequacy of the Information. Such representative shall be an independent
accounting or consulting firm, not employed or regularly retained by or
affiliated with such Licensee, as may be reasonably acceptable to Licensor. As a
condition to such inspection, such representative shall execute a
confidentiality agreement in form and substance reasonably acceptable to
Licensor.
-24-
<PAGE>
9. Release and Delivery of Information.
-----------------------------------
(a) A Licensee may request in writing that Escrow Agent deliver the
Information to such Licensee upon the occurrence of the following event (a
"Triggering Event"):
(i) If Licensor materially breaches its support and maintenance
obligations for the Licensed Program under any written agreement between
Licensor and such Licensee and such breach remains uncured for ninety (90) days
after delivery of written notice thereof to Licensor.
(ii) If a court of competent jurisdiction declares that Licensor is to
be liquidated or a receiver or similar officer has been appointed to liquidate
Peritus business or assets.
(b) Upon receipt by Escrow Agent of notice from a Licensee of
a Triggering Event, Escrow Agent shall promptly deliver a copy of such notice to
Licensor. Escrow Agent shall, ten (10) days after delivery of such notice to
Licensor, deliver the Information to such Licensee, unless within such ten (10)
day period Licensor shall have delivered to Escrow Agent and such Licensee a
written denial that such Triggering Event has occurred. If Escrow Agent receives
such denial within such ten (10) day period, such Licensee's entitlement to
receive the Information under this Agreement shall be resolved by arbitration
pursuant to Section 15 of this Agreement, and Escrow Agent shall retain
possession of the Information pending the final determination by the Arbitration
Panel, which determination may be relied upon by Escrow Agent without further
inquiry.
10. Possession, Use and Protection of the Information.
-------------------------------------------------
(a) If the Information is released to a Licensee pursuant to
this Agreement, Licensor hereby grants to such Licensee a non-exclusive,
royalty-free, non-assignable license to possess and use the Information solely
for the internal support and maintenance of the Licensed Program. Except as set
forth in Section 10(b), such Licensee shall not disclose, market, license, sell,
distribute, sublicense or in any other manner make the Information available to
third parties. Such Licensee shall not under any circumstances copy. duplicate
or otherwise reproduce any Information except as required for the internal
support and maintenance of the Licensed Program.
(b) Each License acknowledges and agrees that title to the
Information shall remain with Licensor at all times and that the Information
shall remain confidential and proprietary to Licensor. If the Information is
released to a Licensee pursuant to this Agreement the Information shall be
received and held by such Licensee in confidence until it falls into the public
domain without breach of this Agreement by such Licensee. Such Licensee shall
limit use of and access to the Information to such of its employees (or third
parties reasonably acceptable to Licensor) as are directly involved in the
internal support and maintenance of the Licensed Program and who are bound by
-25-
<PAGE>
written agreement to preserve the confidentiality thereof. Such Licensee shall
promptly report to Licensor any actual or suspected violation of this Section 10
and shall take all reasonable further steps requested by Licensor to prevent or
remedy any such violation.
(c) If, following the release of the Information to a Licensee,
Licensor subsequently establishes pursuant to Section 15 that the conditions
which constituted a Triggering Event no longer exist, such Licensee shall
immediately cease use of such Information and return such Information (and all
copies thereof) to Escrow Agent together with an Exhibit B. Upon Escrow Agent's
---------
acceptance of such Information in accordance with Section 7(a), such Information
shall be held in escrow in accordance with this Agreement until another
Triggering Event shall have occurred.
11. Termination.
-----------
(a) This Agreement shall continue in effect with respect to a
Licensee until the termination or expiration of the License Agreement between
Licensor and such Licensee unless sooner terminated by the written agreement of
Licensor and such Licensee or for non-payment of Escrow Agent's fees pursuant to
Section 11(b) below. The termination of this Agreement with respect to a
Licensee shall not terminate this Agreement with respect to other Licensees,
except as provided in Section 11(b) below.
(b) This Agreement shall have an initial term of one year,
commencing on the date set forth above in the first sentence of this Agreement
(the "Effective Date"). This Agreement shall automatically bc renewed for
additional one-year periods upon receipt by Escrow Agent of the specified
renewal fees. The initial "Renewal Date" of this Agreement is one year from the
Effective Date and in succeeding years is once year from the most recent Renewal
Date. In the event that the renewal fees are not received within thirty (30)
days prior to the Renewal Date, Escrow Agent shall notify Licensor and each
Licensee that this Agreement will expire on the Renewal Date unless the renewal
fees are paid. If Escrow Agent does not receive the renewal fees by the Renewal
Date, this Agreement shall expire on the Renewal Date without further notice and
without liability of Escrow Agent to the parties to this Agreement.
(c) If this Agreement expires or is otherwise terminated with
respect to a Licensee, all duties and obligations of Escrow Agent to such
Licensee shall terminate, and if this Agreement expires or is otherwise
terminated with respect to all Licensees, all duties and obligations of Escrow
Agent to Licensor and all Licensees shall terminate. If Licensor requests the
return of the Information upon expiration or termination of this Agreement with
respect to all Licensees, Escrow Agent shall return the Information to Licensor
only after Escrow Agent's outstanding invoices and deposit return fees have been
paid. If such fee(s) are not received by Escrow Agent within thirty (30) days
after expiration or termination of this Agreement with respect to all Licensees,
Escrow Agent shall, at its option, destroy or return the Information to
Licensor.
-26-
<PAGE>
12. Responsibilities an Liabilities of Escrow Agent. Escrow Agent shall
-----------------------------------------------
not be liable under this Agreement with respect to the condition or contents of
the Information or for any action taken or omitted in compliance with this
Agreement in good faith and in the exercise of Escrow Agent's own good judgment
or in reliance on advice of Escrow Agent's counsel or for any other cause unless
a court of competent jurisdiction finds that Escrow Agent's conduct was
(i)willful misconduct, (ii)fraudulent, (iii)grossly negligent, (iv)in bad faith
or (v)in disregard of or contrary to the terms of this Agreement. Escrow Agent
shall be obligated only for the performance of such duties as are specifically
set forth in this Agreement and may rely and shall be protected in relying on or
remaining from acting on any order or instrument reasonably and actually
believed by it to be genuine and to have been signed or presented by the proper
party or parties. Escrow Agent shall not be responsible for or be required to
enforce any of the terms or conditions of any agreement between Licensor and any
Licensee. Escrow Agent shall not be responsible or liable in any manner
whatsoever for the performance by Licensor or any Licensee of their respective
obligations under this Agreement.
13. Resignation and Discharge; Successor Escrow Agent.
-------------------------------------------------
(a) Escrow Agent may resign at any time, effective on such date
specified in a written notice of resignation delivered to Licensor and each
Licensee at least ninety (90) days prior to such effective date. Escrow Agent
may be discharged at any time, with or without cause by written agreement of
Licensor and a majority in number of Licensees, effective upon receipt of
written notice of such discharge from Licensor. The resignation or discharge of
Escrow Agent shall not affect the right of Escrow Agent to be paid for its
services through the date of resignation or discharge.
(b) In the event of the resignation or discharge of Escrow Agent,
Licensor shall appoint a successor Escrow Agent (who shall be reasonably
acceptable to a majority in number of Licensees), and such successor Escrow
Agent shall assume the rights, powers and responsibilities of Escrow Agent
hereunder upon its written agreement to act as Escrow Agent hereunder and to
become a party hereto.
(c) Escrow Agent's obligations hereunder shall terminate upon the
effective date of its resignation or discharge, except that it shall continue to
hold the Information in accordance with this Agreement until a successor Escrow
Agent is appointed, at which time Escrow Agent shall deliver the Information to
such successor Escrow Agent. If no successor Escrow Agent is appointed within
thirty (30) days after the effective date of such resignation or discharge,
Escrow Agent shall deliver the Information to the Arbitration Panel pursuant to
Section 15, shall give written notice of the same to Licensor and each Licensee
and shall have no further responsibility with respect thereto.
14. Indemnification. Licensor and each Licensee jointly and severally,
---------------
agree to defend, indeninily and hold Escrow Agent harmless against any loss,
liability or
-27-
<PAGE>
expense, including attorney's fees, incurred by Escrow Agent as a result of any
action taken or omitted in compliance with this Agreement in good faith and in
the exercise of Escrow Agent's own good judgment or in reliance on advice of
Escrow Agent's counsel or for any other cause unless a court of competent
jurisdiction finds that Escrow Agent's conduct was (i) willful misconduct, (ii)
fraudulent, (iii) grossly negligent, (iv) in bad faith or (v) in disregard of or
contrary to the terms of this Agreement.
15. Arbitration. Any dispute regarding the occurrence or non-occurrence
-----------
of a Triggering Event shall be submitted to arbitration before a panel of
arbitrators selected in accordance with the commercial rules of the American
Arbitration Association (the "Arbitration Panel"). The Arbitration Panel shall
hear evidence and arguments and shall limit its deliberations to a determination
of which party would be more likely to prevail on the merits if the dispute were
submitted to a plenary judicial or arbitration proceeding, it being understood
that the applicable Licensee(s) shall bear the burden of proving by a
preponderance of the evidence that a Triggering Event has occurred. The
Arbitration Panel shall provide Escrow Agent with written Notice thereof. The
arbitration shall bc conducted under the then current Federal Rules of Civil
Procedure with respect to discovery, the then current Federal Rules of Evidence
and the then current Commercial Rules of the American Arbitration Association;
provided, however, any such rules conflict with the provisions of this Section
15, the provisions of this Section 15 shall control. If the Arbitration Panel
determines that a Triggering Event has occurred with respect to a Licensee,
Escrow Agent shall immediately release the Information to such Licensee,
provided that if it is subsequently determined pursuant to a final adjudication
of the dispute that a Triggering Event has not occurred, Licensee shall
immediately cease use of the information, shall return the Information to Escrow
Agent, and shall destroy all other copies of the Information, or any part
thereof, in its possession. If the Arbitration Panel determines that a
Triggering Event has not occurred Escrow Agent shall continue to hold the
Information in accordance with this Agreement. The proceedings of the
Arbitration Panel shall be held, and any determination of the Arbitration Panel
shall be deemed to have been made, in Boston, Massachusetts. All questions of
law shall be decided in accordance with the laws of the Commonwealth of
Massachusetts and of the United States of America.
16. Addition of Licensees. Licensor may, in its sole discretion and
---------------------
without obtaining the consent of Escrow Agent or any Licensee, add its customers
as Licensees under this Agreement Licensor and each such customer so added shall
execute a Counterpart Signature Page to this Agreement substantially in the form
of Exhibit C attached hereto, which shall be promptly delivered to Escrow Agent.
Escrow Agent shall acknowledge receipt of such Counterpart Signature Page by
signing it and returning copies to Licensor and such Licensee, and such Licensee
shall thereafter be deemed a "Licensee" for all purposes of this Agreement.
17. Notices. All notices required or permitted hereunder shall be given
-------
in writing and shall be deemed delivered upon (i) delivery by messenger or
overnight
-28-
<PAGE>
courier service or (ii) three (3) days following the date of mailing by
registered or certified mail, postage prepaid, addressed to Licensor or Escrow
Agent at the applicable address Set forth in Exhibit A attached hereto and
---------
addressed to a Licensee at the address set forth on the applicable Counterpart
Signature Page. Any party may change its address by ten (10) days' written
notice given to the other party in the manner set forth in this Section 17.
18. Governing Law. This Agreement is made in and shall be construed in
-------------
accordance with the laws of the Commonwealth of Massachusetts.
19. No Waiver. No delay or omission by any party in exercising any
---------
right under this Agreement shall operate as a waiver of that or any other right.
A waiver or consent given by a party on any one occasion shall be effective only
in that instance and shall not be construed as a bar or waiver of any right on
any other occasion.
20. Severability. In the event that any provision of this Agreement
------------
shall be invalid, illegal or otherwise unenforceable, the validity, legality and
enforceability of the remaining provisions shall in no way be affected or
impaired thereby.
21. Successors and Assigns. Neither Licensor nor any Licensee may
----------------------
assign this Agreement without the written consent of the other, except that no
such consent shall be required for an assignment in connection with the sale of
all or substantially all of a party's business by merger, sale of stock, sale of
assets or otherwise. Notwithstanding anything to the contrary in the foregoing,
Licensee may not in any case assign this Agreement and its status as a Licensee
to another party if the applicable License Agreement is not and/or cannot be
assigned to the same said party. Escrow Agent may not assign this Agreement
without the written consent of Licensor and a majority in number of Licensees.
Subject to the foregoing, this Agreement shall be binding upon and inure to the
benefit of the parties, their respective executors, administrators-, successors
and assigns.
22. Amendment. This Agreement may be amended or modified only by a
---------
written instrument executed by Escrow Agent, Licensor and a majority in number
of Licensees.
23. Counterparts. This Agreement may be executed in counterparts, each
------------
of which shall be deemed an original, but all of which together shall constitute
but one agreement binding on the parties.
24. Captions. The captions of the sections of this Agreement are for
--------
convenience of reference only and in no way define, limit or affect the scope or
substance of any section of this Agreement.
-29-
<PAGE>
25. Bankruptcy Code. Peritus acknowledge that this Agreement is subject
---------------
to Section 365(n) of Title ii of the Bankruptcy Code. Peritus acknowledges that
if Peritus as a debtor in Possession or a trustee in bankruptcy in a case under
the Bankruptcy Code rejects the License Agreement or any part thereof any
Licensee may elect to retain its rights under the License Agreement as provided
in Section 365(n) of the Bankruptcy Code provided that such Licensee complies
with Section 365(n)(ii) of the Bankruptcy Code.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
a sealed instrument as of the day and year set forth above.
Peritus Software Services, Inc. Data Securities International, Inc.
[LICENSOR] [ESCROW AGENT]
Signature: Signature:
-------------------------- ---------------------------
By: By:
--------------------------------- ----------------------------------
Title: Title:
------------------------------ -------------------------------
-30-
<PAGE>
Exhibit A
---------
DESIGNATED REPRESENTATIVES
--------------------------
<TABLE>
<S> <C> <C>
Notices to Licensor Invoices should be addressed
should be addressed to: to:
Licensor: Peritus Software Services, Inc. Peritus Software Services, Inc.
Address: 304 Concord Road 304 Concord Road
Billerica, MA 01821 Billerica, MA 01821
Designated
Representative: Julian Chan John MacPhee
Telephone: (508) 670-2500 Ext. 596 (508) 670-2500 Ext. 268
Invoice inquiries and payments
Deposits and notices to Escrow to Escrow Agent should be
Agent should be addressed to: addressed to:
Escrow Agent: Data Securities International, Inc. Data Securities International, Inc.
Address: 955 Chesapeake Drive 9555 Chesapeake Drive
Suite 200 Suite 200
San Diego, CA 92123 San Diego, CA 92123
Designated
Representative:
------------------------------------
Telephone (619) 694-1900
</TABLE>
-31-
<PAGE>
Exhibit B
---------
DESCRIPTION OF DEPOSIT MATERIALS
--------------------------------
Deposit Account Number:
---------------------------
Account Name:
-------------------------------------------
Exhibit B Number:
--------------------------
Licensor, pursuant to a Source Code Escrow Agreement dated
________________, 19__ among Licensor, Licensee(s) and Escrow Agent (as defined
therein), hereby deposits the below described materials into the
above-referenced Deposit Account. The Deposit type is: (check space that
applies)
Initial Supplemental Replacement
- ----- Deposit ----- Deposit ----- Deposit
If Replacement then destroy Deposit _____ or return Deposit ______
If no Deposit type has been checked, the materials will be deemed to be
an Initial or Supplemental Deposit.
DEPOSIT MATERIALS
Name:_____________________________________ Version:________________
Date:________________________________________ Compiler:________________
Application:_______________________________________________________
Utilities needed:______________________________________________
Special operating instructions:_________________________________
Item Description Media Quantity
- ---------------- ----- --------
Licensor certifies that the above Accepted:
described materials have been
delivered/sent to Escrow Agent
By: By:
---------------------------------- --------------------------------
-32-
<PAGE>
Name: Name:
-------------------------------- ------------------------------
Title: Title:
------------------------------- -----------------------------
For: For:
--------------------------------- -------------------------------
Date: Date:
-------------------------------- ------------------------------
-33-
<PAGE>
Exhibit C
---------
COUNTERPART SIGNATURE PAGE TO SOURCE CODE ESCROW AGREEMENT
----------------------------------------------------------
The undersigned hereby agrees to become a party to that certain Source
Code Escrow Agreement dated November 15, 1996 (the "Agreement") among Licensor,
Licensees and Escrow Agent (as such terms are defined therein). From and after
the undersigned's execution and delivery and Licensor's acceptance of this
Counterpart, the undersigned shall be deemed to be a "Licensee" for all purposes
of the Agreement.
- ------------------------------------ Notices to Licensee should be addressed
Printed Name of Licensee to:
Licensee:
- ------------------------------------ ----------------------------
Signature of Licensee Address:
-----------------------------
-----------------------------
-----------------------------
By:
---------------------------------- Designated
Title: Representative:
------------------------------- -----------------------
Date: Telephone:
-------------------------------- ----------------------------
Invoices should be
addressed to:
--------------------------------------
--------------------------------------
--------------------------------------
--------------------------------------
Agreed and Accepted: Acknowledged:
Licensor: Peritus Software Escrow Agent: Data Securities
Services, Inc. International, Inc.
By: By:
---------------------------------- -----------------------------------
Title: Title:
------------------------------- --------------------------------
Date: Date:
-------------------------------- ---------------------------------
-34-
<PAGE>
Confidential materials omitted and filed separately
with the Securities and Exchange Commission.
Asterisks denote such omissions.
AMENDMENT TO THE LICENSE AND ALLIANCE AGREEMENT-
AGREEMENT FOR THE PURCHASE OF A SPECIAL INVENTORY PACKAGE
Agreement made as of this 31 day of March, 1997 (the "Amendment"), by and
between Peritus Software Services, Inc., a Massachusetts corporation having its
principal place of business at 304 Concord Road, Billerica, MA 01821-3485
("Peritus"), and CSC Consulting, Inc. ("LICENSEE"), a Massachusetts corporation,
having its principal place of business at University Office Park, 29 Sawyer
Road, Waltham, Massachusetts 02154.
WHEREAS, Peritus and LICENSEE have previously executed an agreement so
that LICENSEE can market and deliver Peritus' Automate:2000
service; and
WHEREAS, LICENSEE and Peritus desire to modify the
aforementioned agreement.
NOW THEREFORE, in consideration of the following mutual promises contained
herein, the Parties agree in good faith to the following obligations and duties:
Section 1 - Definitions and Incorporated Definition:
1.1: The "SLA" herein shall refer to the agreements entitled
"License and Alliance Agreement" and "Schedule No. 1," both
dated May 1, 1996, and both signed by Peritus and LICENSEE.
The "SLA" shall also be understood to include any agreement
that succeeds or replaces the SLA referred to in the previous
sentence.
1.2: The terminology and definitions set forth in the SLA, if used
in this Amendment shall have the same meaning and
interpretation.
1.3: "Effective Date" herein shall be March 31, 1997.
1.4: An "Inventory Package" herein shall refer to a set amount of
LOC for which LICENSEE will pay the applicable royalty
hereunder.
1.5: "Inventory Package Royalty Fee" herein shall refer to the
applicable royalty fee for an Inventory Package. The Inventory
Package Royalty Fee is non-refundable, regardless of whether
LICENSEE provides the
-35-
<PAGE>
Automate:2000(sm) service for the number of LOC for which the
Inventory Package applies.
1.6: "Product Technical Support" herein shall refer to the
technical support provided according to Attachment A to
---------------
Schedule No. 1 of the SLA.
-------------------------
Section 2 - Term:
2.1: Notwithstanding Section 7.2 of the SLA, in addition to the
----------------------
other terms of the SLA under which the SLA may be extended,
the SLA and this Amendment may and shall be further extended
to the extent necessary for LICENSEE to deplete the Inventory
Package referred to in Section 3.1 of this Amendment, or until
-----------------------------
April 30, 2000, provided however that any such extension that
results only pursuant to this Section 2.1 shall only be used
-----------
for the purpose of depleting the aforementioned Inventory
Package.
Section 3 - Inventory Package, Royalty Fees, PTA Fees and Payment Terms:
3.1: Pursuant to this Amendment, LICENSEE hereby purchases an
Inventory Package that entitles LICENSEE to provide the
Automate:2000(sm) service for fifty million LOC (50,000,000
LOC), in consideration of which LICENSEE shall pay to Peritus
the applicable Inventory Package Royalty Fee in the amount of
two million, five hundred thousand dollars ($2,500,000 U.S.),
which is due as of the Effective Date and shall be paid
according to the schedule as set forth in Section 3.3 of this
-------------------
Amendment.
---------
3.2: The Inventory Package Royalty Fee shall be paid to Peritus in
twelve equal installments, each installment being due on the
last day of each calendar month, beginning with the first
installment being due as of March 31, 1997. Payment to Peritus
of an installment due to Peritus must be made within 30 days
of receipt of the applicable invoice, such invoice to be
considered valid as of the latter of the date of receipt of
the invoice or the date on which the applicable installment is
due.
Section 4 - General Provisions:
-36-
<PAGE>
Confidential materials omitted and filed separately
with the Securities and Exchange Commission.
Asterisks denote such omissions.
4.1: Except as expressly set forth above, the SLA remains in force
and effect to the same extent to which it was in force and
effect prior to the Effective Date of this Amendment.
IN WITNESS WHEREOF, the parties have caused this Amendment to be executed by
their duly authorized representatives.
CSC Consulting, Inc. Peritus Software Services, Inc.
(LICENSEE)
By: /s/ Tom McAndrew By: /s/ Allen K. Deary
---------------------------------- ---------------------------------
Name: Name:
-------------------------------- -------------------------------
Title: Title:
------------------------------- ------------------------------
-37-
<PAGE>
AMENDMENT TO THE LICENSE AND ALLIANCE AGREEMENT -
AGREEMENT FOR THE PURCHASE OF A SPECIAL INVENTORY PACKAGE
Agreement made as of this 25th day of June, 1997 by and between Peritus
Software Services, Inc., a Massachusetts corporation having its principal place
of business at 304 Concord Road, Billerica, MA 01821-3485 ("Peritus"), and CSC
Consulting, Inc. ("LICENSEE"), a Massachusetts Corporation, having its
principal place of business at University Office Park, 29 Sawyer Road, Waltham,
Massachusetts 02154.
WHEREAS, Peritus and LICENSEE have previously executed an Agreement for the
Purchase of a Special Inventory Package dated March 11, 1997.
WHEREAS, LICENSEE and Peritus desire to modify the aforementioned agreement.
NOW THEREFORE, in consideration of the following mutual promises contained
herein, the parties agree in good faith to the following obligations and duties:
SECTION 3.1 is replaced in its entirety with the following:
Pursuant to this amendment, LICENSEE hereby purchases an Inventory Package that
entitles LICENSEE to provide the Automate:2000 service for fifty seven million
five hundred thousand LOC (57,500,000 LOC), in consideration of which LICENSEE
shall pay to Peritus the applicable Inventory Package Royalty Fee in the amount
of two million five hundred thousand dollars ($2,500,000 U.S.), which is due as
of the Effective Date and shall be paid according to the schedule as set forth
in section 3.2 of this agreement.
SECTION 3.2 is replaced in its entirety with the following:
The Inventory Package Royalty Fee shall be paid to Peritus as follows: the first
installment of $208,333 being due on Mach 31, 1997 the second installment of
$208,333 due April 31, 1997, the third installment of $208,333 due May 31, 1997,
and the final installment of $1,875,001 due June 30, 1997. Payment to Peritus
of an installment due to Peritus, must be made within 60 days of the applicable
installment date.
CSC CONSULTING, INC. (LICENSEE) PERITUS SOFTWARE SERVICES, INC.
By: /s/ James Saviano By: /s/ Robert D. Savoia
_______________________ ______________________
Name: James Saviano Name: Robert D. Savoia
____________________ ____________________
Title: President Title: Vice President
____________________ __________________
Date: June 25, 1997 Date: June 24, 1997
____________________ ___________________
<PAGE>
EXHIBIT 10.40
[FLEET BANK LOGO APPEARS HERE]
March 30, 1997
Mr. John E. MacPhee
Director of Finance & Treasury
Peritus Software Services, Inc.
304 Concord Road
Billerica, MA 01821
Dear John:
Reference is hereby made to the Letter Agreement (the "Agreement") dated
September 6, 1996 by and between Peritus Software Services, Inc. ("Peritus" or
the "Company") and Fleet National Bank (the "Bank"). You have informed us that
the Company expects its profitability to be lower than previously indicated to
the Bank and have requested an amendment in the requirements of Section 3.10
Profitability. Based upon the additional equity capital which the Company raised
during the fourth quarter, the Bank is willing to make these changes to the
Agreement.
Section 3.10 is hereby amended such that Peritus shall be required to report
quarterly Net Income of at least $1.00 for the quarter ending 12/31/96 and for
each quarter of fiscal 1997. In addition, the requirement for trailing two
quarter Net Income of at least $2,000,000 beginning with the second 1997 fiscal
quarter shall be eliminated, replaced by a requirement that the Company report
Net Income for the trailing 12 month period, measured at each quarter end,
beginning with the quarter ended 12/31/97.
Nothing herein shall be construed as a waiver or amendment of any other terms of
the Agreement. By signing below, you accept these amendments and confirm that
the Company is in compliance with the Agreement in all respects.
Sincerely,
/s/ Thomas W. Davies
Thomas W. Davies
Vice President
High Technology Group
<PAGE>
Exhibit 10.41
Fleet Bank
June 20, 1997
Mr. John E. MacPhee
Director of Finance & Treasury
Peritus Software Services, Inc.
304 Concord Road
Billerica, MA 01821
BY TELECOPIER
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Dear John:
Reference is hereby made to the Letter Agreement (the "Agreement") dated
September 6, 1996, and amended as of March 30, 1997, by and between Peritus
Software Services, Inc. ("Peritus" or the "Company") and Fleet National Bank
(the "Bank"). We are pleased to inform you that we have approved an extension
of the Expiration Date from June 30, 1997 to June 30, 1998. In addition, upon
completion of an Initial Public Offering generating gross proceeds of at least
$15,000,000, the quarterly facility fee shall drop from $4,375 to $3,125.
Nothing herein shall be deemed to constitute a waiver, release or amendment of
any other terms of the agreement.
The Borrower represents and warrants that the execution of this amendment has
been duly authorized by the Borrower by all necessary corporate and other action
and that the execution will not conflict with, violate the provisions of, or
cause a default or constitute an event which, with the passage of time or giving
of notice or both, could cause a default on the part of the Borrower under its
charter documents or by-laws or under any contract, agreement, law, rule, order,
ordinance, franchise, instrument or other document, or result in the imposition
of any lien or encumbrance on any property or asset of the Borrower.
The Borrower further represents that this agreement and the attached Allonge to
Promissory Note each represent legal, valid and binding obligations of the
Borrower, enforceable against the Borrower in accordance with their respective
terms. In addition, the statements, representations and warranties made in the
Agreement continue to be correct as of the date hereof and the Borrower is in
compliance with all terms of the Agreement. Except as expressly affected
hereby, the Agreement remains in full force and effect as heretofore.
<PAGE>
John, we are pleased to extend the Agreement and look forward to continuing our
relationship with Peritus. Please sign below and execute the attached Allonge
to evidence your acceptance of this amendment.
Sincerely,
/s/ Thomas W. Davies
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Thomas W. Davies
Senior Vice President
High Technology Group
Agreed and Accepted /s/ John E. MacPhee Date: 6/26/97
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by: John E. MacPhee
title: Director of Finance and Treasurer
<PAGE>
Exhibit 11
Peritus Software Services, Inc.
Statement re computation of unaudited pro forma net income (loss) per share
<TABLE>
<CAPTION>
December 31, 1996 March 31, 1997
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<S> <C> <C>
Net income (loss), as reported $ (4,921,000) $ 406,000
Redeemable stock preference items:
Accrual of cumulative dividends on Series A and Series B
redeemable convertible preferred stock (689,000) (233,000)
Accretion to redemption value of Series A and Series B
redeemable convertible preferred stock (347,000) --
Accretion to redemption value of redeemable common stock right (66,000) (26,000)
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Total redeemable stock preference items (1,102,000) (259,000)
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Net income (loss) attributable to common stockholders $ (6,023,000) $ 147,000
================= ==============
Weighted average shares outstanding:
A. Shares attributable to common stock outstanding 5,876,224 5,888,137
B. Shares attributable to convertible preferred stock outstanding 1,517,605 1,903,525
C. Shares attributable to common stock equivalents pursuant to
APB 15, paragraph 36 -- 1,618,089
D. Shares attributable to SAB No. 83 3,301,447 3,301,447
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Shares used in computing unaudited pro forma net income (loss) per share 10,695,276 12,711,198
================= ==============
Unaudited pro forma net income (loss) per share $ (0.46) $ 0.03
================= ==============
</TABLE>
<PAGE>
Exhibit 21
Subsidiaries
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<TABLE>
<CAPTION>
Name Jurisdiction of
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Incorporation
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<C> <S> <C>
1. Persist, S.A. Spain
2. Peritus Software Services Massachusetts
Securities Corporation
3. Peritus Software Services India
(India) Private Limited
</TABLE>
<PAGE>
Exhibit 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in the Prospectus constituting part of this
Registration Statement on Form S-1 of our report dated May 14, 1997, relating to
the financial statements of Peritus Software Services, Inc., which appears in
such Prospectus. We also consent to the references to us under the headings
"Experts" and "Selected Consolidated Financial Data" in such Prospectus.
However, it should be noted that Price Waterhouse LLP has not prepared or
certified such "Selected Consolidated Financial Data."
PRICE WATERHOUSE LLP
Boston, MA
June 30, 1997
