<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 4, 1997
REGISTRATION NO. 333-27087
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
AMENDMENT NO. 1
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. [_]
----------------
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 4, 1997
2,900,000 SHARES
LOGO
COMMON STOCK
Of the 2,900,000 shares of Common Stock offered hereby, 2,800,000 shares are
being sold by the Company and 100,000 shares are being sold by a Selling
Stockholder. The Company will not receive any of the proceeds from the sale of
shares by the Selling Stockholder. 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 $10.00 and $12.00 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.
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<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>
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- --------------------------------------------------------------------------------
(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 435,000 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.
Industry analysts estimate 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 established
relationships 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. In
May 1997, the Company entered into a non-binding letter of intent 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 opportunites.
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 Stockholder.... 100,000 shares
Common Stock to be outstanding after the offering.. 12,809,648 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 May 31, 1997.
Excludes an aggregate of 3,025,613 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 May 31, 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 May
31, 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 May 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.
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 $31,711
Working capital........................................ 8,406 35,095
Total assets........................................... 15,712 42,401
Long-term debt, net of current portion................. 1,476 533
Redeemable stock....................................... 12,546 --
Stockholders' equity (deficit)......................... (3,160) 37,018
</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 $11.00 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
8
<PAGE>
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 May 1997, the Company entered into a non-binding letter of intent 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 the Company
and VIASOFT will enter into a final agreement, that any 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 Servicios Software, 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 47.3% of the Company's
outstanding Common Stock. As a practical matter, 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 2,900,000 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 139,231 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
9,596,165 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 4,975,613 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 10,707,071 shares of Common Stock (including
1,080,906 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 5,719,112
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."
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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 $27,769,000, assuming an
initial public offering price of $11.00 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 42,560
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 37,018
--------------- --------------- ---------------
Total capitalization.... $ 10,862 $ 10,862 $ 37,551
=============== =============== ===============
</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 $11.00 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 May 31, 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 $11.00 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 $36,592,000, or $2.86 per share. This represents an immediate
increase in such pro forma net tangible book value of $1.96 per share to
existing stockholders and an immediate dilution of $8.14 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............... $11.00
Pro forma net tangible book value per share as of March 31,
1997....................................................... $0.90
Increase per share attributable to this offering............ 1.96
-----
Pro forma net tangible book value per share after this
offering..................................................... 2.86
------
Dilution per share to new investors........................... $ 8.14
======
</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
$11.00 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 31.8% $1.44
New investors............. 2,800,000 21.9 30,800,000 68.2 11.00
---------- ----- ----------- -----
Total................... 12,779,023 100.0% $45,188,000 100.0%
========== ===== =========== =====
</TABLE>
- --------
(1) Sales by the Selling Stockholder in this offering will reduce the number
of shares held by existing stockholders to 9,879,023, or 77.3% of the
total number of shares of Common Stock outstanding after this offering (or
9,444,023 shares and 73.9% if the Underwriters' over-allotment option is
exercised in full), and will increase the number of shares held by new
investors to 2,900,000, or 22.7% of the total number of shares of Common
Stock outstanding after this offering (or 3,335,000 shares and 26.1% 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 Servicios Software, 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 expires and all borrowings are
payable in full on June 30, 1997. 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. The
Company and the bank are negotiating an extension of the line of credit
agreement beyond June 30, 1997. However, there can be no assurance that the
agreement will be extended.
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 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.
31
<PAGE>
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 established relationships 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 May 1997, the Company
entered into a non-binding letter of intent 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.
Industry analysts estimate 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, which determines the
scope and impact of the year 2000 problem on an enterprise; a correction
phase, which entails the planning and implementation of source code
renovation, including the identification of all date-sensitive variables and
their associated corrections; and a testing phase that ensures the integrity
of a year 2000 renovation. 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.
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.
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.
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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 21 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 May 1997, the
Company entered into a non-binding letter of intent 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. 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.
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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
. Perform pre-renovation compile and recoverably
. Establish source code boundary . Strict source code control
. Identify print and display outputs environment established
. Perform dataset name unification . Source code completeness verified
. Source code compliability
validated
. Data synonyms established
- -------------------------------------------------------------------------------------------
IDENTIFICATION . Convert source code into PIL . Logic of code unraveled for
. Perform record name unification automated analysis
. Select bridging strategies . Record synonyms established
. Find the date-sensitive items . Bridging strategies specified
through propagation . Date-sensitive variables and
. Resolve ambiguous identification constants identified
conditions . Procedure-division uses of date-
. Facilitate identification sensitive items identified
completeness using Adaptive Seed . Accuracy and completeness of
Generator identification verified
- -------------------------------------------------------------------------------------------
CORRECTION . Create and apply correction . Source code corrected
transactions
. Create and apply harmonization . Redefines realigned
transactions . All identified uses of date-
. Resolve correction warnings sensitive items corrected
- -------------------------------------------------------------------------------------------
BRIDGE . Generate bridge programs by . Interoperability of renovated and
building wrappers, filters and unrenovated code established
converters
- -------------------------------------------------------------------------------------------
ADAPTATION . Identify Job Control Language . Date-sensitive JCL identified and
(JCL) date-sensitive issues corrections suggested
. Identify record size changes
. Create JCL correction plan
- -------------------------------------------------------------------------------------------
VERIFICATION . Reconcile planned and implemented . Intended and actual changes
corrections reconciled
. Perform post-renovation compile and . Verification to ensure that
compare to pre-renovation compile changes do not impact compiler
results results
- -------------------------------------------------------------------------------------------
PACKAGING . Package renovated source code and . Source code returned to facilitate
generated source code for return replacement and testing
to client
- -------------------------------------------------------------------------------------------
</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 21 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 May 1997, the Company
entered into a non-binding letter of intent 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 May 31, 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.
Netsiel S.p.A.
Complete Business Solutions, Inc.
Computer Sciences Corp. PKS Systems Integration, Inc.
Comtex Information Systems, Inc. PRT Corp. of America
Coritel, S.L. Stratagem, Inc.
Datamatics Ltd. Vital Computer Service
IBM Global Services International, Inc.
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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 UNISYS Corporation
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."
While each client engagement differs, the following examples illustrate the
types of business needs the Company has addressed:
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
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<PAGE>
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 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.
43
<PAGE>
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.
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.
44
<PAGE>
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 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.
45
<PAGE>
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 45 Director
Humphreys(1)...........
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. 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
"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
51
<PAGE>
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 May 31, 1997, options to purchase
3,025,613 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 May 31, 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.
52
<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") 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 is currently exercisable as to 28,000 shares of Common
Stock, and an additional 30,303 shares of Common Stock will vest on December
30, 1997. The NSO will become exercisable as to 157,697 shares of Common Stock
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.
55
<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. 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.
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. As of April
30, 1997, Bull had incurred license and maintenance fees to the Company
pursuant to the License Agreement in excess of $1,500,000. 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.
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
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<PAGE>
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 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.
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<PAGE>
On March 15, 1996, the Company issued an aggregate of 1,903,525 shares of
Series A Convertible Preferred Stock 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.
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, 1997, the Company
executed an Amendment to the License and Alliance Agreement--Agreement for the
Purchase of a Special Inventory Package (the "Amendment") providing for the
grant of a usage-based license. Prior to joining the Company as President and
Chief Operating Officer and as a director, Mr. Catalano was employed by CSC
from
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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.
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PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of the Common Stock of the Company as of May 31, 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(2) NUMBER PERCENTAGE
- ------------------------ --------- ---------- ---------- --------- ----------
<S> <C> <C> <C> <C> <C>
Dominic K. Chan(4)....... 3,013,763 30.1% -- 3,013,763 23.5%
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% 100,000 987,500 7.7%
300 Concord Road
Billerica, MA 01821
John Giordano(8)......... 1,087,500 10.9% 100,000 987,500 7.7%
c/o Bull HN Information
Systems Inc.
300 Concord Road
Billerica, MA 01821
Y2K Partners, Ltd.(9).... 606,061 6.1% -- 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% -- 386,247 3.0%
Adarsh K. Arora.......... 148,808 1.5% -- 148,808 1.2%
Andrea C. Campbell(14)... 250,986 2.5% -- 250,986 1.9%
All executive officers
and directors, as
a group (15
persons)(15)............ 6,428,352 60.8% 100,000 6,328,352 47.3%
</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 May 31, 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) In the event that the over-allotment option is exercised in full, Dominic
K. Chan, Bull, Allen K. Deary and Andrea Campbell will offer to sell
200,000, 185,000, 30,000 and 20,000 shares of Common Stock, respectively,
to the Underwriters. As a result of such exercise, Dominic K. Chan, Bull,
Allen K. Deary and Andrea Campbell will beneficially own 2,813,763,
802,500, 356,247 and 230,986 shares of Common Stock, or 21.9%, 6.3%, 2.7%
and 1.8% of the outstanding shares, respectively, after this offering.
(3) Assumes no exercise of the underwriters' over-allotment option.
(4) Includes 18,750 shares of Common Stock subject to outstanding stock
options which are exercisable within 60 days of May 31, 1997; 2,795,013
shares of Common Stock held jointly with his wife, with 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 May 31, 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 May 31, 1997.
(12) Includes 28,125 shares of Common Stock subject to outstanding stock
options which are exercisable within 60 days of May 31, 1997.
(13) Includes 186,983 shares of Common Stock subject to outstanding stock
options which are exercisable within 60 days of May 31, 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 218,798 shares of Common Stock subject to outstanding stock
options which are exercisable within 60 days of May 31, 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 May 31, 1997, as to
which Ms. Campbell disclaims beneficial ownership.
(15) Includes an aggregate of 565,781 shares of Common Stock subject to
outstanding options which are exercisable within 60 days of May 31, 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 May 31,
1997 (assuming the conversion of all outstanding shares of Convertible
Preferred Stock and Class B Common Stock into Common Stock), there were
outstanding (i) 10,009,648 shares of Common Stock held by 136 stockholders of
record, (ii) stock options for the purchase of 3,495,113 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 May 31, 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 May 31, 1997, there will be 12,809,648 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 2,900,000 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 9,909,648 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 139,231
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 9,596,165 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 1,080,906 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 (128,096 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.
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<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 5,719,112 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.
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<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............................................................ 2,900,000
=========
</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 435,000 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 10,707,071 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."
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<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.
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<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 Servicios Software, 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.
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.
F-9
<PAGE>
PERITUS SOFTWARE SERVICES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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.
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%.
F-10
<PAGE>
PERITUS SOFTWARE SERVICES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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 $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>
F-11
<PAGE>
PERITUS SOFTWARE SERVICES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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, $9,267,000 and $5,579,000, respectively, related to
outsourcing and license agreements with a corporation 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. This stockholder and customer also had certain stock purchase rights
(Note 17).
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.
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>
F-14
<PAGE>
PERITUS SOFTWARE SERVICES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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 are summarized as follows:
<TABLE>
<CAPTION>
1994 1995 1996
------------------- ------------------- -------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
--------- -------- --------- -------- --------- --------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning
of year................ 1,071,575 $0.10 1,356,700 $0.23 1,606,025 $0.64
Granted................. 297,875 0.72 455,250 1.96 1,558,292 3.04
Exercised............... -- -- (95,000) 0.05 (198,533) 0.92
Forfeited............... (12,750) 0.08 (110,925) 1.58 (40,117) 1.20
--------- --------- ---------
Outstanding at year
end.................... 1,356,700 0.23 1,606,025 0.64 2,925,667 1.88
========= ========= =========
Options exercisable at
year end............... 454,927 0.07 692,462 0.21 1,030,036 0.47
========= ========= =========
</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>
F-20
<PAGE>
PERITUS SOFTWARE SERVICES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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
DECEMBER 31,
-------------------
1995 1996
------- -----------
<S> <C> <C>
As reported............................................. $55,000 $(4,921,000)
Pro forma............................................... 36,000 (5,049,539)
</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
DECEMBER 31,
--------------
1995 1996
------ ------
<S> <C> <C>
Expected life (years)....................................... 5 5
Risk-free interest rate..................................... 7.37% 6.25%
Dividend yield.............................................. 0% 0%
Fair value of option grants--exercise price equal to the
fair value of
the related stock.......................................... $ 0.35 $ 0.52
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 (and 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.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
2,900,000 SHARES
LOGO
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............................................ $ 12,128
NASD filing fee................................................. 4,502
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................................................... 33,370
--------
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 May 31, 1997, options to purchase 3,025,613 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
May 31, 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.
*+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.
*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.
**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 NO. 1 TO THE REGISTRATION STATEMENT TO BE
SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN
BILLERICA, MASSACHUSETTS, ON THIS 4TH DAY OF JUNE, 1997.
Peritus Software Services, Inc.
/s/ Allen K. Deary
By: _________________________________
ALLEN K. DEARY VICE PRESIDENT,
FINANCE AND CHIEF FINANCIAL
OFFICER
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS AMENDMENT
NO. 1 TO THE REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS
IN THE CAPACITIES AND ON THE DATES INDICATED.
SIGNATURE TITLE DATE
Chairman of the
* Board and Chief June 4, 1997
- ------------------------------------- Executive Officer
DOMINIC K. CHAN (Principal
Executive Officer)
President, Chief
* Operating Officer June 4, 1997
- ------------------------------------- and Director
DOUGLAS A. CATALANO
Vice President,
/s/ Allen K. Deary Finance, Chief June 4, 1997
- ------------------------------------- Financial Officer
ALLEN K. DEARY and Director
(Principal
Financial Officer)
Director of Finance
* and Treasurer June 4, 1997
- ------------------------------------- (Principal
JOHN E. MACPHEE Accounting Officer)
Director
* June 4, 1997
- -------------------------------------
ARTHUR CARR
Director
* June 4, 1997
- -------------------------------------
JOHN GIORDANO
II-7
<PAGE>
SIGNATURE TITLE DATE
Director
* June 4, 1997
- -------------------------------------
W. MICHAEL HUMPHREYS
Director
* June 4, 1997
- -------------------------------------
AXEL LEBLOIS
Director
* June 4, 1997
- -------------------------------------
HENRY MCCANCE
Director
* June 4, 1997
- -------------------------------------
ROLAND PAMPEL
/s/ Allen K. Deary
*By: ________________________________
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.
*+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.
*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.
**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>
EXHIBIT 3.1
The Commonwealth of Massachusetts
____________ WILLIAM FRANCIS GALVIN FEDERAL IDENTIFICATION
Examiner Secretary of the Commonwealth
ONE ASHBURTON PLACE, BOSTON, MASS 02108 NO. 04-3126919
-------------------
RESTATED ARTICLES OF ORGANIZATION
General Laws, Chapter 156B, Section 74
This certificate must be submitted to the Secretary of the
Commonwealth within sixty days after the date of the vote of stockholders
adopting the restated articles of organization. The fee for filing this
certificate is prescribed by General Laws, Chapter 156B, Section 114.
Make check payable to the Commonwealth of Massachusetts.
----------
We, Dominic Chan, , President/xxxxxxxxxx and
Allen K. Deary , Clerk/ xxxxxxxxx of
Peritus Software Services, Inc.
-------------------------------
(Name of Corporation)
located at 164 Middlesex Turnpike, Burlington, MA 01803
------------------------------------------------
do hereby certify that the following restatement of the articles of
organization of the corporation was duly adopted
at a meeting held on September 16 , 1994
, by vote of
<TABLE>
<S> <C> <C> <C> <C> <C>
200,153 shares Common out 200,453 shares
of of outstanding,
................ ......................... ............
(Class of Stock)
shares out shares
of of outstanding, and
................ ......................... ............
(Class of Stock)
shares out shares
of of outstanding,
................ ......................... ............
(Class of Stock)
</TABLE>
a majority
C [_] being at least xxxxxxxxxxx of each class of stock outstanding and
P [_] entitled to vote and of each class or series of stock adversely affected
M [_] thereby.
RA [_]
1. The name by which the corporation shall be known is:
Peritus Software Services, Inc.
2. The purposes for which the corporation is formed are as
follows:
1. To develop, create, market, sell, license, acquire,
service, provide consultation services for, and generally
to deal in software engineering and software-related
products; and
2. To carry on any business permitted by the laws of The
Commonwealth of Massachusetts to a corporation organized
under Chapter 156B of the Massachusetts General Laws.
Note: If the space provided under any article or item on this form is
insufficient, additions shall be set forth on separate 8 1/2 x 11 sheets
of paper leaving a left hand margin of at least 1 inch for binding.
Additions to more than one article may be continued on a single sheet so
long as each article requiring each such addition is clearly indicated.
<PAGE>
3. The total number of shares and the par value, if any, of
each class of stock which the corporation is authorized to
issue is as follows:
WITHOUT PAR VALUE WITH PAR VALUE
----------------- --------------
CLASS OF STOCK NUMBER OF SHARES NUMBER OF SHARE PAR VALUE
- -------------- ---------------- --------------- ---------
Preferred None None
Common 2,500,000 None
*4. If more than one class is authorized, a description of
each of the different classes of stock with, if any, the
preferences, voting powers, qualifications, special or
relative rights or privileges as to each class thereof and
any series now established:
See Continuation Sheet 4A attached hereto and incorporated
herein.
*5. The restrictions, if any, imposed by the articles of
organization upon the transfer of shares of stock of any
class are as follows:
None
*6. Other lawful provisions, if any, for the conduct and
regulation of the business and affairs of the corporation,
for its voluntary dissolution, or for limiting, defining,
or regulating the powers of the corporation, or of its
directors or stockholders, or of any class of
stockholders:
See Continuation Sheet 6A attached hereto and incorporated
herein.
*If there are no such provisions, state "None".
<PAGE>
CONTINUATION SHEET 4A
ARTICLE IV
Upon the filing of these Restated Articles of Organization, each share
of the corporation's common stock, no par value ("Common Stock"), that was
issued and outstanding or held in the corporation's treasury immediately prior
to such filing (the "Old Common Stock"), without further action, shall be split
into and reclassified as, and shall become, ten fully paid and non-assessable
shares of Common Stock (the "New Common Stock"); and the certificates formerly
representing shares of Old Common Stock that have been so split and reclassified
shall thereafter represent the shares of New Common Stock into which the shares
of Old Common Stock formerly represented thereby have been so split and
reclassified.
<PAGE>
CONTINUATION SHEET 6A
ARTICLE VI
(a) Meetings of the stockholders of the Corporation may be held
anywhere in the United States.
(b) The Corporation may be a partner to the maximum extent permitted
by law.
(c) The directors of the Corporation may make, amend or repeal the
By-laws in whole or in part, except with respect any provision thereof which, by
applicable law or the By-laws, requires action by the stockholder.
(d) No director of this Corporation shall be liable to this
Corporation or its stockholders for monetary damages for breach of fiduciary
duty as a director, except to the extent that such exculpation from liability is
not permitted by the Massachusetts Business Corporation Law as the same exists
or may hereafter be amended. No amendment to or repeal of this provision shall
apply to or have any effect on the liability of any director for or with respect
to any acts or omissions of such director occurring prior to such amendment or
repeal.
<PAGE>
*We further certify that the foregoing restated articles of
organization effect no amendments to the articles of organization of the
corporation as heretofore amended, except amendments to the following articles
III and IV .................
................................................................................
(*If there are no such amendments, state "None".)
Briefly describe amendments in space below:
Article III: The number of authorized shares of common stock, no par value
("Common Stock"), of the corporation is hereby increased from
250,000 shares to 2,500,000 shares.
Article IV: Each share of Common Stock of the corporation that was issued
and outstanding or held in the corporation's treasury
immediately prior to the filing of these Restated Articles of
Organization is hereby split into and reclassified as ten fully
paid and non-assessable shares of Common Stock.
IN WITNESS WHEREOF AND UNDER THE PENALTIES OF PERJURY, we have hereto signed our
names this 27th day of January in the year 1995
/s/ Dominic Chan
........................................... President/xxxxxxxxxx
Dominic Chan
/s/ Allen K. Deary
........................................... Clerk /xxxxxxxxxx
Allen K. Deary
<PAGE>
THE COMMONWEALTH OF MASSACHUSETTS
RESTATED ARTICLES OF ORGANIZATION
(General Laws, Chapter 156B, Section 74)
I hereby approve the within restated articles of
organization and, the filing fee in the amount if
$2,550.00 having been paid, said articles are
deemed to have been filed with me this 3rd day
of February, 1995
WILLIAM FRANCIS GALVIN
Secretary of the Commonwealth
TO BE FILLED IN BY CORPORATION
PHOTO COPY OF RESTATED ARTICLES OF ORGANIZATION TO BE SENT
TO: Brian Keeler, Esq.
Bingham, Dana & Gould
---------------------
150 Federal Street
------------------
Boston, MA 02110
-----------------
Telephone: (617) 951-8000
--------------
Copy Mailed
<PAGE>
FEDERAL IDENTIFICATION
NO. 04-3126919
----------------------
THE COMMONWEALTH OF MASSACHUSETTS
- --------- William Francis Galvin
Examiner Secretary of the Commonwealth
Corporations Division
One Ashburton Place, Boston, MA 02108-1512
ARTICLES OF AMENDMENT
General Laws, Chapter 156B, Section 72
We, Dominic Chan , President/xxxxxxxxxx, and
Allen K. Deary , Clerk/xxxxxxxxxx of
Peritus Software Services, Inc.
-------------------------------
(EXACT Name of Corporation)
located at: 164 Middlesex Turnpike, Burlington, MA 01803
-----------------------------------------------
(MASSACHUSETTS Address of Corporation)
do hereby certify that these ARTICLES OF AMENDMENT affecting
Articles NUMBERED: 3 and 4
-------
(Number those articles 1, 2, 3, 4, 5 and/or 6 being amended
hereby)
- ------- of the Articles of Organization were duly adopted at a meeting held
Name on March 13, 1995, by vote of:
Approved
1,854,390 shares of COMMON STOCK out of 2,004,530 shares outstanding,
--------- ------------ ---------
type, class & series, (if any)
shares of out of shares outstanding,
--------- ------------ ---------
type, class & series, (if any)
and
shares of out of shares outstanding,
--------- ------------ ---------
type, class & series, (if any)
CROSS OUT xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx
INAPPLI- xxxxxxxxx/1/
CABLE being at least two-thirds of each type, class or series outstanding
CLAUSE and entitled to vote thereon and of each type, class or series of
stock whose rights are adversely affected thereby:-/2/
Article 3 is hereby amended as set forth below.
C [_] Article 4 is hereby amended to read as set forth in the
P [_] attached continuation sheet 4.
M [_]
RA [_]
/1/ For amendments adopted pursuant to Chapter 156B, Section 70.
/2/ For amendments adopted pursuant to Chapter 156B, Section 71.
Note: If the space provided under any article or item on this form
is insufficient, additions shall be set forth on one side only of
separate 8 1/2 x 11 sheets of paper leaving a left-hand margin of
at least 1 inch for
<PAGE>
binding. Additions to more than one Amendment may be continued on a
single sheet so long as each Amendment requiring each such addition
is clearly indicated.
- ---------
P.C.
<PAGE>
To CHANGE the number of shares and the par value (if any) of any type, class or
series of stock which the corporation is authorized to issue, fill in the
following:
The total presently authorized is:
<TABLE>
<CAPTION>
WITHOUT PAR VALUE STOCKS WITH PAR VALUE STOCKS
- ---------------------------------------------------------------------------------------------------------------
TYPE NUMBER OF SHARES TYPE NUMBER OF PAR VALUE
SHARES
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common: Common: -------- -------
- ---------------------------------------------------------------------------------------------------------------
2,500,000
- ---------------------------------------------------------------------------------------------------------------
Preferred: ---------- Preferred: -------- --------
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
CHANGE the total authorized to:
<TABLE>
<CAPTION>
WITHOUT PAR VALUE STOCKS WITH PAR VALUE STOCKS
- ---------------------------------------------------------------------------------------------------------------
TYPE NUMBER OF TYPE NUMBER OF PAR VALUE
SHARES SHARES
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common: Common: --------- -------
- ---------------------------------------------------------------------------------------------------------------
Class A Voting: 2,500,000
- ---------------------------------------------------------------------------------------------------------------
Class B Non- 40,000
Voting:
- ---------------------------------------------------------------------------------------------------------------
Preferred: ---------- Preferred: --------- -------
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
Continuation Sheet 4
Page One of Two
If more than one class is authorized, a description of each of the
different classes of stock with, if any, the preferences, voting powers,
qualifications, special or relative rights or privileges as to each class
thereof and any series now established:
1. Voting Rights.
(a) Except as otherwise required by law, the holder of each share of
Class A Voting Common Stock shall be entitled to vote on all matters and shall
be entitled to one vote for each share thereof held.
(b) Except as otherwise required by law, the holders of Class B Non-
Voting Common Stock shall have no voting rights as such.
2. Dividends, Distributions, and Redemptions. Dividends may be paid on
shares of Class A Voting Common Stock and Class B Non-Voting Common Stock,
respectively, if, when, and as declared by the Corporation's Board of Directors,
provided, that no dividend, distribution, or redemption shall be made in respect
of either the Class A Voting Common Stock or the Class B Non-Voting Common Stock
unless the same dividend, distribution, or redemption (on a per-share basis) is
made with respect to both such classes of Common Stock.
3. Liquidation Rights. Upon any voluntary or involuntary liquidation,
dissolution, or winding-up of the affairs of the Corporation, each issued and
outstanding share of Class A Voting Common Stock and Class B Non-Voting Common
Stock, respectively, shall entitle the holder thereof to receive an equal
portion of the remaining funds available for distribution of the holder of
Common Stock.
4. Conversion of Shares on Initial Public Offering. Immediately upon
the closing of a public offering of share of Class A Voting Common Stock
pursuant to an effective registration statement under the Securities Act of
1933, as amended, on a firm-commitment underwritten basis, resulting in
aggregate gross proceeds to the Corporation of at least $10,000,000, each share
of Class B Non-Voting Common Stock that is then outstanding or held in the
Corporation's treasury shall be converted into and reclassified as, and shall
become, automatically and without any further action, one fully paid and
non-assessable share of Class A Voting Common Stock, regardless of whether the
certificate representing such share is surrendered to the Corporation, provided,
however, that the Corporation shall not be obligated to issue a certificate
evidencing the share of Class A Voting Common Stock issuable upon such
conversion unless the certificate evidencing the share of Class B Non-Voting
Common Stock so converted is either delivered to the Corporation, or the
registered holder thereof notifies the Corporation that such certificate has
been lost, stolen, or destroyed and executes an agreement satisfactory to
Corporation to
<PAGE>
indemnify the Corporation from any loss incurred by the Corporation in
connection therewith.
5. Conversion of Old Common Stock. Upon filing of these Articles of
Amendment, each share of the corporation's common stock, no par value, that was
issued and outstanding or held in the corporation's treasury immediately prior
to such filing (the "Old Common Stock"), shall be converted into and
reclassified as, and shall become, automatically and without any further action,
one fully paid and non-assessable share of Class A Voting Common Stock; and the
certificates formerly representing shares of Old Common Stock that have been so
converted shall thereafter represent the shares of Class A Voting Common Stock
into which the shares of Old Common Stock formerly represented thereby have been
so converted, regardless of whether the certificate representing such shares are
surrendered to the Corporation, provided, however, that the Corporation shall
not be obligated to issue certificates evidencing such new shares of Class A
Voting Common Stock unless the certificates evidencing such shares of Old Common
Stock are either delivered to the Corporation, or in any particular case the
registered holder thereof notifies the Corporation that such certificates have
been lost, stolen, or destroyed and executes an agreement satisfactory to the
Corporation to indemnify the Corporation from any loss incurred by the
Corporation in connection therewith.
<PAGE>
The foregoing amendment will become effective when these articles of amendment
are filed in accordance with Chapter 156B, Section 6 of The General Laws unless
these articles specify, in accordance with the vote adopting the amendment, a
later effective date not more than thirty days after such filing, in which event
the amendment will become effective on such later date. EFFECTIVE DATE: upon
----
filing
- ------
IN WITNESS WHEREOF AND UNDER THE PENALTIES OF PERJURY, we have hereunto signed
our names this 24th day of March, in the year 1995.
/s/ Dominic Chan
........................................................., President/xxxxxxxxxx
Dominic Chan
/s/ Allen K. Deary
............................................................., Clerk/xxxxxxxxxx
Allen K. Deary
<PAGE>
497382
THE COMMONWEALTH OF MASSACHUSETTS
ARTICLES OF AMENDMENT
General Laws, Chapter 156B, Section 72
================================================================================
I hereby approve the within articles of amendment, and the
filing fee in the amount of $200.00 having been paid, said
articles are deemed to have been filed with me this 7th day of
April, 1995.
WILLIAM FRANCIS GALVIN
Secretary of the Commonwealth
TO BE FILLED IN BY CORPORATION
PHOTOCOPY OF ARTICLES OF AMENDMENT TO BE SENT TO:
Brian Keeler, Esq.
TO: Bingham, Dana & Gould
---------------------
150 Federal Street
------------------
Boston, MA 02110
----------------
Telephone: (617) 951-8000
--------------
<PAGE>
FEDERAL IDENTIFICATION
NO. 04-3126919
----------------------
THE COMMONWEALTH OF MASSACHUSETTS
- ---------- William Francis Galvin
Examiner Secretary of the Commonwealth
Corporations Division
One Ashburton Place, Boston, MA 02108-1512
ARTICLES OF AMENDMENT
General Laws, Chapter 156B, Section 72
We, Dominic Chan , President/xxxxxxxxx, and
Allen K. Deary, , Clerk/xxxxxxxxxxxxx
of Peritus Software Services, Inc.
-------------------------------
(EXACT Name of Corporation)
located at: xxxxxxxxxxxxxxxxxxxxxxxxx 304 Concord Road, Billerica, MA
------------------------------------------------------------
01821-3485
----------
(MASSACHUSETTS Address of Corporation)
do hereby certify that these ARTICLES OF AMENDMENT affecting Articles
NUMBERED:
3
-
(Number those articles 1, 2, 3, 4, 5 and/or 6 being amended hereby)
- ------
Name of the Articles of Organization were duly adopted at a meeting held on
April 3, 1995, by vote of:
----- - ----
Approved
1,854,810 shares of COMMON STOCK out of 2,004,530 shares outstanding,
--------- ------------ ---------
type, class & series, (if any)
shares of out of shares outstanding,
--------- ------------ ---------
type, class & series, (if any)
and
shares of out of shares outstanding
--------- ------------ ---------
type, class & series, (if any)
CROSS OUT xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx
INAPPLI- xxxxxxxxxxxxxxxxxxxxxxx/1/
CABLE being at least two-thirds of each type, class or series
CLAUSE outstanding and entitled to vote thereon and of each type,
class or series of stock whose rights are adversely affected
thereby/2/
Article 3 is hereby amended as set forth below.
C [ ]
P [ ]
M [ ]
RA [ ] /1/For amendments adopted pursuant to Chapter 156B, Section 70.
/2/For amendments adopted pursuant to Chapter 156B, Section 71.
Note: If the space provided under any Amendment or item on this form is
insufficient, additions shall be set forth on separate 8 1/2 x 11
sheets of paper leaving a left-hand margin of at least 1 inch for
binding. Additions to more than one Amendment may be continued on a
single sheet so long as each Amendment requiring each such addition is
clearly indicated.
- ---------
P.C.
<PAGE>
To CHANGE the number of shares and the par value (if any) of any type, class or
series of stock which the corporation is authorized to issue, fill in the
following:
The total presently authorized is:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
WITHOUT PAR VALUE STOCKS WITH PAR VALUE STOCKS
- ------------------------------------------------------------------------------------------------------------------------------------
TYPE NUMBER OF TYPE NUMBER OF PAR VALUE
SHARES SHARES
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common: Common: ------- --------
- ------------------------------------------------------------------------------------------------------------------------------------
Class A Voting: 2,500,000
- ------------------------------------------------------------------------------------------------------------------------------------
Class B Non- 40,000
Voting:
- ------------------------------------------------------------------------------------------------------------------------------------
Preferred: --------- Preferred: -------- --------
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
CHANGE the total authorized to:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
WITHOUT PAR VALUE STOCKS WITH PAR VALUE STOCKS
- ------------------------------------------------------------------------------------------------------------------------------------
TYPE NUMBER OF TYPE NUMBER OF PAR VALUE
SHARES SHARES
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common: Common: ---------- --------
- ------------------------------------------------------------------------------------------------------------------------------------
Class A Voting: 2,900,000
- ------------------------------------------------------------------------------------------------------------------------------------
Class B Non- 40,000
Voting:
- ------------------------------------------------------------------------------------------------------------------------------------
Preferred: ---------- Preferred: ---------- --------
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
The foregoing amendment will become effective when these articles of amendment
are filed in accordance with Chapter 156B, Section 6 of The General Laws unless
these articles specify, in accordance with the vote adopting the amendment, a
later effective date not more than thirty days after such filing, in which event
the amendment will become effective on such later date. EFFECTIVE DATE:
IN WITNESS WHEREOF AND UNDER THE PENALTIES OF PERJURY, we have hereunto signed
our names this 10 day of April, in the year 1995.
/s/ Dominic Chan
....................................................President/xxxxxxxxxx
Dominic Chan
/s/ Allen K. Deary
.......................................................Clerk/xxxxxxxxxxx
Allen K. Deary
<PAGE>
498035
THE COMMONWEALTH OF MASSACHUSETTS
ARTICLES OF AMENDMENT
General Laws, Chapter 156B, Section 72
================================================================================
I hereby approve the within articles of amendment, and the
filing fee in the amount of $400.00 having been paid, said
articles are deemed to have been filed with me this 13th day
of April, 1995.
WILLIAM FRANCIS GALVIN
Secretary of the Commonwealth
TO BE FILLED IN BY CORPORATION
PHOTOCOPY OF ARTICLES OF AMENDMENT TO BE SENT TO:
Brian Keeler, Esq.
TO: Bingham, Dana & Gould
---------------------
150 Federal Street
------------------
Boston, MA 02110
-----------------
Telephone: (617) 951-8000
--------------
<PAGE>
FEDERAL IDENTIFICATION
NO. 04-3126919
----------------------
- -------- THE COMMONWEALTH OF MASSACHUSETTS
Examiner William Francis Galvin
Secretary of the Commonwealth
One Ashburton Place, Boston, Massachusetts 02108-1512
ARTICLES OF AMENDMENT
(General Laws, Chapter 156B, Section 72)
- --------
Name We, Dominic Chan ,*President/xxxxxx
Approved ------------
and Allen K. Deary , *Clerk/xxxxxxxxx
--------------
of Peritus Software Services, Inc. ,
-------------------------------
(Exact name of corporation)
located at: 304 Concord Road, Billerica, MA 01821-3485 ,
-------------------------------------------
(Street address of corporation in Massachusetts)
certify that these Articles of Amendment affecting articles numbered:
3
-
(Number those articles 1, 2, 3, 4, 5, and/or 6 being amended)
of the Articles of Organization were duly adopted at a meeting held
on December 8, 1995, by vote of:
----------------
1,854,390 shares of COMMON STOCK out of 2,004,530 shares outstanding,
--------- ------------ ---------
type, class & series, (if any)
shares of out of shares outstanding,
--------- ------------ ---------
type, class & series, (if any)
and
shares of out of shares outstanding
--------- ------------ ---------
type, class & series, (if any)
C [ ]
P [ ] xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx/1/
M [ ] being at least two-thirds of each type, class or series outstanding
R.A. [ ] and entitled to vote thereon and of each type, class or series of
stock whose rights are adversely affected thereby/2/:
Article 3 is hereby amended as set forth below.
*Delete the inapplicable words. **Delete the inapplicable clause.
/1/For amendments adopted pursuant to Chapter 156B, Section 70.
<PAGE>
/2/For amendments adopted pursuant to Chapter 156B, Section 71. Note:
If the space provided under any article or item on this form is
insufficient, additions shall be set forth on one side only of
separate 8 1/2 x 11 sheets of paper with a left margin of at least
1 inch. Additions to more than one article may be made on a single
sheet so long as each article requiring each addition is clearly
indicated.
- --------
P.C.
<PAGE>
To change the number of shares and the par value (if any) of any type, class or
series of stock which the corporation is authorized to issue, fill in the
following:
The total presently authorized is:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------
WITHOUT PAR VALUE STOCKS WITH PAR VALUE STOCKS
- ----------------------------------------------------------------------------------------------------------------------------
TYPE NUMBER OF TYPE NUMBER OF PAR VALUE
SHARES SHARES
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common: Common: ---------- ---------
- ----------------------------------------------------------------------------------------------------------------------------
Class A Voting 2,900,000
- ----------------------------------------------------------------------------------------------------------------------------
Class B Non-Voting 40,000
- ----------------------------------------------------------------------------------------------------------------------------
Preferred: ---------- Preferred: ---------- ---------
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
Change the total authorized to:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------
WITHOUT PAR VALUE STOCKS WITH PAR VALUE STOCKS
- ----------------------------------------------------------------------------------------------------------------------------
TYPE NUMBER OF TYPE NUMBER OF PAR VALUE
SHARES SHARES
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common: Common: ---------- ---------
- ----------------------------------------------------------------------------------------------------------------------------
Class A Voting 3,760,000
- ----------------------------------------------------------------------------------------------------------------------------
Class B Non-Voting 40,000
- ----------------------------------------------------------------------------------------------------------------------------
Preferred: --------- Preferred: ---------- ---------
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
The foregoing amendment(s) will become effective when these Articles of
Amendment are filed in accordance with General Laws, Chapter 156B, Section 6
unless these articles specify, in accordance with the vote adopting the
amendment, a later effective date not more than thirty days after such filing,
in which event the amendment will become effective on such later date.
Later effective date:
SIGNED UNDER THE PENALTIES OF PERJURY, this 14th day of December, 1995.
/s/ Dominic Chan
................................................., *President/xxxxxxxxxxxx
Dominic Chan
/s/ Allen K. Deary
.................................................., *Clerk/xxxxxxxxxxxxxxx
Allen K. Deary
*Delete the inapplicable words
<PAGE>
THE COMMONWEALTH OF MASSACHUSETTS
ARTICLES OF AMENDMENT
(General Laws, Chapter 156B, Section 72)
===============================================
I hereby approve the within Articles of Amendment, and the filing fee in
the amount of $860.00 having been paid, said articles are deemed to have
been filed with me this 15th day of December, 1995.
Effective date:
WILLIAM FRANCIS GALVIN
Secretary of the Commonwealth
TO BE FILLED IN BY CORPORATION
Photocopy of document to be sent to:
Peter B. Tarr, Esq.
Hale and Dorr
60 State Street
Boston, MA 02109
Telephone: (617) 526-6000
<PAGE>
Federal Identification Federal Identification
No. 04-3126919 No. 26562472
-------------- -------------
COMMONWEALTH OF MASSACHUSETTS
- -------
Examiner William Francis Galvin
Secretary of the Commonwealth
One Ashburton Place, Boston, Massachusetts 02108-1512
ARTICLES OF xxxxxxxxxxxxxxx/ *MERGER
(General Laws, Chapter 156B, Section 79)
xxxxxxxxx*merger of Peritus Software Services, Inc.
-------------------------------
and
---
Vista Technologies Incorporated
-------------------------------
the constituent corporations, into
Peritus Software Services, Inc. .
-------------------------------
xxxxxxxxxxxxxxx*one of the constituent corporations organized under the
laws of: Massachusetts.
-------------
The undersigned officers of each of the constituent corporations certify
under the penalties of perjury as follows:
1. An agreement of xxxxxxxxxxxx *merger has been duly adopted in
compliance with the requirements of General Laws, Chapter 156B, Section
79, and will be kept as provided by Subsection (c) thereof. The
xxxxxxxxxxxxx *surviving corporation will furnish a copy of said
agreement to any of its stockholders, or to any person who was a
stockholder of any constituent corporation, upon written request and
without charge.
2. The effective date of the xxxxxxxxxxxxxx *merger determined
pursuant to the agreement of xxxxxxxxxx *merger shall be the date
approved and filed by the Secretary of the Commonwealth. If a later
effective date is desired, specify such date which shall not be more
than thirty days after the date of filing:
3. (For a merger)
**The following amendments to the Articles of Organization of the
surviving corporation have been effected pursuant to the agreement of
merger:
None
(For a consolidation)
(a) The purpose of the resulting corporation is to engage in the
C [_] following business activities:
P [_]
M [_] *Delete the inapplicable words.
RA [_] Note: If the space provided under any article or item on this form is
insufficient, additions shall be set forth on separate 8 1/2 x 11 sheets
of paper with a left margin of at least 1 inch. Additions to more than
one article may be made on a single sheet as long as each article
requiring each addition is clearly indicated.
- --------
P.C.
<PAGE>
(For a consolidation)
(b) State the total number of shares and the par value, if any, of each class of
stock, which the resulting corporation is authorized to issue:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------
WITHOUT PAR VALUE WITH PAR VALUE
- ------------------------------------------------------------------------------
TYPE NUMBER OF SHARES TYPE NUMBER OF SHARES PAR VALUE
- ------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common: Common:
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
Preferred: Preferred:
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
</TABLE>
**(c) If more than one class of stock is authorized, state a distinguishing
designation for each class and provide a description of the preferences, voting
powers, qualifications, and special or relative rights or privileges of each
class and of each series then established.
**(d) The restrictions, if any, on the transfer of stock contained in the
agreement of consolidation are:
**(e) Other lawful provisions, if any, for the conduct and regulation of the
business and affairs of the corporation, for its voluntary dissolution, or for
limiting, defining, or regulating the powers of the corporation, or of its
directors or stockholders, or of any class of stockholders:
Item 4 below may be deleted if the resulting/surviving corporation is organized
under the laws of a state other than Massachusetts.
4. The information contained in Item 4 is not a permanent part of the Articles
of Organization of the xxxxxxxxxxxxxxxx *surviving corporation.
(a) The street address (post office boxes are not acceptable) of the
xxxxxxxxxxxxxx *surviving corporation in Massachusetts is:
304 Concord Road, Billerica, MA 01821-3485
**If there are no provisions state "None."
<PAGE>
(b) The name, residential address and post office address of each director and
officer of the xxxxxxxxxxxxxxxxx* surviving corporation is:
<TABLE>
<CAPTION>
NAME RESIDENTIAL ADDRESS POST OFFICE
ADDRESS
<S> <C> <C> <C>
President: Dominic Chan 1196 North Road, Carlisle, MA 01741
Treasurer: Allen K. Deary 1115 North Road, Carlisle, MA 01741
Clerk: Allen K. Deary 1115 North Road, Carlisle, MA 01741
Directors: Art Carr 44 Donnelly Drive, Dover, MA 02030
Dominic Chan 1196 North Road, Carlisle, MA 01741
Allen K. Deary 1115 North Road, Carslisle, MA 01741
Robert Kelly 2 Day Street, Norfolk, MA 02056
Axel Leblois 62 Pond Road, Wellesley, MA 02181
Roland Pampel Prudential Center Apartments,
780 Boylston Street, Apt. 14H,
Boston, MA 02199
</TABLE>
(c) The fiscal year end (i.e. tax year) of the xxxxxxxxxxxx *surviving
corporation shall end on the last day of the month of: December.
(d) The name and business of the resident agent, if any, of the *surviving
corporation is:
None
Item 5 below may be deleted if the resulting/surviving corporation is organized
under the laws of Massachusetts.
xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx
xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx
xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx
xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx
xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx
xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx
xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx
xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx
FOR MASSACHUSETTS CORPORATIONS
The undersigned *President xxxxxxxxxx and *Clerk xxxxxxxxxxxxx of Peritus
-------
Software Services, Inc., a corporation organized under the laws of
- -----------------------
Massachusetts, further state under the penalties of perjury that the agreement
of xxxxxxxx *merger has been duly executed on behalf of such corporation and
duly approved in the manner required by General Laws, Chapter 156B, Section 78.
/s/Dominic Chan
......................................................, *President/xxxxxxxxxx
Dominic Chan
/s/Allen K. Deary
.........................................................., *Clerk/xxxxxxxxxx
Allen K. Deary
<PAGE>
FOR CORPORATIONS ORGANIZED IN A STATE OTHER THAN MASSACHUSETTS
The undersigned, +Adarsh K. Arora, President and ++David Jakopac,
-------------------------- --------------
Secretary, of Vista Technologies Incorporated, a corporation organized under the
- --------- -------------------------------
laws of Illinois, further state under the penalties of perjury that the
--------
agreement of xxxxxxxxxxx *merger has been duly adopted by such corporation in
the manner required by the laws of Illinois.
--------
+ Adarsh K. Arora
---------------
++ David Jakopac
-------------
*Delete the inappliable words.
+Specify the officer having powers and duties corresponding to those of the
president or vice president of a Massachusetts corporation organized under
General Laws, Chapter 156B ++Specify the officer having powers and duties
corresponding to the clerk or assistant clerk of such a Massachusetts
corporation.
<PAGE>
526968
THE COMMONWEALTH OF MASSACHUSETTS
ARTICLES OF *MERGER
(General Laws, Chapter 156B, Section 79)
================================================================================
I hereby approve the within Articles of xxxxxxxxxxxxx*Merger and, the
filing fee in the amount of $250.00, having been paid, said articles are
deemed to have been filed with me this 9th day of February, 1996.
WILLIAM FRANCIS GALVIN
Secretary of the Commonwealth
TO BE FILLED IN BY CORPORATION
Photocopy of document to be sent to:
Peter B. Tarr, Esq.
-------------------
Hale and Dorr
-------------
Boston, MA 02109
----------------
Telephone: (617) 526-6000
--------------
<PAGE>
FEDERAL IDENTIFICATION
NO. 04-3126919
- -------- THE COMMONWEALTH OF MASSACHUSETTS
Examiner William Francis Galvin
Secretary of the Commonwealth
One Ashburton Place, Boston, Massachusetts 02108-1512
ARTICLES OF AMENDMENT
(General Laws, Chapter 156B, Section 72)
- -------- We, Dominic Chan ,*President/xxxxxx
------------
Name
Approved and Allen K. Deary ,*Clerk/xxxxxxxxx
--------------
of Peritus Software Services, Inc. ,
-------------------------------
(Exact name of corporation)
located at: 304 Concord Road, Billerica, MA 01821-3485 ,
-------------------------------------------
(Street address of corporation in Massachusetts)
certify that these Articles of Amendment affecting articles numbered:
3 and 4
-------
(Number those articles 1, 2, 3, 4, 5, and/or 6 being amended)
of the Articles of Organization were duly adopted at a meeting held
on March 15, 1996, by vote of:
--------------
1,672,341 shares of Class A Voting Common Stock of 2,337,815 shares
--------- --------------------------- ---------
(type, class & series, if any)
outstanding
32,050 shares of Class B Non-Voting Common Stock of 39,715 shares
------ ------------------------------- ------
(type, class & series, if any)
outstanding, and
shares of of shares outstanding,
-------- -------------------- ---------
(type, class & series, if any)
C [_]
P [_] xxxxxxxxxxxxxxxx xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx/1/
M [_] being at least two-thirds of each type, class or series outstanding
R.A.[_] and entitled to vote thereon and of each type, class or series of
stock whose rights are adversely affected thereby/2/:
Article 3 is hereby amended as set forth below.
Article 4 is hereby amended by the addition of the provisions
set forth in the attached continuation sheet 4.
*Delete the inapplicable words. **Delete the inapplicable clause.
/1/For amendments adopted pursuant to Chapter 156B, Section 70.
/2/For amendments adopted pursuant to Chapter 156B, Section 71.
Note: If the space provided under any article or item on this form is
insufficient, additions shall be set forth on one side only of
separate 8 1/2 x 11 sheets of paper with a left margin of at least 1
------
inch. Additions to more than one article may be made on a single
sheet so long as P.C. each article requiring each addition is clearly
indicated.
<PAGE>
To change the number of shares and the par value (if any) of any type, class or
series of stock which the corporation is authorized to issue, fill in the
following:
<TABLE>
<CAPTION>
The total presently authorized is:
- ------------------------------------------------------------------------------
WITHOUT PAR VALUE STOCKS WITH PAR VALUE STOCKS
- ------------------------------------------------------------------------------
TYPE NUMBER OF TYPE NUMBER OF PAR VALUE
SHARES SHARES
- ------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common: Common: --------- ---------
- ------------------------------------------------------------------------------
Class A Voting 3,760,000
- ------------------------------------------------------------------------------
Class B Non-Voting 40,000
- ------------------------------------------------------------------------------
Preferred: ---------- Preferred: --------- ---------
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
<CAPTION>
Change the total authorized to:
- ------------------------------------------------------------------------------
WITHOUT PAR VALUE STOCKS WITH PAR VALUE STOCKS
- ------------------------------------------------------------------------------
TYPE NUMBER OF TYPE NUMBER OF PAR VALUE
SHARES SHARES
- ------------------------------------------------------------------------------
<S>
Common: Common: --------- --------
- ------------------------------------------------------------------------------
Class A Voting 9,828,313
- ------------------------------------------------------------------------------
Class B Non-Voting 275,000
- ------------------------------------------------------------------------------
Preferred: Preferred: --------- --------
- ------------------------------------------------------------------------------
Series A 1,903,525
Convertible
- ------------------------------------------------------------------------------
</TABLE>
<PAGE>
Continuation Sheet 4
- --------------------
SERIES A CONVERTIBLE PREFERRED STOCK
1. Number of Shares. The series of Preferred Stock designated and known
----------------
as "Series A Convertible Preferred Stock" shall consist of 1,903,525 shares.
2. Voting.
------
2A. General. Except as may be otherwise provided in these
-------
terms of the Series A Convertible Preferred Stock or by law, the Series A
Convertible Preferred Stock shall vote together with all other classes and
series of stock of the Corporation entitled to vote as a single class on all
actions to be taken by the stockholders of the Corporation, including, but not
limited to actions amending the Restated Articles of Organization of the
Corporation to increase the number of authorized shares of any class of common
stock (including, but not limited to, an increase in the number of authorized
shares of Class A Voting Common Stock, no par value (the "Class A Common Stock")
or any increase in the number of authorized shares of Class B Non-Voting Common
Stock" (the "Class B Non-Voting Common Stock") and, collectively with the Class
A Common Stock and any other classes of common stock, the "Common Stock"). Each
share of Series A Convertible Preferred Stock shall entitle the holder thereof
to such number of votes per share on each such action as shall equal the number
of shares of Class A Common Stock (including fractions of a share) into which
each share of Series A Convertible Preferred Stock is then convertible.
2B. Board Size. The Corporation shall not, without the written
----------
consent or affirmative vote of the holders of at least two-thirds of the then
outstanding shares of Series A Convertible Preferred Stock, given in writing or
by vote at a meeting, consenting or voting (as the case may be) separately as a
series, increase the maximum number of directors constituting the Board of
Directors to a number in excess of nine(9).
2C. Board Seats. The holders of the Series A Convertible Preferred
-----------
Stock, voting as a separate series, shall be entitled to elect two (2) directors
of the Corporation. The holders of the Series A Convertible Preferred Stock and
the Common Stock, voting together as a single class (with the Series A
Convertible Preferred Stock voting on an as converted basis), shall be entitled
to elect the other directors of the Corporation. Notwithstanding the foregoing
or anything else to the contrary provided in the Restated Articles of
Organization, as amended, if the Corporation fails or refuses, for any reason or
for no reason, to redeem on the Redemption Date (as defined in paragraph 7) all
of the then outstanding shares of Series A Convertible Preferred Stock in
accordance with the terms and provisions of paragraph 7, the holders of the
Series A Convertible Preferred Stock outstanding, any two directors shall have
the right to call a meeting of the Board of Directors or stockholders. At any
meeting (or in a written consent in lieu thereof) held for the purpose of
electing directors, the presence in person or by proxy (or the written consent)
of the holders of a majority of the shares of Series A convertible Preferred
Stock then outstanding shall constitute a quorum of the Series
<PAGE>
A Convertible Preferred Stock for the election of directors to be elected solely
by the holders of the Series A Convertible Preferred Stock or jointly by the
holders of the Series A Convertible Preferred Stock and the Class A Common
Stock. A vacancy in any directorship elected by the holders of the Series A
Convertible Preferred Stock shall be filed only by vote or written consent of
the holders of the Series A Convertible Preferred Stock and a vacancy in the
directorship elected jointly by the holders of the Series A Convertible
Preferred Stock and the Class A Common Stock shall be filled only by vote or
written consent of the Series A Convertible Preferred Stock and the Class A
Common Stock as provided above.
3. Dividends. The holders of the Series A Convertible Preferred Stock
---------
shall be entitled to receive, out of funds legally available therefor, when and
if declared by the Board of Directors, quarterly dividends (the "Accruing
Dividends") at the rate per annum of (a) $0.3825 per share plus (b) 10% per
annum of all previously accrued by unpaid Accruing Dividends from the preceding
March 15. Accruing Dividends shall accrue from day to day, whether or not earned
or declared, and shall be cumulative. The Board of Directors shall have no
obligation to declare any dividends.
4. Liquidation. Upon any liquidation, dissolution or winding up the
-----------
Corporation, whether voluntary or involuntary, the holders of the shares of
Series A Convertible Preferred Stock shall be entitled, before any distribution
or payment is made upon any stock ranking on liquidation junior to the Series A
Convertible Preferred Stock, to be paid an amount equal to the greater of (i)
$3.825 per share plus, in the case of each share, an amount equal to all
Accruing Dividends unpaid thereon (whether or not declared) and any other
dividends declared but unpaid thereon, computed to the date payment thereof is
made available, minus the product of (a) 0.366 multiplied by (b) the amount
remaining for distribution with respect to each share of Class A Common Stock
after payment is made to the holders of Series A Preferred Stock pursuant to
this subclause (i), or (ii) such amount per share as would have been payable had
each such share been converted to Class A Common Stock pursuant to paragraph 6
immediately prior to such liquidation, dissolution or winding up, and the
holders of Series A Convertible Preferred Stock shall not be entitled to any
further payment, such amount payable with respect to one share of Series A
Convertible Preferred Stock being sometimes referred to as the "Liquidation
Preference Payment" and with respect to all shares of Series A Convertible
Preferred Stock being sometimes referred to as the "Liquidation Preference
Payments". If upon such liquidation, dissolution or winding up of the
Corporation, whether voluntary or involuntary, the assets to be distributed
among the holders of Series A Convertible Preferred Stock shall be insufficient
to permit payment to the holders of Series A Convertible Preferred Stock of the
amount distributable as aforesaid, then the entire assets of the Corporation to
be so distributed shall be distributed ratably among the holders of Series A
Convertible Preferred Stock. Upon any such liquidation, dissolution or winding
up of the Corporation, after the holders of Series A Convertible Preferred Stock
shall have been paid in full the amounts to which they shall be entitled, the
remaining net assets of the Corporation may be distributed to the holders of
stock ranking on liquidation junior to the Series A Convertible Preferred Stock.
Written notice of such liquidation, dissolution or winding up, stating a payment
date, the amount of the Liquidation Preference Payments and the place where said
Liquidation Preference Payments shall be payable, shall be delivered in person,
mailed by certified or registered mail, return receipt requested, or sent by
telecopier
<PAGE>
or telex, not less than 20 days prior to the payment date stated therein, to the
holders of record of Series A Convertible Preferred Stock, such notice to be
addressed to each such holder at its address as shown by the records of the
Corporation. The consolidation or merger of the Corporation into or with any
other entity or entities which results in the exchange of outstanding shares of
the Corporation for securities or other consideration issued or paid or caused
to be issued or paid by any such entity or affiliate thereof (other than a
merger to reincorporate the Corporation in a different jurisdiction), and the
sale, lease abandonment, transfer or other disposition by the Corporation of all
or substantially all its assets, shall be deemed to be a liquidation,
dissolution or winding up of the Corporation within the meaning of the
provisions of this paragraph 4. For purposes hereof, the Common Stock shall rank
on liquidation junior to the Series A Convertible Preferred Stock.
5. Restrictions. At any time when at least 951,763 shares of Series A
------------
Convertible Preferred Stock are outstanding, except where the vote or written
consent of the holders of a greater number of shares of the Corporation is
required by law or by the Restated Articles of Organization, as amended, and in
addition to any other vote required by law or the Restated Articles of
Organization, as amended, without the approval of the holders of at least
two-thirds of the then outstanding shares of Series A Convertible Preferred
Stock, given in writing or by vote at a meeting, consenting or voting (as the
case may be) separately as a series, the Corporation will not:
5A. Create or authorize the creation of any additional class or
series of shares of stock unless the same ranks junior to the Series A
Convertible Preferred Stock as to the distribution of assets on the liquidation,
dissolution or winding up of the Corporation, or increase the authorized amount
of the Series A Convertible Preferred Stock or increase the authorized amount of
any additional class or series of shares of stock unless the same ranks junior
to the Series A Convertible Preferred Stock as to the distribution of assets on
the liquidation, dissolution or winding up of the Corporation, or create or
authorize any obligation or security convertible into shares of Series A
Convertible Preferred Stock or into shares of any other class or series of stock
unless the same ranks junior to the Series A Convertible Preferred Stock as to
the distribution of assets on the liquidation, dissolution or winding up of the
Corporation, whether any such creation, authorization or increase shall be by
means of amendment to the Restated Articles of Organization, as amended or by
merger, consolidation or otherwise;
5B. Consent to any liquidation, dissolution or winding up of the
Corporation or sell, lease, abandon, transfer or otherwise dispose of all or
substantially all its assets;
5C. Consolidate or merge into or with any other entity in which the
shares of Common Stock and Series A Convertible Preferred Stock of the
Corporation outstanding immediately prior to the close of the transaction
represent, or are converted into or exchanged for equity securities that
represent, less than a majority of the combined voting power of the equity
securities of the surviving or resulting entity immediately following the close
of the transaction;
<PAGE>
5D. Amend, alter or repeal its Amended and Restated Articles of
Organization if the effect would be detrimental or adverse in any manner with
respect to the rights of the holders of the Series A Convertible Preferred
Stock;
5E. Pay a dividend or make any distribution on, any shares of stock
other than the Series A Convertible Preferred Stock, except for dividends or
other distributions payable on the Common Stock solely in the form of additional
shares of Common Stock;
5F. Purchase or set aside any sums for the purchase of any shares of
stock other than the Series A Convertible Preferred Stock, other than (i) the
purchase of an aggregate of 189,588 shares of Common Stock (appropriately
adjusted to reflect the occurrence of any event described in subparagraph 6F) to
be purchased in connection with the closing of the initial sale of shares of
Common Stock (appropriately adjusted to reflect the occurrence of any event
described in subparagraph 6F) to be repurchased from Dominic K. Chan and sold to
employees of the Corporation at the same price.
5G. Redeem or otherwise acquire any shares of Series A Convertible
Preferred Stock except as expressly authorized in paragraph 7 hereof or pursuant
to a purchase offer made pro rata to all holders of the shares of Series A
Convertible Preferred Stock on the basis of the aggregate number of outstanding
shares of Series A Convertible Preferred Stock then held by each such holders.
6. Conversions. The holders of shares of Series A Convertible Preferred
-----------
Stock shall have the following conversion rights:
6A. Right to Convert. Subject to the terms and conditions of this
----------------
paragraph 6, the holder of any share or shares of Series A Convertible Preferred
Stock shall have the right, at its option at anytime, to convert any such shares
of Series A Convertible Preferred Stock (except that upon any liquidation of the
Corporation the right of conversion shall terminate at the close of business on
the business day fixed for payment of the amount distributable on the Series A
Convertible Preferred Stock) into such number of fully paid and nonassessable
shares of Class A Common Stock as is obtained by (i) multiplying the number of
shares of Series A Convertible Preferred Stock so to be converted by $2.80 and
(ii) dividing the result by the conversion price of $2.80 per share or, in case
an adjustment of such price has taken place pursuant to the further provisions
of this paragraph 6, then by the conversion price as last adjusted and in effect
at the date any share or shares of Series A Convertible Preferred Stock are
surrendered for conversion (such price, or such price as last adjusted, being
referred to as the "Conversion Price"). Such rights of conversion shall be
exercised by the holder thereof by giving written notice that the holder elects
to convert a sedated number of shares of Series A Convertible Preferred Stock
into Class A Common Stock and by surrender of a certificate or certificates for
the shares so to be converted to the Corporation at its principal office (or
such other office or agency of the Corporation as the Corporation may designate
by notice in writing to the holders of the Series A Convertible Preferred Stock)
at any time during its usual business hours on the date set forth in such
notice, together with a statement of the name or names (with address) in which
the certificate or certificates for shares of Class A Common Stock shall be
issued.
<PAGE>
6B. Issuance of Certificates; Time Conversion Effected. Promptly after
--------------------------------------------------
the receipt of the written notice referred to in subparagraph 6A and surrender
of the certificate or certificates for the share or shares of Series A
Convertible Preferred Stock to be converted, the Corporation shall issue and
deliver, or cause to be issued and delivered, to the holder, registered in such
name or names as such holder may director, a certificate or certificates for the
number of whole shares of Class A Common Stock issuable upon the conversion of
such share or shares of Series A Convertible Preferred Stock. To the extent
permitted by law, such conversion shall be deemed to have been effected and the
Conversion Price shall be determined as of the close of business on the date on
which such written notice shall have been received by the Corporation and the
certificate or certificates for such share or shares shall have been surrendered
as aforesaid, and at such time the rights of the holder of such share or shares
of Series A Convertible Preferred Stock shall cease, the person or person in
whose name or names any certificate or certificates for shares of Class A Common
Stock shall be issuable upon such conversion shall be deemed to have become the
holder or holders of record of the shares represented thereby.
6C. Fractional Shares; Dividends; Partial Conversion. No fractional
------------------------------------------------
shares shall be issued upon conversion of Series A Convertible Preferred Stock
into Class A Common Stock and no payment or adjustment shall be made upon any
conversion on account of any cash dividends on the Class A Common Stock issue
upon such conversion. At the time of each conversion, the Corporation shall pay
in cash an amount equal to all dividends, excluding Accruing Dividends, accrued
and unpaid on the shares of Series A Convertible Preferred Stock surrendered for
conversion to the date upon which such conversion is deemed to take place as
provided in subparagraph 6B. In case the number of shares of Series A
Convertible Preferred Stock represented by the certificate or certificates
surrendered pursuant to subparagraph 6A exceeds the number of shares converted,
the Corporation shall, upon such conversion, execute and deliver to the holder,
at the expense of the Corporation, a new certificate or certificates for the
number of shares of Series A Convertible Preferred Stock represented by the
certificate or certificates surrendered which are not to be converted. If any
fractional share of Class A Common Stock would, except for the provisions of the
first sentence of this subparagraph 6C, be delivered upon such conversion, the
Corporation, in lieu of delivering such fractional share of Class A Common Stock
would, except for the provisions of the first sentence of this subparagraph 6C,
be delivered upon such conversion, the Corporation, in lieu of delivering such
fractional share, shall pay to the holder surrendering the Series A Convertible
Preferred Stock for conversion an amount in cash equal to the current market
price of such fractional share as determined in good faith by the Board of
Directors of the Corporation .
6D. Adjustment of Price Upon Issuance of Common Stock. Except as
-------------------------------------------------
provided in subparagraph 6E and subject to paragraph 9, if and whenever the
Corporation shall issue or sell, or is, in accordance with subparagraphs 6D(1)
through 6D(7), deemed to have issued or sold, any shares of Common Stock for a
consideration per share less than the Conversion Price in effect immediately
prior to the time of such issue or sale, then forthwith upon such issue or sale,
the Conversion Price shall be reduced to the price determined by dividing (i) an
amount equal to the sum of (a) the number of shares of Common Stock outstanding
immediately prior to such issue or sale multiplied by the then existing
<PAGE>
Conversion Price and (b) consideration per share, if any, received by the
Corporation upon such issue or sale multiplied by the number of shares of Common
Stock issued or sold, by (ii) the total number of shares of Common Stock (or
Common Stock equivalent on an as converted basis) outstanding immediately after
such issue or sale.
For purposes of this subparagraph 6D, the following subparagraphs 6D(1)
to 6D(7) shall also be applicable:
6D(1) Issuance of Rights or Options. In case at any time the
-----------------------------
Corporation shall in any manner grant (whether directly or by assumption in
a merger or otherwise) any warrants or other rights to subscribe for or to
purchase, or any options for the purchase of, Common Stock or any stock or
security convertible into or exchangeable for Common Stock (such warrants,
rights or options being called "Options" and such convertible or
exchangeable stock or securities being called "Convertible Securities")
whether or not such Options or the right to convert or exchange any such
Convertible Securities are immediately exercisable, and the price per share
for which Common Stock is issuable upon the exercise of such Options or
upon the conversion or exchange of such Convertible Securities (determined
by dividing (i) the total amount, if any, received or receivable by the
Corporation as consideration for the granting of such Options, plus the
minimum aggregate amount of additional consideration payable to the
Corporation upon the exercise of all such Options, plus, the case of such
Options which relate to Convertible Securities, the minimum aggregate
amount of additional consideration, if any, payable upon the issue or sale
of such Convertible Securities and upon the conversion or exchange thereof,
by (ii) the total maximum number of shares of Common Stock issuable upon
the exercise of such Options or upon the conversion or exchange of all such
Convertible Securities issuable upon the exercise of such Option) shall be
less than the Conversion Price in effect immediately prior to the time of
the granting of such Options, then the total maximum number of shares of
Common Stock issuable upon the exercise of such Options or upon conversion
or exchange of the total maximum amount of such Convertible Securities
issuable upon the exercise of such Options shall be deemed to have been
issued for such price per share as of the date of granting of such Options
or the issuance of such Convertible Securities and thereafter shall be
deemed to be outstanding. Except as otherwise provided in subparagraph
6D(3), no adjustment of the Conversion Price shall be made upon the actual
issue of such Common Stock or such Convertible SECURITIES upon exercise of
such Options or upon the actual issue of such Common Stock upon conversion
or exchange of such Convertible Securities.
6D(2) Issuance of Convertible Securities. In case the Corporation
----------------------------------
shall in any manner issue (whether directly or by assumption in a merger or
otherwise) or sell any Convertible Securities, whether or not the rights to
exchange or convert any such Convertible Securities are immediately
exercisable, and the price per share for which Common Stock is issuable
upon such conversion or exchange (determined by dividing (i) the total
amount received or receivable by the Corporation as consideration for the
issue or sale of such Convertible Securities, plus the minimum aggregate
amount of additional consideration, if any, payable to the Corporation upon
the
<PAGE>
conversion or exchange thereof, by (ii) the total maximum number of shares
of Common Stock issuable upon the conversion or exchange of all such
Convertible Securities) shall be less than the Conversion Price in effect
immediately prior to the time of such issue or sale, then the total maximum
number of shares of Common Stock issuable upon conversion or exchange of
all such Convertible Securities shall be deemed to have been issued for
such price per share as of the date of the issue or sale of such
Convertible Securities and thereafter shall be deemed to be outstanding,
provided that (a) except as otherwise provided in subparagraph 6D(3), no
adjustment of the Conversion Price shall be made upon the actual issue of
such Common Stock upon conversion or exchange of such Convertibles
Securities and (b) if any such issue or sale of such Convertible Securities
is made upon exercise of any Options to purchase any such Convertible
Securities for which adjustments of the Conversion Price have been or are
to be made pursuant to other provisions of this subparagraph 6D, no further
adjustment of the Conversion Price shall be made by reason of such issue or
sale.
6D(3) Change in Option Price or Conversion Rate. Upon the
-----------------------------------------
happening of any of the following events, namely, if the purchase price
provided for in any Option referred to in subparagraph 6D(1), the
additional consideration, if any, payable upon the conversion or exchange
of any Convertible Securities referred to in subparagraph 6D(1) or 6D(2),
or the rate at which Convertible Securities referred to in subparagraph
6D(1) or 6D(2) are convertible into or exchangeable for the Common Stock
shall change at any time (including, but not limited to, changes under or
by reason of provisions designed to protect against dilution), the
Conversion Price in effect at the time of such event shall forthwith be
readjusted to the Conversion Price which would have been in effect at such
time had such Options or Convertible Securities still outstanding provided
for such changed purchase price, additional consideration or conversion
rate, as the case may be, at the time initially granted, issued or sold,
but only if as a result of such adjustment the Conversion Price then in
effect hereunder is thereby reduced; and on the termination of any such
Option or any such right to convert or exchange such Convertible
Securities, the Conversion Price then in effect hereunder shall forthwith
be increased to the Conversion Price which would have been in effect at the
time of such termination had such Option or Convertible Securities, to the
extent outstanding immediately prior to such termination, never been
issued.
6D(4) Stock Dividends. In case the Corporation shall declare a
---------------
dividend or make any other distribution upon any stock of the Corporation
payable in Common Stock (except for dividends or distributions upon the
Common Stock), Options or Convertible Securities, any Common Stock, Options
or Convertible Securities, as the case may be, issuable in payment of such
dividend or distribution shall be deemed to have been issued or sold
without consideration.
6D(5) Consideration for Stock. In case any shares of Common Stock,
-----------------------
Options or Convertible Securities shall be issued or sold for cash, the
consideration received therefor shall be deemed to be the amount received
by the Corporation therefor, without deduction therefrom of any expenses
incurred or any underwriting
<PAGE>
commissions or concessions paid or allowed by the Corporation in connection
therewith. In case any shares of Common Stock, Options or Convertible
Securities shall be issued or sold for a consideration other than cash, the
amount of the consideration other than cash received by the Corporation
shall be deemed to be the fair value of such consideration as determined in
good faith by the Board of Directors of the Corporation, without deduction
of any expenses incurred or any underwriting commissions or concessions
paid or allowed by the Corporation in connection therewith. In case any
Options shall be issued in connection with the issue and sale of other
securities of the Corporation, together comprising one integral transaction
in which no specific consideration is allocated to such Options by the
parties thereto, such Options shall be deemed to be deemed to have been
issued for such consideration as determined in good faith by the Board of
Directors of the Corporation.
6D(6) Record Date. In case the Corporation shall take a record of
-----------
the holders of its Common Stock for the purpose of entitling them (i) to
received a dividend or other distribution payable in Common Stock, Options
or Convertible Securities or (ii) to subscribe for or purchase Common
Stock, Options or Convertible Securities, then such record date shall be
deemed to be the date of the issue or sale of the shares of Common Stock
deemed to have been issued or sold upon the declaration of such dividend or
the making of such other distribution or the date of the granting of such
right of subscription or purchase, as the case may be.
6D(7) Treasury Shares. The number of shares of Common Stock
---------------
outstanding at any given time shall not include shares owned or held by or
for the account of the Corporation, and the disposition of any such shares
shall be considered an issue or sale of Common Stock for the purpose of
this subparagraph 6D.
6E. Certain Issues of Common Stock Excepted. Anything herein to the
---------------------------------------
contrary notwithstanding, the Corporation shall not be required to make any
adjustment of the Conversion Price in the case of the issuance from and after
the date of filing of these terms of the Series A Convertible Preferred Stock of
(i) up to an aggregate of 2,061,025 shares (approximately adjusted to reflect
the occurrence of any event described in subparagraph 6F) of the Common Stock to
directors, officers, employees or consultants of the Corporation in connection
with their service as directors of the Corporation, their employment by the
Corporation or their retention as consultants by the Corporation, and (ii) up to
100,000 shares (appropriately adjusted to reflect the occurrence of any event
described in subparagraph 6F) of Common Stock to officers and employees of the
Corporation, provided that a like number of shares of Common Stock have been
repurchased by the Corporation from Dominic K. Chan, plus the issuance of up to
312,500 shares (appropriately adjusted to reflect the occurrence of any event
described in subparagraph 6F) of Common Stock issuable upon the exercise of
warrants outstanding as of March 15, 1996, plus such number of shares of Common
Stock which are repurchased by the Corporation and at repurchase prices not
exceeding the respective original purchase prices paid by such persons to the
Corporation therefor.
<PAGE>
6F. Subdivision or Combination of Common Stock. In case the
------------------------------------------
Corporation shall at any time subdivide (by any stock split, stock dividend or
otherwise) its outstanding shares of Common Stock into a greater number of
shares, the Conversion Price in effect immediately prior to such subdivision
shall be proportionately reduced, and, conversely, in case the outstanding
shares of Common Stock shall be combined into a smaller number of shares, the
Conversion Price in effect immediately prior to such combination shall be
proportionately increased. In the case of any such subdivision, no further
adjustment shall be made pursuant to subparagraph 6D(4) by reason thereof.
6G. Reorganization or Reclassification. If any capital reorganization
----------------------------------
or reclassification of the capital stock of the Corporation shall be effected in
such a way that holders of Common Stock shall be entitled to receive stock,
securities or assets with respect to or in exchange for Common Stock, then, as a
condition of such reorganization or reclassification, lawful and adequate
provisions shall be made whereby each holder of a share or shares of Series A
Convertible Preferred Stock shall thereupon have the right to receive, upon the
basis and upon the terms and conditions specified herein and in lieu of the
shares of Class A Common Stock immediately theretofore receivable upon the
conversion of such share or shares of Series A Convertible Preferred Stock, such
shares of stock, securities or assets as may be issued or payable with respect
to or in exchange for a number of outstanding shares of such Class A Common
Stock equal to the number of shares of such Common Stock immediately thereto
fore receivable upon such conversion had such reorganization or reclassification
not taken place, and in any such case appropriate provisions shall be made with
respect to the rights and interests of such holder to the end that the provision
thereof (including without limitation provisions for adjustments of the
Conversion Price) shall thereafter be applicable, as nearly as may be, in
relation to any shares of stock, securities or assets thereafter deliverable
upon the exercise of such conversion rights.
6H. Failure to Redeem. If the Corporation fails, for any reason or for
-----------------
no reason, to redeem on the Redemption Date (as defined in paragraph 7) all of
the then outstanding shares of Series A Convertible Preferred Stock in
accordance with the terms and conditions of paragraph 7, the Conversion Price
then in effect shall be immediately reduced to an amount equal to 90% thereof.
Thereafter, until such redemption has been made in full in accordance with such
terms and conditions, the Conversion Price shall be further reduced on the 90th
day following the Redemption Date and at the end of each 90-day period
thereafter to an amount equal to 90% of the Conversion Price in effect
immediately prior to each such reduction.
6I. Notice of Adjustment. Upon any adjustment of the Conversion Price,
--------------------
then and in each such case the Corporation shall give written notice thereof, by
delivery in person, certified or registered mail, return receipt requested,
telecopier or telex, addressed to each holder of shares of Series A Convertible
Preferred Stock at the address of such holder as shown on the books of the
Corporation, which notice shall state the Conversion Price resulting from such
adjustment, setting forth in reasonable detail the method upon which such
calculation is based.
6J. Other Notices. In case at anytime:
-------------
<PAGE>
(i) the Corporation shall declare any dividend upon its Common
Stock payable in cash or stock or make any other distribution to the
holders of its Common Stock;
(ii) the Corporation shall offer for subscription pro rata to the
holders of its Common Stock any additional shares of stock of any class or
other rights;
(iii) there shall be any capital reorganization or
reclassification of the capital stock of the Corporation, or a
consolidation or merger of the Corporation with or into another entity or
entities, or a sale, lease, abandonment, transfer or other disposition of
all or substantially all its assets; or
(iv) there shall be a voluntary or involuntary dissolution,
liquidation or winding up of the Corporation;
then, in any one or more of said cases, the Corporation shall given, by delivery
in person, certified or registered mail, return receipt requested, telecopier or
telex, addressed to each holder of any shares of Series A Convertible Preferred
Stock at the address of such holder as shown on the books of the Corporation,
(a) at least 20 days' prior written notice of the date on which the books of the
Corporation shall close or a record shall be taken for such dividend,
distribution or subscription rights or for determining rights to vote in respect
of any such reorganization, reclassification, consolidation, merger,
disposition, dissolution, liquidation or winding up and (b) in the case of any
such reorganization, reclassification, consolidation, merger, disposition,
dissolution, liquidation or winding up, at least 20 days' prior written notice
of the date which the same shall take place. Such notice in accordance with the
foregoing clause (a) shall also specify, in the case of any such dividend,
distribution or subscription rights, the date on which the holders of Common
Stock shall be entitled thereto and such notice in accordance with the foregoing
clause (b) shall also specify the date on which the holders of Common Stock
shall be entitled to exchange their Common Stock for securities or other
property deliverable upon such reorganization, reclassification, consolidation,
merger, disposition, dissolution, liquidation or winding up, as the case may be.
6K. Stock to be Reserved. The Corporation will at all times
--------------------
reserve and keep available out of its authorized Common Stock, solely for the
purpose of issuance upon the conversion of Series A Convertible Preferred Stock
as herein provided, such number of shares of Class A Common Stock as shall then
be issuable upon the conversion of all outstanding shares of Series A
Convertible Preferred Stock. The Corporation covenants that all shares of Class
A Common Stock which shall be so issued shall be duly and validly issued and
fully paid and nonassessable and free from all taxes, liens and charges with
respect to the issue thereof, and, without limiting the generality of the
foregoing, the Corporation covenants that it will from time to time take all
such action as may be requisite to assure that the par value per share of the
Class A Common Stock is at all times equal to or less than the Conversion Price
in effect at the time. The Corporation will take all such action as may be
necessary to assure that all such shares of Class A Common Stock may be so
issued without violation of any applicable law or regulation, or of any
requirement of any additional securities exchange upon which the Common Stock
may be listed. The Corporation will not take any action
<PAGE>
which results in any adjustment of the Conversion Price of the total number of
shares of Class A Common Stock issued and issuable after such action upon
conversion of the Series A Convertible Preferred Stock would exceed the total
number of shares of Class A Common Stock then authorized by the Restated
Articles of Organization, as amended.
6L. No Reissuance of Series A Convertible Preferred Stock. Shares of
-----------------------------------------------------
Series A Convertible Preferred Stock which are converted into shares of Class A
Common Stock as provided herein shall not be reissued.
6M. Issue Tax. The issuance of certificates for shares of Class A
---------
Common Stock upon conversion of Series A Convertible Preferred Stock shall be
made without charge to the holders thereof for any issuance tax in respect
thereof, provided that the Corporation shall not be required to pay any tax
which may be payable in respect of any transfer involved in the issuance and
delivery of any certificate in a name other than that of the holder of the
Series A Convertible Preferred Stock which is being converted.
6N. Closing of Books. The Corporation will at no time close its
----------------
transfer books against the transfer of any Series A Convertible Preferred Stock
or of any shares of Class A Common Stock issued or issuable upon the conversion
of any shares of Series A Convertible Preferred Stock in any manner which
interferes with the timely conversion of such Series A Convertible Preferred
Stock, except as may otherwise be required to comply with applicable securities
laws.
6O. Definition of Common Stock. As used in this paragraph 6, the term
--------------------------
"Common Stock" shall mean and include the Corporation's authorized Class A
Common Stock, no par value per share, and the Corporation's Class B Common
Stock, no par value per share (each as constituted on the date of filing of
these terms of the Series A Convertible Preferred Stock), unless otherwise
specifically limited to "Class A Common Stock", and shall also include any
capital stock of any class of the Corporation thereafter authorized which shall
not be limited to a fixed sum or percentage in respect of the rights of
shareholders thereof to participate in dividends or in the distribution of
assets upon the voluntary or involuntary liquidation, dissolution or winding up
of the Corporation; provided that the shares of Class A Common Stock receivable
upon conversion of shares of Series A Convertible Preferred Stock shall include
only shares designated as Class A Common Stock of the Corporation on the date of
filing of this instrument, or in case of any reorganization or reclassification
of the outstanding shares thereof, the stock, securities or assets provided for
in subparagraph 6G.
6P. Mandatory Conversion. If at any time the Corporation shall effect
--------------------
a firm commitment underwritten public offering of shares of Common Stock in
which (i) the aggregate price paid for such shares by the public shall be at
least $15 million and (ii) the price paid by the public for such shares shall be
at least $5.60 per share (appropriately adjusted to reflect the occurrence of
any event described in subparagraph 6F), then effective upon the closing of the
sale of such shares by the Corporation pursuant to such public offering, all
outstanding shares of Series A Convertible Preferred Stock shall automatically
convert to shares of Class A Common Stock on the basis set forth in this
paragraph 6. Holders of shares of Series A Convertible Preferred Stock so
converted may deliver to the
<PAGE>
Corporation at its principal office (or such other office or agency of the
Corporation as the Corporation may designate by notice in writing to such
holders) during its usual business hours, the certificate or certificates for
the shares so converted. As promptly as practicable thereafter, the Corporation
shall issue and deliver to such holder a certificate or certificates of the
number of whole shares of Class A Common Stock to which such holder is entitled,
together with any cash dividends and payment in lieu of fractional shares to
which such holder may be entitled pursuant to subparagraph 6C. Until such time
as a holder of shares of Series A Convertible Preferred Stock shall surrender
his or its certificates therefor as provided above, such certificates shall be
deemed to represent the shares of Class A Common Stock to which such holder
shall be entitled upon the surrender thereof.
7. Redemption. The shares of Series A Convertible Preferred Stock shall
----------
be redeemed as follows:
7A. Option Redemption. The Corporation shall not have the right to
-----------------
call or redeem at any time all or any shares of Series A Convertible Preferred
Stock. Subject to the conditions set forth in this paragraph 7, upon receiving
notice (the "Notice") from the holders of a 66-2/3% of the then outstanding
shares of the Series A Convertible Preferred Stock, the Corporation shall
redeem, to the extent permitted by law, all of the shares of the then
outstanding shares of Series A Convertible Preferred Stock in three annual
installments as follows:
<TABLE>
<CAPTION>
Percentage of Shares of Series A
Convertible Preferred Stock then
Date of Redemption Outstanding to be Redeemed
- ------------------ --------------------------
<S> <C>
March 15, 2001 33-1/3% of all shares of Series A
Convertible Preferred Stock Outstanding on
March 15, 2001.
March 15, 2002 50% of all the shares of Series A
Convertible Preferred Stock outstanding on
March 15, 2002.
March 15, 2003 100% of all the shares of Series A
Convertible Preferred Stock outstanding on
March 15, 2003.
</TABLE>
7B. Redemption Price and Payment. Notwithstanding anything to the
----------------------------
contrary in this paragraph 7, the Corporation shall only be obligated to redeem
the Series A Convertible Preferred Stock with respect to each holder if, at the
time of such redemption, the holder also presents for redemption 0.366 shares of
Class A Common Stock for each shares of Series A Convertible Preferred Stock to
be redeemed. The Corporation shall be required to redeem the Series A
Convertible Preferred Stock according to the schedule set forth above and the
accompanying Class A Common Stock presented for redemption. The shares of Series
A Convertible Preferred Stock to be redeemed on any Redemption Date shall be
<PAGE>
redeemed by paying for each share in cash an amount equal to $2.80 per share
plus, in the case of each share, an amount equal to all dividends, including
Accruing Dividends, declared but unpaid thereon, computed to such Redemption
Date, such amount being referred to as the "Redemption Price". The shares of
Class A Common Stock to be redeemed on any Redemption Date shall be redeemed by
paying for each share in cash an amount equal to $2.80 per share. Such payments
shall be made in full on the applicable Redemption Date to the holders entitled
thereto. Notwithstanding the foregoing, upon delivery of a written notice to the
Company (a "Tax Notice"), holders of a majority of the Series A Convertible
Preferred Stock shall have the right, on any of the Redemption Dates set forth
above, to sell additional shares of Series A Convertible Preferred Stock to the
Company so that such redemption will be treated as an "exchange" under Section
302(a) and (b) of the Internal Revenue Code of 1986, as amended; provided,
however, that the Corporation shall only be obligated to redeem the Series A
Convertible Preferred Stock with respect to each holder if, at the time of such
redemption, the holder presents for redemption 0.366 shares of Class A Common
Stock for each share of Series A Convertible Preferred Stock to be redeemed. The
Corporation shall be required to redeem such accompanying Class A Common Stock
presented for redemption. If holders of a majority of the Series A Convertible
Preferred Stock delivered a Tax Notice to the Company as provided above, the
Company shall redeem each share of Series A Convertible Preferred Stock set
forth in the Tax Notice by paying the Redemption Price for each accompanying
share of Class A Common Stock. At its election, the Company may satisfy its
obligation to redeem the shares of Series A Convertible Preferred Stock set
forth in the Tax Notice and the accompanying shares of Class A Common Stock by
delivering to the holders of the Series A Convertible Preferred Stock a
promissory note of the Company, being interest at 10%, for the full amount of
the Redemption Price of the shares set forth in the Tax Notice and the amount
due with respect to the accompanying shares of Class A Common Stock to be
redeemed, and due and payable on such Redemption Dates as the shares set forth
in the Tax Notice could have been redeemed pursuant to paragraph 7A; provided,
however, that the ability of the Company to issue a promissory note to cover the
redeemed shares of Series A Convertible Preferred Stock set forth in the Tax
Notice and the accompanying shares of Class A Common Stock to be redeemed will
be subject to compliance by the Company with the General Corporation Law of the
Commonwealth of Massachusetts.
7C. Redemption Mechanics. At least 20 but not more than 30 days prior
--------------------
to each Redemption Date, written notice (the "Redemption Notice") shall be given
by the Corporation by delivery in person, certificate or registered mail, return
receipt requested, telecopier or telex, to each holder of record (at the close
of business on the business day next preceding the day on which the Redemption
Notice is given) of shares of Series A Convertible Preferred Stock notifying
such holder of the redemption and specifying the Redemption Price, such
Redemption Date, the number of shares of Series A Convertible Preferred Stock to
be redeemed from such holder (computered on a pro rata basis in accordance with
the number of such shares held by all holders thereof), the number of
accompanying shares of Class A Common Stock to be redeemed from such holder and
the place where said Redemption Price shall be payable. The Redemption Notice
shall be addressed to each holder at his address as shown by the records of the
Corporation. From and after the close of business on a Redemption Date, unless
there shall have been a default in the payment of the Redemption Price, all
rights of holders of shares of Series A Convertible Preferred Stock (except that
right
<PAGE>
to receive the Redemption Price) shall cease with respect to the shares to be
redeemed on such Redemption Date, and such shares shall not thereafter be
transferred on the books of the Corporation or be deemed to be outstanding for
any purpose whatsoever. If the funds of the Corporation legally available for
redemption of shares of Series A Convertible Preferred Stock and the
accompanying Class A Common Stock on a Redemption Date are insufficient to
redeem the total number of shares of Series A Convertible Preferred Stock and
the accompanying Class A Common Stock to be redeemed on such Redemption Date,
the holders of such shares shall share ratably in any funds legally available
for redemption of such shares according to the respective amounts which would be
payable to them if the full number of shares to be redeemed on such Redemption
Date were actually redeemed. The shares of Series A Convertible Preferred Stock
required to be redeemed but not so redeemed shall raman outstanding and entitled
to all rights and preferences provided herein. At any time thereafter when
additional funds of the Corporation are legally available for the redemption of
such shares of Series A Convertible Preferred Stock together with the
accompanying Class A Common Stock, such funds will be used, at the end of the
next succeeding fiscal quarter, to redeem the balance of such shares, or such
portion thereof for which funds are then legally available, on the basis set
forth above.
7D. Redeemed or Otherwise Acquired Shares to be Retired. Any shares of
---------------------------------------------------
Series A Convertible Preferred Stock redeemed pursuant to this paragraph 7 or
otherwise acquired by the Corporation in any manner whatsoever shall be canceled
and shall not under any circumstances be reissued; and the Corporation may from
time to time take such appropriate corporate action as may be necessary to
reduce accordingly the number of authorized shares of Series A Convertible
Preferred Stock.
8. Amendments. No provision of these terms of the Series A Convertible
----------
Preferred Stock may be amended, modified or waived without the written consent
or affirmative vote of the holders of at least two-thirds of the then
outstanding shares of Series A Convertible Preferred Stock.
9. Special Mandatory Conversion. (a) If any holder of shares of Series A
----------------------------
Convertible Preferred Stock is entitled or otherwise afforded the right to
exercise the right of participation (the "Right of Participation") as set forth
in Article V of that Certain Series A Convertible Preferred Stock and Class A
Common Stock Purchase Agreement between the Corporation and the Purchasers
listed on Schedule I thereto dated March 15, 1996 (the "Purchase Agreement"),
with respect to any equity financing (the "Equity Financing") of the Corporation
which would result in the reduction of the Series A Conversion Price, and (i)
the Equity Financing has been approved by the holders of at least fifty-one
percent (51%) in interest of the then outstanding shares of Series A Convertible
Preferred Stock (but excluding from such calculation any holders form whom the
right of Participation has been waived pursuant to subsection (iii) below), (ii)
the Corporation has fully complied in all respect with its obligations pursuant
to Article V of the Purchase Agreement in respect thereof, (iii) the provisions
of the Right of Participation set forth in Article V of the Purchase Agreement
have not been waived at the request of the Corporation by such holder, and (iv)
the holder is not prohibited by government regulation from participating in the
Equity Financing, if such holder (a "Non-Participating Holder") does not be
exercise of such holder's Right of
<PAGE>
Participation to acquire his Special Proportionate Percentage (as hereafter
defined) of the Allocated Offered Securities (as hereinafter defined) offered to
the holders of the Series A Convertible Preferred Stock in such Equity Financing
(a "Mandatory Offering"), a portion (the "Non-Participating Portion") of such
holder's shares of Series A Convertible Preferred Stock shall automatically and
without further action on the part of such holder be converted effective subject
to and concurrently with consummation of the Mandatory Offering (the "Mandatory
Offering Date") as follows: the Non-Participating Portion of all shares of
Series A Convertible Preferred Stock held by such Non-Participating Holder shall
be converted into a corresponding number of shares of a newly created series of
Preferred Stock (having such number of shares as the Board of Directors may by
resolution fix) which such series shall be identified in all respect to the
Series A Convertible Preferred Stock, except that the conversion price of such
series shall be fixed immediately prior to the Mandatory Offering Date and shall
be subject to no further adjustments in a manner similar to that provided in
paragraph 6D. The Board of Directors shall take all necessary actions to
designate such new series. Upon such conversion, the shares of Series A
Convertible Preferred Stock so converted shall be canceled and not subject to
reissuance. As used in this paragraph 9, the following terms shall have the
following respect meanings:
(1) "Allocated Offered Securities" shall mean that portion of the
gross amount of Offered Securities which has expressly been allocated for
purchase by the holders of the Series A Convertible Preferred Stock as a group,
which allocation has been expressly approved by the holders of at least fifty-
one percent 51% in interest of the then outstanding shares of Series A
Convertible Preferred Stock (as contemplated by clause (i) of this paragraph
9(a)), it being understood that for purposes of this paragraph 9(a) that
Allocated Offered Securities may represent an amount of Offered Securities that
is less (but in no event greater) than the amount of Offered Securities which
the Corporation is otherwise required to offer to the holders of Series A
Convertible Preferred Stock pursuant to Article V of the Purchase Agreement; and
(2) "Special Proportionate Percentage" shall mean as to a holder of
Series A Convertible Preferred Stock, that percentage figure which expresses the
ratio which (x) the number of shares of outstanding Common Stock then owned by
such holder bears to (y) the aggregate number of shares of outstanding Common
Stock then owned by all holders of shares of Series A Convertible Preferred
Stock. For purposes solely of the computation required for determination of the
Special Proportionate Percentage, the holders of outstanding Series A
Convertible Preferred Stock shall be treated as having converted all such
outstanding Series A Convertible Preferred Stock into shares of Common Stock at
the rate at which such securities are convertible into Common Stock in effect at
the time of such Equity Financing.
(3) "Non-Participating Portion" shall mean a percentage equal to 100
minus that percentage of its Special Proportionate Percentage as to which such
holder has, in fact, exercised its Right of Participation to acquire the
Allocated Offered Securities.
(b) The holder of any shares of Series A Convertible Preferred Stock
converted pursuant to paragraph 9(a) hereof, shall deliver to the Corporation
during regular business hours at the office of any transfer agent of the
Corporation for the Series A Convertible
<PAGE>
Preferred Stock, or at such other place as may be designed by the Corporation,
the certificate or certificates for the shares so converted, duly endorsed or
assigned in blank or to the Corporation. As promptly as practicable thereafter,
the Corporation shall issue and deliver to such holder, at the place designated
by such holder, a certificate or certificates for the number of full shares of
the new series of Preferred Stock to which such holder is entitled. The person
in whose name the certificate for such new series of Preferred stock is to be
issued shall be deemed to have become a stockholder of record on the Mandatory
Offering Date unless the transfer books of the Corporation are closed on that
date, in which event he shall be deemed to have become a stockholder of record
on the next succeeding date on which the transfer books are open.
(c) In the event that at any time the Special Mandatory Conversion set
forth in this paragraph 9 shall not be effective as to shall shares of the
Series A Convertible Preferred Stock then outstanding, the Board of Directors
shall take all necessary actions to designate new series of Preferred Stock
(having such distribute designations and number of shares as the Board of
Directors may be resolution fix) on each such subsequent occasion that (i) any
Equity Financing occurs, and (ii) any holder of Series A Convertible Preferred
Stock does not by exercise of such holders' Right of Participation acquire his
Special Proportionate Percentage of the Allocated Offered Securities then so
offered to the holders of the Series A Convertible Preferred Stock. Each share
of such Non-Participating Holder's shares of Series A Convertible Preferred
Stock shall be converted into one share of such newly-created series of
Preferred Stock concurrently with the consummation of the subject Mandatory
Offering. Such new series of Preferred Stock shall be identical in all respects,
except with respect to the respective Conversion Price therein effect, to the
new series of Preferred Stock created pursuant to the provisions of paragraph
9(a).
<PAGE>
The foregoing amendment(s) will become effective when these Articles of
Amendment are filed in accordance with General Laws, Chapter 156B, Section 6
unless these articles specify, in accordance with the vote adopting the
amendment, a later effective date not more than thirty days after such filing,
in which event the amendment will become effective on such later date.
Later effective date:
SIGNED UNDER THE PENALTIES OF PERJURY, this 15th day of March, 1996.
/s/ Dominic Chan
...................................................., *President/xxxxxxxxxx
Dominic Chan
/s/ Allen K. Deary
...................................................., *Clerk/xxxxxxxxxxxxxx
Allen K. Deary
*Delete the inapplicable words
<PAGE>
THE COMMONWEALTH OF MASSACHUSETTS
ARTICLES OF AMENDMENT
(General Laws, Chapter 156B, Section 72)
================================================================================
I hereby approve the within Articles of Amendment, and the filing fee in the
amount of $8,306.84 having been paid said articles are deemed to have been filed
with me this 15th day of March, 1996.
Effective date:
WILLIAM FRANCIS GALVIN
Secretary of the Commonwealth
TO BE FILLED IN BY CORPORATION
Photocopy of document to be sent to:
Peter B. Tarr, Esq.
------------------- ------
Hale and Dorr
------------- ------
60 State Street
--------------- ------
Boston, MA 02109
----------------- ------
Telephone (617) 526-6000
------------------------ ------
<PAGE>
FEDERAL IDENTIFICATION
NO. 04-3126919
-------------------
- ---------- THE COMMONWEALTH OF MASSACHUSETTS
Examiner William Francis Galvin
Secretary of the Commonwealth
One Ashburton Place, Boston, Massachusetts 02108-1512
ARTICLES OF AMENDMENT
(General Laws, Chapter 156B, Section 72)
- ---------- We, Dominic Chan ,*President/xxxxxx
------------
Name
Approved and Allen K. Deary , *Clerk/xxxxxxxxx
--------------
of Peritus Software Services, Inc.
-------------------------------
(Exact name of corporation)
located at: 304 Concord Road, Billerica, MA 01821-3485
-------------------------------------------
(Street address of corporation in Massachusetts)
certify that these Articles of Amendment affecting articles
numbered:
3 and 4
(Number those articles 1, 2, 3, 4, 5, and/or 6 being
amended)
of the Articles of Organization were duly adopted at a meeting
held on October 28, 1996, by vote of:
----------------
5,060,303 shares of Class A Voting Common Stock of 5,778,602
---------------------------
(type, class & series, if any)
shares outstanding,
76,602 shares of Class B Non-Voting Common Stock of 99,290
-------------------------------
(type, class & series, if any)
shares outstanding, and
1,690,972 shares of Series A Convertible Preferred of
------------------------------
(type, class & series, if any)
1,903,525 shares outstanding,
C [_]
P [_] xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx/1/
M [_] being at least two-thirds of each type, class or series
outstanding and entitled to vote thereon and of each type,
R.A. [_] class or series of stock whose rights are adversely affected
thereby/2/:
*Article 3 is hereby amended as set forth herein.
*Article 4 is hereby amended by deleting the provisions of
said Article 4 commencing with the heading SERIES A
CONVERTIBLE PREFERRED STOCK and inserting in lieu thereof
the provisions set forth on the attached Continuation Sheet
4.
*Delete the inapplicable words. **Delete the inapplicable
clause.
/1/For amendments adopted pursuant to Chapter 156B, Section
70.
/2/For amendments adopted pursuant to Chapter 156B, Section
71.
Note: If the space provided under any article or item on this
form is insufficient, additions shall be set forth on one side
only of separate 8 1/2 x 11 sheets of paper with a left margin
of at least 1 inch. Additions to more than one article may be
made on a single sheet so long as each article requiring each
addition is clearly indicated.
<PAGE>
To change the number of shares and the par value (if any) of any type, class or
series of stock which the corporation is authorized to issue, fill in the
following:
The total presently authorized is:
<TABLE>
<CAPTION>
WITHOUT PAR VALUE STOCKS WITH PAR VALUE STOCKS
- ---------------------------------------------------------------------------------------------------------------
TYPE NUMBER OF TYPE NUMBER OF PAR VALUE
SHARES SHARES
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common: Common:
- ---------------------------------------------------------------------------------------------------------------
Class A Voting 9,828,313
- ---------------------------------------------------------------------------------------------------------------
Class B Non-Voting 275,000
- ---------------------------------------------------------------------------------------------------------------
Preferred: Preferred:
- ---------------------------------------------------------------------------------------------------------------
Series A Convertible 1,903,525
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Change the total authorized to:
- ---------------------------------------------------------------------------------------------------------------
WITHOUT PAR VALUE STOCKS WITH PAR VALUE STOCKS
- ---------------------------------------------------------------------------------------------------------------
TYPE NUMBER OF TYPE NUMBER OF PAR VALUE
SHARES SHARES
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common: Common:
- ---------------------------------------------------------------------------------------------------------------
Class A Voting 12,474,000
- ---------------------------------------------------------------------------------------------------------------
Class B Non-Voting 275,000
- ---------------------------------------------------------------------------------------------------------------
Preferred: Preferred:
- ---------------------------------------------------------------------------------------------------------------
Series A Convertible 1,903,525
Preferred
- ---------------------------------------------------------------------------------------------------------------
Series B Convertible 1,818,182
Preferred
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
CONTINUATION SHEET 4
- --------------------
PREFERRED STOCK
1. Number of Shares. The Preferred shall consist of 3,721,707 shares,
----------------
1,903,525 of which shall be designated and known as "Series A Convertible
Preferred Stock" and 1,818,182 of which shall be designated and known as "Series
B Convertible Preferred Stock".
2. Voting.
------
2A. General. Except as may be otherwise provided in these
-------
terms of the Preferred Stock or by law, the Preferred Stock shall vote together
with all other classes and series of stock of the Corporation entitled to vote
as a single class on all actions to be taken by the stockholders of the
Corporation, including, but not limited to actions amending the Restated
Articles of Organization of the Corporation to increase the number of authorized
shares of any class of common stock (including, but not limited to, an increase
in the number of authorized shares of Class A Voting Common Stock, no par value
(the "Class A Common Stock") or any increase in the number of authorized shares
of Class B Non-Voting Common Stock" (the "Class B Non-Voting Common Stock") and,
collectively with the Class A Common Stock and any other classes of common
stock, the "Common Stock"). Each share of Preferred Stock shall entitle the
holder thereof to such number of votes per share on each such action as shall
equal the number of shares of Class A Common Stock (including fractions of a
share) into which each share of Preferred Stock is then convertible.
2B. Board Size. The Corporation shall not, without the written
----------
consent or affirmative vote of the holders of at least two-thirds of the then
outstanding shares of Series A Convertible Preferred Stock, given in writing or
by vote at a meeting, consenting or voting (as the case may be) separately as a
series, increase the maximum number of directors constituting the board of
Directors to a number in excess of nine (9).
2C. Board Seats. The holders of the Series A Convertible Preferred
-----------
Stock, voting as a separate class, shall be entitled to elect two (2) directors
of the Corporation. The holders of the Preferred Stock and the Common Stock,
voting together as a single class (with the Preferred Stock voting on an as
converted basis), shall be entitled to elect the remaining directors of the
Corporation. Notwithstanding the foregoing or anything else to the contrary
provided in the Restated Articles of Organization, as amended, if the
Corporation fails or refuses, for any reason or for no reason, to redeem on the
Redemption Date (as defined in paragraph 7) all of the then outstanding shares
of Preferred Stock in accordance with the terms and provisions of paragraph 7,
the holders of the Preferred Stock, voting as a separate class, shall be
entitled to elect a majority of the directors of the Corporation (provided,
--------
however, that two of such directors shall continue to be elected solely by
holders of Series A Convertible Preferred Stock, voting as a separate class).
Until such time as there are no longer any shares of Preferred Stock
outstanding, any two directors shall have the right to call a meeting of the
Board of Directors or stockholders. At any meeting (or in a written consent in
lieu thereof) held for the purpose of electing directors, the presence in person
or by proxy (or the written consent) of the holders of a majority of the shares
of Series A Convertible Preferred Stock then outstanding shall constitute a
quorum of the Series A convertible Preferred Stock for the election of directors
to be elected solely by the holders of the Series A Convertible Preferred Stock,
and the presence in person or by proxy (or written consent) of the holders of a
majority of the shares of Preferred Stock then outstanding shall constitute
<PAGE>
a quorum of the Preferred Stock for the election of directors to be elected
jointly by the holders of the Preferred Stock and the Class A Common Stock. A
vacancy in any directorship elected by the holders of the Series A Convertible
Preferred Stock shall be filled only by vote or written consent of the holders
of the Series A Convertible Preferred Stock and a vacancy in the directorship
elected jointly by the holders of the Preferred Stock and the Class A Common
Stock shall be filled only by vote or written consent of the Preferred Stock and
the Class A Common Stock as provided above.
3. Dividends. The holders of the Series A Convertible Preferred Stock
---------
shall be entitled to receive, out of funds legally available therefor, when and
if declared by the Board of Directors, quarterly dividends (the "Series A
Dividends") at the rate per annum of (a) $0.3825 per share plus (b) 10% per
annum of all previously accrued but unpaid Series A Dividends from the preceding
March 15. The holders of Series B Convertible Preferred Stock shall be entitled
to receive, out of funds legally available therefor, when and if declared by the
Board of Directors, quarterly dividends (the "Series B Dividends" and, together
with the Series A Dividends, the "Accruing Dividends") at the rate per annum of
(a) $0.33 per share plus (b) 10% per annum of all previously accrued from day to
day, whether or not earned or declared, and shall be cumulative. The Board of
Directors shall have no obligation to declare any dividends.
4. Liquidation. Upon any liquidation, dissolution or winding up of the
-----------
Corporation, whether voluntary or involuntary, the holders of the shares of
Preferred Stock shall be entitled, before any distribution or payment is made
upon any stock ranking on liquidation junior to the Preferred Stock, to be paid
an amount equal to the greater of (i) $3.825 in the case of the Series A
Convertible Preferred stock and $3.30 per share in the case of the Series B
Convertible Preferred Stock, plus, in the case of each share, an amount equal to
----
all Accruing Dividends unpaid thereon (whether or not declared) and any other
dividends declared but unpaid thereon, computed to the date payment thereof is
made available, minus, in the case of the Series A Convertible Preferred Stock
-----
only, the produce of (a) 0.366 multiplied by (b) the amount remaining for
distribution with respect to each share of Class A Common Stock after payment is
made to the holders of Preferred Stock pursuant to this subclause (i), or (ii)
such amount per share as would have been payable had each such share been
converted to Class A Common Stock pursuant to paragraph 6 immediately prior to
such liquidation, dissolution or winding up, and the holders of Preferred Stock
shall not be entitled to any further payment, such amount payable with respect
to one share of Preferred Stock being sometimes referred to as the "Liquidation
Preference Payment" and with respect to all shares of Preferred Stock being
sometimes referred to as the "Liquidation Preference Payments". If upon such
liquidation, dissolution or winding up of the Corporation, whether voluntary or
involuntary, the assets to be distributed among the holders of Preferred Stock
shall be insufficient to permit payment to the holders of Preferred Stock of the
amount distributable as aforesaid, then the entire assets of the Corporation to
be so distributed shall be distributed ratably among the holders of Preferred
Stock. Upon any such liquidation, dissolution or winding up of the Corporation,
after the holders of Preferred Stock shall have been paid in full the amounts to
which they shall be entitled, the remaining net assets of the Corporation may be
distributed to the holders of stock ranking on liquidation junior to the
Preferred Stock. Written notice of such liquidation, dissolution or winding up,
stating a payment date, the amount of the Liquidation Preference Payments and
the place where said Liquidation Preference Payments shall be payable, shall be
delivered in person, mailed by certified or registered mail, return receipt
requested, or sent by telecopier or telex, not less than 20 days prior to the
payment date stated therein, to the holders of record of Preferred Stock, such
notice to be addressed to each such holder at its address as shown by the
records
<PAGE>
of the Corporation. The consolidation or merger of the Corporation into or with
any other entity or entities which results in the exchange of outstanding shares
of the Corporation for securities or other consideration issued or paid or
caused to be issued or paid by any such entity or affiliate thereof (other than
a merger to reincorporate the Corporation in a different jurisdiction), and the
sale, lease, abandonment, transfer or other disposition by the Corporation of
all or substantially all its assets, shall be deemed to be a liquidation,
dissolution or winding up of the Corporation within the meaning of the
provisions of this paragraph 4. For purposes hereof, the Common Stock shall rank
on liquidation junior to the Preferred Stock.
5. Restrictions. (a) At any time when at least 1,860,854 shares of
------------
Preferred Stock are outstanding, except where the vote or written consent of the
holders of a greater number of shares of the Corporation is required by law or
by the Restated Articles of Organization, as amended, and in addition to any
other vote required by law or the Restated Articles of Organization, as amended,
without the approval of the holders of at least a majority of the then
outstanding shares of Preferred Stock, given in writing or by vote at a meeting,
consenting or voting (as the case may be) separately as a class, the Corporation
will not:
i. Create or authorize the creation of any additional class or
series of shares of stock unless the same ranks junior to both series of
Preferred Stock as to the distribution of assets on the liquidation, dissolution
or winding up of the Corporation, or increase the authorized amount of the
Preferred Stock or increase the authorized amount of any additional class or
series of shares of stock unless the same ranks junior to both series of
preferred Stock as to the distribution of assets on the liquidation, dissolution
or winding up of the Corporation, or create or authorize any obligation or
security convertible into shares of Preferred Stock or into shares of any her
class or series of stock unless the same ranks junior to both series of
Preferred Stock as to the distribution of assets on the liquidation, dissolution
or winding up of the Corporation, whether any such creation, authorization or
increase shall be by means of amendment to the Restated Articles of
Organization, as amended or by merger, consolidation or otherwise;
ii. Amend, alter or repeal its Amended and Restated Articles of
Organization if the effect would be detrimental or adverse in any manner with
respect to the rights of the holders of either series of Preferred Stock;
iii. Pay any dividend or make any distribution on, any shares of
stock other than the Preferred Stock, except for dividends or other
distributions payable on the Common Stock solely in the form of additional
shares of Common Stock; or
iv. Purchase or set aside any sums for the purchase of any shares
of stock other than the Series A Convertible Preferred Stock, or redeem or
otherwise acquire any shares of Preferred Stock except (A) as expressly
authorized in paragraph 7 hereof, (B) the purchase of up to 100,000 shares of
Common Stock (appropriately adjusted to reflect the occurrence of any event
described in subparagraph 6F) to be repurchased from Dominic K. Chan and sold to
employees of the Corporation at the same price, or (C) pursuant to a purchase
offer made pro rata to all holders of the shares of Preferred Stock on the basis
of the aggregate number of outstanding shares of each series of Preferred Stock
then held by each such holder.
(b)In addition, at any time when at least 951,763 shares of Series A
Convertible Preferred Stock are outstanding, except where the vote or written
consent of the holders of
<PAGE>
a greater number of shares of the Corporation is required by law or by the
Restated Articles of Organization, as amended, and in addition to any other vote
required by law or the Restated Articles of Organization, as amended, without
the approval of the holders of at least two-thirds of the then outstanding
shares of Series A Convertible Preferred Stock, given in writing or by vote at a
meeting, consenting or voting (as the case may be) separately as a series, the
Corporation will not:
i. Consent to any liquidation, dissolution or winding up of the
Corporation or sell, lease, abandon, transfer or otherwise dispose of all or
substantially all its assets; or
ii. Consolidate or merge into or with any other entity in which the
shares of Common Stock and Series A Convertible Preferred Stock of the
Corporation outstanding immediately prior to the close of the transaction
represent, or are converted into or exchanged for equity securities that
represent, less than a majority of the combined voting power of the equity
securities of the surviving or resulting entity immediately following the close
of the transaction.
6. Conversions. The holders of shares of Series A Convertible Preferred
-----------
Stock shall have the following conversion rights:
6A. Right to Convert. Subject to the terms and conditions of this
----------------
paragraph 6, the holder of any share or shares of Preferred Stock shall have the
right, at its option at any time, to convert any such shares of Preferred Stock
(except that upon any liquidation of the Corporation the right of conversion
shall terminate at the close of business on the business day fixed for payment
of the amount distributable on the Preferred Stock) into such number of fully
paid and nonassessable shares of Class A Common Stock as is obtained by (i)
multiplying the number of shares of Preferred Stock so to be converted by the
Original Purchase Price of such shares and (ii) dividing the result by the
conversion price equal to the Original Purchase Price of such shares or, in case
an adjustment of such price has taken place pursuant to the further provisions
of this paragraph 6, then by the conversion price as last adjusted and in effect
at the date any share or shares of Preferred Stock are surrendered for
conversion (such price, or such price as last adjusted, being referred to as the
"Conversion Price"). The Original Purchase Price of each share of Series A
Convertible Preferred Stock is $2.80 and the Original Purchase Price of each
share of Series B convertible Preferred Stock is $3.30. Such rights of
conversion shall be exercised by the holder thereof by giving written notice
that the holder elects to convert a stated number of shares of Preferred Stock
into Class A Common Stock and by surrender of a certificate or certificates for
the shares so to be converted to the Corporation as its principal office (or
such other office or agency of the Corporation as the Corporation may designate
by notice in writing to the holders of the Preferred Stock) at any time during
its usual business hours on the date set forth in such notice, together with a
statement of the name or names (with address) in which the certificate or
certificates for shares of Class A Common Stock shall be issued.
6B. Issuance of Certificates; Time Conversion Effected. Promptly
--------------------------------------------------
after the receipt of the written notice referred to in subparagraph 6A and
surrender of the certificate or certificates for the share or shares of
Preferred Stock to be converted, the Corporation shall issue and deliver, or
cause to be issued and delivered to the holder, registered in such name or names
as such holder may direct, a certificate or certificates for the number of whole
shares of Class A common Stock issuable upon the conversion of such share or
shares of Preferred Stock. To the extent permitted by law, such conversion shall
be deemed to have been effected and the Conversion Price shall be determined as
of the close of business on the date on which
<PAGE>
such written notice shall have been received by the corporation and the
certificate or certificates for such share or shares shall have been surrendered
as aforesaid, and at such time the rights of the holder of such share or shares
of Preferred Stock shall cease, and the person or persons in whose name or names
any certificate or certificates for shares of Class A Common Stock shall be
issuable upon such conversion shall be deemed to have become the holder or
holders of record of the shares represented thereby.
6C. Fractional Shares; Dividends; Partial Conversion. No
------------------------------------------------
fractional shares shall be issued upon conversion of Preferred Stock into Class
A Common Stock and no payment or adjustment shall be made upon any conversion on
account of any cash dividends on the Class A Common Stock issued upon such
conversion. At the time of each conversion, the Corporation shall pay in cash an
amount equal to all dividends, excluding Accruing Dividends, accrued and unpaid
on the shares of Preferred Stock surrendered for conversion to the date upon
which such conversion is deemed to take place as provided in subparagraph 6B. In
case the number of shares of Preferred Stock represented by the certificate or
certificates surrendered pursuant to subparagraph 6A exceeds the number of
shares converted, the Corporation shall, upon such conversion, execute and
deliver to the holder, at the expense of the corporation, a new certificate or
certificates for the number of shares of Preferred Stock represented by the
certificate or certificates surrendered which are not to be converted. If any
fractional share of Class A common Stock would, except for the provisions of the
first sentence of this subparagraph 6C, be delivered upon such conversion, the
Corporation, in lieu of delivering such fractional share, shall pay to the
holder surrendering the Preferred Stock for conversion an amount in cash equal
to the current market price of such fractional share as determined in good faith
by the Board of Directors of the Corporation.
6D. Adjustment of price Upon Issuance of Common Stock. Except as
-------------------------------------------------
provided in subparagraph 6E and subject to paragraph 9, if and whenever the
Corporation shall issue or sell, or is, in accordance with subparagraphs 6D(1)
through 6D(7), deemed to have issued or sold, any shares of Common Stock for a
consideration per share less than the Conversion Price of a series of Preferred
Stock in effect immediately prior to the time of such issue or sale, then,
forthwith upon such issue or sale, the Conversion Price of such series shall be
reduced to the price determined by dividing (i) an amount equal to the sum of
(a) the number of shares of Common Stock outstanding immediately prior to such
issue or sale multiplied by the then existing Conversion Price for such series
and (b) the consideration per share, if any, received by the Corporation upon
such issue or sale multiplied by the number of shares of Common Stock issued or
sold, by (ii) the total number of shares of Common Stock (or Common Stock
equivalent on an as converted basis) outstanding immediately after such issue or
sale.
For purposes of this subparagraph 6D, the following subparagraphs 6D(1)
to 6D(7) shall also be applicable:
6D(1) Issuance of Rights or Options. In case at any time the
-----------------------------
Corporation shall in any manner grant (whether directly or by
assumption in a merger or otherwise) any warrants or other rights to
subscribe for or to purchase, or any options for the purchase of,
Common Stock or any stock or security convertible into or exchangeable
for Common Stock (such warrants, rights or options being called
"Options" and such convertible or exchangeable stock or securities
being called "convertible Securities") whether or not such Options or
the right to convert or exchange any such Convertible Securities are
immediately exercisable, and the price per share for which Common
<PAGE>
Stock is issuable upon the exercise of such Options or upon the
conversion or exchange of such Convertible Securities (determined by
dividing (i) the total amount, if any, received or receivable by the
Corporation as consideration for the granting of such Options, plus the
minimum aggregate amount of additional consideration payable to the
Corporation upon the exercise of all such Options, plus, in the case of
such Options which relate to Convertible Securities, the minimum
aggregate amount of additional consideration, if any, payable upon the
issue or sale of such Convertible Securities and upon the conversion or
exchange thereof by (ii) the total maximum number f shares of Common
Stock issuable upon the exercise of such Options or upon the conversion
or exchange of all such Convertible Securities issuable upon the
exercise of such Options) shall be less than the Conversion Price in
effect immediately prior to the time of the granting of such Options,
then the total maximum number of shares of Common Stock issuable upon
the exercise of such Options or upon conversion or exchange of the
total maximum amount of such Convertible Securities issuable upon the
exercise of such Options shall be deemed to have been issued for such
price per share as of the date of granting of such Options or the
issuance of such Convertible Securities and thereafter shall be deemed
to be outstanding. Except as otherwise provided in subparagraph 6D(3),
no adjustment of the Conversion Price shall be made upon the actual
issue of such Common Stock or of such Convertible Securities upon
exercise of such Options or upon the actual issue of such Common Stock
upon conversion or exchange of such Convertible Securities.
6D(2) Issuance of Convertible Securities. In case the
----------------------------------
Corporation shall in any manner issue (whether directly or by
assumption in a merger or otherwise) or sell any Convertible
Securities, whether or not the rights to exchange or convert any such
Convertible Securities are immediately exercisable, and the price per
share for which Common Stock is issuable upon such conversion or
exchange (determined by dividing (i) the total amount received or
receivable by the Corporation as consideration for the issue or sale of
such Convertible Securities, plus the minimum aggregate amount of
additional consideration, if any, payable to the Corporation upon the
conversion or exchange thereof, by (ii) the total maximum number of
shares of Common Stock issuable upon the conversion or exchange of all
such Convertible Securities) shall be less than the Conversion Price in
effect immediately prior to the time of such issue or sale, then the
total maximum number of shares of Common Stock issuable upon conversion
or exchange of all such Convertible Securities shall be deemed to have
been issued for such price per share as of the date of the issue or
sale of such Convertible Securities and thereafter shall be deemed to
be outstanding, provided that (a) except as otherwise provided in
subparagraph 6D(3), no adjustment of the Conversion Price shall be made
upon the actual issue of such Common Stock upon conversion or exchange
of such Convertible Securities and (b) if any such issue or sale of
such Convertible Securities is made upon exercise of any Options to
purchase any such Convertible Securities for which adjustments of the
Conversion Price have been or are to be made pursuant to other
provisions of this subparagraph 6D, no further adjustment of the
Conversion Price shall be made by reason of such issue or sale.
6D(3) Change in Option Price or Conversion Rate. Upon the happening
-----------------------------------------
of any of the following events, namely, if the purchase price provided
for in any Option referred to in subparagraph 6D(1), the additional
consideration, if any, payable upon the conversion or exchange of any
Convertible Securities referred to in subparagraph 6D(1) or 6D(2), or
the rate at which Convertible Securities referred to in
<PAGE>
subparagraph 6D(1) or 6D(2) are convertible into or exchangeable for
Common Stock shall change at any time (including, but not limited to,
changes under or by reason of provisions designed to protect against
dilution), the Conversion Price in effect at the time of such event
shall forthwith be readjusted to the Conversion Price which would have
been in effect at such time had such Options or Convertible Securities
still outstanding provided for such changed purchase price, additional
consideration or conversion rate, as the case may be, at the time
initially granted, issued or sold, but only if as a result of such
adjustment the Conversion Price then in effect hereunder is thereby
reduced; and on the termination of any such Option or any such right to
convert or exchange such Convertible Securities, the Conversion Price
then in effect hereunder shall forthwith be increased to the Conversion
Price which would have been in effect at the time of such termination
had such Option or Convertible Securities, to the extent outstanding
immediately prior to such termination, never been issued.
6D(4) Stock Dividends. In case the Corporation shall declare a
---------------
dividend or make any other distribution upon any stock of the
Corporation payable in Common Stock (except for dividends or
distributions upon the Common Stock), Options or Convertible
Securities, any Common Stock, Options or Convertible Securities, as the
case may be, issuable in payment of such dividend or distribution shall
be deemed to have been issued or sold without consideration.
6D(5) Consideration for Stock. In case any shares of Common Stock,
-----------------------
Options or Convertible Securities shall be issued or sold for cash, the
consideration received therefor shall be deemed to be the amount
received by the Corporation therefor, without deduction therefrom of
any expenses incurred or any underwriting commissions or concessions
paid or allowed by the Corporation in connection therewith. In case any
shares of Common Stock, Options or Convertible Securities shall be
issued or sold for a consideration other than cash; the amount of the
consideration other than cash received by the Corporation shall be
deemed to be the fair value of such consideration as determined in good
faith by the Board of Directors of the Corporation, without deduction
of any expenses incurred or any underwriting commissions or concessions
paid or allowed by the Corporation in connection therewith. In case any
Options shall be issued in connection with the issue and sale of other
securities of the Corporation, together comprising one integral
transaction in which no specific consideration is allocated to such
Options by the parties thereof such Options shall be deemed to have
been issued for such consideration as determined in good faith by the
Board of Directors of the Corporation.
6D(6) Record Date. In case the Corporation shall take a record of
-----------
the holders of its Common Stock for the purpose of entitling them (i)
to receive a dividend or other distribution payable in Common Stock,
Options or Convertible Securities or (ii) to subscribe for or purchase
Common Stock, Options or Convertible Securities, then such record date
shall be deemed to be the date of the issue or sale of the shares of
common Stock deemed to have been issued or sold upon the declaration of
such dividend or the making of such other distribution or the date of
the granting of such right of subscription or purchase, as the case may
be.
6D(7) Treasury Shares. The number of shares of Common Stock
---------------
outstanding at any given time shall not include shares owned or held by
or for the account of the Corporation, and the disposition of any such
shares shall be considered an issue or sale of Common Stock for the
purpose of this subparagraph 6D.
<PAGE>
6E. Certain Issues of Common Stock Excepted. Anything herein to
---------------------------------------
the contrary notwithstanding, the Corporation shall not be required to make any
adjustment of the Conversion Price in the case of the issuance from and after
the date of filing of these terms of the Preferred Stock of up to an aggregate
of 2,835,695 shares (appropriately adjusted to reflect the occurrence of any
event described in subparagraph 6F) of Common Stock to directors, officers,
employees or consultants of the Corporation in connection with their service as
directors of the Corporation, their employment by the Corporation or their
retention as consultants by the Corporation, plus the issuance of up to 312,500
shares (appropriately adjusted to reflect the occurrence of any event described
in subparagraph 6F) of Common Stock issuable upon the exercise of warrants
outstanding as of March 15, 1996, plus such number of shares of Common Stock
which are repurchased by the Corporation from such persons after such date
pursuant to contractual rights held by the Corporation and at repurchase prices
not exceeding the respective original purchase prices paid by such persons to
the Corporation therefor.
6F. Subdivision or Combination of Common Stock. In case the
------------------------------------------
Corporation shall at any time subdivide (by any stock split, stock dividend or
otherwise) its outstanding shares of Common Stock into a greater number of
shares, the Conversion Price of each series of Preferred Stock in effect
immediately prior to such subdivision shall be proportionately reduced, and,
conversely, in case the outstanding shares of Common Stock shall be combined
into a smaller number of shares, the Conversion Price of each series of
Preferred Stock in effect immediately prior to such combination shall be
proportionately increased. In the case of any such subdivision, no further
adjustment shall be made pursuant to subparagraph 6D(4) by reason thereof.
6G. Reorganization or Reclassification. If any capital
----------------------------------
reorganization or reclassification of the capital stock of the Corporation shall
be effected in such a way that holders of Common Stock shall be entitled to
receive stock, securities or assets with respect to or in exchange for Common
Stock, then, as a condition of such reorganization or reclassification, lawful
and adequate provisions shall be made whereby each holder of a share or shares
of Preferred Stock shall thereupon have the right to receive, upon the basis and
upon the terms and conditions specified herein and in lieu of the shares of
Class A Common Stock immediately theretofore receivable upon the conversion of
such share or shares of Preferred Stock, such shares of stock, securities or
assets as may be issued or payable with respect to or in exchange for a number
of outstanding shares of such Class A Common Stock equal to the number of shares
of such Common Stock, immediately theretofore receivable upon such conversion
had such reorganization or reclassification not taken place, and in any such
case appropriate provisions shall be made with respect to the rights and
interests of such holder to the end that the provisions hereof (including
without limitation provisions for adjustments of the Conversion Price) shall
hereafter be applicable, as nearly as may be, in relation to any shares of
stock, securities or assets thereafter deliverable upon the exercise of such
conversion rights.
6H. Failure to Redeem. If the Corporation fails, for any reason or
-----------------
for no reason, to redeem on the Redemption Date (as defined in paragraph 7) all
of the then outstanding shares of Preferred Stock in accordance with the terms
and conditions of paragraph 7, the Conversion Price of each series of Preferred
Stock then in effect shall be immediately reduced to an amount equal to 90%
thereof. Thereafter, until such redemption has been made in full in accordance
with such terms and conditions, each such Conversion Price shall be further
reduced on the 90th day following the Redemption Date and at the end
<PAGE>
of each 90-day period thereafter to an amount equal to 90% of such Conversion
Price in effect immediately prior to each such reduction.
6I. Notice of Adjustment. Upon any adjustment of the
--------------------
Conversion Price, then and in each such case the Corporation shall give written
notice thereof, by delivery in person, certified or registered mail, return
receipt requested, telecopier or telex, addressed to each holder of shares of
Preferred Stock at the address of such holder as shown on the books of the
Corporation, which notice shall state the Conversion Price resulting from such
adjustment, setting forth in reasonable detail the method upon which such
calculation is based.
6J. Other Notices. In case at any time:
-------------
(1) the Corporation shall declare any dividend upon its Common
Stock payable in cash or stock or make any other distribution to the holders of
its Common Stock;
(2) the Corporation shall offer for subscription pro rata to
--- ----
the holders of its Common Stock any additional shares of stock of any class or
other rights;
(3) there shall be any capital reorganization or
reclassification of the capital stock of the Corporation, or a consolidation or
merger of the Corporation with or into another entity or entities, or a sale,
lease, abandonment, transfer or other disposition of all or substantially all
its assets; or
(4) there shall be a voluntary or involuntary dissolution,
liquidation or winding up of the Corporation;
then, in any one or more of said cases, the Corporation shall give, by delivery
in person, certified or registered mail, return receipt requested, telecopier or
telex, addressed to each holder of any shares of Preferred Stock at the address
of such holder as shown on the books of the Corporation, (a) at least 20 days'
prior written notice of the date on which the books of the Corporation shall
close or a record shall be taken for such dividend, distribution or subscription
rights or for determining rights to vote in respect of any such reorganization
reclassification, consolidation, merger, disposition, dissolution, liquidation
or winding up and (b) in the case of any such reorganization, reclassification,
consolidation, merger, disposition, dissolution, liquidation or winding up, at
least 20 days' prior written notice of the date when the same shall take place.
Such notice in accordance with the foregoing clause (a) shall also specify, in
the case of any such dividend, distribution or subscription rights, the date on
which the holders of Common Stock shall be entitled thereto and such notice in
accordance with the foregoing clause (b) shall also specify the date on which
the holders of Common Stock shall be entitled to exchange their Common Stock for
securities or other property deliverable upon such reorganization,
reclassification, consolidation, merger, disposition, dissolution, liquidation
or winding up, as the case may be.
6K. Stock to be Reserved. The Corporation will at all times
--------------------
reserve and keep available out of its authorized Common Stock, solely for the
purpose of issuance upon the conversion of Preferred Stock as herein provided,
such number of shares of Class A common Stock as shall then be issuable upon the
conversion of all outstanding shares of Preferred Stock. The Corporation
covenants that all shares of Class A Common Stock which shall be so issued shall
be duly and validly issued and fully paid and nonassessable and free from all
taxes, liens and charges with respect to the issue thereof, and, without
limiting the generality of the foregoing, the Corporation covenants that it will
from time to time take all such action
<PAGE>
as may be requisite to assure that the par value per share of the Class A common
Stock is at all times equal to or less than the Conversion Price in effect at
the time. The Corporation will take all such action as may be necessary to
assure that all such shares of Class A Common Stock may be so issued without
violation of any applicable law or regulation, or of any requirement of any
national securities exchange upon which the common Stock may be listed. The
Corporation will not take any action which results in any adjustment of the
Conversion Price if the total number of shares of Class A Common Stock issued
and issuable after such action upon conversion of the Preferred Stock would
exceed the total number of shares of Class A Common Stock then authorized by the
Restated Articles of Organization, as amended.
6L. No Reissuance of Preferred Stock. Shares of Preferred Stock
--------------------------------
which are converted into shares of Class A Common Stock as provided herein shall
not be reissued.
6M. Issue Tax. The issuance of certificates for shares of Class A
---------
Common Stock upon conversion of Preferred Stock shall be made without charge to
the holders thereof for any issuance tax in respect thereof, provided that the
Corporation shall not be required to pay any tax which may be payable in respect
of any transfer involved in the issuance and delivery of any certificate in a
name other than that of the holder of the Preferred Stock which is being
converted.
6N. Closing Books. The Corporation will at no time close its
-------------
transfer books against the transfer of any Preferred Stock or of any shares of
Class A Common Stock issued or issuable upon the conversion of any shares of
Preferred Stock in any manner which interferes with the timely conversion of
such Preferred Stock, except as may otherwise be required to comply with
applicable securities laws.
6O. Definition of Common Stock. As used in this paragraph 6, the
--------------------------
term "Common Stock" shall mean and include the Corporation's authorized Class A
Common Stock, no par value per share, and the Corporation's Class B common
Stock, no par value per share (each as constituted on the date of filing of
these terms of the Preferred Stock), unless otherwise specifically limited to
"Class A Common Stock", and shall also include any capital stock of any class of
the Corporation thereafter authorized which shall not be limited to a fixed sum
or percentage in respect of the rights of the holders thereof to participate in
dividends or in the distribution of assets upon the voluntary or involuntary
liquidation, dissolution or winding up of the Corporation; provided that the
shares of Class A common Stock receivable upon conversion of shares of Preferred
Stock shall include only shares designated as Class A Common Stock of the
Corporation on the date of filing of this instrument, or in case of any
reorganization or reclassification of the outstanding shares thereof, the stock,
securities or assets provided for in subparagraph 6G.
6P. Mandatory Conversion. If at any time the Corporation shall
--------------------
effect a firm commitment underwritten public offering of shares of Common Stock
in which (i) the aggregate price paid for such shares by the public shall be at
least $15 million and (ii) the price paid by the public for such shares shall be
at least $5.60 per share (appropriately adjusted to reflect the occurrence of
any event described in subparagraph 6F), then effective upon the closing of the
sale of such shares by the Corporation pursuant to such public offering, all
outstanding shares of Preferred Stock shall automatically convert to shares of
Class A Common Stock on the basis set forth in this paragraph 6. Holders of
shares of Preferred Stock so converted may deliver to the Corporation at its
principal office (or such other office or agency of the Corporation as the
Corporation may designate by notice in writing so such holders) during its usual
business hours, the certificate or certificates for the
<PAGE>
shares so converted. As promptly as practicable thereafter, the Corporation
shall issue and deliver to such holder a certificate or certificates for the
number of whole shares of Class A Common Stock to which such holder is entitled,
together with any cash dividends and payment in lieu of fractional shares to
which such holder may be entitled pursuant to subparagraph 6C. Until such time
as a holder of shares of Preferred Stock shall surrender his or its certificates
therefor as provided above, such certificates shall be deemed to represent the
shares of Class A common Stock to which such holder shall be entitled upon the
surrender thereof.
7. Redemption. The shares of Preferred Stock shall be redeemed as follows:
----------
7A. Optional Redemption. The Corporation shall not have the right to
-------------------
call or redeem at any time all or any shares of Preferred Stock. Subject to the
conditions set forth in this paragraph 7, upon receiving notice (the "Notice")
from the holders of a majority of the then outstanding shares of Preferred
Stock, the Corporation shall redeem, to the extent permitted by law, all of the
shares of the then outstanding shares of Preferred Stock in three annual
installments as follows:
<TABLE>
<CAPTION>
Percentage of Shares of
Preferred Stock then
Date of Redemption Outstanding to be Redeemed
- ------------------ --------------------------
<S> <C>
March 15, 2001 33-1/3% of all the shares of each series of Preferred Stock
Outstanding on March 15, 2001
March 15, 2002 50% of all the shares of each series of Preferred Stock
outstanding on March 15, 2002.
March 15, 2003 100% of all the shares of each series of Preferred Stock
outstanding on March 15, 2003.
</TABLE>
7B. Redemption Price and Payment. Notwithstanding anything to the
----------------------------
contrary in this paragraph 7, the Corporation shall only be obligated to redeem
the Series A Convertible Preferred Stock with respect to each holder thereof it,
at the time of such redemption, the holder also presents for redemption 0.366
shares of Class A Common Stock for each share of Series A Convertible Preferred
Stock to be redeemed. The Corporation shall be required to redeem the Preferred
Stock according to the schedule se forth above and the accompanying Class A
Common Stock presented for redemption, if any. The shares of Preferred Stock to
be redeemed on any Redemption Date shall be redeemed by paying for each share in
cash an amount equal to the Original Purchase Price for such share plus, in the
case of each share, an amount equal to all dividends, including Accruing
Dividends, declared but unpaid thereon, computed to such Redemption Date, such
amount being referred to as the "Redemption Price". The shares of Class A Common
Stock to be redeemed on any Redemption Date shall be redeemed by paying for each
share in cash an amount equal to $2.80 per share. Such payments shall be made in
full on the applicable Redemption Date to the holders entitled thereto.
Notwithstanding the foregoing, upon delivery of a written notice to the Company
(a "Tax Notice"), holders of a majority of the Series A Convertible Preferred
Stock shall have the right, on any of the Redemption Dates set forth above, to
sell additional shares of Series A Convertible Preferred Stock to the Company so
that such redemption will be treated as an "exchange" under Sections 302(a) and
(b) of the Internal Revenue code of 1986, as amended; provided, however, that
the Corporation shall only be obligated to redeem
<PAGE>
the Series A Convertible Preferred Stock with respect to each holder if, at the
time of such redemption, the holder also presents for redemption 0.366 shares of
Class A common Stock for each share of Series A Convertible Preferred Stock to
be redeemed. The Corporation shall be required to redeem such accompanying Class
A Common Stock presented for redemption. If holders of a majority of the Series
A Convertible Preferred Stock deliver a Tax Notice to the Company as provided
above, the company shall redeem each share of Series A Convertible Preferred
Stock set forth in the Tax Notice by paying the Redemption Price for each such
share of Series A Convertible Preferred Stock and a price of $2.80 per share for
each accompanying share of Class A Common Stock. At its election, the Company
may satisfy its obligation to redeem the shares of Series A Convertible
Preferred Stock set forth in the Tax Notice and the accompanying shares of Class
A Common Stock by delivering to the holders of the Series A Convertible
Preferred Stock a promissory note of the Company, bearing interest at 10%, for
the full amount of the Redemption Price of the shares set forth in the Tax
Notice the amount due with respect to the accompanying shares of Class A common
Stock to be redeemed, and due and payable on such Redemption Dates as the shares
set forth in the Tax Notice could have been redeemed pursuant to paragraph 7A;
provided, however, that the ability of the Company to issue a promissory note to
- -------- -------
cover the redeemed shares of Series A Convertible Preferred Stock set forth in
the Tax Notice and the accompanying shares of Class A common Stock to be
redeemed will be subject to compliance by the Company with the General
Corporation law of the Commonwealth of Massachusetts.
7C. Redemption Mechanics. At least 20 but not more than 30 days prior to
--------------------
each Redemption Date, written notice (the "Redemption Notice") shall be given by
the Corporation by delivery in person, certified or registered mail, return
receipt requested, telecopier or telex, to each holder of record (at the close
of business on the business day next preceding the day on which the Redemption
Notice is given) of shares of Preferred Stock notifying such holder of the
redemption and specifying the Redemption Price, such Redemption Date, the number
of shares of Preferred Stock to be redeemed from such holder (computed on a pro
rata basis in accordance with the number of such shares held by all holders
thereof), the number of accompanying shares of Class A Common Stock to be
redeemed from such holder, if any, and the place where said Redemption Price
shall be payable. The Redemption Notice shall be addressed to each holder at his
address as shown by the records of the Corporation. From and after the close of
business on a Redemption Date, unless there shall have been a default in the
payment of the Redemption Price, all rights of holders of shares of Preferred
Stock (except the right to receive the Redemption Price) shall cease with
respect to the shares to be redeemed on such Redemption Date, and such shares
shall not thereafter be transferred on the books of the Corporation or be deemed
to be outstanding for any purpose whatsoever. If the funds of the Corporation
legally available for redemption of shares of Preferred Stock and the
accompanying Class A common Stock, if applicable, on a Redemption Date are
insufficient to redeem the total number of shares of preferred Stock and the
accompanying Class A Common Stock to be redeemed on such Redemption Date, the
holders of such shares shall share ratably in any funds legally available for
redemption of such shares according to the respective amounts which would be
payable to them if the full number of shares to be redeemed on such Redemption
Date were actually redeemed. The shares of Preferred Stock required to be
redeemed but not so redeemed shall remain outstanding and entitled to all rights
and preferences provided herein. At any time thereafter when additional funds of
the Corporation are legally available for the redemption of such shares of
Preferred Stock together with the accompanying Class A Common Stock, if
applicable, such funds will be used, at the end of the next succeeding fiscal
quarter, to redeem the balance of such shares, or such portion thereof for which
funds are then legally available, on the basis set forth above.
<PAGE>
7D. Redeemed or Otherwise Acquired Shares to be Retired. Any shares of
---------------------------------------------------
Preferred Stock redeemed pursuant to this paragraph 7 or otherwise acquired by
the Corporation in any manner whatsoever shall be canceled and shall not under
any circumstances be reissued; and the Corporation may from time to time take
such appropriate corporate action as may be necessary to reduce accordingly the
number of authorized shares of either or both series of Preferred Stock.
8. Amendments. No provision of these terms of the Preferred Stock may be
----------
amended, modified or waived without the written consent or affirmative vote of
the holders of at least a majority of the then outstanding shares of Preferred
Stock.
9. Special Mandatory Conversion of Preferred Stock. (i) If any holder of
-----------------------------------------------
shares of Preferred Stock is entitled or otherwise afforded the right to
exercise the right of participation (the "Right of Participation") as set forth
in Article V of that certain Series B Convertible Preferred Stock Purchase
Agreement of the Corporation dated on or about October 28, 1996 (the "Purchase
Agreement"), with respect to any equity financing (the "Equity Financing")( of
the Corporation which would result in the reduction of the Conversion Price of
either series of Preferred Stock (a "Diluted Series"), and (i) the Equity
Financing has been approved by the holders of at least fifty-one percent (51%)
in interest of the then outstanding shares of the Diluted Series (but excluding
from such calculation any holders for whom the Right of Participation has been
waived pursuant to subsection (iii) below), (ii) the corporation has fully
complied in all respects with its obligations pursuant to Article V of the
Purchase Agreement in respect thereof, (iii) the provisions of the Right of
Participation set forth in Article V of the Purchase Agreement have not been
waived at the request of the Corporation by such holder, and (iv) the holder is
not prohibited by government regulation from participating in the Equity
Financing, if such holder (a "Non-Participating Holder") does not by exercise of
such holder's Right of Participation to acquire his Special Proportionate
Percentage (as hereinafter defined) of the Allocated Offered Securities (as
hereinafter defined) offered to the holders of the Preferred Stock in such
Equity Financing (a "Mandatory Offering"), a portion (the "NonParticipating
Portion") of such holder's shares of the Diluted Series shall automatically and
without further action on the part of such holder be converted effective subject
to and concurrently with consummation of the Mandatory Offering (the "Mandatory
Offering Date") as follows: the Non-Participating Portion of all shares of
Preferred Stock of the Diluted Series held by such Non-Participating Holder
shall be converted into a corresponding number of shares of a newly created
series of Preferred Stock (having such number of shares as the Board of
Directors may by resolution fix) which such series shall be identical in all
respects to the Preferred Stock of the Diluted Series, except that the
conversion price of such series shall be fixed immediately prior to the
Mandatory Offering Date and shall be subject to no further adjustments in a
manner similar to that provided in paragraph 6D. The Board of Directors shall
take all necessary actions to designate such new series. Upon such conversion,
the shares of Preferred Stock so converted shall be canceled and not subject to
reissuance. As used in this paragraph 9, the following terms shall have the
following respective meanings:
(1) "Allocated Offered Securities" shall mean that portion of the gross
amount of Offered Securities which has expressly been allocated for purchase by
the holders of the Preferred Stock as a group, which allocation has been
expressly approved by the holders of at least fifty-one percent 51% in interest
of the then outstanding shares of the Diluted Series (as contemplated by clause
(i) of this paragraph 9(a)), it being understood that for purposes of this
paragraph 9(a) that Allocated Offered Securities may represent an amount of
Offered Securities that is less (but in no event greater) than the amount of
Offered Securities which
<PAGE>
the Corporation is otherwise required to offer to the holders of Preferred Stock
pursuant to Article V of the Purchase Agreement; and
(2) "Special Proportionate Percentage" shall mean as to a holder of
Preferred Stock, that percentage figure which expresses the ratio which (x) the
number of shares of outstanding Common Stock then owned by such holder bears to
(y) the aggregate number of shares of outstanding Common Stock then owned by all
holders of shares of preferred Stock. For purposes solely of the computation
required for determination of the Special Proportionate Percentage, the holders
of outstanding Preferred Stock shall be treated as having converted all such
outstanding Preferred Stock into shares of Common Stock at the rate at which
such securities are convertible into Common Stock in effect at the time of such
Equity Financing.
(3) "Non-Participating Portion" shall mean a percentage equal to 100
minus that percentage of its Special Proportionate percentage as to which such
- -----
holder has, in fact, exercised its Right of Participation to acquire the
Allocated Offered Securities.
(b) The holder of any shares of Preferred Stock converted pursuant to
paragraph 9(a) hereof, shall deliver to the Corporation during regular business
hours at the office of any transfer agent of the Corporation for such series of
Preferred stock, or at such other place as may be designated by the Corporation,
the certificate or certificates for the shares so converted, duly endorsed or
assigned in blank or to the Corporation. As promptly as practicable thereafter,
the Corporation shall issue and deliver to such holder, at the place designated
by such holder, a certificate or certificates for the number of full shares of
the new series of Preferred Stock to which such holder is entitled. The person
in whose name the certificate for such new series of Preferred Stock is to be
issued shall be deemed to have become a stockholder of record on the Mandatory
Offering Date unless the transfer books of the Corporation are closed on that
date, in which event he shall be deemed to have become a stockholder of record
on the next succeeding date on which the transfer books are open.
(c) In the event that at any time the Special Mandatory Conversion set forth
in this paragraph 9 shall not be effective as to all shares of the Preferred
Stock then outstanding, the Board of Directors shall take all necessary actions
to designate new series of Preferred Stock (having such distinctive designations
and number of shares as the Board of Directors may be resolution fix) on each
such subsequent occasion that (i) any Equity Financing occurs, and (ii) any
holder of Preferred Stock of a Diluted Series does not be exercise of such
holder's Right of participation acquire his Special Proportionate Percentage of
the Allocated Offered Securities then so offered to the holders of the Preferred
Stock. Each share of such NonParticipating Holder's shares of Preferred Stock of
the Diluted Series shall be converted into one share of the applicable newly-
created series of Preferred Stock concurrently with the consummation of the
subject Mandatory Offering. Such new series of Preferred Stock shall be
identical in all respects, except with respect to the respective Conversion
Price then in effect, to the new series of Preferred Stock created pursuant to
the provisions of paragraph 9(a).
<PAGE>
The foregoing amendment(s) will become effective when these Articles of
Amendment are filed in accordance with General Laws, Chapter 156B, Section 6
unless these articles specify, in accordance with the vote adopting the
amendment, a later effective date not more than thirty days after such filing,
in which event the amendment will become effective on such later date.
Later effective date:
SIGNED UNDER THE PENALTIES OF PERJURY, this 28th day of October, 1996.
/s/Dominic Chan
..............................................., *President/xxxxxxxxxxxx
Dominic Chan
/s/Allen K. Deary
................................................, *Clerk/xxxxxxxxxxxxxxx
Allen K. Deary
*Delete the inapplicable words
<PAGE>
THE COMMONWEALTH OF MASSACHUSETTS
ARTICLES OF AMENDMENT
(General Laws, Chapter 156B, Section 72)
============================================
I hereby approve the within Articles of Amendment, and the
filing fee in the amount of $4,563.87 having been paid, said
article is deemed to have been filed with me this 28th day of
October, 1996.
Effective date:
WILLIAM FRANCIS GALVIN
Secretary of the Commonwealth
TO BE FILLED IN BY CORPORATION
Photocopy of document to be sent to:
Peter B. Tarr, Esq. _____
Hale and Dorr _____
60 State Street _____
Boston, MA 02109 _____
(617) 526-6639 _____
<PAGE>
FEDERAL IDENTIFICATION
NO. 04-3126919
-------------------
- -------- THE COMMONWEALTH OF MASSACHUSETTS
Examiner William Francis Galvin
Secretary of the Commonwealth
One Ashburton Place, Boston, Massachusetts 02108-1512
ARTICLES OF AMENDMENT
(General Laws, Chapter 156B, Section 72)
- --------
Name We, Dominic Chan ,*President/xxxxxx
Approved ------------
and Allen K. Deary ,*Clerk/xxxxxxxxx
--------------
of Peritus Software Services, Inc.
-------------------------------
(Exact name of corporation)
located at: 304 Concord Road, Billerica, MA 01821-3485,
-------------------------------------------
(Street address of corporation in Massachusetts)
certify that these Articles of Amendment affecting articles numbered:
3
--
(Number those articles 1, 2, 3, 4, 5, and/or 6 being amended)
of the Articles of Organization were duly adopted at a meeting held on
December 9, 1996, by vote of:
----------------
Class A Voting Common Stock,
Series A Convertible Preferred Stock,
And Series B Convertible Preferred
7,451,635 shares of Stock, voting together as a single class of
--------- ----------------------------------------
(type, class & series, if any)
9,508,309 shares outstanding,
---------
shares of of shares outstanding, and
---------- ----------------
(type, class & series, if any)
--------- shares of ---------------- of shares outstanding,
(type, class & series, if any)
P [_] **being at least two-thirds of each type, class or series outstanding
M [_] and entitled to vote thereon: xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx
xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx
Article 3 is hereby amended as set forth below.
*Delete the inapplicable words. **Delete the inapplicable clause.
/1/For amendments adopted pursuant to Chapter 156B, Section 70.
/2/For amendments adopted pursuant to Chapter 156B, Section 71.
Note: If the space provided under any article or item on this form is
insufficient, additions shall be set forth on one side only of
separate 8 1/2 x 11 sheets of paper with a left margin of at
least 1 inch. Additions to more than one article may be made on a
- -------- single sheet so long as each article requiring each addition is
P.C. clearly indicated.
<PAGE>
To change the number of shares and the par value (if any) of any type, class or
series of stock which the corporation is authorized to issue, fill in the
following:
The total presently authorized is:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------
WITHOUT PAR VALUE STOCKS WITH PAR VALUE STOCKS
- ----------------------------------------------------------------------------------------------
TYPE NUMBER OF TYPE NUMBER OF PAR VALUE
SHARES SHARES
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common: Common: -------------- ----------
- ----------------------------------------------------------------------------------------------
Class A Voting: 12,474,000
- ----------------------------------------------------------------------------------------------
Class B Non-Voting: 275,000
- ----------------------------------------------------------------------------------------------
Preferred: Preferred: --------------- ----------
- ----------------------------------------------------------------------------------------------
Series A Convertible: 1,903,525
- ----------------------------------------------------------------------------------------------
Series B Convertible: 1,818,182
- ----------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Change the total authorized to:
- ----------------------------------------------------------------------------------------------
WITHOUT PAR VALUE STOCKS WITH PAR VALUE STOCKS
- ----------------------------------------------------------------------------------------------
TYPE NUMBER OF TYPE NUMBER OF PAR VALUE
SHARES SHARES
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common: Common:
- ----------------------------------------------------------------------------------------------
Class A Voting: 13,020,000
- ----------------------------------------------------------------------------------------------
Class B Non-Voting: 275,000
- ----------------------------------------------------------------------------------------------
Preferred: Preferred:
- ----------------------------------------------------------------------------------------------
Series A Convertible: 1,903,525
- ----------------------------------------------------------------------------------------------
Series B Convertible: 1,818,182
- ----------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
The foregoing amendment(s) will become effective when these Articles of
Amendment are filed in accordance with General Laws, Chapter 156B, Section 6
unless these articles specify, in accordance with the vote adopting the
amendment, a later effective date not more than thirty days after such filing,
in which event the amendment will become effective on such later date.
Later effective date:
SIGNED UNDER THE PENALTIES OF PERJURY, this 12th day of December, 1996.
/s/Dominic Chan
......................................................., *President/xxxxxxxxxxxx
Dominic Chan
/s/Allen K. Deary
........................................................, *Clerk/xxxxxxxxxxxxxxx
Allen K. Deary
*Delete the inapplicable words
<PAGE>
THE COMMONWEALTH OF MASSACHUSETTS
ARTICLES OF AMENDMENT
(General Laws, Chapter 156B, Section 72)
================================================================================
I hereby approve the within Articles of Amendment, and the filing fee in
the amount of $546.00 having been paid, said article is deemed to have
been filed with me this 16th day of December, 1996.
Effective date:
WILLIAM FRANCIS GALVIN
Secretary of the Commonwealth
TO BE FILLED IN BY CORPORATION
Photocopy of document to be sent to:
Peter B. Tarr, Esq. _____
Hale and Dorr _____
60 State Street _____
Boston, MA 02109 _____
_____
<PAGE>
FEDERAL IDENTIFICATION
NO. 04-3126919
------------------
- -------- THE COMMONWEALTH OF MASSACHUSETTS
Examiner William Francis Galvin
Secretary of the Commonwealth
One Ashburton Place, Boston, Massachusetts 02108-1512
ARTICLES OF AMENDMENT
(General Laws, Chapter 156B, Section 72)
- --------
Name We, Douglas A. Catalano , *President/xxxxxx
-------------------
Approved
and Allen K. Deary , *Clerk/xxxxxxxxx
--------------
of Peritus Software Services, Inc.,
-------------------------------
(Exact name of corporation)
located at: 304 Concord Road, Billerica, MA 01821-3485
-------------------------------------------
(Street address of corporation in Massachusetts)
certify that these Articles of Amendment affecting articles numbered:
3
-
(Number those articles 1, 2, 3, 4, 5, and/or 6 being amended)
of the Articles of Organization were duly adopted at a meeting held
on February 28, 1997, by vote of:
-----------------
5,216,078 shares of Class A Voting Common Stock of 6,148,617 shares
--------- --------------------------- ---------
(type, class & series, if any)
outstanding,
1,891,499 shares of Series A Convertible Preferred Stock of 1,903,525
--------- ------------------------------------ ---------
(type, class & series, if any)
shares outstanding, and
1,243,533 shares of Series B Convertible Preferred Stock of 1,818,182
--------- ------------------------------------ ---------
(type, class & series, if any)
shares outstanding.
C [_]
P [_] xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx/1/ being
M [_] at least two-thirds of each type, class or series outstanding and
R.A.[_] entitled to vote thereon and of each type, class or series of stock
whose rights are adversely affected thereby/2/:
Article 3 is hereby amended as set forth below.
*Delete the inapplicable words.
**Delete the inapplicable clause.
/1/For amendments adopted pursuant to Chapter 156B, Section 70.
/2/For amendments adopted pursuant to Chapter 156B, Section 71.
Note: If the space provided under any article or item on this form is
insufficient, additions shall be set forth on one side only of
separate 8 1/2 x 11 sheets of paper with a left margin of at least 1
inch. Additions to more than one article may be made on a single
- ------- sheet so long as each article requiring each addition is clearly
P.C. indicated.
<PAGE>
To change the number of shares and the par value (if any) of any type, class or
series of stock which the corporation is authorized to issue, fill in the
following:
The total presently authorized is:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------
WITHOUT PAR VALUE STOCKS WITH PAR VALUE STOCKS
- ----------------------------------------------------------------------------------------------------
TYPE NUMBER OF TYPE NUMBER OF PAR VALUE
SHARES SHARES
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common: Common:
- ----------------------------------------------------------------------------------------------------
Class A Voting: 13,020,000
- ----------------------------------------------------------------------------------------------------
Class B Non-Voting: 275,000
- ----------------------------------------------------------------------------------------------------
Preferred: Preferred:
- ----------------------------------------------------------------------------------------------------
Series A Convertible: 1,903,525
- ----------------------------------------------------------------------------------------------------
Series B Convertible: 1,818,182
- ----------------------------------------------------------------------------------------------------
</TABLE>
Change the total authorized to:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------
WITHOUT PAR VALUE STOCKS WITH PAR VALUE STOCKS
- ----------------------------------------------------------------------------------------------------
TYPE NUMBER OF TYPE NUMBER OF PAR VALUE
SHARES SHARES
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common: Common:
- ----------------------------------------------------------------------------------------------------
Class A Voting: 14,020,000
- ----------------------------------------------------------------------------------------------------
Class B Non-Voting: 275,000
- ----------------------------------------------------------------------------------------------------
Preferred: Preferred:
- ----------------------------------------------------------------------------------------------------
Series A Convertible: 1,903,525
- ----------------------------------------------------------------------------------------------------
Series B Convertible: 1,818,182
- ----------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
The foregoing amendment(s) will become effective when these Articles of
Amendment are filed in accordance with General Laws, Chapter 156B, Section 6
unless these articles specify, in accordance with the vote adopting the
amendment, a later effective date not more than thirty days after such filing,
in which event the amendment will become effective on such later date.
Later effective date:
SIGNED UNDER THE PENALTIES OF PERJURY, this 28th day of February, 1997.
/s/Douglas A. Catalano
..........................................................., *President/xxxxxxxx
Douglas A. Catalano
/s/Allen K. Deary
..........................................................., *Clerk/xxxxxxxxxxxx
Allen K. Deary
*Delete the inapplicable words
<PAGE>
THE COMMONWEALTH OF MASSACHUSETTS
ARTICLES OF AMENDMENT
(General Laws, Chapter 156B, Section 72)
====================================================================
I hereby approve the within Articles of Amendment, and the filing fee
in the amount of $1,000.00 having been paid, said article is deemed
to have been filed with me this 28th day of February, 1997.
Effective date:
WILLIAM FRANCIS GALVIN
Secretary of the Commonwealth
TO BE FILLED IN BY CORPORATION
Photocopy of document to be sent to:
Peter B. Tarr, Esq.
Hale and Dorr
60 State Street
Boston, MA 02109
(617) 526-6000
<PAGE>
FEDERAL IDENTIFICATION
NO. 04-3126919
-------------------
- -------- THE COMMONWEALTH OF MASSACHUSETTS
Examiner William Francis Galvin
Secretary of the Commonwealth
One Ashburton Place, Boston, Massachusetts 02108-1512
ARTICLES OF AMENDMENT
(General Laws, Chapter 156B, Section 72)
- --------
Name We, Douglas A. Catalano , *President/xxxxxx
Approved -------------------
and Allen K. Deary , *Clerk/xxxxxxxxx
--------------
of Peritus Software Services, Inc.,
-------------------------------
(Exact name of corporation)
located at: 304 Concord Road, Billerica, MA 01821-3485,
--------------------------------------------
(Street address of corporation in Massachusetts)
certify that these Articles of Amendment affecting articles numbered:
3 and 4
---------------------------------------------------------------------
(Number those articles 1, 2, 3, 4, 5, and/or 6 being amended)
of the Articles of Organization were duly adopted at a meeting held
on May 28, 1997, by vote of:
5,423,211 shares of Class A Voting Common Stock of 6,156,117 shares
--------- --------------------------- ---------
(type, class & series, if any)
outstanding,
1,888,885 shares of Series A Convertible Preferred Stock of 1,903,525
--------- ------------------------------------ ---------
(type, class & series, if any)
shares outstanding, and
1,663,499 shares of Series B Convertible Preferred Stock of 1,818,182
--------- ------------------------------------ ---------
(type, class & series, if any)
shares outstanding.
xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx/1/being
at least two-thirds of each type, class or series outstanding and
entitled to vote thereon and of each type, class or series of stock
whose rights are adversely affected thereby/2/:
Article III is hereby amended (i) by changing the name of the class
of capital stock of the corporation termed "Class A Voting Common
Stock" and (ii) as set forth below,
Article IV is hereby amended by (i) replacing the words "Common
C [_] Stock", in each instance of their occurrence (except where they are
P [_] used as part of the terms "Class A Voting Common Stock", "Class A
M [_] Common Stock", "Class B Non-Voting Common Stock" and "Class B Common
R.A.[_] Stock"), with the words "Combined Common Stock", and (ii) replacing
the words "Class A Voting Common Stock" and "Class A Common Stock",
in each instance of their occurrence, with the words "Common Stock".
*Delete the inapplicable words. *Delete the inapplicable clause.
/1/For amendments adopted pursuant to Chapter 156B, Section 70.
/2/For amendments adopted pursuant to Chapter 156B, Section 71.
Note: If the space provided under any article or item on this form is
insufficient, additions shall be set forth on one side only of
separate 8 1/2 x 11 sheets of paper with a left margin of at least 1
inch. Additions to more than one article may be made on a single
sheet so long as each article requiring each addition is clearly
indicated.
- -------
P.C.
<PAGE>
To change the number of shares and the par value (if any) of any type, class or
series of stock which the corporation is authorized to issue, fill in the
following:
The total presently authorized is:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------
WITHOUT PAR VALUE STOCKS WITH PAR VALUE STOCKS
- ----------------------------------------------------------------------------------------------------
TYPE NUMBER OF SHARES TYPE NUMBER OF SHARES PAR VALUE
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common: Common:
- ----------------------------------------------------------------------------------------------------
Class A Voting: 14,020,000
Class B Non-Voting: 275,000
- ----------------------------------------------------------------------------------------------------
Preferred: Preferred:
- ----------------------------------------------------------------------------------------------------
Series A Convertible: 1,903,525
Series B Convertible:
1,818,182
- ----------------------------------------------------------------------------------------------------
</TABLE>
Change the total authorized to:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------
WITHOUT PAR VALUE STOCKS WITH PAR VALUE STOCKS
- ----------------------------------------------------------------------------------------------------
TYPE NUMBER OF SHARES TYPE NUMBER OF SHARES PAR VALUE
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common: Common: 50,000,000 $0.01
- ----------------------------------------------------------------------------------------------------
Class B Non-Voting: 1,000,000
- ----------------------------------------------------------------------------------------------------
Preferred: Preferred:
- ----------------------------------------------------------------------------------------------------
Series A Convertible: 1,903,525
Series B Convertible:
1,818,182
- ----------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
The foregoing amendment(s) will become effective when these Articles of
Amendment are filed in accordance with General Laws, Chapter 156B, Section 6
unless these articles specify, in accordance with the vote adopting the
amendment, a later effective date not more than thirty days after such filing,
in which event the amendment will become effective on such later date.
Later effective date: ______________________________
SIGNED UNDER THE PENALTIES OF PERJURY, this 28th day of May, 1997.
Douglas A. Catalano /s/ Douglas A. Catalano, *President/XXXXXXXXXXXXXXX
Allen K. Deary /s/ Allen K. Deary, *Clerk/XXXXXXXXXXXXXXXXX
*Delete the inapplicable words
<PAGE>
THE COMMONWEALTH OF MASSACHUSETTS
ARTICLES OF AMENDMENT
(General Laws, Chapter 156B, Section 72)
================================================================================
I hereby approve the within Articles of Amendment, and the filing fee
in the amount of $_____ having been paid, said article is deemed to
have been filed with me this_____ day of_____ , 19___ .
Effective date: _______________________________
WILLIAM FRANCIS GALVIN
Secretary of the Commonwealth
TO BE FILLED IN BY CORPORATION
Photocopy of document to be sent to:
Peter B. Tarr, Esq.
Hale and Dorr
60 State Street
Boston, MA 02109
(617) 526-6000
<PAGE>
Exhibit 5
[LETTERHEAD OF HALE AND DORR LLP APPEARS HERE]
June 4, 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 Amendment No. 1
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 3,335,000 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 535,000 Shares will be sold by
certain stockholders of the Company (the "Selling Stockholders") (including
435,000 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>
Peritus Software Services, Inc.
June 4, 1997
Page 2
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
<PAGE>
Peritus Software Services, Inc.
June 4, 1997
Page 3
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,
HALE AND DORR LLP
<PAGE>
EXHIBIT 10.3
PERITUS SOFTWARE SERVICES, INC.
1997 DIRECTOR STOCK OPTION PLAN
-------------------------------
1. Purpose
-------
The purpose of this 1997 Director Stock Option Plan (the "Plan") of Peritus
Software Services, Inc., a Massachusetts corporation (the "Company"), is to
advance the interests of the Company's shareholders by enhancing the Company's
ability to attract, retain and motivate outside directors of the Company by
providing such directors with equity ownership opportunities and performance-
based incentives and thereby better aligning the interests of such directors
with those of the Company's shareholders.
2. Eligibility
-----------
Each Director of the Company who is not an employee of the Company (an
"Eligible Director") is eligible to be granted options, under the Plan. Any
person who has been granted an option under the Plan shall be deemed a
"Participant".
3. Administration
--------------
The Plan will be administered by the Board of Directors of the Company
(the "Board"). Grants of stock options under the Plan and the amount and nature
of the grants to be awarded shall be automatic and nondiscretionary in
accordance with Section 5. However, the Board shall have authority to adopt,
amend and repeal such administrative rules, guidelines and practices relating to
the Plan as it shall deem advisable. The Board may correct any defect, supply
any omission or reconcile any inconsistency in the Plan or any option in the
manner and to the extent it shall deem expedient to carry the Plan into effect
and it shall be the sole and final judge of such expediency. No member of the
Board shall be liable for any action or determination relating to the Plan. All
decisions by the Board shall be made in the Board's sole discretion and shall be
final and binding on all persons having or claiming any interest in the Plan or
in any Award. No director or person acting pursuant to the authority delegated
by the Board shall be liable for any action or determination under the Plan made
in good faith.
4. Stock Available for Awards
--------------------------
(a) Number of Shares. Subject to adjustment under Section 4(b), options
----------------
may be made under the Plan for up to 200,000 shares of the Class A common stock,
no par value per share, of the Company (the "Common Stock"). If any option
expires or is terminated, surrendered or canceled without having been fully
exercised or is forfeited in whole or in part or results in any Common Stock not
being issued, the
<PAGE>
unused Common Stock covered by such option shall again be available for the
grant of options under the Plan. Shares issued under the Plan may consist in
whole or in part of authorized but unissued shares or treasury shares.
(b) Adjustment to Common Stock. In the event of any stock split, stock
--------------------------
dividend, recapitalization, reorganization, merger, consolidation, combination,
exchange of shares, liquidation, spin-off or other similar change in
capitalization or event, or any distribution to holders of Common Stock other
than a normal cash dividend, (i) the number and class of securities available
under this Plan, (ii) the number and class of securities subject to future
option grants, and (iii) the number and class of securities and exercise price
per share subject to each outstanding option shall be appropriately adjusted by
the Company (or substituted options may be made, if applicable) to the extent
the Board shall determine, in good faith, that such an adjustment (or
substitution) is necessary and appropriate. If this Section 4(b) applies and
Section 6(c)(1) also applies to any event, Section 6(c)(1) shall be applicable
to such event, and this Section 4(b) shall not be applicable.
5. Stock Options
-------------
(a) Automatic Grants.
----------------
(i) Each Eligible Director who was serving on the Board on the
effective date of the initial public offering of the Common
Stock (the "Effective Date") (an "IPO Director") shall be
granted an option to purchase 15,000 shares of Common Stock on
the Effective Date.
(ii) Each IPO Director who is serving on the Board at the
adjournment of the annual meeting of the Company held in the
year 1998 or at the adjournment of any subsequent annual
meeting shall be granted an option to purchase 3,000 shares of
Common Stock at the close of business on the date of such
adjournment.
(iii) Each Eligible Director who is not an IPO Director shall be
granted an option to purchase 15,000 shares of Common Stock at
the close of business on the date such Eligible Director is
first elected to serve on the Board.
(iv) Each Eligible Director who is not an IPO Director and who is
serving on the Board at the adjournment of any annual meeting
which begins after the date of his or her election shall be
granted an option to purchase 3,000 shares of Common Stock at
the close of business on the date of such adjournment.
2
<PAGE>
(b) Option Exercise Price. The option exercise price per share for each
---------------------
option granted under the Plan shall equal (i) the last reported sales price per
share of the Company's Common Stock as listed on a nationally recognized
securities exchange, on the date of grant (or, if no such price is reported on
such date, such price as reported on the nearest preceding day); or (ii) the
fair market value of the stock on the date of grant, as determined by the Board
of Directors, if the Common Stock is not publicly traded. Notwithstanding the
preceding sentence, the option exercise price per share for each option granted
on the Effective Date shall be the price per share for which the Common Stock
was offered to the public.
(c) Exercise Period. Each option granted on the Effective Date shall vest
---------------
and be exercisable on a cumulative basis as to one-third of the shares subject
to such option on each of the first, second and third anniversaries of the date
of the grant of such option, provided that, subject to the provisions of
--------
Sections 5(e) and 5(f), no option may be exercised more than 90 days after the
optionee ceases to serve as a director of the Company and such option may only
be exercised for the purchase of such number of shares as were vested and
exercisable at the time of such termination. No option shall be exercisable
after the expiration of ten (10) years from the date of grant or prior to
approval of the Plan by the stockholders of the Company.
(d) Exercise Period Upon Retirement. Notwithstanding the provisions of
-------------------------------
Section 5(d), in the event an optionee ceases to be a director by reason of
retirement age determined by the Company or by reason of the Company's failure
to nominate the optionee for reelection as a director (other than for such
director's refusal to serve as a director), each option then held by such
director shall, at the time he or she ceases to be a director, be exercisable
for that number of shares of Common Stock which equals the sum of (i) the shares
which are then vested and exercisable and (ii) the shares which would otherwise
become vested and exercisable at the next following anniversary of the date of
grant of the option.
(e) Exercise Period Upon Death or Disability. Notwithstanding the
----------------------------------------
provisions of Section 5(d), any option granted under the Plan:
(i) may be exercised in full by an optionee who becomes disabled
(within the meaning of Section 22(e)(3) of the Code or any
successor provision thereto) while serving as a director of the
Company; or
(ii) may be exercised
(x) in full upon the death of an optionee while serving as a
director of the Company, or
3
<PAGE>
(y) to the extent then exercisable upon the death of an
optionee within 90 days of ceasing to serve as a director
of the Company,
by the person to whom it is transferred by will, by the laws of
descent and distribution, or by written designation of
beneficiary filed with the Company;
in each such case within the period of one year after the date the optionee
ceases to be such a director by reason of such death or disability; provided,
that no option shall be exercisable after the expiration of ten (10) years from
the date of grant.
(f) Payment Upon Exercise. Common Stock purchased upon the exercise of an
----------------------
Option granted under the Plan shall be paid for as follows:
(1) in cash or by check, payable to the order of the Company;
(2) except as the Board may otherwise provide in an Option, delivery
of an irrevocable and unconditional undertaking by a credit worthy broker to
deliver promptly to the Company sufficient funds to pay the exercise price, or
delivery by the Participant to the Company of a copy of irrevocable and
unconditional instructions to a credit worthy broker to deliver promptly to the
Company cash or a check sufficient to pay the exercise price;
(3) (i) by delivery of shares of Common Stock owned by the
Participant valued at their fair market value as determined by the Board in good
faith ("Fair Market Value"), which Common Stock was owned by the Participant at
least six months prior to such delivery, (ii) by delivery of a promissory note
of the Participant to the Company on terms determined by the Board, or (iii) by
payment of such other lawful consideration as the Board may determine; or
(4) any combination of the above permitted forms of payment.
6. General Provisions Applicable to Options
----------------------------------------
(a) Transferability of Options. Except as the Board may otherwise
--------------------------
determine or provide in an option agreement, options shall not be sold,
assigned, transferred, pledged or otherwise encumbered by the person to whom
they are granted, either voluntarily or by operation of law, except by will or
the laws of descent and distribution, and, during the life of the Participant,
shall be exercisable only by the Participant. References to a Participant, to
the extent relevant in the context, shall include references to authorized
transferees.
(b) Documentation. Each option under the Plan shall be evidenced by a
-------------
4
<PAGE>
written instrument in such form as the Board shall determine. Each option may
contain terms and conditions in addition to, and not inconsistent with, those
set forth in the Plan.
(c) Acquisition Events. Except to the extent otherwise provided in the
-------------------
instrument evidencing the Award or in any other agreement between the
Participant and the Company, upon the occurrence of an Acquisition Event or with
respect to Options or any other similar Awards only, upon the execution by the
Company of any agreement with respect to an Acquisition Event, (i) the Board
shall cause all Options then outstanding to become immediately exercisable in
full as of a specified date (the "Acceleration Date") prior to the Acquisition
Event, and shall provide written notice to the Participants informing them that
all such options have become exercisable in full and will terminate immediately
prior to the consummation of such Acquisition Event, except to the extent
exercised by the Participants between the Acceleration Date and the consummation
of such Acquisition Event; (ii) all Restricted Stock Awards then outstanding
shall become immediately free of all restrictions; (iii) all other stock-based
Awards all become immediately exercisable, realizable or vested in full, or
shall be immediately free of all restrictions or conditions, as the case may be.
An "Acquisition Event" shall mean: (a) any merger or consolidation which
results in the voting securities of the Company outstanding immediately prior
thereto continuing to represent (either by remaining outstanding or by being
converted into voting securities of the surviving or acquiring entity) less than
60% of the combined voting power of the voting securities of the Company or such
surviving or acquiring entity outstanding immediately after such merger or
consolidation; (b) any sale of all or substantially all of the assets of the
Company; (c) the complete liquidation of the Company; or (d) the acquisition of
"beneficial ownership" (as defined in Rule 13d-3 under the Exchange Act) of
securities of the Company representing 50% or more of the combined voting power
of the Company's then outstanding securities (other than through a merger or
consolidation or an acquisition of securities directly from the Company) by any
"person", as such term is used in Sections 13(d) and 14(d) of the Exchange Act
other than the Company, any trustee or other fiduciary holding securities under
an employee benefit plan of the Company or any corporation owned directly or
indirectly by the shareholders of the Company in substantially the same
proportion as their ownership of stock of the Company.
(d) Withholding. Each Participant shall pay to the Company, or make
-----------
provision satisfactory to the Board for payment of, any taxes required by law to
be withheld in connection with Awards to such Participant no later than the date
of the event creating the tax liability. The Board may allow Participants to
satisfy such tax obligations in whole or in part in shares of Common Stock,
including shares retained from the Award creating the tax obligation, valued at
their Fair Market Value. The Company may, to the extent permitted by law,
deduct any such tax obligations from
5
<PAGE>
any payment of any kind otherwise due to a Participant.
(e) Conditions on Delivery of Stock. The Company will not be obligated to
-------------------------------
deliver any shares of Common Stock pursuant to the Plan or to remove
restrictions from shares previously delivered under the Plan until (i) all
conditions of the Award have been met or removed to the satisfaction of the
Company, (ii) in the opinion of the Company's counsel, all other legal matters
in connection with the issuance and delivery of such shares have been satisfied,
including any applicable securities laws and any applicable stock exchange or
stock market rules and regulations, and (iii) the Participant has executed and
delivered to the Company such representations or agreements as the Company may
consider appropriate to satisfy the requirements of any applicable laws, rules
or regulations.
(f) Acceleration. The Board may at any time provide that any Options
------------
shall become immediately exercisable in full or in part.
7. Miscellaneous
-------------
(a) No Right To Continue as a Director. Neither the Plan nor the granting
----------------------------------
of an option nor any other action taken pursuant to the Plan shall constitute or
be evidence of any agreement or understanding, express or implied, that the
Company will retain a director for any period of time.
(b) No Rights As Stockholder. No Participant or Designated Beneficiary
------------------------
shall have any rights as a stockholder with respect to any shares of Common
Stock to be distributed with respect to an option until becoming the record
holder of such shares.
(c) Effective Date and Term of Plan. The Plan shall become effective on
-------------------------------
the effective date of the Company's initial public offering, subject to
approval by the stockholders of the Company. No options shall be granted under
the Plan after the completion of ten years from the earlier of (i) the date on
which the Plan was adopted by the Board or (ii) the date the Plan was approved
by the Company's stockholders, but options previously granted may extend beyond
that date.
(d) Amendment of Plan. The Board may amend, suspend or terminate the Plan
-----------------
or any portion thereof at any time, provided that no amendment shall be made
without stockholder approval if such approval is necessary to comply with any
applicable tax or regulatory requirements. Amendments requiring stockholder
approval shall become effective when adopted by the Board.
6
<PAGE>
(e) Governing Law. The provisions of the Plan and all options made
--------------
hereunder shall be governed by and interpreted in accordance with the laws of
the Commonwealth of Massachusetts, without regard to any applicable conflicts of
law.
Adopted by the Board of Directors
on May 5, 1997
Approved by the Stockholders on
May 28, 1997
7
<PAGE>
EXHIBIT 10.4
------------
PERITUS SOFTWARE SERVICES, INC.
1997 EMPLOYEE STOCK PURCHASE PLAN
---------------------------------
The purpose of this Plan is to provide eligible employees of Peritus
Software Services, Inc. (the "Company") and certain of its subsidiaries with
opportunities to purchase shares of the Company's Class A common stock, no par
value (the "Common Stock"), commencing on October 1, 1997. Two hundred thousand
(200,000) shares of Common Stock in the aggregate have been approved for this
purpose.
1. Administration. The Plan will be administered by the Company's Board
--------------
of Directors (the "Board") or by a Committee appointed by the Board (the
"Committee"). The Board or the Committee has authority to make rules and
regulations for the administration of the Plan and its interpretation and
decisions with regard thereto shall be final and conclusive.
2. Eligibility. Participation in the Plan will neither be permitted nor
-----------
denied contrary to the requirements of Section 423 of the Internal Revenue Code
of 1986, as amended (the "Code"), and regulations promulgated thereunder. All
employees of the Company, including Directors who are employees, and all
employees of any subsidiary of the Company (as defined in Section 424(f) of the
Code) designated by the Board or the Committee from time to time (a "Designated
Subsidiary"), are eligible to participate in any one or more of the offerings of
Options (as defined in Section 9) to purchase Common Stock under the Plan
provided that:
(a) they are customarily employed by the Company or a Designated
Subsidiary for more than 20 hours a week; and
(b) they are employees of the Company or a Designated Subsidiary on
the first day of the applicable Plan Period (as defined below).
No employee may be granted an option hereunder if such employee,
immediately after the option is granted, owns 5% or more of the total combined
voting power or value of the stock of the Company or any subsidiary. For
purposes of the preceding sentence, the attribution rules of Section 424(d) of
the Code shall apply in determining the stock ownership of an employee, and all
stock which the employee has a contractual right to purchase shall be treated as
stock owned by the employee.
3. Offerings. The Company will make four offerings ("Offerings") to
---------
employees to purchase stock under this Plan. Unless the Board determines
otherwise, Offerings will begin each October 1 and April 1, or the first
business day
<PAGE>
thereafter (the "Offering Commencement Dates") and each Offering Commencement
Date will begin a 6-month period (a "Plan Period") during which payroll
deductions will be made and held for the purchase of Common Stock at the end of
the Plan Period. The first Plan Period shall begin on October 1, 1997 and end on
March 31, 1998. The last Plan Period shall begin on April 1, 1999 and end on
September 30, 1999 unless the Board determines otherwise. The maximum number of
shares available under each Offering shall not exceed 50,000 shares during each
Plan Period together with any shares remaining unsold from any prior Plan
Period. If the total number of shares for which options are exercised exceeds
the maximum number available for each Plan Period, the Board or Committee shall
make a pro-rata allocation of the shares available and the excess payroll
deduction shall be automatically refunded to the employee, except that any
balance which is less than the purchase price of one share of Common Stock shall
be carried forward into the employee's payroll deduction account for the next
Offering. If the employee elects to discontinue participation in the Plan, such
amount shall promptly be refunded to the employee, without interest.
4. Participation. An employee eligible on the Offering Commencement Date
-------------
of any Offering may participate in such Offering by completing and forwarding a
payroll deduction authorization form to the employee's appropriate payroll
office at least 20 days prior to the applicable Offering Commencement Date. The
form will authorize a regular payroll deduction from the Compensation received
by the employee during the Plan Period. Unless an employee files a new form or
withdraws from the Plan, his deductions and purchases will continue at the same
rate for future Offerings under the Plan as long as the Plan remains in effect.
5. Deductions. The Company will maintain payroll deduction accounts for
----------
all participating employees. With respect to any Offering made under this Plan,
an employee may authorize a payroll deduction of any whole number percentage of
Compensation from 1% through 10% of Compensation with any change in compensation
during the Plan Period to result in an automatic corresponding change in the
dollar amount withheld. An employee's Compensation shall be the employee's Base
Pay. An employee's Base Pay is his or her regular straight-time earnings, as
the same may be adjusted from time to time, and amounts paid for vacation,
holiday, sick time and short-term disability. Base Pay excludes all special
payments including the following without limitation: overtime, incentive
compensation, bonuses, sales commissions, automobile allowances, relocation
expense reimbursements, insurance payments made pursuant to any long-term
disability policies and any other type of special payment.
No employee may be granted an Option (as defined in Section 9) which
permits his rights to purchase Common Stock under this Plan and any other stock
purchase plan of the Company and its subsidiaries, to accrue at a rate which
exceeds $25,000 of fair market value of such Common Stock (determined at the
Offering
-2-
<PAGE>
Commencement Date of the Plan Period) for each calendar year in which the Option
is outstanding at any time.
6. Deduction Changes. An employee may not increase or decrease his
-----------------
payroll deduction during a Plan Period. However, an employee may discontinue
his payroll deduction once during any Plan Period, by filing a new payroll
deduction authorization form. If an employee elects to discontinue his payroll
deductions during a Plan Period, such election shall constitute an election to
withdraw his funds pursuant to Section 8 hereof.
7. Interest. Interest will not be paid on any employee accounts, except
--------
to the extent that the Board or the Committee, in its sole discretion, elects to
credit employee accounts with interest at such per annum rate as it may from
time to time determine.
8. Withdrawal of Funds. An employee may at any time twenty (20) days
-------------------
prior to the close of business on the last business day in a Plan Period and for
any reason permanently draw out the balance accumulated in the employee's
account and thereby withdraw from participation in an Offering. Partial
withdrawals are not permitted. The employee may not begin participation again
during the remainder of the Plan Period. The employee may participate in any
subsequent Offering by filing a new payroll authorization form no later than 20
days prior to the beginning date of such Offering.
9. Purchase of Shares. On the Offering Commencement Date of each Plan
------------------
Period, the Company will grant to each eligible employee who is then a
participant in the Plan an option ("Option") to purchase on the last business
day of such Plan Period (the "Exercise Date"), at the Option Price hereinafter
provided for, the largest number of whole shares of Common Stock of the Company
reserved for the purposes of the Plan as does not exceed the number of shares
determined by dividing $12,500 by the Average Market Price on the Offering
Commencement Date of such Plan Period. The Average Market Price on any date
shall be (a) the average (on that date) of the high and low prices of the Common
Stock on any national securities exchange on which the Common Stock is listed,
(b) the last reported sale price of the Common Stock on the Nasdaq National
Market or (c) the average of the closing bid and asked prices last quoted on
that date in the over-the-counter-market, whichever is applicable, as published
in The Wall Street Journal. If no sales of Common Stock were made on such a day,
-----------------------
the price of the Common Stock for purposes of clauses (a) and (b) above shall be
the reported price for the next preceding day on which sales were made.
The purchase price for each share purchased (the "Option Price") will be
85% of the Average Market Price of the Common Stock on (i) the first business
day of such Plan Period or (ii) the Exercise Date, whichever is less. Each
employee who
-3-
<PAGE>
continues to be a participant in the Plan on the Exercise Date shall be deemed
to have exercised his Option at the Option Price on such date and shall be
deemed to have purchased from the Company the number of full shares of Common
Stock reserved for the purpose of the Plan that his accumulated payroll
deductions on such date will pay for pursuant to the formula set forth above
(but not in excess of the maximum number determined in the manner set forth
above). The Board may set a higher purchase price for an Offering at any time at
least 30 days prior to the Offering Commencement Date of such Offering.
Any balance remaining in an employee's payroll deduction account at the end
of a Plan Period will be automatically refunded to the employee, except that any
balance which is less than the purchase price of one share of Common Stock will
be carried forward into the employee's payroll deduction account for the
following Offering, unless the employee elects not to participate in the
following Offering under the Plan, in which case the balance in the employee's
account shall be refunded.
10. Issuance of Certificates. Certificates representing shares of Common
------------------------
Stock purchased under the Plan may be issued only in the name of the employee,
in the name of the employee and another person of legal age as joint tenants
with rights of survivorship, or (in the Company's sole discretion) in the street
name of a brokerage firm, bank or other nominee holder designated by the
employee.
11. Rights on Retirement, Death or Termination of Employment. In the
--------------------------------------------------------
event of a participating employee's termination of employment prior to the last
business day of a Plan Period, no payroll deduction shall be taken from any pay
due and owing to an employee and the balance in the employee's account shall be
paid to the employee or, in the event of the employee's death, (a) to a
beneficiary previously designated in a revocable notice signed by the employee
(with any spousal consent required under state law) or (b) in the absence of
such a designated beneficiary, to the executor or administrator of the
employee's estate or (c) if no such executor or administrator has been appointed
to the knowledge of the Company, to such other person(s) as the Company may, in
its discretion, designate. If, prior to the last business day of the Plan
Period, the Designated Subsidiary by which an employee is employed shall cease
to be a subsidiary of the Company, or if the employee is transferred to a
subsidiary of the Company that is not a Designated Subsidiary, the employee
shall be deemed to have terminated employment for the purposes of this Plan.
Employment shall be defined in accordance with Treasury Regulation (S) 1.421-
7(h).
12. Optionees Not Stockholders. Neither the granting of an Option to an
--------------------------
employee nor the deductions from his pay shall constitute such employee a
stockholder of the shares of Common Stock covered by an Option under this Plan
until such shares have been purchased by and issued to him.
-4-
<PAGE>
13. Rights Not Transferable. Rights under this Plan are not transferable
-----------------------
by a participating employee other than by will or the laws of descent and
distribution, and are exercisable during the employee's lifetime only by the
employee.
14. Application of Funds. All funds received or held by the Company under
--------------------
this Plan may be combined with other corporate funds and may be used for any
corporate purpose.
15. Adjustment in Case of Changes Affecting Common Stock. In the event of
----------------------------------------------------
a subdivision of outstanding shares of Common Stock, or the payment of a
dividend in Common Stock, the number of shares approved for this Plan, and the
share limitation set forth in Section 9, shall be increased proportionately, and
such other adjustment shall be made as may be deemed equitable by the Board or
the Committee. In the event of any other change affecting the Common Stock,
such adjustment shall be made as may be deemed equitable by the Board or the
Committee to give proper effect to such event.
16. Merger. If the Company shall at any time merge or consolidate with
------
another corporation and the holders of the capital stock of the Company
immediately prior to such merger or consolidation continue to hold at least 80%
by voting power of the capital stock of the surviving corporation ("Continuity
of Control"), the holder of each Option then outstanding will thereafter be
entitled to receive at the next Exercise Date upon the exercise of such Option
for each share as to which such Option shall be exercised the securities or
property which a holder of one share of the Common Stock was entitled to upon
and at the time of such merger, and the Committee shall take such steps in
connection with such merger as the Committee shall deem necessary to assure that
the provisions of Paragraph 15 shall thereafter be applicable, as nearly as
reasonably may be, in relation to the said securities or property as to which
such holder of such Option might thereafter be entitled to receive thereunder.
In the event of a merger or consolidation of the Company with or into
another corporation which does not involve Continuity of Control, or of a sale
of all or substantially all of the assets of the Company while unexercised
Options remain outstanding under the Plan, (a) subject to the provisions of
clauses (b) and (c), after the effective date of such transaction, each holder
of an outstanding Option shall be entitled, upon exercise of such Option, to
receive in lieu of shares of Common Stock, shares of such stock or other
securities as the holders of shares of Common Stock received pursuant to the
terms of such transaction; or (b) all outstanding Options may be cancelled by
the Board or the Committee as of a date prior to the effective date of any such
transaction and all payroll deductions shall be paid out to the participating
employees; or (c) all outstanding Options may be cancelled by the Board or the
Committee as of the effective date of any such transaction, provided that notice
of such cancellation shall be given to each holder of an Option, and each holder
of an
-5-
<PAGE>
Option shall have the right to exercise such Option in full based on payroll
deductions then credited to his account as of a date determined by the Board or
the Committee, which date shall not be less than ten (10) days preceding the
effective date of such transaction.
17. Amendment of the Plan. The Board may at any time, and from time to
---------------------
time, amend this Plan in any respect, except that (a) if the approval of any
such amendment by the shareholders of the Company is required by Section 423 of
the Code, such amendment shall not be effected without such approval, and (b) in
no event may any amendment be made which would cause the Plan to fail to comply
with Section 16 of the Exchange Act and the rules promulgated thereunder, as in
effect from time to time, or Section 423 of the Code.
18. Insufficient Shares. In the event that the total number of shares of
-------------------
Common Stock specified in elections to be purchased under any Offering plus the
number of shares purchased under previous Offerings under this Plan exceeds the
maximum number of shares issuable under this Plan, the Board or the Committee
will allot the shares then available on a pro rata basis.
19. Termination of the Plan. This Plan may be terminated at any time by
-----------------------
the Board. Upon termination of this Plan all amounts in the accounts of
participating employees shall be promptly refunded.
20. Governmental Regulations. The Company's obligation to sell and
------------------------
deliver Common Stock under this Plan is subject to listing on a national stock
exchange or quotation on the Nasdaq National Market and the approval of all
governmental authorities required in connection with the authorization, issuance
or sale of such stock.
The Plan shall be governed by Massachusetts law except to the extent that
such law is preempted by federal law.
The Plan is intended to comply with the provisions of Rule 16b-3
promulgated under the Securities Exchange Act of 1934. Any provision
inconsistent with such Rule shall to that extent be inoperative and shall not
affect the validity of the Plan.
21. Issuance of Shares. Shares may be issued upon exercise of an Option
------------------
from authorized but unissued Common Stock, from shares held in the treasury of
the Company, or from any other proper source.
22. Notification upon Sale of Shares. Each employee agrees, by entering
--------------------------------
the Plan, to promptly give the Company notice of any disposition of shares
purchased under the Plan where such disposition occurs within two years after
the date of grant of the Option pursuant to which such shares were purchased.
-6-
<PAGE>
23. Effective Date and Approval of Shareholders. The Plan hereby shall take
-------------------------------------------
effect on the closing of the Company's initial public offering, subject to
approval by the shareholders of the Company as required by Section 423 of the
Code, which approval must occur within twelve months of the adoption of such
amendment by the Board.
Adopted by the Board of Directors
on May 5, 1997
Approved by the Shareholders on
May 28, 1997
-7-
<PAGE>
EXHIBIT 10.7
AGREEMENT OF AMENDMENT
March 15, 1996
AGREEMENT, made as of the 15th day of March, 1996, by and between
Peritus Software Services, Inc., a Massachusetts corporation (the "Company") and
Bull HN Information Systems Inc. ("Bull HN").
WHEREAS, the Company and Bull HN entered into a certain Common Stock
Purchase Agreement dated May 29, 1992 (the "1992 Bull HN Stock Purchase
Agreement") and a certain Agreement dated September 1, 1994 (the "1994 Bull HN
Agreement"); and
WHEREAS, the Company proposes to enter into a certain Series A
Convertible Preferred Stock and Class A Common Stock Purchase Agreement of even
date herewith (the "Purchase Agreement") with the Purchasers listed on Schedule
I thereto pursuant to which the Purchasers have agreed to purchase an aggregate
of 1,903,525 shares (the "Preferred Shares") of Series A Convertible Preferred
Stock, no par value, of the Company (the "Preferred Stock") and 71,775 shares of
Class A Common Stock, no par value, of the Company (the "Common Stock"); and
WHEREAS, the investment by the Purchasers will benefit the Company and
its shareholders; and
WHEREAS, it is a condition to the obligations of the Purchasers under
the Purchase Agreement that this Agreement be executed by the parties hereto,
and the parties are willing to execute this Agreement and to be bound by the
provisions hereof.
NOW THEREFORE, in consideration of the foregoing and other good and
valuable consideration receipt of which is hereby acknowledged, and in
consideration of the premises and the mutual covenants and obligations contained
in this Agreement, the parties hereto agree as follows:
1. This Agreement, together with the Registration Rights Agreement and
Stock Restriction Agreement entered into on even date herewith, amends and
restates in its entirety the 1994 Bull HN Agreement. Upon execution of this
Agreement, the 1994 Bull HN Agreement shall be superseded by the terms and
provisions hereof and shall have no further force nor effect.
2. In the event that the Company proposes to enter into a transaction,
or series of
<PAGE>
related transactions, at any time until the third anniversary of this Agreement,
pursuant to which any third party would otherwise acquire equity securities of
the Company that represent a majority of the combined voting power of the equity
securities of the Company immediately after the close of the transaction, or
series of related transactions, then immediately prior to the close of such
transaction, or series of related transactions, Bull HN, or at Bull HN's option,
its parent corporation, Compagnie des Machines Bull ("CMB") shall have the right
to purchase at the same price and on the same conditions as agreed to between
the Company and the third party, sufficient equity securities of the Company
such that immediately after the close of the transaction, or series of related
transactions, the equity securities held by Bull HN and/or CMB shall represent a
majority of the combined voting power of the equity securities of the Company.
The foregoing provision shall not apply if (i) the Company proposes to enter any
such transaction after the first anniversary of this Agreement and (ii) such
transaction is for an effective price per share of Common Stock greater than
$5.60 (subject to appropriate adjustment to reflect stock splits, stock
dividends, and other similar actions after the date of this Agreement affecting
the number of issued and outstanding related shares of Common Stock). The
Company shall provide Bull HN with written notice and at least ten (10) days in
which to exercise its rights described above prior to the close of such
transaction. This right shall expire on the earlier to occur of (i) the close of
a transaction, or series of transactions, in which a third party acquires
equity securities of the Company, at an effective price per share of Common
Stock greater than $5.60 (subject to appropriate adjustment to reflect stock
splits, stock dividends, and other similar actions after the date of this
Agreement affecting the number of issued and outstanding shares of Common
Stock), that represent a majority of the combined voting power of the equity
securities of the Company immediately after the close of the transaction
provided that the Company has given notice to Bull HN as set forth above, (ii)
the closing of a firm commitment underwritten public offering of the Company's
Common Stock in which the aggregate price paid for the shares by the public is
at least 15 million, or (iii) three years from the date of this Agreement.
3. In the event that any person or entity with a substantial part of
its business activity directly competitive with that of Bull HN, CMB or an
affiliate of CMB, shall acquire either (i) all or substantially all of the
assets of the Company or (ii) equity securities of the Company that represent a
majority of the combined voting power of the equity securities of the Company
immediately after the close of the transaction, or series of related
transactions, the Company shall, upon receipt of a written request by Bull HN
delivered to the Company within six months after such acquisition, use its best
efforts to assign and transfer all of its rights and obligations under that
certain Master Software and Hardware Services Agreement between the Company and
Bull HN dated as of February 3, 1992, as amended (the "Software Agreement") to a
third party acceptable to Bull HN in its discretion, taking into account the
technical, strategic and economic viability of such third party and the possible
need for
- 2 -
<PAGE>
additional security to insure the ability of such third party to perform under
the Software Agreement. In addition, the Company shall use its best efforts to
assure that personnel devoted to maintain any proprietary source code of Bull HN
under the Software Agreement are transferred to such third party without cost to
Bull HN. In the event that Bull HN requests such transfer, the Company and Bull
HN agree to act in good faith in order to effect such transfer so as to minimize
the disruption of either party's business resulting from such transfer. The
Company shall indemnify Bull HN for any claims Bull HN may have under the
Software Agreement against such third party as a result of such third party's
failure to perform the Software Agreement as in effect on the date of such
assignment as it relates to maintenance of the GCOS 6 and HVX systems and
applications software and related hardware and software. The obligations of the
Company under this paragraph shall terminate on the earlier of (i) five years
from the date of this Agreement, or (ii) the closing of a firm commitment
underwritten public offering of the Company's Common Stock in which the
aggregate price paid for the shares by the public is at least $15 million.
4. The Company and Bull HN agree that Section 11.1.1 of the 1992 Bull
HN Stock Purchase Agreement is hereby amended to replace the reference to "up to
40,000 shares" in subclause (iv) with "from and after March 15, 1996, up to
2,161,025 shares (which number reflects all stock splits and dividends through
March 15, 1996 and shall be appropriately adjusted to reflect stock splits,
stock dividends and other similar actions thereafter affecting the number of
issued and outstanding shares of Class A Common Stock)".
- 3 -
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the date first above written.
PERITUS SOFTWARE SERVICES, INC.
By: /s/ Dominic K. Chan
-----------------------------
Title:
-----------------------------
[Corporate Seal]
Attest:
/s/ Allen K. Deary
- -------------------------
Clerk
BULL HN INFORMATION SYSTEMS INC.
By: illegible
-------------------------
Title:
-------------------------
- 4 -
<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
----------------- --------------
<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)
----------------- --------------
Total redeemable stock preference items (1,102,000) (259,000)
----------------- --------------
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 -- 1,618,089
D. Shares pursuant to APB 15, paragraph 38(a) 3,301,447 3,301,447
----------------- --------------
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
------------
<TABLE>
<CAPTION>
Name Jurisdiction of
---- ---------------
Incorporation
-------------
<C> <S> <C>
1. Persist Servicios Software 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 4, 1997
