<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the Quarterly Period Ended June 30, 1998.
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 000-22647
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Peritus Software Services, Inc.
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(Exact Name of Registrant as Specified in its Charter)
Massachusetts 04-3126919
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(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
2 Federal Street, Billerica, Massachusetts 01821
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(Address of Principal Executive Offices) (Zip Code)
(978) 670-0800
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(Registrant's Telephone Number, Including Area Code)
Not Applicable
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(Former Name, Former Address and Former Fiscal Year,
If Changed Since Last Report)
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 the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date:
Title of Class Shares outstanding at August 10, 1998
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Common Stock, $0.01 par value 16,299,990
<PAGE>
PERITUS SOFTWARE SERVICES, INC.
FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1998
TABLE OF CONTENTS
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<TABLE>
<CAPTION>
Page
<S> <C> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheet as of June 30, 1998 and December 31, 1997 3
Consolidated Statement of Operations for the Three and Six Months Ended
June 30, 1998 and 1997 4
Consolidated Statement of Cash Flows for the Six Months Ended
June 30, 1998 and 1997 5
Notes to Unaudited Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 9
Item 3. Quantitative and Qualitative Disclosures about Market Risk 19
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 19
Item 2. Changes in Securities and Use of Proceeds 19
Item 4. Submission of Matters to a Vote of Security Holders 20
Item 5. Other Information 20
Item 6. Exhibits and Reports on Form 8-K 20
Signatures 22
</TABLE>
2
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Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
PERITUS SOFTWARE SERVICES, INC.
CONSOLIDATED BALANCE SHEET
(IN THOUSANDS, EXCEPT SHARE-RELATED DATA)
(UNAUDITED)
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<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1998 1997
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<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 5,285 $ 11,340
Short-term investments 4,000 3,000
Accounts receivable, net of allowance for doubtful accounts of $445 and $95,
respectively and including amounts receivable from related parties
of $944 and $289, respectively 10,030 13,287
Costs and estimated earnings in excess of billings on uncompleted contracts,
including amounts on uncompleted contracts with related parties of $171
and $250, respectively 3,492 2,547
Prepaid expenses and other current assets 2,249 710
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Total current assets 25,056 30,884
Property and equipment, net 5,521 3,859
Intangible and other assets, net 5,220 5,787
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$ 35,797 $ 40,530
============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of capital lease obligations $ 91 $ 51
Current portion of long-term debt 292 292
Accounts payable 970 1,650
Billings in excess of costs and estimated earnings on uncompleted contracts 1,114 976
Deferred revenue 1,708 2,886
Other accrued expenses and other current liabilities 2,638 3,518
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Total current liabilities 6,813 9,373
Capital lease obligations 347 144
Long-term debt 123 269
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Total liabilities 7,283 9,786
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Minority interest in consolidated subsidiary 147 159
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Stockholders' equity:
Common stock, $.01 par value; 50,000,000 shares authorized; 16,283,735 and
15,361,800 shares issued and outstanding at June 30, 1998 and December 31, 1997,
respectively 163 154
Additional paid-in capital 105,056 103,808
Accumulated deficit (76,780) (73,235)
Note receivable from stockholder - (58)
Cumulative translation adjustment (72) (84)
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Total stockholders' equity 28,367 30,585
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$ 35,797 $ 40,530
============== ==============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements
3
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PERITUS SOFTWARE SERVICES, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE-RELATED DATA)
(UNAUDITED)
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<TABLE>
<CAPTION>
THREE MONTHS SIX MONTHS
ENDED ENDED
JUNE 30, JUNE 30,
1998 1997 1998 1997
---------- ---------- ----------- ----------
<S> <C> <C> <C> <C>
Revenue:
Outsourcing services, including $1,034, $978, $2,248, and $1,953
from related parties, respectively $ 2,864 $ 3,044 $ 5,486 $ 5,563
License, including $277, $0, $277, and $0 from related
parties, respectively 4,501 4,643 9,263 8,787
Other services, including $317, $0, $317, and $0 from
related parties, respectively 4,465 1,295 7,231 2,491
---------- ---------- ----------- ----------
Total revenue 11,830 8,982 21,980 16,841
---------- ---------- ----------- ----------
Cost of revenue:
Cost of outsourcing services, including $421, $592, $1,134 and $965
from related parties, respectively 1,886 2,358 3,991 4,403
Cost of license 506 148 1,039 275
Cost of other services, including $56, $0, $56, and $0 from related
parties, respectively 2,611 1,036 5,048 2,325
---------- ---------- ----------- ----------
Total cost of revenue 5,003 3,542 10,078 7,003
---------- ---------- ----------- ----------
Gross profit 6,827 5,440 11,902 9,838
---------- ---------- ----------- ----------
Operating expenses:
Sales and marketing 3,247 2,035 6,339 3,418
Research and development 1,957 1,969 4,979 3,603
General and administrative 1,286 875 3,022 1,800
Restructuring charge 1,439 - 1,439 -
---------- ---------- ----------- ----------
Total operating expenses 7,929 4,879 15,779 8,821
---------- ---------- ----------- ----------
Income (loss) from operations (1,102) 561 (3,877) 1,017
Interest income (expense), net 185 (7) 345 20
---------- ---------- ----------- ----------
Income (loss) before income taxes and minority interest in
consolidated subsidiary (917) 554 (3,532) 1,037
Provision for income taxes 25 124 25 172
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Income (loss) before income taxes and minority interest in
consolidated subsidiary (942) 430 (3,557) 865
Minority interest in consolidated subsidiary 37 (8) (12) 21
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Net income (loss) $ (979) 438 $ (3,545) 844
Accrual of cumulative dividends on Series A and B redeemable ========== ===========
convertible preferred stock (444) (677)
Accretion to redemption of redeemable common stock rights (31) (57)
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Net income (loss) available to common stockholders $ (37) $ 110
========== ==========
Net income (loss) per common share:
Basic $ (0.06) $ (0.01) $ (0.22) $ 0.02
========== ========== =========== ==========
Diluted $ (0.06) $ (0.01) $ (0.22) $ 0.01
========== ========== =========== ==========
Weighted average common shares outstanding:
Basic 16,179 6,000 16,082 5,944
========== ========== =========== ==========
Diluted 16,179 8,587 16,082 8,531
========== ========== =========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
4
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PERITUS SOFTWARE SERVICES, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
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<TABLE>
<CAPTION>
SIX MONTHS
ENDED
JUNE 30,
1998 1997
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<S> <C> <C>
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
Cash flows from operating activities:
Net income (loss) $ (3,545) $ 844
Adjustments to reconcile net income (loss) to net cash used for
operating activities:
Depreciation and amortization 1,660 495
Minority interest in consolidated subsidiary (12) 21
Changes in assets and liabilities, net of effects from acquisitions:
Accounts receivable 3,257 (3,833)
Costs and estimated earnings in excess of billings on uncompleted contracts (945) 224
Unbilled license revenue from related parties - 400
Prepaid expenses and other current assets (1,539) (475)
Other assets (52) 10
Accounts payable (680) 427
Billings in excess of costs and estimated earnings on uncompleted contracts 138 (52)
Deferred revenue (1,178) (2,255)
Other accrued expenses and other current liabilities (880) 123
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Net cash used for operating activities (3,776) (4,071)
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Cash flows from investing activities:
Purchase of short-term investments (1,000) -
Investments in consolidated subsidiary - (111)
Purchases of property and equipment (2,415) (779)
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Net cash used for investing activities (3,415) (890)
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Cash flows from financing activities:
Proceeds from long-term debt - 200
Principal payments on long-term debt (146) (105)
Principal payments on capital lease obligations (45) (34)
Proceeds from exercise of stock options 1,001 23
Proceeds from sale of common stock 256 -
Proceeds from payment of note receivable from stockholder 58 -
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Net cash provided by financing activities 1,124 84
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Effects of exchange rates on cash and cash equivalents 12 (38)
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Net decrease in cash and cash equivalents (6,055) (4,915)
Cash and cash equivalents, beginning of period 11,340 7,388
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Cash and cash equivalents, end of period $ 5,285 $ 2,473
============== ==============
SUPPLEMENTAL DISCLOSURE OF CASH FLOWS:
Cash paid for income taxes $ 78 $ -
Cash paid for interest 34 109
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
5
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PERITUS SOFTWARE SERVICES, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
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1. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements include the
accounts of Peritus Software Services, Inc. and its subsidiaries (the "Company")
and have been prepared by the Company without audit in accordance with the
Company's accounting policies, as described in the Company's Annual Report on
Form 10-K for the year ended December 31, 1997, as filed with the Securities and
Exchange Commission ("SEC"). In the opinion of management, the accompanying
unaudited consolidated financial statements contain all adjustments, consisting
only of those of a normal recurring nature, necessary for a fair presentation of
the Company's financial position, results of operations and cash flows at the
dates and for the periods indicated. While the Company believes that the
disclosures presented are adequate to make the information not misleading, these
financial statements should be read in conjunction with the audited consolidated
financial statements and related notes included in the Company's 1997 Annual
Report on Form 10-K. The operating results for the three and six months ended
June 30, 1998 are not necessarily indicative of the results to be expected for
the full year ending December 31, 1998.
2. LEGAL PROCEEDINGS
The Company and certain of its officers and directors have been named as
defendants in purported class action lawsuits filed in the United States
District Court for the District of Massachusetts by Robert Downey on April 1,
1998, by Scott Cohen on April 7, 1998, by Timothy Bonnett on April 9, 1998, by
Peter Lindsay on April 17, 1998, by Harry Teague on April 21, 1998, by Jesse
Wijntjes on April 29, 1998, by H. Vance Johnson and H. Vance Johnson as Trustee
for the I.O.R.D. Profit-Sharing Plan on May 6, 1998, by John B. Howard, M.D. on
May 21, 1998 and by Helen Lee on May 28, 1998 (collectively, the "complaints").
The Downey complaint alleges a class period of October 22, 1997 to March 27,
1998. The Cohen, Bonnett, Wijntjes and Lee complaints allege a class period of
January 27, 1998 to March 27, 1998. The Lindsay, Teague and Johnson complaints
allege a class period of January 28, 1998 to March 27, 1998. The Howard
complaint alleges a class period of July 3, 1997 to March 27, 1998. The
complaints principally allege that the defendants violated federal securities
laws by making false and misleading statements and by failing to disclose
material information concerning the Company's December 1997 acquisition of
substantially all of the assets and assumption of certain liabilities of the
Millennium Dynamics, Inc. business from American Premier Underwriters, Inc.,
thereby allegedly causing the value of the Company's common stock to be
artificially inflated during the purported class periods. In addition, the
Howard complaint alleges violation of federal securities laws as a result of the
Company's purported failure to disclose material information in connection with
the Company's initial public offering on July 2, 1997, and also names Montgomery
Securities, Inc., Wessels, Arnold & Henderson, and H.C. Wainwright & Co., Inc.
as defendants. The complaints further allege that certain officers and/or
directors of the Company sold stock in the open market during the class periods
and seek unspecified damages. On or about June 1, 1998, all of the named
plaintiffs and additional purported class members filed a motion for the
appointment of several of those individuals as lead plaintiffs, for approval of
lead and liaison plaintiffs' counsel and for consolidation of the actions.
Although the Company believes that it and the other defendants have meritorious
defenses to the claims made in the complaints and intends to contest the
lawsuits vigorously, an adverse resolution of the lawsuits could have a material
adverse effect on the Company's financial condition and results of operations in
the period in which the litigation is resolved. The Company is not able to
reasonably estimate potential losses, if any, related to the complaints.
6
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PERITUS SOFTWARE SERVICES, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
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3. RESTRUCTURING CHARGE
In March 1998, the Company announced its intentions for a strategic
restructuring to refocus the Company's investments and to reduce its operating
expenses. The Company effected this restructuring, which was finalized in the
second quarter of 1998, and recorded a non-recurring charge of $1,439,000
consisting primarily of severance payments associated with the termination of
approximately 12% of the Company's employees in April 1998 (48 employees). At
June 30, 1998, all 48 employees had been terminated with no further terminations
remaining under the restructuring. In addition, a significant portion of the
restructuring charge related to the closure of two research and development and
outsourcing centers and support costs for a discontinued product. The amounts
accrued to and charged against restructuring costs during the second quarter of
1998 and the composition of the remaining balance at June 30, 1998 were as
follows:
<TABLE>
<CAPTION>
(in thousands)
Balance Q2 1998 Q2 1998 Balance
March 31, 1997 Accrual Charges June 30, 1998
---------------- --------- --------- ---------------
<S> <C> <C> <C> <C>
Provision for severance and benefit
payments to terminated employees $ - $ 947 $ (526) $ 421
Provisions related to closure of facilities - 327 - 327
Other - 165 (41) 124
---------------- --------- --------- ---------------
Total $ - $ 1,439 $ (567) $ 872
================ ========= ========= ===============
</TABLE>
4. COMPREHENSIVE INCOME (LOSS)
The Company adopted Statement of Financial Accounting Standards ("SFAS")
No. 130, "Reporting Comprehensive Income" effective January 1, 1998. 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 requires that an enterprise display an
amount representing total comprehensive income for the period.
For the three and six months ended June 30, 1998 and 1997, the Company's
comprehensive income (loss) was as follows:
<TABLE>
<CAPTION>
Three months ended June 30, Six months ended June 30,
--------------------------- -------------------------
1998 1997 1998 1997
------ ------ ------ ------
<S> <C> <C> <C> <C>
Net income (loss) $(979,000) $438,000 $(3,545,000) $844,000
Cumulative translation adjustment 15,000 (31,000) 12,000 (38,000)
---------- ---------- ----------- ----------
$(964,000) $407,000 $(3,533,000) $806,000
========== ========== =========== =========
</TABLE>
5. NET INCOME (LOSS) PER SHARE
In February 1997, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 128, "Earnings per Share", which supersedes Accounting Principles Board
Opinion Accounting ("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, when not
anti-dilutive, and dilutive potential common stock including outstanding stock
options.
7
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PERITUS SOFTWARE SERVICES, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
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The Company adopted SFAS No. 128 in the fourth quarter of 1997 and has restated
earnings per share amounts for all periods presented herein, as required.
6. RECENTLY ISSUED ACCOUNTING STANDARDS
In October 1997, the Accounting Standards Executive Committee ("AcSEC") of the
American Institute of Certified Public Accountants issued Statement of Position
("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 stated 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,
were effective as of January 1, 1998, have not materially affected 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.
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.
7. SUBSEQUENT EVENT
In July 1998, the Company divested all of its interest in Persist, S.A.
("Persist"), the Company's majority owned Spanish subsidiary, for $600,000 cash
less adjustments for certain inter-company balances then outstanding.
Accordingly, the results of operations of Persist will no longer be
consolidated with the results of the Company. As a result of this transaction,
Persist became wholly owned by the former minority shareholders. During the six
months ended June 30, 1998, Persist had revenues of $1,090,000. The Company will
recognize a gain of approximately $300,000 in the three months ended September
30, 1998 as a result of this divestiture.
8
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
Peritus Software Services, Inc. ("Peritus") was founded in 1991 to address the
growing market for managing and maintaining the installed base of software in
organizations. The Company focused its efforts on the delivery of software
maintenance outsourcing services until 1995, when it began to devote significant
resources to the development of software tools addressing the problems
associated with mass changes to application systems and their associated
databases, particularly the year 2000 problem. In 1996, the Company began
licensing its AutoEnhancer/2000 software, which was designed to address the year
2000 problem, to value added integrators and directly to end users. In 1996, the
Company expanded its research and development efforts through the acquisition of
Vista Technologies Incorporated ("Vista"), a developer of computer-aided
engineering software. In 1997, the Company expanded its products offerings 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, and through the acquisition of substantially all of the assets and
the assumption of certain liabilities of the business of Millennium Dynamics,
Inc. ("MDI"), a software tools company with year 2000 products for the IBM
mainframe and AS/400 platforms, from American Premier Underwriters, Inc.
("APU"). In 1998 the Company further emphasized its products and services by
selling and providing direct delivery of year 2000 renovation services.
The Company derives its revenue from software maintenance outsourcing services,
software and methodology licensing and other services (including direct delivery
of year 2000 renovation 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 Europe, through value added integrators
operating worldwide and through international distributors in Canada, Europe and
Japan.
THREE MONTHS ENDED JUNE 30, 1998 COMPARED TO THREE MONTHS ENDED JUNE 30, 1997
Revenue
Total revenue increased 31.7% to $11,830,000 in the three months ended June 30,
1998 from $8,982,000 in the three months ended June 30, 1997. This increase in
revenue was due to an increase in year 2000 renovation sources performed by the
Company using the Auto Enhancer/2000 software and the Vantage YR2000 products.
During the three months ended June 30, 1998, one customer generated 30.2% of
total revenue. International revenue increased 107.4% to $1,178,000 in 1998
from $568,000 in 1997. On July 20, 1998, the Company divested its entire
interest in its majority owned Spanish subsidiary, Persist S.A. ("Persist") for
cash of $600,000 less adjustments for certain inter-company balances then
outstanding. The former minority shareholders of Persist now own all of that
entity. Persist and value added integrators, distributors, and end users
generated 37.6% and 62.4%, respectively of the Company's international revenue
in the three months ended June 30, 1998. Persist generated substantially all of
the Company's international revenue in 1997.
Outsourcing Services
Outsourcing services revenue decreased 5.9% to $2,864,000 in the three months
ended June 30, 1998 from $3,044,000 in the three months ended June 30, 1997.
The decrease in outsourcing services revenue in absolute dollars was primarily
attributable to the termination of one outsourcing contract and the recognition
of lesser amounts of revenue under the percentage-of-completion method on
existing outsourcing contracts that were in their later phases during 1998. As
a percentage of total revenue, outsourcing services revenue decreased to 24.2%
in the three months ended June 30, 1998 from 33.9% in the three months ended
June 30, 1997. The decrease in outsourcing services revenue as a percentage of
total revenue reflects the increased contribution of license and other services
revenue to total revenue during the three months ended June 30, 1998 when
compared to the comparable period for 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
9
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for the foreseeable future. In July 1998, the Company announced its outsourcing
offerings, "Software Asset Maintenance for Software Providers" and "Software
Asset Maintenance for Information Systems", which are outsourcing solutions
designed specifically for the manufacturers of system software and software
products and for information technology departments that maintain application
software, respectively.
License
License revenue was $4,501,000 in the three months ended June 30, 1998 or 38.0%
of total revenue, compared to $4,643,000, or 51.7% of total revenue, in the
three months ended June 30, 1997. The decrease in license revenue for the three
months ended June 30, 1998 was primarily attributable to the decrease in direct
delivery of licensed software to end users and to decreased license fees from
value added integrators.
Other Services
Other services revenue increased 244.8% to $4,465,000 in the three months ended
June 30, 1998 from $1,295,000 in the three months ended June 30, 1997. As a
percentage of total revenue, other services revenue was 37.7% in the three
months ended June 30, 1998 and 14.4% in the three months ended June 30, 1997.
The increase in other services revenue in absolute dollars was primarily
attributable to an increase in year 2000 renovation services performed by
Company personnel using the Company's year 2000 products.
Cost of Revenue
Cost of Outsourcing Services Revenue
Cost of outsourcing services revenue consists primarily of salaries, benefits
and overhead costs associated with delivering outsourcing services to clients.
The cost of outsourcing services revenue decreased 20.0% to $1,886,000 in the
three months ended June 30, 1998 from $2,358,000 for the three months ended June
30, 1997. Cost of outsourcing services revenue as a percentage of outsourcing
services revenue decreased to 65.9% in the three months ended June 30, 1998 from
77.5% in the three months ended June 30, 1997. The decrease in costs of
outsourcing services revenue in absolute dollars was due primarily to the
reduction of resources related to the termination of one outsourcing contract.
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 $506,000 in the three months ended June 30, 1998, or 11.2% of
license revenue compared to $148,000 or 3.2% of license revenue, in the three
months ended June 30, 1997. 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 and the
amortization of intangibles related to the MDI acquisition.
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 152.0% to $2,611,000 in the three
months ended June 30, 1998 from $1,036,000 in the three months ended June 30,
1997. Cost of the services revenue as a percentage of other services revenue
decreased to 58.5% in the three months ended June 30, 1998 from 80.0% in the
three months ended June 30, 1997. Costs increased in absolute dollars in the
three months ended June 30, 1998 due to additional staffing the Company required
to support the demand for the Company's year 2000 renovation services.
10
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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 59.6% to $3,247,000 in the three months ended
June 30, 1998 from $2,035,000 in the three months ended June 30, 1997. As a
percentage of total revenue, sales and marketing expenses increased to 27.4% in
the three months ended June 30, 1998 from 22.7% in the three months ended June
30, 1997. The increase in expenses in absolute dollars and as a percentage of
revenue was primarily attributable to increased staffing, commissions, including
an increase in sales referral fees to third parties, and promotional activities
in conjunction with the Company's year 2000 software products and services in
1998.
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 remained flat at
$1,957,000 in the three months ended June 30, 1998 from $1,969,000 in the three
months ended June 30, 1997. As a percentage of total revenue, research and
development expenses decreased to 16.5% in the three months ended June 30, 1998
from 21.9% in the three months ended June 30, 1997.
General and Administrative
General and administrative expenses consist primarily of salaries and related
costs for the finance and accounting, human resources, legal services,
information systems and other administrative departments of the Company, as well
as legal and accounting expenses and the amortization of intangible assets
associated with the Vista acquisition. General and administrative expenses
increased 47.0% to $1,286,000 in the three months ended June 30, 1998 from
$875,000 in the three months ended June 30, 1997. As a percentage of total
revenue, general and administrative expenses increased to 10.9% in the three
months ended June 30, 1998 from 9.7% in the three months ended June 30, 1997.
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.
Restructuring Charge
In March 1998, the Company announced its intentions for a strategic
restructuring to refocus the Company's investments and to reduce its operating
expenses. The Company effected this restructuring, which was finalized in the
second quarter of 1998, by recording a non-recurring charge of $1,439,000 in
the three months ended June 30, 1998, consisting primarily of severance payments
associated with the termination of approximately 48 employees, costs associated
with closing two research and development and outsourcing service centers, and
support costs for a discontinued product.
Interest Income (Expense), Net
Interest income (expense), net is primarily composed of interest earned on cash
balances and interest expense on debt incuding capital lease obligations. The
Company had interest income, net of $185,000 in the three months ended June 30,
1998 compared to interest expense, net of $7,000 in the three months ended June
30, 1997. This change in interest income, net was primarily attributable to
increased interest income from increased cash balances resulting from the
Company's initial public offering in July 1997.
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PERITUS SOFTWARE SERVICES, INC.
FORM 10-Q
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
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Provision for Income Taxes
The Company's income tax provision was $25,000 and $124,000 in the three months
ended June 30, 1998 and 1997, respectively. The provision in 1998 reflects
potential international tax obligations.
Minority Interest in Consolidated Subsidiary
The minority interest in consolidated subsidiary represents the equity interest
in the operating results of Persist held by stockholders of Persist other than
the Company. The minority interest in consolidated subsidiary increased to a net
income of $37,000 in the three months ended June 30, 1998 from a loss of $8,000
in the three months ended June 30, 1997. This change was the result of the
increased profitability of Persist. At June 30, 1998 and 1997, the Company held
a 63.0% equity interest in Persist.
SIX MONTHS ENDED JUNE 30, 1998 COMPARED TO SIX MONTHS ENDED JUNE 30, 1997
Revenue
Total revenue increased 30.5% to $21,980,000 in the six months ended June 30,
1998 from $16,841,000 in the six months ended June 30, 1997. This increase in
revenue was primarily due to an increase in year 2000 renovation services
performed by the Company using the Auto Enhancer/2000 software and Vantage
YR2000 products. During the six months ended June 30, 1998, one customer
generated 16.5% of total revenue. International revenue increased 138.6% to
$3,102,000 in the six months ended June 30, 1998 from $1,300,000 in the six
months ended June 30, 1997. On July 20, 1998, the Company divested its entire
interest in its majority owned Spanish subsidiary, Persist S.A. ("Persist") for
cash of $600,000 less adjustments for certain inter-company balances then
outstanding. The former minority shareholders of Persist now own all of that
entity. Persist and value added integrators, distributors, and end users
generated 35.1% and 64.9%, respectively of the Company's international revenue
in the six months ended June 30, 1998. Persist generated substantially all of
the Company's international revenue in the six months ended June 30, 1997.
Outsourcing Services
Outsourcing services revenue decreased 1.4% to $5,486,000 in the six months
ended June 30, 1998 from $5,563,000 in the six months ended June 30, 1997. The
decrease in outsourcing services revenue in absolute dollars was primarily
attributable to the termination of one significant outsourcing contract and 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
1998. As a percentage of total revenue, outsourcing services revenue decreased
to 25.0% in the six months ended June 30, 1998 from 33.0% in the six months
ended June 30, 1997. The decrease in outsourcing revenue as a percentage of
total revenue reflects the increased contribution of license and renovation
services revenue to total revenue during the six months ended June 30, 1998.
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. In July
1998, the Company announced its outsourcing offerings, "Software Asset
Maintenance for Software Providers" and "Software Asset Maintenance for
Information Systems", which are outsourcing solutions designed specifically for
the manufacturers of system software and software products and for information
technology departments that maintain application software, respectively.
License
License revenue was $9,263,000 in the six months ended June 30, 1998 or 42.1% of
total revenue, compared to $8,787,000, or 52.2% of total revenue, in the six
months ended June 30, 1997. The increase in license revenue for the six months
ended June 30, 1998 was primarily attributable to the delivery of licensed
software to additional end users and to increased license fees from value added
integrators.
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Other Services
Other services revenue increased 190.3% to $7,231,000 in the six months ended
June 30, 1998 from $2,491,000 in the six months ended June 30, 1997. As a
percentage of total revenue, other services revenue was 32.9% in the six months
ended June 30, 1998 and 14.8% in the six months ended June 30, 1997. The
increase in other services revenue in absolute dollars was primarily
attributable to an increase in year 2000 services performed by Company personnel
using Company's year 2000 products.
Cost of Revenue
Cost of Outsourcing Services Revenue
Cost of outsourcing services revenue consists primarily of salaries, benefits
and overhead costs associated with delivering outsourcing services to clients.
The cost of outsourcing services revenue decreased 9.4% to $3,991,000 in the six
months ended June 30, 1998 from $4,403,000 for the six months ended June 30,
1997. Cost of outsourcing services revenue as a percentage of outsourcing
services revenue decreased to 72.7% in the six months ended June 30, 1998 and
from 79.2% in the six months ended June 30, 1997. The decrease in costs of
outsourcing services revenue in absolute dollars was due primarily to the
termination of one outsourcing contract.
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 $1,039,000 in the six months ended June 30, 1998, or 11.2% of
license revenue compared to $275,000 or 3.1% of license revenue, in the six
months ended June 30, 1997. 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 and the
amortization of intangibles related to the MDI acquisition.
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 117.1% to $5,048,000 in the six months
ended June 30, 1998 from $2,325,000 in the six months ended June 30, 1997. Cost
of the services revenue as a percentage of other services revenue decreased to
69.8% in the six months ended June 30, 1997 from 93.3% in the three months ended
June 30, 1997. Costs increased in absolute dollars in the six months ended June
30, 1998 due to additional staffing the Company required to support the demand
from the Company's year 2000 renovation 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 85.5% to $6,339,000 in the six months ended June
30, 1998 from $3,418,000 in the six months ended June 30, 1997. As a percentage
of total revenue, sales and marketing expenses increased to 28.8% in the six
months ended June 30, 1998 from 20.3% in the three months ended June 30, 1997.
The increase in expenses in absolute dollars and as a percentage of revenue was
primarily attributable to increased staffing, commissions, including an increase
in sales referral fees to third parties, and promotional activities in
conjunction with the Company's year 2000 software products and services in 1998.
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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 38.2%
to $4,979,000 in the six months ended June 30, 1998 from $3,603,000 in the six
months ended June 30, 1997. As percentage of total revenue, research and
development expenses increased to 22.7% in six months ended June 30, 1998 from
21.4% in the six months ended June 30, 1997. 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 Vista acquisition. General and administrative expenses
increased 67.9% to $3,022,000 in the six months ended June 30, 1998 from
$1,800,000 in the six months ended June 30, 1997. As a percentage of total
revenue, general and administrative expenses increased to 13.7% in the six
months ended June 30, 1998 from 10.7% in the six months ended June 30, 1997.
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.
Restructuring Charge
In March 1998, the Company announced its intentions for a strategic
restructuring to refocus the Company's investments and to reduce its operating
expenses. The Company effected this restructuring, which was finalized in the
second quarter of 1998, by recording a non-recurring charge of $1,439,000 in the
three months ended June 30, 1998, consisting primarily of severance payments
associated with the termination of approximately 48 employees, costs associated
with closing two research and development and outsourcing service centers and
support costs for a discontinued product.
Interest Income (Expense), Net
Interest income (expense), net is primarily composed of interest income earned
on cash balances and interest expense on debt including capital lease
obligations. The Company had interest income, net of $345,000 in the six months
ended June 30, 1998 compared to interest income, net of $20,000 in the six
months ended June 30, 1997. This change in interest income, 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 was $25,000 and $172,000 in the six months
ended June 30, 1998 and 1997, respectively. The provision in the six months
ended June 30, 1998 reflects potential international tax obligations.
Minority Interest in Consolidated Subsidiary
The minority interest in consolidated subsidiary represents the equity interest
in the operating results of Persist held by stockholders of Persist other than
the Company. The minority interest in consolidated subsidiary decreased to a
loss of $12,000 in the six months ended June 30, 1998 from income of $21,000 in
the six months ended June 30, 1997. This change was the result of the decreased
profitability of Persist. As of June 30, 1998 and 1997, the Company held a 63.0%
equity interest in Persist.
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LIQUIDITY AND CAPITAL RESOURCES
Historically, 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 and advance payments for services from
clients. The Company's cash balances were $5,285,000 and $11,340,000 at June 30,
1998 and December 31, 1997, respectively. The Company's working capital was
$18,243,000 and $21,511,000 at June 30, 1998 and December 31, 1997,
respectively. The Company's operating activities used cash of $3,776,000 and
$4,071,000 during the six months ended June 30, 1998 and 1997, respectively. The
Company's use of cash during the six months ended June 30, 1998 was primarily
caused by net loss of $3,545,000 less non-cash depreciation and amortization
expense of $1,660,000, an increase in prepaid expenses and other current assets
of $1,539,000 and a decrease in accounts payable, deferred revenue and other
accrued expenses and current liabilities of $2,738,000. These uses of cash were
partially offset by a decrease in accounts receivable of $3,257,000.
The Company used cash of $3,415,000 and $890,000 for investing activities during
the six months ended June 30, 1998 and 1997, respectively. Investing activities
in the six months ended June 30, 1998 consisted principally of the purchases of
property and equipment, most notably computer equipment and software, furniture
and fixtures and leasehold improvements related to the Company's relocations of
its headquarters and regional offices. Although the Company has no significant
commitments for capital expenditures in the remainder of 1998, the Company
expects to continue to purchase property and equipment to further develop its
infrastructure.
The Company's financing activities provided cash of $1,124,000 and $84,000
during the six months ended June 30, 1998 and 1997, respectively. Financing
activities in the six months ended June 30, 1998 primarily reflect proceeds from
the exercise of stock options.
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% (9.00% at June
30, 1998). The Company has obtained approval of amendments of its credit
facility providing for among other terms, renewal and increase of its line of
credit. Maximum borrowing under this line of credit, as amended, is $5,000,000
and is limited to 75% of certain receivables plus 50% of cost and estimated
earnings in excess of billings on uncompleted contracts, as defined by the line
of credit agreement. The line of credit expires and all borrowings are payable
in full on June 30, 1999. 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% (9.50%
at June 30, 1998). 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 June 30, 1998, the Company was in compliance with such financial covenants
as waived or amended, there were no borrowings outstanding, and $5,000,000
remained available, under the revolving credit facility and $415,000 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.
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The Company anticipates that the net proceeds from the sale of common stock in
its July 1997 initial public offering, together with cash generated from
operations, existing cash balances and advances available under its revolving
credit line agreement will be adequate to finance its operations through 1998.
Thereafter, the 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 and/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 financings will be
available on terms acceptable to the Company and, if available, such financings
may result in further dilution to the Company's stockholders and higher interest
expense.
FOREIGN CURRENCY
Assets and liabilities of the Company's subsidiaries are translated into United
States 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 the Company's results of
operations.
RECENTLY ISSUED ACCOUNTING STANDARDS
In October 1997, the Accounting Standards Executive Committee ("AcSEC") of the
American Institute of Certified Public Accountants issued Statement of Position
("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 Financial Accounting Standards Board ("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 stated
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, were effective as of January 1,
1998, have not materially affected 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.
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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.
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 Quarterly Report on Form 10-Q 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 risks
specifically described in the Company's Annual Report on Form 10-K for the year
ended December 31, 1997 and other public documents, filed by the Company with
the Securities and Exchange Commission (the "Commission"), which factors are
incorporated herein by reference, and other factors such as the Company's
limited operating history, the dependence on the year 2000 market, the need to
develop additional products and services, the concentration of clients and
credit risk, the management of growth and increases in expenditures in sales and
marketing, research and development and finance and administration, the
dependence upon third-party channels and potential for channel conflict, the
impact of competitive products and services and pricing, competition for
qualified technical personnel, the offering of fixed-price, fixed time-frame
contracts rather than contracts on a time and materials basis, the potential for
contract liability related to the provision of year 2000 and other products and
services, the potential for software errors or bugs in the Company's products,
the operating difficulties and expenditures associated with acquisitions
including the Company's MDI acquisition, limited protection of proprietary
rights, dependence on third party technology, rapid technological change, risks
associated with international operations and dependence on Indian offshore
software development centers, the impact of the government regulation of
immigration, dependence on government contracts, product or services demand and
market acceptance risks, product development and services capacity,
commercialization and technological difficulties, capacity and supply
constraints or difficulties and the effect of general business or economic
conditions.
In addition, the Company's quarterly revenue, expenses and operating results
have varied significantly in the past and are likely to vary significantly from
quarter to quarter in the future. A significant portion of the Company's
revenue in any quarter is typically derived from a limited number of large
client transactions. In addition, the sales cycle associated with these
transactions is lengthy and is subject to a number of uncertainties, including
clients' budgetary constraints, the timing of clients' budget cycles and
clients' internal approval processes. Accordingly, the timing of significant
transactions is unpredictable and, as a result, the Company's revenue and
results of operations for any particular period are subject to significant
variability. The complexity of certain projects and the requirements of
generally accepted accounting principles can also result in a deferral of
revenue recognition, in whole or in part, on a particular contract during a
quarter, even though the contract has been executed or payment has actually been
received by the Company. Quarterly fluctuations may also result from other
factors such as new product and service introductions or announcements of new
products and services by the Company's
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competitors, changes in the Company's or its competitors' pricing policies,
changes in the mix of distribution channels through which the Company's products
and services are sold, the timing and nature of sales and marketing expenses,
changes in operating expenses, the financial stability of major clients, changes
in the demand for software maintenance products and services, foreign currency
exchange rates and general economic conditions.
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.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company and certain of its officers and directors have been named as
defendants in purported class action lawsuits filed in the United States
District Court for the District of Massachusetts by Robert Downey on April 1,
1998, by Scott Cohen on April 7, 1998, by Timothy Bonnett on April 9, 1998, by
Peter Lindsay on April 17, 1998, by Harry Teague on April 21, 1998, by Jesse
Wijntjes on April 29, 1998, by H. Vance Johnson and H. Vance Johnson as Trustee
for the I.O.R.D. Profit-Sharing Plan on May 6, 1998, by John B. Howard, M.D. on
May 21, 1998 and by Helen Lee on May 28, 1998 (collectively, the "complaints").
The Downey complaint alleges a class period of October 22, 1997 to March 27,
1998. The Cohen, Bonnett, Wijntjes and Lee complaints allege a class period of
January 27, 1998 to March 27, 1998. The Lindsay, Teague and Johnson complaints
allege a class period of January 28, 1998 to March 27, 1998. The Howard
complaint alleges a class period of July 3, 1997 to March 27, 1998. The
complaints principally allege that the defendants violated federal securities
laws by making false and misleading statements and by failing to disclose
material information concerning the Company's December 1997 acquisition of
substantially all of the assets and assumption of certain liabilities of the
Millennium Dynamics, Inc. business from American Premier Underwriters, Inc.,
thereby allegedly causing the value of the Company's common stock to be
artificially inflated during the purported class periods. In addition, the
Howard complaint alleges violation of federal securities laws as a result of the
Company's purported failure to disclose material information in connection with
the Company's initial public offering on July 2, 1997, and also names Montgomery
Securities, Inc., Wessels, Arnold & Henderson, and H.C. Wainwright & Co., Inc.
as defendants. The complaints further allege that certain officers and/or
directors of the Company sold stock in the open market during the class periods
and seek unspecified damages. On or about June 1, 1998, all of the named
plaintiffs and additional purported class members filed a motion for the
appointment of several of those individuals as lead plaintiffs, for approval of
lead and liaison plaintiffs' counsel and for consolidation of the actions.
Although the Company believes that it and the other defendants have meritorious
defenses to the claims made in the complaints and intends to contest the
lawsuits vigorously, an adverse resolution of the lawsuits could have a material
adverse effect on the Company's financial condition and results of operations in
the period in which the litigation is resolved. The Company is not able to
reasonably estimate potential losses, if any, related to the complaints.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
The Company is furnishing the following information with respect to the use of
proceeds from its initial public offering of common stock, $0.01 par value per
share on July 2, 1997:
(1) The effective date of the registration statement of the offering and the
commission file number were July 1, 1997 and 333-27087, respectively.
(4)(vi) The net offering proceeds to the Company after expenses were
approximately $40,664,000.
(4)(vii) From July 1, 1997 to June 30, 1998, $500,000 of the offering proceeds
were used to repay certain indebtedness under a secured subordinated
note, $30,000,000 were paid to APU in connection with the MDI
acquisition and $3,404,000 were used to fund the Company's operations.
The balance of
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the offering proceeds ($6,760,000) was invested in commercial paper,
corporate bonds and money market accounts.
Except for the $30,000,000 paid to APU which, as a result of the MDI
acquisition, 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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On June 10, 1998, the Company held its Annual Meeting of Stockholders ( the
"Annual Meeting"). Douglas C. Catalano, Henry F. McCance, and William W. Verity
were elected Class I Directors at the Annual Meeting. In addition to the
foregoing individuals, the term of the office as a director of Arthur Carr,
Dominic K. Chan, Allen K. Deary, W. Michael Humphreys, Axel Leblois and Roland
D. Pampel, continued after the Annual Meeting.
At the Annual Meeting, the votes cast for each matter described below were as
follows:
(a). Election of Three Class I Directors.
(i). Douglas A. Catalano For: 13,583,679 Withheld: 212,489
(ii). Henry F. McCance For: 13,591,581 Withheld: 204,587
(iii). William F. Verity For: 13,638,224 Withheld: 157,944
(b). Approval of an Amendment to the Company's 1997 Stock Incentive Plan
increasing the number of shares of Common Stock authorized for issuance
thereunder from 1,950,000 to 3,950,000.
For: 8,458,187 Against: 973,025 Abstain: 14,443
Broker non-votes: 4,350,513
(c). Approval of Amendments to the Company's 1997 Employee Stock Purchase
Plan (i) increasing the number of shares of Common Stock authorized for
issuance thereunder from 200,000 to 300,000 and (ii) increasing the
number of shares authorized for issuance under the third and last
plan periods from 50,000 to 100,000 per
plan period.
For: 9,022,257 Against: 407,912 Abstain: 15,486
Broker non votes: 4,350,513
ITEM 5. OTHER INFORMATION
Stockholder Proposals for 1999 Annual Meeting
As set forth in the Company's Proxy Statement for its 1998 Annual Meeting
of Stockholders, any proposal that a stockholder of the Company wishes to be
considered for inclusion in the Company's proxy materials for the Company's 1999
Annual Meeting of Stockholders (the "1999 Annual Meeting") must be submitted to
the Clerk of the Company at its offices, 2 Federal Street, Billerica,
Massachusetts 01821, no later than January 5, 1999.
In addition, in accordance with recent amendments to Rules 14a-4, 14a-5 and
14a-8 under the Securities Exchange Act of 1934, as amended, if a stockholder of
the Company wishes to present a proposal before the 1999 Annual Meeting, but
does not wish to have the proposal considered for inclusion in the Company's
proxy materials, such stockholder must also give written notice to the Clerk of
the Company at the address noted above. Such notice must be received by the
Company on or before March 23, 1999 in order to be considered timely for
purposes of Rule 14a-4. If a stockholder fails to provide timely notice of a
proposal to be presented at the 1999 Annual Meeting, the proxies designated by
the Board of Directors of the Company will have discretionary authority to vote
on any such proposal.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
Documents listed below, except for documents identified by footnotes, are
being filed as exhibits herewith. Documents identified by footnotes, if any,
are not being filed herewith and, pursuant to Rule 12b-32 of the General Rules
and Regulations promulgated by the Commission under the Securities Exchange Act
of 1934 (the "Exchange Act") reference is made to such documents as previously
filed as exhibits with the Commission. The Company's file number under the
Exchange Act is 000-22647.
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Exhibit 10.1. Employment Agreement dated as of May 18, 1998 between the
Company and Richard Wilkie
Exhibit 10.2. Employment Agreement dated as of May 18, 1998 between the
Company and Peter Espinosa
Exhibit 10.3. Promissory Note of Peter Espinosa payable to the Company
dated May 29, 1998
Exhibit 10.4. Service Agreement dated as of November 18, 1997 by and
between the Company and Great American Insurance Company
Exhibit 11. Statement re computation of per share earnings
Exhibit 27. Financial Data Schedule
(b) Reports on Form 8-K
None.
21
<PAGE>
- -------------------------------------------------------------------------------
SIGNATURES
Pursuant to the requirements 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.
Dated: August 14, 1998
Peritus Software Services, Inc.
By: /s/ Allen K. Deary
-------------------------------
Allen K. Deary
Vice President, Finance and
Chief Financial Officer (Principal
Financial Officer)
22
<PAGE>
- -------------------------------------------------------------------------------
EXHIBIT NO. DESCRIPTION
Exhibit 10.1. Employment Agreement dated as of May 18, 1998 between the
Company and Richard Wilkie
Exhibit 10.2. Employment Agreement dated as of May 18, 1998 between the
Company and Peter Espinosa
Exhibit 10.3. Promissory Note of Peter Espinosa payable to the Company
dated May 29, 1998
Exhibit 10.4. Service Agreement dated as of November 18, 1997 by and
between the Company and Great American Insurance Company
Exhibit 11. Statement re computation of earnings per common share
Exhibit 27. Financial Data Schedule
23
<PAGE>
EXHIBIT 10.1
EMPLOYMENT AGREEMENT
Agreement made as of the eighteenth day of May, 1998 (the "Effective
Date"), by and between Peritus Software Services, Inc., a Massachusetts
corporation (the "Company"), and Richard Wilkie (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, Product Development or such
other title as may be mutually agreed upon between Employee and the Company.
The Employee will report to the either the President and CEO or Chief Technology
Officer.
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 $6,538.47, which is the
equivalent of $170,000 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.
(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
President and CEO or the Chief Technology Officer.
(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. This Agreement shall
be binding on the parties and their respective successors and assigns.
(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
1997 Stock Incentive Plan in the event of an "acquisition event" as such
term is defined in such respective plan shall be governed by the terms of
plan under which such options are 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.
____________________________________ By:__________________________________
Employee Signature
Address: 39 Old Homestead Road Address: 2 Federal Street
Groton, MA 01450 Billerica, MA 01821-3540
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: Richard Wilkie
7
<PAGE>
EXHIBIT 10.2
EMPLOYMENT AGREEMENT
Agreement made as of the eighteenth day of May, 1998 (the "Effective
Date"), by and between Peritus Software Services, Inc., a Massachusetts
corporation (the "Company"), and Peter Espinosa (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, Worldwide Sales or such
other title as may be mutually agreed upon between Employee and the Company. The
Employee will report to the CEO or, if there is no CEO, the President.
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 $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.
In addition, the Company will provide you with a relocation allowance of
up to $60,000 in accordance with the Company's relocation policy.
(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 the CEO or, if there is no CEO, the President.
(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. This Agreement shall
be binding on the parties and their respective successors and assigns.
(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
1997 Stock Incentive Plan in the event of an "acquisition event" as such
term is defined in such respective plan shall be governed by the terms of
plan under which such options are 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.
_____________________________________ By:_________________________________
Employee Signature
Address: 9123 West 145 Place Address: 2 Federal Street
Overland Park, KS 66221 Billerica, MA 01821-3540
Attn: C.E.O.
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: Peter Espinosa
7
<PAGE>
EXHIBIT 10.3
PROMISSORY NOTE
---------------
$150,000 May 29, 1998 Billerica, MA
FOR VALUE RECEIVED, Peter Espinosa (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 $ 150,000, 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 $75,000 on each
of May 29, 1999 and May 29, 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:
__________________________________________
Signature
____________________________
Peter Espinosa____________________________
Name
<PAGE>
EXHIBIT 10.4
SERVICE AGREEMENT: AUTOMATE: 2000/(R)/ SERVICES
Agreement dated, executed and effective as of this 18/th/ day of November, 1997,
by and between Peritus Software Services, Inc., a Massachusetts corporation
having its principal place of business at 2 Federal Street, Billerica, MA 01821-
3485 ("Peritus"), and Great American Insurance Company ("CLIENT"), an Ohio
corporation, having its principal place of business at 49 East Fourth Street,
Cinncinati, Ohio 45202
WHEREAS, Peritus is in the business of providing Automate:2000/(R)/ services;
and
WHEREAS, CLIENT desires to receive such services, subject to the terms and
conditions of this Agreement.
NOW THEREFORE, in consideration of the following mutual promises contained
herein, the Parties agree in good faith to the following obligations and duties:
SECTION 1- DEFINITIONS:
1.1: "Automate:2000/(R)/" herein shall refer to the service, provided by
Peritus, of identifying portions of software code that may cause
errors relating to the change in the calendar year to 2000 A.D. ("Year
2000 Type Errors") and/or correcting such identified portions so as to
prevent the occurrence of Year 2000 Type Errors.
1.2: "Delivery Personnel" herein shall refer to the Employees of Peritus
who provide the Automate:2000/(R)/ service to CLIENT.
1.3: "LOC" herein shall refer to the lines of code for which the
Automate:2000/(R)/ service is used, or the lines of code which are
treated by or processed by Peritus pursuant to this Agreement. A line
of code is an 80 character string of computer software code that is
not solely a comment line or is not solely a blank line. Copybooks and
other code that might be used many times within the application are
counted only once.
1.4: "Service Order" or "SO" herein shall refer to an agreement between
Peritus and CLIENT in which the parties agree that Peritus will
provide the Automate:2000/(R)/ service to CLIENT with respect to a
specific number of LOC or for a specific project. A form of the
Service Order is attached at Attachment A.
-------------
1.5: "Domain Expert" herein shall refer to person who is an expert in the
program language, program code, program coding practices, program
architecture and use of such program which is the subject matter of an
SO.
1.6: "Acceptance" herein shall refer to confirmation from CLIENT that
goods or services provided by Peritus to CLIENT are reasonably
acceptable to
1
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CLIENT in terms of quality, performance and in time of delivery, and
further is a statement that Peritus has complied with all of its
material obligations with regard to the goods or services for which
Acceptance is provided.
1.7: "Accepted" herein shall refer to the fact that the relevant goods or
services provided by Peritus to CLIENT have been such that CLIENT has
given Acceptance to Peritus.
1.8: "Rejection" shall refer to an affirmative statement from CLIENT that
goods or services provided by Peritus to CLIENT are not reasonably
acceptable to CLIENT in terms of quality, performance and in time of
delivery, and further is a statement that Peritus has not complied
with all of its material obligations with regard to the goods or
services for which Acceptance is requested.
1.9: "Year 2000 Corrected" herein refers to the status of the applicable
CLIENT software as such that no Year 2000 Type Errors affect the
ability of the applicable CLIENT software to correctly identify,
manipulate, and perform calculations on dates later than December 31,
1999, provided it is used in accordance with its associated
documentation and provided that when it is linked up to other
software and hardware, such software and hardware factor in the
calendar date on the same conditions as, and are compatible with such
applicable CLIENT software. However, notwithstanding anything to the
contrary in the foregoing, the applicable CLIENT software may be
considered "Year 2000 Corrected" even if it is not capable of
correctly identifying, manipulating, and performing calculations on
dates later than December 31, 1999 if such incapability is a result
solely of the applicable CLIENT software not being able to correctly
identify, manipulate, and perform calculations on dates due to
mishandling or miscoding of leap year calculations and related
adjustments.
1.10: "SA" herein shall refer to this Agreement.
1.11: "Frozen Code" shall refer to a copy of the LOC Peritus provides to
CLIENT under this Agreement that is unchanged by any entity other
than Peritus.
SECTION 2- SERVICE ORDERS:
2.1: A Service Order shall be subject to the terms and conditions of this
Agreement and shall identify itself as an SO governed by this
Agreement. In the event that terms of this Agreement conflict with
the terms of any Service Order, the terms of this Agreement shall
control and take precedence unless the Service Order explicitly, and
with reference to the specific terms in this Agreement which are to
be affected, states otherwise.
2
<PAGE>
2.2: Peritus and CLIENT acknowledge that this Agreement sets forth the
terms under which Peritus may provide the Automate:2000/(R)/ service
to CLIENT, but does not by itself create any obligation to provide
the Automate:2000/(R)/ service to CLIENT. The specific nature and
amount of the Automate:2000/(R)/ services to be provided to CLIENT
shall be as specified in Service Orders executed pursuant and subject
to this Agreement. Hence, notwithstanding anything to the contrary
herein, any services or Delivery Personnel that Peritus is to provide
or supply under this Agreement shall only be provided in accordance
with this Agreement and an effective Service Order.
---
2.3: Peritus shall be entitled to assume that each executed SO has an
effective purchase order associated with such SO.
SECTION 3- CONTRACT ASSUMPTIONS:
3.1- PRICING ASSUMPTIONS:
Peritus and CLIENT agree and acknowledge that they have made and
used the assumptions set forth below in this Section 3.1 (hereafter
-----------
the "Assumptions") to formulate and create the pricing described in
the applicable SO that will be applicable to each and every
separately applicable Service Order unless a particular SO provides
otherwise. The Assumptions are as follows:
i) that all assessment/ impact analysis SO will be priced at a
time and material cost,
ii) that all of the software source code provided for which the
Automate:2000/(R)/ services are to be provided involve
software code written in the IBM OS/VS COBOL or the IBM VS
COBOL II standard computer language (excluding nested
programs and intrinsic functions), and
iii) that the number of LOC referenced in any SO is materially
correct.
SECTION 4- LEVELS OF SERVICE, WARRANTIES AND RELATED MATTERS:
4.1: In fulfillment of any SO, Peritus shall:
i) be responsible for the packaging and return of LOC to be
provided to CLIENT,
3
<PAGE>
ii) assign a "Peritus Project Manager" who will be responsible
for managing, along with the CLIENT Project Manager, quality
control, communications, planning, support and service
issues relevant to the Automate:2000/(R)/ services being
provided to CLIENT under the SOs,
iii) assign a "Peritus Team Leader" for each SO who will
technically evaluate the subject matter of the SO and
develop a plan to perform the SO, in addition to managing
the Peritus Renovation Engineers assigned to perform the
obligations of Peritus pursuant to the applicable SO, and
iv) provide two "Renovation Engineers" for each SO to provide
the Automate:2000/(R)/ services.
4.2- WARRANTY AND RELATED REMEDIES:
When Peritus delivers LOC to CLIENT, both Peritus and CLIENT shall
maintain a copy of such LOC as Frozen Code for at least 210 days
after such delivery.
For the period beginning when Peritus delivers LOC to CLIENT for
testing and ending 210 days after such delivery, Peritus warrants
that the applicable delivered LOC in its Frozen Code state shall be
Year 2000 Corrected. This warrant does not extend to LOC which is
altered by any party other than Peritus. In order to enforce the
aforementioned warranty, it shall be the responsibility of CLIENT to
identify in the Frozen Code the claimed defect which CLIENT believes
breaches this Section 4.2.
-----------
4.3- SOLE AND EXCLUSIVE REMEDIES FOR SECTION 4.2 WARRANTY:
-----------
CLIENT'S SOLE AND EXCLUSIVE REMEDY (PROVIDED THAT SUCH DOES NOT FAIL
OF ITS ESSENTIAL PURPOSE) FOR A BREACH OF THE WARRANTY PROVIDED
UNDER SECTION 4.2 HEREIN SHALL BE THAT DURING THE PERIOD FOR WHICH
-----------
THE WARRANTY IS IN EFFECT, PERITUS SHALL CORRECT ALL DOCUMENTED AND
REPEATABLE DEFECTS WHICH ARE IN THE APPLICABLE DELIVERED LOC IN ITS
FROZEN CODE STATE WHICH CLIENT HAS EXPLICITLY IDENTIFIED FOR PERITUS
(BY REFERENCE TO THE APPLICABLE PORTION OF THE FROZEN CODE) AS
CAUSING A BREACH OF THE SECTION 4.2 WARRANTY.
-----------
4
<PAGE>
Subject to the limitations on liability in this Agreement, nothing
in this Section 4.3 limits CLIENT's right to seek to recover direct
-----------
damages, provided that CLIENT has first sought remedy as set forth
in the preceding paragraph, such remedy has failed of its essential
purpose, and further that CLIENT takes reasonable steps to mitigate
CLIENT's damages and related costs.
Peritus shall not charge CLIENT pursuant to Section 4.4 for
-----------
delivery personnel (or for the travel and living expenses of such)
utilized to fulfill the peritus' obligations set forth in this
Section 4.3.
-----------
4.4: Intentionally left blank.
4.5: Intentionally left blank.
4.6: In fulfillment of any SO, CLIENT shall:
i) appoint an employee of CLIENT to act as "CLIENT Project
Manager", to represent CLIENT in the execution of the SO,
and to be responsible for managing along with the Peritus
Project Manager, quality control, communications, planning,
support and service issues relevant to the
Automate:2000/(R)/ services being provided to CLIENT under
the SOs,
ii) conduct "assessments" and "inventories" prior to when such
may be required for Peritus to act to fulfill its
obligations under this Agreement or an SO,
iii) collect and provide to Peritus computer code prior to when
such may be required for Peritus to act to fulfill its
obligations under this Agreement or an SO,
iv) provide to Peritus access to Domain Experts of CLIENT as
necessary when such may be required for Peritus to act to
fulfill its obligations under this Agreement or an SO, and
v) conduct all testing and all Acceptance testing of LOC or
other items provided by Peritus to CLIENT.
4.7- TIMELY PERFORMANCE:
If Peritus has knowledge that anything prevents or threatens to
prevent the timely performance of services or work to be performed
under this Agreement, Peritus shall promptly notify CLIENT's
Technical Representative thereof and include all relevant
information concerning the delay or potential delay.
5
<PAGE>
4.8- WORK DONE BY OTHERS:
If any of the services to be provided under this Agreement is
dependent on work done by others, Peritus shall inspect and promptly
report to CLIENT's Technical Representative any defect that renders
such other work unsuitable for Peritus' proper performance. Peritus'
silence shall constitute approval of such work as fit and suitable
for Peritus' performance.
4.9- TOOLS AND EQUIPMENT:
Unless otherwise specifically provided in this Agreement, Peritus
shall provide all labor, tools, and equipment ("Tools") for
performance of this Agreement. Should Peritus actually use any Tools
owned or rented by CLIENT or its customers, Peritus acknowledges
that Peritus accepts Tools "as is, where is,", that neither CLIENT
nor it customer have any responsibility for the condition or state
of repair of the tools and that Peritus shall have risk of loss and
damage to such Tools. In such case, Peritus agrees not to remove
Tools from CLIENT's or its customers' premises, to use Tools only
for the work or services to be provided pursuant to this Agreement
and to return Tools to CLIENT or its customer upon completion of
use, or at such earlier time as CLIENT or its customer may request,
in the same condition as when received by Peritus, reasonable wear
and tear excepted.
4.10- CARE AND CUSTODY OF PROPERTY:
"Movable goods" in this Section 4.10 does not refer to LOC. Peritus
------------
shall have the sole and exclusive care, custody and control of all
CLIENT's movable goods in the possession of Peritus pursuant to this
Agreement, and shall be fully responsible for any and all damage to
or loss of such goods, however occurring, during the time they are
in Peritus' care, custody and control. When CLIENT orders the goods
for delivery to Peritus or delivers goods in its possession to
Peritus, Peritus' responsibility hereunder shall commence upon
tender of delivery at the point of destination and shall continue
uninterrupted until the goods are delivered to CLIENT or its
designees. CLIENT shall have no responsibility for any damage to or
loss of any goods ordered by Peritus until they have been delivered
to CLIENT or its designees. The liability of Peritus for any and all
damage to or loss of goods of CLIENT in Peritus' possession shall be
based on the full replacement value of the goods as reasonably
determined by CLIENT.
Whenever loss or damage has occurred to the goods prior to receipt
by Peritus, Peritus shall promptly note the damage or loss on all
copies of the
6
<PAGE>
delivery receipt. Each copy of the delivery receipt shall be signed
by Peritus and the carrier's. Peritus shall request the delivery
carrier to inspect damaged goods and secure an inspection report or
waiver of inspection from the carrier. Peritus shall thereupon
notify CLIENT of the loss or damage.
4.11- INSPECTION:
Provided that CLIENT does not interfere with Peritus' operations,
during the normal business hours of Peritus CLIENT's Representatives
shall have reasonable access to work being provided pursuant to this
Agreement for the purpose of inspection or a quality review and
Peritus shall provide safe and proper facilities for such purpose.
4.12- RIGHT OF ENTRY AND PLANT RULES:
Each party shall have the right to enter the premises of the other
party during normal business hours with respect to the performance
of this Agreement, subject to all plant rules and regulations,
security regulations and procedures and U.S. Government clearance
requirements if applicable. Peritus shall become acquainted with
conditions governing the delivery, receipt and storage of materials
at the site of the work or services provided pursuant to this
Agreement so that Peritus will not interfere with CLIENT's
operations. Storage space will not necessarily be provided adjacent
to the site of the work or services provided pursuant to this
Agreement. Therefore, Peritus shall be expected to select, uncrate,
remove and transport materials from the storage areas provided.
CLIENT is not responsible for the safekeeping of Peritus' property
on CLIENT premises. Peritus shall not stop, delay or interfere with
CLIENT's work schedule without the prior approval of CLIENT's
Representative, which approval shall not be unreasonably withheld.
Peritus shall provide and maintain sufficient covering and take any
other precautions necessary to protect CLIENT's stock, equipment and
other property from damage due to Peritus' performance of the work
or services provided pursuant to this Agreement.
4.13- PERITUS EMPLOYEES:
As used in Sections 4.13 and 4.14 only, the term "Peritus Employee"
----------------------
means anyone performing on behalf of Peritus, the work or services
provided pursuant to this Agreement, including but not limited to
the Peritus' employees, consultants, representatives, agents,
subcontractors, and subcontractors' subcontractors at all tiers. It
is agreed that all persons provided by Peritus to perform Peritus'
obligations under this Agreement are not employees or agents of
CLIENT, and CLIENT shall not exercise any direct control or
supervision over Peritus Employees but CLIENT's Technical
Representative will be available for consultation.
7
<PAGE>
Peritus shall be the sole entity responsible for receiving
complaints from Peritus Employees regarding their assignments and
for notifying Peritus Employees of the termination or change of
their assignments. CLIENT has the right at any time (prior to and
after assignment to perform Peritus' obligations under this
Agreement) and for any reason to reject or to have Peritus remove
specific Peritus' Employees that have been performing Peritus
obligations under this Agreement upon notice to Peritus. Upon such
notice, Peritus shall, at CLIENT's request, replace the Peritus
Employee(s). CLIENT's aforementioned right or rejection and/or
removal shall not be used in such a manner as to unreasonably
inhibit Peritus' ability to perform its obligations under this
Agreement. In the event of any staffing change, CLIENT shall not be
charged for the time required to train the replacement. The amount
of noncompensatory training time, if any, shall be mutually
determined by Peritus and CLIENT's Technical Representative. At
CLIENT's request, Peritus shall provide evidence to CLIENT to
document the qualifications and experience of Peritus' Employees
assigned to perform Peritus obligations under this Agreement and
CLIENT may interview such Peritus Employees prior to when they start
been performing Peritus obligations under this Agreement.
Peritus further agrees that any of Peritus' Employees who is or
becomes a `leased employee' (in the U.S. as defined in Section
414(n) of the Internal Revenue Code) of CLIENT during the term of
this Agreement, shall not be covered by, and shall be excluded from
participation in, any employee benefit plan maintained by CLIENT.
Peritus shall indemnify and save CLIENT harmless from and against
any losses, damages, claims, demands, suits, and liabilities that
arise out of, or results from, any failure by Peritus to perform its
obligations under this paragraph. Peritus shall also indemnify and
save CLIENT harmless from any entitlement, assertion, or claim,
which any of Peritus's employees might have or might make relative
to rights or privileges in any CLIENT employee benefit plan and
which arises, in whole or in part, out of work or services rendered
under this Agreement.
4.14- IDENTIFICATION CREDENTIALS:
CLIENT may, at its discretion, require Peritus' Employees to exhibit
identification credentials, which CLIENT may issue, in order to gain
access to CLIENT's premises for the performance of this Agreement.
If, for any reason, any of Peritus' Employees are no longer
performing relative to this Agreement, Peritus shall promptly inform
CLIENT's Technical Representative in the speediest manner possible.
Notification shall be followed by the prompt delivery to CLIENT's
Technical Representative of the identification credentials involved
or a written statement of the reasons why the Identification
Credentials cannot be
8
<PAGE>
returned. Peritus shall be liable for any damage or loss sustained
by CLIENT if such identification credentials are not returned to
CLIENT.
4.15- NON-EXCLUSIVE SERVICES:
It is expressly understood and agreed that this Agreement neither
grants to Peritus an exclusive right or privilege to sell to CLIENT
any or all material or services of the type described in this
Agreement which CLIENT may require, nor (except as set forth herein)
requires the purchase of any material or services from Peritus by
CLIENT. It is, therefore, understood that CLIENT may contract with
other manufacturers other than Peritus for the procurement of
comparable material or services.
Except as set forth herein, Peritus agrees that purchases by CLIENT
under this Agreement shall neither restrict the right of CLIENT to
cease purchasing nor require CLIENT to continue any level of such
purchases.
SECTION 5- ACCEPTANCE:
5.1: Within 120 days of delivery of LOC, goods or services from Peritus,
CLIENT shall test and then provide either Acceptance or Rejection of
them. In the event that CLIENT does not provide Rejection within
such 120 day period, then CLIENT will be deemed to have provided
Acceptance of such LOC, goods or services. Acceptance does not
affect CLIENT's rights or remedies under Section 4.2 or 4.3.
------------------
5.2: In providing Rejection with regard to any LOC, goods or services
received from Peritus, CLIENT shall provide a detailed explanation
of why Rejection was provided.
5.3: Rejection shall be determined by CLIENT in CLIENT's sole, but
reasonable judgment. Rejection shall be deemed reasonable only if
Peritus has:
i) not correctly fixed identified Year 2000 Type Errors,
ii) introduced new errors and defects in the LOC due to attempts
to correct Year 2000 Type Errors,
iii) been materially late in performing its obligations under
this Agreement (and any SOs) provided that such result is
solely the result of Peritus' performance and not due to the
actions or inactions of CLIENT or any other party, or
9
<PAGE>
iv) failed to identify at least 99% of the variables that are
sensitive to the calendar year in such a way as to cause a
Year 2000 Type Error.
SECTION 6- USE OF LOC:
6.1: Except for testing to determine whether to provide Acceptance,
CLIENT hereby agrees that in no event shall it use any LOC or other
items received from Peritus pursuant to this Agreement (and any SO)
unless CLIENT has previously Accepted such LOC or items. In no event
shall CLIENT use any LOC for any purpose if CLIENT has provided or
has been deemed to have provided Rejection of such LOC.
SECTION 7- DISCLAIMER OF WARRANTIES; LIMITATION OF LIABILITY; RELATED MATTERS:
7.1: Except as set forth in Section 4.2, CLIENT AGREES THAT PERITUS, IN
-----------
PROVIDING LOC, WORK, DELIVERABLES, SOFTWARE, SERVICES, COMPUTER CODE
AND/OR OTHER MATERIALS TO CLIENT, IS PROVIDING SUCH "AS IS" AND
PERITUS IS NOT AND DOES NOT MAKE ANY WARRANTIES TO CLIENT. IT IS
HEREBY ACKNOWLEDGED THAT PERITUS SPECIFICALLY DISCLAIMS THE IMPLIED
WARRANTIES OF FITNESS FOR A PARTICULAR PURPOSE, MERCHANTABILITY AND
NON-INFRINGEMENT, IN REGARD TO THE LOC, SOFTWARE AND/OR OTHER
MATERIALS PROVIDED TO CLIENT, AS WELL AS IN REGARD TO ANY WORK,
DELIVERABLES, SOFTWARE, SERVICES, COMPUTER CODE AND/OR OTHER
MATERIALS PROVIDED BY PERITUS TO CLIENT.
7.2: IT IS FURTHER AGREED THAT, TO THE MAXIMUM EXTENT PERMITTED UNDER
APPLICABLE LAW, THERE WILL BE NO LIABILITY FOR PERITUS TO CLIENT FOR
ANY CONSEQUENTIAL, INCIDENTAL, PUNITIVE OR OTHER INDIRECT DAMAGES
(INCLUDING BUT NOT LIMITED TO LOST PROFITS, LOST OPPORTUNITIES AND
LOST DATA) RESULTING FROM THE PROVISION OF ANY LOC, WORK,
DELIVERABLES, SOFTWARE, SERVICES, COMPUTER CODE AND/OR OTHER
MATERIALS TO CLIENT.
7.3: TO THE MAXIMUM EXTENT PERMITTED UNDER APPLICABLE LAW, CLIENT AGREES
THAT PERITUS SHALL NOT BE LIABLE FOR ANY CLAIMS FOR DIRECT OR ACTUAL
DAMAGES, HARM OR FOR ANY RESULTING MONETARY DAMAGES, IN EXCESS OF
THE AMOUNTS PAID TO PERITUS UNDER THE APPLICABLE SERVICE ORDER.
10
<PAGE>
AFTER DECEMBER 31/ST/, 2000, IT IS FURTHER AGREED THAT, TO THE
MAXIMUM EXTENT PERMITTED UNDER APPLICABLE LAW, THERE WILL BE NO
LIABILITY FOR PERITUS TO CLIENT FOR ANY DAMAGES, INCLUDING BUT NOT
LIMITED TO DIRECT, ACTUAL, CONSEQUENTIAL, INCIDENTAL, PUNITIVE OR
OTHER INDIRECT DAMAGES (INCLUDING LOST PROFITS, LOST OPPORTUNITIES
AND LOST DATA) RESULTING FROM THE PROVISION OF LOC, SOFTWARE,
SERVICES, COMPUTER CODE AND/OR OTHER MATERIALS TO CLIENT.
7.4: Notwithstanding anything to the contrary in Sections 7.1, 7.2, 7.3
----------------------
or 7.4, no limit of liability in Sections 7.1, 7.2, 7.3 or 7.4 shall
------ -----------------------------
be applicable with regard to damages resulting from i) personal
injury (including death) caused by Peritus, ii) real or personal
property damage caused by Peritus, or iii) the willful misconduct of
Peritus. Nothing in Sections 7.1, 7.2, 7.3 or 7.4 alters or amends
-----------------------------
Peritus' obligations under Section 7.6.
-----------
7.5- INDEMNITY:
Peritus agrees to indemnify and save harmless CLIENT, its affiliates
and its customers and their officers, directors, employees,
successors and assigns (all hereinafter referred to as
"Indemnified") from and against any losses, damages, claims,
demands, suits, liabilities, and expenses (including reasonable
attorneys' fees) that arise out of or result from: (1) injuries or
death to persons or damage to property, including theft, in any way
arising out of or occasioned by, caused or alleged to have been
caused by or on account of the performance of services performed by
Peritus or persons furnished by Peritus, (2) assertions under
Workers' Compensation or similar acts made by persons furnished by
Peritus or by any subcontractor of Peritus, or by reason of any
injuries to such persons for which indemnified would be responsible
under workers' compensation or similar acts if the persons were
employed by indemnified, (3) any breach by Peritus of Sections 7.6,
-------------
12, and 13.4.
------------
Peritus agrees to defend CLIENT, at CLIENT's request, against any
such claim, demand, or suit of the nature described in this Section
7.5. CLIENT agrees to notify peritus within a reasonable time of any
written claims or demands against CLIENT for which Peritus is
responsible under this Section 7.5.
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7.6- INFRINGEMENT:
Peritus shall indemnify and save harmless the Indemnified from and
against any losses, damages, liabilities, fines, penalties, and
expenses (including reasonable attorneys' fees) that arise out of or
result from any and all claims (1) of infringement of any U.S.
patent, copyright, trademark
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or trade secret right, or other intellectual property right, private
right, or any other proprietary or personal interest, and (2) are
related by circumstances to the existence of this Agreement or
performance under or in contemplation of it (an "Infringement
Claim"). If the Infringement Claim arises solely from Peritus'
adherence to the indemnified's written instructions regarding
services or tangible or intangible goods provided by Peritus
("Items") and if the Items are not (1) commercial items available on
the open market or the same as such items, or (2) items of Peritus's
designated origin, design or selection, the Indemnified shall
indemnify Peritus. The Indemnified or Peritus (at the Indemnified 's
request) shall defend or settle, at its own expense, any demand,
action or suit on any Infringement Claim for which it is the
indemnitor under this Section 7.6 and each shall timely notify the
-----------
other of any assertion against it of any Infringement Claim and
shall cooperate in good faith with the other to facilitate the
defense of any such claim.
7.7- IMPLEADER:
Peritus shall not implead or bring an action against CLIENT based on
any claim by any person for personal injury or death to an employee
of CLIENT for which CLIENT has previously paid or is obligated to
pay worker's compensation benefits to such employee or claimant and
for which such employee or claimant could not otherwise bring legal
action against CLIENT.
7.8- INSURANCE:
Peritus shall maintain and cause Peritus's subcontractors to
maintain during the term of this Agreement: (1) Workers'
Compensation insurance as prescribed by the law of the state or
nation in which this Agreement is performed, (2) employer's
liability insurance with limits of at least $500,000 for each
occurrence; (3) automobile liability insurance if the use of motor
vehicles is required, with limits of at least $1,000,000 combined
single limit for bodily injury and property damage per occurrence,
(4) Comprehensive General Liability ("CGL") insurance, including
Blanket Contractual Liability and Broad Form Property damage, with
limits of at least $1,000,000 combined single limit for personal
injury and property damage per occurrence; (5) if the furnishing to
CLIENT (by sale or otherwise) of products or material is involved,
CGL insurance endorsed to include products liability and completed
operations coverage in the amount of $5,000,000 per occurrence; and
(6) Errors and Omissions Insurance in the amount of at least
$1,000,000 per claim with an annual aggregate of at least $3,000,000
inclusive of legal defense costs. All CGL and automobile liability
insurance shall designate CLIENT, its affiliates, and its officers,
directors, and employees (all referred to as "CLIENT") as additional
insured. All such insurance must be primary and non-
12
<PAGE>
contributory and required to respond and pay prior to any other
insurance or self insurance available. any other coverage available
to CLIENT shall apply on an excess basis.
Peritus agrees that Peritus, Peritus's insurer(s) and anyone
claiming by, through, under, or in Peritus's behalf shall have no
claim, right of action, or right of subrogation against CLIENT and
its customers based on any loss or liability insured under the
foregoing insurance. At the request of CLIENT, Peritus and Peritus's
subcontractors shall furnish certificates or adequate proof of the
foregoing insurance including, if specifically requested by CLIENT,
copies of the endorsements and policies. CLIENT shall be notified in
writing at least thirty (30) days prior to cancellation of or any
change in the policy. Insurance companies providing coverage under
this agreement must be rated by A-M Best with at least an A- rating.
SECTION 8- FEES:
8.1: For each Service Order, the fees due Peritus shall be calculated as
set forth in the applicable SO, subject to readjustment pursuant to
Section 8.2.
-----------
8.2- READJUSTMENTS:
In the event that for any Service Order, the Assumptions set forth
in Section 3.1 are not accurate and the applicable Service Order
-----------
does not specifically address such deviation from the Assumptions,
then Peritus and CLIENT shall negotiate in good faith regarding a
readjustment of the services to be provided under the Service Order
or readjustment of fees for such services.
In the event that Peritus and CLIENT cannot reach a mutually
agreeable readjustment, Peritus shall have at its option the right
to cancel all further work and obligations under the applicable
Service Order and receive payment with regard to work and services
previously delivered.
8.3- GENERAL PAYMENT TERMS:
CLIENT shall pay fees and other payments due to Peritus, including
but not limited to reimbursement of expenses, within thirty (30)
days of the issuance by Peritus of an invoice.
Unless or until CLIENT designates otherwise in writing, invoicing
shall be sent to the following address:
Attn: William B. Shively, Vice President, Personal Lines Address:
Great American Insurance Company--49 East Fourth Street, Cincinnati,
Ohio 45202
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<PAGE>
LOC and related materials returned to CLIENT shall be delivered free
from all claims, liens, and charges whatsoever. CLIENT reserves the
right to require, before making payment, proof that all parties
furnishing labor and materials for the LOC and related materials
have been paid.
CLIENT shall reimburse Peritus only for the following tax payments
with respect to transactions under this Agreement unless CLIENT
advises Peritus that an exemption applies: state and local sales and
use taxes, as applicable. Taxes payable by CLIENT shall be billed as
separate items on Peritus' invoices and shall not be included in
Peritus' prices. CLIENT shall have the right to have Peritus contest
any such taxes that CLIENT deems improperly levied at CLIENT's
expense and subject to its direction and control.
8.4- DEFAULT SERVICE ORDER PAYMENT TERMS:
Fees shall be due Peritus under each and any Service Order as
follows;
i) 30% of the total of all such fees upon signing of the
applicable Service Order,
ii) 30% of the total of all such fees upon completion of the
"identification stage" of the Automate:2000/(R)/ service
provided under the applicable Service Order,
iii) 30% of the total of all such fees upon delivery by Peritus
of the LOC to CLIENT for Acceptance and testing by CLIENT,
and
iv) 10% of the total of all such fees upon the earlier of a)
Acceptance by CLIENT or b), 120 days after the delivery of
the LOC to CLIENT for Acceptance and testing by CLIENT if
CLIENT has neither provided final Acceptance or Rejection in
writing to Peritus prior to the end of such 120 day period.
v) All SO which are time and material based will be billed
monthly at actual incurred costs
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<PAGE>
8.5- OTHER ADJUSTMENTS:
On a monthly basis, the fees due under this Agreement (and hence
also under any SO) shall be recomputed to adjust for any additional
services or work performed or not performed, items provided or not
provided or expenses incurred. If the adjustment results in a
greater amount of money being due Peritus, Peritus shall invoice
CLIENT for such fees. If the adjustment results in a lesser amount
of money being due that is less than what Peritus has already
received for such services or items, then Peritus shall credit such
amounts to CLIENT's future debts, or, if requested in written by
CLIENT, return such excess amounts to CLIENT.
8.6- AUDIT:
Peritus shall maintain complete and accurate accounting records, in
a form in accordance with generally accepted accounting practices,
to substantiate Peritus' charges (if and only if such charges are
calculated on a time and material basis or are for reimbursements)
under this Agreement. Such records shall include, but not be limited
to, time cards, original receipts, job cards, attendance cards, job
summaries, and travel and living expense reports. All payments, if
any, made by CLIENT shall be subject to final adjustments as
determined by such audit(s). Peritus shall retain such records
relating to this Agreement for a period of two (2) years from the
date of final payment for services authorized herein. Reimbursable
expenses for which receipts are not available for review shall be
repaid promptly by Peritus to CLIENT.
CLIENT and its authorized agents and representatives shall have
access to such records no more than once per calendar quarter during
normal business hours during the term of this Agreement and during
the respective periods in which Peritus is required to maintain such
records as provided in this clause.
SECTION 9- GENERAL RESPONSIBILITIES OF CLIENT:
9.1- CONDUCT OF BUSINESS:
CLIENT shall pay all expenses, including without limitation, taxes
incurred by it in connection with its business and will be solely
responsible for the acts and expenses of its employees and agents.
9.2- CLIENT'S REPRESENTATIVES:
CLIENT's "Technical Representative" under this Agreement shall be
______________. Unless otherwise notified in writing, Peritus shall
assume that all inspection and Acceptance, as is set forth in this
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<PAGE>
Agreement, of services and work rendered under this Agreement shall
be conducted by the Technical Representative or others as may be
delegated in writing by the Technical Representative. CLIENT's
"Purchasing Representative" shall be ________________. CLIENT may
replace or change the representatives mentioned in this Section 9.2
-----------
by providing written notice to Peritus.
SECTION 10- TERM:
10.1: This Agreement shall be deemed effective as of the date of execution
set forth above and shall remain in effect for a term ending January
1/st/, 2001 unless sooner terminated in accordance with the terms of
this Agreement. The term of this Agreement may be extended by mutual
written consent of Peritus and CLIENT.
SECTION 11- TERMINATION:
11.1- Termination of an SO:
Any SO may be terminated and the obligations thereunder discharged;
(i) by either party, without cause, by giving 180 days prior
written notice of termination to the other party;
(ii) by either party, effective immediately and without notice,
if either party shall assign or attempt to assign the SO
without the prior written approval of the other;
(iii) by either party, upon written notice, if the other party
shall breach any other material provision of the SO or this
Agreement (other than Section 11.1(ii) ), and such breach is
-----------------
not cured within 30 days after notice thereof from the other
party; or
(iv) by either party, upon written notice, if there is (A) a
dissolution, termination of existence, liquidation,
insolvency or business failure of the other party, or the
appointment of a custodian or receiver of any party of such
party's property, if such appointment is not terminated or
dismissed within 30 days; (B) a composition or an assignment
or trust mortgage for the benefit of creditors by the other
party (other than solely as assignment of monies due); (C)
the commencement with respect to the other party of any
proceeding under the United States Bankruptcy Code or any
other federal or state bankruptcy, reorganization,
receivership, insolvency or other similar law, or any law of
any applicable country or jurisdiction, affecting the
16
<PAGE>
rights of creditors generally, which proceeding, if
initiated against such party, is not dismissed within 30
days; or (D) if the other party evidences an inability to
pay debts as they become due, unless adequate assurance of
such ability to pay is provided within thirty (30) days of
such notice.
11.2- TERMINATION OF THIS AGREEMENT:
If a proceeding is commenced under any provision of the United States
Bankruptcy Code, voluntary or involuntary, by or against either
party, and this Agreement has not been terminated, the non-debtor
party may file a request with the bankruptcy court to have the court
set a date within sixty (60) days after the commencement of the case,
by which the debtor party will assume or reject this Agreement, and
the debtor party shall cooperate and take whatever steps necessary to
assume or reject the Agreement by such date.
If and only if all SOs have either previously expired or been
terminated or are contemporaneously terminated or expire at the time
this Agreement is to terminate, then this Agreement may be terminated
at any time, by either party, immediately upon notice.
11.3- RIGHTS:
Neither party shall be entitled to any compensation or claim for
goodwill or other loss, cost or expense which either of them may
suffer or claim to have suffered solely by reason of termination or
expiration of this Agreement or an SO, provided, however, that
nothing herein shall operate to limit any other rights or remedies
available to a non-defaulting party at law or in equity upon the
breach of this Agreement or an SO by the other party.
SECTION 12- CONFIDENTIAL INFORMATION:
12.1- CONFIDENTIAL INFORMATION:
Peritus and CLIENT acknowledge that as a result of their
relationship, they may be exposed to or receive the confidential
and/or proprietary information of the other. The party disclosing
the confidential and/or proprietary information shall be referred to
as the "Discloser". The party receiving the confidential and/or
proprietary information shall be referred to as the "Recipient".
"Confidential Information" herein refers to the confidential and/or
the proprietary information of the party disclosing the information.
This Confidential Information may include but is not limited to
software in source code and/or object code forms, documentation,
program libraries, program listings, methods of processing,
technical
17
<PAGE>
processes, operational methods, tools, trade secrets,
client lists, methodologies, financial information (including
information regarding sales and profits) and training materials.
Confidential Information also includes information which the
Discloser is obligated to maintain the confidentiality of, such as
the confidential information of parties with whom the Discloser
conducts business.
12.2- NOTICE THAT INFORMATION RECEIVED FROM DISCLOSER IS CONFIDENTIAL
INFORMATION:
Information which Discloser discloses to Recipient shall be
considered Confidential Information if:
(i) such information is designated or indicated in writing as
proprietary or confidential by the Discloser, prior to or at
the time any such information is disclosed. Notwithstanding
the foregoing, information that is disclosed orally,
visually, in writing or by other means, to the Recipient by
the Discloser without a written indication or designation of
its confidential or proprietary nature shall constitute
Confidential Information if the Discloser, within thirty
(30) days after such disclosure, notifies the Recipient, in
writing, that the information disclosed is Confidential
Information and provides a brief description of the
information sufficient to identify it;
(ii) it is material containing or incorporating Peritus' training
methodologies or is material relating to the
Automate:2000/(R)/ service, the PCA software, the
AutoEnhancer/2000/(TM)/ software, or other related software;
or
(iii) is source code for CLIENT's computer software application
and any related information as well as any information
relative to CLIENT's plans for Year 2000 compliance.
12.3- EXCEPTIONS:
Notwithstanding the foregoing Section 12.2, Confidential Information
------------
shall not include any information to the extent that it:
(i) is or becomes a matter of public knowledge without the fault
of the Recipient; or
(ii) was lawfully obtained and known to Recipient prior to the
disclosure to it by Discloser; or
(iii) was developed independently by Recipient; or
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<PAGE>
(iv) was rightfully disclosed to Recipient by a third party which
is not under an obligation to maintain such information in
confidence; or
(v) is disclosed under operation of law, government regulation,
or court order, provided that Recipient first gives Discloser
notice and a reasonable opportunity to secure confidential
protection of such Confidential Information if such notice is
not prohibited by the applicable law, government regulation
or court order.
Furthermore, information which is disclosed by either Peritus or
CLIENT to the other for the first time after and only after the
termination or expiration of this Agreement shall not be considered
Confidential Information under the terms of this Agreement.
12.4: Recipient shall maintain the confidentiality of all Confidential
Information, holding such information in strict confidence, using at
least such degree of care as it uses to protect its own Confidential
Information of a similar nature.
12.5: Recipient will not, directly or indirectly, disclose any
Confidential Information to anyone outside of Recipient, except with
Discloser's prior written consent.
12.6: Recipient shall not make use of any Confidential Information for
any purpose or for the benefit of anyone or any other entity other
than Discloser, except as permitted by this Agreement and an SO.
12.7: Recipient shall be permitted to disclose the Confidential
Information only to its employees and agents ("Employees") having a
need to know such information in connection with the performance of
this Agreement and an SO, and who are bound by a written agreement,
enforceable by the Recipient, that obligates the Employees to comply
with the provisions set forth in this Section 12. Recipient shall
----------
instruct all such Employees as to Recipient's and their obligations
under this Agreement.
12.8: Recipient, upon termination of this Agreement or at any time
Discloser may so request, shall deliver promptly to Discloser, or,
at Discloser's option, shall destroy all memoranda, notes, records,
reports, and other documents, media and materials (and all copies
thereof) regarding or including any Confidential Information which
Recipient may then possess, have under its control or in its
custody.
12.9: Recipient acknowledges that the disclosure of Confidential
Information will cause irreparable injury to Discloser. Discloser
shall, therefore, be entitled to injunctive relief upon a disclosure
or threatened disclosure of any Confidential Information, without a
requirement that Discloser prove
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<PAGE>
irreparable harm or the posting of a bond. Without limitation of the
foregoing, Recipient shall advise Discloser immediately in the event
that it learns or has reason to believe that any person or entity
which has had access to Confidential Information has violated or
intends to violate the terms of this Agreement or an SO with regard
to confidentiality, and will reasonably cooperate with Discloser in
seeking injunctive relief against any such person or entity. This
provision shall not in any way limit such other remedies as may be
available to Discloser at law or in equity.
12.10: The terms and conditions of this Agreement shall be considered the
Confidential Information of Peritus and Peritus shall be considered
the Discloser of this Confidential Information.
12.11- IDENTIFICATION:
Peritus shall not, without CLIENT's prior written consent, engage
in advertising, promotion or publicity related to this Agreement, or
make public use of any identification in any circumstances related
to this Agreement, except as may be required to comply with law,
court order administrative order or government regulation.
"Identification" means any copy or semblance of any trade name,
trademark, service mark, insignia, symbol, logo, or any other
product, service or organization designation, or any specification
or drawing of CLIENT or its affiliates or evidence of inspection by
or for any of them. Peritus shall remove or obliterate any
identification prior to any use or disposition of any material
rejected or not purchased by CLIENT, and, shall indemnify, defend
(at CLIENT's request) and save harmless CLIENT and their affiliates
and each of their officers, directors and employees from and against
any losses, damages, claims, demands, suits, liabilities, fines,
penalties and expenses (including reasonable attorneys' fees)
arising out of Peritus' failure to so remove or obliterate.
In the event that Peritus requests to make any Identification,
CLIENT shall promptly review and consider such request.
SECTION 13- GENERAL PROVISIONS:
13.1- ENTIRE AGREEMENT:
This Agreement and the attachments to this Agreement constitute the
entire agreement between the parties with reference to the subject
matter hereof and supersedes all prior agreements. No waiver,
consent, modification or change of the terms of this Agreement or of
the attachments to this Agreement shall bind either party unless it
is in writing signed by both parties by their duly authorized
representatives. There are no understandings, agreements,
representations or warranties, express or
20
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implied, with respect to the subject matter hereof except as
expressly set forth in this Agreement and the attachments to this
Agreement. Only the terms and conditions of this Agreement and the
attachments to this Agreement shall govern the transactions
contemplated hereunder, notwithstanding any additional, different or
conflicting terms which may be contained in any other document
provided by one party to the other.
13.2- RELEASES VOID:
Neither party shall require (i) waivers or releases of any personal
rights or (ii) execution of documents, if any of the foregoing
conflict with the terms of this Agreement, from employees,
representatives, or customers of the other in connection with visits
to its premises and both parties agree that no such releases,
waivers or documents shall be pleaded by them or third persons in
any action or proceeding.
13.3- FORCE MAJEURE:
Neither party shall be held responsible for any delay or failure in
performance of any part of this Agreement (or any SO) to the extent
such delay or failure is caused by fire, flood, explosion, war,
strike, embargo, governmental requirement, civil or military
authority, act of God, or other similar causes beyond its control and
without the fault or negligence of the delayed or nonperforming party
or its subcontractors ("force majeure conditions"). Notwithstanding
the foregoing, Peritus' liability for loss or damage to CLIENT's
material in Peritus' possession or control shall not be modified by
this clause. If any force majeure condition occurs, the party delayed
or unable to perform shall give immediate notice to the other party,
stating the nature of the force majeure condition and any action
being taken to avoid or minimize its effect, and the party affected
by the other's delay or inability to perform may elect to: (1)
suspend this Agreement or any SO for the duration of the force
majeure condition and (i) at its option buy, sell, obtain, or furnish
elsewhere material or services to be bought, sold, obtained, or
furnished under this Agreement or SO (unless such sale or furnishing
is prohibited under this Agreement) and deduct from any commitment
the quality bought, sold, obtained, or furnished or for which
commitments have been made elsewhere and (ii) once the force majeure
condition ceases, resume performance under this Agreement or SO with
an option in the affected party to extend the period of this
Agreement or SO up to the length of time the force majeure condition
endured and/or (2) when the delay or nonperformance continues for a
period of at least fifteen (15) days, terminate, at no charge, this
Agreement or an SO or the part of it relating to material not already
shipped or services not already performed. Unless written notice is
given within forty-five (45) days after the affected party is
notified of the force majeure condition, (1) shall be deemed
selected.
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13.4- COMPLIANCE WITH LAWS:
Peritus and all persons furnished by Peritus shall comply at their
own expense with all applicable federal, state, local and foreign
laws, ordinances, regulations, and codes, including those relating to
the use of chlorofluorocarbons, and including the identification and
procurement of required permits, certificates, licenses, insurance,
approvals, and inspections in performance under this Agreement.
13.5- CHOICE OF LAW:
This Agreement and all SOs shall be governed by the laws of Ohio,
excluding however its conflicts of laws principles. This Agreement
and all SOs shall be deemed when executed to have been made in Ohio.
The CLIENT agrees to submit to the venue and jurisdiction of the
state and federal courts of Ohio in disputes concerning this
Agreement and/or any SOs.
13.6- NOTICES:
Any notice, demand or other communication required, or which may be
given unless otherwise specifically provided for in this Agreement,
shall be in writing and shall be effective: five (5) days after
mailed, if sent by certified, postage prepaid U.S. mail; upon receipt
of confirmation, if delivered by confirmed facsimile; upon delivery
if delivered in person; or the day after dispatch if sent by an
overnight courier service that provides the sender with written
record of delivery, and shall be addressed to the respective parties
as follows:
To CLIENT:
Great American Insurance Company
49 East Fourth Street, Suite 600
Cincinnati, Ohio 45202
To Peritus:
Peritus Software Services, Inc.
2 Federal Street
Billerica, MA 01821
Attn: Geoff Tanham
CC: General Counsel
The above addresses and contact persons may be changed at any time by
giving thirty (30) days prior written notice.
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13.7- GOVERNMENT CONTRACT PROVISIONS:
The following provisions regarding equal opportunity, and all
applicable laws, rules, regulations and executive orders
specifically related thereto, including applicable provisions and
clauses from the Federal Acquisition Regulation and all supplements
thereto are incorporated in this Agreement as they apply to work
performed under specific U.S. Government contracts: 41 CFR 60-1.4,
Equal Opportunity; 41 CFR 60-1.7, Reports and Other Required
Information; 41 CFR 60-1.8, Segregated Facilities; 41 CFR 60-250.4,
Affirmative Action for Disabled Veterans and Veterans of the Vietnam
Era (if in excess of $10,000); and 41 CFR 60-741.4, Affirmative
Action for Disabled Workers (if in excess of $2500) wherein the
terms "contractor" and "subcontractor" shall mean "Peritus". In
addition, SOs placed under this Agreement containing a notation that
the material or services are intended for use under Government
contracts shall be subject to such other Government provisions
printed, typed or written thereon, or on the reverse side thereof,
or in attachments thereto.
13.8- SEVERABILITY:
If any of the provisions of this Agreement or an SO shall be invalid
or unenforceable, such invalidity or unenforceability shall not
invalidate or render unenforceable the entire Agreement (or SO), but
rather the entire Agreement (or SO) shall be construed as if not
containing the particular invalid or unenforceable provision or
provisions, and the rights and obligations of each party shall be
construed and enforced accordingly.
13.9- WAIVER:
The failure of either party at any time to enforce any right or
remedy available to it under this Agreement or otherwise with
respect to any breach or failure by the other party shall not be
construed to be a waiver of such right or remedy with respect to any
other breach or failure by the other party.
13.10- SECTION HEADINGS:
The headings of sections are inserted for convenience only and are
not intended to affect the meaning or interpretation of this
Agreement.
References to a section without inclusion of the section numbers
after a decimal place shall refer all such sections containing the
section number that is prior to the decimal place. For example, a
reference to Section 2 shall be understood and deemed to be
---------
reference to Sections 2.1, 2.2 and 2.3.
-------------------------
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13.11- MEDIATION:
If a dispute arises out of or relates to this Agreement, or its
breach, and the parties have not been successful in resolving such
dispute through negotiation, the parties agree to attempt to resolve
the dispute through mediation by submitting the dispute to a sole
mediator selected by the parties or, at anytime at the option of a
party, to mediation by the American Arbitration Association ("AAA").
Each party shall bear its own expenses and an equal share of the
expenses of the mediator and the fees of the AAA. The parties, their
representatives, other participants and the mediator shall hold the
existence, content and result of the mediation in confidence. If
such dispute is not resolved by such mediation, the parties shall
have the right to resort to any remedies permitted by law. All
defenses based on passage of time shall be tolled pending the
termination of the mediation. Nothing in this clause shall be
construed to preclude any party from seeking injunctive relief in
order to protect its rights pending mediation. A request by a party
to a court for such injunctive relief shall not be deemed a waiver
of the obligation to mediate.
13.12- ASSIGNMENT AND SUBCONTRACTING BY PERITUS:
Peritus shall not assign any right or interest under this Agreement
(excepting solely for monies due or to become due) or delegate or
subcontract any work, services or other obligation to be performed
or owed under this Agreement without the prior written consent of
CLIENT. Any attempted assignment, delegation or subcontracting in
contravention of the above provisions shall be void and ineffective.
Any assignment of monies shall be void and ineffective to the extent
that (1) Peritus shall not have given CLIENT at least thirty (30)
days prior written notice of such assignment or (2) such assignment
attempts to impose upon CLIENT obligations to the assignee
additional to the payment of such monies, or to preclude CLIENT from
dealing solely and directly with Peritus in all matters pertaining
to this Agreement including the negotiation of amendments or
settlements of charges due. All work or services performed by
Peritus' subcontractor(s) at any tier shall be deemed work or
services performed by Peritus.
13.13- SURVIVAL OF ADDITIONAL OBLIGATIONS:
Sections 1, 2, 3, 4.2, 4.3, 5, 6, 7, 8, 9, 11.3, 12, 13.1, 13.2,
----------------------------------------------------------------
13.4, 13.5, 13.8, 13.9, 13.10, 13.11 and 13.13 of this Agreement
----------------------------------------------
shall survive the expiration or termination of this Agreement and
continue to be enforceable.
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IN WITNESS WHEREOF, the parties have caused this Agreement to be executed by
their duly authorized representatives.
GREAT AMERICAN INSURANCE COMPANY PERITUS SOFTWARE SERVICES, INC.
(CLIENT)
By: _________________________ By:____________________________
Name: ______________________ Name: _________________________
Title: ______________________ Title: ________________________
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ATTACHMENT A
------------
SERVICE ORDER #____
-------------------
( GOVERNED BY THE SERVICE AGREEMENT: AUTOMATE: 2000/(R)/ SERVICES)
Agreement dated, executed and effective as of this _______ day of ___________,
1998, (the "Effective Date") by and between Peritus Software Services, Inc., a
Massachusetts corporation having its principal place of business at 2 Federal
Street, Billerica, MA 01821-3485 ("Peritus"), and Great American Insurance
Company ("CLIENT"), an Ohio corporation, having its principal place of business
at 49 East Fourth Street, Cinncinati, Ohio 45202.
WHEREAS, Peritus is in the business of providing Automate:2000/(R)/ services;
and
WHEREAS, CLIENT desires to receive such services, subject to the terms and
conditions of the SA and this Agreement.
NOW THEREFORE, in consideration of the following mutual promises contained
herein, the Parties agree in good faith to the following obligations and duties:
SECTION 1- DEFINITIONS:
1.1: "SA" herein shall refer to the agreement entitled "Service
Agreement:Automate:2000/(R)/ Services", executed by CLIENT and
Peritus, and dated as of November 18/th/, 1997.
1.2: The terminology and definitions set forth in the SA, if used in this
Agreement shall have the same meaning and interpretation.
SECTION 2- WORK TO BE PERFORMED:
2.1: Peritus shall provide the Automate:2000/(R)/ service for the following
computer programs or applications:
______________________________________________________
______________________________________________________
______________________________________________________
<PAGE>
2.2: The total number of LOC for which Peritus shall provide services or
resources pursuant to Section 2.1 of this SO herein is
-----------
_______________LOC. The applicable fee for such services shall be
____________.
2.3: The following activities are scheduled, subject to revision by CLIENT
and Peritus, as follows;
Action/Event Date for completion/Sign-off
------------ ----------------------------
i) _____ business days from____________
___________
ii) _____ business days from____________
__________
2.4- ADDITIONAL SERVICE WORK:
Peritus shall provide the following additional services or items:
______________________________________________________
______________________________________________________
2.5: Peritus shall be paid for the services or items provided pursuant to
Section 2.4 of this SO as follows:
-----------
______________________________________________________
______________________________________________________
SECTION 3- APPLICABILITY OF TERMS OF SA:
3.1: The SA provides definitions, terms and conditions that are to govern
the provision of products and/or services as defined and described by
a "Service Order", also referred to as an "SO". This Agreement is a
Service Order and hereby is governed by and incorporates the
definitions, terms and conditions of the SA. In the event that terms
of this Agreement conflict with the terms of the SA, the terms of the
SA shall control and take precedence over the terms and conditions of
this Agreement.
SECTION 4- ASSOCIATED PURCHASE ORDER:
4.1: In addition to any other applicable purchase orders, approval for
payments with respect to work, services or goods provided under this
SO are made
<PAGE>
or will be made under the purchase order numbered or entitled as
_________________.
IN WITNESS WHEREOF, the parties have caused this Agreement to be executed by
their duly authorized representatives.
GREAT AMERICAN INSURANCE COMPANY PERITUS SOFTWARE SERVICES, INC.
(CLIENT)
By: _________________________ By:____________________________
Name: ______________________ Name:__________________________
Title: ______________________ Title:_________________________
<PAGE>
Exhibit 11
PERITUS SOFTWARE SERVICES, INC.
STATEMENT RE COMPUTATION OF EARNINGS PER COMMON SHARE
(IN THOUSANDS, EXCEPT PER SHARE DATA)
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
--------------------------- -------------------------
1998 1997 1998 1997
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Net income (loss), as reported $ (979) $ 438 (3,545) 844
Preferred stock preference items:
Accrual of cumulative dividends on Series A and Series B
redeemable convertible preferred stock - (444) - (677)
Accretion to redemption of redeemable common stock rights - (31) - (57)
---------- ---------- ---------- ----------
Total preferred stock preference items - (475) - (734)
---------- ---------- ---------- ----------
Net income (loss) attributable to common stockholders $ (979) $ (37) $ (3,545) $ 110
---------- ---------- ---------- ----------
Weighted average shares outstanding - Basic 16,179 6,000 16,082 5,944
Adjustments thereto:
Shares attributable to common stock equivalents - 2,587 - 2,587
---------- ---------- ---------- ----------
Weighted average shares outstanding - Diluted 16,179 8,587 16,082 8,531
========== ========== ========== ==========
Net income (loss) per share
Basic $ (0.06) $ (0.01) $ (0.22) $ 0.02
========== ========== ========== ==========
Diluted $ (0.06) $ (0.01) $ (0.22) $ 0.01
========== ========== ========== ==========
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 6-MOS
<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1998
<PERIOD-START> APR-01-1998 JAN-01-1998
<PERIOD-END> JUN-30-1998 JUN-30-1998
<CASH> 5,285 5,285
<SECURITIES> 4,000 4,000
<RECEIVABLES> 10,475 10,475
<ALLOWANCES> (445) (445)
<INVENTORY> 0 0
<CURRENT-ASSETS> 25,056 25,056
<PP&E> 9,074 9,074
<DEPRECIATION> (3,553) (3,553)
<TOTAL-ASSETS> 35,797 35,717
<CURRENT-LIABILITIES> 6,813 6,813
<BONDS> 0 0
0 0
0 0
<COMMON> 163 163
<OTHER-SE> 28,204 28,204
<TOTAL-LIABILITY-AND-EQUITY> 35,797 35,797
<SALES> 11,830 21,980
<TOTAL-REVENUES> 11,830 21,980
<CGS> 5,003 10,078
<TOTAL-COSTS> 0 0
<OTHER-EXPENSES> 7,929 15,779
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> (185) 345
<INCOME-PRETAX> (917) (3,532)
<INCOME-TAX> 25 25
<INCOME-CONTINUING> (942) (3,557)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> (37) 12
<NET-INCOME> (979) (3,545)
<EPS-PRIMARY> (0.06) (0.22)
<EPS-DILUTED> (0.06) (0.22)
</TABLE>
