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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTIONS 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 1997
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
COMMISSION FILE NUMBER 0-22647
PERITUS SOFTWARE SERVICES, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
MASSACHUSETTS 04-3126919
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
2 FEDERAL STREET, BILLERICA, MASSACHUSETTS 01821-3540
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (978) 670-0800
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
------------------- -----------------------------------------
NOT APPLICABLE NOT APPLICABLE
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
COMMON STOCK, $0.01 PAR VALUE
(TITLE OF CLASS)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes X . No .
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [_]
As of March 19, 1998, the aggregate market value of voting common stock held
by non-affiliates of the registrant was approximately $162,793,651. As of that
date, there were 16,085,325 shares outstanding of the registrant's common
stock, $0.01 par value. The registrant has no shares of non-voting common
stock authorized or outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Parts of the definitive Proxy Statement for the Annual Meeting of
Stockholders of the Company to be held June 10, 1998, which will be filed with
the Securities and Exchange commission not later than 120 days after December
31, 1997, are incorporated by reference into Part III of this Annual Report on
Form 10-K.
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PERITUS SOFTWARE SERVICES INC.
FORM 10-K
ANNUAL REPORT
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
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<C> <S> <C>
PART I
Item 1. Business ..................................................... 3
Item 2. Properties ................................................... 16
Item 3. Legal Proceedings ............................................ 17
Item 4. Submission of Matters to a Vote of Security Holders .......... 17
PART II
Market for Registrant's Common Equity and Related Stockholder
Item 5. Matters ...................................................... 17
Item 6. Selected Financial Data ...................................... 19
Management's Discussion and Analysis of Financial Condition
Item 7. and Results of Operations .................................... 20
Item 7A. Quantitative and Qualitative Disclosures about Market Risk ... 37
Item 8. Financial Statements and Supplementary Data .................. 38
Changes in and Disagreements with Accountants on Accounting
Item 9. and Financial Disclosure ..................................... 65
PART III
Item 10. Directors and Executive Officers of the Registrant ........... 65
Item 11. Executive Compensation ....................................... 65
Security Ownership of Certain Beneficial Owners and Management
Item 12. .............................................................. 65
Item 13 Certain Relationships and Related Transactions ............... 65
PART IV
Exhibits, Financial Statement Schedules and Reports on Form 8-
Item 14. K ............................................................ 66
SIGNATURES.............................................................. 69
</TABLE>
Peritus is a registered trademark, Automate:2000 is a registered service mark
and AutoEnhancer is a trademark of Peritus Software Services, Inc. Vantage YR
2000 is a trademark of Millennium Dynamics, Inc.
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ITEM 1. BUSINESS
OVERVIEW
Peritus Software Services, Inc. (the "Company" or "Peritus") provides
solutions consisting of 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 employs software tools, methodologies and processes,
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 in the software evolution process.
On December 1, 1997, Twoquay, Inc. ("Twoquay"), a wholly owned subsidiary of
the Company, acquired substantially all of the assets and assumed certain
liabilities of the business of Millennium Dynamics, Inc. ("MDI") from American
Premier Underwriters, Inc. ("APU") in exchange for 2,175,000 shares of
Registrant's common stock, $.01 par value per share, and $30 million in cash.
The number of shares issued to APU was determined in accordance with the terms
of the Asset Purchase Agreement by and among the Company and Twoquay and APU
and MDI dated October 22, 1997 (the "Purchase Agreement") based on the Average
Share Price (as defined therein) for the five trading days beginning on the
second day immediately preceding the date thereof and ending on the second
trading day immediately following the date thereof. Neither the Company nor
Twoquay had any material relationship with either APU or MDI prior to
execution of the Purchase Agreement. The cash portion of the purchase price
was paid for from the proceeds of the Company's initial public offering which
closed on July 8, 1997. The shares of common stock issued to APU at the
closing are entitled to certain registration rights as set forth in a
Registration Rights Agreement dated as of December 1, 1997 by and among
Company and APU. Twoquay changed its name to MDI after the closing of the
acquisition. MDI's primary product, Vantage YR2000, is a software toolset
utilized for computer program analysis. The software was designed and
developed to automate the year 2000 conversion process.
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. In some circumstances,
it has formed the basis for organizations to enter into new business or
develop new businesses strategies.
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.
One of the most crucial software evolution challenges currently facing IT
departments is the cost-effective implementation of mass change to application
systems and their associated databases. A mass change software
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modification initiative is the process of effecting a change to the way a
basic variable is interpreted and acted 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, and also have 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 to
devote considerable IT resources, including investment in software tools and
processes, personnel, time and other resources, to undertake large-scale mass
change initiatives.
A typical year 2000 renovation project includes: an Assessment Phase, where
an enterprise performs an inventory of its code, analyzes the impact and
exposure of the year 2000 problem on its business and plans the renovation of
the affected code; a Correction Phase, which entails the implementation of
source code renovation, including the identification of all date-sensitive
variables, correction of the code, and generation of bridges and data
converters so the corrected code will still function with non-compliant code,
and verification of the corrected code; and a Testing Phase, which ensures the
integrity of a year 2000 renovation by performing unit and systems tests prior
to re-deploying the code into production. To date, most large organizations
that have begun to address the year 2000 problem have focused on the initial
assessment phase, and a smaller percentage have begun the more critical
correction and testing phases. The Company's AutoEnhancer/2000 software
focuses on the correction phase of a year 2000 renovation project with links
to third-party assessment tools on the front of the process and third-party
testing tools on the back.
To respond to the foregoing challenges in software evolution, many large
organizations are seeking to improve the software evolution process. With the
lack of internal resources to incorporate new and developing technologies,
select and train personnel and develop efficient methodologies to improve IT
applications, many large organizations are seeking ways to outsource their IT
requirements, particularly on a fixed-price, fixed-time frame basis in order
to minimize the risks and costs associated with such large-scale technology
requirements. In addition, industry analysts acknowledge that there is a
growing shortage of IT professionals, which is being exacerbated by the year
2000 problem. These trends have resulted in increased demand for automated
software tools that supplement traditional, mostly manual, maintenance methods
that are often tedious, time-consuming and error-prone.
Historically, software development tools have been targeted to address the
front end of the software development cycle--the analysis, design and coding
of an application--rather than on the maintenance or evolution of the
application. Existing tools and processes to address the software evolution
and mass change needs of organizations typically provide limited
functionality, lack a high degree of automation and are not designed to
address the full scope of the maintenance process. In addition, many existing
solutions do not emphasize productivity and do not address the broad range of
requirements needed to manage the software evolution process across
heterogeneous computing environments.
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With software evolution becoming an increasing burden in the operation of
mission-critical systems, organizations are actively seeking solutions that:
(i) provide comprehensive software evolution capabilities to accommodate
continually changing business needs; (ii) automate and streamline the software
evolution function; (iii) provide a comprehensive solution to mass change
initiatives, including the year 2000 problem; (iv) are compatible with
multiple platforms, operating systems and programming languages; and (v)
provide measurable productivity gains.
PERITUS SOLUTIONS
Peritus offers comprehensive products and services that enable organizations
to improve the productivity, effectiveness and quality of the software
evolution process. The Company's solutions employ a combination of tools,
processes, skilled professionals and methodologies. The Company's underlying
technology consists of its Peritus Intermediate Language ("PIL") and
proprietary tools that can be implemented to address mass change or other
software maintenance challenges.
Mass Change Solutions
Proven Technology for Mass Change. The Company's Mass Change Engine, which
is based on PIL and other proprietary technologies, converts source code from
a variety of programming languages into PIL in order to perform analysis,
correction and testing on the code during mass change maintenance initiatives.
The Mass Change Engine is designed to automate the labor-intensive code
maintenance function, thereby increasing productivity, and can be customized
to provide function-specific mass change capabilities. The Mass Change Engine
operates across multiple platforms, languages and operating systems.
Comprehensive Year 2000 Renovation Tools. 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. The Vantage YR2000 software toolset is designed
to assist and automate the code conversion process required to make software
code residing on the IBM mainframe and AS/400 platforms year 2000 compliant.
The toolset employs a combination of methodologies and automated software
tools that are designed to enhance the productivity of the code conversion
process. The underlying technology is based on an automated parsing and
conversion technology that identifies date sensitive variables and provides
correction either through date expansion or logic conversion.
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.
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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.
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 acquired the MDI business and
has focused a significant portion of its recent research and development
expenditures on enhancing current products and technologies in order to
leverage 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 over 30 value added integrators and distributors
that license its AutoEnhancer/2000 and its Vantage YR2000 software. The
Company's value added integrators operate on a worldwide basis, and its
distributors are currently located in the United States, Canada, Europe and
Japan.
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.
Expanded Service Offerings. The Company expanded 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.
Pursue Strategic Opportunities. Although the Company's growth to date has
occurred principally through internally developed products and services and
the MDI acquisition, 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
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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.
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 analysis of why 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.
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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.
PRODUCTS AND SERVICES
The Company provides solutions consisting of products and services that 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 and Vantage
YR2000 software, and its current 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.
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.
In order to increase the accurate identification of lines of affected
software code, the AutoEnhancer/2000 software traces and propagates variables
that a user has identified as date-sensitive to identify interrelated
variables. The AutoEnhancer/2000 software also uses a pattern matching program
that identifies variables that were named by a user in such a manner as to
suggest that they may be date-sensitive variables. This pattern matching
program uses "neural net" concepts, logical principles, user input and user
feedback to attempt to learn and adjust the patterns searched so as to improve
accuracy in determining which variations to encompass as variables of
interest. Quantifying the speed at which the Company's AutoEnhancer/2000
software (or other conversion tools) performs data conversion or the accuracy
at which the software identifies lines of affected software code is not easily
accomplished as results vary based on a large number of variables, including:
(i) the user-determined qualitative degree of accuracy of identification and
correction of errors; (ii) the nature and type of the identification and
correction methods; (iii) the computer languages used in the code being
corrected; (iv) whether the computer code contains a mixture of various
languages or involves proprietary aspects specific to the client; and (v) the
specific coding practices used by programmers in creating programs and
generating computer code. Among software tools designed for data correction of
the year 2000 problem, there is no mutually agreed upon standard benchmark of
comparison with regard to speed and accuracy.
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The following table highlights the various steps in which the
AutoEnhancer/2000 software addresses the correction phase of a year 2000
renovation:
AUTOENHANCER/2000 SOFTWARE
FUNCTION FEATURES BENEFITS
Segmentation .Load source code into .EBCDIC to ASCII encoded
program accurately and recoverably
.Perform pre-renovation .Strict source code control
compile environment established
.Establish source code .Source code completeness
boundary verified
.Identify print and .Source code compliability
display outputs validated
.Perform dataset name .Data synonyms established
unification
Identification .Convert source code .Logic of code unraveled for
into PIL automated analysis
.Perform record name .Record synonyms established
unification .Bridging strategies specified
.Select bridging .Date-sensitive variables and
strategies constants identified
.Find the date-sensitive .Procedure-division uses of
items through date-sensitive items identified
propagation .Accuracy and completeness of
.Resolve ambiguous identification verified
identification
conditions
Correction .Create and apply .Source code corrected
correction transactions
.Facilitate .Redefines realigned
identification
completeness using
Adaptive Seed Generator
.Create and apply .All identified uses of date-
harmonization sensitive items corrected
transactions
.Resolve correction
warnings
Bridge .Generate bridge .Interoperability of renovated
programs by building and unrenovated code
wrappers, filters and established
converters
Adaptation .Identify Job Control .Date-sensitive JCL identified
Language (JCL) date- and corrections suggested
sensitive issues
.Identify record size
changes
.Create JCL correction
plan
Verification .Reconcile planned and .Intended and actual changes
implemented corrections reconciled
.Perform post-renovation .Verification to ensure that
compile and compare to changes do not impact compiler
pre-renovation compile results
results
Packaging .Package renovated .Source code returned to
source code and facilitate replacement and
generated source code testing
for return to client
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Vantage YR2000 Software
The Company's Vantage YR2000 tools provide the ability to identify and
automatically convert substantially all of the software components and data
files of a client's information systems. The Vantage YR2000 tools:
. analyze the software components of an organization's systems environment
. provide valuable information, including date fields in programs and
cross-reference reports, for planning, controlling and implementing year
2000 projects
. and support the automatic conversion of the software and related data.
The Company believes that the use of an automated tool in a conversion
project reduces the project timeframe, the experience levels and number of
people required and the overall project costs, and increases the reliability
of the converted system.
The Vantage YR2000 tools are available as a suite of products or as
individual components depending on the needs of each customer. The Company
provides the toolset and the necessary support and technical training for
clients that wish to control their own conversion project or for those clients
that may use outside consultants for their conversion project. Presently, the
Vantage YR2000 toolset includes products for the IBM mainframe and AS/400
platforms.
Various components of the client's software and related data files are
analyzed and the Vantage YR2000 tool marks dates in programs and files and
generates an audit trail that identifies the size and complexity of the
project. Using this information, an assessment of resource requirements,
skills, project timelines and costs can be prepared.
The Vantage YR2000 tools automatically identify and change dates in existing
programs and files throughout the client's environment as well as document
those changes. The tools also highlight areas that may require intervention
due to inconsistent naming conventions or other factors that may prevent
automatic date changes and instances where the client may prefer to pursue a
logic approach to code conversion.
Peritus offers extensive training and support to its software licensees
including "quick-start" consulting and training program for Vantage YR2000.
The licensees' 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 and/or Vantage YR2000 software in the licensees'
environment. The Company also provides licenses with client technical support
as well as on-site or remote consulting.
The Company licenses its AutoEnhancer/2000 and Vantage YR2000 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 or number of central processing
units (CPUs) licensed, and license fees to value added integrators and
distributors are generally royalties based on lines of code processed or to be
processed or CPUs licensed.
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, modernization 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 and the Company's
processes enable workflow management techniques to improve a
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maintenance team's throughput. In addition, the Company may from time to time
directly provide year 2000 renovation services for its clients. In 1998, the
Company began to launch a marketing program combining year 2000 renovation and
outsourcing offerings.
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 together with other factors such as quality,
productivity, and software and hardware environment and in general agrees to
provide IT services on a fixed price, fixed time from bases after a detailed
assessment. Benefits are 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.
With respect to technology transfer services, the Company targets an
increase in client productivity of up to 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 introduced insourcing services, which combined the
Company's technology transfer services with on-site management of the Peritus-
trained client teams. In an insourcing engagement, the Company participates
with the client management to provide that the teams accurately implement the
Company's approach and perform at expected productivity levels. Typical
insourcing engagements 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.
Direct Sales
The Company sells and supports its products and services directly through
its regional sales force located in the Northeast, Southeast, Central and West
areas of the United States.
11
<PAGE>
Indirect Sales
The Company currently has agreements with over 30 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 and/or Vantage YR2000
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, Europe and
Japan and are authorized by Peritus to sublicense the Company's products
and/or services to end users or system integrators or distributors their
respective territories.
Marketing
The Company's marketing organization works closely with product management
and 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. In 1998, the Company began to launch its
marketing campaigns covering its combined year 2000 renovation and outsourcing
service offering and combined Auto Enhancer/2000 and Vantage YR 2000 product
offering. The Company is also conducting an advertising campaign for its year
2000 and other products and services.
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 from industries
including insurance, financial services, telecommunications, transportation,
utilities and manufacturing.
<TABLE>
<S> <C>
Advanced Micro Devices, Inc. Merrill Lynch, Pierce, Fenner & Smith Incorporated
Bell Communications Research,
Inc. ("Merrill Lynch")
Bull HN Information Systems
Inc. ("Bull") Metropolitan Life Insurance Company ("Met Life")
Computervision Corporation MicroAge Computer Center, Inc.
("Computervision") Microcom, Inc.
BankBoston Corporation Bell Atlantic
Lucent Technologies Prudential Life Insurance
</TABLE>
To date, the Company's revenue has been dependent on a few major clients,
including Bull, Stratus Computer, Inc. ("Stratus"), Computervision, Met Life,
IBM Global Services ("IBM") and Merrill Lynch. During 1997, Bull, Merrill
Lynch and Met Life represented approximately 8.2%, 6.6% and 6.6% of the
Company's total revenues, 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 62.9%,
77.9% and 90.5% and of the Company's total revenue in the years ended December
31, 1997, 1996 and 1995, respectively.
The Company has entered into agreements to provide software consulting
services and software maintenance services with each of Computervision,
Stratus and Bull. These agreements expire, subject to extension, on December
31, 2000, June 6, 1998 and December 31, 1999, respectively.
The Company has also entered into a license agreement with Bull that expires
on December 31, 2001. This agreement grants to Bull certain use rights,
sublicensing rights and the right to make certain derivative works with regard
to proprietary software programs of the Company. In the event that the Company
fails to fulfill any
12
<PAGE>
of its obligations under the Bull license agreement for a period of 90 days,
Bull has the option, upon notice to the Company, to elect in lieu of
termination to assume performance of the Company's obligations and to have
access to source code of the Company's licensed software to perform such
assumed obligations.
The Company and Merrill Lynch have entered into a master license agreement
granting to Merrill Lynch the right to use certain proprietary software of the
Company on a non-exclusive, perpetual use basis to address year 2000 issues.
The Company has also entered into a license agreement with Met Life that
provides for the purchase by Met Life of several non-exclusive, worldwide
licenses of certain of the Company's proprietary software. The Met Life
agreement is terminable by Met Life upon 90 days' written notice. Such
termination may result in a partial refund of sums paid to the Company under
the agreement.
While each client engagement differs, the following examples illustrate the
types of business needs the Company has addressed:
Merrill Lynch--AutoEnhancer/2000 Licensee. Merrill Lynch, a global financial
services concern, evaluated the Company's AutoEnhancer/2000 software in 1996
as part of its process of developing a comprehensive solution to its year 2000
renovation efforts. Along with a number of other vendors, Peritus was invited
to conduct two pilot programs, which were designed to demonstrate the tool's
ability to automate the identification and correction tasks of a year 2000
conversion. In December 1996, Merrill Lynch entered into a direct end-user
license for the AutoEnhancer/2000 software to support its data expansion
renovation efforts. Merrill Lynch notified the Company that the tool was among
those selected based upon the accuracy of its identification function and the
level of automation provided. Merrill Lynch has established a renovation
center in New York that provides divisions with remote access to perform the
renovations, and Peritus has trained more than 35 of Merrill Lynch's
renovation engineers.
Computer Sciences Corp.--AutoEnhancer/2000 Value Added Integrator. Computer
Sciences Corp. ("CSC"), an international provider of IT services, provides a
dedicated national practice that addresses the year 2000 problem. CSC's
Catalyst 2000(R) service includes a renovation center designed to process
large amounts of code through the correction phase. To achieve the desired
throughput, the CSC renovation center sought tools that would automate the
process. After evaluating several tools and technologies, CSC chose the
Company's AutoEnhancer/2000 software for its center and signed a strategic
agreement that provided for a usage-based license. Since the initiation of the
agreement, Peritus has trained CSC renovation engineers to work with the
Peritus technology in this renovation center.
Bell Atlantic--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.
Fina Oil and Chemical--Vantage YR2000 Licensee. In 1996, Fina Oil and
Chemical ("Fina"), a large petroleum and chemical company, conducted an impact
analysis of its year 2000 problem and began to review the options available to
address the problem in April of that year. MDI conducted a pilot program for
Fina later in the year after which Fina licensed the Vantage YR2000 tools.
Fina set up an internal factory in early 1997 to begin renovating its code and
had completed renovating over 1.5 million lines of code by the end of 1997.
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
13
<PAGE>
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 typically capped at $400,000 annually per direct licensee.
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 or acquire new products, including the development of new versions
of its mass change software and the commercialization of its internally used
outsourcing tools and methodologies. See "Management's Discussion and Analysis
of Fiinancial Condition and Results of Operations" for a description of
research and development expenses incurred from 1995 through 1997.
The Company maintains research and development facilities in Lisle,
Illinois, Cincinnati, Ohio and Nashua, NH as well as at the Company's
Billerica, Massachusetts headquarters. In January 1997, the Company began
research and development activities in Bangalore, India.
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 Technologies Incorporated ("Vista") to gain additional
technologies in user interface and software behavior modeling. In December
1997, the Company acquired additional year 2000 technology in connection with
the MDI acquisition.
COMPETITION
The market for the Company's software products and services, including its
solutions for the year 2000 problem, is intensely competitive and
characterized by rapid changes in technology and user needs and the frequent
introduction of new products. The Company's competitors include year 2000
software vendors, year 2000 service providers and outsourcing service
providers.
Vendors of year 2000 software products generally focus on a particular phase
of a year 2000 renovation, such as assessment, correction or testing. The
Company's AutoEnhancer/2000 and Vantage YR 2000 software primarily address 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, Cognicase, Inc. 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, CCd On-Line, Computer Horizons Corp. and
Information Management Resources, Inc. Many smaller local and regional
organizations also compete in the year 2000 services market.
14
<PAGE>
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 Information Services, Inc.
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 certain 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 and Vantage YR 2000 software source code for certain
purposes. Access to the source code may increase the likelihood of
misappropriation or misuse by third parties.
The Company's business also includes licensing of the Company's proprietary
software, methodologies and related services to end users, as well as to value
added integrators and distributors authorized to provide services to third
parties. In general, such licensing of the Company's proprietary software,
methodologies and related services to a licensee is a limited term, limited
use, non-exclusive license that contains restrictions on copying, disclosure,
usage, decompiling and transferability. In particular cases, however, a
license agreement may have certain provisions that are exclusive in some
manner. Within these licensing agreements the Company seeks to avoid
disclosure of its trade secrets, including, but not limited to, generally
requiring those persons with access to the Company's proprietary information
to execute confidentiality agreements restricting use of and access to the
Company's confidential information.
The Company generally relies on internal efforts in order to develop its
software and methodologies. However, in some limited cases the Company has
contracted with various firms, certain of which are located in India and
Canada, to develop software or portions of software for and on behalf of the
Company. Software development by a contractor for the Company is done pursuant
to agreements that generally assign all rights to the Company and contain
nondisclosure provisions. Such software developed by a contractor may be
merged
15
<PAGE>
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. In
December 1997, the Company acquired additional year 2000 technology in
connection with the MDI acquisition.
The Company has filed six patent applications with the United States Patent
and Trademark Office pertaining to technologies, processes and methodologies
used by the Company's software. None of these patents has been granted and
there can be no assurance that a patent will be issued pursuant to any 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 February 28, 1998, the Company employed 453 full-time employees,
including 124 in research and development, 52 in sales and marketing, 244 in
professional services and support and 33 in finance, administration and
corporate support. The success of the Company depends on its continued ability
to attract and retain highly skilled and qualified personnel. Competition for
such personnel is intense in the computer software industry, particularly for
software developers, service consultants, and sales and marketing personnel.
There can be no assurance that the Company will be able to attract and retain
qualified personnel in the future.
The Company's employees are not represented by any labor unions. The Company
considers its relations with its employees to be good.
ITEM 2. PROPERTIES
The Company is headquartered in Billerica, Massachusetts, where it leases
approximately 100,000 square feet under a lease expiring in January 2006. In
addition, the Company leases office space of approximately 5,000 square feet
in Trumbull, Connecticut, which it currently uses to provide some outsourcing
and software evolution services, approximately 23,000 square feet in Westboro,
Massachusetts, where the Company also provides outsourcing and software
evolution services, and approximately 16,000 square feet in Cincinnati, Ohio
where the Company maintains a research and development facility and provides
client support. These leases expire in January 2000, December 1998 and
November 2002, respectively.
The Company also maintains research and development facilities in Lisle,
Illinois and Nashua, New Hampshire, of approximately 5,000 and 4,500 square
feet, respectively, the leases for which expire in February
16
<PAGE>
2003 and December 2002, respectively. The Company leases additional facilities
and offices in Phoenix, Arizona; Denver, Colorado; Dayton, Ohio; Houston and
Dallas, Texas and Bangalore, India. The Company's majority-owned subsidiary,
Persist, leases facilities in Barcelona, Spain. The Company believes its
current facilities are in good condition, are sufficient for its current
operations and that the facilities will continue to provide adequate space for
its operations in the foreseeable future.
ITEM 3. LEGAL PROCEEDINGS
The Company is not a party to any material legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II.
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER
MATTERS.
The following table sets forth, for the periods indicated, the range of high
and low sales prices for the Company's common stock, as reported by the Nasdaq
National Market. The Company's common stock has been traded under the Nasdaq
symbol "PTUS" since the Company's initial public offering on July 2, 1997.
These prices reflect interdealer prices, without retail mark-ups, mark-downs
or commissions, and do not necessarily represent actual transactions.
<TABLE>
<CAPTION>
1997
--------------
HIGH LOW
------- ------
<S> <C> <C>
Third Quarter (since July 2, 1997)........................ $32.375 $19.00
Fourth Quarter............................................ 30.25 14.75
</TABLE>
Historically, the Company has not declared or paid cash dividends on its
common stock and does not plan to pay cash dividends to its stockholders in
the foreseeable future. The Company presently intends to retain any earnings
to finance further growth of its business. As of March 19, 1998, there were
328 stockholders of record of the Company's common stock.
On December 1, 1997, the Company issued 2,175,000 unregistered shares of its
common stock and paid $30 million in cash to APU in exchange for the
acquisition of substantially all of the assets and assumption of certain
liabilities of the business of MDI from APU. The securities issued in the
foregoing transaction were offered in reliance upon an exemption from
registration under the Securities Act of 1933 under Section 4(2) of such
Securities Act, relating to sales by an issuer in a transaction not involving
a public offering.
The Company is furnishing the following information with respect to the use
of proceeds from its initial public offering of common stock, $.01 par value
per share on July 2, 1997:
(1) The effective date of the registration statement for the offering and
the commission file number were July 1, 1997 and 333-27087, respectively.
17
<PAGE>
(4)(v) From July 1, 1997 to December 31, 1997, the estimate of expenses
incurred is as follows:
<TABLE>
<S> <C>
Underwriting discount......................................... 3,136,000
SEC registration fee.......................................... 15,056
NASD filing fee............................................... 5,458
Nasdaq National Market listing fee............................ 56,948
Blue Sky fees and expenses.................................... 16,105
Transfer Agent and Registrar fees............................. 5,000
Accounting fees and expenses.................................. 281,900
Legal fees and expenses....................................... 287,091
Printing and mailing expenses................................. 210,316
Miscellaneous................................................. 122,126
---------
Total....................................................... 4,136,000*
=========
</TABLE>
Payment of expenses were to persons other than directors, officers,
general partners of the Company or their associates, persons owning 10%
or more of the equity securities of the Company or affiliates of the
Company.
* $1,000,000 of the above expenses (excluding the underwriting
discount) incurred were recorded as offering expenses netted against
the proceeds.
(vi) The net offering proceeds to the Company after expenses were
approximately $40,664,000.
(vii) From July 1, 1997 to December 31, 1997, $500,000 of the offering
proceeds were used to repay certain indebtedness under a secured
subordinated note and $30 million were paid to APU in connection with the
MDI acquisition. The balance of the offering proceeds ($10,164,000) was
invested in commercial paper and money market accounts.
Except for the $30 million paid to APU which, as a result of the MDI
acquisistion, owns 10% or more of the Company's common stock, payment of the
offering proceeds were to persons other than directors, officers, general
partners of the Company or their associates, persons owning 10% or more of the
equity securities of the Company or affiliates of the Company.
18
<PAGE>
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated financial data set forth below as of December 31,
1997 and 1996, and for the three years ended December 31, 1997, are derived
from the Company's Consolidated Financial Statements, which appear elsewhere
in this Annual Report and which have been audited by Price Waterhouse LLP,
independent accountants. The selected financial data set forth below as of
December 31, 1995 and 1994 and for the year ended December 31, 1994 are
derived from the Company's audited financial statements, which are not
included in this Annual Report. The selected financial data as of and for the
year ended December 31, 1993 is derived from the Company's unaudited financial
statements, which are not included in this Annual Report. 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 Annual Report and include all adjustments, consisting only of normal
recurring adjustments, necessary for a fair statement of the financial
position and results of operations for this unaudited period. 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 Annual Report.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------
1997 1996 1995 1994 1993
-------- -------- ------- ------- ------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
Statement of Operations Data:
Revenue:
Outsourcing services............ $ 11,447 $ 10,190 $16,400 $ 7,130 $1,798
License......................... 21,826 6,526 -- -- --
Other services.................. 7,028 2,519 2,105 742 433
-------- -------- ------- ------- ------
Total revenue (1).............. $ 40,301 19,235 18,505 7,872 2,231
-------- -------- ------- ------- ------
Cost of revenue:
Cost of outsourcing services.... 9,536 8,488 9,602 4,700 841
Cost of license................. 690 162 -- -- --
Cost of other services.......... 5,357 2,931 2,421 319 306
-------- -------- ------- ------- ------
Total cost of revenue.......... 15,583 11,581 12,023 5,019 1,147
-------- -------- ------- ------- ------
Gross profit ................... 24,718 7,654 6,482 2,853 1,084
-------- -------- ------- ------- ------
Operating expenses:
Sales and marketing............. 8,864 3,116 2,129 366 265
Research and development........ 8,324 6,033 1,703 560 196
General and administrative...... 4,312 3,249 2,357 1,283 428
Write-off of acquired in-process
research and development....... 70,800 -- -- -- --
-------- -------- ------- ------- ------
Total operating expenses....... 92,300 12,398 6,189 2,209 889
-------- -------- ------- ------- ------
Income (loss) from operations... (67,582) (4,744) 293 644 195
Interest income (expense), net.. 948 (296) (203) (63) --
-------- -------- ------- ------- ------
Income (loss) before income
taxes, minority interest and
equity in loss of less than
majority-owned company......... (66,634) (5,040) 90 581 195
Provision (benefit) for
estimated income taxes......... 272 (143) (8) 179 7
-------- -------- ------- ------- ------
Income (loss) before minority
interest and equity in loss of
less than majority-owned
company........................ (66,906) (4,897) 98 402 188
Minority interest in
consolidated subsidiary........ (4) (24) (43) -- --
Equity in loss of less than
majority-owned company......... -- -- -- (97) --
-------- -------- ------- ------- ------
Net income (loss)............... $(66,910) $ (4,921) $ 55 $ 305 $ 188
======== ======== ======= ======= ======
Net income (loss) per share:(2)
Basic........................... $ (6.97) $ (1.02) $ 0.01 $ 0.06 $ 0.04
======== ======== ======= ======= ======
Diluted......................... $ (6.97) $ (1.02) $ 0.01 $ 0.05 $ 0.03
======== ======== ======= ======= ======
Weighted average shares
outstanding:(2)
Basic........................... 9,708 5,876 5,078 4,950 4,866
======== ======== ======= ======= ======
Diluted......................... 9,708 5,876 6,456 5,873 5,673
======== ======== ======= ======= ======
Pro forma basic and diluted net
loss per share (unaudited) .... $ (5.78) $ (6.67)
======== ========
Pro forma basic and diluted av-
erage shares outstanding (unau-
dited) ........................ 11,574 7,394
======== ========
</TABLE>
19
<PAGE>
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------------
1997 1996 1995 1994 1993
------- ------- ------ ------ ------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Balance Sheet Data:
Cash and cash equivalents.............. $11,340 $ 7,388 $ 264 $ 339 $ 2
Short-term investments................. 3,000 -- -- -- --
Working capital........................ 21,511 8,218 2,218 1,267 338
Total assets........................... 40,530 17,725 7,179 2,924 1,075
Long-term debt, net of current
portion............................... 413 1,538 1,792 777 491
Redeemable stock....................... -- 12,287 -- -- --
Stockholders' equity (deficit) ........ 30,585 (3,302) 1,802 867 498
</TABLE>
- --------
(1) Revenue (in thousands) from related parties in the years ended December
31, 1997, 1996, 1995, 1994 and 1993 was $4,478, $6,443, $10,114, $3,951
and $4,317, 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 historical and pro forma net income
(loss) per share.
The following unaudited pro forma data has been prepared as if the
acquisition of MDI was completed at the beginning of the periods presented, is
presented for illustrative purposes only and is not necessarily indicative of
results of operations which would actually have been achieved had the
acquisition occurred at the beginning of such periods or which may be achieved
in the future. In addition, the following unaudited pro forma data is adjusted
to reflect the amortization of acquired intangible assets and excludes the
write off of acquired in-process research and development of $70,800,000 due
to its non-recurring nature. Also, the following unaudited pro forma basic and
diluted net loss per share data assumes conversion of all redeemable
convertible preferred stock as of the beginning of the year, or date of
issuance if later, using the if-converted method (see Note 2 to the
consolidated financial statements) and assumes the 2,175,000 shares issued in
connection with the acquisition were outstanding for the entire periods
presented.
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
---------------------------------------------------
1997 1996
------------------------- ------------------------
AS REPORTED PRO FORMA AS REPORTED PRO FORMA
------------ ----------- ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Revenues............... $ 40,301,000 $51,225,000 $19,235,000 $22,348,000
Net loss............... (66,910,000) (2,299,000) (4,921,000) (5,689,000)
Net loss per share:
Basic................ $ (6.97) $ (0.26) $ (1.02) $ (0.71)
Diluted.............. $ (6.97) $ (0.26) $ (1.02) $ (0.71)
</TABLE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
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, a developer of computer-aided engineering software. During the year
ended December 31,1997, the Company expanded its product offering by releasing
an enhanced version of the AutoEnhancer/2000 software which enables a client
to perform logic correction only changes with regard to year 2000 renovations.
20
<PAGE>
In 1997, the Company derived 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 included 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, Europe and Japan.
On July 8, 1997, the Company closed its initial public offering of 4,025,000
shares of common stock, 2,800,000 of which were sold by the Company and the
balance by selling stockholders, at a public offering price of $16 per share.
The proceeds to the Company from the offering, net of offering expenses, were
$40,664,000. The Company used a portion of the net proceeds to repay a secured
subordinated note payable. The Company also used the proceeds to acquire MDI
and plans to use any remaining proceeds for research and development, working
capital and general corporate purposes. In connection with closing the initial
public offering, all outstanding shares of Series A and B preferred stock and
Class B common stock automatically converted into 3,822,903 shares of common
stock, all Class A common stock was redesignated as common stock, and the
redeemable common stock right automatically terminated.
Effective December 1, 1997, Twoquay, Inc., a wholly owned subsidiary of the
Company, acquired substantially all of the assets and assumed certain
liabilities of the business of MDI from APU in exchange for $30 million in
cash and 2,175,000 unregistered shares of the Company's common stock. Pursuant
to a Registration Rights Agreement between the Company and APU, the Company
agreed to file a Registration Statement on Form S-3 covering up to all of the
common shares issued in the MDI acquisition by July 6, 1998 and to use its
best efforts to cause such Registration Statement to become effective prior to
August 1, 1998. The Company also granted APU certain incidental rights to
register up to 500,000 of the shares of common stock prior to July 6, 1998 in
the event of a secondary offering of the Company's common stock. Under the
terms of the Registration Rights Agreement, APU also agreed that up to 837,500
of the shares of common stock issued by the Company would be subject to
restrictions on sale through December 31,1998. In determining the purchase
price for accounting purposes, the shares of common stock issued by the
Company in connection with this transaction have been assigned a value of
$47.3 million based on the average closing sale price of the Company's common
stock during the six trading days beginning on the second trading day
immediately preceding the completion and public announcement of the terms of
the acquisition on October 22, 1997, less a discount of approximately 13%
primarily reflecting the illiquid nature of the unregistered shares of common
stock issued by the Company in connection with this transaction as discussed
above. Twoquay changed its name to MDI after the closing of the acquisition.
As the result of the MDI acquisition, the results of operations and cash flows
are included in the results of the Company from the date of acquisition.
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
21
<PAGE>
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 or number of CPUs licensed. 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 or number of CPUs licensed. Revenue derived from
these usage-based or CPU 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.
Other services provided by the Company include technology transfer
engagements, 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 and/or Vantage YR2000 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. 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
For the year ended December 31, 1997, no single customer accounted for more
than 10% of the Company's total revenue. However, 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. The largest client in both 1996 and
1995 was a related party of the Company. See Note 9 of Notes to the Company's
Consolidated Financial Statements. The Company's ten largest clients in the
year ended December 31, 1997, 1996 and 1995 accounted for approximately 62.9%,
77.9% and 90.5% 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. In 1997, approximately fifty percent, and, in 1996 and 1995
substantially all, of the Company's international revenue has been
attributable to revenue generated by Persist.
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>
YEAR ENDED DECEMBER 31,
----------------------------
1997 1996 1995
-------- ------- -------
<S> <C> <C> <C>
Revenue:
Outsourcing services........................... 28.4% 53.0% 88.6%
License........................................ 54.2 33.9 --
Other services................................. 17.4 13.1 11.4
-------- ------- -------
Total revenue (1)............................ 100.0 100.0 100.0
-------- ------- -------
Cost of revenue:
Cost of outsourcing services................... 23.7 44.1 51.9
Cost of license................................ 1.7 0.8 --
Cost of other services......................... 13.3 15.3 13.0
-------- ------- -------
Total cost of revenue........................ 38.7 60.2 65.0
-------- ------- -------
Gross profit..................................... 61.3 39.8 35.0
-------- ------- -------
Operating expenses:
Sales and marketing............................ 22.0 16.2 11.5
Research and development....................... 20.7 31.4 9.2
General and administrative..................... 10.7 16.9 12.7
Write-off of acquired in-process research and
development................................... 175.6 -- --
-------- ------- -------
Total operating expenses..................... 229.0 64.5 33.4
-------- ------- -------
Income (loss) from operations.................. (167.7) (24.7) 1.6
Interest income (expense), net................... 2.4 (1.5) (1.1)
-------- ------- -------
Income (loss) before income taxes and minority
interest in consolidated subsidiary........... (165.3) (26.2) 0.5
Provision (benefit) for estimated income taxes... 0.7 (0.7) --
-------- ------- -------
Income (loss) before minority interest in
consolidated subsidiary....................... (166.0) (25.5) 0.5
Minority interest in consolidated subsidiary..... -- (0.1) (0.2)
-------- ------- -------
Net income (loss).............................. (166.0)% (25.6)% 0.3%
======== ======= =======
</TABLE>
- --------
(1) Revenue from related parties in the years ended December 31, 1997, 1996
and 1995 represented 11.1%, 33.5% and 54.7% of total revenue,
respectively.
YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996
Revenue
Total revenue increased 109.5% to $40,301,000 in the year ended December 31,
1997 from $19,235,000 in the year ended December 31, 1996. This increase in
revenue was primarily due to an increase in the licensing of the Company's
Auto Enhancer/2000 software and revenue attributable to Vantage YR2000
products as well as from increases in other services revenue and, to a lesser
extent, outsourcing services revenue. International revenue increased 130.8%
to $4,154,000 in 1997 from $180,000 in 1996. Persist generated 46.3% of the
Company's international revenue in 1997 and substantially all of the Company's
international revenue in 1996.
Outsourcing Services. Outsourcing services revenue increased 12.3% to
$11,447,000 in the year ended December 31, 1997 from $10,190,000 in the year
ended December 31, 1996. As a percentage of total revenue, outsourcing
services revenue decreased to 28.4% in the year ended December 31, 1997 from
53.0% in the year ended December 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 one in 1997 and was
partially offset
23
<PAGE>
by the recognition of lesser amounts of revenue under the percentage-of-
completion method on existing outsourcing contracts that were in their later
phases during 1997. The decrease in outsourcing services revenue as a
percentage of total revenue reflects the increased contribution of license
revenue to total revenue during the year ended December 31, 1997 when compared
to the prior year. 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 $21,826,000 in the year ended December 31,
1997, or 54.2% of total revenue, compared to $6,526,000, or 33.9% of total
revenue, in the year ended December 31, 1996. The increase in license revenue
for 1997 was primarily attributable to the delivery of licensed software to
additional end users and to increased license fees from value added
integrators.
Other Services. Other services revenue increased 179.0% to $7,028,000 in the
year ended December 31, 1997 from $2,519,000 in the year ended December 31,
1996. As a percentage of total revenue, other services revenue was 17.4% in
the year ended December 31, 1997 and 13.1% in the year ended December 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.
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 increased 12.3% to $9,536,000 in the year ended December 31, 1997 from
$8,488,000 for the year ended December 31, 1996. Cost of outsourcing services
revenue as a percentage of outsourcing services revenue remained flat at 83.3%
in the years ended December 31, 1997 and 1996. The increase in costs of
outsourcing services revenue in absolute dollars was due primarily to the
addition of resources necessary to provide services under new outsourcing
contracts.
Cost of License Revenue. Cost of license revenue consists primarily of
salaries, benefits, amortization expense of intangibles related to the MDI
acquisition and related overhead costs associated with license-related
materials packaging and freight. Cost of license revenue was $690,000 in the
year ended December 31, 1997, or 3.2% of license revenue. Cost of license
revenue was $162,000, or 2.5% of license revenue, in the year ended December
31, 1996. The increase in cost of license revenue in absolute dollars was
primarily attributable to the addition of employees and related resources to
support additional end users and value added integrators.
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
82.8% to $5,357,000 in the year ended December 31, 1997 from $2,931,000 in the
year ended December 31, 1996. Cost of other services revenue as a percentage
of other services revenue decreased to 76.2% in the year ended December 31,
1997 from 116.4% in the year ended December 31, 1996. Costs exceeded revenues
in the year ended December 31, 1996 primarily as a result of expected overruns
on one significant pilot engagement, which subsequently became a significant
product license in 1997. Costs increased in absolute dollars in the year ended
December 31, 1997 due to additional staffing in the Company's client support,
training and consulting organizations related to additional customers for 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 sales and marketing
personnel; sales referral fees to third parties; advertising programs; and
other promotional activities. Sales and marketing expenses increased 184.5% to
$8,864,000 in the year ended December 31, 1997 from $3,116,000 in the year
ended December 31, 1996. As a percentage of total revenue, sales and marketing
expenses increased to 22.0% in the year ended December 31, 1997 from 16.2% in
the year ended December 31, 1996. The increase in expenses in absolute dollars
and as a percentage of revenue was
24
<PAGE>
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 in
late 1996 and throughout 1997.
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 38.0% to $8,324,000 in the year ended December
31, 1997 from $6,033,000 in the year ended December 31, 1996. As a percentage
of total revenue, research and development expenses decreased to 20.7% in the
year ended December 31, 1997 from 31.4% in the year ended December 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.
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 intangible assets associated with the Vista acquisition.
General and administrative expenses increased 32.7% to $4,312,000 in the year
ended December 31, 1997 from $3,249,000 in the year ended December 31, 1996.
As a percentage of total revenue, general and administrative expenses
decreased to 10.7% in the year ended December 31, 1997 from 16.9% in the year
ended December 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 as well as increased costs associated with
being a publicly traded company.
Acquired Research and Development and other Intangible Assets. As discussed
in Note 3 to the consolidated financial statements, the Company recorded a
charge to operations of $70,800,000 for the write-off of acquired in-process
research and development, the value of which was determined based upon an
independent appraisal. In addition, the Company recorded intangible assets of
$5,503,000, which included approximately $4,800,000 of developed technology.
The amounts allocated to intangible assets are being amortized on a straight-
line basis over their expected useful lives of five years. Acquired technology
included in the in-process write-off reflects the purchase price allocated to
technology currently under development which is not yet considered
technologically feasible and which had no alternative failure use at the time
of the acquisition.
Interest Income (Expense), Net. Interest income and expense is primarily
composed of interest income from cash balances and interest expense on debt.
The Company had interest income, net of $948,000 in the year ended December
31, 1997 compared to interest expense, net of $296,000 in the year ended
December 31, 1996. This change in interest income (expense), net was primarily
attributable to increased interest income from increased cash balances
resulting from the Company's initial public offering.
Provision for Income Taxes. The Company's income tax provision (benefit) was
$272,000 and ($143,000) in 1997 and 1996, respectively. The Company's
effective tax rate for 1997 was significantly impacted by the write-off of the
acquired in-process research and development which is not immediately
deductible by the Company and for which a deferred tax asset valuation
allowance was provided. Accordingly, the Company did not realize a tax benefit
in 1997 as a result of its net loss. The provision was the result of an
increase in taxable income and international taxes, which was substantially
offset by the Company's expected utilization in 1997 of previously generated
net operating loss carryforwards.
The Company had net deferred tax assets of $23,870,000 and $2,178,000 at
December 31, 1997 and 1996, respectively. The Company has provided a valuation
allowance for the full amount of the net deferred tax assets, since the
realization of these future benefits was not sufficiently assured. If the
Company achieves profitability, these deferred tax assets may be available to
offset future income tax liabilities and expense.
25
<PAGE>
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 decreased to a loss of $4,000 in the year ended
December 31,1997 from income of $24,000 in the year ended December 31, 1996.
This change was the result of the decreased profitability of Persist. At
December 31,1997 and 1996, the Company held a 63.0% equity interest in
Persist.
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.
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.
26
<PAGE>
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.
LIQUIDITY AND CAPITAL RESOURCES
The Company has 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 $11,340,000
and $7,388,000 at December 31, 1997 and 1996, respectively. The Company's
working capital was $21,512,000 and $8,218,000, at December 31, 1997 and 1996,
respectively. On July 8, 1997, the Company closed an initial public offering
of 4,025,000 shares (2,800,000 of which were offered by the Company and the
balance by selling stockholders) of common stock at a price of $16.00 per
share. The net proceeds to the Company from the offering after deducting
offering expenses were $40,664,000. The Company used such proceeds for
repayment of certain existing indebtedness and the MDI acquisition, and plans
to use the remaining proceeds for research and development, working capital
and general corporate purposes.
27
<PAGE>
The Company's operating activities provided cash of $774,000 and used cash
of $2,342,000 during the years ended December 31, 1997 and 1996, respectively.
The Company's generation of cash during the year ended December 31, 1997 was
primarily caused by net income of $3,890,000 (excluding the non-cash write-off
of acquired in process research and development of $70,800,000) plus non-cash
depreciation and amortization expense of $1,327,000, a decrease in unbilled
license revenue from related parties of $1,400,000 and an increase in accrued
expenses and other liabilities of $897,000. These increases were partially
offset by an increase in accounts receivable of $6,853,000.
The Company used cash of $36,368,000 and $1,059,000 for investing activities
during the years ended December 31, 1997 and 1996, respectively. Investing
activities in 1997 consisted principally of the MDI acquisition and purchases
of short-term investments and 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 1998, the Company expects to continue to purchase
property and equipment to further develop its infrastructure.
The Company's financing activities provided cash of $40,158,000 and
$10,555,000 during the years ended December 31, 1997 and 1996, respectively.
As discussed above, the 1997 period includes the net proceeds of the Company's
initial public offering. In March 1996, the Company raised aggregate net
proceeds of $5,408,000 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 May 1995, the Company issued a secured subordinated note payable for
$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 $76,000 for the purchase of up to 312,500 shares of
common stock for $1.60 per share. These warrants were exercised in July 1997.
In July 1997, the Company used a portion of the net proceeds from the exercise
of the detachable warrants and the initial public offering to repay the note
in full.
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
December 31, 1997). The maximum borrowing under this line of credit is
$3,500,000 and is limited to 75% of certain receivables plus 50% of costs and
estimated earnings in excess of billings on uncompleted contracts, as defined
by the line of credit agreement. The line of credit, which was extended on
June 20, 1997, expires and all borrowings are payable in full on June 30,
1998. In addition to this line of credit, the Company also entered into an
equipment financing agreement in September 1996. Under this agreement, the
bank agreed to provide up to $1,500,000 for the purchase of certain equipment
(as defined by the agreement) through June 30, 1997. Ratable principal and
interest payments are payable during the period July 1, 1997 through June 1,
2000, and bear interest at the bank's prime rate plus 1% (9.5% at December 31,
1997). In November 1997, the bank agreed to amend certain financial covenants
in connection with the MDI acquisition. 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 December 31, 1997, there were no borrowings
outstanding, and $3,500,000 remained available, under the revolving credit
facility and $561,000 was outstanding under the equipment financing agreement.
To date, the Company has not invested in derivative securities or any other
financial instruments that involve a high level of complexity or risk. Excess
cash has been, and the Company contemplates that it will continue to be,
invested in interest-bearing, investment grade securities.
The Company anticipates that the net proceeds from the sale of common stock
in its initial public offering, together with cash generated from operations
and existing cash balances and advances available under its revolving credit
line agreement will be adequate to finance its capital requirements for 1998.
Thereafter, the
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Company's cash requirements will depend on the results of future operations,
which cannot be foreseen. To the extent that such sources are insufficient to
finance the Company's capital requirements, the Company will be required to
raise additional funds through bank borrowings or equity or debt financing. No
assurance can be given that the Company will be able to borrow under, extend
or increase its bank borrowings, or 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.
The Company began an assessment of certain of its internal computer hardware
and software in connection with the year 2000 problem and expects to complete
its assessment of such hardware and software in 1998. The Company expects that
its business systems installed in 1997 will be year 2000 compliant through
upgrades and maintenance thereto. The Company expects that costs related to
providing that its internal computer hardware and software will be year 2000
compliant will not be material to the financial condition or results of
operations of the Company and are not expected to be significant.
In some cases, the Company warrants to its clients that its software will be
year 2000 compliant generally subject to certain limitations or conditions.
The Company also provides solutions consisting of products and services to
address the year 2000 problem involving key aspects of a client's computer
systems. A failure in a client's system or failure of the Company's software
to be year 2000 compliant would result in substantial damages and therefore
have a material adverse effect on the Company's business, financial condition
and results of operations. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Factors That May Affect Future
Results--Potential for Contract Liability" and "Software Errors or Bugs."
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.
INFLATION
To date, inflation has not had a material impact on Peritus' results of
operations.
ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 130, "Reporting Comprehensive Income." This statement establishes
standards for the reporting and display of comprehensive income and its
components. Comprehensive income is defined as the change in equity of a
business enterprise during a period from transactions and other events and
circumstances from non-owner sources. It includes all changes in equity during
a period except those resulting from investments by owners and distributions
to owners. This standard will require that an enterprise display an amount
representing total comprehensive income for the period. SFAS No. 130 will be
effective for the Company's year ending December 31, 1998. Adoption of SFAS
No. 130 is for presentation only and will not affect the Company's financial
position or results of operations.
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of
an Enterprise and Related Information" which supersedes SFAS No. 14. This
statement changes the way that public business enterprises report segment
information, including financial and descriptive information about their
selected segment information. Operating segments are defined as revenue-
producing components of the enterprise which are generally used internally for
evaluating segment performance. SFAS No. 131 will be effective for the
Company's year ending December 31, 1998 and will not affect the Company's
financial position or results of operations.
In October 1997, the Accounting Standards Executive Committee ("AcSEC") of
the American Institute of Certified Public Accountants issued SOP 97-2,
"Software Revenue Recognition." SOP 97-2 provides guidance on the timing and
amount of revenue recognition when licensing, selling, leasing or otherwise
marketing
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computer software and is effective for transactions entered into during fiscal
years beginning after December 15, 1997. On March 18, 1998, the FASB cleared a
new SOP that provides for the one-year deferral of certain provisions of SOP
97-2 pertaining to its requirements for what constitutes vendor specific
evidence of the fair value of multiple elements included in an arrangement. It
is AcSEC's intention to immediately begin a project to consider whether
guidance is needed on any restrictions that should be placed on what
constitutes evidence of fair value and, if so, what the guidance should be.
Because of the uncertainties with respect to the outcome of any such project,
the Company believes that the impact of the deferred provisions of SOP 97-2 on
its financial position or results of operations upon expiration of the one-
year deferral period is not currently determinable. However, the Company
believes that those provisions of SOP 97-2 that have not been deferred, and
therefore are applicable commencing January 1, 1998, will not materially
affect its financial position or results of operations.
In February 1998, AcSEC issued SOP 98-1, "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use". SOP 98-1
establishes the accounting for costs of software products developed or
purchased for internal use, including when such costs should be capitalized.
The Company does not expect SOP 98-1, which is effective for the Company
beginning January 1, 1999, to have a significant impact on the Company's
financial condition or results of operations.
FACTORS THAT MAY AFFECT FUTURE RESULTS
From time to time, information provided by the Company or statements made by
its employees may contain "forward-looking" statements, as that term is
defined in the Private Securities Litigation Reform Act of 1995. For this
purpose, any statements contained herein that are not statements of historical
fact may be deemed to be forward-looking statements. Without limiting the
foregoing, the words "believes," "anticipates," "plans," "expects" and similar
expressions are intended to identify forward-looking statements.
This Form 10-K may contain forward looking statements which involve risks
and uncertainties. The Company's actual results may differ materially from the
results discussed in such statements. Certain factors that could cause such a
difference include, without limitation the following:
Limited Operating History
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 and VANTAGE YR
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.
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
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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, financial
condition and results of operations. The timing of any expense increases in
research and development, client technical support and professional services
staff, sales force and administrative infrastructure 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 a 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.
Dependence on Year 2000 Market
The growth in the Company's revenue in 1996 and 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.
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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
To date, the Company's revenue has been dependent on a few major clients,
Bull, Stratus, Computervision, Met Life, IBM and Merrill Lynch. 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.
Management of Growth
The Company's business has grown significantly in size and complexity over
the past three years. In addition, the number of employees increased during
the same period, and the Company may hire additional personnel in the future.
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 a limited time
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. 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
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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.
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.
Competition
The market for the Company's products and services is intensely competitive
and is characterized by rapid changes 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
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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 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 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 managements'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 conditions 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 December 1997, the Company acquired certain assets and assumed certain
liabilities of the MDI business from APU and in January 1996, the Company
acquired Vista, 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
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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.
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 clients that allow
these clients access to and use of the Company's AutoEnhance/2000 an Vantage
YR 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 six 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. None of these patents
has been granted and there can be no assurance that a patent will be issued
pursuant to any 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
and 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
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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 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.
Risks Associated with International Operations
The Company has subsidiaries in Spain and India and distributors in Canada,
Europe and Japan, and intends to expand its international sales activities as
part of its business strategy. In 1997, about fifty percent, and in 1996 and
1995 substantially all, of the Company's international revenue has been
attributable to revenue generated by the Company's majority-owned Spanish
subsidiary, Persist. S.A. In order to expand international sales, the Company
must establish additional foreign operations, hire additional personnel and
establish relationships with additional value added integrators and
distributors. This will require significant management attention and financial
resources and could have a material adverse effect on the Company's business,
financial condition and results of operations. In addition, there can be no
assurance that the Company will be able to address international market demand
for the Company's products and services. The Company's international sales are
primarily denominated in U.S. dollars. An increase in the value of the U.S.
dollar relative to foreign currencies could make the Company's products more
expensive and, therefore, potentially less competitive in those markets. In
addition, the Company's international business may be subject to a variety of
risks, including difficulties in collecting international accounts receivable
or obtaining U.S. export licenses, potentially longer payment cycles,
increased costs associated with maintaining international marketing efforts,
the introduction of non-tariff barriers and higher duty rates and difficulties
in enforcement of contractual obligations and intellectual property rights.
There can be no assurance that such factors will not have a material adverse
effect on the Company's future international sales and, consequently, on the
Company's business, financial condition or results of operations.
36
<PAGE>
Dependence on India Offshore Software Development Center
The Company has 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 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. Certain 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.
37
<PAGE>
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
PERITUS SOFTWARE SERVICES, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Financial Statements:
Report of Independent Accountants........................................ 39
Consolidated Balance Sheet as of December 31, 1997 and 1996.............. 40
Consolidated Statement of Operations for the three years ended December
31, 1997................................................................ 41
Consolidated Statement of Changes in Stockholders' Equity for the three
years ended December 31, 1997........................................... 42
Consolidated Statement of Cash Flows for the three years ended December
31, 1997................................................................ 44
Notes to Consolidated Financial Statements............................... 46
Financial Statement Schedule:
For the three years ended December 31, 1997
II. Valuation and Qualifying Accounts.................................. 64
</TABLE>
All other schedules are omitted because they are not applicable or the
required information is shown in the consolidated financial statements or
notes thereto.
38
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
Peritus Software Services, Inc.
In our opinion, the consolidated financial statements listed in the
accompanying index present fairly, in all material respects, the financial
position of Peritus Software Services, Inc. and its subsidiaries at December
31, 1997 and 1996, and the results of their operations and their cash flows
for each of the three years in the period ended December 31, 1997, 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
January 27, 1998
39
<PAGE>
PERITUS SOFTWARE SERVICES, INC.
CONSOLIDATED BALANCE SHEET
(IN THOUSANDS, EXCEPT SHARE-RELATED DATA)
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------
1997 1996
-------- -------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.................................. $ 11,340 $ 7,388
Short-term investments..................................... 3,000 --
Accounts receivable, net of allowance for doubtful accounts
of $95 and $30, respectively and including amounts
receivable from related parties of $289 and $260,
respectively.............................................. 13,287 4,163
Costs and estimated earnings in excess of billings on
uncompleted contracts, including amounts on uncompleted
contracts with related parties of $250 and $562,
respectively.............................................. 2,547 2,195
Unbilled license revenue from related parties.............. -- 1,400
Prepaid expenses and other current assets.................. 710 119
-------- -------
Total current assets....................................... 30,884 15,265
Property and equipment, net................................ 3,859 1,970
Intangible and other assets, net........................... 5,787 490
-------- -------
$ 40,530 $17,725
======== =======
LIABILITIES, REDEEMABLE STOCK AND STOCKHOLDERS' EQUITY
(DEFICIT)
Current liabilities:
Current portion of capital lease obligations............... $ 51 $ 74
Current portion of long-term debt.......................... 292 225
Accounts payable........................................... 1,650 497
Billings in excess of costs and estimated earnings on
uncompleted contracts..................................... 976 902
Deferred revenue........................................... 2,886 3,262
Other accrued expenses and current liabilities............. 3,518 2,087
-------- -------
Total current liabilities.................................. 9,373 7,047
Capital lease obligations................................... 144 201
Long-term debt.............................................. 269 1,337
-------- -------
Total liabilities.......................................... 9,786 8,585
-------- -------
Minority interest in consolidated subsidiary................ 159 155
-------- -------
Commitments (Note 15)....................................... -- --
-------- -------
Redeemable convertible preferred stock, no par value:
Series A--0 shares authorized, issued and outstanding at
December 31, 1997; 1,903,525 shares authorized, issued and
outstanding at issuance cost plus accretion and accrued
dividends (liquidation preference $7,281) at December 31,
1996...................................................... -- 5,912
Series B--0 shares authorized, issued and outstanding at
December 31,1997; 1,818,182 shares authorized, issued and
outstanding at issuance cost plus accretion and accrued
dividends (liquidation preference $6,000) at December 31,
1996...................................................... -- 6,107
Redeemable common stock right............................... -- 268
-------- -------
-- 12,287
-------- -------
Stockholders' equity (deficit):
Class A common stock, no par value; 0 and13,295,000 shares
authorized at December 31, 1997 and 1996, respectively; 0
and 6,033,614 shares issued and outstanding, at December
31, 1997 and 1996, respectively........................... -- 2,207
Class B non-voting common stock, no par value; 0 and
275,000 shares authorized at December 31, 1997 and 1996,
respectively; 0 and 101,196 shares issued and outstanding
at December 31, 1997 and 1996, respectively............... -- 164
Common stock, $.01 par value; 50,000,000 shares authorized;
15,361,800 and 0 shares issued and outstanding at December
31, 1997 and 1996, respectively........................... 154 --
Additional paid-in capital................................. 103,808 --
Accumulated deficit........................................ (73,235) (5,593)
Note receivable from stockholder........................... (58) (58)
Cumulative translation adjustment.......................... (84) (22)
-------- -------
Total stockholders' equity (deficit)....................... 30,585 (3,302)
-------- -------
$ 40,530 $17,725
======== =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
40
<PAGE>
PERITUS SOFTWARE SERVICES, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE-RELATED DATA)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------
1997 1996 1995
-------- -------- -------
<S> <C> <C> <C>
Revenue:
Outsourcing services, including $4,478, $4,943
and $10,114 from related parties,
respectively................................... $ 11,447 $ 10,190 $16,400
License, including $0, $1,500 and $0 from
related parties, respectively.................. 21,826 6,526 --
Other services.................................. 7,028 2,519 2,105
-------- -------- -------
Total revenue................................. 40,301 19,235 18,505
-------- -------- -------
Cost of revenue:
Cost of outsourcing services, including $2,467,
$1,984 and $3,318 from related parties,
respectively................................... 9,536 8,488 9,602
Cost of license................................. 690 162 --
Cost of other services.......................... 5,357 2,931 2,421
-------- -------- -------
Total cost of revenue......................... 15,583 11,581 12,023
-------- -------- -------
Gross profit...................................... 24,718 7,654 6,482
-------- -------- -------
Operating expenses:
Sales and marketing............................. 8,864 3,116 2,129
Research and development........................ 8,324 6,033 1,703
General and administrative...................... 4,312 3,249 2,357
Write off of acquired in-process research and
development.................................... 70,800 -- --
-------- -------- -------
Total operating expenses...................... 92,300 12,398 6,189
-------- -------- -------
Income (loss) from operations................. (67,582) (4,744) 293
Interest income................................... 1,163 48 18
Interest expense.................................. (215) (344) (221)
-------- -------- -------
Income (loss) before income taxes and minority
interest in consolidated subsidiary............ (66,634) (5,040) 90
Provision (benefit) for estimated income taxes.... 272 (143) (8)
-------- -------- -------
Income (loss) before minority interest in
consolidated subsidiary........................ (66,906) (4,897) 98
Minority interest in consolidated subsidiary...... (4) (24) (43)
-------- -------- -------
Net income (loss)............................... (66,910) (4,921) 55
Accrual of dividends on Series A and B preferred
stock............................................ (675) (689) --
Accretion to redemption value of redeemable
stock............................................ (57) (413) --
-------- -------- -------
Net income (loss) available to common
stockholders..................................... $(67,642) $ (6,023) $ 55
======== ======== =======
Net income (loss) per share:
Basic........................................... $ (6.97) $ (1.02) $ 0.01
======== ======== =======
Diluted......................................... $ (6.97) $ (1.02) $ 0.01
======== ======== =======
Weighted average shares outstanding:
Basic........................................... 9,708 5,876 5,078
======== ======== =======
Diluted......................................... 9,708 5,876 6,456
======== ======== =======
Pro forma basic and diluted net loss per share
(unaudited)...................................... $ (5.78) $ (0.67)
======== ========
Pro forma basic and diluted average shares
outstanding (unaudited).......................... 11,574 7,394
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
41
<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 COMMON STOCK
----------------- ADDITIONAL ----------------- ---------------- RECEIVABLE CUMULATIVE
NUMBER PAID-IN NUMBER NUMBER ACCUMULATED TREASURY FROM TRANSLATION
OF SHARES AMOUNT CAPITAL OF SHARES AMOUNT OF SHARES AMOUNT DEFICIT STOCK STOCKHOLDER ADJUSTMENT
---------- ------ ---------- --------- ------ --------- ------ ----------- -------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance,
December 31,
1994............ -- $ -- $ -- 5,011,325 $ 492 -- $ -- $ 375 $ -- $ -- $ --
Purchase of
95,537 shares of
Class A common
stock for
treasury........ (153)
Issuance of
common stock.... 4,375 7
Sale of common
stock pursuant
to employee
stock purchase
plan............ 95,537 153
Purchase of 625
shares of Class
B common stockp
for treasury.... (1)
Effect of
accelerating
vesting of
certain common
stock options... 36
Issuance of
common stock
warrants........ 76
Sale of common
stock pursuant
to stock
agreement....... 512,500 758
Sale of common
stock puruant to
exercise of
stock options... 1,250 (146) 150
Net income...... 55
---------- ----- --------- --------- ------ ------- ----- ------- ----- ----- -----
Balance,
December 31,
1995............ -- -- -- 5,525,075 1,216 99,912 160 430 (4) -- --
Purchase of
189,588 shares
of Class A
common stock for
treasury........ (531)
Issuance of
common stock.... 431,515 1,027 201
Exercise of
employee stock
options,
including
related
receivable from
stockholder..... 36,250 58 (58)
Effect of
accelerating
vesting of
certain common
stock options... 118
Sale of common
stock pursuant
to exercise of
stock options... 158,587 118 1,909 5 3
Retirement of
treasury stock.. (117,813) (330) (625) (1) 331
Accural of
cumulative
dividends on
redeemable
convertible
preferred stock
and accretion to
redemption value
on redeemable
stock........... (1,102)
Cumulative
translation
adjustment...... (22)
Net loss........ (4,921)
---------- ----- --------- --------- ------ ------- ----- ------- ----- ----- -----
Balance,
December 31,
1996............ -- $ -- $ -- 6,033,614 $2,207 101,196 $ 164 $(5,593) $ -- $ (58) $ (22)
<CAPTION>
TOTAL
STOCKHOLDER'S
EQUITY (DEFICIT)
----------------
<S> <C>
Balance,
December 31,
1994............ $ 867
Purchase of
95,537 shares of
Class A common
stock for
treasury........ (153)
Issuance of
common stock.... 7
Sale of common
stock pursuant
to employee
stock purchase
plan............ 153
Purchase of 625
shares of Class
B common stockp
for treasury.... (1)
Effect of
accelerating
vesting of
certain common
stock options... 36
Issuance of
common stock
warrants........ 76
Sale of common
stock pursuant
to stock
agreement....... 758
Sale of common
stock puruant to
exercise of
stock options... 4
Net income...... 55
----------------
Balance,
December 31,
1995............ 1,802
Purchase of
189,588 shares
of Class A
common stock for
treasury........ (531)
Issuance of
common stock.... 1,228
Exercise of
employee stock
options,
including
related
receivable from
stockholder..... --
Effect of
accelerating
vesting of
certain common
stock options... 118
Sale of common
stock pursuant
to exercise of
stock options... 126
Retirement of
treasury stock.. --
Accural of
cumulative
dividends on
redeemable
convertible
preferred stock
and accretion to
redemption value
on redeemable
stock........... (1,102)
Cumulative
translation
adjustment...... (22)
Net loss........ (4,921)
----------------
Balance,
December 31,
1996............ $(3,302)
</TABLE>
42
<PAGE>
PERITUS SOFTWARE SERVICES, INC.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY--(CONTINUED)
(IN THOUSANDS, EXCEPT SHARE-RELATED DATA)
<TABLE>
<CAPTION>
CLASS A CLASS B
COMMON STOCK COMMON STOCK COMMON STOCK
----------------- ADDITIONAL ------------------- ----------------- RECEIVABLE
NUMBER PAID-IN NUMBER NUMBER ACCUMULATED TREASURY FROM
OF SHARES AMOUNT CAPITAL OF SHARES AMOUNT OF SHARES AMOUNT DEFICIT STOCK STOCKHOLDER
---------- ------ ---------- ---------- ------- --------- ------ ----------- -------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Sale of common
stock pursuant
to exercise of
stock options... 52,002 $ 1 $ 51 165,781 $ 23 $ -- $ -- $ -- $--
Accrual of
cumulative
dividends on
redeemable
convertible
preferred stock
and accretion to
redemption value
on redeemable
stock........... (732)
Termination of
stock purchase
right........... 326
Conversion of
Class A and
Class B common
stock to common
stock........... 6,300,591 63 2,331 (6,199,395) (2,230) (101,196) (164)
Conversion of
Series A and
Series B
redeemable
convertible
preferred stock
to common
stock........... 3,721,707 37 12,657
Sale of common
stock in
connection with
initial public
offering, net of
issuance costs.. 2,800,000 28 40,636
Cumulative
translation
adjustment......
Sale of common
stock pursuant
to exercise of
warrants........ 312,500 3 497
Issuance of
common stock in
connection with
acquisition of
Millennium
Dynamics,
Inc. ........... 2,175,000 22 47,310
Net loss........ (66,910)
---------- ---- -------- ---------- ------- -------- ----- -------- ----- ----
Balance,
December 31,
1997............ 15,361,800 $154 $103,808 -- $ -- -- $ -- $(73,235) $ -- $(58)
========== ==== ======== ========== ======= ======== ===== ======== ===== ====
<CAPTION>
CUMULATIVE TOTAL
TRANSLATION STOCKHOLDER'S
ADJUSTMENT EQUITY (DEFICIT)
----------- ----------------
<S> <C> <C>
Sale of common
stock pursuant
to exercise of
stock options... $-- $ 75
Accrual of
cumulative
dividends on
redeemable
convertible
preferred stock
and accretion to
redemption value
on redeemable
stock........... (732)
Termination of
stock purchase
right........... 326
Conversion of
Class A and
Class B common
stock to common
stock........... --
Conversion of
Series A and
Series B
redeemable
convertible
preferred stock
to common
stock........... 12,694
Sale of common
stock in
connection with
initial public
offering, net of
issuance costs.. 40,664
Cumulative
translation
adjustment...... (62) (62)
Sale of common
stock pursuant
to exercise of
warrants........ 500
Issuance of
common stock in
connection with
acquisition of
Millennium
Dynamics,
Inc. ........... 47,332
Net loss........ (66,910)
----------- ----------------
Balance,
December 31,
1997............ $(84) $ 30,585
=========== ================
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
43
<PAGE>
PERITUS SOFTWARE SERVICES, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(IN THOUSANDS, EXCEPT SHARE-RELATED DATA)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 1997 1996 1995
- ------------------------------------------------ -------- ------- -------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss)................................... $(66,910) $(4,921) $ 55
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......................................... -- -- 12
Depreciation and amortization..................... 1,327 854 443
Minority interest in consolidated subsidiary...... 4 24 43
Write off of acquired in process research and
development...................................... 70,800 -- --
Non-cash employee compensation.................... -- 118 83
Changes in assets and liabilities, net of effects
from acquisitions:
Accounts receivable............................. (6,853) (1,690) (1,354)
Costs and estimated earnings in excess of
billings on uncompleted contracts.............. (9) 501 (1,635)
Unbilled license revenue from related parties... 1,400 (1,400) --
Prepaid expenses and other current assets....... (438) 177 (218)
Accounts payable................................ 495 (222) 226
Billings in excess of costs and estimated
earnings on uncompleted contracts.............. 74 192 509
Deferred revenue................................ (561) 3,262 --
Other accrued expenses and current liabilities.. 897 949 732
Deferred income taxes........................... -- (186) 7
-------- ------- -------
Net cash provided by (used for) operating
activities..................................... 226 (2,342) (1,097)
-------- ------- -------
Cash flows from investing activities:
Purchase of short-term investments.................. (3,000) -- --
Cash paid for acquisition of businesses, and related
costs, net of cash acquired........................ (31,350) 174 (43)
Partial sale of investment in consolidated
subsidiary......................................... -- 8 --
Purchases of property and equipment................. (2,018) (1,240) (824)
Acquisition of patents.............................. -- (1) (105)
-------- ------- -------
Net cash used for investing activities.......... (36,368) (1,059) (972)
======== ======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
44
<PAGE>
PERITUS SOFTWARE SERVICES, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS--(CONTINUED)
(IN THOUSANDS, EXCEPT SHARE-RELATED DATA)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------
1997 1996 1995
-------- -------- -------
<S> <C> <C> <C>
Cash flows from financing activities:
Proceeds from (principal payments on) line of
credit borrowings, net......................... $ -- $ (440) $ 550
Proceeds from long-term debt.................... 200 450 1,000
Principal payments on long-term debt............ (1,201) (686) (198)
Principal payments on capital lease
obligations.................................... (80) (107) (110)
Proceeds from exercise of stock options......... 75 126 4
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 --
Proceeds from sale of common stock.............. 40,664 500 156
Proceeds from sale of subsidiary common stock... -- 59 --
Proceeds from exercise of common stock
warrants....................................... 500 -- --
Treasury stock acquired......................... -- (531) (154)
-------- -------- -------
Net cash provided by financing activities..... 40,158 10,555 1,994
-------- -------- -------
Effects of exchange rates on cash and cash
equivalents...................................... (64) (30) --
-------- -------- -------
Net increase (decrease) in cash and cash
equivalents...................................... 3,952 7,124 (75)
Cash and cash equivalents, beginning of year...... 7,388 264 339
-------- -------- -------
Cash and cash equivalents, end of year............ $ 11,340 $ 7,388 $ 264
======== ======== =======
SUPPLEMENTAL DISCLOSURE OF CASH FLOWS:
Cash paid for income taxes...................... $ 115 $ -- $ 31
Cash paid for interest.......................... 215 327 227
</TABLE>
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
In the years ended December 31, 1997, 1996 and 1995, the Company incurred
capital lease obligations of $0, $39 and $399, respectively.
In the year ended December 31, 1997, the Company issued 2,175,000 shares of
common stock valued at $47,332 and paid cash of $30,000 to acquire
substantially all of the assets and assume certain liabilities of Millenium
Dynamics, Inc.
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.
45
<PAGE>
PERITUS SOFTWARE SERVICES, INC.
NOTES TO 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. In 1997, the Company derived 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 included primarily Fortune 1000
companies and similarly sized business and government organizations worldwide.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The consolidated financial statements include the accounts of the Company
and its majority-owned domestic and foreign subsidiaries (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
For the year ended December 31, 1997, no single customer accounted for more
than 10% of the Company's total revenue. 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 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 9). 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. Revenue
from three customers accounted for 50%, 13% and 11% of the Company's total
revenue for the year ended December 31, 1995.
46
<PAGE>
PERITUS SOFTWARE SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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 and cash equivalents,
short-term investments, accounts receivable, costs and estimated earnings in
excess of billings on uncompleted contracts, accounts payable, accrued
expenses, billings in excess of costs and estimated earnings on uncompleted
contracts, deferred revenue and long-term debt. The carrying amounts of these
instruments at December 31, 1997 approximate their fair values.
Cash Equivalents and Short-Term Investments
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, commercial paper
and corporate bonds. Accordingly, these investments are subject to minimal
credit and market risk.
The Company accounts for its investments in accordance with Statement of
Financial Accounting Standards ("SFAS") No. 115, "Accounting for Certain
Investments in Debt and Equity Securities." SFAS No. 115 requires the Company
to classify its investments among three categories: held-to-maturity, which
are reported at amortized cost; trading securities, which are reported at fair
value, with unrealized gains and losses included in earnings; and available-
for-sale securities, which are reported at fair value, with unrealized gains
and losses excluded from earnings and reported as a separate component of
shareholders' equity. At December 31, 1997, the Company held short-term
investments in corporate bonds of $3,000,000 and are classified as available-
for-sale. At December 31, 1997, the Company's cash equivalents included
commercial paper and corporate bonds of $5,000,000 and $1,000,000,
respectively, which are classified as available for sale. The fair market
value of these investments approximated their amortized cost.
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 primary
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, 1997, 1996 and 1995,
costs subject to capitalization were not significant and therefore, were not
capitalized. At December 31, 1997 and 1996, the Company had $54,000 and
$104,000, respectively, in unamortized capitalized software costs acquired
from Vista Technologies Incorporated ("Vista") during 1996 (Note 3).
Amortization expense related to capitalized software costs for the years ended
December 31, 1997, 1996 and 1995 was $50,000, $108,000 and $63,000,
respectively, of which $50,000, $45,000 and $0, respectively, related to the
capitalized software acquired from Vista.
47
<PAGE>
PERITUS SOFTWARE SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Intangible Assets
Intangible assets relate primarily to the MDI acquisition (Note 3) and are
being amortized on a straight-line basis over their expected useful lives of
five years. Costs associated with obtaining patents are capitalized as
incurred and 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, 1996 or 1995. For the year ended
December 31, 1997, the Company recorded $12,000 of amortization expense
relating to capitalized patent costs.
Accounting for Impairment of Long-Lived Assets
In accordance with SFAS No. 121, "Accounting for the Impairment of Long-
Lived Assets and Long-Lived Assets to be Disposed Of," the Company records
impairment losses on long-lived assets used in operations when indicators of
impairment are present and the undiscounted cash flows estimated to be
generated by those assets are less than the assets' carrying amount. No such
significant impairments have occurred through December 31, 1997.
Foreign Currency
Assets and liabilities of the Company's foreign subsidiaries are translated
into U.S. dollars at exchange rates in effect at the balance sheet date.
Income and expense items are translated at average exchange rates for the
period. Accumulated net translation adjustments are included in stockholders'
equity.
Accounting for Stock-Based Compensation
The Company accounts for stock-based awards to its employees using the
intrinsic value based method as prescribed by Accounting Principles Board
Opinion ("APB") No. 25, "Accounting for Stock Issued to Employees," and
related interpretations. Accordingly, no compensation expense is recorded for
options issued to employees in fixed amounts and with exercise prices equal to
the fair market value of the Company's common stock at the date of grant. The
Company has adopted the provisions of SFAS No. 123, "Accounting for Stock-
Based Compensation," for disclosure only (Note 12). All stock-based awards to
non-employees are accounted for at their fair value in accordance with SFAS
No. 123.
Net Income (Loss) Per Share
In February 1997, the Financial Accounting Standards Board (the "FASB")
issued SFAS No. 128, "Earnings per Share", which supersedes APB No. 15 and
specifies the computation, presentation and disclosure requirements of
earnings per share. SFAS No. 128 requires the presentation of "basic" earnings
per share and "diluted" earnings per share. Basic earnings per share is
computed by dividing the net income (loss) available to common stockholders by
the weighted average shares of outstanding common stock. For purposes of
calculating diluted earnings per share, the denominator includes both the
weighted average shares of common stock outstanding and dilutive potential
common stock.
In February 1998, the Securities and Exchange Commission issued Staff
Accounting Bulletin ("SAB") No. 98, which supersedes SAB No. 83 upon a
company's adoption of SFAS No. 128, and includes new guidance with respect to
historical and pro forma earnings per share computations in an initial public
offering. Pursuant to SAB No. 98, nominal issuances of common stock during the
period from January 1, 1995 through July 1, 1997 (the effective date of the
Company's initial public offering) would be included in computing basic net
income per share as if outstanding for all periods presented. In computing
diluted net income per share for such periods,
48
<PAGE>
PERITUS SOFTWARE SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
nominal issuances of common stock and potential common stock would be included
as if outstanding for all periods presented. During the period from January 1,
1995 through July 2, 1997, the Company did not issue any common stock or
potential common stock which would be considered nominal pursuant to SAB No.
98.
The Company adopted SFAS No. 128 and SAB No. 98 in the fourth quarter of
1997 and has restated earnings per share amounts for all periods presented
herein, as required.
Antidilutive potential common stock excluded from the 1997, 1996 and 1995
diluted earnings per share computation includes approximately 4,121,000,
3,238,000 and 200,000 of common stock shares, respectively, issuable upon the
exercise of stock options and warrants.
As described in Note 11, all outstanding shares of the Company's redeemable
convertible preferred stock converted to shares of the Company's common stock
upon the closing of the Company's initial public offering. The unaudited pro
forma diluted net income (loss) per share information included in the
accompanying consolidated statement of operations for the two years ended
December 31, 1997 reflects the impact of such conversion on basic and diluted
net income (loss) per share as of the beginning of the year, or date of
issuance, if later, using the if-converted method.
Below is a summary of the shares used in calculating diluted net income
(loss) per share and unaudited pro forma diluted net income (loss) per share
for the years indicated.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------
1997 1996 1995
---------- --------- ---------
<S> <C> <C> <C>
Diluted weighted average shares outstanding:
Attributable to common stock
outstanding............................. 9,708,000 5,876,000 5,078,000
Attributable to common stock options and
warrants............................... -- -- 1,378,000
---------- --------- ---------
9,708,000 5,876,000 6,456,000
========== ========= =========
Unaudited pro forma basic and diluted
weighted average shares outstanding:
Attributable to common stock
outstanding............................. 9,708,000 5,876,000
Attributable to redeemable convertible
preferred stock........................ 1,866,000 1,518,000
---------- ---------
11,574,000 7,394,000
========== =========
</TABLE>
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 the
allowance for doubtful accounts, revenue based on percentage-of-completion and
the valuation allowance on deferred tax assets, as well as the fair values of
equity instruments issued by the Company. Actual amounts could differ from
those estimates.
Recently Issued Accounting Standards
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income." This statement establishes standards for the reporting and display of
comprehensive income and its components. Comprehensive
49
<PAGE>
PERITUS SOFTWARE SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
income is defined as the change in equity of a business enterprise during a
period from transactions and other events and circumstances from non-owner
sources. It includes all changes in equity during a period except those
resulting from investments by owners and distributions to owners. This
standard will require that an enterprise display an amount representing total
comprehensive income for the period. SFAS No. 130 will be effective for the
Company's fiscal year ending December 31, 1998. Adoption of SFAS No. 130 is
for presentation only and will not affect the Company's financial position or
results of operations.
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of
an Enterprise and Related Information" which supersedes SFAS No. 14. This
statement changes the way that public business enterprises report segment
information, including financial and descriptive information about their
selected segment information. Operating segments are defined as revenue-
producing components of the enterprise which are generally used internally for
evaluating segment performance. SFAS No. 131 will be effective for the
Company's fiscal year ending December 31, 1998 and will not affect the
Company's financial position or results of operations.
In October 1997, the Accounting Standards Executive Committee ("AcSEC") of
the American Institute of Certified Public Accountants issued SOP 97-2,
"Software Revenue Recognition." SOP 97-2 provides guidance on the timing and
amount of revenue recognition when licensing, selling, leasing or otherwise
marketing computer software and is effective for transactions entered into
during fiscal years beginning after December 15, 1997. On March 18, 1998, the
FASB cleared a new SOP that provides for the one-year deferral of certain
provisions of SOP 97-2 pertaining to its requirements for what constitutes
vendor specific evidence of the fair value of multiple elements included in an
arrangement. It is AcSEC's intention to immediately begin a project to
consider whether guidance is needed on any restrictions that should be placed
on what constitutes evidence of fair value and, if so, what the guidance
should be. Because of the uncertainties with respect to the outcome of any
such project, the Company believes that the impact of the deferred provisions
of SOP 97-2 on its financial position or results of operations upon expiration
of the one-year deferral period is not currently determinable. However, the
Company believes that those provisions of SOP 97-2 that have not been
deferred, and therefore are applicable commencing January 1, 1998, will not
materially affect its financial position or results of operations.
In February 1998, AcSEC issued SOP 98-1, "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use". SOP 98-1
establishes the accounting for costs of software products developed or
purchased for internal use, including when such costs should be capitalized.
The Company does not expect SOP 98-1, which is effective for the Company
beginning January 1, 1999, to have a significant impact on the Company's
financial condition or results of operations.
3. ACQUISITIONS
Millennium Dynamics, Inc.
Effective December 1, 1997, Twoquay, Inc., a wholly owned subsidiary of the
Company, acquired substantially all of the assets and assumed certain
liabilities of the business of Millennium Dynamics, Inc. ("MDI") from American
Premier Underwriters, Inc. ("APU") in exchange for $30 million in cash and
2,175,000 unregistered shares of the Company's common stock. Pursuant to a
Registration Rights Agreement between the Company and APU, the Company agreed
to file a Registration Statement on Form S-3 covering up to all of the shares
of common stock issued to APU by July 6, 1998 and to use its best efforts to
cause such Registration Statement to become effective prior to August 1, 1998.
The Company also granted APU certain incidental rights to register up to
500,000 shares of common stock prior to July 6, 1998 in the event of a
secondary offering of the Company's common stock. Under the terms of the
Registration Rights Agreement, APU also agreed that up to 837,500 of the
shares of common stock issued by the Company would be subject to certain
restrictions on sale through December 31, 1998. In determining the purchase
price for accounting purposes, the shares of common stock issued by the
Company in connection with this transaction have been assigned a value of
$47.3 million
50
<PAGE>
PERITUS SOFTWARE SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
based on the average closing sale price of the Company's common stock during
the six trading days beginning on the second trading day immediately preceding
the completion and public announcement of the terms of the acquisition on
October 22, 1997, less a discount of approximately 13% primarily reflecting
the illiquid nature of the unregistered shares of common stock issued by the
Company in connection with this transaction as discussed above. Twoquay
changed its name to MDI after the closing of the acquisition.
The acquisition was accounted for under the purchase method of accounting.
Accordingly, the results of the operations of MDI and the fair market value of
the acquired assets and assumed liabilities have been included in the
Company's financial statements since the effective date of the acquisition.
The purchase price was allocated to the acquired assets and assumed
liabilities as follows:
<TABLE>
<S> <C>
Accounts receivable............................................. $ 2,271,000
Unbilled license revenues....................................... 343,000
Other current assets............................................ 135,000
Property and equipment.......................................... 1,011,000
In-process research and development............................. 70,800,000
Acquired technology............................................. 4,800,000
Assembled workforce............................................. 600,000
Goodwill........................................................ 103,000
Accounts payable................................................ (658,000)
Restructuring reserves.......................................... (435,000)
Other current liabilities....................................... (285,000)
-----------
$78,685,000
===========
</TABLE>
The amounts allocated to intangible assets, including acquired in-process
research and development, was determined by an independent appraiser. The
amount allocated to acquired in-process research and development represented
technology which had not reached technological feasibility and had no
alternative future use. Accordingly, the amount of $70,800,000 was charged to
operations at the effective date of the acquisition. The amounts allocated to
intangible assets are being amortized on a straight-line basis over their
expected useful lives of five years.
In connection with the acquisition, the Company recorded a reserve of
approximately $435,000 of which approximately $221,000 related to provisions
for the closure of certain MDI facilities and $214,000 related to severance
benefits for terminated MDI employees. Such costs are expected to be paid in
1998.
51
<PAGE>
PERITUS SOFTWARE SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The following unaudited pro forma data has been prepared as if the
acquisition was completed at the beginning of the periods presented, is
presented for illustrative purposes only and is not necessarily indicative of
results of operations which would actually have been achieved had the
acquisition occurred at the beginning of such periods or which may be achieved
in the future. In addition, the following unaudited pro forma data is adjusted
to reflect the amortization of acquired intangible assets and excludes the
write off of acquired in-process research and development of $70,800,000 due
to its non-recurring nature. Also, the following unaudited pro forma basic and
diluted net loss per share data assumes conversion of all redeemable
convertible preferred stock as of the beginning of the year, or date of
issuance if later, using the if-converted method (Note 2) and assumes the
2,175,000 shares issued in connection with the acquisition were outstanding
for the entire periods presented.
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
---------------------------------------------------
1997 1996
------------------------- ------------------------
AS REPORTED PRO FORMA AS REPORTED PRO FORMA
------------ ----------- ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Revenues............... $ 40,301,000 $51,225,000 $19,235,000 $22,348,000
Net loss............... (66,910,000) (2,299,000) (4,921,000) (5,689,000)
Net loss per share:
Basic................ $ (6.97) $ (0.26) $ (1.02) $ (0.71)
Diluted.............. $ (6.97) $ (0.26) $ (1.02) $ (0.71)
</TABLE>
Persist
At December 31, 1994, the Company owned a 40% voting interest in Persist,
S.A. ("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 and 1997, the Company's ownership was reduced
to approximately 63%.
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, 1997, 1996 and 1995 include the
operating results of Persist less the minority stockholders' pro rata share of
net income.
Vista Technologies Incorporated
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 Technologies Incorporated
("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. 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.
52
<PAGE>
PERITUS SOFTWARE SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
4. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
<TABLE>
<CAPTION>
ESTIMATED
USEFUL DECEMBER 31,
LIVES ---------------------
(YEARS) 1997 1996
--------- ---------- ----------
<S> <C> <C> <C>
Equipment.................................. 3-7 $4,235,000 $2,406,000
Furniture and fixtures..................... 5-7 1,876,000 787,000
Leasehold improvements..................... 5 260,000 149,000
---------- ----------
6,371,000 3,342,000
Less: Accumulated depreciation and
amortization.............................. 2,512,000 1,372,000
---------- ----------
$3,859,000 $1,970,000
========== ==========
</TABLE>
Equipment under capital leases at December 31, 1997 and 1996 was $239,000
with related accumulated depreciation of $234,000 and $151,000, respectively.
Furniture and fixtures under capital leases at December 31, 1997 and 1996 was
$271,000, with related accumulated depreciation of $110,000 and $77,000,
respectively. Amortization expense related to assets under capital leases was
$116,000, $130,000 and $79,000 for the years ended December 31, 1997, 1996 and
1995, respectively. Depreciation expense on all fixed assets amounted to
$1,140,000, $677,000 and $376,000 for the years ended December 31, 1997, 1996
and 1995, respectively.
5. INTANGIBLE AND OTHER ASSETS
Intangible and other assets consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1997 1996
---------- ---------
<S> <C> <C>
Acquired technology................................... $4,950,000 $ 150,000
Assembled workforce................................... 600,000 --
Goodwill.............................................. 338,000 235,000
Other................................................. 249,000 268,000
---------- ---------
6,137,000 653,000
Less: Accumulated amortization........................ (350,000) (163,000)
---------- ---------
$5,787,000 $ 490,000
========== =========
</TABLE>
Amortization expense related to intangible assets was $187,000, $163,000 and
$0 for the years ended December 31, 1997, 1996 and 1995, respectively.
6. OTHER ACCRUED EXPENSES AND CURRENT LIABILITIES
Other accrued expenses and current liabilities consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1997 1996
---------- ----------
<S> <C> <C>
Bonus and commissions................................. $1,317,000 $1,280,000
Acquisition costs..................................... 435,000 --
Other................................................. 1,765,000 807,000
---------- ----------
$3,517,000 $2,087,000
========== ==========
</TABLE>
53
<PAGE>
PERITUS SOFTWARE SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
7. 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 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% (9.00% at December 31, 1997). 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, 1998. 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, 1997.
8. LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1997 1996
-------- ----------
<S> <C> <C>
Secured subordinated note payable to bank (described
further below), with interest only payable quarterly
through June 30, 1998 at 10% per annum. Paid in full in
July 1997.............................................. $ -- $ 943,000
Term loan payable to bank in monthly principal
installments of $24,000 with interest at prime plus 1%
(9.50% at December 31, 1997), through January 2000..... 561,000 619,000
-------- ----------
561,000 1,562,000
Less--Current portion................................... 292,000 225,000
-------- ----------
$269,000 $1,337,000
======== ==========
</TABLE>
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 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 take a form of a term loan and bear
interest at the bank's prime rate plus 1% (9.5% at December 31, 1997) and are
collateralized by the assets of the Company. Under the Equipment Line, the
Company is required to comply with certain financial covenants. Borrowings
outstanding under the Equipment Line, which expired on June 30, 1997, were
$561,000 at December 31, 1997.
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 was subordinate to the bank debt and was collateralized by a
second security interest in all assets of the Company.
54
<PAGE>
PERITUS SOFTWARE SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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
warrant value was recorded as a discount from the face value of the note.
Amortization of this discount for the years ended December 31, 1997, 1996 and
1995 was $57,000, $13,000 and $6,000, respectively, which amounts are included
in interest expense. Upon the closing of the Company's initial public offering
in July 1997, the holder exercised the detachable warrants and the Company
repaid the note in full using proceeds from the warrant exercise and its
initial public offering.
Maturities
The future aggregate annual principal payments on long-term debt as of
December 31, 1997 for each of the years ended December 31 are as follows:
<TABLE>
<S> <C>
1998........................................................... $292,000
1999........................................................... 236,000
2000........................................................... 33,000
--------
$561,000
========
</TABLE>
9. RELATED PARTY TRANSACTIONS
For the years ended December 31, 1997, 1996 and 1995, the Company recorded
revenue of $3,319,000, $5,579,000 and $9,313,000, respectively, related to
outsourcing and license agreements with a significant shareholder, Bull HN
Information Systems Inc. ("Bull"). At December 31, 1997 and 1996, $289,000 and
$123,000, respectively, was included in accounts receivable from related
parties with respect to this stockholder and $233,000 and $501,000,
respectively, was included in costs and estimated earnings in excess of
billings on uncompleted contracts with related parties; also, at December 31,
1996, $1,400,000 was included in unbilled license revenue.
For the years ended December 31, 1997 and 1996, Persist recorded revenue of
$1,183,000 and $776,000, respectively, related to outsourcing services to a
corporation owning 27% of the outstanding stock of Persist at December 31,
1997 (Note 3).
For the years ended December 31, 1996 and 1995, the Company recorded revenue
of $137,000 and $402,000, respectively, related to software services to a
customer. A director of the Company was also an officer and director of the
customer from 1994 through 1996.
For the years ended December 31, 1997, 1996 and 1995, the Company recorded
revenue of $2,640,000, $1,501,000 and $1,717,000, respectively, related to
software services and licensing to a customer. An employee and officer of the
Company, hired in September 1996, was previously employed by the customer as
an employee and officer until August 1996.
For the year ended December 31, 1997 and 1996, the Company recorded license
and other services revenue of $2,828,000 and $190,000, respectively, from a
customer. An employee and officer of the Company, hired in December 1996, was
previously employed by the customer as an employee and officer until December
1996.
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. The outstanding principal and accrued interest was
paid in full in 1998.
55
<PAGE>
PERITUS SOFTWARE SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
10. INCOME TAXES
The components of income (loss) before income taxes are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------
1997 1996 1995
------------ ----------- --------
<S> <C> <C> <C>
Domestic................................ $(66,731,000) $(5,141,000) $(45,000)
Foreign................................. 97,000 101,000 135,000
------------ ----------- --------
$(66,634,000) $(5,040,000) $ 90,000
============ =========== ========
</TABLE>
The provision (benefit) for estimated income taxes consists of the following:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------
1997 1996 1995
------------ ----------- --------
<S> <C> <C> <C>
Current:
Federal.............................. $ 164,000 $ -- $(14,000)
State................................ 52,000 -- (1,000)
Foreign.............................. 56,000 43,000 --
------------ ----------- --------
$ 272,000 $ 43,000 $(15,000)
============ =========== ========
Deferred:
Federal.............................. $(18,410,000) $(1,798,000) $ 3,000
State................................ (3,282,000) (435,000) 4,000
------------ ----------- --------
(21,692,000) (2,233,000) 7,000
Deferred tax asset valuation
allowance............................ 21,692,000 2,047,000 --
------------ ----------- --------
-- (186,000) 7,000
------------ ----------- --------
$ 272,000 $ (143,000) $ (8,000)
============ =========== ========
</TABLE>
No current federal or state income taxes were payable in the years ended
December 31, 1996 and 1995 as a result of losses incurred.
56
<PAGE>
PERITUS SOFTWARE SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The components of deferred tax assets and liabilities follow:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------
1997 1996
------------ -----------
<S> <C> <C>
Deferred tax assets:
In-process research and development........... $ 22,944,000 $ --
Net operating loss carryforwards.............. 509,000 2,641,000
Tax credit carryforwards...................... 867,000 531,000
Deferred revenue.............................. 161,000 238,000
Nondeductible accrued expenses................ 102,000 64,000
Unexercised stock options..................... 45,000 56,000
Other......................................... 14,000 11,000
------------ -----------
Gross deferred tax assets....................... 24,642,000 3,541,000
------------ -----------
Deferred tax liabilities:
Estimated earnings on uncompleted contracts... (722,000) (1,317,000)
Capitalized research and development costs,
net.......................................... (50,000) (46,000)
------------ -----------
Gross deferred tax liabilities................ (772,000) (1,363,000)
------------ -----------
Net deferred tax (liabilities) assets........... 23,870,000 2,178,000
Deferred tax asset valuation allowance.......... (23,870,000) (2,178,000)
------------ -----------
$ -- $ --
============ ===========
</TABLE>
A reconciliation between the amount of reported income tax provision
(benefit) and the amount determined by applying the U.S. federal statutory
rate to the income (loss) before income taxes and minority interest in
consolidated subsidiary follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------
1997 1996 1995
------------ ----------- --------
<S> <C> <C> <C>
Income (loss) at statutory rate....... $(22,656,000) $(1,699,000) $ 31,000
Federal research and development
credits.............................. (322,000) (251,000) (53,000)
Income (losses) of foreign subsidiary
not subject to taxation.............. -- -- 13,000
Permanent differences and other, net.. 5,440,000 70,000 (3,000)
State tax benefit, net of federal
effect............................... (3,882,000) (310,000) 4,000
Change in deferred tax asset valuation
allowance............................ 21,692,000 2,047,000
------------ ----------- --------
$ 272,000 $ (143,000) $ (8,000)
============ =========== ========
</TABLE>
The Company has provided a valuation allowance for the full amount of the
net deferred tax assets, since the realization of these future benefits was
not sufficiently assured at December 31, 1997 and 1996. If the Company
achieves profitability, these deferred tax assets may be available to offset
future income tax liabilities and expense.
At December 31, 1997, the Company had available net operating loss
carryforwards of approximately $1,295,000 and $902,000 for federal and state
income tax reporting purposes, respectively. At December 31, 1997, the Company
had research and development credit carryforwards of $508,000 and $381,000
available to offset future federal and state income tax, respectively. These
carryforwards will expire in the years 2008 through 2012 if not utilized. The
Company also has federal alternative minimum tax credit carryforwards of
$111,000.
57
<PAGE>
PERITUS SOFTWARE SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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. A future
change in ownership could result in such a limitation.
11. REDEEMABLE STOCK AND COMMON STOCK
Redeemable Convertible Preferred Stock
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.
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.
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 common stock.
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.
On July 8, 1997, the Company closed its initial public offering of 4,025,000
shares of common stock, 2,800,000 of which were sold by the Company and the
balance by selling stockholders, at a public offering price of $16 per share.
The proceeds to the Company from the offering, net of offering expenses, were
approximately $40,664,000. The Company used a portion of the net proceeds to
repay a secured subordinated note payable (Note 8). The Company also used a
portion of the proceeds to acquire Millennium Dynamics, Inc. (Note 3) and
plans to use remaining proceeds for research and development, working capital
and general corporate purposes.
In connection with closing the initial public offering, the Company amended
its Articles of Organization to authorized 50,000,000 shares of Common Stock,
$0.01 par value, all outstanding shares of Series A and B preferred stock and
Class B common stock automatically converted into an aggregate of 3,822,903
shares of common stock, the Class A common stock was redesignated as common
stock, and the redeemable common stock right automatically terminated.
58
<PAGE>
PERITUS SOFTWARE SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
12. STOCK PLANS
1992 Long-Term Incentive Plan and 1997 Stock Incentive Plan
In January 1992, the Board of Directors established the Long-Term Incentive
Plan (the "1992 Incentive Plan"). In May 1997, the Board of Directors
established the 1997 Stock Incentive Plan (the "1997 Incentive Plan") which
replaced the 1992 Incentive Plan. The 1992 Incentive Plan and the 1997
Incentive Plan allow for the grant of awards in the form of incentive and
nonqualified 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, the "Awards") to officers, employees,
directors, consultants and advisors of the Company. At December 31, 1997,
1,950,000 shares of common stock were authorized under the 1997 Incentive
Plan, and no further grants may be made under the 1992 Incentive Plan.
Incentive stock options are granted at an exercise price equal to the fair
market value of the Company's common stock 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, 1997, 1996 and 1995, no awards other than incentive stock options
and non qualified stock options were issued under the 1992 Incentive and 1997
Incentive Plans.
1997 Director Stock Option Plan
In May 1997, the Board of Directors established the 1997 Director Stock
Option Plan (the "Director Plan") which provides for the issuance of up to
200,000 shares of the Company's common stock upon exercise of options granted
under the Director Plan to non-employee directors of the Company who are not
employees of the Company (the "Directors"). Under the Director Plan, each
Director received an option to purchase 15,000 shares of Common Stock at
$16.00 at the time of the effective date of the initial public offering. In
addition, subsequent to the Company's initial public offering each Director
will receive an option to purchase 15,000 shares of common stock on the date
of the Director's 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. 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
Directors 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.
At December 31, 1997, there were 915,650 options available for future grant
under the 1997 Incentive Plan and the Director Plan.
59
<PAGE>
PERITUS SOFTWARE SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The following table summarizes stock option activity during the years ended
December 31, 1997, 1996 and 1995:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------------------------
1997 1996 1995
------------------- ------------------- -------------------
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 Period.............. 2,925,667 $ 1.88 1,606,025 $0.64 1,356,700 $0.23
Granted................. 1,511,613 12.92 1,558,292 3.04 455,250 1.96
Exercised............... (217,783) 0.34 (198,533) 0.92 (95,000) 0.05
Forfeited............... (79,530) 2.70 (40,117) 1.20 (110,925) 1.58
--------- --------- ---------
Outstanding at end of
period................. 4,139,967 5.94 2,925,667 1.88 1,606,025 0.64
========= ========= =========
Options exercisable at
end of period.......... 1,453,740 $ 1.33 1,030,036 $0.47 692,462 $0.21
========= ========= =========
</TABLE>
The following summarizes information regarding stock options outstanding and
exercisable at December 31, 1997:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
--------------------------------- ---------------------------------
WEIGHTED WEIGHTED
AVERAGE WEIGHTED AVERAGE WEIGHTED
REMAINING AVERAGE REMAINING AVERAGE
NUMBER CONTRACTUAL EXERCISE NUMBER CONTRACTUAL EXERCISE
RANGE OF EXERCISE PRICES OUTSTANDING LIFE (YEARS) PRICE OUTSTANDING LIFE (YEARS) PRICE
- ------------------------ ----------- ------------ -------- ----------- ------------ --------
<S> <C> <C> <C> <C> <C> <C>
$ 0.01-0.10............. 515,250 5.0 $0.09 515,250 5.0 $0.09
0.15-0.24............. 174,075 5.5 0.02 174,075 5.5 0.23
0.48-0.80............. 240,595 6.5 0.65 182,186 6.5 0.66
1.60.................. 90,750 7.1 1.60 48,562 7.1 1.60
2.60-3.30............. 1,634,947 8.8 3.01 489,917 8.8 2.95
4.65.................. 175,000 9.1 4.65 43,750 9.1 4.65
8.20-11.00............ 547,500 9.4 9.76 -- 9.4 --
13.00-18.13............ 741,350 9.8 16.93 -- 9.8 --
23.50-28.75............ 20,500 9.7 25.82 -- 9.7 --
--------- ---------
4,139,967 1,453,740
========= =========
</TABLE>
In accordance with APB 25, the Company recognized $0, $118,000 and $83,000
in compensation expense related to stock-based compensation awards for the
years ended December 31, 1997, 1996 and 1995, respectively. Had compensation
cost been determined based upon the fair value of options at their grant
dates, as prescribed in SFAS No. 123, the Company's net income (loss) and
basic and diluted net income (loss) per share would have been as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------
1997 1996 1995
------------ ----------- -------
<S> <C> <C> <C>
Net income (loss):
As reported.............................. $(66,910,000) $(4,921,000) $55,000
Pro forma................................ (69,088,000) (5,050,000) 36,000
</TABLE>
60
<PAGE>
PERITUS SOFTWARE SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Basic and diluted net income (loss) per share:
<TABLE>
<S> <C> <C> <C>
As reported.......................................... $(6.97) $(1.02) $0.01
Pro forma............................................ (7.19) (1.05) 0.01
</TABLE>
Because the determination of the fair value of all options granted after May
14, 1997, the date the Company filed its initial registration statement on
Form S-1 in connection with its initial public offering of common stock, will
include an expected volatility factor, additional option grants are expected
to be made subsequent to December 31, 1997 and options vest over several
years, the above pro forma effects may not be indicative of pro forma effects
in future years.
The fair value of options at date of grant was estimated using the Black-
Scholes option pricing model with the following weighted average assumptions:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
---------------------
1997 1996 1995
----- ------ ------
<S> <C> <C> <C>
Expected life (years)............................... 5 5 5
Risk-free interest rate............................. 6.05% 6.25% 7.37%
Dividend yield...................................... 0% 0% 0%
Fair value of option grants--exercise price equal to
the fair value of the related stock................ $7.79 $ 0.52 $ 0.35
Fair value of option grants--exercise price less
than the fair value of the related stock........... $ -- $ -- $ 0.14
</TABLE>
On May 14, 1997, the Company filed its initial registration statement on
Form S-1. Accordingly, the Company assumed an expected volatility factor of
70% for all option grants subsequent to this date. Prior to May 14, 1997, all
options granted to employees were valued using a volatility factor of 0%.
1997 Employee Stock Purchase Plan
In May 1997, the Board of Directors adopted the 1997 Employee Stock Purchase
Plan (the "Purchase Plan") which provides for the issuance of up to 200,000
shares of the Company's common stock to participating employees. All employees
of the Company whose customary employment is more than 20 hours per week and
who own no more than 5% of the total combined voting power or value of the
stock of the Company are eligible to participate in the Purchase Plan. Under
the terms of the Purchase Plan, the option price is an amount equal to 85% of
the average market price per share of the common stock on either the first day
or the last day of the offering period, whichever is lower. 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. No
awards were made under the Purchase Plan in 1997.
13. 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. For the year ended December 31,
1997, the Company contributed $213,000 to the Plan. There were no
contributions made by the Company to the Plan during the years ended December
31, 1996 and 1995.
61
<PAGE>
PERITUS SOFTWARE SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
14. 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 geographic areas are accounted for at prices which are
designed to be representative of unaffiliated party transactions. Information
by geographic area at December 31, 1997, 1996 and 1995 and for the years then
ended, is summarized below:
<TABLE>
<CAPTION>
GEOGRAPHIC AREAS
---------------------------
NORTH AMERICA(1) EUROPE ELIMINATIONS TOTAL
---------------- ---------- ------------ ------------
<S> <C> <C> <C> <C>
1997
Revenue to unaffiliated
customers.............. $ 38,373,000 $1,928,000 $ -- $ 40,301,000
Intercompany revenue.... 40,000 299,000 (339,000) --
------------ ---------- --------- ------------
Total revenue......... 38,413,000 2,227,000 (339,000) 40,301,000
Income (loss) from
operations............. (67,629,000) 47,000 -- (67,582,000)
Identifiable assets..... 39,385,000 1,828,000 (683,000) 40,530,000
Capital expenditures.... 1,935,000 83,000 -- 2,018,000
Depreciation and
amortization........... 1,308,000 19,000 -- 1,327,000
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
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
</TABLE>
- --------
(1) For purposes of the above presentation, the operating results and other
financial data of the Company's wholly-owned subsidiary, Peritus Software
Services (India) Private Limited, are considered immaterial and are
included in North America.
62
<PAGE>
PERITUS SOFTWARE SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
15. COMMITMENTS
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, 1997, 1996 and 1995 was $1,101,000, $999,000 and
$839,000, respectively. Future minimum lease payments under noncancelable
leases as of December 31, 1997 are as follows:
<TABLE>
<CAPTION>
OPERATING CAPITAL
YEAR ENDING DECEMBER 31, LEASES LEASES
------------------------ ----------- --------
<S> <C> <C>
1998................................................. $ 1,662,000 $ 73,000
1999................................................. 1,582,000 133,000
2000................................................. 1,775,000 9,000
2001................................................. 1,937,000 6,000
2002................................................. 1,933,000 --
Thereafter........................................... 4,150,000 --
----------- --------
$13,039,000 221,000
===========
Less--Amount representing interest................... 26,000
--------
Present value of minimum lease payments.............. $195,000
========
</TABLE>
63
<PAGE>
SCHEDULE II
PERITUS SOFTWARE SERVICES, INC.
VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)
<TABLE>
<CAPTION>
BALANCE CHARGED TO CHARGED TO BALANCE
BEGINNING COSTS AND OTHER END OF
FOR THE YEAR ENDED CLASSIFICATION OF YEAR EXPENSES ACCOUNTS DEDUCTIONS YEAR
- ------------------ -------------- --------- ---------- ---------- ---------- --------
<S> <C> <C> <C> <C> <C> <C>
December 31, 1995 Allowance for doubtful accounts $ 30 $ -- $ -- $-- $ 30
December 31, 1996 Allowance for doubtful accounts $ 30 $ -- $ -- $-- $ 30
December 31, 1997 Allowance for doubtful accounts $ 30 $ 65 $ -- $-- $ 95
<CAPTION>
BALANCE CHARGED TO CHARGED TO BALANCE
BEGINNING COSTS AND OTHER END OF
FOR THE YEAR ENDED CLASSIFICATION OF YEAR EXPENSES ACCOUNTS DEDUCTIONS YEAR
- ------------------ -------------- --------- ---------- ---------- ---------- --------
<S> <C> <C> <C> <C> <C> <C>
December 31, 1995 Net deferred tax assets valuation allowance $ -- $ -- $ -- $-- $ --
December 31, 1996 Net deferred tax assets valuation allowance $ -- $ -- $ (2,178) $-- $ (2,178)
December 31, 1997 Net deferred tax assets valuation allowance $(2,178) $ -- $(21,692) $-- $(23,870)
</TABLE>
64
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by Items 401 and 405 of Regulation S-K set forth
under the caption "Directors and Executive Officers" appearing in the
Company's definitive Proxy Statement for the Annual Meeting of Stockholders to
be held on June 10, 1998, and which will be filed with the Securities and
Exchange Commission not later than 120 days after December 31, 1997, is
incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
The information required by Item 402 of Regulation S-K set forth under the
Caption "Compensation of Directors and Executive Officers" appearing in the
Company's definitive Proxy Statement for the Annual Meeting of Stockholders to
be held on June 10, 1998, and which will be filed with the Securities and
Exchange Commission not later than 120 days after December 31, 1997, is
incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information set forth under the Caption "Voting Securities and Principal
Holders Thereof" and "Election of Directors" appearing in the Company's
definitive Proxy Statement for the Annual Meeting of Stockholders to be held
on June 10, 1998, and which will be filed with the Securities and Exchange
Commission not later than 120 days after December 31, 1997, is incorporated
herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information set forth under the Caption "Certain Relationships and
Related Transactions" appearing in the Company's definitive Proxy Statement
for the Annual Meeting of Stockholders to be held on June 10, 1998, and which
will be filed with the Securities and Exchange Commission not later than 120
days after December 31, 1997, is incorporated herein by reference.
65
<PAGE>
PART IV.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(A)(1) FINANCIAL STATEMENTS
The financial statements filed as part of this report are listed on the
Index to Consolidated Financial Statements on Page 38 and incorporated
herein by reference.
(2) FINANCIAL STATEMENT SCHEDULES
Schedule II: Valuation and Qualifying Accounts
All other Schedules are omitted because they are not applicable or
the required information is shown in the consolidated financial
statements or notes thereto.
(3) EXHIBITS
Documents listed below, except for documents identified by footnotes, are
being filed as exhibits herewith. Documents identified by footnotes are not
being filed herewith and, pursuant to Rule 12bg-32 of the General Rules and
Regulations promulgated by the Commission under the Securities Exchange Act
of 1934 (the "Act") reference is made to such documents as previously filed
as exhibits filed with the Commission. The Company's file number under the
Act is 0-22647.
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- -----------
<C> <S>
3.1/1/ Restated Articles of Organization of the Registrant.
3.2/1/ Amended and Restated By-Laws of the Registrant.
4/1/ Specimen Certificate for shares of Common Stock.
*10.1/1/ Long-Term Incentive Plan (1992).
*10.2/1/ 1997 Stock Incentive Plan.
*10.3/1/ 1997 Director Stock Option Plan.
*10.4/1/ 1997 Employee Stock Purchase Plan.
10.5 Lease dated December 14, 1997, between MGI Two Federal Street,
Inc. and the Registrant.
10.6/1/ Common Stock Purchase Agreement dated May 29, 1992 between the
Registrant and Bull HN Information Systems, Inc.
10.7/1/ Agreement of Amendment dated as of March 15, 1996 between the
Registrant and Bull HN Information Systems, Inc.
10.8/1/ Note and Warrant Purchase Agreement dated as of May 30, 1995
between the Registrant and Massachusetts Capital Resource
Company.
10.9/1/ Common Stock Purchase Warrant, due May 30, 1995.
10.10/1/ Secured Subordinated Note due 2002, dated May 30, 1995.
10.11/1/ Voting Agreement dated as of May 30, 1995 among the Registrant,
Dominic K. Chan and Massachusetts Capital Resource Company.
10.12/1/ Security Agreement dated as of May 30, 1995 between the
Registrant and Massachusetts Capital Resource Company.
10.13/1/ 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
</TABLE>
66
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- -----------
<C> <S>
10.14/1/ Registration Rights Agreement dated as of March 15, 1996, as
amended, among the Registrant and the stockholders listed on the
signature pages thereto.
10.15/1/ 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.
10.16/1/ Voting Agreement dated as of March 15, 1996 among the Registrant
and the stockholders listed in the signature pages thereto.
10.17/1/ Stock Option Agreement dated as of March 15, 1996 among the
Registrant, Dominic K. Chan and Marsha C. Chan.
*10.18/1/ Non-Competition Agreement dated as of March 15, 1996 between the
Registrant and Dominic K. Chan.
*10.19/1/ Series B Convertible Preferred Stock Purchase Agreement dated as
of October 28, 1996 among the Registrant and the purchasers
named in Schedule I thereto.
*10.20/1/ Employment Agreement dated as of December 30, 1996 between the
Registrant and Douglas A. Catalano.
*10.21/1/ Employment Agreement dated as of January 27, 1997 between the
Registrant and Robert D. Savoia.
*10.22/1/ Letter Agreement dated as of August 15, 1996 between the
Registrant and Leonard Miller.
10.23/1/ Master Software Services Agreement dated as of February 3, 1992
between the Registrant and Bull HN Information Systems, Inc.
10.24/1/ License Agreement dated as of July 29, 1996 between the
Registrant and Bull HN Information Inc., as amended.
10.25/1/ Master License Agreement dated as of October 21, 1996, as
amended, between the Registrant and Merrill Lynch, Pierce,
Fenner & Smith Incorporated.
10.26/1/ Engineering Consultant Services Agreement, as amended, between
Stratus Computer, Inc. and the Registrant, dated November 30,
1993.
10.27/1/ Letter Agreement dated September 6, 1996 between the Registrant
and Fleet National Bank
10.28/1/ Promissory Note between the Registrant and Fleet National Bank
in the amount of $3,500,000, dated September 6, 1996.
10.29/1/ Promissory Note between the Registrant and Fleet National Bank
in the amount of $675,000, dated September 6, 1996.
10.30/1/ Promissory Note between the Registrant and Fleet National Bank
in the amount of $825,000, dated September 6, 1996.
10.31/1/ Inventory, Accounts Receivable and Intangibles Security
Agreement between the Registrant and Fleet National Bank, dated
September 6, 1996.
10.32/1/ Supplemental Security Agreement between the Registrant and Fleet
National Bank, dated September 6, 1996.
10.33/1/ Security Agreement (Trademarks) between the Registrant and Fleet
National Bank, dated September 6, 1996.
10.34/1/ Security Agreement (Patents) between the Registrant and Fleet
National Bank, dated September 6, 1996.
10.35/1/ Subordination Agreement between Massachusetts Capital Resource
Company and Fleet National Bank dated September 6, 1996.
</TABLE>
67
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- -----------
<C> <S>
10.36/1/ License and Alliance Agreement dated as of may 1,1996, as
amended, between the Registrant and CSC Consulting, Inc., as
amended
10.37/1/ Agreement and Plan of Merger among the Registrant, Vista
technologies Incorporated and its stockholders, dated January
29, 1996.
10.38/1/ Letter of Intent dated May 9, 1997 between the Registrant and
VIASOFT, Inc.
10.39/1/ Joint Marketing Agreement effective as of June 12, 1997 between
the Registrant and VIASOFT, Inc.
10.40/1/ Letter Agreement dated March 30, 1997 between the Registrant and
Fleet National Bank.
10.41/1/ Letter Agreement dated June 20, 1997 between the Registrant and
Fleet National Bank.
10.42 Letter Agreement dated November 26, 1997 between the Registrant
and Fleet National Bank.
10.43/2/ Asset Purchase Agreement dated October 22, 1997 by and among the
Registrant and Twoquay, Inc. and Millennium Dynamics, Inc.
("MDI") and American Premier Underwriters ("APU")
10.44/2/ Registration Rights Agreement dated December 1, 1997 by and
among the Registrant and APU
*10.45 Employment Agreement dated as of January 20, 1998 between the
Registrant and Adarsh Arora
*10.46 Employment Agreement dated as of January 19, 1998 between the
Registrant and Donald Beck
*10.47 Promissory Note of Donald Beck payable to the Registrant dated
January 30, 1998
10.48 License Agreement dated October 25, 1997 between MDI and
Chiquita Brands International, Inc.
10.49 License Agreement dated December 31, 1996 between MDI and
Windsor Group
10.50 License Agreement dated March 17, 1997 between MDI and Provident
Bank
10.51 License Agreement dated November 11, 1997 between MDI and Great
American Insurance Company
11. Statement regarding computation of earnings per common share.
21. Subsidiaries of the Registrant
23. Consent of Price Waterhouse LLP
27.1 Financial Data Schedule
27.2 Restated Financial Data Schedule for the three months ended
March 31, 1997
27.3 Restated Financial Data Schedule for the three months ended June
30, 1997
27.4 Restated Financial Data Schedule for the six months ended June
30, 1997
27.5 Restated Financial Data Schedule for the three months ended
September 30, 1997
27.6 Restated Financial Data Schedule for the nine months ended
September 30, 1997
</TABLE>
- --------
(/1/Incorporated)by reference to Registrant's Registration Statement on Form
S-1, Commission file number 333-27087
(/2/Incorporated)by reference to Registrant's Current Report on Form 8-K dated
December 16, 1997
* Management Contract or compensatory plan or arrangement filed in response
to Item 14(a)(3) of the instructions to the Annual Report on Form 10-K
(B) REPORTS ON FORM 8-K:
A Current Report on Form 8-K was filed by the Company on October 23, 1997.
The Company filed under Item 5 (Other Matters) a press release announcing
(i) the Company's financial results for the three months and nine months
ended September 30, 1997, (ii) that on October 22, 1997, the Company,
Twoquay, Inc., a wholly owned subsidiary of the Company ("Twoquay") and
American Premier Underwriters, Inc. ("APU") entered into an Asset Purchase
Agreement to acquire substantially all of the assets and assume certain
liabilities of the business of MDI from APU and (iii) certain management
changes of the Company.
A Current Report on Form 8-K dated December 1, 1997 was filed by the
Company on December 16, 1997 and amended on February 17, 1998. The Company
reported under Item 2 (Acquisition or Disposition of Assets) that on
December 1, 1997, Twoquay acquired substantially all of the assets and
assumed certain liabilities of the business of MDI from APU.
68
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934, THE REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON ITS
BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED.
Peritus Software Services, Inc.
/s/ Douglas A. Catalano
By: _________________________________
Douglas A. Catalano
Chief Executive Officer and
President
March 31, 1998
-----------------------------------
(Date)
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS
REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF THE
REGISTRANT AND IN THE CAPACITIES AND ON THE DATES INDICATED.
/s/ Dominic K. Chan
By: _________________________________
Dominic K. Chan, Chairman of the
Board of Directors and Chief
Technology Officer
March 31, 1998
-----------------------------------
(Date)
/s/ Douglas A. Catalano
By: _________________________________
Douglas A. Catalano, President,
Chief Executive Officer and
Director (Principal Executive
Officer)
March 31, 1998
-----------------------------------
(Date)
/s/ Allen K. Deary
By: _________________________________
Allen K. Deary, Vice President,
Finance, Chief Financial Officer
and Director (Principal Financial
Officer)
March 31, 1998
-----------------------------------
(Date)
/s/ John E. MacPhee
By: _________________________________
John E. MacPhee, Director of
Finance and Treasurer (Principal
Accounting Officer)
March 31, 1998
-----------------------------------
(Date)
69
<PAGE>
By: _________________________________
Axel Leblois, Director
_____________________________________
(Date)
/s/ Roland Pampel
By: _________________________________
Roland Pampel, Director
March 31, 1998
--------------------------------------
(Date)
/s/ Henry McCance
By: _________________________________
Henry McCance, Director
March 31, 1998
--------------------------------------
(Date)
By: _________________________________
Arthur Carr, Director
_____________________________________
(Date)
/s/ Michael Humphreys
By: _________________________________
Michael Humphreys, Director
March 31, 1998
-------------------------------------
Date
70
<PAGE>
<TABLE>
<CAPTION>
Exhibit No. Description
- ----------- -----------
<S> <C>
3.1/1/ Restated Articles of Organization of the Registrant.
3.2/1/ Amended and Restated By-Laws of the Registrant, to be effective upon the
4/1/ Specimen Certificate for shares of Common Stock.
*10.1/1/ Long-Term Incentive Plan (1992).
*10.2/1/ 1997 Stock Option Plan
*10.3/1/ 1997 Director Stock Option Plan.
*10.4/1/ 1997 Employee Stock Purchase Plan.
10.5 Lease dated December 14, 1997, between MGI Two Federal Street, Inc. and
the Registrant.
10.6/1/ Common Stock Purchase Agreement dated May 29, 1992 between the
Registrant and Bull HN Information Systems, Inc.
10.7/1/ Agreement of Amendment dated as of March 15, 1996 between the Registrant
and Bull HN Information Systems, Inc.
10.8/1/ Note and Warrant Purchase Agreement dated as of May 30, 1995 between the
Registrant and Massachusetts Capital Resource Company.
10.9/1/ Common Stock Purchase Warrant, dated May 30, 1995.
10.10/1/ Secured Subordinated Note due 2002, dated May 30, 1995.
10.11/1/ Voting Agreement dated as of May 30, 1995 among the Registrant,
Dominic K. Chan and Massachusetts Capital Resource Company.
10.12/1/ Security Agreement dated as of May 30, 1995 between the Registrant and
Massachusetts Capital Resource Company.
10.13/1/ Series A Convertible Preferred Stock and Class A Common Stock Purchase Agreement
dated as of March 15, 1996 amond the Registrant and the purchasers named in
Schedule I thereto
10.14/1/ Registration Rights Agreement dated as of March 15, 1996, as amended, among
the Registrant and the stockholders listed on the signature pages thereto.
10.15/1/ 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.
10.16/1/ Voting Agreement dated as of March 15, 1996 among the Registrant and the stockholders
listed in the signature pages thereto.
10.17/1/ Stock Option Agreement dated as of March 15, 1996 among the Registrant, Dominic K. Chan
and Marsha C. Chan.
10.18/1/ Non-Competition Agreement dated as of March 15, 1996 between the Registrant and
Dominic K. Chan.
10.19/1/ Series B Convertible Preferred Stock Purchase Agreement dated as of October 28, 1996
among the Registrant and the purchasers named in Schedule I thereto.
*10.20/1/ Employment Agreement dated as of December 30, 1996 between the Registrant and
Douglas A. Catalano.
*10.21/1/ Employment Agreement dated as of January 27, 1997 between the Registrant and Robert D. Savoia.
*10.22/1/ Letter Agreement dated as of August 15, 1996 between the Registrant and Leonard Miller.
10.23/1/ Master Software Services Agreement dated as of February 3, 1992 between the Registrant and
Bull HN Information Systems, Inc.
10.24/1/ License Agreement dated as of July 29, 1996 between the Registrant and Bull HN Information Inc.,
as amended.
10.25/1/ Master License Agreement dated as of October 21, 1996, as amended, between the Registrant and
Merrill Lynch, Pierce, Fenner & Smith Incorporated.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Exhibit No. Description
- ----------- -----------
<S> <C>
10.26/1/ Engineering Consultant Services Agreement, as amended, between Stratus Computer, Inc. and the
Registrant, dated November 30, 1993.
10.27/1/ Letter Agreement dated September 6, 1996 between the Registrant and Fleet National Bank
10.28/1/ Promissory Note between the Registrant and Fleet National Bank in the amount of $3,500,000,
dated September 6, 1996.
10.29/1/ Promissory Note between the Registrant and Fleet National Bank in the amount of $675,000,
dated September 6, 1996.
10.30/1/ Promissory Note between the Registrant and Fleet National Bank in the amount of $825,000,
dated September 6, 1996.
10.31/1/ Inventory, Accounts Receivable and Intangibles Security Agreement between the Registrant and
Fleet National Bank, dated September 6, 1996.
10.32/1/ Supplemental Security Agreement between the Registrant and Fleet National Bank, dated
September 6, 1996.
10.33/1/ Security Agreement (Trademarks) between the Registrant and Fleet National Bank, dated
September 6, 1996.
10.34/1/ Security Agreement (Patents) between the Registrant and Fleet National Bank, dated
September 6, 1996.
10.35/1/ Subordination Agreement between Massachusetts Capital Resource Company and Fleet National Bank
dated September 6, 1996.
10.36/1/ License and Alliance Agreement dated as of May 1,1996, as amended, between the Registrant and
CSC Consulting, Inc., as amended
10.37/1/ Agreement and Plan of Merger among the Registrant, Vista Technologies Incorporated and its
stockholders, dated January 29, 1996.
10.38/1/ Letter of Intent dated May 9, 1997 between the Registrant and VIASOFT, Inc.
10.39/1/ Joint Marketing Agreement effective as of June 12, 1997 between the Registrant and VIASOFT, Inc.
10.40/1/ Letter Agreement dated March 30, 1997 between the Registrant and Fleet National Bank.
10.41/1/ Letter Agreement dated June 20, 1997 between the Registrant and Fleet National Bank.
10.42 Letter Agreement dated November 26, 1997 between the Registrant and Fleet National Bank.
10.43/2/ Asset Purchase Agreement dated October 22, 1997 by and among the Registrant and Twoquay, Inc.
and Millennium Dynamics, Inc. ("MDI") and American Premier Underwriters ("APU")
10.44/2/ Registration Rights Agreement dated December 1, 1997 by and among the Registrant and APU
*10.45 Employment Agreement dated as of January 20, 1998 between the Registrant and Adarsh Arora
*10.46 Employment Agreement dated as of January 19, 1998 between the Registrant and Donald Beck
*10.47 Promissory Note of Donald Beck payable to the Registrant dated January 30, 1998
10.48 License Agreement dated October 25, 1996 between MDI and Chiquita Brands International, Inc.
10.49 License Agreement dated December 31, 1996 between MDI and Windsor Group.
10.50 License Agreement dated March 17, 1997 between MDI and Provident Bank.
10.51 License Agreement dated November 11, 1997 between MDI and Great American Insurance Company
11. Statement regarding computation of earnings per common share.
21. Subsidiaries of the Registrant
23. Consent of Price Waterhouse
27 Financial Data Schedule
</TABLE>
- ----------------
(1) Incorporated by reference to Registrant's Registration Statement on
Form S-1, Commission file number 333-27087
(2) Incorporated by reference to Registrant's Current Report on Form 8-K dated
December 16, 1997
* Management contract or compensation plan or arrangement filed in response
to Item 14(a)3 of the instructions to the Annual Report on Form 10-K.
<PAGE>
EXHIBIT 10.5
------------
Two Federal Street
Billerica, Massachusetts
LEASE dated December 11, 1997
Article I
Reference Data
--------------
1.1 Subjects Referred To. Each reference in this Lease to any of the
--------------------
following subjects shall be construed to incorporate the data stated for that
subject in this Article:
1.1.1 LANDLORD: MGI Two Federal Street, Inc.
1.1.2 LANDLORD'S
ADDRESS: c/o MGI Properties
One Winthrop Square
Boston, Massachusetts 02110
1.1.3 TENANT: 1.1.3 TENANT: Peritus Software
Services, Inc., a Massachusetts
corporation
1.1.4 TENANT'S ORIGINAL 304 Concord Road
ADDRESS: Billerica, Massachusetts 01821
1.1.5 LEASE COMMENCEMENT The later of: (i) February 8, 1998;
DATE: or (ii) the date that Landlord
delivers the Premises substantially
complete, as defined in Section 3.2.
1.1.6 SCHEDULED RENT
COMMENCEMENT DATE: The Lease Commencement Date.
1.1.7 LAND: The land more particularly described
in Exhibit A attached hereto upon
---------
which the Building is located.
1.1.8 BUILDING The building commonly known as Two
Federal Street, Billerica,
Massachusetts
1.1.9 PROPERTY The Land and Building, Collectively,
as shown on the site plan attached
hereto as Exhibit B.
---------
<PAGE>
1.1.10 PREMISES: The Building known as and numbered Two Federal
Street, Billerica, Massachusetts.
1.1.11 INITIAL TERM: Eight (8) years
1.1.12 ANNUAL BASE RENT: See chart below.
<TABLE>
<CAPTION>
- --------------------------------------------------
RENT PERIOD ANNUAL BASE RENT MONTHLY
RENT
- --------------------------------------------------
<S> <C> <C>
Lease Year 1 $ 750,000.00 $ 62,500.00
- --------------------------------------------------
Lease Year 2 $ 950,000.00 $ 79,166.67
- --------------------------------------------------
Lease Years 3 & 4 $1,200,000.00 $100,000.00
- --------------------------------------------------
Lease Year 5 $1,350,000.00 $112,500.00
- --------------------------------------------------
Lease Years 6 & 7 $1,375,000.00 $114,583.33
- --------------------------------------------------
Lease Year 8 $1,400,000.00 $116,666.67
- --------------------------------------------------
</TABLE>
1.1.13 PERMITTED USES: general office, light manufacturing, warehouse,
research and development and, to the extent
permitted by law, distribution.
1.1.14 COMMERCIAL
GENERAL LIABILITY
INSURANCE BY
TENANT: Personal Injury, Bodily Injury and Property Damage
Limits - $3,000,000.
1.1.15 RENTABLE AREA OF
PREMISES: Approximately 100,000 rentable square feet
1.1.16 RENTABLE AREA OF
BUILDING: Approximately 100,000 rentable square feet
1.1.17 TENANT'S
PROPORTIONATE
SHARE: 100%
1.1.18 EXTENSION OPTION: One (1) five (5) year option to extend the term of
the Lease. The Annual Base Rent during the
Extended Term shall be equal to the greater of:
(i) 95% of the Prevailing Market Rent; or (i)
$1,200,000.00. See Section 2.2.1.
2
<PAGE>
1.1.19 SECURITY DEPOSIT: $300,000.00 - See Section 2.5.
1.1.20 PARKING: approximately 290 parking spaces as shown on the
site plan attached hereto as Exhibit B.
---------
1.2 Exhibits. There are incorporated as a part of this Lease:
--------
EXHIBIT A - Description of the Land
EXHIBIT B - Floor Plan of the Premises and Site Plan.
EXHIBIT C - Landlord's Work
EXHIBIT D - List of Chemicals Permitted on the Premises
EXHIBIT E - Rules and Regulations
EXHIBIT F - Broker's Determination of Fair Market Rent
Article II
Premises, Term and Rent
-----------------------
2.1 The Premises. Landlord hereby leases to Tenant and Tenant hereby
------------
leases from Landlord, for the Initial Lease Term as it may be extended or
earlier terminated hereunder (the "Lease Term"), and upon the terms, conditions,
covenants and agreements herein provided, the Premises.
Tenant shall have, as appurtenant to the Premises, the exclusive right
(subject to the rights of other occupants of the Building) to use the Property,
subject to rules and regulations attached hereto as Exhibit E, the walkways,
---------
driveways and other areas on the Property which would be common areas if the
Building were a multi-tenanted office building, including, without limitation,
the parking areas on the Property.
2.1.1 Landlord's Reservations. Upon prior notice to Tenant, Landlord
-----------------------
reserves the right from time to time to install, use, maintain, repair, replace
and relocate for service to the Premises and/or other parts of the Building,
pipes, ducts, conduits, wires and appurtenant
3
<PAGE>
fixtures, wherever located in the Premises or the Building; provided that
Landlord shall in the exercise of such rights use reasonable efforts to minimize
interference with Tenant's business operations.
2.2 Initial Lease Term. Tenant shall have and hold the Premises for a
------------------
period commencing on the Lease Commencement Date, as determined pursuant to
Section 3.2 hereof, continuing for the balance of the month in which the Lease
Commencement Date occurs if it does not occur on the first day of a calendar
month, and continuing until the end of the eighth (8th) Lease Year (the "Initial
-------
Lease Term"), unless the Initial Lease Term is terminated earlier in accordance
- ----------
with the provisions of this Lease.
Promptly after the Lease Commencement Date is ascertained pursuant to
Section 3.2 hereof, Landlord and Tenant shall execute, in recordable form, a
written declaration setting forth the Lease Commencement Date and the date upon
which the Initial Lease Term will expire.
2.2.1 Option to Extend. Provided that at the time of exercise of the
----------------
herein described option to extend (i) Tenant is not in default after applicable
notice and grace period of any of its obligations hereunder, and (ii) this Lease
is still in force and effect, Tenant shall have the right (the "Extension
Option") to extend the Initial Term for one (1) additional period of five (5)
years (the "Extended Term"), upon the same terms, conditions covenants and
agreements of this Lease other than Annual Base Rent and this Section 2.2.1.
The Annual Base Rent during the Extended Term shall be equal to the greater of:
(i) ninety-five percent of the Prevailing Market Rent, as defined in and
determined pursuant to Exhibit F; or (ii) $1,200,000.00.
---------
If Tenant desires to exercise the Extension Option, then Tenant must give
written notice to Landlord of such election at least twelve (12) months prior to
the expiration of the Initial Lease Term. If at the expiration of thirty (30)
days following the date when Landlord receives Tenant's written election (the
"Negotiation Period"), Landlord and Tenant have not reached agreement on a
determination of an annual rental for the Extended Term and executed a written
instrument setting forth the Annual Base Rent for the Extended Term pursuant to
such agreement, then either Landlord or Tenant shall have the right, to make a
request for a determination (the "Brokers' Determination") of the Prevailing
Market Rent (as defined in Exhibit F) for the Extended Term, which Brokers'
---------
Determination shall be made in the manner set forth in Exhibit F.
---------
2.3 Lease Year. "Lease Year" shall mean, in the case of the first Lease
---------- ----------
Year, the twelve (12) full calendar months plus the partial calendar month, if
any, following the Lease Commencement Date. Thereafter, "Lease Year" shall mean
each successive twelve (12) calendar month period following the expiration of
the first Lease Year during the Lease Term. If this Lease ends on a day other
than the last day of a Lease Year (as defined above), the Last Lease Year shall
end on the termination date.
4
<PAGE>
2.4 Rent. Tenant shall pay as rent for the Premises, without set-off,
----
reduction or offset whatsoever except as otherwise specifically provided herein,
Base Rent, and all other Additional Rent (as such terms are respectively
hereinafter defined) required of Tenant under this Lease, all of which are
collectively referred to herein as "Rent".
----
2.4.1 Base Rent. Beginning on the Lease Commencement Date (the "Rent
---------
Commencement Date") and continuing throughout the Lease Term, Tenant shall pay
"Base Rent" for the Premises in equal monthly installments of 1/12th of the
- ----------
Annual Base Rent in advance on the first day of each calendar month included in
the Lease Term. If the Rent Commencement Date begins on a date other than the
first day of a calendar month, or the Lease Term ends on a day other than the
last day of the calendar month, Base Rate for such month shall be prorated based
on the number of days in the calendar month included in the Lease Term.
2.4.2 Additional Rent. Beginning on the Lease Commencement Date and
---------------
continuing throughout the Lease Term, Tenant shall pay, as Additional Rent,
Tenant's Proportionate Share of Taxes and Operating Expenses in the manner set
forth in Section 2.4.6. Appropriate prorations shall be made at the beginning
and end of the Lease Term for any Operating Year only part of which falls within
the Lease Term. Tenant's obligation to pay such amounts as Additional Rent
shall survive any termination of this Lease by lapse of time or otherwise.
2.4.3 Definition of Taxes. "Taxes" means (i) all taxes, assessments
------------------- -----
(special or otherwise), levies, fees and all other government levies, exactions
and charges of every kind and nature, general and special, ordinary and
extraordinary, foreseen and unforeseen, which are imposed or levied upon or
assessed for any period applicable to any portion of the Lease Term (A) against
the Property or any portion thereof or (B) against any Base Rent, Additional
Rent or other rent of any kind or nature payable to Landlord by anyone on
account of the ownership, leasing or operation of the Property, or which arise
on account of or in respect of the ownership, leasing, operation or use of the
Property or any portion thereof; (ii) all gross receipts taxes or similar taxes
imposed or levied upon, assessed against or measured by any Base Rent,
Additional Rent or other rent of any kind or nature or other sum payable to
Landlord by anyone on account of the ownership, development, leasing, operation,
or use of the Property or any portion thereof; (iii) all value added, use and
similar taxes at any time levied, assessed or payable on account of the
ownership, development, leasing, operation, or use of the Property or any
portion thereof; and (iv) reasonable expenses of any proceeding for abatement of
any of the foregoing items included in Taxes, provided only if Landlord prevails
in such abatement proceeding.
The amount of special taxes or special assessments included in Taxes shall
be limited to the amount of the installment (plus any interest, other than
penalty interest, payable thereon) of such special tax or special assessment
required to be paid during the year in respect of which such Taxes are being
determined. There shall be excluded from such Taxes all income, estate,
succession, inheritance and transfer taxes of Landlord; provided, however, that
if at any time during the Lease Term the present system of ad valorem taxation
of real property shall be
5
<PAGE>
changed so that a capital levy, franchise, income, profits, sales, rental, use
and occupancy, or other tax or charge shall in whole or in part be substituted
for, or added to, such ad valorem tax and levied against, or be payable by,
Landlord with respect to the Property or any portion thereof, such tax or charge
shall be included in the term "Taxes" for the purposes of this Article.
-----
If there is an abatement in Taxes with respect to any Operating Year with
respect to which Tenant paid Additional Rent, and Landlord receives a tax refund
or reimbursement as a result thereof, then the balance of such tax refund or
reimbursement remaining after deducting Landlord's reasonable expenses incurred
in obtaining the same shall be refunded to Tenant.
2.4.4 Definition of Operating Expenses. "Operating Expenses" shall be
-------------------------------- ------------------
computed on the accrual basis and shall consist of all reasonable, arm's length
(except as expressly provided below) expenses, costs and disbursements of every
kind and nature which Landlord shall pay or become obligated to pay because of
or in connection with the ownership, management and operation of the Building or
the Property, including, without limitation, except as specified herein, the
following:
(i) Wages, salaries and benefits of all employees directly engaged in
building, equipment and grounds operations, maintenance, repair, cleaning or
security, including, without limitation, taxes, insurance, workers' compensation
benefits, and other benefits relating thereto;
(ii) All supplies and materials used in operations, maintenance, repair,
cleaning and security;
(iii) Costs (including surcharges) of all utilities including, without
limitation, water, sewer, power, heating, lighting, air-conditioning and
ventilating not directly billed to Tenant;
(iv) Cost of all equipment and the maintenance and service thereof and
equipment leasing agreements therefor, including, without limitation, all life
safety equipment, security and energy management services, window cleaning,
carpet and window covering cleaning, elevator maintenance, janitorial service,
trash and refuse removal;
(v) Cost of all insurance, including, without limitation, casualty and
liability insurance, use, occupancy and business interruption insurance,
casualty rent insurance and such other insurance as Landlord deems necessary and
is customarily carried by owners of comparable buildings;.
(vi) Except for the cost of the repairs required to be made by Landlord at
its sole cost and expense pursuant to Section 6.4, all costs and expenses
relating to building, equipment and grounds maintenance, operation, replacement
and repair, including, without limitation, normal structural maintenance, repair
or replacement due to ordinary wear and tear, as well as non-structural
replacement and repair of any kind, provided that if the cost of any replacement
6
<PAGE>
or repair is of a capital nature which is not, under generally accepted
principles of accounting, all properly included as an operating expense in the
year incurred, there shall nevertheless be included in Operating Expenses for
the Operating Year in which it was incurred and in Operating Expenses for each
succeeding Operating Year, the annual charge-off of such capital expenditure.
Annual charge-off shall be determined by dividing the cost of the original
capital expenditure, plus an interest factor equal to ten percent (10%) per
year, by the number of years of useful life of the improvement made with the
capital expenditure, as reasonably determined by Landlord in accordance with
generally accepted principles of accounting in effect at the time of making the
expenditure;
(vii) Costs of snow removal, landscaping, planting, maintaining driveways,
parking areas and loading docks and similar services and facilities;
(viii) Management fees; such fees may be paid to Landlord or an affiliate
of Landlord so long as such fees are at a rate which is comparable to rates then
being charged for similar management services by non-affiliates in respect of
similar buildings in the Suburban Boston area, which rate shall be 3% of gross
rents payable by Tenant during the first year of this Lease and not more than 5%
of such gross rents during the remaining term; and
(ix) All costs of equipping, furnishing and maintaining all portions of
the Building or the Property which are used for maintenance.
The following shall be excluded from Operating Expenses:
(i) Wages,salaries and benefits of officers and executives and other
employees of Landlord above the grade of building manager or not
directly connected with the operation of the Property; and
Landlord's general overhead and any profit increment paid to
subsidiaries or affiliates, except for a reasonable management fee
which may be included in Operating Expenses;
(ii) Depreciation of the Building;
(iii) Interest and amortization upon indebtedness;
(iv) Expenses for which Landlord, by the terms of the Lease, makes a
separate charge to Tenant;
(v) Taxes;
(vi) Leasing fees or commissions, and other fees and expenses incurred
in negotiations or disputes with other tenants;
(vii) Repairs, replacements or expenses paid for out of proceeds of
insurance; and
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(viii) The cost of any utilities currently furnished directly to and paid
for by Tenant.
(ix) Advertising costs;
(x) Landlord's costs and expenses to satisfy its obligations under
Section 6.4 of this Lease;
(xi) Costs incurred by Landlord with respect to the remediation of any
existing "hazardous substances" or "toxic substances" as such terms
are defined in Section 4.1, as of the date of this Lease;
(xii) Costs incurred by Landlord for the restoration of the Property
after damage or destruction which are reimbursed by the proceeds of
any casualty insurance maintained by Landlord; and
(xiii) Costs incurred by Landlord arising from the willful violation
of applicable laws by Landlord or from the gross negligence of
Landlord.
2.4.5 Definition of Operating Year. "Operating Year" shall mean any
---------------------------- --------- ----
twelve (12) month period (unless longer or shorter by virtue in any change in
the Operating Year hereinafter made by Landlord) elected by Landlord for
operating purposes. Landlord's current Operating Year commences on January 1.
Upon any change in the Operating Year, all items of Operating Expenses and Taxes
shall be appropriately prorated and apportioned.
2.4.6 Operating Statements and Estimated Additional Rent Payments.
---------------------------------- ------------------------
Within one hundred eighty (180) days after the end of the first Operating Year
occurring within the Lease Term and of each succeeding Operating Year during the
Lease Term or fraction thereof at the beginning or end of the Lease Term,
Landlord shall render to Tenant a statement ("Operating Statement") in
-------------------
reasonable detail and according to usual accounting practices, certified by a
representative of Landlord, showing for the preceding Operating Year or fraction
thereof, as the case may be (a) Operating Expenses and Taxes with respect to
such Operating Year and (b) Tenant's Proportionate Share of Operating Expenses
and Taxes. Any items which are not determinable at the time an Operating
Statement is rendered shall be included therein on the basis of Landlord's
reasonable estimate and with respect thereto Landlord shall promptly after
determination render a supplemental Operating Statement, and appropriate
adjustment shall be made according thereto. Within thirty (30) days after the
date of delivery of each such Operating Statement, Tenant shall pay to Landlord,
as Additional Rent the amount of Tenant's Proportionate Share of Operating
Expenses and Taxes shown thereon for the preceding Operating Year or fraction
thereof, less the aggregate amount of the Estimated Additional Rent Payments
previously paid as hereinafter provided with respect to said Operating Year or
fraction thereof.
In addition, Tenant shall, commencing on the Lease Commencement Date and
thereafter on the first day of each month of the Lease Term, make Estimated
Additional Rent
8
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Payments to Landlord. "Estimated Additional Rent Payments" refer to such
----------------------------------
payments as Landlord shall reasonably determine from time to time to be
sufficient to provide in the aggregate a fund adequate to pay Operating Expenses
and Taxes for such Operating Year without need for an adjustment as hereinabove
described. If the aggregate amount of Estimated Additional Rent Payments with
respect to any Operating Year exceed the amount of Operating Expenses and Taxes
for such Operating Year as shown on the applicable Operating Statement, such
excess shall be applied as a credit against the next ensuing Estimated
Additional Rent Payments or, if the Lease Term has then expired, Landlord shall
promptly pay to Tenant such excess.
2.4.7 Tenant's Right to Review. Tenant or its representatives shall have
------------------------
the right, upon reasonable prior notice, to examine Landlord's books and records
with respect to the items in the Operating Statement during normal business
hours at Landlord's offices where such books and records are maintained within
one hundred eighty (180) days following the delivery by Landlord to Tenant of
such statement. Within such one hundred eighty (180) day period, Tenant may
file written exception to any items of expense, provided, however, that nothing
herein shall be deemed to afford Tenant any right to withhold any disputed
payment claimed by Landlord to be due from Tenant to Landlord, and Tenant shall
promptly make all such payments as aforesaid. All information and calculations
set forth in the Operating Statement shall be binding upon Tenant and no longer
subject to challenge or dispute following such one hundred eighty (180) day
period unless and to the extent Tenant shall have timely disputed the same and
such dispute shall not have been resolved.
2.4.8 Additional Rent. All payments due from Tenant to Landlord under
---------------
this Lease, in addition to Base Rent, shall be considered "Additional Rent" and
---------- ----
any failure by Tenant to make payment to Landlord of any item of Additional Rent
shall have the same effect under this Lease as a failure to pay Base Rent.
2.4.9 Where To Pay Rent. All Rent shall be paid to Landlord, without
-----------------
notice or demand at Landlord's Address or to such other party or to such other
address as Landlord may designate from time to time by notice to Tenant. If
Landlord shall at any time accept Rent after it shall become due and payable,
such acceptance shall not excuse a delay upon subsequent occasions, or
constitute or be construed as a waiver of any of Landlord's rights hereunder.
Section 2.5 Security Deposit. Tenant agrees to deposit with Landlord,
----------------
upon the execution of this Lease, the Security Deposit, in the amount set forth
in Subsection 1.1, as security for the full and faithful performance by Tenant
of each and every term, provision, covenant and condition of this Lease.
Landlord agrees to deposit any cash Security Deposit in an interest bearing
account with a commercial bank, such interest to be considered part of the
Security Deposit for purposes of this provision. In lieu of a cash Security
Deposit, Tenant may deposit with Landlord an irrevocable letter of credit, as
more particularly described in Section 2.5.1 below. If Tenant defaults (for
purposes of this Section 2.5 and Section 2.5.1, any reference to "default" shall
mean Default as defined in Section 17.1) in respect to any of the
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terms, provisions, covenants and conditions of this Lease, including, but not
limited to, payment of the Annual Base Rent, and Additional Rent, Landlord may
use, apply, or retain the whole or any part of said Security Deposit for the
payment of any such Annual Base Rent and Additional Rent, or for any other sum
which Landlord may expend or be required to expend by reason of Tenant's
default, including without limitation any damages or deficiency in the reletting
of the Premises, whether such damages or deficiency shall have occurred before
or after any re-entry by Landlord. If any of the Security Deposit shall be so
used, applied or retained by Landlord, at any time or from time to time, then
Tenant shall promptly, in each such instance, upon the written demand therefor
by Landlord, pay to Landlord such additional sum as may be necessary to restore
the Security Deposit to the original amount set forth in Subsection 1.1.
If Tenant shall fully and faithfully comply with all the terms, provisions,
covenants, and conditions of this Lease, the Security Deposit or any balance
thereof shall be returned to Tenant promptly after all of the following have
taken place: (a) expiration of the Lease Term; (b) removal of Tenant's property
from the Premises; (c) the surrender of the Premises and vacation thereof by
Tenant to Landlord in accordance with this Lease; and (d) all Rent owed pursuant
to this Lease has been paid by Tenant.
Landlord shall deliver the Security Deposit funds deposited hereunder by
Tenant not theretofore expended pursuant to the terms and conditions of this
Lease by Landlord to the transferee of Landlord's interest in the Building in
the event that such interest is transferred, and thereupon Landlord shall be
discharged from any further liability with respect to said Security Deposit.
Tenant hereby agrees not to look to any Mortgagee as mortgagee, mortgagee
in possession, or successor in title to the Premises for any Security Deposit
required by Landlord hereunder, unless said sums have actually been received by
said Mortgagee as security for Tenant's performance of this Lease.
Notwithstanding the foregoing, Landlord shall use reasonable efforts to obtain
from each Mortgagee during the Lease Term an agreement, for the benefit of
Tenant, pursuant to which the Mortgagee agrees to remain responsible for the
portion of the Security Deposit not theretofore expended pursuant to the terms
and conditions of this Lease in the event of a foreclosure or deed in lieu of
foreclosure or similar exercise of remedies by the Mortgagee and agrees to
deliver the portion of the Security Deposit not theretofore expended pursuant to
the terms and conditions of this Lease to any Successor (as defined in Section
15.2). Landlord further agrees that if a first institutional Mortgagee requires
that the Mortgagee hold the Security Deposit in order to accept responsibility
for the Security Deposit, Landlord will cooperate with the Mortgagee by agreeing
to the appropriate arrangements. Tenant also agrees to cooperate with any
arrangements resulting from transfer of the Security Deposit to a institutional
Mortgagee.
In the absence of evidence satisfactory to Landlord of any assignment of
the right to receive the Security Deposit or the remaining balance thereof,
Landlord may return the Security Deposit to the original Tenant, regardless of
one or more assignments of this Lease.
10
<PAGE>
2.5.1 Letter of Credit. In lieu of the cash Security Deposit,
----------------
Tenant at any time may deliver to and deposit with Landlord an irrevocable,
unconditional Letter of Credit in form reasonably acceptable to Landlord and
Tenant, in the face amount equal to the Original Amount specified in Section
l.1.19 running to Landlord as the sole beneficiary. The Letter of Credit shall
be from a financial institution reasonably acceptable to Landlord. Any Letter
of Credit shall have a stated duration of and shall be effective for at least
one year with provision for automatic successive annual one-year extensions for
the Initial Lease Term (and any renewal term or extension term) and for sixty
(60) days thereafter. Tenant shall keep the Letter of Credit in force
throughout the Lease Term and for sixty days after (i) the Lease Expiration Date
of the Lease Term or (ii) the earlier termination of the Lease Term, except that
if such earlier termination is based on Tenant's default, Tenant shall keep the
Letter of Credit in force until sixty days after the date when the Lease Term
would have expired had it not been earlier terminated. Tenant shall deliver to
Landlord a renewal Letter of Credit no later than thirty days prior to the
expiration date of any Letter of Credit issued under this Section 2.5.1, and if
Tenant fails to do so, Landlord may draw the entire amount of the expiring
Letter of Credit and hold the proceeds in cash for the same purposes as the
Letter of Credit. The Letter of Credit shall be issued by a commercial bank
acceptable to Landlord.
If, and as soon as, there shall exist a default under this Lease (and on
the occasion of each default if there shall be more than one), Landlord may draw
upon the Letter of Credit at any time and from time to time in such amount or
amounts as may be necessary to cure the default or to reimburse Landlord for any
sum(s) which Landlord may have spent to cure the default(s) and if Landlord has
terminated this Lease for Tenant's default(s), Landlord may also draw upon the
Letter of Credit in such amount (or all) as may be necessary to obtain any
amounts from time to time owed to Landlord by Tenant after termination under
Article XVII or otherwise. In the case of each such drawing (except a drawing
occurring after termination or expiration of this Lease), Tenant shall, on
demand, cause the Letter of Credit to be reinstated to the full amount that was
requested by this Lease prior to the drawings, or cause a similar Letter of
Credit, aggregating said full amount, to be issued to Landlord. If at the end
of the Lease Term, no Event of Default shall exist, the Letter of Credit, or any
balance thereof, shall be returned to Tenant, but not otherwise. Landlord shall
have the right, in the event of a default by Tenant, to draw on all of the
Letter of Credit and hold the proceeds thereof to be applied from time to time
against all amounts due Landlord (as described in Article XVII).
Article III
Delivery of Demised Premises
----------------------------
3.1 Landlord's Work. Landlord and Tenant hereby acknowledge and agree
---------------
that Landlord prior to the Lease Commencement Date, at its sole cost and
expense, shall perform the work described in Exhibit C. The above work shall be
---------
referred to as "Landlord's Work." Landlord's Work shall be performed in a good
and workmanlike manner in accordance with all
11
<PAGE>
applicable laws. Except for Landlord's Work, the Premises shall be delivered to
Tenant in their "as is" condition without any representation or warranty as to
the condition thereof by Landlord. Landlord warrants and represents to Tenant
that, as of the date hereof, Landlord has received no written notice from any
applicable governmental authority that the Premises are in violation of any
applicable law. Landlord and Tenant agree to hold periodic meetings during the
course of Landlord's Work to review the progress of such work and Tenant shall
have the right, upon reasonable advance notice to Landlord, to enter the
Premises to inspect the progress of Landlord's Work.
3.2 Lease Commencement Date. The "Lease Commencement Date" shall occur
----------------------- -----------------------
upon the later of: (i) February 8, 1998; or (b) the date that Landlord
substantially completes Landlord's Work, as hereinafter defined, and delivers
the Premises to Tenant.
3.2.1 Substantial Completion. "Substantially completed" and "substantial
----------------------
completion" shall mean the date when Landlord's Work, except for work then
remaining to be done, if any, consisting of minor "punchlist item" shall have
reached that stage of completion such that Tenant could either use and occupy
the Premises or complete Tenant's Work without substantial interference by
reason of those items still required to complete Landlord's Work and Landlord
obtains a certificate of occupancy permitting Tenant to use the Premises for the
uses permitted herein. If a temporary certificate of occupancy is issued
subject to conditions which require the completion of Landlord's Work, Landlord
shall with reasonable diligence complete such work and satisfy such conditions.
Subject to the above, the taking of possession of the Premises or any portion or
portions thereof by Tenant following Tenant's receipt of notice from Landlord of
substantial completion of Landlord's Work in respect thereof, or otherwise,
shall be conclusive evidence that substantial completion was, in fact, achieved,
but Tenant shall have forty-five (45) days after Tenant's receipt of Landlord's
notice of substantial completion to give Landlord notice of any "punch list"
items remaining to be completed. In the event that any requests for changes or
additions in Landlord's Work are made by Tenant and approved by Landlord, which
approval shall not be unreasonably withheld, and such requests extend the
estimated time for substantial completion of Landlord's Work, such estimate to
be determined solely by Landlord or Landlord's contractors or subcontractors
hired to perform said required work, then for the purposes hereof, Landlord's
Work shall be deemed to have been substantially completed at such time as, in
the sole reasonable judgment of Landlord or said contractors or said
subcontractors, Landlord's Work would have been substantially completed except
for the delay caused by or in any manner related to the requests of Tenant made
as aforesaid. Notwithstanding the foregoing, in the event that Tenant shall
commence day-to-day operations in the Premises prior to when Landlord's Work has
been substantially completed, then for all purposes of this Lease, Landlord's
Work shall be deemed to have been substantially completed on the date Tenant
commenced such day-to-day operations in the Premises.
Tenant acknowledges that the Premises are currently occupied by another
tenant who is obligated to vacate the Premises by no later than January 31,
1998. Except as herein expressly set forth, Landlord shall incur no liability
for its failure to deliver possession of the Premises
12
<PAGE>
to Tenant. In the event that Landlord is unable to deliver possession of the
Premises as herein provided to Tenant by February 8, 1998, the Lease
Commencement Date shall be the date that Landlord delivers possession of the
Premises. If Landlord is unable to deliver the Premises to Tenant by March 8,
1998, Tenant may, at any time thereafter, by written notice to Landlord given at
any time prior to the date when Landlord delivers possession to Tenant, elect to
terminate this Lease, in which event, this Lease will terminate and be of no
force and effect on the date thirty (30) days after Tenant's notice to terminate
and neither party shall have any liability hereunder; provided, however, that if
Landlord delivers possession of the Premises to Tenant within such thirty (30)
day period, Tenant's notice to terminate shall be nullified and this Lease and
the obligations of the parties shall continue as if such notice to terminate
were not given by Tenant. In addition, if Landlord fails to deliver possession
of the Premises as herein provided to Tenant by March 9, 1998, then for each day
thereafter that Landlord fails to deliver possession of the Premises as herein
provided, Landlord shall pay Tenant the sum of $2,000 up to a maximum aggregate
sum equal to $28,000 as liquidated damages for Landlord's failure. In no event
shall Landlord be liable to Tenant for any sum in excess of the amounts set
forth in the preceding sentence for its failure to deliver possession of the
Premises to Tenant, Tenant hereby acknowledging that Tenant's rights to the
liquidated damage payment set forth in the preceding sentence and to terminate
the Lease shall be Tenant's sole remedies for Landlord's failure to deliver
possession of the Premises to Tenant as herein provided.
Section 3.2.2 Early Entry by Tenant. Landlord shall not unreasonably
---------------------
withhold its consent to any request by Tenant to have access to the Premises at
some interval prior to the date of substantial completion of Landlord's Work for
the purpose of allowing Tenant to install Tenant's furniture, fixtures and
equipment, provided that such entry, in Landlord's reasonable judgement, will
not unreasonably interfere with Landlord's Work, increase the cost thereof or
result in any delay therein. Such entry shall be subject to all of the
provisions of this Lease other than the payment of Annual Base Rent, Operating
Expenses or Taxes, but shall not be considered Tenant's acceptance of the
Premises.
Article IV
Additional Covenants of Tenant
------------------------------
In addition to the covenants expressly set forth in this Lease, Tenant
covenants and agrees as follows:
4.1 Use. To use and occupy the Premises solely for the Permitted Uses and
---
for no other use or purpose.
Not to use or occupy the Premises for any unlawful purpose or in any manner
that will be inconsistent with any certificate of occupancy applicable from time
to time to the Premises or the Building or any part thereof, or that will
constitute waste or nuisance. Without limitation of the foregoing, Tenant shall
not injure or deface the Premises (i.e., beyond
13
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reasonable wear and tear) or the Property, nor keep in the Premises any
inflammable fluids or chemicals except for customary cleaning and office
supplies and those fluids or chemicals enumerated on the list attached hereto as
Exhibit D (but only in such quantities as comply with law), or permit the
- ---------
emission from the Premises of any objectionable noise or odor; nor dump, flush,
or in any way introduce any hazardous substances (defined below) or any other
toxic substances (defined below) into the sewage or other waste disposal system
serving the Premises or the Building; nor generate, store, use or dispose of
hazardous or toxic substances in or on the Premises or the Building (other than
the storage, use and disposal, all in accordance with legal requirements
applicable thereto, of any of the aforesaid which constitute consumer products
or are otherwise typically so stored, used and disposed of by tenants of other
office buildings in connection with office purposes and then only those types
and quantities permitted under Landlord's policies of insurance); nor use or
devote the Premises or any part thereof for any use thereof which is
inconsistent with the quality, maintenance, use and occupancy of the Building or
for any use which is in violation of law or liable to invalidate or prevent
Landlord from obtaining any insurance customarily carried by landlords of
buildings of the type and character of the Building (or liable to materially
increase the premiums therefor) on the Building. "Hazardous substances" and
--------------------
"toxic substances" as used herein shall have the same meanings as defined and
----------------
used in the Comprehensive Environmental Response, Compensation and Liability Act
of 1980, as amended, 42 U.S.C. (S)9061 et seq.; in the Hazardous Material
-- ---
Transportation Act, 49 U.S.C. (S)1802; in the Toxic Substances Act, 15 U.S.C.
(S)2601 et seq.; in the Resource Conservation and Recovery Act, as amended, 42
-- ---
U.S.C. (S)6921 et seq.; in the Massachusetts Hazardous Waste Management Act, as
-- ---
amended; in Massachusetts General Laws Chapter 21; in the Massachusetts Oil and
Hazardous Material Release Prevention and Response Act, as amended; in the
regulations adopted and publications promulgated pursuant to said Acts; and in
any other applicable laws, rules, regulations and orders.
To comply with all present and future laws, ordinances (including zoning
ordinances and land use requirements), regulations, and orders of all public or
quasi-public authorities having jurisdiction over the Property concerning the
use, occupancy and condition of the Premises and all machinery, equipment and
furnishings therein and provide Landlord with a copy of any notice Tenant
receives of lack of such compliance and with any notice alleging violation given
by any governmental authority. It is expressly understood that if any present
or future law, ordinance, regulation or order requires an occupancy, use or
other permit for Tenant's particular use and occupancy of the Premises, Tenant
will promptly obtain and maintain such permit at Tenant's own expense and will
promptly provide copies to Landlord of all such permits so obtained.
4.2 Safety Appliances; Licenses. To keep the Premises equipped with all
---------------------------
safety appliances (such as, without limitation, fire extinguishers) required by
law or ordinance or any other regulation of any public authority because of the
particular manner of use made by Tenant of the Premises, and to procure all
licenses and permits so required because of Tenant's particular manner of use
and, if requested by Landlord, to do any work so required because of such use,
it being understood that the foregoing provisions shall not be construed to
broaden in any way Tenant's Permitted Uses.
14
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4.3 Personal Property Taxes. To pay, on or before the due date thereof,
-----------------------
all taxes charged, assessed or imposed upon the personal property (including,
without limitation, fixtures and equipment) of Tenant in or upon the Premises.
Article V
Assignment and Subletting
-------------------------
5.1 General Prohibition of Assignment and Subletting. Except as
------------------------------------------------
hereinafter provided, Tenant shall not, without the prior written consent of
Landlord, which Landlord may withhold in its sole discretion, assign, mortgage,
pledge, sublease or otherwise transfer or encumber this Lease or its interest
therein, in whole or in part, or permit the assignment or transfer of this Lease
or the right of occupancy thereunder by operation of law or otherwise.
Furthermore, if at any time during the Lease Term, Tenant is (a) a corporation
(excluding a corporation the outstanding voting stock of which is listed on a
recognized securities exchange or inter dealer quotation system) or a trust
(whether or not having shares of beneficial interest) and there shall occur any
change in the identity of any of the persons then having power to participate in
the election or appointment of the directors, trustees or other persons
exercising like functions and managing the affairs of Tenant, or (b) a
partnership or association or otherwise not a natural person (and is not a
corporation or a trust) and there shall occur any change in the identity of any
of the persons who then are members of such partnership or association or who
comprise Tenant, such change in identity shall constitute an assignment of this
Lease for all purposes hereunder.
5.2 Affiliated Entities. Notwithstanding the foregoing, Tenant may sublet
-------------------
or assign this Lease without Landlord's consent to (i) any corporation or entity
which is a successor to Tenant either by merger or consolidation, or (ii) a
corporation or other entity which shall (A) control, (B) be under the control
of, or (C) be under common control with, Tenant (the term "control" as used
-------
herein shall mean ownership of more than fifty percent (50%) of the outstanding
voting stock of a corporation, or other equivalent equity and control interest
if Tenant is not a corporation) so long as (I) the principal purpose of such
assignment is not the acquisition of Tenant's interest in this Lease (except if
such assignment is made for a valid intra corporate business purpose to an
entity described in clause (C) above) and is not made to circumvent the
provisions of this Section 5.1, and (II) any such assignee in a transaction
described in (i) above shall have a net worth, determined in accordance with
generally accepted accounting principles, consistently applied, after giving
effect to such assignment, equal to or greater than Tenant's net worth, as so
determined, on the date of such assignment.
Subject to Landlord's right's under Section 5.5 below, with regard to any
other proposed assignment or sublease, Landlord agrees not to unreasonably
withhold its consent. In determining reasonableness, Landlord may take into
consideration all relevant factors surrounding the proposed sublease and/or
assignment, including, without limitation, the following: (i) the business
reputation of the proposed assignee or subtenant and its officers,
15
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directors and stockholders; (ii) the nature of the business to be conducted in
the Demised Premises by the proposed assignee or subtenant and (iii) the
financial ability of the proposed assignee or sublessee to pay all monetary
obligations under the sublease and to satisfy all other obligations of the
sublessee. Other than with respect to any such assignment or sublease which does
not require the consent of Landlord under (i) or (ii) of the previous paragraph,
if Landlord consents to any assignment or sublease, Tenant shall be obligated to
pay Landlord as additional rent, fifty percent (50%) of any "Net Profit"
received by Tenant. For purposes of the preceding sentence, "Net Profit" shall
mean the excess of all rent and other consideration paid by such sublessee to
Tenant over the sum of that portion of the rent and additional rent paid by
Tenant to Landlord hereunder reasonably allocable to such subleased space and
all out-of-pocket third party expenses reasonably incurred by Tenant for leasing
commissions and leasehold improvements necessitated by such sublease. Any
attempted assignment, mortgage, pledge, transfer, or encumbrance by Tenant of
this Lease or its interest herein contrary to the provisions of this Section 5.1
shall, at the option of Landlord, terminate this Lease, and Tenant shall remain
liable for all Rent and other sums due under this Lease and all damages suffered
by Landlord on account of such breach by Tenant.
5.3 Terms Governing Assignments and Subleases. Any assignment of this
-----------------------------------------
Lease or subletting of the Premises is subject to all of the terms, covenants
and conditions of this Lease, including, without limitation, the provisions of
this Article V relating to the assignment of this Lease (which shall also govern
in the case of the assignment of any sublease by such subtenant) and the
subletting of the Premises. Tenant shall reimburse Landlord as Additional Rent,
for Landlord's reasonable legal fees and disbursements and other expenses
incurred in connection with any request by Tenant to assign or sublet, promptly
following Landlord's demand therefor.
5.4 No Waiver or Release. The consent by Landlord to any assignment or
--------------------
subletting shall not be construed as a waiver or release of Tenant from its
primary liability for the performance of all covenants and obligations to be
performed by Tenant under this Lease nor as limiting or affecting in any way any
of Landlord's rights or remedies, including, without limitation, its rights and
remedies under Article XVII, nor shall the collection or acceptance of Rent from
any assignee, transferee or subtenant constitute a waiver or release of Tenant
from any such primary liability, which following any assignment, transfer or
sublease shall be joint and several with the assignee, transferee or sublessee,
as the case may be. Landlord's consent to any assignment or subletting shall
not be construed as relieving Tenant from the obligation of complying with the
provisions of Section 5.1 hereof, as applicable, with respect to any subsequent
assignment or subletting.
5.5 Landlord's Recapture Right. Notwithstanding anything herein to the
--------------------------
contrary, except as set forth in the last sentence of this Section, with respect
to any proposed assignment of this Lease or sublease of the Premises or any
portion thereof which requires the consent of Landlord hereunder, other than an
assignment to an entity described in Section 5.2 (i) or (ii), Landlord shall
have the right, to be exercised in writing within fifteen (15) days after
written notice from Tenant seeking Landlord's consent to assign this Lease or
sublease all or any
16
<PAGE>
portion of the Premises, to terminate this Lease (in the event of a proposed
assignment) or recapture that portion of the Premises to be subleased (in the
event of a proposed sublease) by written notice thereof to Tenant. If Landlord
shall give notice of its election to terminate this Lease (or recapture a
portion of the Premises, in the event of a proposed sublease), then this Lease
shall terminate sixty (60) days after the date of Landlord's termination notice
or, in the case of a proposed sublease, this Lease shall be deemed amended to
eliminate the proposed sublease premises from the Premises and thereafter all
Base Rent and Additional rent shall be appropriately prorated to reflect the
reduction of the Premises as of the sixtieth (60th) day following the date of
Landlord's notice thereof. The provisions of this Section 5.5 shall not apply to
any proposed sublease of less than 40% of the Premises, provided that the
proposed sublease together with all other subleases of portions of the Premises
which require Landlord's consent do not comprise more than 40% of the rentable
area of the Premises in the aggregate.
Article VI
Maintenance and Repairs
-----------------------
6.1 Repair and Yield Up. Tenant shall keep and maintain the Premises and
-------------------
all fixtures and building equipment located therein, in clean, safe and sanitary
condition, casualty and reasonable wear and tear and the obligations of Landlord
under Section 6.4 only excepted, and shall take good care thereof and make all
required repairs thereto, and shall suffer no waste or injury thereto. At the
expiration or other termination of the Lease Term, Tenant shall surrender the
Premises and all alterations and additions thereto in good order, repair and
condition, reasonable wear and tear and damage by casualty and the obligations
of Landlord under Section 6.4 only excepted, first removing all goods and
effects of Tenant and, to the extent specified by Landlord by notice to Tenant
given at least thirty (30) days before such expiration or termination, all
alterations and additions made by or on behalf of Tenant except for Landlord's
Work and those other alterations and additions made with the prior consent of
Landlord or which do not require the consent of Landlord. Tenant shall repair
any damage caused by such removal and restore the Premises and leave them clean
and neat.
6.2 Landlord's Right To Self-Help. Tenant shall repair, at its sole cost
-----------------------------
and expense, all injury, breakage and damage to (a) the Premises as required
under Section 6.1 and (b) if caused by any act or omission of Tenant, or of any
agent, employee, subtenant, contractor, customer or invitee of Tenant, all
injury, breakage and damage to any other part of the Building, provided that
Landlord shall have the right, at its option, upon reasonable prior written
notice to Tenant (except prior written notice shall not be required in the event
of an emergency) to make such repairs to the exclusion of Tenant and to charge
Tenant for all reasonable costs and expenses incurred in connection therewith as
Additional Rent hereunder. The liability of Tenant for such costs and expenses
shall be reduced by the amount of any insurance proceeds received by Landlord on
account of such injury, breakage or damage.
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6.3 Repairs to the Demised Premises and the Property. Landlord shall keep
-------------------------------------------------
and maintain, in good repair and tenantable condition, all plumbing, electrical
and HVAC systems within the Demised Premises, the sidewalks, driveways, parking
areas and other common areas of the Property, all plate and other exterior
glass, window frames and exterior door frames and the non-structural components
of the roof such as but not limited to any insulation, roof lining, the outside
membrane, gutters and downspouts. The cost and expense of all such repairs
and/or replacements, except as expressly set forth in Section 6.4, shall be
includable in the Operating Expenses as described in Section 2.4.4.
Notwithstanding the above, Tenant shall reimburse Landlord for the cost of all
repairs made necessary as the result of Tenant's negligence or willful
misconduct. tenant acknowledges that Landlord shall have no obligation to
provide security to the Premises or the Property.
6.4 Landlord's Obligations. Landlord, at its sole cost and expense, shall
----------------------
make all structural repairs to the foundation and structural members of the
Building, including, the structural components to the roof not caused by the
negligence or willful misconduct of Tenant and such repairs shall not be
includable in the Operating Expenses described in Section 2.4.4. In addition, if
any replacement or repair of a capital nature necessary to maintain the HVAC
system or any other building system or the elevator in good operating order is
incurred (or in the exercise of customary building maintenance standards for
buildings comparable to the Building, should have been incurred) by Landlord
prior to the date six months after the Lease Commencement Date, such cost or
expense shall not be includable as an Operating Expense, unless caused by the
negligence or willful misconduct of Tenant.
6.5 Tenant's Right To Self-Help. If Landlord defaults in its obligations
---------------------------
under Sections 3.1, 6.3 or 6.4 , then Tenant shall give notice to Landlord of
such default, which notice shall contain a specific reference to this Section
6.5. If Landlord fails to cure such default within fifteen (15) days after such
notice (or if Landlord has commenced such cure within such fifteen (15) day
period, such additional time as shall be necessary for Landlord to reasonably
prosecute such cure to completion), Tenant may, following such fifteen (15) day
(or longer) period, but shall not be required to, make such payment or do such
act; provided that if there is imminent danger of loss of life or property,
Tenant may make such repairs earlier than such fifteen (15) day period if Tenant
has given Landlord reasonable advance notice that Tenant intends to exercise its
rights under this provision and Tenant expends only the amount reasonably
required to abate such danger. If Tenant elects to make such payment or do such
act, all costs and expenses reasonably incurred by Tenant, plus interest thereon
at the rate of twelve percent (12%) per year, from the date paid by Tenant to
the date of payment thereof by Landlord, shall be promptly paid by Landlord to
Tenant upon submission of invoices or other reasonable evidence of such payment
by Tenant to Landlord.
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Article VII
Tenant Alterations
------------------
7.1 Improvements. Tenant will not make or permit anyone to make any
------------
alterations, decorations, additions or improvements, structural or otherwise, in
or to the Premises (hereinafter referred to collectively as "Improvements")
------------
without the prior written consent of Landlord, which consent shall not be
unreasonably withheld. Landlord shall not unreasonably withhold its approval of
any minor alterations requested to be made by Tenant not exceeding $20,000 in
the aggregate in any Lease Year.
All of Tenant's Improvements shall be coordinated with any work being
performed by Landlord and in a manner so as not to damage the Building or
interfere with construction or operation of the Building and, except for
installation of furnishings, shall be performed by contractors or workers first
approved by Landlord in writing, such approval not to be unreasonably withheld
or delayed. Tenant, before its work is started, shall: secure all licenses and
permits necessary therefor; deliver to Landlord a statement of the names of all
its contractors and subcontractors and assurances satisfactory to Landlord
protecting Landlord against liens arising out of the furnishing of such labor
and materials; and cause each contractor to carry workers' compensation
insurance in statutory amounts covering all the contractor's and subcontractor's
employees and comprehensive public liability insurance with such limits as
Landlord may reasonably require, but in no event less than a combined single
limit of three million dollars ($3,000,000), and any other insurance which
Landlord may from time to time reasonably require, all such insurance to be
written in reputable companies reasonably approved by Landlord and insuring
Landlord and Tenant as well as the contractors; and deliver to Landlord
certificates of all such insurance. Tenant agrees to pay promptly when due the
entire cost of any work done on behalf of Tenant, its agents, employees or
independent contractors, and not to cause or permit any liens for labor or
materials performed or furnished in connection therewith to attach to the
Property and immediately to discharge or bond any such liens which may so
attach. If, notwithstanding the foregoing, any mechanic's or materialmen's lien
is filed against the Property for work claimed to have been done for, or
materials claimed to have been furnished to, Tenant or its agents, employees or
independent contractors, Tenant, at its sole cost and expense, shall cause such
lien to be dissolved promptly after receipt of notice that such lien has been
filed, by the payment thereof or by the filing of a bond sufficient to
accomplish the foregoing. If Tenant shall fail to discharge any such mechanic's
or materialmen's lien, Landlord may, at its option, discharge such lien and
treat the cost thereof (including reasonable attorneys' fees incurred in
connection therewith) as Additional Rent payable upon demand, it being expressly
agreed that such discharge by Landlord shall not be deemed to waive or release
the default of Tenant in not discharging such lien. It is understood and agreed
that any Improvements to the Premises shall be constructed on behalf of Tenant
and not on behalf of Landlord.
7.2 Indemnity. Tenant shall indemnify and hold Landlord harmless from and
---------
against any and all expenses, liens, claims, liabilities and damages based on or
arising, directly or
19
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indirectly, by reason of the making of any improvements to the Premises, which
obligation shall survive the termination of this Lease.
Article VIII
Signs and Furnishings
---------------------
8.1 Signage. No sign, advertisement or notice (hereinafter "sign") shall
-------
be inscribed, painted, affixed or otherwise displayed by Tenant on any part of
the exterior or the interior of the Building unless in compliance with all
applicable law and approved in writing by Landlord as to the location, number,
size, color and style of same, which approval shall not be unreasonably
withheld.
8.2 Floor Load; Deliveries. Landlord shall have the right to prescribe
----------------------
the weight and position of safes and other heavy equipment, supplies, fixtures
and other concentrated loads, which, if allowed by Landlord, shall be installed
in such manner as to distribute their weight adequately. Any and all damage or
injury to the Premises or the Building caused by moving the same in or upon the
Premises shall be repaired by and at the sole cost and expense of Tenant.
Article IX
Tenant's Equipment
------------------
Tenant shall not install any equipment of any type or nature that will or
may necessitate any changes, replacements or additions to, or in the use of, the
water system, heating system, plumbing system, air-conditioning system or
electrical system of the Premises or the Building without first obtaining the
prior written consent of Landlord, which consent Landlord shall not unreasonably
withhold; any consent granted by Landlord may be conditioned upon the payment by
Tenant of any costs incurred by Landlord in connection with the foregoing.
Business machines and mechanical equipment belonging to Tenant which cause noise
or vibration that may be transmitted to the structure of the Building or to any
space therein to such a degree as to be reasonably objectionable to Landlord
shall be installed and maintained by Tenant at Tenant's sole cost and expense on
vibration eliminators or other devices sufficient to reduce such noise and
vibration to a level reasonably satisfactory to Landlord or shall be removed
from the Premises at Tenant's sole cost and expense if Tenant shall be unable to
reduce such noise and vibration to a level reasonably satisfactory to Landlord.
20
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Article X
Inspection by Landlord
----------------------
Tenant will permit Landlord, its agents or representatives to enter the
Premises at all reasonable times following reasonable advance notice (or at any
time in cases of emergency and without advance notice in such cases) to examine,
inspect and protect the Premises and the Building, to make such alterations and
repairs in accordance with Sections 2.1.1 and 17.6 as in the reasonable judgment
of Landlord may be deemed necessary, or to show the same to prospective tenants
of the Premises during the last year of the Lease Term and to prospective
purchasers and mortgagees at all reasonable times. In connection with any such
entry, Landlord shall use reasonable efforts to minimize the disruption to
Tenant's use of the Premises.
Article XI
Insurance
---------
11.1 Increase in Insurance Rate. Tenant shall not conduct or permit to be
--------------------------
conducted any activity, or place any equipment, signs or furnishings in or about
the Premises, which will in any way increase the rate of fire insurance or other
insurance on the Building. As a result thereof, Tenant shall be liable for the
amount of such increase and shall reimburse Landlord for such amount as
Additional Rent upon written demand from Landlord; it being understood, however,
that Tenant's payment of such increase shall not operate as a waiver by Landlord
of Landlord's right to enforce the provisions of this Article XI and that this
provision shall not be construed to broaden, in any way, the Permitted Uses.
11.2 Commercial General Liability and Casualty Insurance. Throughout the
---------------------------------------------------
Lease Term, Tenant shall obtain and maintain (a) commercial general liability
and property damage insurance, including a broad form contractual liability
endorsement, in the minimum amount set forth in Section 1.1.14, (b) casualty
insurance covering Tenant's fixtures and personal property located in the
Premises, (c) workers' compensation insurance on its employees as required by
law, (d) host liquor liability insurance, if applicable, and (e) such other
insurance as may reasonably be required by Landlord from time to time. All of
such insurance shall be underwritten by a company or companies licensed to do
insurance business in Massachusetts by the Department of Insurance, shall be
written on the "occurrence basis", and, with respect to the types of insurance
referred to in clauses (a), (b), (d) and (e) above, shall be in such amounts and
contain such deductible amounts as may be reasonably required by Landlord from
time to time. The policies referred to in clauses (a) and (e) above shall name
Landlord as an additional insured thereunder and, in addition, shall name as
additional insureds the holders of any Mortgage of the Property of which Tenant
is notified in writing, as their respective interest may appear. Tenant shall
furnish Landlord receipts evidencing payment of the premiums for such insurance
and shall deposit certificates of such insurance with Landlord no later than the
Lease Commencement Date and at least thirty (30) days before each insurance
renewal date thereof. Each such policy shall contain provisions to the effect
that no act or omission of Tenant shall affect or limit the obligation of the
insurance company to pay the amount of the loss sustained and prohibiting
cancellation or reduction of coverage without first giving
21
<PAGE>
Landlord not less than 30 days' prior written notice (if available at no
additional cost to Tenant, but in any event, not less than 10 days' prior
written notice) of such proposed action. Landlord's rights under Section 17.6
shall include, without limitation, the right to obtain the insurance coverage
required to be maintained by Tenant hereunder should Landlord not be timely
furnished the evidence of insurance required under this Section 11.2.
Landlord shall carry such insurance as Landlord reasonably considers
prudent and customary or is required by Landlord's lender in connection with the
ownership, operation and management of the Building, including without
limitation, (i) fire and extended coverage insurance insuring the Building with
one hundred percent (100%) replacement cost coverage and loss of rents for a
period of one (1) year, and (ii) commercial general liability and property
damage insurance, including a broad form contractual liability endorsement, in
such amounts at least equal to those that are required of Tenant for such
coverage hereunder. Any costs incurred in connection with any such Landlord's
insurance shall be an Operating Expense. Landlord shall have no obligation to
insure Tenant's personal property or chattels, including, without limitation,
Tenant's trade fixtures, or any improvements installed by any party other than
the Landlord named herein.
11.3 Waiver of Subrogation. Any casualty insurance carried by either
---------------------
party with respect to the Premises, the Building or the Property, or property
therein or occurrences thereon shall include a clause or endorsement denying to
the insurer rights of subrogation against the other party to the extent rights
have been waived by the insured prior to occurrence of injury or loss, provided
that such clause or endorsement is obtainable without payment of an additional
premium. If such clause or endorsement is obtainable upon payment of an
additional premium, notice thereof shall be given to the party that would
benefit from such clause or endorsement and such party may request the other
party to obtain it and shall reimburse the other party for the cost of such
additional premium. Each party, notwithstanding any provisions of this Lease to
the contrary, hereby waives any rights of recovery against the other for injury
or loss due to hazards covered by such insurance to the extent such party's
policy permits such waiver of subrogation and then only with respect to sums
which are collectible thereunder.
Article XII
Utilities and Services
----------------------
12.1 Utilities. Tenant shall pay, as Additional Rent, the cost of all
---------
utilities furnished to Tenant on the Premises, including, but not limited to,
electricity, gas, oil, water and sewer. Tenant agrees to pay any and all such
charges for the Premises to Landlord in the event any of such utilities are not
separately metered to Tenant or directly to the utility company if such
utilities are separately metered.
22
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12.2 Interruption of Services. Landlord shall not have any liability to
------------------------
Tenant whatsoever as result of Landlord's failure or inability to furnish any of
the utilities or services required to be furnished by Landlord hereunder, or to
perform any other covenant or duty to be performed by Landlord hereunder by
reason of any so-called force majeure cause reasonably beyond Landlord's
----- -------
control, including, without limitation, acts of God, casualty, strikes, scarcity
of labor or materials, governmental requirements or the like. Any such failure
or inability due to force majeure causes to furnish the utilities or services or
----- -------
perform the covenants or duties required hereunder shall not be considered an
eviction, actual or constructive, of Tenant from the Premises and shall not
entitle Tenant to terminate this Lease nor to any abatement of Rent payable
hereunder. Notwithstanding the foregoing, if during the term of this Lease,
there occurs any failure of any building system, which failure is not the result
of an event of force majeure which affects other property near the Property in
addition to the Property, and as a result of such failure, Tenant, in good faith
is unable to operate its business in the Premises for four (4) consecutive
business days, the Annual Base Rent shall be equitably abated after such four
(4) day period until such failure is repaired by Landlord, provided that if
Tenant maintains loss of business insurance which compensates Tenant for its
inability to operate, the Annual Base Rent shall not be abated.
12.3 Governmental Regulations. The parties hereto shall comply with all
------------------------
mandatory energy conservation controls and requirements applicable to comparable
buildings that are imposed or instituted by the federal, state, county or
municipal governments, including, without limitation, controls on the permitted
range of temperature settings in office/retail buildings, and requirements
necessitating curtailment of the volume of energy consumption or the hours of
operation of the Building. Any terms or conditions of this Lease that conflict
or interfere with compliance with such controls or requirements shall be
suspended for the duration of such controls or requirements. Compliance with
such controls or requirements shall not be considered an eviction, actual or
constructive, of Tenant from the Premises and shall not entitle Tenant to
terminate this Lease or to an abatement of any Rent payable hereunder.
Article XIII
Liability of Landlord; Indemnity by Tenant
------------------------------------------
13.1 Limitation of Liability. Landlord shall not be liable to Tenant, its
-----------------------
employees, agents, business invitees, licensees, customers, or guests for any
damage, injury, loss, compensation, or claim (including, but not limited to,
claims for the interruption of or loss to Tenant's business) based on, arising
out of or resulting from any cause whatsoever, including, but not limited to,
repairs to any portion of the Premises or the Property, any fire, robbery,
theft, mysterious disappearance and/or any other crime or casualty, the actions
of any other tenants of the Building or of any other person or persons, or any
leakage in any part or portion of the Premises or the Building, or from water,
rain or snow that may leak into, or flow from any part of the Premises or the
Building, or from drains, pipes or plumbing fixtures in the
23
<PAGE>
Building, unless due to the gross negligence or willful misconduct of Landlord
or Landlord's agents, servants or employees. Any goods, property or personal
effects stored or placed by Tenant or its employees in or about the Premises
shall be at the sole risk of Tenant, and Landlord shall not in any manner be
held responsible therefor. Notwithstanding the foregoing, Landlord shall not be
released from liability for any injury, loss, damages or liability to the extent
arising from any gross negligence or willful misconduct of Landlord, its
servants, employees or agents acting within the scope of their authority on or
about the Premises; provided, however, that in no event shall Landlord, its
servants, employees or agents have any liability to Tenant based on any loss
with respect to or interruption in the operation of Tenant's business.
13.2 Indemnity. Tenant hereby agrees to indemnify and hold Landlord, the
---------
holder of any Mortgage and any of their respective partners, shareholders,
officers, directors, employees, agents and contractors, harmless from and
against all costs, damages, claims, liabilities, liens and expenses (including,
without limitation, attorneys' fees, court costs and other expenses of
litigation or arbitration) suffered by or claimed against Landlord, the holder
of any Mortgage, and any of their respective partners, shareholders, officers,
directors, employees, agents and contractors, directly or indirectly, based on,
arising out of or resulting from (a) Tenant's use and occupancy of the Premises,
the Property or the business conducted by Tenant therein, (b) any act, fault,
omission to act or willful misconduct by Tenant or its employees, agents,
licensees, invitees, contractors or sublessees, (c) any accident, injury or
damage whatsoever caused to any person or to the property of any person in or
about the Premises or the Property where such accident, injury or damage results
or is claimed to have resulted from any act, fault, omission to act or
misconduct by Tenant or its employees, agents, licensees, invitees, customers,
guests, contractors or sublessees or (d) any breach or default by Tenant in the
performance or observance of its covenants or obligations under this Lease,
unless any of the foregoing is due to the gross negligence or willful misconduct
of Landlord, its agents, servants or employees.
13.3 No Right of Set-Off. In the event that Tenant shall have a claim
-------------------
against Landlord, at any time during the Lease Term, Tenant shall not have the
right to deduct the amount allegedly owed to Tenant from any Rent or other sums
payable to Landlord, it being understood that Tenant's sole remedy for
recovering upon such claim shall be an independent action against Landlord,
except to the extent that Tenant is entitled to an abatement of rent as
expressly set forth in Articles XV or XVI.
13.4 Nonrecourse. In the event Tenant is awarded a money judgment against
-----------
Landlord, Tenant's sole recourse for satisfaction of such judgment shall be
limited to Landlord's then interest in the Property. In no event shall any
partner, officer, director, trustee, stockholder, employee or beneficiary of
Landlord or any other person be held to have any personal liability for
satisfaction of any claims or judgments that Tenant may have against Landlord
and Tenant may not look to any other assets of Landlord or any beneficiary of
Landlord.
24
<PAGE>
13.5 Landlord's Indemnity. Landlord hereby agrees to indemnify and hold
--------------------
Tenant and any of its respective shareholders, officers, directors, employees
and agents harmless from and against all costs, damages, claims, liabilities,
liens and expenses (including, without limitation, attorneys' fees, court costs
and other expenses of litigation or arbitration) suffered by or claimed against
Tenant, and any of its respective shareholders, officers, directors, employees
and agents, directly or indirectly, based on, arising out of or resulting from
the gross negligence or willful misconduct of Landlord or its employees, agents,
licensees or contractors.
Article XIV
Rules and Regulations
---------------------
14.1 Rules and Regulations. Tenant and its employees, agents, licensees,
---------------------
invitees, customers, guests and permitted subtenants shall at all times abide by
and observe the rules and regulations attached hereto as Exhibit E. Nothing
---------
contained in this Lease shall be construed as imposing upon Landlord any duty or
obligation to enforce any such rules and regulations, except that no action
shall be taken against Tenant unless also taken against all other tenants in the
Building not complying with any such rules and regulations.
Article XV
Damage or Destruction
---------------------
15.1 Restoration or Termination. If, during the Lease Term, the Premises
--------------------------
or the Building are totally or partially damaged or destroyed from any cause
rendering the Premises totally or partially inaccessible or unusable, and such
cause is fully covered by the net proceeds of insurance made available to
Landlord, Landlord shall diligently (taking into account the time necessary to
effectuate a satisfactory settlement with any insurance companies involved)
restore and repair the Premises and the Building, as the case may be, to proper
condition for use and occupancy by Tenant to the extent of such net proceeds;
provided, however, if such damage or destruction is not reasonably susceptible
of being repaired or restored within one hundred eighty (180) days after the
occurrence of such damage, including the time needed for removal of debris,
preparation of plans and issuance of all required governmental permits, Landlord
or Tenant may, within forty-five (45) days after the occurrence of such damage,
terminate this Lease by giving notice of termination to the other and specifying
in such notice the effective date of such termination. If this Lease is
terminated pursuant to the preceding sentence, all Base Rent and Additional Rent
payable hereunder shall be apportioned and paid (i) to the date such damage
occurred, with respect to space inaccessible or unusable, and (ii) to the date
of such termination of this Lease, with respect to the remainder of the
Premises, an equitable apportionment to be based upon the criteria provided
below. Following any termination of this Lease as aforesaid, Tenant shall have
no further rights or remedies as against Landlord pursuant to this Lease or
otherwise. If this Lease is not terminated as a result of such damage,
25
<PAGE>
this Lease shall continue in full force and effect and a just and proportionate
part of the Base Rent and Additional Rent shall, according to the nature and
extent to which the Premises shall have been so rendered inaccessible or
unusable for Tenant's Permitted Uses, be suspended or abated until the Premises
shall have been restored to proper use and occupancy as aforesaid.
15.2 Tenant's Personal Property. If Landlord repairs and restores the
--------------------------
Premises as provided in Section 15.1, Landlord shall not be required to repair
or restore any improvements made by or at the expense of Tenant (unless such
improvements are covered by Landlord's insurance) or any trade fixtures,
furnishings, equipment or personal property belonging to Tenant. It shall be
Tenant's sole responsibility to repair and restore all such items.
15.3 Landlord's and Tenant's Right to Terminate. Notwithstanding anything
------------------------------------------
to the contrary contained herein, if the Building is damaged or destroyed from
any cause to such an extent that the costs of repairing and restoring the
Building as reasonably estimated by Landlord would exceed fifty percent (50%) of
the replacement value of the Building, whether or not the Premises are damaged
or destroyed, Landlord or Tenant shall have the right to terminate this Lease by
notice to the other. This right of termination shall be in addition to any
other right of termination provided in this Lease.
Article XVI
Condemnation
------------
16.1 Taking. If the whole or a substantial part of the Premises (as
------
hereinafter defined) shall be taken or condemned by any governmental or quasi-
governmental authority for any public or quasi-public use or purpose (including
a sale thereof under threat of such a taking), then this Lease shall terminate
on the date title thereto vests in such governmental or quasi-governmental
authority, and all Base Rent and Additional Rent payable hereunder shall be
apportioned as of such date. If less than a substantial part of the Premises is
taken or condemned by any governmental or quasi-governmental authority for any
public or quasi-public use or purpose (including a sale thereof in lieu of such
a taking), this Lease shall continue in full force and effect, but the Base Rent
and the formula for determining Tenant's Proportionate Share of Taxes and
Operating Expenses thereafter payable hereunder shall be equitably adjusted as
of the date title vests in the governmental or quasi-governmental authority.
For purposes of this Section 16.1, a "substantial part of the Premises"
--------------------------------
shall be considered to have been taken if more ten percent (10%) of the rentable
area of the Premises or twenty-five percent (25%) of the Tenant's parking spaces
are rendered unusable as a result of such taking, excluding any area taken for
expansion of Concord Road.
16.2 Awards. All awards, damages and other compensation paid by the
------
condemning authority on account of such taking or condemnation (or sale under
threat of such a taking) shall belong to Landlord; Tenant hereby releases and
assigns to Landlord all Tenant's rights to
26
<PAGE>
such awards, damages and other compensation, and covenants to deliver such
further assignments and assurances thereof as Landlord may from time to time
reasonably request. Tenant agrees not to make any claim against Landlord or the
condemning authority for any portion of such award or compensation attributable
to damages to the Premises, the value of the unexpired term of this Lease, the
loss of profits or goodwill, leasehold improvements or severance damages.
Nothing contained herein, however, shall prevent Tenant from pursuing a separate
claim against the condemning authority for the value of furnishings, equipment
and trade fixtures installed in the Premises at Tenant's expense (but excluding
any component of Tenant's Work and Improvements made to the Premises) and for
relocation expenses, provided that such claim does not in any way diminish the
award or compensation payable to or recoverable by Landlord in connection with
such taking or condemnation.
Article XVII
Default by Tenant; Remedies
---------------------------
17.1 Default. The occurrence of any of the following (whether or not the
-------
Lease Term shall have commenced) shall constitute a default under this Lease:
(a) if Tenant shall fail to pay when due any installment of Base Rent or
Estimated Additional Rent Payments or any other Additional Rent; provided,
however, that any such failure shall not constitute a default under this Lease
so long as such failure shall not continue for more than ten (10) days after
written notice from Landlord to Tenant; or
(b) if Tenant shall violate or fail to perform any other term, condition,
covenant or agreement to be performed or observed by Tenant under this Lease and
such violation or failure shall continue for more than thirty (30) days after
written notice thereof from Landlord plus such additional time, if any, as is
reasonably necessary to cure the default if it is of such a nature that it
cannot reasonably be cured in thirty (30) days, which additional time may not
exceed ninety (90) days, provided Tenant is diligently proceeding to cure such
default at all times; or
(c) if Tenant shall commence any case, proceeding or other action seeking
reorganization, arrangement, adjustment, liquidation, dissolution or composition
of Tenant or any of its debts under any law relating to bankruptcy, insolvency,
reorganization, liquidation or relief of debtors, or seeking appointment of a
receiver, trustee, custodian or other similar official for Tenant or for all or
any substantial part of its property; or
(d) if any case, proceeding or other action against Tenant shall be
commenced seeking to have an order for relief entered against Tenant as debtor,
or seeking reorganization, arrangement, adjustment, liquidation, dissolution or
composition of Tenant or any of its debts under any law relating to bankruptcy,
insolvency, reorganization, liquidation or relief of debtors, or seeking
appointment of a receiver, trustee, custodian or other similar official for
27
<PAGE>
Tenant or for all or any substantial part of its property, and such case,
proceeding or other action (i) results in the entry of an order for relief
against Tenant or (ii) remains undismissed for a period of sixty (60) days.
17.2 Landlord's Right to Terminate. If Tenant shall be in default under
-----------------------------
this Lease beyond the applicable cure period, if any, then, in any such case,
Landlord may, whether or not the Lease Term shall have begun, immediately, or at
any time while such default exists and without further notice, terminate this
Lease by written notice to Tenant, specifying a date on which this Lease shall
terminate, and this Lease shall thereupon come to an end on the date specified
therein as fully and completely as if such date were the date herein originally
fixed for the expiration of the Lease Term, and Tenant shall then quit and
surrender the Premises to Landlord, it being understood, however, that Tenant
shall remain liable as hereinafter provided. Landlord, without notice to
Tenant, may store Tenant's removable fixtures, equipment and personal property,
and those of any person claiming through or under Tenant, at the expense and
risk of Tenant, and, if Landlord so elects, may sell such effects at public
auction or private sale and apply the net proceeds to the payment of all sums
due to Landlord from Tenant, if any, and pay over the balance, if any, to
Tenant.
17.3 Rent Reserved. If this Lease is terminated under any of the
-------------
provisions contained in Sections 17.1 and 17.2 or shall be otherwise terminated
for breach of any obligation of Tenant, Tenant covenants to pay forthwith to
Landlord, as compensation, the excess of the total Base Rent and Additional Rent
reserved for the residue of the Lease Term, together with the value of all other
considerations agreed to be paid or performed by Tenant for said residue, over
the rental value of the Premises for said residue of the Lease Term. Tenant
further covenants as an additional and cumulative obligation after any such
ending to pay punctually to Landlord all the sums and perform all the
obligations which Tenant covenants in this Lease to pay and to perform in the
same manner and to the same extent and at the same time as if this Lease had not
been terminated. In calculating the amounts to be paid by Tenant under the next
foregoing covenant, Tenant shall be credited with any amount paid to Landlord as
compensation as in this Section 17.3 provided and also with the net proceeds of
any rent obtained by Landlord by reletting the Premises, after deducting all
Landlord's expenses in connection with such reletting, including, without
limitation, all repossession costs, brokerage commissions, fees for legal
services and expenses of preparing the Premises for such reletting; it being
agreed by Tenant that Landlord (a) may relet the Premises or any part or parts
thereof, for a term or terms which may, at Landlord's option, be equal to, less
than or exceed the period which would otherwise have constituted the balance of
the Lease Term and may grant such concessions and free rent as Landlord in its
sole discretion considers advisable or necessary to relet the same and (b) may
make such alterations, repairs and decorations in the Premises as Landlord in
its sole discretion considers advisable or necessary to relet the same, and no
action of Landlord in accordance with the foregoing or its failure to relet or
to collect rent under reletting shall operate or be construed to release or
reduce Tenant's liability as aforesaid.
28
<PAGE>
In lieu of any other damages for Tenant's breach and in lieu of full
recovery by Landlord of all sums payable under all the foregoing provisions of
this Section 17.3, Landlord may, by notice to Tenant given at any time after
this Lease is terminated under any of the provisions contained in Section 17.1
or 17.2 or is otherwise terminated for breach of any obligation of Tenant, and
before such full recovery, elect to recover, and Tenant shall thereupon pay, as
liquidated damages, (i) an amount equal to the aggregate of the Base Rent and
Additional Rent with respect to the 12 months ended next prior to such
termination (or in the event a default occurs during the first Lease Year, an
amount equal to the aggregate of an annualized amount of Base Rent and
Additional Rent accrued under this Lease in the first Lease Year) plus the
amount of Base Rent and Additional Rent of any kind accrued and unpaid at the
time of termination, (ii) less the amount of any recovery by Landlord under the
foregoing provisions of this Section 17.3 up to the time of payment of such
liquidated damages. Nothing contained in this Lease shall, however, limit or
prejudice the right of Landlord to prove for and obtain in proceedings for
bankruptcy or insolvency by reason of the termination of this Lease an amount
equal to the maximum allowed by any statute or rule of law in effect at the time
when, and governing the proceedings in which, the damages are to be proved,
whether or not the amount be greater, equal to, or less than the amount of the
loss or damages referred to above.
17.4 Cumulative Remedies. All rights and remedies of Landlord and Tenant
-------------------
set forth herein are in addition to all other rights and remedies available at
law or in equity. All rights and remedies available hereunder or at law or in
equity are expressly declared to be cumulative. The exercise by Landlord or
Tenant of any such right or remedy shall not prevent the concurrent exercise of
any other right or remedy hereunder or subsequent exercise of the same or any
other right or remedy. No delay in the enforcement or exercise of any such
right or remedy shall constitute a waiver of any default hereunder or of any of
Landlord's or Tenant's rights or remedies in connection therewith. Landlord or
Tenant shall not be deemed to have waived any default hereunder unless such
waiver is set forth in a written instrument. If Landlord or Tenant waives in
writing any default, such waiver shall not be construed as a waiver of any
covenant, condition or agreement set forth in this Lease except as to the
specific circumstances described in such written waiver.
17.5 No Waiver. No waiver of any provision of this Lease shall be implied
---------
by any failure of Landlord or Tenant to enforce any remedy on account of the
violation of such provision, even if such violation be continued or repeated
subsequently. Neither the payment by Tenant of a lesser amount than the
installments of Base Rent Estimated Additional Rent Payments or of any other
Additional Rent nor any endorsement or statement on any check or letter
accompanying a check for payment of Rent shall be deemed an accord and
satisfaction, and Landlord may accept such check or payment without prejudice to
Landlord's right to recover the balance of such Rent or to pursue any other
remedy available to Landlord. No re-entry by Landlord, and no acceptance by
Landlord of keys from Tenant, shall be considered an acceptance of a surrender
of this Lease.
29
<PAGE>
17.6 Landlord's Right To Self-Help. If Tenant defaults in the making of
-----------------------------
any payment or in the doing of any act herein required to be made or done by
Tenant, then Landlord may, following thirty (30) days prior written notice or
such shorter period as may be necessary in the event of an emergency, but shall
not be required to, make such payment or do such act. If Landlord elects to
make such payment or do such act, all costs and expenses incurred by Landlord,
plus interest thereon at the rate per annum (the "Interest Rate") of twelve
-------------
percent (12%), from the date paid by Landlord to the date of payment thereof by
Tenant, shall be promptly paid by Tenant to Landlord as Additional Rent;
provided however, that nothing contained herein shall be construed as permitting
Landlord to charge or receive interest in excess of the maximum legal rate then
allowed by law. Landlord may, but is under no obligation to, apply any monies
held by Landlord for Tenant's account, including, without limitation, Estimated
Additional Rent Payments, in exercising its rights under this Section 17.6. The
taking of any action by Landlord under this Section 17.6 shall not be considered
as a cure of such default by Tenant or prevent Landlord from pursuing any remedy
it is otherwise entitled to in connection with such default.
17.7 Late Charge. If Tenant fails to make any payment of Base Rent,
-----------
Estimated Additional Rent Payments or any other Additional Rent on or before the
date five (5) days after such payment is due and payable, a late charge of four
percent (4%) of the amount of such payment shall then be due and payable from
Tenant to Landlord as Additional Rent. In addition, such late payment shall
bear interest at the Interest Rate from the date such payment became due to the
date of payment thereof by Tenant; provided, however, that nothing contained
herein shall be construed as permitting Landlord to charge or receive interest
in excess of the maximum legal rate then allowed by law.
Article XVIII
Holding Over
------------
In the event that Tenant shall not immediately surrender the Premises on
the date of the expiration of the Lease Term or the sooner termination of this
Lease, Tenant shall, at Landlord's election exercised by giving notice to Tenant
as described in the next following paragraph of this Article XVIII, become a
month-to-month tenant and shall be obligated to pay monthly installments of Base
Rent and Additional Rent in an amount equal to one hundred fifty percent (150%)
of the installment of Base Rent and 100% of the Estimated Additional Rent
Payment payable during the last full calendar month of the Lease Term.
If Landlord shall not have elected to make Tenant a month-to-month tenant,
Landlord may, at any time prior to its giving a notice to Tenant that it has
become a month-to-month tenant pursuant to the terms of this Article XVIII,
forthwith re-enter and take possession of the Premises. Until Tenant shall have
either been evicted from the Premises or made a month-to-month tenant as
aforesaid, Tenant shall be a tenant-at-will, subject to all the terms,
conditions, covenants and agreements of this Lease which would have applied in
the case of a
30
<PAGE>
month-to-month tenancy except Tenant's monthly rental obligations shall be
prorated on a daily basis. Nothing herein contained is intended to limit any
rights of Landlord under Article XVII or otherwise, including, without
limitation, Landlord's right to be indemnified against and reimbursed for, in
addition to all amounts otherwise required by the provisions of Article XVII,
the amount of all loss, cost and damage (other than consequential) incurred by
Landlord as a result of any holdover by Tenant, including, without limitation,
all court and arbitration costs, attorneys' fees and expenses and any other
expenses of litigation or arbitration plus any damages on account of inability
to deliver possession of the Premises to any successor tenant.
Article XIX
Covenants of Landlord
---------------------
19.1 Quiet Enjoyment. Landlord covenants that it has the right to make
---------------
this Lease for the Lease Term and that if Tenant shall pay all Rent when due and
punctually perform all the covenants, terms, conditions and agreements of this
Lease to be performed by Tenant, Tenant shall, during the Lease Term, freely,
peaceably and quietly occupy and enjoy the full possession of the Premises,
subject to all of the terms and provisions hereof.
Article XX
Rights of Mortgagee
-------------------
20.1 Definition of Mortgage. The term "Mortgage" shall mean any one or
---------------------- --------
more mortgages or deeds of trust which may now or hereafter affect Landlord's
interest in the Property and all renewals, extensions, supplements, amendments,
modifications, consolidations, and replacements thereof or thereto,
substitutions therefor, and advances made thereunder.
20.2 Lease Subordinate-Superior. This Lease shall be subject and
--------------------------
subordinate to any Mortgage now or hereafter encumbering the Property or any
portion thereof, provided that the holder thereof enters into an agreement with
Tenant by the terms of which the holder will agree not to disturb the rights of
Tenant under this Lease and to accept Tenant as tenant of the Premises under the
terms and conditions of this Lease in the event of acquisition of the Premises
by such holder through foreclosure proceedings or otherwise. In the event that
the holder of a Mortgage or any purchaser at a foreclosure sale or otherwise (a
"Successor") shall succeed to the interest of Landlord, then Tenant shall and
---------
does hereby agree to attorn to such Successor and to recognize such Successor as
its landlord. A Successor shall not, except to the extent consented to in
writing by itself or any predecessor Successor, be:
(a) liable for any act or omission of a prior landlord (including
Landlord); or
31
<PAGE>
(b) subject to any offset or defenses which Tenant might have against any
prior landlord (including Landlord); or
(c) bound by any Rent which Tenant might have paid more than 30 days in
advance to any prior landlord (including Landlord); or
(d) bound by any agreement or modification of this Lease made without the
consent of the Successor; or
(e) liable for any fact or circumstance or condition to the extent
existing or arising prior to such Successor's succession to the
interest of Landlord under this Lease and such Successor further
shall not be liable except during the period of time, if any, during
which such Successor is the owner of the Landlord's interest in the
Building and in any event only to the extent set forth in Section
13.4.
Any claim by Tenant under this Lease against a Successor shall be satisfied
solely out of such Successor's interest in the Property and Tenant shall not
seek recovery against or out of any other assets of such Successor.
Notwithstanding the foregoing, the holder of a Mortgage may at its election
subordinate the same to this Lease without the consent or approval of Tenant.
Any such Mortgage to which this Lease shall subordinate may contain such terms,
provisions and conditions as the holder reasonably deems usual or customary.
This Section 20.2 shall be self-operative. Tenant agrees to execute and
deliver promptly any customary instruments requested by Landlord or the holder
of any Mortgage to carry out the subordination, nondisturbance and attornment
agreements contained in this Section 20.2.
Article XXI
General Provisions
------------------
21.1 No Representations. Tenant acknowledges that neither Landlord nor
------------------
any broker, agent or employee of Landlord has made any representations or
promises with respect to the Premises or the Building except as herein expressly
set forth, and no rights, privileges, easements or licenses are being acquired
by Tenant, except as herein expressly set forth.
21.2 No Partnership or Joint Venture. Nothing contained in this Lease
-------------------------------
shall be construed as creating a partnership or joint venture of or between
Landlord and Tenant, or to create any other relationship between the parties
hereto other than that of landlord and tenant.
32
<PAGE>
21.3 Brokerage. Landlord and Tenant each represent and warrant to the
---------
other that neither of them has employed or dealt with any broker, agent or
finder other than Meredith & Grew and Lynch, Murphy & Walsh (together, the
"Broker") in carrying on the negotiations relating to this Lease. Tenant shall
indemnify and hold Landlord harmless from and against any claim or claims for
brokerage or other commissions asserted by any broker, agent or finder (other
than the Broker) engaged by Tenant or with whom Tenant has dealt. Similarly,
Landlord shall indemnify and hold Tenant harmless from and against any claims
asserted by any broker, agent or finder engaged by Landlord or with whom
Landlord has dealt. The representations and warranties contained in this
Section 21.3 shall survive any termination of this Lease. As between Tenant and
Landlord, Landlord shall be responsible to pay any brokerage commission that may
be due to the Broker in connection with the transactions described herein.
21.4 Estoppel Certificate. Tenant shall, at any time and from time to
--------------------
time, upon not less than ten (10) business days prior written notice by
Landlord, execute, acknowledge and deliver to Landlord an estoppel certificate
containing such statements of fact as Landlord reasonably requests.
21.5 Cost of Enforcement. Landlord and Tenant shall pay all reasonable
-------------------
costs and counsel and other fees incurred by the other in connection with the
successful enforcement from time to time of any obligation under this Lease.
21.6 Notice. All notices or other communications required hereunder shall
------
be in writing and shall be deemed duly given if delivered in person (with
receipt therefor), if sent by reputable overnight delivery or courier service
(e.g., Federal Express) providing for receipted delivery, or if sent by
certified or registered mail, return receipt requested, postage prepaid, to the
following address:
(a) if to Landlord at Landlord's Address, to the attention of Karl W.
Weller, Senior Vice President
(b) if to Tenant, prior to the Lease Commencement Date, at Tenant's
Original Address, to the attention of the Treasurer with a copy to:
Frederick S. Gilman, Esq.
Lynch, DeSimone & Nylen LLP
Suite 3500
One Post Office Square
Boston, MA 02109
and thereafter, at the Premises.
Receipt of notice or other communication shall be conclusively established
by either (i) return of a return receipt indicating that the notice has been
delivered; or (ii) return of the
33
<PAGE>
letter containing the notice with an indication from the courier or postal
service that the addressee has refused to accept delivery of the notice. Either
party may change its address for the giving of notices by notice given in
accordance with this Section.
21.7 Partial Invalidity. If any provision of this Lease or the
------------------
application thereof to any person or circumstances shall to any extent be
invalid or unenforceable, the remainder of this Lease, or the application of
such provision to persons or circumstances other than those as to which it is
invalid or unenforceable, shall not be affected thereby, and each provision of
this Lease shall be valid and enforced to the fullest extent permitted by law.
21.8 Gender. Feminine or neuter pronouns shall be substituted for those
------
of the masculine form, and the plural shall be substituted for the singular
number, in any place or places herein in which the context may require such
substitution.
21.9 Bind and Inure. The provisions of this Lease shall be binding upon,
--------------
and shall inure to the benefit of, the parties hereto and each of their
respective successors and assigns, subject to the provisions hereof restricting
assignment or subletting by Tenant.
21.10 Entire Agreement. This Lease contains and embodies the entire
----------------
agreement of the parties hereto with respect to Tenant's leasehold estate
hereunder and supersedes all prior agreements, negotiations and discussions
between the parties hereto and any representation, inducement or agreement that
is not contained in this Lease shall not be of any force or effect. This Lease
may not be modified or changed in whole or in part in any manner other than by
an instrument in writing duly signed by both parties hereto.
21.11 Applicable Law. This Lease shall be governed by and construed in
--------------
accordance with the laws of Massachusetts.
21.12 Headings. Article headings are used herein for the convenience of
--------
reference and shall not be considered when construing or interpreting this
Lease.
21.13 Not An Offer. The submission of an unsigned copy of this document
------------
to either party for the other party's consideration does not constitute an offer
to lease the Premises or an option to or for the Premises. This document shall
become effective and binding only upon the execution and delivery of this Lease
by both Landlord and Tenant.
21.14 Multiple Counterparts. This Lease may be executed in multiple
---------------------
counterparts, each of which shall be deemed an original and all of which
together shall constitute one and the same document.
21.15 Notice of Lease. This Lease shall not be recorded. Upon the
---------------
request of either party, the parties shall execute, in recordable form, a Notice
of this Lease. If this Lease is terminated before the Lease Term expires, upon
the request of either party, the parties shall
34
<PAGE>
execute, in recordable form, an instrument acknowledging the date of
termination. Recordation costs shall be paid by the requesting party.
21.16 Waiver of Jury Trial. Landlord and Tenant hereby each waive trial
--------------------
by jury in any action, proceeding or counterclaim brought by either against the
other, on or in respect of any matter whatsoever arising out of or in any way
connected with this Lease, the relationship of Landlord and Tenant or Tenant's
use or occupancy of the Premises.
21.17 Exhibits. This Lease includes and incorporates all Exhibits
--------
referred to hereby and attached hereto.
MGI TWO FEDERAL STREET, INC.:
By: /s/ (Illegible)
--------------------------
PERITUS SOFTWARE SERVICES, INC.:
By: /s/ Allen Deary
-------------------------
Name: Allen Deary
-----------------------
Title: Vice President
-----------------------
35
<PAGE>
EXHIBIT A
Legal Description of Land
A certain parcel of land, together with the building and other improvements
constructed thereon, situated in the Town of Billerica, County of Middlesex,
Commonwealth of Massachusetts, known as Lot 7, as shown on a plan entitled "Plan
of Land in Billerica, Mass., (Middlesex County), For: William J. Callahan,
Scale: 1"=60', dated October 13, 1983, by Joseph W. Moore Co., Land Surveyors
and Civil Engineers, 16 Railroad Ave., Bedford, Mass." and more particularly
described as follows:
Beginning: at a point at the northwesterly corner of said parcel, same point
being on the easterly sideline of Concord Road, at a stonewall and
at land of Casey, as shown on said plan;
thence: thence: running S23-08'-49"E Five Hundred Seventy-Seven and 88/100
(577.88) feet to a point;
thence: turning and running S66-35'-16"W Six and 98/100 (6.98) feet to a
point;
thence: turning and running S10-43'-40"E Seventy-Four and 35/100 (74.35)
feet to a point at Lot 6, last three (3) courses being by a
stonewall;
thence: turning and running S42-28'-33"W Two Hundred Fifty-Three and 80/100
(253.80) feet to a point;
thence: turning and running N47-31'-27"W Thirty (30.00) feet to a point;
thence: turning and running S42-28'-33"W Two Hundred Sixty-Two (262.00) feet
to a point on the northerly sideline of Federal Street;
thence: turning and running N47-31'-27"W One Hundred Fifteen (115.00) feet
to a point of curvature;
thence: turning and running along a curved line having an arc of One Hundred
Twenty-One and 94/100 (121.94) feet and a radius of Two Hundred
Twenty-Seven and 96/100 (227.96) feet to a point of tangency;
thence: turning and running N78-10'-23"W Thirty-Eight and 51/100 (38.51)
feet to a point of curvature;
thence: turning and running along a curved line having an arc of Thirty-Nine
and 27/100 (39.27) feet and a radius of Twenty-Five (25.00) feet to
a point on the
36
<PAGE>
easterly sideline of Concord Road, last four (4) courses being along
the northerly sideline of Federal Street;
thence: turning and running N11-49'-37"E Three Hundred Twenty-Five and
06/100 (325.06) feet to a point of curvature;
thence: turning and running along a curved line having an arc of Five
Hundred Seven and 55/100 (507.55) feet and a radius of Seven Hundred
Sixty (760.00) feet to a point of tangency;
thence: turning and running N50-05'-26"E Eighty and 85/100 (80.85) feet to
the point of beginning, last three (3) courses being along the
easterly sideline of Concord Road.
Containing: 346,278 square feet, or 7.95 acres, more or less.
Said lot is subject to restrictions and easements of record.
BEING the same premises as shown on "Plan of Land in Billerica,
Mass. (Middlesex County) For: The Fields Realty Trust, January 12,
1987, BSC-Bedford Land Surveyors - Civil Engineers."
and a certain parcel of land situated in the Town of Billerica, County of
Middlesex, Commonwealth of Massachusetts known as Federal Street as shown on a
plan recorded in the Middlesex North District Registry of Deeds, Plan Book 141
Plan 60 and more particularly described as follows:
Beginning: at the northwesterly corner of said parcel same point being on
the easterly sideline of Concord Road and at lot 7 as shown on said
plan;
Thence: running along a curved line having an arc of Thirty-Nine and 27/100
(39.27) feet and a radius of Twenty-Five (25.00) feet to a point;
Thence: turning and running S78-10'-23"E Thirty-Eight and 51/100 (38.51)
feet to a point;
37
<PAGE>
Thence: turning and running along a curved line having an arc on One Hundred
Twenty-One and 94/100 (121.94) feet and a radius of Two Hundred
Twenty-Seven and 96/100 (227.96) feet to a point;
Thence: turning and running S47-31'-27"E Four Hundred Sixty-one and 23/100
(461.23) feet to a point;
Thence: turning and running along a curved line having an arc of Eighty-Five
and 63/100 (85.63) feet and a radius of Three Hundred Fifty-Five and
97/100 (355.97) feet to a point;
Thence: turning and running S33-44'-00"E Eighty-Three and 33/100 (83.33)
feet to a point;
Thence: turning and running along a curved line having an arc of Thirty-Four
and 84/100 (34.84) feet and a radius of Twenty-Five (25.00) feet to
a point;
Thence: turning and running along a curved line having an arc of Two Hundred
Seventy-Two and 10/100 (272.10) feet and a radius of Sixty (60.00)
feet to a point;
Thence: turning and running N33-44'-30"W One Hundred Sixty-Seven (167.00)
feet to a point;
Thence: turning and running along a curved line having an arc of Seventy-
Three and 60/100 (73.60) feet and a radius of Three Hundred Five and
97/100 (305.97) feet to a point;
Thence: turning and running N47-31'-27"W Four Hundred Sixty-One and 23/100
(461.23) feet to a point;
Thence: turning and running along a curved line having an arc of Fifty-Six
and 90/100 (56.90) feet and a radius of One Hundred Six and 37/100
(106.37) feet to a point;
Thence: turning and running N78-10'-23"W Seventy Five (75.00) feet to a
point;
Thence: turning and running along a curved line having an arc of Thirty-Nine
and 27/100 (39.27) feet and a radius of Twenty-Five (25.00) feet to
a point on the easterly sideline of Concord Road;
Thence: turning and running along the easterly sideline of Concord Road N11-
49'-37"E One Hundred Ten (110.00) feet to the point of beginning.
Said parcel is subject to easements and restrictions of record.
38
<PAGE>
EXHIBIT B
Floor Plan of Premises and Site Plan
39
<PAGE>
EXHIBIT C
Landlord Work
40
<PAGE>
EXHIBIT D
List of Chemicals Permitted on the Premises
None
41
<PAGE>
EXHIBIT E
Rules and Regulations
42
<PAGE>
EXHIBIT F
---------
Brokers' Determination of Prevailing Market Rent
------------------------------------------------
Where in the Lease to which this Exhibit is attached provision is made
for the "Brokers' Determination" the following procedures and requirements
shall apply:
1. Request. The party initiating the Brokers' Determination (the
-------
"Initiating Party") shall send a notice to the other party (the "Other
Party") requesting the Brokers' Determination of the Prevailing Market
Rent, which notice to be effective must (i) make explicit reference to
the Lease, and (ii) include the name of a broker selected by the
Initiating Party to act for the Initiating Party, which broker shall
be affiliated with a major Boston commercial real estate brokerage
firm selected by the Initiating Party and which broker shall have at
least ten (10) years experience dealing in properties of a nature and
type generally similar to the Buildings located in the Boston Suburban
Market.
2. Response. Within thirty (30) days after the Other Party's receipt of
--------
the Initiating Party's notice requesting the Broker Determination and
stating the name of the broker selected by the Initiating Party, the
Other Party shall give written notice to the Initiating Party of the
Other Party's selection of a broker having at least the affiliation
and experience referred to above.
3. Rental Value Determination. Within thirty (30) days after the
--------------------------
selection of the broker by the Other Party, the brokers so selected
shall make a determination of the annual fair market rental value of
the Premises for the period referred to in the Lease. Such annual
fair market rental value determination shall take into account the
condition of the Premises as required to be maintained in accordance
with this Lease (but shall not take into account any new leasehold
improvements or brokerage commissions which would be customary for
Landlord to pay for in connection with a lease of the Premises to a
new tenant) and the market rental rate for the time period such
determination is being made for space in buildings of comparable
condition and of equivalent quality, size, utility and location. The
brokers shall advise Landlord and Tenant in writing by the expiration
of said thirty (30) day period of the annual fair market rental value
which as so determined shall be referred to as the Prevailing Market
Rent.
4. Resolution of Broker Deadlock. If the Brokers are unable to agree on
-----------------------------
a determination of Prevailing Market Rent, then the brokers shall send
a notice to Landlord and Tenant by the end of the thirty (30) day
period for making said determination setting forth their individual
determinations of Prevailing Market Rent. The Brokers then shall,
within ten (10) days after such thirty (30) day period expires,
jointly appoint an independent real estate broker or a consultant who
also has at least the affiliation and experience referred to above and
is not
43
<PAGE>
affiliated with either Landlord or Tenant (the "Arbiter"). The
Brokers shall submit to the Arbiter their respective assessments of
the Prevailing Market Rent, together with the supporting data that was
used to calculate such assessments. Within twenty (20) days after the
selection of the Arbiter, the Arbiter shall select the assessment
which is closest to his/her determination of such Prevailing Market
Rent, which assessment shall be the Base Rent for such Extended Term.
The Arbiter's determination shall be binding on Landlord and Tenant
and may be enforced by a court of competent jurisdiction.
5. Costs. Each party shall pay the costs and expenses of the broker
-----
selected by it and each shall pay one half ( 1/2) of the costs and
expenses of the Arbiter.
6. Failure to Select Broker or Failure of Broker to Serve. If the
------------------------------------------------------
Initiating Party shall have requested a Broker Determination and the
Other Party shall not have designated a broker within the time period
provided therefor above, then the Initiating Party's Broker shall
alone make the determination of Prevailing Market Rent in writing to
the Other Party and the Initiating Party within thirty (30) days after
the expiration of the Other Party's right to designate a broker
hereunder. In case of the inability or refusal to serve of any person
designated as a broker, or in case any broker for any reason ceases to
be such, a broker to fill such vacancy shall be appointed by Tenant,
Landlord, the brokers first appointed or the said Greater Boston Real
Estate Board, Inc., as the case may be, whichever made the original
appointment, or if the person who made the original appointment fails
to fill such vacancy, upon application of any broker who continues to
act or by Landlord or Tenant such vacancy may be filled by the
President of the Greater Boston Real Estate Board, Inc. or her/his
designee, and any broker so appointed to fill such vacancy shall have
the same standing and powers as though originally appointed.
44
<PAGE>
EXHIBIT 10.42
-------------
[FLEET BANK LOGO APPEARS HERE]
November 26th, 1997
Mr. John McPhee
Director of Finance & Treasurer
Peritus Software Services, Inc.
304 Concord Road
Billerica, MA 01821-3485
Dear John:
Reference is hereby made to the Letter Agreement (the "Agreement") dated
September 6, 1996, and amended as of March 30, 1997, and June 30, 1997, by and
between Peritus Software Services, Inc. ("Peritus" or the "Company") and Fleet
National Bank (the "Bank").
The Borrower has informed the Bank that in connection with its acquisition of
Millennium Dynamics, Inc. ("Millennium"), it will be in violation of certain
financial covenants for the fourth fiscal quarter ended December 31,1997,
specifically:
. Tangible Capital Base: We have revised this covenant for the fourth
---------------------
quarter ending December 31, 1997, by setting the minimum base at $30
million. The step-up remains the same as defined in the Agreement, i.e. 80%
of new equity raised and subordinated debt raised after December 31, 1997
and 80% of Net Income earned after December 31, 1997.
. Profitability: We have revised the definition of this covenant for the
-------------
fourth quarter ending December 31, 1997, to exclude the one-time charge of
$72 million relating to the Millennium acquisition. With this modification,
we still require that Profitability must exceed $1.00 for the fourth quarter
ending December 31, 1997.
. Trailing Fourth-Quarter Profitability: We have revised this covenant to
-------------------------------------
reflect the modified Profitability covenant for the fourth quarter ending
December 31, 1997.
These changes are for the specific time period detailed above only and do not
amend in any manner any other terms of the Agreement. These changes will become
effective upon our receipt of a countersigned copy of this letter.
John, we are pleased to continue our relationship with Peritus and look forward
to expanding it in the future.
Sincerely,
/s/ Olaperi Onipede
Olaperi Onipede Agreed and Accepted: /s/ John E. MacPhee
Vice President ---------------------
High Technology Group by: JOHN E. MACPHEE
title: Director of Finance and Treasurer
date: 12/9/97
<PAGE>
Exhibit 10.45
-------------
Employment Agreement
Agreement made as of the 20th day of Janaury, 1998 (the "Effective
Date"), by and between Peritus Software Services, Inc., a Massachusetts
corporation (the "Company"), and Adarsh K. Arora (the "Employee").
The Company wishes to employ the Employee, and the Employee wishes to
continue to be employed by the Company. In consideration of the mutual covenants
and promises contained herein, and other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged by the parties hereto,
the parties agree as follows:
I. Titles and Reporting Responsibilities
-------------------------------------
The Employee's title will be Vice President, Research and Development
or such other title as may be mutually agreed upon between Employee and the
Company. The Employee will report to either the CEO or the Chairman of the
Board. The Employee shall be based in the Company's offices in the greater
Chicago metropolitan area.
II. Term of Employment
------------------
The Company hereby agrees to employ the Employee and the Employee
hereby accepts employment with the Company for a period (the "Employment
Period") commencing on the Effective Date and ending May 31, 2001 unless earlier
terminated pursuant to the provisions of Section VII below. This Agreement shall
remain in full force and effect until expiration hereof unless and until earlier
terminated in accordance with Section VII of this Agreement.
III. Responsibilities of the Employee
--------------------------------
The Employee agrees to undertake the duties and responsibilities
inherent in the position described in Section I above and such other duties and
responsibilities as the Company or its designee shall from time to time
reasonably assign. The Employee agrees to devote his entire business time,
attention and energies to the business and interests of the Company during the
term of this Agreement. The Employee agrees to abide by the rules, regulations,
instructions, personnel practices and policies of the Company and any changes
therein which may be adopted from time to time by the Company.
IV. Expense Reimbursement
---------------------
The Company will reimburse the Employee for all reasonable documented
travel and other business expenses incurred in furthering the business of the
Company and in accordance with the Company's then current travel and business
expense policy. Expenditures of an extraordinary nature shall require prior
written approval of the Company.
1
<PAGE>
V. Prohibitions
------------
During the term of this Agreement, the Employee shall not:
(a) be employed by or otherwise represent any other company, product,
service or enterprise, without the prior written approval of the
Company; or
(b) make any representation, warranty, guarantee, or statement, orally
or in writing, which would contravene any Company policy or compromise
the Company's interests.
VI. Compensation
------------
(a) The Employee shall be paid a base salary (the "Base Salary") and,
when appropriate, bonuses (Bonus Compensation") as described in this
Section VI. The Employee's bi-weekly Base Salary shall be $7,115.38,
which is the equivalent of $185,000 per year. Provided neither party
has exercised the right to terminate this Agreement under Section VII,
performance and compensation reviews will be conducted annually
beginning January 1, 1998.
(b) Bonus Compensation may be paid from time to time to the Employee as
approved by the Board of Directors of the Company, by a Committee of
the Board of Directors of the Company established for the purpose of
determining bonus compensation or by a designee of the Board of
Directors or such Committee who has been granted the authority to
determine bonuses.
(c) Except as otherwise provided, the Employee shall be entitled to
participate in any and all benefit programs that the Company
establishes and makes generally available to its employees for which he
may be eligible under plan documents and applicable laws. In any case
where contributions or benefits related to participation in a plan vary
on the basis of compensation, "compensation" shall mean Employee's Base
Salary only and shall not include expense reimbursements, advances,
Bonus Compensation or any other compensation which may be paid by the
Company. The Employee shall be entitled to vacation in accordance with
the Company's then current policy, to be taken at such times as may be
approved by either the CEO or the Chairman.
(d) Any future revisions to Base Salary or Bonus Compensation may be
implemented by the Board of Directors of the Company, by a Committee of
the Board of Directors of the Company established for the purpose of
determining bonus compensation or by a designee of the Board of
Directors or such Committee who has been granted the authority to
determine bonuses.
2
<PAGE>
VII. Termination
-----------
The employment of the Employee by the Company pursuant to this
Agreement shall terminate:
(a) By the Employee, without cause, by giving 45 days' prior written
notice of termination to the Company or within such shorter period as
is established by mutual agreement of the parties or upon Employee's
commencement of employment or consulting with a third party, or by the
Company, without cause, upon at least 52 weeks prior written notice
(the "Notice Period") of termination to the Employee.
(b) By either party, if the other party breaches any of its obligations
under this Agreement and fails to remedy such breach within 30 days
after written notice of such breach is provided to such other party;
failure of the Employee to adequately perform the duties and
responsibilities specified in Section III hereof shall be considered a
breach of this Agreement
(c) By the Company, effective immediately and without notice, for
cause. For purposes of this Section VII (c), "cause" for termination
shall be deemed to exist upon (a) good faith finding by the Company of
the failure of the Employee to perform the assigned duties and
responsibilities for the Company as specified in Section III above,
dishonesty, gross negligence or misconduct, in which case the
provisions of Section 7(b) shall not apply, or (b) the conviction of
the Employee of, or the entry of a pleading of guilty or nolo
contendere by the Employee to, any crime involving moral turpitude or
any felony.
(d) Upon the death or disability of the Employee. As used in this
Agreement, the term "disability" shall mean the inability of the
Employee, due to a physical or mental disability, to perform the
essential functions of his/her job with or without a reasonable
accommodation by the Company.
VIII. Rights Following Termination
----------------------------
(a) Following termination of this Agreement, pursuant to Section
VII(b), VII(c), VII(d), or at the option of the Employee pursuant to
Section VII(a), or upon expiration of this Agreement, the Company shall
have no further responsibility to Employee except to pay Base Salary up
to and including the last day of employment.
(b) Following termination of this Agreement at the option of the
Company pursuant to Section VII(a), the Company shall continue to pay
to the Employee the Base Salary in accordance with its then current
payroll policies until the earlier of either expiration of the Notice
Period or the date Employee commences employment or consulting with a
third party during the Notice Period. Employee shall perform such
services for the Company as mutually agreed upon between Company and
Employee as to scope, timing and location during such Notice Period.
The Employee shall not be eligible to receive the
3
<PAGE>
payments during the Notice Period unless and until the Employee signs a
release in the form attached hereto as Exhibit A.
(c) In the event of termination or expiration of this Agreement,
Employee shall, at the instruction of the Company, promptly return to
the Company or its designee all files, letters, memoranda, reports,
records, data, sketches, drawings, laboratory notebooks, program
listings, or other written, photographic, or other tangible material
supplied by the Company to the Employee or created or maintained for
the Company by the Employee.
(d) Except as set forth above, neither party shall be entitled to any
compensation or claim for goodwill or other loss, suffered by reason or
termination of this Agreement.
(e) The rights and obligations of the parties to this Agreement set
forth in Section VIII and Section IX shall survive any termination or
expiration of this Agreement. The termination or expiration of this
Agreement shall in no case relieve either party from its obligations to
pay to the other any monies accrued hereunder prior to such termination
or expiration.
(f) Employee shall not disclose the terms of this Agreement to any
third party unless such third party is obligated to keep such
information confidential.
IX. Non-Competition
---------------
(a) During the Employment Period and (i) for a period of one year
after the termination of this Agreement pursuant to Sections
VII(b), VII(c), VII(d) or at the option of the Employee pursuant
to Section VII(a) or expiration thereof or (ii) in the event of
termination of this Agreement by the Company without cause under
Section VII (a) for the Notice Period, the Employee will not
directly or indirectly:
(i) as an individual, proprietor, partner, stockholder, officer,
employee, director, joint venturer, investor, lender, or in any other
capacity whatsoever (other than as the holder of not more than one
percent (1%) of the total outstanding stock of a publicly held
company), engage in the business of developing, producing, marketing or
selling products or services of the kind or type developed or being
developed, produced, marketed or sold by the Company or any subsidiary
of the Company while the Employee was employed by the Company provided
that the foregoing restriction shall not apply after the end of the
Employment Period to activities that are not related to the Company's
year 2000 business activities.; or
(ii) recruit, solicit or induce, or attempt to induce, any
employee or employees of the Company to terminate their employment
with, or otherwise cease their relationship with, the Company; or
4
<PAGE>
(iii) solicit, divert or take away, or attempt to divert or take
away, the business or patronage of any of the clients, customers or
accounts, or prospective clients, customers or accounts, of the Company
which were contacted, solicited, served or known by the Employee while
employed by the Company.
(b) If any restriction set forth in this Section IX is found by any
court of competent jurisdiction to be unenforceable because it extends
for too long a period of time or over too great a range of activities
or in too broad a geographic area, it shall be interpreted to extend
only over the maximum period of time, range of activities or geographic
area as to which it may be enforceable.
(c) The restrictions contained in this Section IX are necessary for the
protection of the business and goodwill of the Company and are
considered by the Employee to be reasonable for such purpose. The
Employee agrees that any breach of this Section IX will cause the
Company substantial and irrevocable damage and therefore, in the event
of any such breach, in addition to such other remedies which may be
available, the Company shall have the right to seek specific
performance and injunctive relief.
X. Other Agreements
----------------
Employee represents that his performance of all the terms of this
Agreement and as an employee of the Company does not and will not breach any
employment agreement with any previous employer or any agreement with any
previous employer or other party to keep in confidence proprietary information,
knowledge or data acquired by him in accordance or in trust prior to his
employment with the Company or to refrain from competing, directly or
indirectly, with the business of such previous employer or any other party.
Employee has executed the Company's standard confidentiality and nondisclosure
agreement.
XI. Notices
-------
All notices, requests, demands, and other communications under this
Agreement shall be in writing and shall be deemed to have been duly given when
delivered in person or, if mailed, when mailed by certified or registered mail,
postage prepaid, or by recorded delivery service to the parties at the addresses
set forth below their signatures to this Agreement or at such other address as
may be given in writing by either party to the other party in accordance with
this Section XI.
XII. Assignability
-------------
Employee acknowledges that the Company is entering into this Agreement
in reliance upon the personal reputation, qualifications and abilities of the
Employee and accordingly, the Employee may not assign his rights or obligations
under this Agreement, either voluntary or by operation of law.
5
<PAGE>
XIII. Miscellaneous
-------------
(a) This Agreement shall not be binding upon the Company until it has
been executed by a duly authorized officer of the Company.
(b) This Agreement shall be governed by, and construed in accordance
with, the substantive laws of The Commonwealth of Massachusetts.
(c) This Agreement constitutes the entire understanding between the
parties relating to the subject matter of this Agreement and supersedes
all prior writings, negotiations or understanding with respect thereto
except the confidentiality and nondisclosure agreement referenced in
Section X above. No modification or addition to the Agreement shall
have any effect unless it is set forth in writing and signed by both
parties.
(d) The waiver by the Company of any breach of any provision of this
Agreement shall not be construed as a continuing waiver of such breach
or as a waiver of other breaches of the same or of other provisions of
this Agreement.
(e) Should any provision of this Agreement be declared or be determined
by any court of competent jurisdiction to be illegal or invalid, the
validity of the remaining parts, terms, or provisions shall not be
affected thereby and said illegal and invalid part, term or provision
shall be deemed not to be a part of this Agreement.
(f) The exercisability of Employee's options granted under the
Company's 1992 Long Term Incentive Plan or 1997 Stock Incentive Plan in
the event of a "change in control" or "acquisition event" as such terms
are defined in such respective plans shall be governed by the terms of
plans under which such options were granted and any related option
agreements.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the
date first above written.
Peritus Software Services, Inc.
/s/ Adarsh Arora By: /s/ Douglas Catalano
- ------------------------------- -------------------------------
Employee Signature
Address:1100 Woodfield #437 Address: 304 Concord Road
----------------------- Billerica, MA 01821-3485
Schaumburg, IL 60173 Attn: President
- -------------------------------
- -------------------------------
6
<PAGE>
EXHIBIT A
---------
RELEASE
1. Release. In consideration of the payments provided to me under a certain
-------
employment contract between Peritus Software Services, Inc., a Massachusetts
Corporation (the "Company") and me, I hereby fully, forever, irrevocably and
unconditionally release, remise and discharge the Company, and any subsidiary or
affiliated organization of the Company or their respective current or former
officers, directors, stockholders, corporate affiliates, attorneys, agents and
employees (the "Released Parties") from any and all claims, charges, complaints,
demands, actions, causes of action, suits, rights, debts, amounts of money,
promises, doings, omissions, damages, executions, obligations, liabilities, and
expenses (including attorneys' fees and costs), of every kind and nature, known
or unknown, which I ever had or now have against the Released Parties,
including, but not limited to, all claims arising out of my employment, all
claims arising out of your separation of my employment, all claims arising from
any failure to reemploy me, all claims of race, sex, national origin, handicap,
religious, sexual orientation, benefit and age discrimination, all employment
discrimination claims under Title VII of the Civil Rights Act of 1964, 42 U.S.C.
(S)2000 et seq., the Age Discrimination in Employment Act, 29 U.S.C. (S)621 et
seq., the Americans with Disabilities Act of 1990, 29 U.S.C. (S)12101 et seq.,
The Employee Retirement Income Security Act of 1974, 29 U.S.C. (S)1001 et seq.,
and similar state or local statutes, wrongful discharge claims, common law tort,
defamation, breach of contract and other common law claims, and any claims under
any other federal, state or local statutes or ordinances not expressly
referenced above.
2. Entire Understanding and Applicable Law. This Release contains and
---------------------------------------
constitutes my entire understanding with respect to the settlement of claims
against the Company and the Released Parties and cancels all previous oral and
written negotiations, agreements, commitments, and writings in connection
therewith. This Release shall be governed by the substantive laws of The
Commonwealth of Massachusetts to the extent not preempted by federal law.
3. Acknowledgements. I acknowledge that I have been given at least twenty-one
----------------
(21) days to consider this Release and that the Company advised me to consult
with any attorney of my own choosing prior to signing this Release. I
acknowledge that I may revoke this Release for a period of seven (7) days after
signing it, and the Release shall not be effective or enforceable until the
expiration of this seven (7) day revocation period.
Date: __________________ Employee's Signature: ________________________
Employee's Name: Adarsh K. Arora
7
<PAGE>
Exhibit 10.46
Employment Agreement
Agreement made as of the 19 day of January, 1998 (the "Effective
Date"), by and between Peritus Software Services, Inc., a Massachusetts
corporation (the "Company"), and Donald M. Beck (the "Employee").
The Company wishes to employ the Employee, and the Employee wishes to
be employed by the Company. In consideration of the mutual covenants and
promises contained herein, and other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged by the parties hereto,
the parties agree as follows:
I. Titles and Reporting Responsibilities
-------------------------------------
The Employee's title will be Vice President and General Manager,
Outsourcing Services or such other title as may be mutually agreed upon between
Employee and the Company. The Employee will report to the CEO. The Employee will
be located in the Company's offices in the greater Denver, Colorado metropolitan
area.
II. Term of Employment
------------------
The Company hereby agrees to employ the Employee and the Employee
hereby accepts employment with the Company for a period (the "Employment
Period") commencing on the Effective Date and ending upon termination of
Employee's employment pursuant to the provisions of Section VII below. This
Agreement shall remain in full force and effect until expiration hereof unless
and until earlier terminated in accordance with Section VII of this Agreement.
III. Responsibilities of the Employee
--------------------------------
The Employee agrees to undertake the duties and responsibilities
inherent in the position described in Section I above and such other duties and
responsibilities as the Company or its designee shall from time to time
reasonably assign in good faith and in a manner as is reasonable for a person in
Employee's position. The Employee agrees to devote his entire business time,
attention and energies to the business and interests of the Company during the
term of this Agreement. The Employee agrees to abide by the rules, regulations,
instructions, personnel practices and policies of the Company and any changes
therein which may be adopted from time to time by the Company.
IV. Expense Reimbursement
---------------------
The Company will reimburse the Employee for all reasonable documented
travel and other business expenses including lodging when working at the
Company's headquarters in Billerica, Massachusetts incurred in furthering the
business of the Company and in accordance
1
<PAGE>
with the Company's then current travel and business expense policy. Expenditures
of an extraordinary nature shall require prior written approval of the Company.
V. Prohibitions
------------
During the term of this Agreement, the Employee shall not:
(a) be employed by or otherwise represent any other company, product,
service or enterprise, without the prior written approval of the
Company; or
(b) make any representation, warranty, guarantee, or statement, orally
or in writing, which would contravene any Company policy or compromise
the Company's interests.
VI. Compensation
------------
(a) The Employee shall be paid a base salary (the "Base Salary") and,
when appropriate, bonuses ("Bonus Compensation") as described in this
Section VI. The Employee's bi-weekly Base Salary shall be $8,653.85,
which is the equivalent of $225,000 per year. Provided neither party
has exercised the right to terminate this Agreement under Section VII,
performance and compensation reviews will be conducted annually
beginning January 1, 1999.
(b) Bonus Compensation may be paid from time to time to the Employee as
approved by the Board of Directors of the Company, by a Committee of
the Board of Directors of the Company established for the purpose of
determining bonus compensation or by a designee of the Board of
Directors or such Committee who has been granted the authority to
determine bonuses. In addition, the Company shall pay Employee a bonus
of $15,000 in 1998 and 1999 within 60 days of the end of such years.
(c) Except as otherwise provided, the Employee shall be entitled to
participate in any and all benefit programs that the Company
establishes and makes generally available to its employees for which he
may be eligible under plan documents and applicable laws. In any case
where contributions or benefits related to participation in a plan vary
on the basis of compensation, "compensation" shall mean Employee's Base
Salary only and shall not include expense reimbursements, advances,
Bonus Compensation or any other compensation which may be paid by the
Company. The Employee shall be entitled to vacation in accordance with
the Company's then current policy, to be taken at such times as may be
approved by the CEO.
(d) Any future revisions to Base Salary or Bonus Compensation may be
implemented by the Board of Directors of the Company, by a Committee of
the Board of Directors of the Company established for the purpose of
determining bonus compensation or by a designee of the Board of
Directors or such Committee who has been granted the authority to
determine bonuses. In no event shall Employee's Base Salary be less
than the amount set forth in paragraph(a) above.
2
<PAGE>
VII. Termination
-----------
The employment of the Employee by the Company pursuant to this
Agreement shall terminate:
(a) By the Employee, without cause, by giving 15 days' prior written
notice of termination to the Company or within such shorter period as
is established by mutual agreement of the parties or upon Employee's
commencement of employment or consulting with a third party, or by the
Company, without cause, upon at least 52 weeks prior written notice
(the "Notice Period") of termination to the Employee, subject to the
provisions of Section VIII (b) below.
(b) By either party, if the other party breaches any of its obligations
under this Agreement and fails to remedy such breach within 30 days
after written notice of such breach is provided to such other party;
failure of the Employee to adequately perform the duties and
responsibilities specified in Section III hereof shall be considered a
breach of this Agreement
(c) By the Company, effective immediately and without notice, for
cause. For purposes of this Section VII (c), "cause" for termination
shall be deemed to exist upon the conviction of the Employee of, or the
entry of a pleading of guilty or nolo contendere by the Employee to,
any crime involving moral turpitude or any felony.
(d) Upon the death or disability of the Employee. As used in this
Agreement, the term "disability" shall mean the inability of the
Employee, due to a physical or mental disability, to perform the
essential functions of his/her job with or without a reasonable
accommodation by the Company.
VIII. Rights Following Termination
----------------------------
(a) Following termination of this Agreement, pursuant to Section
VII(b), VII(c), VII(d), or at the option of the Employee pursuant to
Section VII(a), the Company shall have no further responsibility to
Employee except to pay Base Salary and Bonus Compensation as provided
under the terms of any related bonus plan or arrangement up to and
including the last day of employment.
(b) Following termination of this Agreement at the option of the
Company pursuant to Section VII(a), the Company shall continue to pay
to the Employee the Base Salary in accordance with its then current
payroll policies until the earlier of either expiration of the Notice
Period or the date Employee commences employment or consulting with a
third party during the Notice Period, together with any Bonus
Compensation payable as provided under the terms of any related bonus
plan or arrangement through the date of the notice of termination given
by the Company under Section VII (a) above. Employee shall
3
<PAGE>
perform such services for the Company as mutually agreed upon between
Company and Employee as to scope, timing and location during such
Notice Period. The Employee shall not be eligible to receive the
payments during the Notice Period unless and until the Employee signs a
release in the form attached hereto as Exhibit A.
(c) In the event of termination of this Agreement, Employee shall, at
the instruction of the Company, promptly return to the Company or its
designee all files, letters, memoranda, reports, records, data,
sketches, drawings, laboratory notebooks, program listings, or other
written, photographic, or other tangible material supplied by the
Company to the Employee or created or maintained for the Company by the
Employee.
(d) Except as set forth above, neither party shall be entitled to any
compensation or claim for goodwill or other loss, suffered by reason or
termination of this Agreement.
(e) The rights and obligations of the parties to this Agreement set
forth in Section VIII and Section IX shall survive any termination or
expiration of this Agreement. The termination of this Agreement shall
in no case relieve either party from its obligations to pay to the
other any monies accrued hereunder prior to such termination or
expiration.
(f) Employee shall not disclose the terms of this Agreement to any
third party unless such third party is obligated to keep such
information confidential.
IX. Non-Competition
---------------
(a) During the Employment Period and (i) for a period of one year
after the termination of this Agreement pursuant to Sections
VII(b), VII(c), VII(d) or at the option of the Employee pursuant
to Section VII(a) or expiration thereof or (ii) in the event of
termination of this Agreement by the Company without cause under
Section VII (a) for the Notice Period, the Employee will not
directly or indirectly:
(i) as an individual, proprietor, partner, stockholder, officer,
employee, director, joint venturer, investor, lender, or in any other
capacity whatsoever (other than as the holder of not more than one
percent (1%) of the total outstanding stock of a publicly held
company), engage in the business of developing, producing, marketing or
selling products or services of the kind or type developed or being
developed, produced, marketed or sold by the Company or any subsidiary
of the Company while the Employee was employed by the Company provided
that the foregoing restriction shall not apply after the end of the
Employment Period to activities that are not related to the Company's
year 2000 business activities.; or
(ii) recruit, solicit or induce, or attempt to induce, any
employee or employees of the Company to terminate their employment
with, or otherwise cease their relationship with, the Company; or
4
<PAGE>
(iii) solicit, divert or take away, or attempt to divert or take
away, the business or patronage of any of the clients, customers or
accounts, or prospective clients, customers or accounts, of the Company
which were contacted, solicited, served or known by the Employee while
employed by the Company.
(b) If any restriction set forth in this Section IX is found by any
court of competent jurisdiction to be unenforceable because it extends
for too long a period of time or over too great a range of activities
or in too broad a geographic area, it shall be interpreted to extend
only over the maximum period of time, range of activities or geographic
area as to which it may be enforceable.
(c) The restrictions contained in this Section IX are necessary for the
protection of the business and goodwill of the Company and are
considered by the Employee to be reasonable for such purpose. The
Employee agrees that any breach of this Section IX will cause the
Company substantial and irrevocable damage and therefore, in the event
of any such breach, in addition to such other remedies which may be
available, the Company shall have the right to seek specific
performance and injunctive relief.
X. Other Agreements
----------------
Employee represents that his performance of all the terms of this
Agreement and as an employee of the Company does not and will not breach any
employment agreement with any previous employer or any agreement with any
previous employer or other party to keep in confidence proprietary information,
knowledge or data acquired by him in accordance or in trust prior to his
employment with the Company or to refrain from competing, directly or
indirectly, with the business of such previous employer or any other party.
Employee has executed the Company's standard confidentiality and nondisclosure
agreement.
XI. Notices
-------
All notices, requests, demands, and other communications under this
Agreement shall be in writing and shall be deemed to have been duly given when
delivered in person or, if mailed, when mailed by certified or registered mail,
postage prepaid, or by recorded delivery service to the parties at the addresses
set forth below their signatures to this Agreement or at such other address as
may be given in writing by either party to the other party in accordance with
this Section XI.
XII. Assignability
-------------
Employee acknowledges that the Company is entering into this Agreement
in reliance upon the personal reputation, qualifications and abilities of the
Employee and accordingly, the Employee may not assign his rights or obligations
under this Agreement, either voluntary or by operation of law.
5
<PAGE>
XIII. Miscellaneous
-------------
(a) This Agreement shall not be binding upon the Company until it has
been executed by a duly authorized officer of the Company.
(b) This Agreement shall be governed by, and construed in accordance
with, the substantive laws of The Commonwealth of Massachusetts.
(c) This Agreement constitutes the entire understanding between the
parties relating to the subject matter of this Agreement and supersedes
all prior writings, negotiations or understanding with respect thereto
except the confidentiality and nondisclosure agreement referenced in
Section X above. No modification or addition to the Agreement shall
have any effect unless it is set forth in writing and signed by both
parties.
(d) The waiver by the Company of any breach of any provision of this
Agreement shall not be construed as a waiver of any other breaches of
the same or of other provisions of this Agreement.
(e) Should any provision of this Agreement be declared or be determined
by any court of competent jurisdiction to be illegal or invalid, the
validity of the remaining parts, terms, or provisions shall not be
affected thereby and said illegal and invalid part, term or provision
shall be deemed not to be a part of this Agreement.
(f) The exercisability of Employee's options granted under the
Company's 1997 Stock Incentive Plan in the event of an "acquisition
event" as such term is defined in such plan shall be governed by the
terms of such plan under which such options are granted and any related
option agreements.
(g) This Agreement shall be binding on the parties hereto and their
respective heirs, successors and assigns.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement by their
duly authorized officers as of the date first above written.
Peritus Software Services, Inc.
/s/ Donald Beck By: /s/ Douglas Catalano
- --------------------------------- ----------------------------------
Employee Signature
Address: 2376 East Glenhaven Dr. Address: 304 Concord Road
Highlands Ranch, Colorado 80126 Billerica, MA 01821-3485
Attn: President
6
<PAGE>
EXHIBIT A
---------
RELEASE
1. Release. In consideration of the payments provided to me under a certain
-------
employment contract between Peritus Software Services, Inc., a Massachusetts
Corporation (the "Company") and me, I hereby fully, forever, irrevocably and
unconditionally release, remise and discharge the Company, and any subsidiary or
affiliated organization of the Company or their respective current or former
officers, directors, stockholders, corporate affiliates, attorneys, agents and
employees (the "Released Parties") from any and all claims, charges, complaints,
demands, actions, causes of action, suits, rights, debts, amounts of money,
promises, doings, omissions, damages, executions, obligations, liabilities, and
expenses (including attorneys' fees and costs), of every kind and nature, known
or unknown, which I ever had or now have against the Released Parties,
including, but not limited to, all claims arising out of my employment, all
claims arising out of your separation of my employment, all claims of race, sex,
national origin, handicap, religious, sexual orientation, benefit and age
discrimination, all employment discrimination claims under Title VII of the
Civil Rights Act of 1964, 42 U.S.C. (S)2000 et seq., the Age Discrimination
in Employment Act, 29 U.S.C. (S)621 et seq., the Americans with Disabilities
Act of 1990, 29 U.S.C. (S)12101 et seq., The Employee Retirement Income
Security Act of 1974, 29 U.S.C. (S)1001 et seq., and similar state or local
statutes, wrongful discharge claims, common law tort, defamation, breach of
contract and other common law claims, and any claims under any other federal,
state or local statutes or ordinances not expressly referenced above.
2. Entire Understanding and Applicable Law. This Release contains and
---------------------------------------
constitutes my entire understanding with respect to the settlement of claims
against the Company and the Released Parties and cancels all previous oral and
written negotiations, agreements, commitments, and writings in connection
therewith. This Release shall be governed by the substantive laws of The
Commonwealth of Massachusetts to the extent not preempted by federal law.
3. Acknowledgements. I acknowledge that I have been given at least twenty-one
----------------
(21) days to consider this Release and that the Company advised me to consult
with any attorney of my own choosing prior to signing this Release. I
acknowledge that I may revoke this Release for a period of seven (7) days after
signing it, and the Release shall not be effective or enforceable until the
expiration of this seven (7) day revocation period.
Date: Employee's Signature:
_________________________ ________________________
Employee's Name: Donald M. Beck
7
<PAGE>
Exhibit 10.47
PROMISSORY NOTE
---------------
$130,000 January 30, 1998 Billerica, MA
FOR VALUE RECEIVED, Donald Beck (the "Maker"), promises to pay to
Peritus Software Services, Inc. ("Peritus"), or order, at the offices of 2
Federal Street, Billerica, MA or at such other place as the holder of this Note
may designate, the principal sum of $ 130,000, together with simple interest on
the unpaid principal balance of this Note from time to time outstanding at the
rate of 6 % per year until paid in full. Principal and interest shall be paid as
follows: principal shall be paid in two equal installments of $65,000 on each of
January 30, 1999 and January 30, 2000, together with accrued interest.
Interest on this Note shall be computed on the basis of a year of 365
days for the actual number of days elapsed. All payments by the Maker under this
Note shall be in immediately available funds.
This Note shall become immediately due and payable without notice or
demand upon the occurrence at any time of any of the following events of default
(individually, "an Event of Default" and collectively, "Events of Default"):
(1) default in the payment or performance of this or any other
liability or obligation of the Maker to the holder, including
the payment when due of any principal, premium or interest
under this Note;
(2) the liquidation, termination of existence, dissolution,
insolvency or business failure of the Maker, or the
appointment of a receiver or custodian for the Maker or any
part of its property;
(3) the institution by or against the Maker or any endorser or
guarantor of this Note of any proceedings under the United
States Bankruptcy Code or any other federal or state
bankruptcy, reorganization, receivership, insolvency or other
similar law affecting the rights of creditors generally or the
making by the Maker or any endorser or guarantor of this Note
of a composition or an assignment or trust mortgage for the
benefit of creditors; or
(4) the termination of the Maker's employment with Peritus for any
reason including, without limitation, death or disability.
Upon the occurrence of an Event of Default, the holder shall have then,
or at any time thereafter, all of the rights and remedies afforded by the
Uniform Commercial Code as from time to time in effect in the Commonwealth of
Massachusetts or afforded by other applicable law.
Every amount overdue under this Note shall bear interest from and after
the date on which such amount first became overdue at an annual rate which is
two (2) percentage points above the rate per year specified in the first
paragraph of this Note. Such interest on overdue amounts under this Note shall
be payable on demand and shall accrue and be compounded monthly until the
obligation of the Maker with respect to the payment of such interest has been
discharged (whether before or after judgment).
In no event shall any interest charged, collected or reserved under
this Note exceed the maximum rate then permitted by applicable law and if any
such payment is paid by the Maker, then such excess sum shall be credited by the
holder as a payment of principal.
All payments by the Maker under this Note shall be made without set-off
or counterclaim and be free and clear and without any deduction or withholding
for any taxes or fees of any nature whatever, unless the obligation to make such
deduction or withholding is imposed by law. The Maker shall pay and save the
holder harmless from all liabilities with respect to or resulting from any delay
or omission to make any such deduction or withholding required by law.
<PAGE>
Whenever any amount is paid under this Note, all or part of the amount
paid may be applied to principal, premium or interest in such order and manner
as shall be determined by the holder in its discretion.
No reference in this note to any guaranty or other document shall
impair the obligation of the Maker, which is absolute and unconditional, to pay
all amounts under this Note strictly in accordance with the terms of this Note.
The Maker agrees to pay on demand all costs of collection, including
reasonable attorneys' fees, incurred by the holder in enforcing the obligations
of the Maker under this Note.
No delay or omission on the part of the holder in exercising any right
under this Note shall operate as a waiver of such rights or of any other right
of such holder, nor shall any delay, omission or waiver of any occasion be
deemed a bar to or waiver of the same or any other right on any future occasion.
The Maker and every endorser or guarantor of this Note regardless of the time,
order or place of signing waives presentment, demand, protest and notices of
every kind and assents to any extension or postponement of the time of payment
or any other indulgence, to any substitution, exchange or release of collateral,
and to the addition or release of any other party or person primarily or
secondarily liable.
This Note may be prepaid in whole or in part at any time or from time
to time upon written notice to the holder. Any such prepayment shall be without
premium or penalty.
None of the terms or provisions of this Note may be excluded, modified
or amended except by a written instrument duly executed on behalf of the holder
expressly referring to this Note and setting forth the provision excluded,
modified or amended.
All rights and obligations hereunder shall be governed by the laws of
the Commonwealth of Massachusetts and this Note is executed as an instrument
under seal.
ATTEST:
/s/ Donald Beck
-------------------------------------
Signature
/s/ Eugene DiDonato
- -------------------------------------
Donald Beck
-------------------------------------
Name
<PAGE>
EXHIBIT 10.48
Agreement Number: ML-038
---------------------------------------
Effective Date: October 25, 1996
-------------------------------------------
LICENSE AGREEMENT
This License Agreement (the "Agreement") made this 25th day of October, 1996 by
and among MILLENNIUM DYNAMICS, INC., 580 Walnut Street, Cincinnati, Ohio 45202
("Millennium Dynamics, Inc.") and CHIQUITA BRANDS INTERNATIONAL, INC., 250 East
Fifth Street, Cincinnati, Ohio 45202 (hereinafter collectively referred to as
the "Customer").
W I T N E S S E T H:
--------------------
WHEREAS, Millennium Dynamics, Inc. has developed and is the owner of certain
computer software programs it desires to license to the Customer; and
WHEREAS, the Customer desires to license such programs from Millennium Dynamics,
Inc.
NOW, THEREFORE, in consideration of the mutual terms and conditions set forth
herein, the parties agree hereto as follows:
1. DEFINITIONS.
-----------
For purposes of this Agreement, the following terms shall have the meanings set
forth below:
1.1 Confidential Information -- "Confidential Information" means the Software
------------------------
(as defined herein) and all information disclosed to or known by the
Customer about Millennium Dynamics, Inc.'s marketing strategy, business
practices, customers, finances, products, software, computer programs,
services, methods and processes. "Confidential Information" also includes
any and all information which this Agreement provides shall be deemed to
be Confidential Information.
-1-
<PAGE>
1.2 Agreement. -- This "Agreement" shall mean and include this document, all
----------
Schedules, Appendices, Product Description Manuals, and Addenda attached to
this document or added to it by amendment or incorporated herein by
references.
2. GRANT.
------
Subject to the terms and conditions of this Agreement and in consideration of
the payment of specified fees by the Customer, Millennium Dynamics, Inc. hereby
grants to the Customer a nonexclusive right to use the object code version of
each computer program listed on the Software Schedule attached hereto and
incorporated herein by reference and all manuals, instructions, documentation
coding sheets and other documents or information relating thereto (collectively,
the "Software") at the computer site(s) and on the CPU(s) indicated for such
programs on the Software Schedule. This license is for the designated CPU(s) at
the designated site. The Customer has no right to copy any of the Software,
except for purposes of system backup. On any backup copy of the Software, the
Customer shall reproduce all original copyright notices and claims of
confidentiality, proprietary rights or trade secret.
3. LIMITS ON USE.
-------------
The Customer shall use the Software for the Customer's internal purposes only
for its own business purposes and shall not use the Software for the benefit of
or to provide services to any third party or unaffiliated organization. Without
limiting the generality of the foregoing restriction, the Customer shall not use
any of the Software to perform data processing services or service bureau
activated for a third party or an unaffiliated organization. The license
granted to Customer hereunder does permit the Customer to use the Software for
the benefit of Customer's affiliates, so long as such use is on the designated
CPU(s) at the designated site identified on the Software Schedule.
4. FEES AND TAXES.
--------------
For each site listed on the Software Schedule, the Customer shall pay to
Millennium Dynamics, Inc. the license fees specified on the Software Schedule
upon installation of the Software at such site.
4.1 Due Date. -- Unless otherwise specified in this Agreement, all amounts
---------
payable by the Customer to Millennium Dynamics, Inc. shall be paid within
thirty (30) days after the date of Millennium Dynamics, Inc.'s invoice to
the Customer for such amounts.
-2-
<PAGE>
4.2 Late Payment. -- If the Customer fails to make payment when due
--------------
hereunder, then the Customer shall pay interest to Millennium Dynamics,
Inc. at the rate of one and one half percent (1.5%) per month for any
unpaid balance (including previously accrued interest charges) outstanding
at the end of each calendar month after payment is first due. The Customer
shall also pay Millennium Dynamics, Inc. for any reasonable expenses
(including attorneys' fees) incurred by Millennium Dynamics, Inc. in
connection with the collection of any amounts due to Millennium Dynamics,
Inc. from the Customer.
4.3 Taxes. -- All amounts specified in this Agreement to be paid to Millennium
------
Dynamics, Inc. by the Customer are net of taxes. Thus, if Millennium
Dynamics, Inc. or the Customer is required to pay any sales, use, export,
import, excise or other taxes (whether federal, state, local or otherwise)
imposed with respect to this Agreement or any of the transactions
contemplated hereby, such taxes shall be paid by the Customer or the
Customer shall reimburse Millennium Dynamics, Inc. for any such taxes paid
by Millennium Dynamics, Inc. Taxes based on Millennium Dynamics, Inc.'s
net income and Millennium Dynamics, Inc.'s franchise taxes shall be the
sole responsibility of Millennium Dynamics, Inc.
5. ADDITIONAL SITES OR CPU(S).
--------------------------
New sites or CPU(s) other than those listed on the Software Schedule will
require a license fee as specified in the Software Schedule. Any upgrade of a
CPU will also require an additional fee as determined by Millennium Dynamics,
Inc. The new site or CPU(s) fee shall be listed on an amended Software Schedule
and the license fee shall be paid in accordance with Section 4. above.
6. CONFIDENTIALITY AND OWNERSHIP.
------------------------------
The Software and all derivatives and modifications thereof (including ones made
by or for the Customer) shall at all times be and remain the property of
Millennium Dynamics, Inc., and the Customer shall have no rights thereto except
as explicitly provided elsewhere in this Agreement. The Software and all
derivatives and modifications thereof shall be deemed to be Confidential
Information of Millennium Dynamics, Inc. and shall be subject to the terms and
provisions of this Agreement which govern Confidential Information.
6.1 General. -- The Customer will keep confidential, will use only for the
--------
Customer's benefit as expressly permitted elsewhere in this Agreement and
will not disclose to others without Millennium Dynamics, Inc.'s prior
written approval, all Confidential Information.
-3-
<PAGE>
6.2 Limited Access. -- The Customer shall limit access to Confidential
----------------
Information to those employees who require such access in order to permit
the Customer to use the Confidential Information as expressly permitted
elsewhere in this Agreement in furtherance of the Customer's business.
6.3 Best Efforts. -- The Customer shall take all reasonable precautions to
-------------
maintain the confidentiality of all Confidential Information. Without
limiting the generality of the foregoing, the Customer shall employ
precautions for the protection of Confidential Information which are no
less stringent than those employed by the Customer to protect its own
confidential and proprietary information and/or trade secrets.
6.4 Return or Destruction. -- If at any time the Customer has in its possession
----------------------
or under its control one or more copies (whether partial or complete) of
any Confidential Information which the Customer does not at such time,
pursuant to the terms of this Agreement, have the right to use at the
designated site(s) and/or on the designated CPU(s), then the Customer shall
(without the requirement of any notice or demand from Millennium Dynamics,
Inc.) either deliver to Millennium Dynamics, Inc. or destroy all such
copies, whether partial or whole and regardless of form. If the Customer
elects to destroy such copies, it agrees to notify Millennium Dynamics,
Inc. promptly that such copies have been destroyed.
7. EXCLUSION OF WARRANTIES.
------------------------
Except as explicitly provided elsewhere in this Agreement, all information,
products and/or services provided to the Customer by Millennium Dynamics, Inc.
are provided "as is" and without any express or implied warranties whatsoever,
including, but not limited to any implied warranty of merchantability or fitness
for a particular purpose.
8. LIMITED WARRANTIES.
-------------------
8.1 General Provisions. -- In any case for which two or more limitations of
-------------------
Millennium Dynamics, Inc.'s liability are specified in this Agreement,
Millennium Dynamics, Inc.'s liability shall be limited to the smallest of
such limitations. In no event shall Millennium Dynamics, Inc. be liable
(under any contract, tort, or other theory) for any special, indirect,
incidental or consequential damages arising out of or in connection with
this Agreement, including, without limitation, loss of anticipated profits
or loss resulting from business disruption, even if Millennium Dynamics,
Inc. has been advised of the possibility of such damages. In no event
shall the liability of Millennium Dynamics, Inc. for damages arising out of
or in connection with this Agreement (under any contract, tort, or other
theory) exceed the amount of all payments actually
-4-
<PAGE>
received by Millennium Dynamics, Inc. from the Customer in connection with
the programs responsible for such damage.
8.2 Media. -- Millennium Dynamics, Inc. hereby warrants to the Customer that
------
all of the magnetic media delivered to the Customer by Millennium Dynamics,
Inc. on which any of the Software is recorded (including any disks or
tapes, but excluding the information recorded thereon) are free from
defects in materials and faulty workmanship at the time of shipment by
Millennium Dynamics, Inc. If any defect exists at the time of shipment
which is detected within ninety (90) days of the time of shipment, then the
defective item will be replaced by Millennium Dynamics, Inc. at no charge
to the Customer. THIS WARRANTY IS IN LIEU OF ALL OTHER WARRANTIES ON THE
MAGNETIC MEDIA, WHETHER EXPRESS OR IMPLIED, INCLUDING, WITHOUT LIMITATION,
ANY IMPLIED WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR
PURPOSE, ALL OF WHICH ARE EXPRESSLY DISCLAIMED. IN NO EVENT SHALL
MILLENNIUM DYNAMICS, INC. BE LIABLE FOR ANY SPECIAL, INDIRECT, INCIDENTAL
OR CONSEQUENTIAL DAMAGES ARISING FROM ANY DEFECTS IN THE MAGNETIC MEDIA.
8.3 Software. -- For each program listed on the Software Schedule, subject to
---------
the limitations of liability contained in this Agreement, Millennium
Dynamics, Inc. warrants that such program (as delivered to the Customer
and when used by the Customer without modification for its intended purpose
and in accordance with this Agreement) (i) does not and will not infringe,
violate or invade any copyright, trade secret, patent, or other proprietary
right of any third party, and (ii) so long as such program is supported by
Millennium Dynamics, Inc. and unmodified by the Customer and used in
accordance with this Agreement, it will operate substantially as specified
within the product description manual. EXCEPT FOR THE FOREGOING WARRANTIES
OF NON-INFRINGEMENT AND OPERATION IN SUBSTANTIAL COMPLIANCE WITH
SPECIFICATIONS, THE SOFTWARE IS PROVIDED "AS IS", WITHOUT ANY EXPRESS OR
IMPLIED WARRANTIES WHATSOEVER, INCLUDING BUT NOT LIMITED TO, ANY IMPLIED
WARRANTY OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE.
8.4 Limitation of Liability. -- IN NO EVENT SHALL MILLENNIUM DYNAMICS, INC. BE
------------------------
LIABLE (UNDER ANY CONTRACT, TORT, OR OTHER THEORY) FOR ANY SPECIAL,
INDIRECT, INCIDENTAL OR CONSEQUENTIAL DAMAGES ARISING FROM THE PERFORMANCE
OF THIS AGREEMENT OR IN CONNECTION WITH THE SOFTWARE, INCLUDING, WITHOUT
LIMITATION, LOSS OF ANTICIPATED PROFITS OR LOSS RESULTING FROM BUSINESS
DISRUPTION, EVEN IF MILLENNIUM DYNAMICS, INC. HAS BEEN ADVISED OF THE
POSSIBILITY OF SUCH DAMAGES. IN NO EVENT SHALL THE LIABILITY OF
MILLENNIUM DYNAMICS, INC. FOR DAMAGES ARISING OUT OF OR IN CONNECTION WITH
THE USE OR PERFORMANCE OF THE SOFTWARE (UNDER ANY CONTRACT,
-5-
<PAGE>
TORT OR OTHER THEORY) EXCEED THE AMOUNT OF FEES ACTUALLY RECEIVED BY
MILLENNIUM DYNAMICS, INC. FROM THE CUSTOMER IN CONNECTION WITH THE
PROGRAM(S) RESPONSIBLE FOR SUCH DAMAGES.
8.5 Correction of Errors. -- The Customer understands and accepts the risk
---------------------
that errors may exist or occur in the Software, and agrees that no such
error will be deemed to violate the warranty contained in subpart (ii) of
Section 8.3 of this Agreement, provided Millennium Dynamics, Inc.
diligently investigates and corrects such error after the Customer reports
it to Millennium Dynamics, Inc. Without limiting the generality of the
foregoing, the Customer accepts responsibility for testing the accuracy of
any and all conversion generated by the Software and agrees that in the
event of any error, Millennium Dynamics, Inc. shall have no liability for
any lost profits or other damages suffered by the Customer in connection
with the Customer's reliance upon the results of such conversion.
8.6 Indemnification. -- Subject to the limitations of liability contained in
----------------
this Agreement, and this Section 8, Millennium Dynamics, Inc. agrees to
indemnify and hold harmless the Customer from all costs, expenses
(including reasonable attorneys' fees), losses, liabilities, damages, and
settlements arising out of or in connection with any claim or suit based on
allegations which, if true, would constitute a breach of the warranty of
non-infringement contained in subpart (i) of Section 8.3 of this
Agreement. HOWEVER, IN NO EVENT SHALL THE LIABILITY OF MILLENNIUM
DYNAMICS, INC. UNDER THIS SECTION 8.6 EXCEED THE AMOUNT OF FEES ACTUALLY
RECEIVED BY MILLENNIUM DYNAMICS, INC. FROM THE CUSTOMER IN CONNECTION WITH
THE PROGRAM(S) WHICH PURPORTEDLY VIOLATE SUCH WARRANTY.
8.6.1 Notice. -- The Customer shall as soon as practicable, notify
-------
Millennium Dynamics, Inc. in writing of any claim or suit which
might give rise to a claim for indemnification by Millennium
Dynamics, Inc. hereunder.
8.6.2 Defense. -- In the event of such a claim or suit, Millennium
--------
Dynamics, Inc. will employ counsel for the defense and settlement
thereof, shall file proper pleadings in said suit within the time
required by law, and shall keep the Customer informed of all
developments. If the suit is brought to trial, Millennium
Dynamics, Inc. shall conduct the defense thereof. The Customer,
at its own election and expense, shall always have the right to
employ its own counsel and to monitor Millennium Dynamics, Inc.'s
activities. In such event, Millennium Dynamics, Inc. and the
Customer shall cooperate fully.
8.7 Right to Cure or Terminate. -- If any claim or suit based on allegations,
---------------------------
which, if true, would constitute a breach of the warranty of non-
infringement contained in subpart (i) of Section 8.3 of this Agreement with
respect to one of the
-6-
<PAGE>
program(s) listed on the Software Schedule, is brought or threatened
against either Millennium Dynamics, Inc. or the Customer, then Millennium
Dynamics, Inc. shall have the right, at its option and expense, to do any
one or more of the following:
8.7.1 Obtain for the Customer the right to continue using such program
or a modified version thereof;
8.7.2 Replace all or part of such program with a non-infringing
program, or
8.7.3 Terminate the license granted to the Customer with respect to
such program and refund to the Customer an amount equal to the
unamortized portion of the license fees paid to Millennium
Dynamics, Inc. by the Customer in connection with such program.
For these purposes, license fees shall be amortized on a straight
line method over five years; thus, the unamortized portion of an
license fee would be equal to the greater of (a) zero and (b) the
initial license fee divided by 5, then divide that quotient by
12, and multiply that quotient by the difference between 60 and
the number of months since the license fee was received by
Millennium Dynamics, Inc. (for example, 6,000 (divided by) 5 =
1,200; 1,200 (divided by) 12 = 100; 100 x (60 - 12) = $4,800).
9. MAINTENANCE.
------------
9.1 Error Correction. -- So long as Millennium Dynamics, Inc. continues to
-----------------
support the programs listed on the Software Schedule, Millennium Dynamics,
Inc. agrees to diligently investigate and attempt to correct any error in
such programs reported to Millennium Dynamics, Inc. by the Customer and
determined by Millennium Dynamics, Inc. to be an error in such programs or
in the operating procedures recommended by Millennium Dynamics, Inc. Such
services shall be provided at no additional cost to the Customer.
However, if Millennium Dynamics, Inc. determines that any error reported by
the Customer is not an error in such programs or operating procedures, the
Customer promptly shall pay Millennium Dynamics, Inc. for its services in
investigating and/or correcting such error at Millennium Dynamics, Inc.'s
then current consulting fees and shall reimburse Millennium Dynamics, Inc.
for reasonable travel and living costs incurred in connection with such
services.
9.2 Updates and Related Products. -- For each program listed on the Software
-----------------------------
Schedule, Millennium Dynamics, Inc. may from time to time, at Millennium
Dynamics, Inc.'s option, develop and distribute a new version or revision
of such program (an "Update") or a new product which is related to such
program and may in fact be a derivative of such program (a "Related
Product"). In
-7-
<PAGE>
general, a program which simply corrects errors or enhances the existing
features and functions of a program is an Update, while one which adds new
functions and features is a Related Product. Whenever there is any question
whether a particular program is an Update or a Related Product, Millennium
Dynamics, Inc. shall make a determination which shall be binding upon both
Millennium Dynamics, Inc. and the Customer.
Millennium Dynamics, Inc. shall provide to the Customer, for the
maintenance fees identified on the Software Schedule, all Updates to all
programs listed on the Software Schedule (herein referred to as
"Maintenance"). All Updates provided to the Customer hereunder shall be
deemed to be Software and confidential information and shall be subject to
the provisions of this Agreement. The Customer will be contractually
obligated to maintain the Software based on the most recent version that
Millennium Dynamics, Inc. releases. Failure by the Customer to do so will
release Millennium Dynamics, Inc. of any warranty or performance liability
hereunder. Millennium Dynamics, Inc. shall offer to the Customer, for
additional fees to be determined by Millennium Dynamics, Inc. at the time
of the offering, the option to add any Related Product to the Software
Schedule.
9.3 Maintenance Fees. -- The Customer shall receive the first year of
----------------
Maintenance at no charge. The first year of Maintenance shall commence on
the effective date of this Agreement and shall terminate automatically on
the day before the first anniversary of the effective date of this
Agreement. The second year and each year thereafter of Maintenance shall
be calculated in the same manner. The Customer shall have the option to
purchase subsequent years of Maintenance at the rate identified on the
Software Schedule. Customer shall notify Millennium Dynamics, Inc. thirty
(30) days before the end of the first anniversary of the effective date of
this Agreement whether it intends to acquire Maintenance for the subsequent
period. Customer may elect to terminate Maintenance for any subsequent
period by providing Millennium Dynamics, Inc. notice thirty (30) days
before the anniversary of an effective date of this Agreement. A
termination of maintenance does not preclude the Customer from using the
Software. However, if the Customer elects at any time not to receive
Maintenance and then subsequently makes such an election, Customer shall be
required to pay for the periods during which Maintenance is not provided as
a condition to receiving Maintenance for the current period.
9.4 Limited Warranties. -- The warranty granted by Millennium Dynamics, Inc.
------------------
herein for Maintenance is a limited warranty only. The parties agree that
this is a contract for services and is not covered by Article 2 of the
Uniform Commercial Code. Millennium Dynamics, Inc. agrees that it will
perform all services hereunder in a proper and workmanlike manner in
accordance with industry standards. THIS WARRANTY IS IN LIEU OF ALL OTHER
WARRANTIES, WHETHER EXPRESS OR IMPLIED, INCLUDING, WITHOUT LIMITATION, ANY
-8-
<PAGE>
IMPLIED WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE,
ALL OF WHICH ARE EXPRESSLY DISCLAIMED. IN NO EVENT SHALL MILLENNIUM
DYNAMICS, INC. BE LIABLE (UNDER ANY CONTRACT, TORT, OR OTHER THEORY) FOR
ANY SPECIAL, INDIRECT, INCIDENTAL, OR CONSEQUENTIAL DAMAGES ARISING FROM
THE PERFORMANCE OF THIS AGREEMENT OR IN CONNECTION WITH MAINTENANCE,
INCLUDING, WITHOUT LIMITATION, LOSS OF ANTICIPATED PROFITS OR LOSS
RESULTING FROM BUSINESS DISRUPTION, EVEN IF MILLENNIUM DYNAMICS, INC. HAS
BEEN ADVISED TO THE POSSIBILITY OF SUCH DAMAGES. IN NO EVENT SHALL THE
LIABILITY OF MILLENNIUM DYNAMICS, INC. FOR DAMAGES ARISING OUT OF OR IN
CONNECTION WITH MAINTENANCE (UNDER ANY CONTRACT, TORT OR OTHER THEORY)
EXCEED THE AMOUNT OF FEES ACTUALLY RECEIVED BY MILLENNIUM DYNAMICS, INC.
FROM THE CUSTOMER IN CONNECTION WITH MAINTENANCE.
9.5 Unsupported Programs. -- If the Software Schedule indicates that a
---------------------
particular program is unsupported, Millennium Dynamics, Inc. shall have no
obligation to correct errors in such program. If Millennium Dynamics, Inc.
no longer wishes to support a program which is listed on the Software
Schedule, then Millennium Dynamics, Inc. shall have the right to amend the
Software Schedule to indicate that such program is unsupported in
accordance with the following procedure:
9.5.1 Millennium Dynamics, Inc. shall provide written notice to the
Customer that the program will cease to be supported on a
specified date (the "Cutoff Date") which must be at least six (6)
months in the future;
9.5.2 Until after the Cutoff Date, Millennium Dynamics, Inc. shall
continue to support such program and the Customer shall continue
to pay any fee(s) specified on the Software Schedule for such
program; and
9.5.3 On and after the Cutoff Date, the Software Schedule shall be
amended to indicate that such program is unsupported. Millennium
Dynamics, Inc. shall have no further obligation to correct errors
in the Program, the warranty contained in subpart (ii) of Section
8.3 of this Agreement shall no longer be effective with respect
to such program, and the Customer shall have the right to receive
a copy of the source code for such program as provided in Section
9.4 of this Agreement.
9.6 Source Code. -- For any program listed on the Software Schedule, if
------------
Millennium Dynamics, Inc. fails to fulfill its obligations under Section
8.5 of this Agreement or if such program is designated as unsupported on
the Software Schedule, then the Customer shall have the right to receive
upon demand a copy of the source code for such program subject to the
following terms and conditions:
-9-
<PAGE>
9.6.1 The source code for such program shall be deemed to be
Confidential Information of Millennium Dynamics, Inc. and shall
be subject to the terms and provisions of the Agreement which
govern Confidential Information;
9.6.2 The Customer shall have a nonexclusive right to use the source
code version of such program for the limited purpose of
maintaining the object code version of such program so that it
can be used by the Customer at the designated sites and on the
designated CPU(s) listed on the Software Schedule.
9.6.3 The source code for such program shall be deemed to be Software
within the meaning of this Agreement.
9.7 Source Code Escrow.
------------------
Millennium Dynamics, Inc. will maintain a copy of the source code for the
Software in escrow for the benefit of the Customer and all other customers of
Millennium Dynamics, Inc. with Star Bank N.A., 425 Walnut Street, Cincinnati,
Ohio 45202. Millennium Dynamics, Inc. will pay all fees associated with such
source code escrow.
10. INSTALLATION.
------------
Millennium Dynamics, Inc.'s standard initial installation shall be no more than
delivery of a copy of the licensed programs to the designated site. If the
Customer requests that Millennium Dynamics, Inc. perform more extensive
installation procedures, then the Customer shall pay Millennium Dynamics, Inc.
for such services at Millennium Dynamics, Inc.'s then current consulting rates
and shall reimburse Millennium Dynamics, Inc. for reasonable travel and living
expenses.
11. MANUALS.
-------
11.1 No Charge. -- Millennium Dynamics, Inc. will provide to the Customer, at no
----------
additional cost to the Customer, the number of manuals for each program as
indicated on the Software Schedule.
11.2 Additional Charge. -- The Customer shall pay all shipping charges for
------------------
copies of manuals and other documentation which is sent to the Customer by
Millennium Dynamics, Inc.
12. SPECIAL LICENSES
----------------
-10-
<PAGE>
If Millennium Dynamics, Inc. provides any program to the Customer which is not
listed on the Software Schedule, then (a) such program shall be deemed
Confidential Information and (b) the Customer shall have no right to use, copy
or disclose such program unless the Customer is granted such rights pursuant to
some other license or sublicense agreement between the Customer and Millennium
Dynamics, Inc. or a third party specified by Millennium Dynamics, Inc. (a
"Special License"). If Millennium Dynamics, Inc. provides any such software to
the Customer pursuant to a Special License, then the Customer shall be bound by
the terms and conditions of such Special License.
13. EDUCATION.
----------
13.1 Training Classes. -- The Customer will be entitled to have two (2)
----------------
individuals of its selection attend a two day training class held in
Cincinnati, Ohio at the offices of Millennium Dynamics, Inc. There will be
no additional cost to the Customer for attendance of its designees at this
class. Travel and other expenses for the attendance of these individuals
are the responsibility of the Customer.
13.2 Telephone Support -- At no extra cost, Millennium Dynamics, Inc. will
-----------------
provide reasonable user support for the Customer's employees by telephone
in connection with the Customer's use of information, products and services
provided to the Customer by Millennium Dynamics, Inc. pursuant to this
Agreement. Such support shall be limited to answering questions about the
use and/or operation of such information, products and/or services.
Millennium Dynamics, Inc. shall have no obligation pursuant to this Section
to perform any design or consulting services for the Customer.
14. TERMINATION.
------------
14.1 Procedure. -- This Agreement may be terminated as follows:
----------
14.1.1 Breach. -- Except as otherwise provided, in the event of breach
-------
of any of the terms or conditions of this Agreement, the non-
defaulting party may terminate this Agreement upon sixty (60)
days prior written notice to the defaulting party specifying with
particularity the breach. If the defaulting party shall, within
such sixty (60) days, cure the breach complained of and advise
the non-defaulting party of such cure, this Agreement shall
continue in full force and effect as if the notice of termination
had not been issued; otherwise, this Agreement shall terminate at
the end of such sixty (60) day period.
-11-
<PAGE>
14.1.2 Insolvency. -- In the event that the Customer becomes insolvent
-----------
or voluntarily or involuntarily bankrupt or is unable to meet its
obligations when they become due or if a receiver or other
liquidating officer is appointed for substantially all of the
assets or business of the Customer or if the Customer makes an
assignment for the benefit of creditors, Millennium Dynamics,
Inc. may immediately terminate this Agreement by notice to the
Customer.
14.1.3 Mutual Agreement. -- This Agreement may be terminated by the
----------------
mutual agreement of the parties. The understanding of the parties
must be in writing and signed by both parties.
14.2 Effects of Termination. -- The following provisions shall apply in the
-----------------------
event this Agreement expires or is terminated for any reason whatsoever:
14.2.1 Return of Confidential Information. -- The Customer shall return
-----------------------------------
promptly or destroy all copies (in whatever form and whether full
or partial) of all Confidential Information which is in the
Customer's possession or under its control. Within thirty (30)
days after termination, the Customer shall provide written
confirmation to Millennium Dynamics, Inc. that all copies have
not been returned or have been destroyed. The Customer shall also
implement appropriate measures to safeguard the confidentiality
of any Confidential Information which, by virtue of its
intangibility, cannot be physically returned or destroyed.
14.2.2 Payments. -- The Customer shall remain obligated to pay all
---------
amounts already owed to Millennium Dynamics, Inc. hereunder. All
amounts due to Millennium Dynamics, Inc. hereunder shall become
immediately due and payable.
14.2.3 Provisions Which Survive. -- Millennium Dynamics, Inc.'s rights
-------------------------
and the Customer's obligations pursuant to Sections 6
(Confidentiality) and 18 (Export) shall survive the termination
and/or expiration of this Agreement.
15. INDEMNIFICATION BY CUSTOMER.
---------------------------
The Customer agrees to indemnify and hold harmless Millennium Dynamics, Inc.,
its subsidiaries and affiliates, and the officers, directors, employees, and
agents of any of them from all costs, expenses (including reasonable attorneys'
fees), losses, liabilities, damages and settlements arising out of or in
connection with any claim or suit based on allegations which, if true, would
constitute a breach of this Agreement.
-12-
<PAGE>
15.1 Notice. -- Millennium Dynamics, Inc. shall as soon as practicable, notify
-------
the Customer in writing of any claim or suit which might give rise to a
claim for indemnification by the Customer hereunder.
15.2 Defense. -- In the event of such claim or suit, the Customer will employ
-------
counsel for the defense thereof, shall file proper pleadings in said suit
within the time required by law, and shall keep Millennium Dynamics, Inc.
informed of all developments. If the suit is brought to trial, the
Customer shall conduct the defense thereof. Millennium Dynamics, Inc., at
its own election and expense, shall always have the right to employ its own
counsel and may monitor the Customer's activities. In such event, the
Customer and Millennium Dynamics, Inc. shall cooperate fully.
16. ASSIGNMENT.
----------
This Agreement and the Customer's rights hereunder may not and cannot be
assigned, sublicensed, sold, mortgaged, pledged or otherwise transferred by the
Customer without Millennium Dynamics, Inc.'s prior written consent.
17. EXPORT.
------
Regardless of any disclosure made by the Customer to Millennium Dynamics, Inc.
of an ultimate destination of any product, service, information or Confidential
Information provided in connection with this Agreement ("the Products"), the
Customer will not export or re-export, either directly or indirectly, any the
Products or any system incorporating the Products, without first obtaining an
appropriate license or authorization therefor from the United States government,
if required by United States law.
The Customer will not, without first obtaining an appropriate license or
authorization therefor from the United States government, if required by United
States law, directly or indirectly, export, re-export, transmit or disclose to
anyone or use, act upon, or provide services which involve the use of, any
information of any kind (including, without limitation, any Confidential
Information) (a) which can be used, or adopted for use, in the design,
production, manufacturing, utilization or reconstruction of articles or
materials and (b) which was disclosed to the Customer by Millennium Dynamics,
Inc. or relates to any Products, this Agreement, or any transaction hereunder.
The Customer shall notify Millennium Dynamics, Inc. if the Customer knows,
believes or has any reason to suspect that any of the Products are being or have
been exported or re-exported without proper licenses or authorizations.
18. ADVERTISING.
-----------
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<PAGE>
The Customer hereby authorizes Millennium Dynamics, Inc. to use the Customer's
name as a reference during verbal conversations concerning the Software. Any
other advertising involving the Customers's name will require the prior written
consent of the Customer. The Customer shall not use the name and/or logo of
Millennium Dynamics, Inc., without obtaining the prior written consent of
Millennium Dynamics, Inc.
19. INJUNCTIONS.
-----------
The Customer agrees that because any unauthorized use or disclosure of
Confidential Information could cause Millennium Dynamics, Inc. irreparable
damage, Millennium Dynamics, Inc. is entitled to obtain injunctive relief in
the event of any unauthorized use or disclosure of Confidential Information.
20. ENTIRE AGREEMENT.
-----------------
This Agreement (including the associated schedules, appendices, product
description manuals and addenda) constitute the entire agreement between
Millennium Dynamics, Inc. and the Customer relating to the subject matter hereof
and this Agreement supersedes all prior negotiations, agreements and
understandings between them relating to the subject matter hereof and no
modifications and/or additions to this Agreement shall be binding on either
party unless in writing and signed by the party against whom enforcement is
sought.
21. WAIVER.
-------
No waiver of any provision of this Agreement shall be effective unless made in
writing. No waiver of any breach of any provision of this Agreement shall
constitute a waiver of any subsequent breach of the same or any other provision
of this Agreement. Failure to enforce any contract term shall not be deemed a
waiver of future enforcement of that or any other term.
-14-
<PAGE>
22. NOTICE.
------
All notices permitted or required under this Agreement shall be directed to the
address set forth on the first page hereof or to such address as either party
may from time to time specify by written notice to the other. Any notice shall
be transmitted in one or more of the following ways:
22.1 In writing, delivered in person, effective upon delivery;
22.2 Mailed by first class, registered or certified mail, return receipt
requested, postage prepaid, effective 5 days after mailing;
22.3 Sent by telex or telecopy, or other digital telecommunications medium
providing a verifiable transcript, and original sent by first class mail,
postage prepaid, effective upon receipt.
22.4 Sent by overnight mail, billed to the sender, effective the next day.
23. FORCE MAJEURE.
--------------
Neither party shall not be held liable to the other for failure to perform any
of its obligations hereunder where such performance is prevented or interfered
with by riots, wars or hostilities between any nations, Acts of God, fires,
storms, floods, earthquakes, strikes, labor disputes, shortages or curtailments
of raw materials, labor, power or other utility services, any government
restrictions, and other similar or dissimilar contingencies beyond the
reasonable control of the non-participating party.
24. GOVERNING LAW AND VENUE.
------------------------
This Agreement shall be deemed to have been executed in Cincinnati, Ohio
U.S.A., and shall be governed by and construed in accordance with the laws of
the United States and the laws of the State of Ohio, U.S.A. The Customer
hereby consents generally to the jurisdiction of the courts of the State of
Ohio and of any United States federal court.
25. SEVERABILITY.
-------------
The provisions hereof are severable. If any provision of this Agreement is
invalid or unenforceable in any circumstances, then (i) in such circumstances
such provision shall be interpreted as though it provided for the maximum
permissible obligation or right, (ii) the application of such provision in any
other circumstances shall not be
-15-
<PAGE>
affected thereby, and (iii) the application of the remaining provisions hereof
shall not be affected thereby.
-16-
<PAGE>
26. CUMULATIVE REMEDIES.
-------------------
Except as otherwise provided herein, all rights and remedies conferred hereunder
shall be cumulative and may be exercised singularly or concurrently.
IN WITNESS WHEREOF, each of the parties hereto has caused this Agreement to be
executed and delivered by its duly authorized officers as of the day and year
first above written.
CHIQUITA BRANDS INTERNATIONAL, INC. MILLENNIUM DYNAMICS, INC.
/s/ (Illegible) /s/ Michael D. Rice
By: _______________________________ By: __________________________________
Michael D. Rice
Name: _____________________________ Name: ________________________________
Assistant Secretary
Title: ____________________________ Title: _______________________________
10/25/96
Date: _____________________________ Date: ________________________________
-17-
<PAGE>
SOFTWARE SCHEDULE
-----------------
1. Software Programs.
-----------------
a. JCL/Proc Analyzer.
b. COBOL Copy Library Converter.
c. COBOL Program Converter.
d. Assembler Program Converter.
e. File and Transaction Converter.
f. Universal Text Scanner.
g. Bridge Utility.
2. Site Address.
-------------
250 East Fifth Street, 24th floor
-----------------------------------------------------------------
Cincinnati, Ohio 45202
-----------------------------------------------------------------
3. Designated CPU(s) at site.
-------------------------
9672 R21
-----------------------------------------------------------------
Serial No. 000671
-----------------------------------------------------------------
Millennium Dynamics, Inc. acknowledges that the Customer has future plans
to acquire a new CPU on or before December 31, 1997. This new CPU may
involve an upgrade. Millennium Dynamics, Inc. hereby grants to the
Customer the authority to install the Software on any new CPU acquired
without any additional fees. This authority is granted so long as the
Software only operates on one CPU and the Customer notifies Millennium
Dynamics, Inc. of the new installation. Such notice by the Customer to
Millennium Dynamics, Inc. shall be made thirty (30) days before the change
is to occur. The Customer hereby acknowledges that in order to obtain a
new copy of the Software to be provided for the purpose of this
arrangement, the Customer must notify Millennium Dynamics, Inc. of its plan
within the time frame identified above and provide the necessary
information requested by Millennium Dynamics, Inc.
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<PAGE>
4. License Fees.
------------
Initial License Fee No charge
Total Cost No charge
This License Fee includes the designated CPU(s) at the designated site.
Additional sites and CPU(s) will require an addendum to this Software
Schedule.
6. Maintenance Fees.
----------------
There is no annual maintenance fee for the software products identified on
this Software Schedule. All other services, including consulting services,
are to be incurred on a time and material basis.
7. Education.
---------
a. The License Fee includes two (2) attendees from the designated site for
a two (2) day training session in Cincinnati, Ohio.
b. The Customer may request on-site training which will consist of two (2)
days of training for ten (10) individuals at a cost of $5,000 plus all
travel and living expenses incurred in connection with the training at
the Customer's site.
8. Manuals
-------
The License Fee includes four (4) copies of installation/user manuals. The
Customer is not permitted to reproduce copies of the installation/user
manual, without the prior written permission of Millennium Dynamics, Inc.
-19-
<PAGE>
Exhibit 10.49
Agreement Number: ML-016
-------------------------------------
Effective Date: March 6, 1996
-------------------------------------
LICENSE AGREEMENT
This License Agreement (the "Agreement") made this 31 day of December,
---------
1996 by and among MILLENNIUM DYNAMICS, INC., 580 Walnut Street, Cincinnati, Ohio
45202 ("Millennium Dynamics, Inc.") and WINDSOR GROUP, 1300 Parkwood Circle,
Atlanta, Georgia 30339 (hereinafter collectively referred to as the "Customer").
W I T N E S S E T H:
--------------------
WHEREAS, Millennium Dynamics, Inc. has developed and is the owner of certain
computer software programs it desires to license to the Customer; and
WHEREAS, the Customer desires to license such programs from Millennium Dynamics,
Inc.
NOW, THEREFORE, in consideration of the mutual terms and conditions set forth
herein, the parties agree hereto as follows:
1. DEFINITIONS.
-----------
For purposes of this Agreement, the following terms shall have the meanings set
forth below:
1.1 Confidential Information -- "Confidential Information" means the Software
------------------------
(as defined herein) and all information disclosed to or known by the
Customer about Millennium Dynamics, Inc.'s marketing strategy, business
practices, customers, finances, products, software, computer programs,
services, methods and processes. "Confidential Information" also includes
any and all information which this Agreement provides shall be deemed to
be Confidential Information.
1.2 Agreement. -- This "Agreement" shall mean and include this document, all
----------
Schedules, Appendices, Product Description Manuals, and Addenda attached to
this document or added to it by amendment or incorporated herein by
references.
-1-
<PAGE>
2. GRANT.
------
Subject to the terms and conditions of this Agreement and in consideration of
the payment of specified fees by the Customer, Millennium Dynamics, Inc. hereby
grants to the Customer a nonexclusive right to use the object code version of
each computer program listed on the Software Schedule attached hereto and
incorporated herein by reference and all manuals, instructions, documentation
coding sheets and other documents or information relating thereto (collectively,
the "Software") at the computer site(s) and on the CPU(s) indicated for such
programs on the Software Schedule. This license is for the designated CPU(s) at
the designated site. The Customer has no right to copy any of the Software,
except for purposes of system backup. On any backup copy of the Software, the
Customer shall reproduce all original copyright notices and claims of
confidentiality, proprietary rights or trade secret.
3. LIMITS ON USE.
-------------
The Customer shall use the Software for the Customer's internal purposes only
for its own business purposes and shall not use the Software for the benefit of
or to provide services to any third party or unaffiliated organization. Without
limiting the generality of the foregoing restriction, the Customer shall not use
any of the Software to perform data processing services or service bureau
activities for a third party or an unaffiliated organization. The license
granted to Customer hereunder does permit the Customer to use the Software for
the benefit of Customer's affiliates, so long as such use is on the designated
CPU(s) at the designated site identified on the Software Schedule.
4. FEES AND TAXES.
--------------
For each site listed on the Software Schedule, the Customer shall pay to
Millennium Dynamics, Inc. the license fees specified on the Software Schedule
upon installation of the Software at such site.
4.1 Due Date. -- Unless otherwise specified in this Agreement, all amounts
---------
payable by the Customer to Millennium Dynamics, Inc. shall be paid within
thirty (30) days after the date of Millennium Dynamics, Inc.'s invoice to
the Customer for such amounts.
4.2 Late Payment. -- If the Customer fails to make payment when due
--------------
hereunder, then the Customer shall pay interest to Millennium Dynamics,
Inc. at the rate of one and one half percent (1.5%) per month for any
unpaid balance (including previously accrued interest charges) outstanding
at the end of each calendar month after payment is first due. The Customer
shall also pay Millennium Dynamics, Inc. for any reasonable expenses
(including attorneys' fees) incurred by Millennium Dynamics, Inc. in
connection with the collection of any amounts due to Millennium Dynamics,
Inc. from the Customer.
-2-
<PAGE>
4.3 Taxes. -- All amounts specified in this Agreement to be paid to Millennium
------
Dynamics, Inc. by the Customer are net of taxes. Thus, if Millennium
Dynamics, Inc. or the Customer is required to pay any sales, use, export,
import, excise or other taxes (whether federal, state, local or otherwise)
imposed with respect to this Agreement or any of the transactions
contemplated hereby, such taxes shall be paid by the Customer or the
Customer shall reimburse Millennium Dynamics, Inc. for any such taxes paid
by Millennium Dynamics, Inc. Taxes based on Millennium Dynamics, Inc.'s
net income and Millennium Dynamics, Inc.'s franchise taxes shall be the
sole responsibility of Millennium Dynamics, Inc.
5. ADDITIONAL SITES OR CPU(S).
--------------------------
New sites or CPU(s) other than those listed on the Software Schedule will
require a license fee as specified in the Software Schedule. Any upgrade of a
CPU will also require an additional fee as determined by Millennium Dynamics,
Inc. The new site or CPU(s) fee shall be listed on an amended Software Schedule
and the license fee shall be paid in accordance with Section 4. above.
6. CONFIDENTIALITY AND OWNERSHIP.
------------------------------
The Software and all derivatives and modifications thereof (including ones made
by or for the Customer) shall at all times be and remain the property of
Millennium Dynamics, Inc., and the Customer shall have no rights thereto except
as explicitly provided elsewhere in this Agreement. The Software and all
derivatives and modifications thereof shall be deemed to be Confidential
Information of Millennium Dynamics, Inc. and shall be subject to the terms and
provisions of this Agreement which govern Confidential Information.
6.1 General. -- The Customer will keep confidential, will use only for the
--------
Customer's benefit as expressly permitted elsewhere in this Agreement and
will not disclose to others without Millennium Dynamics, Inc.'s prior
written approval, all Confidential Information.
6.2 Limited Access. -- The Customer shall limit access to Confidential
----------------
Information to those employees who require such access in order to permit
the Customer to use the Confidential Information as expressly permitted
elsewhere in this Agreement in furtherance of the Customer's business.
6.3 Best Efforts. -- The Customer shall take all reasonable precautions to
-------------
maintain the confidentiality of all Confidential Information. Without
limiting the generality of the foregoing, the Customer shall employ
precautions for the protection of Confidential Information which are no
less stringent than those employed by the Customer to protect its own
confidential and proprietary information and/or trade secrets.
-3-
<PAGE>
6.4 Return or Destruction. -- If at any time the Customer has in its possession
----------------------
or under its control one or more copies (whether partial or complete) of
any Confidential Information which the Customer does not at such time,
pursuant to the terms of this Agreement, have the right to use at the
designated site(s) and/or on the designated CPU(s), then the Customer shall
(without the requirement of any notice or demand from Millennium Dynamics,
Inc.) either deliver to Millennium Dynamics, Inc. or destroy all such
copies, whether partial or whole and regardless of form. If the Customer
elects to destroy such copies, it agrees to notify Millennium Dynamics,
Inc. promptly that such copies have been destroyed.
7. EXCLUSION OF WARRANTIES.
------------------------
EXCEPT AS EXPLICITLY PROVIDED ELSEWHERE IN THIS AGREEMENT, ALL INFORMATION,
PRODUCTS AND/OR SERVICES PROVIDED TO THE CUSTOMER BY MILLENNIUM DYNAMICS, INC.
ARE PROVIDED "AS IS" AND WITHOUT ANY EXPRESS OR IMPLIED WARRANTIES WHATSOEVER,
INCLUDING, BUT NOT LIMITED TO ANY IMPLIED WARRANTY OF MERCHANTABILITY OR FITNESS
FOR A PARTICULAR PURPOSE.
8. LIMITED WARRANTIES.
-------------------
8.1 General Provisions. -- In any case for which two or more limitations of
-------------------
Millennium Dynamics, Inc.'s liability are specified in this Agreement,
Millennium Dynamics, Inc.'s liability shall be limited to the smallest of
such limitations. In no event shall Millennium Dynamics, Inc. be liable
(under any contract, tort, or other theory) for any special, indirect,
incidental or consequential damages arising out of or in connection with
this Agreement, including, without limitation, loss of anticipated profits
or loss resulting from business disruption, even if Millennium Dynamics,
Inc. has been advised of the possibility of such damages. In no event
shall the liability of Millennium Dynamics, Inc. for damages arising out of
or in connection with this Agreement (under any contract, tort, or other
theory) exceed the amount of all payments actually received by Millennium
Dynamics, Inc. from the Customer in connection with the programs
responsible for such damage.
8.2 Media. -- Millennium Dynamics, Inc. hereby warrants to the Customer that
------
all of the magnetic media delivered to the Customer by Millennium Dynamics,
Inc. on which any of the Software is recorded (including any disks or
tapes, but excluding the information recorded thereon) are free from
defects in materials and faulty workmanship at the time of shipment by
Millennium Dynamics, Inc. If any defect exists at the time of shipment
which is detected within ninety (90) days of the time of shipment, then the
defective item will be replaced by Millennium Dynamics, Inc. at no charge
to the Customer. THIS WARRANTY IS IN LIEU OF ALL OTHER WARRANTIES ON THE
MAGNETIC MEDIA, WHETHER EXPRESS OR IMPLIED, INCLUDING, WITHOUT LIMITATION,
ANY IMPLIED WARRANTIES OF
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<PAGE>
MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE, ALL OF WHICH ARE
EXPRESSLY DISCLAIMED. IN NO EVENT SHALL MILLENNIUM DYNAMICS, INC. BE LIABLE
FOR ANY SPECIAL, INDIRECT, INCIDENTAL OR CONSEQUENTIAL DAMAGES ARISING FROM
ANY DEFECTS IN THE MAGNETIC MEDIA.
8.3 Software. -- For each program listed on the Software Schedule, subject to
---------
the limitations of liability contained in this Agreement, Millennium
Dynamics, Inc. warrants that such program (as delivered to the Customer
and when used by the Customer without modification for its intended purpose
and in accordance with this Agreement) (i) does not and will not infringe,
violate or invade any United States copyright, trade secret, patent, or
other proprietary right of any third party, and (ii) so long as such
program is supported by Millennium Dynamics, Inc. and unmodified by the
Customer and used in accordance with this Agreement, it will operate
substantially as specified within the product description manual. EXCEPT
FOR THE FOREGOING WARRANTIES OF NON-INFRINGEMENT AND OPERATION IN
SUBSTANTIAL COMPLIANCE WITH SPECIFICATIONS, THE SOFTWARE IS PROVIDED "AS
IS", WITHOUT ANY EXPRESS OR IMPLIED WARRANTIES WHATSOEVER, INCLUDING BUT
NOT LIMITED TO, ANY IMPLIED WARRANTY OF MERCHANTABILITY OR FITNESS FOR A
PARTICULAR PURPOSE.
8.4 Limitation of Liability. -- IN NO EVENT SHALL MILLENNIUM DYNAMICS, INC. BE
------------------------
LIABLE (UNDER ANY CONTRACT, TORT, OR OTHER THEORY) FOR ANY SPECIAL,
INDIRECT, INCIDENTAL OR CONSEQUENTIAL DAMAGES ARISING UNDER THIS AGREEMENT
OR IN CONNECTION WITH THE SOFTWARE, INCLUDING, WITHOUT LIMITATION, LOSS OF
ANTICIPATED PROFITS OR LOSS RESULTING FROM BUSINESS DISRUPTION, EVEN IF
MILLENNIUM DYNAMICS, INC. HAS BEEN ADVISED OF THE POSSIBILITY OF SUCH
DAMAGES. IN NO EVENT SHALL THE LIABILITY OF MILLENNIUM DYNAMICS, INC. FOR
DAMAGES ARISING OUT OF OR IN CONNECTION WITH THE USE OR PERFORMANCE OF THE
SOFTWARE (UNDER ANY CONTRACT, TORT OR OTHER THEORY) EXCEED THE AMOUNT OF
FEES ACTUALLY RECEIVED BY MILLENNIUM DYNAMICS, INC. FROM THE CUSTOMER IN
CONNECTION WITH THE PROGRAM(S) RESPONSIBLE FOR SUCH DAMAGES.
8.5 Correction of Errors. -- The Customer understands and accepts the risk
---------------------
that errors may exist or occur in the Software, and agrees that no such
error will be deemed to violate the warranty contained in subpart (ii) of
Section 8.3 of this Agreement, provided Millennium Dynamics, Inc.
diligently investigates and attempts to correct such error after the
Customer reports it to Millennium Dynamics, Inc. Without limiting the
generality of the foregoing, the Customer accepts responsibility for
testing the accuracy of any and all conversion generated by the Software
and agrees that in the event of any error, Millennium Dynamics, Inc. shall
have no liability for any lost profits or other damages suffered by the
Customer in connection with the Customer's reliance upon the results of
such conversion.
-5-
<PAGE>
8.6 Indemnification. -- Subject to the limitations of liability contained in
----------------
this Agreement, and this Section 8, Millennium Dynamics, Inc. agrees to
indemnify and hold harmless the Customer from all costs, expenses
(including reasonable attorneys' fees), losses, liabilities, damages, and
settlements arising out of or in connection with any claim or suit based on
allegations which, if true, would constitute a breach of the warranty of
non-infringement contained in subpart (i) of Section 8.3 of this
Agreement. HOWEVER, IN NO EVENT SHALL THE LIABILITY OF MILLENNIUM
DYNAMICS, INC. UNDER THIS SECTION 8.6 EXCEED THE AMOUNT OF FEES ACTUALLY
RECEIVED BY MILLENNIUM DYNAMICS, INC. FROM THE CUSTOMER IN CONNECTION WITH
THE PROGRAM(S) WHICH PURPORTEDLY VIOLATE SUCH WARRANTY.
8.6.1 Notice. -- The Customer shall as soon as practicable, notify
-------
Millennium Dynamics, Inc. in writing of any claim or suit which
might give rise to a claim for indemnification by Millennium
Dynamics, Inc. hereunder.
8.6.2 Defense. -- In the event of such a claim or suit, Millennium
--------
Dynamics, Inc. will employ counsel for the defense and settlement
thereof, shall file proper pleadings in said suit within the time
required by law, and shall keep the Customer informed of all
developments. If the suit is brought to trial, Millennium Dynamics,
Inc. shall conduct the defense thereof. The Customer, at its own
election and expense, shall always have the right to employ its own
counsel and to monitor Millennium Dynamics, Inc.'s activities. In
such event, Millennium Dynamics, Inc. and the Customer shall
cooperate fully.
8.7 Right to Cure or Terminate. -- If any claim or suit based on allegations,
---------------------------
which, if true, would constitute a breach of the warranty of non-
infringement contained in subpart (i) of Section 8.3 of this Agreement with
respect to one of the program(s) listed on the Software Schedule, is
brought or threatened against either Millennium Dynamics, Inc. or the
Customer, then Millennium Dynamics, Inc. shall have the right, at its
option and expense, to do any one or more of the following:
8.7.1 Obtain for the Customer the right to continue using such program or
a modified version thereof;
8.7.2 Replace all or part of such program with a non-infringing program,
or
8.7.3 Terminate the license granted to the Customer with respect to such
program and refund to the Customer an amount equal to the
unamortized portion of the license fees paid to Millennium Dynamics,
Inc. by the Customer in connection with such program. For these
purposes, license fees shall be amortized on a straight line method
over five years; thus, the unamortized portion of an license fee
would be equal to the greater of (a) zero and (b) the initial
license fee divided by 5, then divide that quotient by 12, and
multiply that quotient by the difference between 60 and the number
of months since
-6-
<PAGE>
the license fee was received by Millennium Dynamics, Inc. (for
example, 6,000 (divided by) 5 = 1,200; 1,200 (divided by) 12 = 100;
100 x (60 -12) = $4,800).
-7-
<PAGE>
9. MAINTENANCE.
------------
9.1 Error Correction. -- So long as Millennium Dynamics, Inc. continues to
-----------------
support the programs listed on the Software Schedule, Millennium Dynamics,
Inc. agrees to diligently investigate and attempt to correct any error in
such programs reported to Millennium Dynamics, Inc. by the Customer and
determined by Millennium Dynamics, Inc. to be an error in such programs or
in the operating procedures recommended by Millennium Dynamics, Inc. Such
services shall be provided as a part of "Maintenance" described below.
However, if Millennium Dynamics, Inc. determines that any error reported by
the Customer is not an error in such programs or operating procedures, the
Customer promptly shall pay Millennium Dynamics, Inc. for its services in
investigating and/or correcting such error at Millennium Dynamics, Inc.'s
then current consulting fees and shall reimburse Millennium Dynamics, Inc.
for reasonable travel and living costs incurred in connection with such
services.
9.2 Updates and Related Products. -- For each program listed on the Software
-----------------------------
Schedule, Millennium Dynamics, Inc. may from time to time, at Millennium
Dynamics, Inc.'s option, develop and distribute a new version or revision
of such program (an "Update") or a new product which is related to such
program and may in fact be a derivative of such program (a "Related
Product"). In general, a program which simply corrects errors or enhances
the existing features and functions of a program is an Update, while one
which adds new functions and features is a Related Product. Whenever there
is any question whether a particular program is an Update or a Related
Product, Millennium Dynamics, Inc. shall make a determination which shall
be binding upon both Millennium Dynamics, Inc. and the Customer.
Millennium Dynamics, Inc. shall provide to the Customer, for the
maintenance fees identified on the Software Schedule, all Updates to all
programs listed on the Software Schedule (herein referred to as
"Maintenance"). All Updates provided to the Customer hereunder shall be
deemed to be Software and Confidential Information and shall be subject to
the provisions of this Agreement. The Customer will be contractually
obligated to maintain the Software based on the most recent version that
Millennium Dynamics, Inc. releases. Failure by the Customer to do so will
release Millennium Dynamics, Inc. of any warranty or performance liability
hereunder. Millennium Dynamics, Inc. shall offer to the Customer, for
additional fees to be determined by Millennium Dynamics, Inc. at the time
of the offering, the option to add any Related Product to the Software
Schedule.
The Customer shall be responsible for the installation of all Updates and
any Related Product, unless otherwise agreed upon by the parties upon
mutually acceptable terms. If the Customer requests that Millennium
Dynamics, Inc. perform installation, then the Customer shall pay Millennium
Dynamics, Inc. for such
-8-
<PAGE>
services at Millennium Dynamics, Inc.'s then current consulting rates and
shall reimburse Millennium Dynamics, Inc. for reasonable travel and living
expenses.
9.3 Maintenance Fees. -- The Customer shall receive the first year of
----------------
Maintenance at no charge. The first year of Maintenance shall commence on
the effective date of this Agreement and shall terminate automatically on
the day before the first anniversary of the effective date of this
Agreement. The second year and each year thereafter of Maintenance shall
be calculated in the same manner. The Customer shall have the option to
purchase subsequent years of Maintenance at the rate identified on the
Software Schedule. Customer shall notify Millennium Dynamics, Inc. thirty
(30) days before the end of the first anniversary of the effective date of
this Agreement whether it intends to acquire Maintenance for the subsequent
period. Customer may elect to terminate Maintenance for any subsequent
period by providing Millennium Dynamics, Inc. notice thirty (30) days
before the anniversary of an effective date of this Agreement. A
termination of maintenance does not preclude the Customer from using the
Software. However, if the Customer elects at any time not to receive
Maintenance and then subsequently makes such an election, Customer shall be
required to pay for the periods during which Maintenance is not provided as
a condition to receiving Maintenance for the current period.
9.4 Limited Warranties. -- Millennium Dynamics, Inc. shall perform all
------------------
maintenance services hereunder in a proper and workmanlike manner in
accordance with industry standards. The preceding warranty granted by
Millennium Dynamics, Inc. herein for Maintenance is a limited warranty
only. The parties agree that the Maintenance and related limited liability
warranty consist of a contract for services and are not covered by Article
II of the Uniform Commercial Code. THIS WARRANTY IS IN LIEU OF ALL OTHER
WARRANTIES, WHETHER EXPRESS OR IMPLIED, INCLUDING, WITHOUT LIMITATION, ANY
IMPLIED WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE,
ALL OF WHICH ARE EXPRESSLY DISCLAIMED. IN NO EVENT SHALL MILLENNIUM
DYNAMICS, INC. BE LIABLE (UNDER ANY CONTRACT, TORT, OR OTHER THEORY) FOR
ANY SPECIAL, INDIRECT, INCIDENTAL, OR CONSEQUENTIAL DAMAGES ARISING FROM
THE PERFORMANCE OF THIS AGREEMENT OR IN CONNECTION WITH MAINTENANCE,
INCLUDING, WITHOUT LIMITATION, LOSS OF ANTICIPATED PROFITS OR LOSS
RESULTING FROM BUSINESS DISRUPTION, EVEN IF MILLENNIUM DYNAMICS, INC. HAS
BEEN ADVISED TO THE POSSIBILITY OF SUCH DAMAGES. IN NO EVENT SHALL THE
LIABILITY OF MILLENNIUM DYNAMICS, INC. FOR DAMAGES ARISING OUT OF OR IN
CONNECTION WITH MAINTENANCE (UNDER ANY CONTRACT, TORT OR OTHER THEORY)
EXCEED THE AMOUNT OF FEES ACTUALLY RECEIVED BY MILLENNIUM DYNAMICS, INC.
FROM THE CUSTOMER IN CONNECTION WITH MAINTENANCE.
9.5 Unsupported Programs. -- If the Software Schedule indicates that a
---------------------
particular program is unsupported, Millennium Dynamics, Inc. shall have no
obligation to correct errors in such program. If Millennium Dynamics, Inc.
no longer wishes to
-9-
<PAGE>
support a program which is listed on the Software Schedule, then Millennium
Dynamics, Inc. shall have the right to amend the Software Schedule to
indicate that such program is unsupported in accordance with the following
procedure:
9.5.1 Millennium Dynamics, Inc. shall provide written notice to the
Customer that the program will cease to be supported on a specified
date (the "Cutoff Date") which must be at least six (6) months in
the future;
9.5.2 Until after the Cutoff Date, Millennium Dynamics, Inc. shall
continue to support such program and the Customer shall continue to
pay any fee(s) specified on the Software Schedule for such program;
and
9.5.3 On and after the Cutoff Date, the Software Schedule shall be amended
to indicate that such program is unsupported. Millennium Dynamics,
Inc. shall have no further obligation to correct errors in the
Program, the warranty contained in subpart (ii) of Section 8.3 of
this Agreement shall no longer be effective with respect to such
program, and the Customer shall have the right to receive a copy of
the source code for such program as provided in Section 9.6 of this
Agreement.
9.6 Source Code. -- For any program listed on the Software Schedule, if such
------------
program is designated as unsupported by Millennium Dynamics, Inc. then the
Customer shall have the right to receive upon demand a copy of the source
code for such program subject to the following terms and conditions:
9.6.1 The source code for such program shall be deemed to be Confidential
Information of Millennium Dynamics, Inc. and shall be subject to the
terms and provisions of the Agreement which govern Confidential
Information;
9.6.2 The Customer shall have a nonexclusive right to use the source code
version of such program for the limited purpose of maintaining the
object code version of such program so that it can be used by the
Customer at the designated sites and on the designated CPU(s) listed
on the Software Schedule.
9.6.3 The source code for such program shall be deemed to be Software
within the meaning of this Agreement.
9.7 Source Code Escrow.
------------------
Millennium Dynamics, Inc. will maintain a copy of the source code for the
Software in escrow for the benefit of the Customer and all other customers of
Millennium Dynamics, Inc. with Star Bank N.A., 425 Walnut Street, Cincinnati,
Ohio 45202. Millennium Dynamics, Inc. will pay all fees associated with such
source code escrow.
10. INSTALLATION.
------------
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<PAGE>
Millennium Dynamics, Inc.'s standard initial installation shall be no more than
delivery of a copy of the licensed programs to the designated site. If the
Customer requests that Millennium Dynamics, Inc. perform more extensive
installation procedures, then the Customer shall pay Millennium Dynamics, Inc.
for such services at Millennium Dynamics, Inc.'s then current consulting rates
and shall reimburse Millennium Dynamics, Inc. for reasonable travel and living
expenses.
11. MANUALS.
-------
11.1 No Charge. -- Millennium Dynamics, Inc. will provide to the Customer, at
----------
no additional cost to the Customer, the number of manuals for each program
as indicated on the Software Schedule.
11.2 Additional Charge. -- The Customer shall pay all shipping charges for
------------------
copies of manuals and other documentation which is sent to the Customer by
Millennium Dynamics, Inc.
12. SPECIAL LICENSES
----------------
If Millennium Dynamics, Inc. provides any program to the Customer which is not
listed on the Software Schedule, then (a) such program shall be deemed
Confidential Information and (b) the Customer shall have no right to use, copy
or disclose such program unless the Customer is granted such rights pursuant to
some other license or sublicense agreement between the Customer and Millennium
Dynamics, Inc. or a third party specified by Millennium Dynamics, Inc. (a
"Special License"). If Millennium Dynamics, Inc. provides any such software to
the Customer pursuant to a Special License, then the Customer shall be bound by
the terms and conditions of such Special License.
13. EDUCATION.
----------
13.1 Training Classes. -- The Customer will be entitled to have two (2)
----------------
individuals of its selection attend a two day training class held in
Cincinnati, Ohio at the offices of Millennium Dynamics, Inc. at times and
dates agreed upon by the parties. There will be no additional cost to the
Customer for attendance of its designees at this class. Travel and other
expenses for the attendance of these individuals are the responsibility of
the Customer.
13.2 Telephone Support -- As a part of Maintenance, Millennium Dynamics, Inc.
-----------------
will provide reasonable user support for the Customer's employees by
telephone in connection with the Customer's use of information, products
and services provided to the Customer by Millennium Dynamics, Inc.
pursuant to this Agreement. Such support shall be limited to answering
questions about the use and/or operation of such information, products
and/or services. Millennium Dynamics, Inc. shall have no obligation
pursuant to this Section to perform any design or consulting services for
the Customer.
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<PAGE>
14. TERMINATION.
------------
14.1 Procedure. -- This Agreement may be terminated as follows:
----------
14.1.1 Breach. -- Except as otherwise provided, in the event of breach
-------
of any of the terms or conditions of this Agreement, the non-
defaulting party may terminate this Agreement upon sixty (60)
days prior written notice to the defaulting party specifying with
particularity the breach. If the defaulting party shall, within
such sixty (60) days, cure the breach complained of and advise
the non-defaulting party of such cure, this Agreement shall
continue in full force and effect as if the notice of termination
had not been issued; otherwise, this Agreement shall terminate at
the end of such sixty (60) day period.
14.1.2 Insolvency. -- In the event that the Customer becomes insolvent or
-----------
voluntarily or involuntarily bankrupt or is unable to meet its
obligations when they become due or if a receiver or other
liquidating officer is appointed for substantially all of the
assets or business of the Customer or if the Customer makes an
assignment for the benefit of creditors, Millennium Dynamics,
Inc. may immediately terminate this Agreement by notice to the
Customer.
14.1.3 Mutual Agreement. -- This Agreement may be terminated by the mutual
----------------
agreement of the parties. The understanding of the parties must
be in writing and signed by both parties.
14.2 Effects of Termination. -- The following provisions shall apply in the
-----------------------
event this Agreement expires or is terminated for any reason whatsoever:
14.2.1 Return of Confidential Information. -- The Customer shall return
-----------------------------------
promptly or destroy all copies (in whatever form and whether full
or partial) of all Confidential Information which is in the
Customer's possession or under its control. Within thirty (30)
days after termination, the Customer shall provide written
confirmation to Millennium Dynamics, Inc. that all copies have
been returned or have been destroyed. The Customer shall also
implement appropriate measures to safeguard the confidentiality
of any Confidential Information which, by virtue of its
intangibility, cannot be physically returned or destroyed.
14.2.2 Payments. -- The Customer shall remain obligated to pay all amounts
---------
already owed to Millennium Dynamics, Inc. hereunder. All
amounts
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<PAGE>
due to Millennium Dynamics, Inc. hereunder shall become
immediately due and payable.
14.2.3 Provisions Which Survive. -- Millennium Dynamics, Inc.'s rights
-------------------------
and the Customer's obligations pursuant to Sections 6
(Confidentiality) and 17 (Export) shall survive the termination
and/or expiration of this Agreement.
15. INDEMNIFICATION BY CUSTOMER.
---------------------------
The Customer agrees to indemnify and hold harmless Millennium Dynamics, Inc.,
its subsidiaries and affiliates, and the officers, directors, employees, and
agents of any of them from all costs, expenses (including reasonable attorneys'
fees), losses, liabilities, damages and settlements arising out of or in
connection with any claim or suit based on allegations which, if true, would
constitute a breach of this Agreement.
15.1 Notice. -- Millennium Dynamics, Inc. shall as soon as practicable, notify
-------
the Customer in writing of any claim or suit which might give rise to a
claim for indemnification by the Customer hereunder.
15.2 Defense. -- In the event of such claim or suit, the Customer will employ
-------
counsel for the defense thereof, shall file proper pleadings in said suit
within the time required by law, and shall keep Millennium Dynamics, Inc.
informed of all developments. If the suit is brought to trial, the
Customer shall conduct the defense thereof. Millennium Dynamics, Inc., at
its own election and expense, shall always have the right to employ its
own counsel and may monitor the Customer's activities. In such event, the
Customer and Millennium Dynamics, Inc. shall cooperate fully.
16. ASSIGNMENT.
----------
This Agreement and the Customer's rights hereunder may not and cannot be
assigned, sublicensed, sold, mortgaged, pledged or otherwise transferred by the
Customer without Millennium Dynamics, Inc.'s prior written consent.
17. EXPORT.
------
Regardless of any disclosure made by the Customer to Millennium Dynamics, Inc.
of an ultimate destination of any product, service, information or Confidential
Information provided in connection with this Agreement ("the Products"), the
Customer will not export or re-export, either directly or indirectly, any the
Products or any system incorporating the Products, without first obtaining an
appropriate license or authorization therefor from the United States government,
if required by United States law.
-13-
<PAGE>
The Customer will not, without first obtaining an appropriate license or
authorization therefor from the United States government, if required by United
States law, directly or indirectly, export, re-export, transmit or disclose to
anyone or use, act upon, or provide services which involve the use of, any
information of any kind (including, without limitation, any Confidential
Information) (a) which can be used, or adopted for use, in the design,
production, manufacturing, utilization or reconstruction of articles or
materials and (b) which was disclosed to the Customer by Millennium Dynamics,
Inc. or relates to any Products, this Agreement, or any transaction hereunder.
The Customer shall notify Millennium Dynamics, Inc. if the Customer knows,
believes or has any reason to suspect that any of the Products are being or have
been exported or re-exported without proper licenses or authorizations.
18. ADVERTISING.
-----------
The Customer hereby authorizes Millennium Dynamics, Inc. to use the Customer's
name as a reference during verbal conversations concerning the Software. Any
other advertising involving the Customer's name will require the prior written
consent of the Customer. The Customer shall not use the name and/or logo of
Millennium Dynamics, Inc., without obtaining the prior written consent of
Millennium Dynamics, Inc.
19. INJUNCTIONS.
-----------
The Customer agrees that a breach of this Agreement, including without
limitation, any unauthorized use or disclosure of Confidential Information,
could cause Millennium Dynamics, Inc. irreparable damage, Millennium Dynamics,
Inc. is entitled to obtain injunctive relief in the event of any unauthorized
use or disclosure of Confidential Information.
20. ENTIRE AGREEMENT.
-----------------
This Agreement (including the associated schedules, appendices, product
description manuals and addenda) constitute the entire agreement between
Millennium Dynamics, Inc. and the Customer relating to the subject matter hereof
and this Agreement supersedes all prior negotiations, agreements and
understandings between them relating to the subject matter hereof and no
modifications and/or additions to this Agreement shall be binding on either
party unless in writing and signed by the party against whom enforcement is
sought.
21. WAIVER.
-------
No waiver of any provision of this Agreement shall be effective unless made in
writing. No waiver of any breach of any provision of this Agreement shall
constitute a waiver of any subsequent breach of the same or any other provision
of this Agreement. Failure to
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<PAGE>
enforce any contract term shall not be deemed a waiver of future enforcement of
that or any other term.
-15-
<PAGE>
22. NOTICE.
------
All notices permitted or required under this Agreement shall be directed to the
address set forth on the first page hereof or to such address as either party
may from time to time specify by written notice to the other. Any notice shall
be transmitted in one or more of the following ways:
22.1 In writing, delivered in person, effective upon delivery;
22.2 Mailed by first class, registered or certified mail, return receipt
requested, postage prepaid, effective 5 days after mailing;
22.3 Sent by telex or telecopy, or other digital telecommunications medium
providing a verifiable transcript, and original sent by first class mail,
postage prepaid, effective upon receipt.
22.4 Sent by overnight mail, billed to the sender, effective the next day.
23. FORCE MAJEURE.
--------------
Neither party shall be held liable to the other for failure to perform any of
its obligations hereunder where such performance is prevented or interfered
with by riots, wars or hostilities between any nations, Acts of God, fires,
storms, floods, earthquakes, strikes, labor disputes, shortages or curtailments
of raw materials, labor, power or other utility services, any government
restrictions, and other similar or dissimilar contingencies beyond the
reasonable control of the non-participating party.
24. GOVERNING LAW AND VENUE.
------------------------
This Agreement shall be deemed to have been executed in Cincinnati, Ohio
U.S.A., and shall be governed by and construed in accordance with the laws of
the United States and the laws of the State of Ohio, U.S.A. The Customer
hereby consents generally to the jurisdiction of the courts of the State of
Ohio and of any United States federal court.
25. SEVERABILITY.
-------------
The provisions hereof are severable. If any provision of this Agreement is
invalid or unenforceable in any circumstances, then (i) in such circumstances
such provision shall be interpreted as though it provided for the maximum
permissible obligation or right, (ii) the application of such provision in any
other circumstances shall not be affected thereby, and (iii) the application of
the remaining provisions hereof shall not be affected thereby.
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<PAGE>
26. CUMULATIVE REMEDIES.
-------------------
Except as otherwise provided herein, all rights and remedies conferred hereunder
shall be cumulative and may be exercised singularly or concurrently.
IN WITNESS WHEREOF, each of the parties hereto has caused this Agreement to be
executed and delivered by its duly authorized officers as of the day and year
first above written.
WINDSOR GROUP MILLENNIUM DYNAMICS, INC.
By: /s/ (Illegible) By: /s/ Michael D. Rice
-------------------------------------- -----------------------------
Name: Name: Michael D. Rice
-------------------------------------- ---------------------------
Title: Title: Assistant Secretary
------------------------------------- --------------------------
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<PAGE>
SOFTWARE SCHEDULE
-----------------
1. Software Programs.
-----------------
a. JCL/Proc Analyzer
b. COBOL Copy Library Converter
c. COBOL Program Converter
d. Assembler Program Converter
e. File and Transaction Converter
f. Universal Text Scanner
g. Bridge Utility
2. Site Address.
-------------
Windsor Group
-----------------------
1300 Parkwood Circle
-----------------------
Atlanta, Georgia 30339
-----------------------
3. Designated CPU(s) at site.
-------------------------
IBM 9121-610
-----------------------
Serial #79318
-----------------------
-----------------------
4. License Fees.
------------
Initial License Fee $10,000
Total Cost $10,000
=======
This License Fee includes the designated CPU(s) at the designated site.
Additional sites and CPU(s) will require an addendum to this Software
Schedule.
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<PAGE>
5. Maintenance Fees.
----------------
The annual maintenance fee for the software products identified on this
Software Schedule is 10% of the Initial License Fee identified above. The
annual maintenance fee will be billed in advance for the full year and is
due thirty (30) days after receipt of an invoice from Millennium Dynamics,
Inc.
6. Education.
---------
The License Fee includes two (2) attendees from the designated site for a
two (2) day training session in Cincinnati, Ohio.
7. Manuals
-------
The License Fee includes four (4) copies of installation/user manuals. The
Customer is not permitted to reproduce copies of the installation/user
manual, without the prior written permission of Millennium Dynamics, Inc.
-19-
<PAGE>
Exhibit 10.50
Agreement Number: ML-053
-------------------------------------
Effective Date: March 17, 1997
-----------------------------------------
LICENSE AGREEMENT
This License Agreement (the "Agreement") made this 17th day of March, 1997 by
and among MILLENNIUM DYNAMICS, INC., 580 Walnut Street, Cincinnati, Ohio 45202
("Millennium Dynamics, Inc.") and PROVIDENT BANK, 925 Dalton Street, Cincinnati,
Ohio 45203 (hereinafter collectively referred to as the "Customer").
W I T N E S S E T H:
--------------------
WHEREAS, Millennium Dynamics, Inc. has developed and is the owner of certain
computer software programs it desires to license to the Customer; and
WHEREAS, the Customer desires to license such programs from Millennium Dynamics,
Inc.
NOW, THEREFORE, in consideration of the mutual terms and conditions set forth
herein, the parties agree hereto as follows:
1. DEFINITIONS.
-----------
For purposes of this Agreement, the following terms shall have the meanings set
forth below:
1.1 Confidential Information -- "Confidential Information" means the Software
------------------------
(as defined herein) and all information disclosed to or known by the
Customer about Millennium Dynamics, Inc.'s marketing strategy, business
practices, customers, finances, products, software, computer programs,
services, methods and processes. "Confidential Information" also includes
any and all information which this Agreement provides shall be deemed to
be Confidential Information.
1.2 Agreement. -- This "Agreement" shall mean and include this document, all
----------
Schedules, Appendices, Product Description Manuals, and Addenda attached to
this document or added to it by amendment or incorporated herein by
references.
- 1 -
<PAGE>
2. GRANT.
-----
Subject to the terms and conditions of this Agreement and in consideration of
the payment of specified fees by the Customer, Millennium Dynamics, Inc. hereby
grants to the Customer a nonexclusive right to use the object code version of
each computer program listed on the Software Schedule attached hereto and
incorporated herein by reference and all manuals, instructions, documentation
coding sheets and other documents or information relating thereto (collectively,
the "Software") at the computer site(s) and on the CPU(s) indicated for such
programs on the Software Schedule. This license is for the designated CPU(s) at
the designated site. The Customer has no right to copy any of the Software,
except for purposes of system backup. On any backup copy of the Software, the
Customer shall reproduce all original copyright notices and claims of
confidentiality, proprietary rights or trade secret.
3. LIMITS ON USE.
-------------
The Customer shall use the Software for the Customer's internal purposes only
for its own business purposes and shall not use the Software for the benefit of
or to provide services to any third party or unaffiliated organization. Without
limiting the generality of the foregoing restriction, the Customer shall not use
any of the Software to perform data processing services or service bureau
activities for a third party or an unaffiliated organization. The license
granted to Customer hereunder does permit the Customer to use the Software for
the benefit of Customer's affiliates, so long as such use is on the designated
CPU(s) at the designated site identified on the Software Schedule.
4. FEES AND TAXES.
--------------
For each site listed on the Software Schedule, the Customer shall pay to
Millennium Dynamics, Inc. the license fees specified on the Software Schedule
upon installation of the Software at such site.
4.1 Due Date. -- Unless otherwise specified in this Agreement, all amounts
---------
payable by the Customer to Millennium Dynamics, Inc. shall be paid within
thirty (30) days after the date of Millennium Dynamics, Inc.'s invoice to
the Customer for such amounts.
4.2 Late Payment. -- If the Customer fails to make payment when due hereunder,
-------------
then the Customer shall pay interest to Millennium Dynamics, Inc. at the
rate of one and one half percent (1.5%) per month for any unpaid balance
(including previously accrued interest charges) outstanding at the end of
each calendar month after payment is first due. The Customer shall also
pay Millennium Dynamics, Inc. for any reasonable expenses (including
attorneys' fees) incurred
- 2 -
<PAGE>
by Millennium Dynamics, Inc. in connection with the collection of any
amounts due to Millennium Dynamics, Inc. from the Customer.
4.3 Taxes. -- All amounts specified in this Agreement to be paid to Millennium
------
Dynamics, Inc. by the Customer are net of taxes. Thus, if Millennium
Dynamics, Inc. or the Customer is required to pay any sales, use, export,
import, excise or other taxes (whether federal, state, local or otherwise)
imposed with respect to this Agreement or any of the transactions
contemplated hereby, such taxes shall be paid by the Customer or the
Customer shall reimburse Millennium Dynamics, Inc. for any such taxes paid
by Millennium Dynamics, Inc. Taxes based on Millennium Dynamics, Inc.'s
net income and Millennium Dynamics, Inc.'s franchise taxes shall be the
sole responsibility of Millennium Dynamics, Inc.
5. ADDITIONAL SITES OR CPU(S).
--------------------------
New sites or CPU(s) other than those listed on the Software Schedule will
require a license fee as specified in the Software Schedule. Any upgrade of a
CPU will also require an additional fee as determined by Millennium Dynamics,
Inc. The new site or CPU(s) fee shall be listed on an amended Software Schedule
and the license fee shall be paid in accordance with Section 4. above.
6. CONFIDENTIALITY AND OWNERSHIP.
-----------------------------
The Software and all derivatives and modifications thereof (including ones made
by or for the Customer) shall at all times be and remain the property of
Millennium Dynamics, Inc., and the Customer shall have no rights thereto except
as explicitly provided elsewhere in this Agreement. The Software and all
derivatives and modifications thereof shall be deemed to be Confidential
Information of Millennium Dynamics, Inc. and shall be subject to the terms and
provisions of this Agreement which govern Confidential Information.
6.1 General. -- The Customer will keep confidential, will use only for the
--------
Customer's benefit as expressly permitted elsewhere in this Agreement and
will not disclose to others without Millennium Dynamics, Inc.'s prior
written approval, all Confidential Information.
6.2 Limited Access. -- The Customer shall limit access to Confidential
---------------
Information to those employees who require such access in order to permit
the Customer to use the Confidential Information as expressly permitted
elsewhere in this Agreement in furtherance of the Customer's business.
6.3 Best Efforts. -- The Customer shall take all reasonable precautions to
-------------
maintain the confidentiality of all Confidential Information. Without
limiting the generality
- 3 -
<PAGE>
of the foregoing, the Customer shall employ precautions for the protection
of Confidential Information which are no less stringent than those employed
by the Customer to protect its own confidential and proprietary information
and/or trade secrets.
6.4 Return or Destruction. -- If at any time the Customer has in its possession
----------------------
or under its control one or more copies (whether partial or complete) of
any Confidential Information which the Customer does not at such time,
pursuant to the terms of this Agreement, have the right to use at the
designated site(s) and/or on the designated CPU(s), then the Customer shall
(without the requirement of any notice or demand from Millennium Dynamics,
Inc.) either deliver to Millennium Dynamics, Inc. or destroy all such
copies, whether partial or whole and regardless of form. If the Customer
elects to destroy such copies, it agrees to notify Millennium Dynamics,
Inc. promptly that such copies have been destroyed.
7. EXCLUSION OF WARRANTIES.
-----------------------
EXCEPT AS EXPLICITLY PROVIDED ELSEWHERE IN THIS AGREEMENT, ALL INFORMATION,
PRODUCTS AND/OR SERVICES PROVIDED TO THE CUSTOMER BY MILLENNIUM DYNAMICS, INC.
ARE PROVIDED "AS IS" AND WITHOUT ANY EXPRESS OR IMPLIED WARRANTIES WHATSOEVER,
INCLUDING, BUT NOT LIMITED TO ANY IMPLIED WARRANTY OF MERCHANTABILITY OR FITNESS
FOR A PARTICULAR PURPOSE.
8. LIMITED WARRANTIES.
-------------------
8.1 General Provisions. -- In any case for which two or more limitations of
-------------------
Millennium Dynamics, Inc.'s liability are specified in this Agreement,
Millennium Dynamics, Inc.'s liability shall be limited to the smallest of
such limitations. In no event shall Millennium Dynamics, Inc. be liable
(under any contract, tort, or other theory) for any special, indirect,
incidental or consequential damages arising out of or in connection with
this Agreement, including, without limitation, loss of anticipated profits
or loss resulting from business disruption, even if Millennium Dynamics,
Inc. has been advised of the possibility of such damages. In no event
shall the liability of Millennium Dynamics, Inc. for damages arising out of
or in connection with this Agreement (under any contract, tort, or other
theory) exceed the amount of all payments actually received by Millennium
Dynamics, Inc. from the Customer in connection with the programs
responsible for such damage.
8.2 Media. -- Millennium Dynamics, Inc. hereby warrants to the Customer that
------
all of the magnetic media delivered to the Customer by Millennium Dynamics,
Inc. on which any of the Software is recorded (including any disks or
tapes, but
- 4 -
<PAGE>
excluding the information recorded thereon) are free from
defects in materials and faulty workmanship at the time of shipment by
Millennium Dynamics, Inc. If any defect exists at the time of shipment
which is detected within ninety (90) days of the time of shipment, then the
defective item will be replaced by Millennium Dynamics, Inc. at no charge
to the Customer. THIS WARRANTY IS IN LIEU OF ALL OTHER WARRANTIES ON THE
MAGNETIC MEDIA, WHETHER EXPRESS OR IMPLIED, INCLUDING, WITHOUT LIMITATION,
ANY IMPLIED WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR
PURPOSE, ALL OF WHICH ARE EXPRESSLY DISCLAIMED. IN NO EVENT SHALL
MILLENNIUM DYNAMICS, INC. BE LIABLE FOR ANY SPECIAL, INDIRECT, INCIDENTAL
OR CONSEQUENTIAL DAMAGES ARISING FROM ANY DEFECTS IN THE MAGNETIC MEDIA.
8.3 Software. -- For each program listed on the Software Schedule, subject to
---------
the limitations of liability contained in this Agreement, Millennium
Dynamics, Inc. warrants that such program (as delivered to the Customer and
when used by the Customer without modification for its intended purpose and
in accordance with this Agreement) (i) does not and will not infringe,
violate or invade any United States copyright, trade secret, patent, or
other proprietary right of any third party, and (ii) so long as such
program is supported by Millennium Dynamics, Inc. and unmodified by the
Customer and used in accordance with this Agreement, it will operate
substantially as specified within the product description manual. EXCEPT
FOR THE FOREGOING WARRANTIES OF NON-INFRINGEMENT AND OPERATION IN
SUBSTANTIAL COMPLIANCE WITH SPECIFICATIONS, THE SOFTWARE IS PROVIDED "AS
IS", WITHOUT ANY EXPRESS OR IMPLIED WARRANTIES WHATSOEVER, INCLUDING BUT
NOT LIMITED TO, ANY IMPLIED WARRANTY OF MERCHANTABILITY OR FITNESS FOR A
PARTICULAR PURPOSE.
8.4 Limitation of Liability. -- IN NO EVENT SHALL MILLENNIUM DYNAMICS, INC. BE
------------------------
LIABLE (UNDER ANY CONTRACT, TORT, OR OTHER THEORY) FOR ANY SPECIAL,
INDIRECT, INCIDENTAL OR CONSEQUENTIAL DAMAGES ARISING UNDER THIS AGREEMENT
OR IN CONNECTION WITH THE SOFTWARE, INCLUDING, WITHOUT LIMITATION, LOSS OF
ANTICIPATED PROFITS OR LOSS RESULTING FROM BUSINESS DISRUPTION, EVEN IF
MILLENNIUM DYNAMICS, INC. HAS BEEN ADVISED OF THE POSSIBILITY OF SUCH
DAMAGES. IN NO EVENT SHALL THE LIABILITY OF MILLENNIUM DYNAMICS, INC. FOR
DAMAGES ARISING OUT OF OR IN CONNECTION WITH THE USE OR PERFORMANCE OF THE
SOFTWARE (UNDER ANY CONTRACT, TORT OR OTHER THEORY) EXCEED THE AMOUNT OF
FEES ACTUALLY RECEIVED BY MILLENNIUM DYNAMICS, INC. FROM THE CUSTOMER IN
CONNECTION WITH THE PROGRAM(S) RESPONSIBLE FOR SUCH DAMAGES.
8.5 Correction of Errors. -- The Customer understands and accepts the risk that
---------------------
errors may exist or occur in the Software, and agrees that no such error
will be deemed to violate the warranty contained in subpart (ii) of Section
8.3 of this
- 5 -
<PAGE>
Agreement, provided Millennium Dynamics, Inc. diligently investigates and
attempts to correct such error after the Customer reports it to Millennium
Dynamics, Inc. Without limiting the generality of the foregoing, the
Customer accepts responsibility for testing the accuracy of any and all
conversion generated by the Software and agrees that in the event of any
error, Millennium Dynamics, Inc. shall have no liability for any lost
profits or other damages suffered by the Customer in connection with the
Customer's reliance upon the results of such conversion.
8.6 Indemnification. -- Subject to the limitations of liability contained in
----------------
this Agreement, and this Section 8, Millennium Dynamics, Inc. agrees to
indemnify and hold harmless the Customer from all costs, expenses
(including reasonable attorneys' fees), losses, liabilities, damages, and
settlements arising out of or in connection with any claim or suit based on
allegations which, if true, would constitute a breach of the warranty of
non-infringement contained in subpart (i) of Section 8.3 of this Agreement.
HOWEVER, IN NO EVENT SHALL THE LIABILITY OF MILLENNIUM DYNAMICS, INC. UNDER
THIS SECTION 8.6 EXCEED THE AMOUNT OF FEES ACTUALLY RECEIVED BY MILLENNIUM
DYNAMICS, INC. FROM THE CUSTOMER IN CONNECTION WITH THE PROGRAM(S) WHICH
PURPORTEDLY VIOLATE SUCH WARRANTY.
8.6.1 Notice. -- The Customer shall as soon as practicable, notify
-------
Millennium Dynamics, Inc. in writing of any claim or suit which might give
rise to a claim for indemnification by Millennium Dynamics, Inc. hereunder.
8.6.2 Defense. -- In the event of such a claim or suit, Millennium
--------
Dynamics, Inc. will employ counsel for the defense and settlement thereof,
shall file proper pleadings in said suit within the time required by law,
and shall keep the Customer informed of all developments. If the suit is
brought to trial, Millennium Dynamics, Inc. shall conduct the defense
thereof. The Customer, at its own election and expense, shall always have
the right to employ its own counsel and to monitor Millennium Dynamics,
Inc.'s activities. In such event, Millennium Dynamics, Inc. and the
Customer shall cooperate fully.
8.7 Right to Cure or Terminate. -- If any claim or suit based on allegations,
---------------------------
which, if true, would constitute a breach of the warranty of non-
infringement contained in subpart (i) of Section 8.3 of this Agreement with
respect to one of the program(s) listed on the Software Schedule, is
brought or threatened against either Millennium Dynamics, Inc. or the
Customer, then Millennium Dynamics, Inc. shall have the right, at its
option and expense, to do any one or more of the following:
8.7.1 Obtain for the Customer the right to continue using such program
or a modified version thereof;
- 6 -
<PAGE>
8.7.2 Replace all or part of such program with a non-infringing
program, or
8.7.3 Terminate the license granted to the Customer with respect to
such program and refund to the Customer an amount equal to the unamortized
portion of the license fees paid to Millennium Dynamics, Inc. by the
Customer in connection with such program. For these purposes, license fees
shall be amortized on a straight line method over five years; thus, the
unamortized portion of an license fee would be equal to the greater of (a)
zero and (b) the initial license fee divided by 5, then divide that
quotient by 12, and multiply that quotient by the difference between 60 and
the number of months since the license fee was received by Millennium
Dynamics, Inc. (for example, if the license is terminated after twelve (12)
months, 6,000 (divided by) 5 = 1,200; 1,200 (divided by) 12 = 100; 100 x
(60 - 12) = $4,800).
9. MAINTENANCE.
-----------
9.1 Error Correction. -- So long as Millennium Dynamics, Inc. continues to
-----------------
support the programs listed on the Software Schedule, Millennium Dynamics,
Inc. agrees to diligently investigate and attempt to correct any error in
such programs reported to Millennium Dynamics, Inc. by the Customer and
determined by Millennium Dynamics, Inc. to be an error in such programs or
in the operating procedures recommended by Millennium Dynamics, Inc. Such
services shall be provided as a part of "Maintenance" described below.
However, if Millennium Dynamics, Inc. determines that any error reported by
the Customer is not an error in such programs or operating procedures, the
Customer promptly shall pay Millennium Dynamics, Inc. for its services in
investigating and/or correcting such error at Millennium Dynamics, Inc.'s
then current consulting fees and shall reimburse Millennium Dynamics, Inc.
for reasonable travel and living costs incurred in connection with such
services.
9.2 Updates and Related Products. -- For each program listed on the Software
-----------------------------
Schedule, Millennium Dynamics, Inc. may from time to time, at Millennium
Dynamics, Inc.'s option, develop and distribute a new version or revision
of such program (an "Update") or a new product which is related to such
program and may in fact be a derivative of such program (a "Related
Product"). In general, a program which simply corrects errors or enhances
the existing features and functions of a program is an Update, while one
which adds new functions and features is a Related Product. Whenever there
is any question whether a particular program is an Update or a Related
Product, Millennium Dynamics, Inc. shall make a determination which shall
be binding upon both Millennium Dynamics, Inc. and the Customer.
- 7 -
<PAGE>
Millennium Dynamics, Inc. shall provide to the Customer, for the
maintenance fees identified on the Software Schedule, all Updates to all
programs listed on the Software Schedule (herein referred to as
"Maintenance"). All Updates provided to the Customer hereunder shall be
deemed to be Software and Confidential Information and shall be subject to
the provisions of this Agreement. The Customer will be contractually
obligated to maintain the Software based on the most recent version that
Millennium Dynamics, Inc. releases. Failure by the Customer to do so will
release Millennium Dynamics, Inc. of any warranty or performance liability
hereunder. Millennium Dynamics, Inc. shall offer to the Customer, for
additional fees to be determined by Millennium Dynamics, Inc. at the time
of the offering, the option to add any Related Product to the Software
Schedule.
The Customer shall be responsible for the installation of all Updates and
any Related Product, unless otherwise agreed upon by the parties upon
mutually acceptable terms. If the Customer requests that Millennium
Dynamics, Inc. perform installation, then the Customer shall pay Millennium
Dynamics, Inc. for such services at Millennium Dynamics, Inc.'s then
current consulting rates and shall reimburse Millennium Dynamics, Inc. for
reasonable travel and living expenses.
9.3 Maintenance Fees. -- The Customer shall receive the first year of
----------------
Maintenance at no charge. The first year of Maintenance shall commence on
the effective date of this Agreement and shall terminate automatically on
the day before the first anniversary of the effective date of this
Agreement. The second year and each year thereafter of Maintenance shall
be calculated in the same manner. The Customer shall have the option to
purchase subsequent years of Maintenance at the rate identified on the
Software Schedule. Customer shall notify Millennium Dynamics, Inc. thirty
(30) days before the end of the first anniversary of the effective date of
this Agreement whether it intends to acquire Maintenance for the subsequent
period. Customer may elect to terminate Maintenance for any subsequent
period by providing Millennium Dynamics, Inc. notice thirty (30) days
before the anniversary of an effective date of this Agreement. A
termination of maintenance does not preclude the Customer from using the
Software. However, if the Customer elects at any time not to receive
Maintenance and then subsequently makes such an election, Customer shall be
required to pay for the periods during which Maintenance is not provided as
a condition to receiving Maintenance for the current period.
9.4 Limited Warranties. -- Millennium Dynamics, Inc. shall perform all
------------------
maintenance services hereunder in a proper and workmanlike manner in
accordance with industry standards. The preceding warranty granted by
Millennium Dynamics, Inc. herein for Maintenance is a limited warranty
only. The parties agree that the Maintenance and related limited liability
warranty consist of a contract for services and are not covered by Article
II of the Uniform Commercial Code. THIS WARRANTY IS IN LIEU OF ALL OTHER
WARRANTIES, WHETHER EXPRESS OR IMPLIED, INCLUDING, WITHOUT LIMITATION, ANY
IMPLIED
- 8 -
<PAGE>
WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE, ALL OF
WHICH ARE EXPRESSLY DISCLAIMED. IN NO EVENT SHALL MILLENNIUM DYNAMICS, INC.
BE LIABLE (UNDER ANY CONTRACT, TORT, OR OTHER THEORY) FOR ANY SPECIAL,
INDIRECT, INCIDENTAL, OR CONSEQUENTIAL DAMAGES ARISING FROM THE PERFORMANCE
OF THIS AGREEMENT OR IN CONNECTION WITH MAINTENANCE, INCLUDING, WITHOUT
LIMITATION, LOSS OF ANTICIPATED PROFITS OR LOSS RESULTING FROM BUSINESS
DISRUPTION, EVEN IF MILLENNIUM DYNAMICS, INC. HAS BEEN ADVISED TO THE
POSSIBILITY OF SUCH DAMAGES. IN NO EVENT SHALL THE LIABILITY OF MILLENNIUM
DYNAMICS, INC. FOR DAMAGES ARISING OUT OF OR IN CONNECTION WITH MAINTENANCE
(UNDER ANY CONTRACT, TORT OR OTHER THEORY) EXCEED THE AMOUNT OF FEES
ACTUALLY RECEIVED BY MILLENNIUM DYNAMICS, INC. FROM THE CUSTOMER IN
CONNECTION WITH MAINTENANCE.
9.5 Unsupported Programs. -- If the Software Schedule indicates that a
---------------------
particular program is unsupported, Millennium Dynamics, Inc. shall have no
obligation to correct errors in such program. If Millennium Dynamics, Inc.
no longer wishes to support a program which is listed on the Software
Schedule, then Millennium Dynamics, Inc. shall have the right to amend the
Software Schedule to indicate that such program is unsupported in
accordance with the following procedure:
9.5.1 Millennium Dynamics, Inc. shall provide written notice to the
Customer that the program will cease to be supported on a specified date
(the "Cutoff Date") which must be at least six (6) months in the future;
9.5.2 Until after the Cutoff Date, Millennium Dynamics, Inc. shall
continue to support such program and the Customer shall continue to pay any
fee(s) specified on the Software Schedule for such program; and
9.5.3 On and after the Cutoff Date, the Software Schedule shall be
amended to indicate that such program is unsupported. Millennium Dynamics,
Inc. shall have no further obligation to correct errors in the Program, the
warranty contained in subpart (ii) of Section 8.3 of this Agreement shall
no longer be effective with respect to such program, and the Customer shall
have the right to receive a copy of the source code for such program as
provided in Section 9.6 of this Agreement.
9.6 Source Code. -- For any program listed on the Software Schedule, if
------------
Millennium Dynamics, Inc. designates such program as unsupported, then the
Customer shall have the right to receive upon demand a copy of the source
code for such program subject to the following terms and conditions:
9.6.1 The source code for such program shall be deemed to be
Confidential Information of Millennium Dynamics, Inc. and shall be subject
to the
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<PAGE>
terms and provisions of the Agreement which govern Confidential
Information;
9.6.2 The Customer shall have a nonexclusive right to use the source
code version of such program for the limited purpose of maintaining the
object code version of such program so that it can be used by the Customer
at the designated sites and on the designated CPU(s) listed on the Software
Schedule.
9.6.3 The source code for such program shall be deemed to be Software
within the meaning of this Agreement.
9.7 Source Code Escrow.
------------------
Millennium Dynamics, Inc. will maintain a copy of the source code for the
Software in escrow for the benefit of the Customer and all other customers of
Millennium Dynamics, Inc. with Star Bank N.A., 425 Walnut Street, Cincinnati,
Ohio 45202. Millennium Dynamics, Inc. will pay all fees associated with such
source code escrow or a successor escrow agent.
10. INSTALLATION.
------------
Millennium Dynamics, Inc.'s standard initial installation shall be no more than
delivery of a copy of the licensed programs to the designated site. If the
Customer requests that Millennium Dynamics, Inc. perform more extensive
installation procedures, then the Customer shall pay Millennium Dynamics, Inc.
for such services at Millennium Dynamics, Inc.'s then current consulting rates
and shall reimburse Millennium Dynamics, Inc. for reasonable travel and living
expenses.
11. MANUALS.
-------
11.1 No Charge. -- Millennium Dynamics, Inc. will provide to the Customer, at no
----------
additional cost to the Customer, the number of manuals for each program as
indicated on the Software Schedule.
11.2 Additional Charge. -- The Customer shall pay all shipping charges for
------------------
copies of manuals and other documentation which is sent to the Customer by
Millennium Dynamics, Inc.
12. SPECIAL LICENSES.
----------------
If Millennium Dynamics, Inc. provides any program to the Customer which is not
listed on the Software Schedule, then (a) such program shall be deemed
Confidential
- 10 -
<PAGE>
Information and (b) the Customer shall have no right to use, copy or disclose
such program unless the Customer is granted such rights pursuant to some other
license or sublicense agreement between the Customer and Millennium Dynamics,
Inc. or a third party specified by Millennium Dynamics, Inc. (a "Special
License"). If Millennium Dynamics, Inc. provides any such software to the
Customer pursuant to a Special License, then the Customer shall be bound by the
terms and conditions of such Special License.
13. EDUCATION.
---------
13.1 Training Classes. -- The Customer will be entitled to have two (2)
----------------
individuals of its selection attend a two day training class held in
Cincinnati, Ohio at the offices of Millennium Dynamics, Inc. at times and
dates agreed upon by the parties. There will be no additional cost to the
Customer for attendance of its designees at this class. Travel and other
expenses for the attendance of these individuals are the responsibility of
the Customer.
13.2 Telephone Support -- As a part of Maintenance, Millennium Dynamics, Inc.
-----------------
will provide reasonable user support for the Customer's employees by
telephone in connection with the Customer's use of information, products
and services provided to the Customer by Millennium Dynamics, Inc. pursuant
to this Agreement. Such support shall be limited to answering questions
about the use and/or operation of such information, products and/or
services. Millennium Dynamics, Inc. shall have no obligation pursuant to
this Section to perform any design or consulting services for the Customer.
14. TERMINATION.
-----------
14.1 Procedure. -- This Agreement may be terminated as follows:
----------
14.1.1 License Fee. -- Millennium Dynamics, Inc. shall have the right to
------------
immediately terminate this Agreement if the Customer fails to make any
payment due under this Agreement within fifteen (15) days after its due
date.
14.1.2 Breach/Limits on Use. -- In the event of a breach of Section 3,
---------------------
the non-defaulting party may terminate this Agreement immediately with
written notice to the defaulting party specifying with particularity the
breach.
14.1.3 Breach/Confidentiality and Ownership. -- In the event of a breach
-------------------------------------
of Section 6, the non-defaulting party may terminate this Agreement
immediately with written notice to the defaulting party specifying with
particularity the breach.
- 11 -
<PAGE>
14.1.4 Breach/Other Provisions. -- Except as otherwise provided, in the
------------------------
event of breach of any of the terms or conditions of this Agreement, the
non-defaulting party may terminate this Agreement upon sixty (60) days
prior written notice to the defaulting party specifying with particularity
the breach. If the defaulting party shall, within such sixty (60) days,
cure the breach complained of and advise the non-defaulting party of such
cure, this Agreement shall continue in full force and effect as if the
notice of termination had not been issued; otherwise, this Agreement shall
terminate at the end of such sixty (60) day period.
14.1.5 Insolvency. -- In the event that the Customer becomes insolvent
-----------
or voluntarily or involuntarily bankrupt or is unable to meet its
obligations when they become due or if a receiver or other liquidating
officer is appointed for substantially all of the assets or business of the
Customer or if the Customer makes an assignment for the benefit of
creditors, Millennium Dynamics, Inc. may immediately terminate this
Agreement by notice to the Customer.
14.1.6 Mutual Agreement. -- This Agreement may be terminated by the
----------------
mutual agreement of the parties. The understanding of the parties must be
in writing and signed by both parties.
14.2 Effects of Termination. -- The following provisions shall apply in the
-----------------------
event this Agreement expires or is terminated for any reason whatsoever:
14.2.1 Return of Confidential Information. -- The Customer shall return
-----------------------------------
promptly or destroy all copies (in whatever form and whether full or
partial) of all Confidential Information which is in the Customer's
possession or under its control. Within thirty (30) days after termination,
the Customer shall provide written confirmation to Millennium Dynamics,
Inc. that all copies have been returned or have been destroyed. The
Customer shall also implement appropriate measures to safeguard the
confidentiality of any Confidential Information which, by virtue of its
intangibility, cannot be physically returned or destroyed.
14.2.2 Payments. -- The Customer shall remain obligated to pay all
---------
amounts already owed to Millennium Dynamics, Inc. hereunder. All amounts
due to Millennium Dynamics, Inc. hereunder shall become immediately due and
payable.
14.2.3 Provisions Which Survive. -- Millennium Dynamics, Inc.'s rights
-------------------------
and the Customer's obligations pursuant to Sections 6
- 12 -
<PAGE>
(Confidentiality) and 17 (Export) shall survive the termination and/or
expiration of this Agreement.
15. INDEMNIFICATION BY CUSTOMER.
---------------------------
The Customer agrees to indemnify, defend, and hold harmless Millennium Dynamics,
Inc., its subsidiaries and affiliates, and the officers, directors, employees,
and agents of any of them from all costs, expenses (including reasonable
attorneys' fees), losses, liabilities, damages and settlements arising out of or
in connection with any claim or suit based on allegations which, if true, would
constitute a breach of this Agreement by the Customer.
15.1 Notice. -- Millennium Dynamics, Inc. shall as soon as practicable, notify
-------
the Customer in writing of any claim or suit which might give rise to a
claim for indemnification by the Customer hereunder.
15.2 Defense. -- In the event of such claim or suit, the Customer will employ
-------
counsel for the defense thereof, shall file proper pleadings in said suit
within the time required by law, and shall keep Millennium Dynamics, Inc.
informed of all developments. If the suit is brought to trial, the
Customer shall conduct the defense thereof. Millennium Dynamics, Inc., at
its own election and expense, shall always have the right to employ its own
counsel and may monitor the Customer's activities. In such event, the
Customer and Millennium Dynamics, Inc. shall cooperate fully.
16. ASSIGNMENT.
----------
This Agreement and the Customer's rights hereunder may not and cannot be
assigned, sublicensed, sold, mortgaged, pledged or otherwise transferred by the
Customer without Millennium Dynamics, Inc.'s prior written consent.
17. EXPORT.
------
Regardless of any disclosure made by the Customer to Millennium Dynamics, Inc.
of an ultimate destination of any product, service, information or Confidential
Information provided in connection with this Agreement ("the Products"), the
Customer will not export or re-export, either directly or indirectly, any the
Products or any system incorporating the Products, without first obtaining an
appropriate license or authorization therefor from the United States government,
if required by United States law.
The Customer will not, without first obtaining an appropriate license or
authorization therefor from the United States government, if required by United
States law, directly or indirectly, export, re-export, transmit or disclose to
anyone or use, act upon, or
- 13 -
<PAGE>
provide services which involve the use of, any information of any kind
(including, without limitation, any Confidential Information) (a) which can be
used, or adopted for use, in the design, production, manufacturing, utilization
or reconstruction of articles or materials and (b) which was disclosed to the
Customer by Millennium Dynamics, Inc. or relates to any Products, this
Agreement, or any transaction hereunder. The Customer shall notify Millennium
Dynamics, Inc. if the Customer knows, believes or has any reason to suspect that
any of the Products are being or have been exported or re-exported without
proper licenses or authorizations.
18. ADVERTISING.
-----------
The Customer hereby authorizes Millennium Dynamics, Inc. to use the Customer's
name as a reference during verbal conversations concerning the Software. Any
other advertising involving the Customer's name will require the prior written
consent of the Customer. The Customer shall not use the name and/or logo of
Millennium Dynamics, Inc., without obtaining the prior written consent of
Millennium Dynamics, Inc.
19. INJUNCTIONS.
-----------
The Customer agrees that a breach of this Agreement, including without
limitation, any unauthorized use or disclosure of Confidential Information,
could cause Millennium Dynamics, Inc. irreparable damage, Millennium Dynamics,
Inc. is entitled to obtain injunctive relief in the event of any unauthorized
use or disclosure of Confidential Information.
20. ENTIRE AGREEMENT.
----------------
This Agreement (including the associated schedules, appendices, product
description manuals and addenda) constitute the entire agreement between
Millennium Dynamics, Inc. and the Customer relating to the subject matter hereof
and this Agreement supersedes all prior negotiations, agreements and
understandings between them relating to the subject matter hereof and no
modifications and/or additions to this Agreement shall be binding on either
party unless in writing and signed by the party against whom enforcement is
sought.
21. WAIVER.
------
No waiver of any provision of this Agreement shall be effective unless made in
writing. No waiver of any breach of any provision of this Agreement shall
constitute a waiver of any subsequent breach of the same or any other provision
of this Agreement. Failure to enforce any contract term shall not be deemed a
waiver of future enforcement of that or any other term.
- 14 -
<PAGE>
22. NOTICE.
------
All notices permitted or required under this Agreement shall be directed to the
address set forth on the first page hereof or to such address as either party
may from time to time specify by written notice to the other. Any notice shall
be transmitted in one or more of the following ways:
22.1 In writing, delivered in person, effective upon delivery;
22.2 Mailed by first class, registered or certified mail, return receipt
requested, postage prepaid, effective 5 days after mailing;
22.3 Sent by telex or telecopy, or other digital telecommunications medium
providing a verifiable transcript, and original sent by first class mail,
postage prepaid, effective upon receipt.
22.4 Sent by overnight mail, billed to the sender, effective the next day.
23. FORCE MAJEURE.
-------------
Neither party shall be held liable to the other for failure to perform any of
its obligations hereunder where such performance is prevented or interfered with
by riots, wars or hostilities between any nations, Acts of God, fires, storms,
floods, earthquakes, strikes, labor disputes, shortages or curtailments of raw
materials, labor, power or other utility services, any government restrictions,
and other similar or dissimilar contingencies beyond the reasonable control of
the non-participating party.
24. GOVERNING LAW AND VENUE.
-----------------------
This Agreement shall be deemed to have been executed in Cincinnati, Ohio U.S.A.,
and shall be governed by and construed in accordance with the laws of the United
States and the laws of the State of Ohio, U.S.A. The Customer hereby consents
generally to the jurisdiction of the courts of the State of Ohio and of any
United States federal court.
25. SEVERABILITY.
------------
The provisions hereof are severable. If any provision of this Agreement is
invalid or unenforceable in any circumstances, then (i) in such circumstances
such provision shall be interpreted as though it provided for the maximum
permissible obligation or right, (ii) the application of such provision in any
other circumstances shall not be affected thereby, and (iii) the application of
the remaining provisions hereof shall not be affected thereby.
- 15 -
<PAGE>
26. CUMULATIVE REMEDIES.
-------------------
Except as otherwise provided herein, all rights and remedies conferred hereunder
shall be cumulative and may be exercised singularly or concurrently.
IN WITNESS WHEREOF, each of the parties hereto has caused this Agreement to be
executed and delivered by its duly authorized officers as of the day and year
first above written.
PROVIDENT BANK MILLENNIUM DYNAMICS, INC.
/s/ (Illegible) /s/ Michael D. Rice
By: ______________________________________ By:____________________________
Name: _____________________________________ Name: Michael D. Rice
------------------------
Title: ____________________________________ Title: Assistant Secretary
------------------------
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<PAGE>
SOFTWARE SCHEDULE
-----------------
1. Software Programs.
-----------------
a. JCL/Proc Analyzer
b. COBOL Copy Library Converter
c. COBOL Program Converter
d. Assembler Program Converter
e. File and Transaction Converter
f. Universal Text Scanner
g. Bridge Utility
2. Site Address.
-------------
Provident Bank
-----------------
925 Dalton Street
--------------------
Cincinnati, Ohio 45203
-----------------------
3. Designated CPU(s) at site.
-------------------------
IBM 3090, Model 40J
-----------------------
Serial #73244
-------------
4. License Fees.
------------
Initial License Fee $150,000
Total Cost $150,000
========
This License Fee includes the designated CPU(s) at the designated site.
Additional sites and CPU(s) will require an addendum to this Software
Schedule.
- 17 -
<PAGE>
5. Maintenance Fees.
----------------
The annual maintenance fee for the software products identified on this
Software Schedule is 10% of the then current License Fee for such software
products. The annual maintenance fee will be billed in advance for the
full year and is due thirty (30) days after receipt of an invoice from
Millennium Dynamics, Inc.
6. Education.
---------
The License Fee includes two (2) attendees from the designated site for a
two (2) day training session in Cincinnati, Ohio.
7. Manuals.
-------
The License Fee includes four (4) copies of installation/user manuals. The
Customer is not permitted to reproduce copies of the installation/user
manual, without the prior written permission of Millennium Dynamics, Inc.
- 18 -
<PAGE>
Exhibit 10.51
Agreement Number: ML-092
-----------------------------------
Effective Date: November 11, 1997
------------------------------------
LICENSE AGREEMENT
This License Agreement (the "Agreement") made this 11th of November, 1997 by and
among MILLENNIUM DYNAMICS, INC., 580 Walnut Street, Cincinnati, Ohio 45202
("Millennium Dynamics, Inc.") and GREAT AMERICAN INSURANCE COMPANY, 580 Walnut
Street, Cincinnati, Ohio 45202 (hereinafter collectively referred to as the
"Customer").
W I T N E S S E T H:
--------------------
WHEREAS, Millennium Dynamics, Inc. has developed and is the owner of certain
computer software programs it desires to license to the Customer; and
WHEREAS, the Customer desires to license such programs from Millennium Dynamics,
Inc.
NOW, THEREFORE, in consideration of the mutual terms and conditions set forth
herein, the parties agree hereto as follows:
1. DEFINITIONS.
-----------
For purposes of this Agreement, the following terms shall have the meanings set
forth below:
1.1 Confidential Information -- "Confidential Information" means the Software
------------------------
(as defined herein) and all information disclosed to the Customer about
Millennium Dynamics, Inc.'s marketing strategy, business practices,
customers, finances, products, software, computer programs, services,
methods and processes. "Confidential Information" also includes any and all
information which this Agreement provides shall be deemed to be
Confidential Information.
1.2 Agreement. -- This "Agreement" shall mean and include this document, all
----------
Schedules, Appendices, Product Description Manuals, and Addenda attached to
this document or added to it by amendment or incorporated herein by
references.
-1-
<PAGE>
2. GRANT.
-----
Subject to the terms and conditions of this Agreement Millennium Dynamics, Inc.
hereby grants to the Customer a nonexclusive right to use the object code
version of each computer program listed on the Software Schedule attached hereto
and incorporated herein by reference and all manuals, instructions,
documentation coding sheets and other documents or information relating thereto
(collectively, the "Software") at the computer site(s) and on the CPU(s)
indicated for such programs on the Software Schedule. This license is for the
designated CPU(s) at the designated site. The Customer has no right to copy any
of the Software, except for purposes of system backup. On any backup copy of
the Software, the Customer shall reproduce all original copyright notices and
claims of confidentiality, proprietary rights or trade secret. This license
grants to the Customer the right to use the Software on another CPU at another
site for disaster recovery purposes. This license to use the Software for
disaster recovery purposes shall continue for so long as the disaster at the
designated CPU and/or site exists. The Customer acknowledges that the Software
may not operate on a new CPU without modification to the mechanism that
identifies the specific CPU on which the Software is installed. This license
also grants to the Customer the right to concurrently use the Software on
another CPU at another site for the limited purpose of disaster recovery
testing.
At no additional cost to the Customer, the Customer may transfer the Software
from the designated CPU at the designated site to a replacement CPU and/or a
replacement site, provided (i) that the replacement CPU is owned or leased by
the Customer and/or the replacement site is owned or leased by the Customer,
(ii) the Customer deinstalls the Software from the original designated CPU,
(iii) the Software is operated on only the replacement CPU, (iv) the Customer
provides Millennium Dynamics, Inc. at least thirty (30) days advanced written
notice of such transfer and provides Millennium Dynamics, Inc. the required
information about the replacement CPU and/or replacement site, and (v) the
operating system of the replacement CPU is MVS. The Customer and Millennium
Dynamics, Inc. shall confirm the transfer of the Software from the designated
CPU at the designated site to a replacement CPU and/or a replacement site by
execution of an Amended Software Schedule to this Agreement. The provisions of
this paragraph are based on the assumption that the transfer of the Software
from the designated CPU at the designated site to a replacement CPU and/or
replacement site is not part of an outsourcing of services by the Customer to a
third party or service bureau. If an outsourcing of services to a third party
or service bureau does occur, the Customer and Millennium Dynamics, Inc. will
need to agree upon amended terms to this Agreement.
3. LIMITS ON USE.
-------------
The Customer shall use the Software for the Customer's internal purposes only
for its own business purposes and shall not use the Software for the benefit of
or to provide services to any third party or unaffiliated organization. Without
limiting the generality of the foregoing restriction, the Customer shall not use
any of the Software to perform data processing services or service bureau
activities for a third party or an unaffiliated
-2-
<PAGE>
organization. The license granted to Customer hereunder does permit the Customer
to use the Software for the benefit of any of the Customer's business divisions
and the Customer's affiliates, so long as such use is on the designated CPU(s)
at the designated site identified on the Software Schedule. For purposes of this
Agreement the term "affiliate" shall mean any entity that is controlled by,
under common control with, or controls the Customer. The parties will execute
Software Schedules to indicate the designated CPU(s) and the designated sites,
including any logical partitions of the designated CPU(s).
4. TAXES.
-----
If Millennium Dynamics, Inc. or the Customer is required to pay any sales, use,
export, import, excise or other taxes (whether federal, state, local or
otherwise) imposed with respect to this Agreement or any of the transactions
contemplated hereby, such taxes shall be paid by the Customer or the Customer
shall reimburse Millennium Dynamics, Inc. for any such taxes paid by Millennium
Dynamics, Inc. Taxes based on Millennium Dynamics, Inc.'s net income and
Millennium Dynamics, Inc.'s franchise taxes shall be the sole responsibility of
Millennium Dynamics, Inc.
5. ADDITIONAL SITES OR CPU(S).
--------------------------
New sites or CPU(s) other than those listed on the Software Schedule will
require an amendment to the Software Schedule.
6. CONFIDENTIALITY AND OWNERSHIP.
-----------------------------
The Software and all derivatives and modifications thereof (including ones made
by or for the Customer) shall at all times be and remain the property of
Millennium Dynamics, Inc., and the Customer shall have no rights thereto except
as explicitly provided elsewhere in this Agreement. The Software and all
derivatives and modifications thereof shall be deemed to be Confidential
Information of Millennium Dynamics, Inc. and shall be subject to the terms and
provisions of this Agreement which govern Confidential Information.
6.1 General. -- The Customer will keep confidential, will use only for the
--------
Customer's benefit as expressly permitted elsewhere in this Agreement and
will not disclose to others without Millennium Dynamics, Inc.'s prior
written approval, all Confidential Information.
6.2 Limited Access. -- The Customer shall limit access to Confidential
---------------
Information to those employees who require such access in order to permit
the Customer to use the Confidential Information as expressly permitted
elsewhere in this Agreement in furtherance of the Customer's business.
6.3 Best Efforts. -- The Customer shall take all reasonable precautions to
-------------
maintain the confidentiality of all Confidential Information. Without
limiting the generality of the foregoing, the Customer shall employ
precautions for the protection of Confidential
-3-
<PAGE>
Information which are no less stringent than those employed by the Customer
to protect its own confidential and proprietary information and/or trade
secrets.
6.4 Return or Destruction. -- If at any time the Customer has in its possession
----------------------
or under its control one or more copies (whether partial or complete) of
any Confidential Information which the Customer does not at such time,
pursuant to the terms of this Agreement, have the right to use at the
designated site(s) and/or on the designated CPU(s), then the Customer shall
(without the requirement of any notice or demand from Millennium Dynamics,
Inc.) either deliver to Millennium Dynamics, Inc. or destroy all such
copies, whether partial or whole and regardless of form. If the Customer
elects to destroy such copies, it agrees to notify Millennium Dynamics,
Inc. promptly that such copies have been destroyed.
6.5 Customer Confidential Information -- It is acknowledged and agreed that
---------------------------------
Millennium Dynamics, Inc. will have access to confidential and proprietary
information relating to the Customer's business and systems. Millennium
Dynamics, Inc. will keep confidential all such information and will take
all reasonable precautions to maintain the confidentiality of such
information. Without limiting the generality of the foregoing, Millennium
Dynamics, Inc. will employ precautions for the protection of such
information which are no less stringent than those employed by Millennium
Dynamics, Inc. to protect its own confidential and proprietary information
and trade secrets.
7. EXCLUSION OF WARRANTIES.
-----------------------
EXCEPT AS EXPLICITLY PROVIDED ELSEWHERE IN THIS AGREEMENT, ALL INFORMATION,
PRODUCTS AND/OR SERVICES PROVIDED TO THE CUSTOMER BY MILLENNIUM DYNAMICS, INC.
ARE PROVIDED "AS IS" AND WITHOUT ANY EXPRESS OR IMPLIED WARRANTIES WHATSOEVER,
INCLUDING, BUT NOT LIMITED TO ANY IMPLIED WARRANTY OF MERCHANTABILITY OR FITNESS
FOR A PARTICULAR PURPOSE.
8. LIMITED WARRANTIES.
-------------------
8.1 General Provisions. -- In any case for which two or more limitations of
-------------------
Millennium Dynamics, Inc.'s liability are specified in this Agreement,
Millennium Dynamics, Inc.'s liability shall be limited to the smallest of
such limitations. In no event shall Millennium Dynamics, Inc. be liable
(under any contract, tort, or other theory) for any special, indirect,
incidental or consequential damages arising out of or in connection with
this Agreement, including, without limitation, loss of anticipated profits
or loss resulting from business disruption, even if Millennium Dynamics,
Inc. has been advised of the possibility of such damages. In no event
shall the liability of Millennium Dynamics, Inc. for damages arising out of
or in connection with this
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<PAGE>
Agreement (under any contract, tort, or other theory) exceed the amount of
$225,000 in connection with the programs responsible for such damage.
8.2 Media. -- Millennium Dynamics, Inc. hereby warrants to the Customer that
------
all of the magnetic media delivered to the Customer by Millennium Dynamics,
Inc. on which any of the Software is recorded (including any disks or
tapes, but excluding the information recorded thereon) are free from
defects in materials and faulty workmanship at the time of shipment by
Millennium Dynamics, Inc. If any defect exists at the time of shipment
which is detected within ninety (90) days of the time of shipment, then the
defective item will be replaced by Millennium Dynamics, Inc. at no charge
to the Customer. THIS WARRANTY IS IN LIEU OF ALL OTHER WARRANTIES ON THE
MAGNETIC MEDIA, WHETHER EXPRESS OR IMPLIED, INCLUDING, WITHOUT LIMITATION,
ANY IMPLIED WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR
PURPOSE, ALL OF WHICH ARE EXPRESSLY DISCLAIMED. IN NO EVENT SHALL
MILLENNIUM DYNAMICS, INC. BE LIABLE FOR ANY SPECIAL, INDIRECT, INCIDENTAL
OR CONSEQUENTIAL DAMAGES ARISING FROM ANY DEFECTS IN THE MAGNETIC MEDIA.
8.3 Software. -- For each program listed on the Software Schedule, subject to
---------
the limitations of liability contained in this Agreement, Millennium
Dynamics, Inc. warrants that such program (as delivered to the Customer and
when used by the Customer without modification for its intended purpose and
in accordance with this Agreement) (i) does not and will not infringe,
violate or invade any United States copyright, trade secret, patent, or
other proprietary right of any third party, (ii) so long as such program is
supported by Millennium Dynamics, Inc. and unmodified by the Customer and
used in accordance with this Agreement, it will operate substantially as
specified within the product description manual, and (iii) the Software is
free from computer viruses on the day of delivery by Millennium Dynamics,
Inc. to the Customer. EXCEPT FOR THE FOREGOING WARRANTIES OF NON-
INFRINGEMENT AND OPERATION IN SUBSTANTIAL COMPLIANCE WITH SPECIFICATIONS,
THE SOFTWARE IS PROVIDED "AS IS", WITHOUT ANY EXPRESS OR IMPLIED WARRANTIES
WHATSOEVER, INCLUDING BUT NOT LIMITED TO, ANY IMPLIED WARRANTY OF
MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE.
"Computer Virus" means any inappropriate computer instructions that alter,
destroy, or inhibit the Software and/or the Customer's processing
environment. A Computer Virus includes, but is not limited to, a program
that self replicates without manual intervention and instruction programmed
to activate at a predetermined time or upon a specific event, and/or a
program purporting to do a meaningful function but designed for a different
function. In the event a Computer Virus is contained in the Software
delivered to the Customer, Millennium Dynamics, Inc.'s only obligation is
to send to the Customer another copy of the Software to correct any
Computer Virus problems.
-5-
<PAGE>
8.4 Limitation of Liability. -- IN NO EVENT SHALL MILLENNIUM DYNAMICS, INC. BE
------------------------
LIABLE (UNDER ANY CONTRACT, TORT, OR OTHER THEORY) FOR ANY SPECIAL,
INDIRECT, INCIDENTAL OR CONSEQUENTIAL DAMAGES ARISING UNDER THIS AGREEMENT
OR IN CONNECTION WITH THE SOFTWARE, INCLUDING, WITHOUT LIMITATION, LOSS OF
ANTICIPATED PROFITS OR LOSS RESULTING FROM BUSINESS DISRUPTION, EVEN IF
MILLENNIUM DYNAMICS, INC. HAS BEEN ADVISED OF THE POSSIBILITY OF SUCH
DAMAGES. IN NO EVENT SHALL THE LIABILITY OF MILLENNIUM DYNAMICS, INC. FOR
DAMAGES ARISING OUT OF OR IN CONNECTION WITH THE USE OR PERFORMANCE OF THE
SOFTWARE (UNDER ANY CONTRACT, TORT OR OTHER THEORY) EXCEED THE AMOUNT OF
$225,000.00.
8.5 Correction of Errors. -- The Customer understands and accepts the risk that
---------------------
errors may exist or occur in the Software, and agrees that no such error
will be deemed to violate the warranty contained in subpart (ii) of Section
8.3 of this Agreement, provided Millennium Dynamics, Inc. diligently
investigates and attempts to correct such error after the Customer reports
it to Millennium Dynamics, Inc. Without limiting the generality of the
foregoing, the Customer accepts responsibility for testing the accuracy of
any and all conversion generated by the Software and agrees that in the
event of any error, Millennium Dynamics, Inc. shall have no liability for
any lost profits or other damages suffered by the Customer in connection
with the Customer's reliance upon the results of such conversion.
8.6 Indemnification. -- Millennium Dynamics, Inc. agrees to indemnify and hold
----------------
harmless the Customer from all costs, expenses (including reasonable
attorneys' fees), losses, liabilities, damages, and settlements arising out
of or in connection with any claim or suit based on allegations which, if
true, would constitute a breach of the warranty of non-infringement
contained in subpart (i) of Section 8.3 of this Agreement. The limitations
of liability set forth in this Agreement shall not apply to the obligations
of Millennium Dynamics, Inc. under this Section 8.6.
8.6.1 Notice. -- The Customer shall as soon as practicable, notify
-------
Millennium Dynamics, Inc. in writing of any claim or suit which
might give rise to a claim for indemnification by Millennium
Dynamics, Inc. hereunder.
8.6.2 Defense. -- In the event of such a claim or suit, Millennium
--------
Dynamics, Inc. will employ counsel for the defense and settlement
thereof, shall file proper pleadings in said suit within the time
required by law, and shall keep the Customer informed of all
developments. If the suit is brought to trial, Millennium Dynamics,
Inc. shall conduct the defense thereof. The Customer, at its own
election and expense, shall always have the right to employ its own
counsel and to monitor Millennium Dynamics, Inc.'s activities. In
such event, Millennium Dynamics, Inc. and the Customer shall
cooperate fully.
8.7 Right to Cure or Terminate. -- If any claim or suit based on allegations,
---------------------------
which, if true, would constitute a breach of the warranty of non-
infringement contained in
-6-
<PAGE>
subpart (i) of Section 8.3 of this Agreement with respect to one of the
program(s) listed on the Software Schedule, is brought or threatened
against either Millennium Dynamics, Inc. or the Customer, then Millennium
Dynamics, Inc. shall have the right, at its option and expense, to do any
one or more of the following:
8.7.1 Obtain for the Customer the right to continue using such program or
a modified version thereof;
8.7.2 Replace all or part of such program with a non-infringing program,
or
8.7.3 Terminate the license granted to the Customer with respect to such
program and refund to the Customer an amount equal to the
unamortized portion of the license fees paid to Millennium Dynamics,
Inc. by the Customer in connection with such program. For these
purposes, license fees shall be amortized on a straight line method
over five years; thus, the unamortized portion of an license fee
would be equal to the greater of (a) zero and (b) the initial
license fee divided by 5, then divide that quotient by 12, and
multiply that quotient by the difference between 60 and the number
of months since the license fee was received by Millennium Dynamics,
Inc. (for example, if the license is terminated after twelve (12)
months, 6,000 (divided by) 5 = 1,200; 1,200 (divided by) 12 = 100;
100 x (60 - 12) = $4,800).
9. MAINTENANCE.
-----------
9.1 Error Correction. -- So long as Millennium Dynamics, Inc. continues to
-----------------
support the programs listed on the Software Schedule, Millennium Dynamics,
Inc. agrees to diligently investigate and attempt to correct any error in
such programs reported to Millennium Dynamics, Inc. by the Customer and
determined by Millennium Dynamics, Inc. to be an error in such programs or
in the operating procedures recommended by Millennium Dynamics, Inc. Such
services shall be provided as a part of "Maintenance" described below.
However, if Millennium Dynamics, Inc. determines that any error reported by
the Customer is not an error in such programs or operating procedures, the
Customer promptly shall pay Millennium Dynamics, Inc. for its services in
investigating and/or correcting such error at Millennium Dynamics, Inc.'s
then current consulting fees and shall reimburse Millennium Dynamics, Inc.
for reasonable travel and living costs incurred in connection with such
services.
9.2 Updates and Related Products. -- For each program listed on the Software
-----------------------------
Schedule, Millennium Dynamics, Inc. may from time to time, at Millennium
Dynamics, Inc.'s option, develop and distribute a new version or revision
of such program (an "Update") or a new product which is related to such
program and may in fact be a derivative of such program (a "Related
Product"). In general, a program which simply corrects errors or enhances
the existing features and functions of a
-7-
<PAGE>
program is an Update, while one which adds new functions and features is a
Related Product. Whenever there is any question whether a particular
program is an Update or a Related Product, Millennium Dynamics, Inc. shall
make a determination which shall be binding upon both Millennium Dynamics,
Inc. and the Customer.
Millennium Dynamics, Inc. shall provide to the Customer, for the
maintenance fees identified on the Software Schedule, all Updates to all
programs listed on the Software Schedule (herein referred to as
"Maintenance"). All Updates provided to the Customer hereunder shall be
deemed to be Software and Confidential Information and shall be subject to
the provisions of this Agreement. The Customer will be contractually
obligated to maintain the Software based on the most recent version that
Millennium Dynamics, Inc. releases. Failure by the Customer to do so will
release Millennium Dynamics, Inc. of any warranty or performance liability
hereunder. Millennium Dynamics, Inc. shall offer to the Customer, for
additional fees to be determined by Millennium Dynamics, Inc. at the time
of the offering, the option to add any Related Product to the Software
Schedule.
The Customer shall be responsible for the installation of all Updates and
any Related Product, unless otherwise agreed upon by the parties upon
mutually acceptable terms. If the Customer requests that Millennium
Dynamics, Inc. perform installation, then the Customer shall pay Millennium
Dynamics, Inc. for such services at Millennium Dynamics, Inc.'s then
current consulting rates and shall reimburse Millennium Dynamics, Inc. for
reasonable travel and living expenses.
9.3 Maintenance Fees. -- The Customer shall receive Maintenance at no charge.
----------------
The first year of Maintenance shall commence on the effective date of this
Agreement and shall terminate automatically on the day before the first
anniversary of the effective date of this Agreement. The second year and
each year thereafter of Maintenance shall be calculated in the same manner.
9.4 Limited Warranties. -- Millennium Dynamics, Inc. shall perform all
------------------
maintenance services hereunder in a proper and workmanlike manner in
accordance with industry standards. The preceding warranty granted by
Millennium Dynamics, Inc. herein for Maintenance is a limited warranty
only. The parties agree that the Maintenance and related limited liability
warranty consist of a contract for services and are not covered by Article
II of the Uniform Commercial Code. THIS WARRANTY IS IN LIEU OF ALL OTHER
WARRANTIES, WHETHER EXPRESS OR IMPLIED, INCLUDING, WITHOUT LIMITATION, ANY
IMPLIED WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE,
ALL OF WHICH ARE EXPRESSLY DISCLAIMED. IN NO EVENT SHALL MILLENNIUM
DYNAMICS, INC. BE LIABLE (UNDER ANY CONTRACT, TORT, OR OTHER THEORY) FOR
ANY SPECIAL, INDIRECT, INCIDENTAL, OR CONSEQUENTIAL DAMAGES ARISING FROM
THE PERFORMANCE OF THIS AGREEMENT OR IN CONNECTION WITH MAINTENANCE,
INCLUDING, WITHOUT LIMITATION, LOSS OF ANTICIPATED PROFITS OR LOSS
RESULTING FROM BUSINESS
-8-
<PAGE>
DISRUPTION, EVEN IF MILLENNIUM DYNAMICS, INC. HAS BEEN ADVISED TO THE
POSSIBILITY OF SUCH DAMAGES. IN NO EVENT SHALL THE LIABILITY OF MILLENNIUM
DYNAMICS, INC. FOR DAMAGES ARISING OUT OF OR IN CONNECTION WITH MAINTENANCE
(UNDER ANY CONTRACT, TORT OR OTHER THEORY) EXCEED THE AMOUNT OF
$225,000.00.
9.5 Unsupported Programs. -- If the Software Schedule indicates that a
---------------------
particular program is unsupported, Millennium Dynamics, Inc. shall have no
obligation to correct errors in such program. If Millennium Dynamics, Inc.
no longer wishes to support a program which is listed on the Software
Schedule, then Millennium Dynamics, Inc. shall have the right to amend the
Software Schedule to indicate that such program is unsupported in
accordance with the following procedure:
9.5.1 Millennium Dynamics, Inc. shall provide written notice to the
Customer that the program will cease to be supported on a specified
date (the "Cutoff Date") which must be at least six (6) months in
the future;
9.5.2 Until after the Cutoff Date, Millennium Dynamics, Inc. shall
continue to support such program and the Customer shall continue to
pay any fee(s) specified on the Software Schedule for such program;
and
9.5.3 On and after the Cutoff Date, the Software Schedule shall be amended
to indicate that such program is unsupported. Millennium Dynamics,
Inc. shall have no further obligation to correct errors in the
Program, the warranty contained in subpart (ii) of Section 8.3 of
this Agreement shall no longer be effective with respect to such
program, and the Customer shall have the right to receive a copy of
the source code for such program as provided in Section 9.6 of this
Agreement.
9.6 Source Code. -- For any program listed on the Software Schedule, if
------------
Millennium Dynamics, Inc. designates such program as unsupported, then the
Customer shall have the right to receive upon demand a copy of the source
code for such program subject to the following terms and conditions:
9.6.1 The source code for such program shall be deemed to be Confidential
Information of Millennium Dynamics, Inc. and shall be subject to the
terms and provisions of the Agreement which govern Confidential
Information;
9.6.2 The Customer shall have a nonexclusive right to use the source code
version of such program for the limited purpose of maintaining the
object code version of such program so that it can be used by the
Customer at the designated sites and on the designated CPU(s) listed
on the Software Schedule.
9.6.3 The source code for such program shall be deemed to be Software
within the meaning of this Agreement.
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<PAGE>
9.7 Source Code Escrow.
------------------
Millennium Dynamics, Inc. will maintain a copy of the source code for the
Software in escrow for the benefit of the Customer and all other customers of
Millennium Dynamics, Inc. with Star Bank N.A., 425 Walnut Street, Cincinnati,
Ohio 45202. Millennium Dynamics, Inc. will pay all fees associated with such
source code escrow or a successor escrow agent.
10. INSTALLATION.
------------
Millennium Dynamics, Inc. shall install the licensed programs on the designated
CPU at the designated site. Such installation shall consist of Millennium
Dynamics, Inc.'s standard installation.
11. MANUALS.
-------
Millennium Dynamics, Inc. will provide to the Customer, at no additional cost to
the Customer, the number of manuals for each program as indicated on the
Software Schedule.
12. SPECIAL LICENSES.
----------------
If Millennium Dynamics, Inc. provides any program to the Customer which is not
listed on the Software Schedule, then (a) such program shall be deemed
Confidential Information and (b) the Customer shall have no right to use, copy
or disclose such program unless the Customer is granted such rights pursuant to
some other license or sublicense agreement between the Customer and Millennium
Dynamics, Inc. or a third party specified by Millennium Dynamics, Inc. (a
"Special License"). If Millennium Dynamics, Inc. provides any such software to
the Customer pursuant to a Special License, then the Customer shall be bound by
the terms and conditions of such Special License.
13. TELEPHONE SUPPORT
-----------------
As a part of Maintenance, Millennium Dynamics, Inc. will provide reasonable user
support for the Customer's employees by telephone in connection with the
Customer's use of information, products and services provided to the Customer by
Millennium Dynamics, Inc. pursuant to this Agreement. Such support shall be
limited to answering questions about the use and/or operation of such
information, products and/or services. Millennium Dynamics, Inc. shall have no
obligation pursuant to this Section to perform any design or consulting services
for the Customer.
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<PAGE>
14. TERMINATION.
-----------
14.1 Procedure. -- This Agreement may be terminated as follows:
----------
14.1.1 Breach/Limits on Use. -- In the event of a breach of Section 3,
---------------------
the non-defaulting party may terminate this Agreement immediately
with written notice to the defaulting party specifying with
particularity the breach.
14.1.2 Breach/Confidentiality and Ownership. -- In the event of a breach
-------------------------------------
of Section 6, the non-defaulting party may terminate this
Agreement immediately with written notice to the defaulting party
specifying with particularity the breach.
14.1.3 Breach/Other Provisions. -- Except as otherwise provided, in the
------------------------
event of breach of any of the terms or conditions of this
Agreement, the non-defaulting party may terminate this Agreement
upon sixty (60) days prior written notice to the defaulting party
specifying with particularity the breach. If the defaulting
party shall, within such sixty (60) days, cure the breach
complained of and advise the non-defaulting party of such cure,
this Agreement shall continue in full force and effect as if the
notice of termination had not been issued; otherwise, this
Agreement shall terminate at the end of such sixty (60) day
period.
14.1.4 Insolvency. -- In the event that the Customer becomes insolvent
-----------
or voluntarily or involuntarily bankrupt or is unable to meet its
obligations when they become due or if a receiver or other
liquidating officer is appointed for substantially all of the
assets or business of the Customer or if the Customer makes an
assignment for the benefit of creditors, Millennium Dynamics,
Inc. may immediately terminate this Agreement by notice to the
Customer.
14.1.5 Mutual Agreement. -- This Agreement may be terminated by the
----------------
mutual agreement of the parties. The understanding of the
parties must be in writing and signed by both parties.
14.2 Effects of Termination. -- The following provisions shall apply in the
-----------------------
event this Agreement expires or is terminated for any reason whatsoever:
14.2.1 Return of Confidential Information. -- The Customer shall return
-----------------------------------
promptly or destroy all copies (in whatever form and whether full
or partial) of all Confidential Information which is in the
Customer's possession or under its control. Within thirty (30)
days after
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<PAGE>
termination, the Customer shall provide written confirmation to
Millennium Dynamics, Inc. that all copies have been returned or
have been destroyed. The Customer shall also implement
appropriate measures to safeguard the confidentiality of any
Confidential Information which, by virtue of its intangibility,
cannot be physically returned or destroyed.
14.2.2 Payments. -- The Customer shall remain obligated to pay all
---------
amounts already owed to Millennium Dynamics, Inc. hereunder. All
amounts due to Millennium Dynamics, Inc. hereunder shall become
immediately due and payable.
14.2.3 Provisions Which Survive. -- Millennium Dynamics, Inc.'s rights
-------------------------
and the Customer's obligations pursuant to Sections 6
(Confidentiality) and 17 (Export) shall survive the termination
and/or expiration of this Agreement. The Customer's rights and
Millennium Dynamics, Inc.'s obligations pursuant to Section 8
shall survive the termination and/or expiration of this
Agreement.
15. INDEMNIFICATION BY CUSTOMER.
---------------------------
The Customer agrees to indemnify, defend, and hold harmless Millennium Dynamics,
Inc., its subsidiaries and affiliates, and the officers, directors, employees,
and agents of any of them from all costs, expenses (including reasonable
attorneys' fees), losses, liabilities, damages and settlements arising out of or
in connection with any claim or suit based on allegations which, if true, would
constitute a breach of this Agreement by the Customer.
15.1 Notice. -- Millennium Dynamics, Inc. shall as soon as practicable, notify
-------
the Customer in writing of any claim or suit which might give rise to a
claim for indemnification by the Customer hereunder.
15.2 Defense. -- In the event of such claim or suit, the Customer will employ
-------
counsel for the defense thereof, shall file proper pleadings in said suit
within the time required by law, and shall keep Millennium Dynamics, Inc.
informed of all developments. If the suit is brought to trial, the
Customer shall conduct the defense thereof. Millennium Dynamics, Inc., at
its own election and expense, shall always have the right to employ its own
counsel and may monitor the Customer's activities. In such event, the
Customer and Millennium Dynamics, Inc. shall cooperate fully.
16. ASSIGNMENT.
----------
This Agreement and the Customer's rights hereunder may not and cannot be
assigned, sublicensed, sold, mortgaged, pledged or otherwise transferred by the
Customer without Millennium Dynamics, Inc.'s prior written consent.
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17. EXPORT.
------
Regardless of any disclosure made by the Customer to Millennium Dynamics, Inc.
of an ultimate destination of any product, service, information or Confidential
Information provided in connection with this Agreement ("the Products"), the
Customer will not export or re-export, either directly or indirectly, any the
Products or any system incorporating the Products, without first obtaining an
appropriate license or authorization therefor from the United States government,
if required by United States law.
The Customer will not, without first obtaining an appropriate license or
authorization therefor from the United States government, if required by United
States law, directly or indirectly, export, re-export, transmit or disclose to
anyone or use, act upon, or provide services which involve the use of, any
information of any kind (including, without limitation, any Confidential
Information) (a) which can be used, or adopted for use, in the design,
production, manufacturing, utilization or reconstruction of articles or
materials and (b) which was disclosed to the Customer by Millennium Dynamics,
Inc. or relates to any Products, this Agreement, or any transaction hereunder.
The Customer shall notify Millennium Dynamics, Inc. if the Customer knows,
believes or has any reason to suspect that any of the Products are being or have
been exported or re-exported without proper licenses or authorizations.
18. ADVERTISING.
-----------
The Customer hereby authorizes Millennium Dynamics, Inc. to use the Customer's
name as a reference during verbal conversations concerning the Software. Any
other advertising involving the Customer's name will require the prior written
consent of the Customer. The Customer shall not use the name and/or logo of
Millennium Dynamics, Inc., without obtaining the prior written consent of
Millennium Dynamics, Inc.
19. INJUNCTIONS.
-----------
The Customer agrees that a breach of this Agreement, including without
limitation, any unauthorized use or disclosure of Confidential Information,
could cause Millennium Dynamics, Inc. irreparable damage, Millennium Dynamics,
Inc. is entitled to obtain injunctive relief in the event of any unauthorized
use or disclosure of Confidential Information.
20. ENTIRE AGREEMENT.
----------------
This Agreement (including the Software Schedule) constitutes the entire
agreement between Millennium Dynamics, Inc. and the Customer relating to the
subject matter hereof
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<PAGE>
and this Agreement supersedes all prior negotiations, agreements and
understandings between them relating to the subject matter hereof and no
modifications and/or additions to this Agreement shall be binding on either
party unless in writing and signed by the party against whom enforcement is
sought.
21. WAIVER.
------
No waiver of any provision of this Agreement shall be effective unless made in
writing. No waiver of any breach of any provision of this Agreement shall
constitute a waiver of any subsequent breach of the same or any other provision
of this Agreement. Failure to enforce any contract term shall not be deemed a
waiver of future enforcement of that or any other term.
22. NOTICE.
------
All notices permitted or required under this Agreement shall be directed to the
address set forth on the first page hereof or to such address as either party
may from time to time specify by written notice to the other. Any notice shall
be transmitted in one or more of the following ways:
22.1 In writing, delivered in person, effective upon delivery;
22.2 Mailed by first class, registered or certified mail, return receipt
requested, postage prepaid, effective 5 days after mailing;
22.3 Sent by telex or telecopy, or other digital telecommunications medium
providing a verifiable transcript, and original sent by first class mail,
postage prepaid, effective upon receipt.
22.4 Sent by overnight mail, billed to the sender, effective the next day.
23. FORCE MAJEURE.
-------------
Neither party shall be held liable to the other for failure to perform any of
its obligations hereunder where such performance is prevented or interfered with
by riots, wars or hostilities between any nations, Acts of God, fires, storms,
floods, earthquakes, strikes, labor disputes, shortages or curtailments of raw
materials, labor, power or other utility services, any government restrictions,
and other similar or dissimilar contingencies beyond the reasonable control of
the non-participating party.
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<PAGE>
24. GOVERNING LAW AND VENUE.
-----------------------
This Agreement shall be deemed to have been executed in Cincinnati, Ohio U.S.A.,
and shall be governed by and construed in accordance with the laws of the United
States and the laws of the State of Ohio, U.S.A. The Customer hereby consents
generally to the jurisdiction of the courts of the State of Ohio and of any
United States federal court.
25. SEVERABILITY.
------------
The provisions hereof are severable. If any provision of this Agreement is
invalid or unenforceable in any circumstances, then (i) in such circumstances
such provision shall be interpreted as though it provided for the maximum
permissible obligation or right, (ii) the application of such provision in any
other circumstances shall not be affected thereby, and (iii) the application of
the remaining provisions hereof shall not be affected thereby.
26. CUMULATIVE REMEDIES.
-------------------
Except as otherwise provided herein, all rights and remedies conferred hereunder
shall be cumulative and may be exercised singularly or concurrently.
IN WITNESS WHEREOF, each of the parties hereto has caused this Agreement to be
executed and delivered by its duly authorized officers as of the day and year
first above written.
GREAT AMERICAN INSURANCE MILLENNIUM DYNAMICS, INC.
COMPANY
By: /s/ (illegible) By: /s/ Michael D. Rice
------------------------------------- --------------------------------
Name: Name: MICHAEL D. RICE
----------------------------------- --------------------------------
Title: Title: Vice President
---------------------------------- --------------------------------
-15-
<PAGE>
SOFTWARE SCHEDULE
-----------------
1. Software Programs.
-----------------
a. JCL/Proc Analyzer
b. COBOL Copy Library Converter
c. COBOL Program Converter
d. Assembler Program Converter
e. File and Transaction Converter
f. Universal Text Scanner
g. Bridge Utility
Version: 5.0
---
- -----------------------------------
The above software programs operate within the MVS operating system or MVS
compatible operating system.
2. Site Address.
-------------
Great American Insurance Company
-----------------------------------
580 Walnut Street
--------------------
Cincinnati, Ohio 45202
-----------------------
3. Designated CPU(s) at site.
-------------------------
Make: Model:
---------------------------------------------------------
Serial #:
--------------------------------------------------------------
4. License Fees.
------------
Initial License Fee: No charge
Total cost: No charge
This License Fee includes the designated CPU(s) at the designated site.
Additional sites and CPU(s) will require an addendum to this Software
Schedule.
-16-
<PAGE>
5. Maintenance Fees.
----------------
There is no annual maintenance fee for the software products identified on
this Software Schedule. All other services, including consulting services,
are to be incurred on a time and material basis.
6. Manuals.
-------
The License Fee includes four (4) copies of installation/user manuals. The
Customer is permitted to reproduce copies of the installation/user manual.
The Customer may acquire a copy of the installation/user manual on diskette
and thereby is entitled to reproduce an unlimited number of copies of the
installation/user manual at no additional cost. If the Customer elects to
acquire a copy of the installation/user manual on diskette, Customer is
responsible for all reproductions of the installation/user manual and shall
not hold Millennium Dynamics, Inc. responsible for any errors or
miscopying.
-17-
<PAGE>
EXHIBIT 11
PERITUS SOFTWARE SERVICES, INC.
COMPUTATION OF NET INCOME (LOSS) PER SHARE AND UNAUDITED PRO FORMA NET LOSS PER
SHARE
<TABLE>
<CAPTION>
Year ended
December 31,
-----------------------------------------
1997 1996 1995
<S> <C>
Net income (loss), as reported $(66,910,000) $(4,921,000) $ 55,000
Redeemable stock preference items:
Accrual of cumulative dividends on Series A and Series B
redeemable convertible preferred stock (675,000) (689,000) -
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 (57,000) (66,000) -
-----------------------------------------
Total redeemable stock preference items (732,000) (1,102,000) -
-----------------------------------------
Net income (loss) available to common stockholders (67,642,000) (6,023,000) 55,000
=========================================
Basic weighted average common stock outstanding 9,708,000 5,876,000 5,078,000
=========================================
Basic net income (loss) per share $ (6.97) $ (1.02) $ 0.01
=========================================
Diluted weighted average shares outstanding:
a. shares attributable to common stock outstanding 9,708,000 5,876,000 5,078,000
b. shares attributable to common stock options and warrants - - 1,378,000
-----------------------------------------
9,708,000 5,876,000 6,456,000
=========================================
-----------------------------------------
Diluted net income (loss) per share $ (6.97) $ (1.02) $ 0.01
=========================================
- -------------------------------------------------------------------------------------------------------------------------
Net loss $ (66,910,000) $(4,921,000)
Unaudited pro forma basic and diluted weighted average shares outstanding:
a. shares attributable to common stock outstanding 9,708,000 5,876,000
b. shares attributable to common stock options and warrants - -
c. shares attributable to redeemable convertible preferred stock 1,866,000 1,518,000
---------------------------
11,574,000 7,394,000
===========================
---------------------------
Unaudited pro forma basic and diluted net loss per share $ (5.78) $ (0.67)
===========================
</TABLE>
<PAGE>
Exhibit 21
----------
Subsidiaries
------------
Address of Jurisdiction of
Name Principal Office Incorporation
---- ---------------- ---------------
1. Persist, S.A. Avda. Sofia 45-53
Local Comercial Torre 7
08870 - Sitges (Barcelona)
Spain Spain
2. Peritus Software Services 2 Federal Street Massachusetts
Securities Corporation Billerica, MA 01821
3. Peritus Software Services Gopalakrishna Complex India
(India) Private Limited V Floor, 45/3, Residency Road
Bangalore, India
4. Millennium Dynamics, Inc. 2 Federal Street Delaware
(formerly Twoquay, Inc.) Billerica, MA 01821
<PAGE>
Exhibit 23
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statements on Form S-8 (No. 333-35257, 333-35259, 333-38657, 333-38659) of
Peritus Software Services, Inc. of our report dated January 27, 1998, appearing
on page 39 of this Annual Report on Form 10-K. We also consent to the reference
to us under the heading "Selected Financial Data" included in such Annual Report
on Form 10-K. However, it should be noted that Price Waterhouse LLP has not
prepared or certified such "Selected Financial Data."
/s/ Price Waterhouse LLP
Boston, Massachussetts
March 30, 1998
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 11,340
<SECURITIES> 3,000
<RECEIVABLES> 13,287
<ALLOWANCES> 95
<INVENTORY> 0
<CURRENT-ASSETS> 30,884
<PP&E> 6,371
<DEPRECIATION> 2,512
<TOTAL-ASSETS> 40,530
<CURRENT-LIABILITIES> 9,373
<BONDS> 0
0
0
<COMMON> 154
<OTHER-SE> 30,431
<TOTAL-LIABILITY-AND-EQUITY> 40,530
<SALES> 40,301
<TOTAL-REVENUES> 40,301
<CGS> 15,583
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 92,300
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (948)
<INCOME-PRETAX> (66,634)
<INCOME-TAX> 272
<INCOME-CONTINUING> (66,906)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> (4)
<NET-INCOME> (66,910)
<EPS-PRIMARY> (6.97)
<EPS-DILUTED> (6.97)
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<CASH> 5,022
<SECURITIES> 0
<RECEIVABLES> 4,691
<ALLOWANCES> 30
<INVENTORY> 0
<CURRENT-ASSETS> 13,083
<PP&E> 3,629
<DEPRECIATION> 1,587
<TOTAL-ASSETS> 15,712
<CURRENT-LIABILITIES> 4,677
<BONDS> 0
0
12,546
<COMMON> 2,373
<OTHER-SE> (5,533)
<TOTAL-LIABILITY-AND-EQUITY> 15,712
<SALES> 7,859
<TOTAL-REVENUES> 7,859
<CGS> 3,461
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 3,942
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (27)
<INCOME-PRETAX> 483
<INCOME-TAX> 48
<INCOME-CONTINUING> 435
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> (29)
<NET-INCOME> 406
<EPS-PRIMARY> $0.02
<EPS-DILUTED> $0.02
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> APR-01-1997
<PERIOD-END> JUN-30-1997
<CASH> 2,473
<SECURITIES> 0
<RECEIVABLES> 8,026
<ALLOWANCES> 30
<INVENTORY> 0
<CURRENT-ASSETS> 14,034
<PP&E> 4,273
<DEPRECIATION> 1,787
<TOTAL-ASSETS> 16,880
<CURRENT-LIABILITIES> 5,273
<BONDS> 0
0
13,021
<COMMON> 226
<OTHER-SE> (3,431)
<TOTAL-LIABILITY-AND-EQUITY> 16,880
<SALES> 8,982
<TOTAL-REVENUES> 8,982
<CGS> 3,542
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 4,879
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 7
<INCOME-PRETAX> 554
<INCOME-TAX> 124
<INCOME-CONTINUING> 430
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 8
<NET-INCOME> 438
<EPS-PRIMARY> $(0.01)
<EPS-DILUTED> $(0.01)
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-30-1997
<CASH> 2,473
<SECURITIES> 0
<RECEIVABLES> 8,026
<ALLOWANCES> 30
<INVENTORY> 0
<CURRENT-ASSETS> 14,034
<PP&E> 4,273
<DEPRECIATION> 1,787
<TOTAL-ASSETS> 16,880
<CURRENT-LIABILITIES> 5,273
<BONDS> 0
0
13,021
<COMMON> 226
<OTHER-SE> (3,431)
<TOTAL-LIABILITY-AND-EQUITY> 16,880
<SALES> 16,841
<TOTAL-REVENUES> 16,841
<CGS> 7,003
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 8,821
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (20)
<INCOME-PRETAX> 1,037
<INCOME-TAX> 172
<INCOME-CONTINUING> 865
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> (21)
<NET-INCOME> 844
<EPS-PRIMARY> $0.02
<EPS-DILUTED> $0.01
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JUL-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 46,292
<SECURITIES> 0
<RECEIVABLES> 7,214
<ALLOWANCES> 45
<INVENTORY> 0
<CURRENT-ASSETS> 55,650
<PP&E> 4,604
<DEPRECIATION> 2,118
<TOTAL-ASSETS> 58,806
<CURRENT-LIABILITIES> 5,902
<BONDS> 0
0
0
<COMMON> 132
<OTHER-SE> 52,021
<TOTAL-LIABILITY-AND-EQUITY> 58,806
<SALES> 9,852
<TOTAL-REVENUES> 9,852
<CGS> 3,879
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 5,225
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (462)
<INCOME-PRETAX> 1,210
<INCOME-TAX> 50
<INCOME-CONTINUING> 1,160
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 6
<NET-INCOME> 1,166
<EPS-PRIMARY> $0.09
<EPS-DILUTED> $0.08
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 46,292
<SECURITIES> 0
<RECEIVABLES> 7,214
<ALLOWANCES> 45
<INVENTORY> 0
<CURRENT-ASSETS> 55,650
<PP&E> 4,604
<DEPRECIATION> 2,118
<TOTAL-ASSETS> 58,806
<CURRENT-LIABILITIES> 5,902
<BONDS> 0
0
0
<COMMON> 132
<OTHER-SE> 52,021
<TOTAL-LIABILITY-AND-EQUITY> 58,806
<SALES> 26,693
<TOTAL-REVENUES> 26,693
<CGS> 10,883
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 14,046
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (482)
<INCOME-PRETAX> 2,246
<INCOME-TAX> 222
<INCOME-CONTINUING> 2,024
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> (14)
<NET-INCOME> 2,010
<EPS-PRIMARY> $0.16
<EPS-DILUTED> $0.11
</TABLE>
