SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
SCHEDULE 13E-3
(Rule 13e-3)
Transaction Statement under Section 13(e) of
the Securities Exchange Act of 1934 and Rule 13e-3
thereunder.
Rule 13e-3 Transaction Statement under Section 13(e) of the Securities
Exchange Act of 1934
---------------------------------
PERITUS SOFTWARE SERVICES, INC.
(Name of Issuer)
PERITUS SOFTWARE SERVICES, INC.
ROCKET SOFTWARE, INC.
ROCKET ACQUISITION COMPANY, INC.
(Name of Person(s) Filing Statement)
---------------------------------
Common Stock, Par Value $0.01 Per Share
(Title of Class of Securities)
---------------------------------
714006-10-3
(CUSIP Number of Class of Securities)
---------------------------------
JOHN D. GIORDANO JOHAN MAGNUSSON JOHAN MAGNUSSON
PERITUS SOFTWARE SERICES, INC. ROCKET SOFTWARE, INC. ROCKET ACQUISTION COMPANY, INC.
112 TURNPIKE ROAD, SUITE 111 2 APPLE HILL DRIVE c/o ROCKET SOFTWARE, INC.
WESTBOROUGH, MA 01581 NATICK, MA 01760 2 APPLE HILL DRIVE
(508) 870-0963 (508) 655-4321 NATICK, MA 01760
(508) 655-4321
(Name, Address and Telephone Numbers of Person Authorized to Receive Notices
and Communications on Behalf of Persons Filing Statement)
Copy of Communications To:
Peter B. Tarr, Esq. Peter M. Moldave, Esq.
Hale and Dorr LLP Timothy M. Lindamood, Esq.
60 State Street Lucash, Gesmer & Updegrove, LLP
Boston, MA 02109 40 Broad Street
(617) 526-6639 Boston, MA 02109
(617) 350-6800
---------------------------------
This statement is filed in connection with (check the appropriate box):
a. [X]The filing of solicitation materials or an information statement
subject to Regulation 14A, Regulation 14C or Rule 13e-3(c) under the
Securities Exchange Act of 1934.
b. [_]The filing of a registration statement under the Securities Act of
1933.
c. [_]A tender offer.
d. [_]None of the above.
Check the following box if the soliciting materials or information
statement referred to in checking box (a) are preliminary copies: [X]
Check the following box if the filing is a final amendment reporting the
results of the transaction:
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CALCULATION OF FILING FEE
- --------------------------------------------------------------------------------
Transaction valuation Amount of filing fee
- --------------------------------------------------------------------------------
$3,321,170.00 (*) $665.00
================================================================================
* FOR PURPOSES OF CALCULATING THE FILING FEE ONLY. PURSUANT TO THE
AGREEMENT AND PLAN OF MERGER, DATED APRIL 18, 2001, BY AND AMONG
PERITUS SOFTWARE SERVICES, INC., ROCKET SOFTWARE, INC. AND ROCKET
ACQUISITION COMPANY, INC., ROCKET ACQUISITION COMPANY, INC. WILL MERGE
WITH AND INTO PERITUS SOFTWARE SERVICES, INC., AND EACH OUTSTANDING
SHARE OF COMMON STOCK OF PERITUS SOFTWARE SERVICES, INC., EXCEPT FOR
SHARES OWNED BY ROCKET SOFTWARE, INC., ROCKET ACQUISITION AND THEIR
RESPECTIVE WHOLLY OWNED SUBSIDIARIES, WILL BE CONVERTED INTO THE RIGHT
TO RECEIVE $0.19 IN CASH. In addition, pursuant to the terms of the
agreement of merger, each outstanding option to purchase common stock,
whether vested or unvested, with a per share exercise price less than
$0.19, will be converted into the right to receive, upon the surrender
of the instrument evidencing the stock option, a cash payment equal to
the product of (1) the number of shares underlying the option and (2)
the difference between $0.19 and the per share exercise price of the
option. Those options will then be canceled. The aggregate number of
securities to which this transaction applies is (i) 17,319,903
outstanding shares of common stock held of record by stockholders
other than Rocket Software, Inc., Rocket Acquisition Company, Inc., or
their respective wholly owned subsidiaries and (ii) outstanding
options to purchase an aggregate of 549,375 shares of common stock,
all with a per share exercise price less than $0.19, and a per share
weighted average exercise price of $0.1347.
[X]Check the box if any part of the fee is offset as provided by Exchange
Act Rule 0-11(a) (2) and identify the filing with which the offsetting fee was
previously paid. Identify the previous filing by registration statement number,
or the Form or Schedule and the date of its filing.
Amount Previously Paid: $665.00
Form or Registration No.: PREM14A
Filing Party: Peritus Software Services, Inc.
Date Filed: April 27, 2001
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INTRODUCTION
This Rule 13e-3 Transaction Statement on Schedule 13E-3 (this "Schedule
13E-3") is being filed by Peritus Software Services, Inc., a Massachusetts
corporation ("Peritus"), the issuer of the common stock, par value $0.01 per
share ("Common Stock"), which is the subject of the Rule 13e-3 transaction,
Rocket Software, Inc., a Massachusetts corporation ("Rocket Software") and
Rocket Acquisition Company, Inc., a Massachusetts corporation ("Rocket
Acquisition"). This Schedule 13E-3 relates to the Agreement and Plan of Merger,
dated as of April 18, 2001, by and among Peritus Software Services, Inc., Rocket
Software, Inc. and Rocket Acquisition (the "Merger Agreement").
Concurrently with the filing of this Schedule 13E-3, Peritus is filing with
the Securities and Exchange Commission a proxy statement (the "Proxy Statement")
under Regulation 14A of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), relating to the special meeting of stockholders of Peritus at
which the stockholders of Peritus will consider and vote upon, among other
things, a proposal to approve and adopt the Merger Agreement and authorize the
merger of Rocket Acquisition Company, Inc. with and into Peritus. As a result of
this merger, the holders of shares of Common Stock of Peritus, other than Rocket
Software, Rocket Acquisition, their respective wholly owned subsidiaries and
stockholders who are entitled to and have dissenters' rights, will be entitled
to receive $0.19 in cash for each share of Common Stock. Options will be treated
as described more fully in the Proxy Statement.
A copy of the Proxy Statement is attached hereto as Exhibit (a)(1) and a
copy of the Merger Agreement is attached as Annex A to the Proxy Statement. All
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references in this Schedule 13E-3 to Items numbered 1001 through 1016 are
references to Items contained in Regulation M-A under the Exchange Act.
All information contained in this Schedule 13E-3 concerning Peritus has
been supplied by Peritus, and all information concerning Rocket Software and
Rocket Acquisition has been provided by Rocket Software.
The information contained in the Proxy Statement, including all annexes
thereto, is hereby expressly incorporated by reference. As of the date hereof,
the Proxy Statement is in preliminary form and is subject to completion or
amendment. Capitalized terms used but not defined in this Schedule 13E-3 shall
have the meanings given to them in the Proxy Statement.
Item 1. Summary Term Sheet
Item 1001
Summary Term Sheet. The information contained in the section of the Proxy
Statement entitled "Summary" is incorporated herein by reference.
Item 2. Subject Company Information
Item 1002
(a) Name and Address. The information contained in the sections of the
Proxy Statement entitled "Questions and Answers About the Merger and
the Special Meeting - Whom Should I Call If I Have Any Questions?" and
"Summary - The Parties" is incorporated herein by reference.
(b) Securities. The information contained in the sections of the Proxy
Statement entitled "Questions and Answers About the Merger and the
Special Meeting - What Vote is Required to Approve the Merger?",
"Summary - Stock Ownership of Management, Directors and Other
Affiliates", "Peritus Software Services, Inc. Special Meeting - Only
Peritus Holders of Record Are Entitled to Vote", "Information About
Stock Ownership" is incorporated herein by reference.
(c) Trading Market and Price. The information contained in the section of
the Proxy Statement entitled "Comparative Per Share, Market Price and
Dividend Information" is incorporated herein by reference.
(d) Dividends. The information contained in the sections of the Proxy
Statement entitled "Comparative Per Share, Market Price and Dividend
Information" and "The Agreement of Merger--Principal Covenants" is
incorporated herein by reference.
3
(e) Prior Public Offerings. Not applicable.
(f) Prior Stock Purchases. The information contained in the
sections of the Proxy Statement entitled "Summary - The
Parties", "Peritus Software Services, Inc. Special Meeting -
Contacts and Negotiations with Rocket Software"
"Management's Discussion and Analysis of Financial Condition
and Results of Operations - Cost of Strategic Investment"
"Information about Stock Ownership" is incorporated herein
by reference.
Item 3. Identity and Background of Filing Person
Item 1003
(a) Name and Address. The information contained in the sections
of the Proxy Statement entitled "Summary - The Parties",
"Special Factors - Identity and Background of Rocket
Software and Rocket Acquisition", "Information About Stock
Ownership" and "Board of Directors and Executive Officers"
is incorporated herein by reference.
(b) Business and Background of Entities. The information
contained in the sections of the Proxy Statement entitled
"Summary - The Parties", "Special Factors - Identity and
Background of Rocket Software and Rocket Acquisition" and
"Information About Stock Ownership" is incorporated herein
by reference.
(c)(1)-(5) Business and Background of Natural Persons. The information
contained in the sections of the Proxy Statement entitled
"Special Factors - Identity and Background of Rocket
Software and Rocket Acquisition", "Information About Stock
Ownership" and "Board of Directors and Executive Officers"
is incorporated herein by reference.
Item 4. Terms of Transaction
Item 1004
(a)(1) Tender Offers. Not applicable.
(a)(2) Mergers or Similar Transactions. The information contained
in the sections of the Proxy Statement entitled "Questions
and Answers About the Merger and the Special Meeting",
"Summary", "Peritus Software Services, Inc. Special
Meeting", "The Agreement of Merger - Merger Consideration",
"Special Factors - Strategic and Financing Alternatives",
"Special Factors - Contacts and Negotiations with Rocket
Software", "Special Factors - Opinion of Special Committee's
Financial Advisor", "Special Factors - Peritus' Purpose and
Reasons For the Merger", "Special Factors - Rocket
Software's Purpose and Reasons For the Merger", "Special
Factors - Plans for Peritus After the Merger", "Special
Factors - Material Federal Income Tax Consequences" and "The
Agreement of Merger - Accounting Treatment" is incorporated
herein by reference.
(c) Different Terms. The information contained in the sections
of the Proxy Statement entitled "Questions and Answers About
the Merger and the Special Meeting", "Summary", "The Peritus
Software Services, Inc. Special Meeting - Vote Required to
Adopt the Agreement of Merger", "Special Factors - Rocket
Software's Purpose and Reasons for the Merger", "The
Agreement of Merger - Merger Consideration", "The Agreement
of Merger - Option Awards", "The Agreement of Merger -
Principal Covenants - Benefits", "Information About Stock
Ownership", "Information About Stock Ownership - Stock
Options" and "Dissenters' Rights" is incorporated herein by
reference.
(d) Appraisal Rights. The information contained in the sections
of the Proxy Statement entitled "Questions and Answers About
the Merger and the Special Meeting - Are Peritus
stockholders entitled to dissenters' or appraisal rights?",
"Summary - Dissenters' Rights", "Peritus Software Services,
Inc. Special Meeting - Dissenting Holders", "Special Factors
- Material Federal Income Tax Consequences", "Dissenters'
Rights" and in Annex C to the Proxy Statement, Sections 85
through 98, inclusive, of Chapter 156B of the General Laws
of Massachusetts, is incorporated herein by reference.
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(e) Provisions for Unaffiliated Security Holders. Peritus and
Rocket Software have made no provisions in connection with
this transaction to grant unaffiliated security holders
access to the corporate files of either Peritus or Rocket
Software or to obtain counsel or appraisal services at the
expense of Peritus and/or Rocket Software.
(f) Eligibility for Listing or Trading. Not Applicable.
Item 5. Past Contacts, Transactions, Negotiations and Agreements
Item 1005
(a)(1) Transactions. The information contained in the sections of
the Proxy Statement entitled "Interests of Certain Persons
in the Merger", "Business" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations"
is incorporated herein by reference.
(a)(2) Transactions. The information contained in the section of
the Proxy Statement entitled "Interests of Certain Persons
in the Merger" is incorporated herein by reference.
(b),(c) Significant Corporate Events, Negotiations or Contacts. The
information contained in the sections of the Proxy Statement
entitled "Special Factors - Strategic and Financing
Alternatives", "Special Factors - Contacts and Negotiations
with Rocket Software", "Special Factors - Peritus' Purpose
and Reasons For the Merger", "Special Factors - Rocket
Software's Purpose and Reasons For the Merger", "Interests
of Certain Persons in the Merger", "The Agreement of
Merger", and "Business" is incorporated herein by reference.
(e) Agreements Involving Peritus' Securities. The information
contained in the Proxy Statement entitled "Information About
Stock Ownership", "Information About Stock Ownership - Stock
Options" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Company
Overview" is incorporated herein by reference.
Item 6. Purposes of the Transaction and Plans or Proposals
Item 1006
(b) Use of Securities Acquired. The information contained in the
sections of the Proxy Statement entitled "Summary - The
Agreement of Merger", "Special Factors - Certain Effects of
the Merger", "The Agreement of Merger - Merger
Consideration", "The Agreement of Merger - Option Awards",
"Information About Stock Ownership - Stock Options" and
"Information About Stock Ownership - Employment Agreement"
is incorporated herein by reference.
(c)(1)-(8) Plans. The information contained in the sections of the
Proxy Statement entitled "Questions and Answers About the
Merger and the Special Meeting", "Summary", "Special Factors
- Contacts and Negotiations with Rocket Software", "Special
Factors - Certain Effects of the Merger", "Special Factors -
Plans for Peritus After the Merger", "Special Factors -
Conduct of the Business of Peritus If the Merger is Not
Completed", "Comparative Per Share, Market Price and
Dividend Information" and "The Agreement of Merger" is
incorporated herein by reference.
Item 7. Purposes, Alternatives, Reasons and Effects
Item 1013
(a)-(c) Purposes; Alternatives; Reasons. The information contained
in the sections of the Proxy Statement entitled "Questions
and Answers About the Merger and the Special Meeting",
"Summary", "Special Factors - Contacts and Negotiations with
Rocket Software", "Special Factors - Peritus' Purpose and
Reasons for the Merger", "Special Factors - Opinion of
Special Committee's Financial Advisor", "Special Factors -
Rocket Software's Purpose and Reasons for the Merger",
"Special Factors - Conduct of the Business of
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Peritus if the Agreement of Merger is Not Completed",
"Special Factors - Plans for Peritus After the Merger" and
"Special Factors - Certain Effects of the Merger" is
incorporated herein by reference.
(d) Effects. The information contained in the sections of the
Proxy Statement entitled "Questions and Answers About the
Merger and the Special Meeting", "Summary - Going Private
Transaction", "Summary - How Will Options be Treated",
"Summary - Tax Consequences", "Special Factors - Opinion of
Special Committee's Financial Advisor", "Special Factors -
Certain Effects of the Merger", "Special Factors - Material
Federal Income Tax Consequences", "Special Factors -
Regulatory Matters", "Special Factors - Position of Rocket
Software as to Fairness of the Merger", "Accounting
Treatment" and "The Agreement of Merger" is incorporated
herein by reference.
Item 8. Fairness of the Transaction
Item 1014
(a),(b) Fairness; Factors Considered in Determining Fairness. The
information contained in the sections of the Proxy Statement
entitled "Questions and Answers About the Merger and the
Special Meeting - Why are the special committee and the
board of directors recommending the merger?", "Special
Factors - Strategic and Financing Alternatives", "Special
Factors - Contacts and Negotiations with Rocket Software",
"Special Factors - Rocket Software's Purpose and Reasons for
the Merger", "Special Factors - Peritus' Purpose and Reasons
for the Merger", "Special Factors - Opinion of Special
Committee's Financial Advisor" and "Interests of Certain
Persons in the Merger" is incorporated herein by reference.
(c) Approval of Security Holders. The information contained in
the sections of the Proxy Statement entitled "Questions and
Answers About the Merger and the Special Meeting", "Summary
- Stockholder Vote Required to Approve the Merger" and "The
Peritus Software Services, Inc. Special Meeting - Vote
Required to Adopt the Peritus Agreement of Merger" is
incorporated herein by reference.
(d) Unaffiliated Representative. The information contained in
the sections of the Proxy Statement entitled "Questions and
Answers About the Merger and the Special Meeting", "Summary
- Opinion of Financial Advisor", "Special Factors -
Strategic and Financing Alternatives", "Special Factors -
Contacts and Negotiations with Rocket Software" and "Special
Factors - Opinion of Special Committee's Financial Advisor"
is incorporated herein by reference.
(e) Approval of Directors. The information contained in the
section of the Proxy Statement entitled "Questions and
Answers About the Merger and the Special Meeting - Why are
the special committee and the board of directors
recommending the merger?", "Summary - Board of Director's
Recommendations to Stockholders", "Special Factors -
Strategic and Financing Alternatives" and "Special Factors -
Contacts and Negotiations with Rocket Software" is
incorporated herein by reference.
(f) Other Offers. The information contained in the section of
the Proxy Statement entitled "Special Factors - Strategic
and Financing Alternatives" is incorporated herein by
reference.
Item 9. Reports, Opinions, Appraisals and Negotiations
Item 1015
(a)-(c) The information contained in the section of the Proxy
Statement entitled "Summary - Opinion of Financial Advisor",
"Special Factors - Opinion of Special Committee's Financial
Advisor" and in Annex B to the Proxy Statement is
incorporated herein by reference.
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Item 10. Source and Amounts of Funds or Other Consideration
Item 1007
(a),(b) Source of Funds; Conditions. The information contained in
the sections of the Proxy Statement entitled "Questions and
Answers About the Merger and the Special Meeting - How will
the cash merger consideration be paid?" and "The Agreement
of Merger - Representations and Warranties" is incorporated
herein by reference.
(c) Expenses. The information contained in the section of the
Proxy Statement entitled "Expenses" is incorporated herein
by reference.
(d) (1)-(2) Borrowed Funds. Not Applicable.
Item 11. Interest in Securities of the Subject Company
Item 1008
(a) Securities Ownership. The information contained in the
sections of the Proxy Statement entitled "Summary - Stock
Ownership of Management, Directors and Other Affiliates",
"Interest of Certain Persons in the Merger" and "Information
About Stock Ownership" is incorporated herein by reference.
(b) Securities Transactions. Not Applicable.
Item 12. The Solicitation or Recommendation
Item 1012
(d) Intent to Tender or Vote in a Going-Private Transaction. The
information contained in the sections of the Proxy Statement
entitled "Summary - Stockholder Vote Required to Approve the
Merger", "Summary - Stock Ownership of Management, Directors
and Other Affiliates" and "The Peritus Software Services,
Inc. Special Meeting - Vote Required to Adopt the Peritus
Agreement of Merger" is incorporated herein by reference.
(e) Recommendations of Others. The information contained in the
sections of the Proxy Statement entitled "Summary - Stock
Ownership of Management, Directors and Other Affiliates",
"Peritus' Purpose and Reasons for the Merger" and "Special
Factors - Contacts and Negotiations with Rocket Software" is
incorporated herein by reference.
Item 13. Financial Statements
Item 1010
(a) Financial Information. The information contained in the
section of the Proxy Statement entitled "Selected Historical
Financial Data", the Financial Statements for each of the
years ended 1998, 1999 and 2000 on pages F-1 through F-28 of
the Proxy Statement are incorporated herein by reference.
(b) Pro-Forma Information. Not Applicable.
Item 14. Persons/Assets, Retained, Employed, Compensated or Used
Item 1009
(a),(b) Solicitations or Recommendations; Employees and Corporate
Assets. The information contained in the sections of the
Proxy Statement entitled "Peritus Software Services, Inc.
Special Meeting - Costs of Soliciting these Proxies" is
incorporated herein by reference.
7
Item 15. Additional Information
Item 1011
(b) Other Material Information. The information contained in the
Proxy Statement, including all appendices thereto, is
incorporated herein by reference.
Item 16. Exhibits
Item 1016.
(a)(1) Preliminary Proxy Statement filed with the Securities and
Exchange Commission on April 27, 2001.
(a)(2) Form of Proxy Card filed with the Securities and Exchange
Commission along with the Proxy Statement. (1)
(a)(3) Press Release of Peritus Software Services, Inc. dated April
18, 2001. (2)
(a)(4) Soliciting Material Under Rule 14a-12 filed with the
Commission on April 25, 2001. (3)
(b) None.
(c) Opinion of The Catalyst Group, LLC, dated April 17, 2001,
attached as Annex B to the Proxy Statement. (1)
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(d)(1) Agreement and Plan of Merger, dated as of April 18, 2001, by
and among Peritus Software Services, Inc., Rocket Software,
Inc. and Rocket Acquisition Company, Inc., attached as Annex
A to the Proxy Statement. (1)
(d)(2) Common Stock Purchase Agreement, dated as of March 27, 2000,
by and between Peritus Software Services, Inc. and Rocket
Software, Inc. (4)
(d)(3) Registration Rights Agreement, dated as of March 27, 2000,
by and between Peritus Software Services, Inc. and Rocket
Software, Inc. (4)
(d)(4) Long-Term Incentive Plan (1992) of Peritus Software
Services. Inc. (5)
(d)(5) 1997 Stock Incentive Plan, as amended, of Peritus Software
Services, Inc. (6)
(d)(6) 1997 Director Stock Option Plan, as amended and restated, of
Peritus Software Services, Inc. (7)
(d)(7) Employment Agreement, dated August 13, 1998, between Peritus
Software Services, Inc. and John D. Giordano. (8)
(d)(8) Addendum to Employment Agreement, dated October 5, 1998,
between Peritus Software Services, Inc. and John D.
Giordano. (9)
(d)(9) Letter Agreement, dated April 9, 1999, between Peritus
Software Services, Inc. and John D. Giordano. (9)
(d)(10) Amended Employment Agreement, dated as of September 9, 1999,
between Peritus Software Services, Inc. and John D.
Giordano. (10)
(d)(11) Addendum to Employment Agreement, dated as of September 9,
1999, between Peritus Software Services, Inc. and John D.
Giordano. (10)
(d)(12) Addendum to the Employment Agreement, dated as of January
21, 2000, between Peritus Software Services, Inc. and John
D. Giordano. (4)
(d)(13) Amended Employment Agreement, dated as of January 21, 2000,
between Peritus Software Services, Inc. and John D.
Giordano. (4)
(f) Sections 85 through 98, inclusive, of Chapter 156B of the
General Laws of Massachusetts, attached as Annex C to the
Proxy Statement. (1)
(g) None.
_____________________________
(1) Incorporated by reference to the Proxy Statement filed by Peritus Software
Services, Inc. with the Commission on April 27, 2001.
(2) Incorporated by reference to the Soliciting Material Under Rule 14a-12
filed by Peritus Software Services, Inc. with the Commission on April 18,
2001.
(3) Incorporated by reference to the Soliciting Material Under Rule 14a-12
filed by Peritus Software Services, Inc. with the Commission on April 25,
2001.
(4) Incorporated by reference to the Annual Report on Form 10-K for Peritus
Software Services, Inc. for the year ended December 31, 1999.
(5) Incorporated by reference to the Registration Statement on Form S-1 of
Peritus Software Services, Inc. (Commission File No. 333-27087).
(6) Incorporated by reference to the Registration Statement on Form S-8 of
Peritus Software Services, Inc. (Commission File No. 333-59783), as filed
with the Commission on July 24, 1998.
(7) Incorporated by reference to the Registration Statement on Form S-8 of
Peritus Software Services, Inc. (Commission File No. 333-40358), as filed
with the Commission on June 28, 2000.
(8) Incorporated by reference to the Quarterly Report on Form 10-Q for Peritus
Software Services, Inc. for the quarterly period ended September 30, 1998.
(9) Incorporated by reference to the Annual Report on Form 10-K for Peritus
Software Services, Inc. for the year ended December 31, 1998.
(10) Incorporated by reference to the Quarterly Report on Form 10-Q for Peritus
Software Services, Inc. for the quarterly period ended September 30, 1999.
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SIGNATURES
After due inquiry and to the best of my knowledge and belief, I certify
that the information set forth in this statement is true, complete and correct.
PERITUS SOFTWARE SERVICES, INC.
By: /s/ John D. Giordano
-----------------------------------------------
Name: John D. Giordano
Title: President and Chief Executive Officer
ROCKET SOFTWARE, INC.
By: /s/ Johan Magnusson
-----------------------------------------------
Name: Johan Magnusson
Title: Director, Chief Operating Officer
ROCKET ACQUISITION COMPANY, INC.
By: /s/ Johan Magnusson
-----------------------------------------------
Name: Johan Magnusson
Title: President
Date: April 27, 2001
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EXHIBIT INDEX
(a)(1) Preliminary Proxy Statement filed with the Securities and
Exchange Commission on April 27, 2001.
(a)(2) Form of Proxy Card filed with the Securities and Exchange
Commission along with the Proxy Statement. (1)
(a)(3) Press Release of Peritus Software Services, Inc. dated April
18, 2001. (2)
(a)(4) Soliciting Material Under Rule 14a-12 filed with the
Commission on April 25, 2001. (3)
(b) None.
(c) Opinion of The Catalyst Group, LLC, dated April 17, 2001,
attached as Annex B to the Proxy Statement. (1)
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(d)(1) Agreement and Plan of Merger, dated as of April 18, 2001, by
and among Peritus Software Services, Inc., Rocket Software,
Inc. and Rocket Acquisition Company, Inc., attached as Annex
A to the Proxy Statement. (1)
(d)(2) Common Stock Purchase Agreement, dated as of March 27, 2000,
by and between Peritus Software Services, Inc. and Rocket
Software, Inc. (4)
(d)(3) Registration Rights Agreement, dated as of March 27, 2000,
by and between Peritus Software Services, Inc. and Rocket
Software, Inc. (4)
(d)(4) Long-Term Incentive Plan (1992) of Peritus Software
Services. Inc. (5)
(d)(5) 1997 Stock Incentive Plan, as amended, of Peritus Software
Services, Inc. (6)
(d)(6) 1997 Director Stock Option Plan, as amended and restated, of
Peritus Software Services, Inc. (7)
(d)(7) Employment Agreement, dated August 13, 1998, between Peritus
Software Services, Inc. and John D. Giordano. (8)
(d)(8) Addendum to Employment Agreement, dated October 5, 1998,
between Peritus Software Services, Inc. and John D.
Giordano. (9)
(d)(9) Letter Agreement, dated April 9, 1999, between Peritus
Software Services, Inc. and John D. Giordano. (9)
(d)(10) Amended Employment Agreement, dated as of September 9, 1999,
between Peritus Software Services, Inc. and John D.
Giordano. (10)
(d)(11) Addendum to Employment Agreement, dated as of September 9,
1999, between Peritus Software Services, Inc. and John D.
Giordano. (10)
(d)(12) Addendum to the Employment Agreement, dated as of January
21, 2000, between Peritus Software Services, Inc. and John
D. Giordano. (4)
(d)(13) Amended Employment Agreement, dated as of January 21, 2000,
between Peritus Software Services, Inc. and John D.
Giordano. (4)
(f) Sections 85 through 98, inclusive, of Chapter 156B of the
General Laws of Massachusetts, attached as Annex C to the
Proxy Statement. (1)
(g) None.
_____________________________
(1) Incorporated by reference to the Proxy Statement filed by Peritus Software
Services, Inc. with the Commission on April 27, 2001.
(2) Incorporated by reference to the Soliciting Material Under Rule 14a-12
filed by Peritus Software Services, Inc. with the Commission on April 18,
2001.
(3) Incorporated by reference to the Soliciting Material Under Rule 14a-12
filed by Peritus Software Services, Inc. with the Commission on April 25,
2001.
(4) Incorporated by reference to the Annual Report on Form 10-K for Peritus
Software Services, Inc. for the year ended December 31, 1999.
(5) Incorporated by reference to the Registration Statement on Form S-1 of
Peritus Software Services, Inc. (Commission File No. 333-27087).
(6) Incorporated by reference to the Registration Statement on Form S-8 of
Peritus Software Services, Inc. (Commission File No. 333-59783), as filed
with the Commission on July 24, 1998.
(7) Incorporated by reference to the Registration Statement on Form S-8 of
Peritus Software Services, Inc. (Commission File No. 333-40358), as filed
with the Commission on June 28, 2000.
(8) Incorporated by reference to the Quarterly Report on Form 10-Q for Peritus
Software Services, Inc. for the quarterly period ended September 30, 1998.
(9) Incorporated by reference to the Annual Report on Form 10-K for Peritus
Software Services, Inc. for the year ended December 31, 1998.
(10) Incorporated by reference to the Quarterly Report on Form 10-Q for Peritus
Software Services, Inc. for the quarterly period ended September 30, 1999.
10
SCHEDULE 14A
(Rule 14a-101)
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the Securities
Exchange Act of 1934
Filed by the Registrant [X]
Filed by a Party other than the Registrant [_]
Check the appropriate box:
[_] Confidential, for Use of the
[X] Preliminary Proxy Statement Commission Only (as Permitted by
Rule 14a-6(e)(2))
[_] Definitive Proxy Statement
[_] Definitive Additional Materials
[_] Soliciting Material Under Rule 14a-12
PERITUS SOFTWARE SERVICES, INC.
(Name of Registrant as Specified In Its Charter)
Not Applicable.
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[_] No fee required.
[X] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.
1) Title of each class of securities to which transaction applies: Peritus
Software Services, Inc. common stock, par value $0.01 per share
2) Aggregate number of securities to which transaction applies: (i)
17,319,903 outstanding shares of common stock held of record by
stockholders other than Rocket Software, Inc., Rocket Acquisition
Company, Inc., or their respective wholly owned subsidiaries and (ii)
outstanding options to purchase an aggregate of 549,375 shares of common
stock, all with a per share exercise price less than $0.19, and a per
share weighted average exercise price of $0.1347
3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (set forth the amount on which the
filing fee is calculated and state how it was determined): Pursuant to
the Agreement and Plan of Merger, dated April 18, 2001, by and among
Peritus Software Services, Inc., Rocket Software, Inc. and Rocket
Acquisition Company, Inc., Rocket Acquisition will merge with and into
Peritus, and each outstanding share of common stock of Peritus, except
for shares owned by Rocket Software, Rocket Acquisition and their
respective wholly owned subsidiaries, will be converted into the right
to receive $0.19 in cash. In addition, pursuant to the terms of the
agreement of merger, each outstanding option to purchase common stock,
whether vested or unvested, with a per share exercise price less than
$0.19, will be converted into the right to receive, upon the surrender
of the instrument evidencing the stock option, a cash payment equal to
the product of (1) the number of shares underlying the option and (2)
the difference between $0.19 and the per share exercise price of the
option. Those options will then be canceled.
4) Proposed maximum aggregate value of transaction: $3,321,170.00 (*)
5) Total fee paid: $665.00
[_] Fee paid previously with preliminary materials.
[_]Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number,
or the form or schedule and the date of its filing.
1) Amount Previously Paid:
2) Form, Schedule or Registration Statement No.:
3) Filing Party:
4) Date Filed:
(*) Calculated based upon (i) a proposed per share cash payment of $0.19 for
the 17,319,903 outstanding shares of common stock and (ii) an aggregate
cash payment of $30,388 to holders of outstanding options to purchase an
aggregate of 549,375 shares of common stock with a per share exercise price
less than $0.19 and a weighted average per share exercise price of $0.1347.
Preliminary Copy
Filed on April 27, 2001
PERITUS SOFTWARE SERVICES, INC.
112 TURNPIKE ROAD, SUITE 111
WESTBOROUGH, MASSACHUSETTS 01581
----------------
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD ON JUNE , 2001
----------------
To the Stockholders of Peritus Software Services, Inc.:
We will hold a special meeting of stockholders of Peritus Software Services,
Inc., a Massachusetts corporation, on June , 2001, at 10:00 a.m., local time,
at the offices of Hale and Dorr LLP, 60 State Street, Boston, Massachusetts
02109. At this special meeting, we will ask you to consider and vote upon the
following proposals as further described in the accompanying proxy statement:
1. Approval and adoption of the agreement and plan of merger dated as of
April 18, 2001 by and among Peritus, Rocket Software, Inc. and Rocket
Acquisition Company, Inc. and the transactions contemplated by that
agreement, including the merger of Rocket Acquisition with and into
Peritus, with Peritus as the surviving corporation and with each
outstanding share of Peritus' common stock, other than shares held by
Rocket Software, Rocket Acquisition and their respective wholly owned
subsidiaries, being converted into the right to receive $0.19 in cash;
and
2. Transaction of such other business as may properly come before the
meeting or any adjournment or adjournments thereof.
Peritus' special committee of the board of directors has fixed May 10, 2001
as the record date for the special meeting. Only stockholders of record at the
close of business on May 10, 2001 are entitled to notice of, and to vote at,
the special meeting or any adjournment or adjournments thereof. A list of
stockholders of record as of May 10, 2001 will be available for inspection at
Peritus' offices at 112 Turnpike Road, Suite 111, Westborough, Massachusetts
01581-2860, at least ten days prior to the meeting.
Rocket Software is currently the holder of approximately 36.6% of the
outstanding shares of the common stock of Peritus. Following the proposed
merger of Rocket Acquisition with and into Peritus, Peritus will cease to exist
as a publicly held corporation and will be a privately held, majority-owned
subsidiary of Rocket Software. As a result of the merger, each share of common
stock of Peritus, except shares held by Rocket Software, Rocket Acquisition and
holders who properly perfect their dissenters' rights, will be canceled and
converted into the right to receive $0.19 in cash. The accompanying proxy
statement contains detailed information about the merger and the actions to be
taken in connection with the merger. The terms of the merger are more fully
described in the agreement of merger which is attached as Annex A to the
accompanying proxy statement.
If the action proposed is approved by the stockholders at the meeting and
effected by Peritus, any Peritus stockholder (1) who files with Peritus before
the taking of the vote on the approval of such action, written objection to the
proposed action stating that he intends to demand payment for his shares if the
action is taken, and (2) whose shares are not voted in favor of such action has
or may have the right to demand in writing from Peritus, within 20 days after
the date of mailing to him of notice in writing that the corporate action has
become effective, payment for his shares and an appraisal of the value thereof.
Peritus and any such stockholder shall in such cases have the rights and duties
and shall follow the procedure set forth in Sections 88 through 98, inclusive,
of Chapter 156B of the General Laws of Massachusetts, which is attached as
Annex C to the accompanying proxy statement.
Both Peritus' special committee of directors unaffiliated with Rocket
Software and its board of directors have determined that the agreement of
merger and the transactions contemplated by the agreement, including the
merger, are fair to, advisable, and in the best interests of the holders of
shares of common stock of Peritus. Both the special committee and the board of
directors have approved, and recommend that you vote "FOR", the adoption of the
agreement of merger and the transactions contemplated by the agreement,
including the merger.
We hope that all stockholders will be able to attend the special meeting in
person. In order to ensure that a quorum is present at the special meeting,
please date, sign and promptly return the enclosed proxy whether or not you
expect to attend the special meeting. A postage-prepaid envelope, addressed to
EquiServe, L.P., the service agent of our transfer agent and registrar, Fleet
Bank, N.A., has been enclosed for your convenience. If you attend the special
meeting, your proxy will, upon your written request, be returned to you and you
may vote your shares in person.
All stockholders are cordially invited to attend the special meeting.
By Order of the Special Committee
and the Board of Directors,
John D. Giordano
President, Chief Executive Officer
and
Chief Financial Officer
Westborough, Massachusetts
May , 2001
Whether or not you expect to attend the meeting, please complete, date and
sign the enclosed proxy card and promptly mail it in the enclosed envelope in
order to ensure representation of your shares at the meeting. No postage need
be affixed if the proxy card is mailed in the United States.
If a properly executed proxy card is submitted and no instructions are
given, the shares of common stock represented by that proxy will be voted "FOR"
approval and adoption of the agreement of merger.
Please do not send your stock certificates to Peritus at this time.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of the merger, passed upon the merits or
fairness of the merger, or passed upon the adequacy or accuracy of the
disclosure in this notice or in the attached proxy statement. Any
representation to the contrary is a criminal offense.
This notice, the attached proxy statement and the accompanying proxy card
are first being mailed to stockholders on or about May , 2001.
Preliminary Copy
Filed on April 27, 2001
PERITUS SOFTWARE SERVICES, INC.
112 TURNPIKE ROAD, SUITE 111
WESTBOROUGH, MASSACHUSETTS 01581
----------------
PROXY STATEMENT FOR
SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD ON JUNE , 2001
----------------
This proxy statement and the accompanying proxy card are first being sent to
stockholders on or about May , 2001.
PERITUS SOFTWARE SERVICES, INC.
112 TURNPIKE ROAD, SUITE 111
WESTBOROUGH, MASSACHUSETTS 01581
----------------
PROXY STATEMENT FOR
SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD ON JUNE , 2001
----------------
QUESTIONS AND ANSWERS ABOUT THE MERGER AND THE SPECIAL MEETING
Q: What am I being asked to vote upon?
A: You are being asked to vote to approve and adopt the agreement of merger
among Peritus Software Services, Inc., Rocket Software, Inc. and Rocket
Acquisition Company, Inc., a majority-owned subsidiary of Rocket Software,
and the transactions contemplated by the agreement, including the merger of
Rocket Acquisition with and into Peritus.
Q: Who is merging with whom?
A: Rocket Acquisition, a majority-owned subsidiary of Rocket Software, will
merge with and into Peritus. Peritus will survive the merger, as a
majority-owned private company subsidiary of Rocket Software.
Q: What will I receive in the merger?
A: Upon consummation of the merger, each share of Peritus' common stock owned
by Peritus' stockholders, except for shares owned by Rocket Software,
Rocket Acquisition, any of their respective wholly owned subsidiaries and
stockholders who are entitled to and have dissenters' rights, will be
converted into the right to receive $0.19 in cash, without interest.
Q: How many votes do I have?
A: You have one vote for each share of common stock that you owned at the
close of business on May 10, 2001.
Q: What vote is required to approve the merger?
A: For the merger to occur, the agreement of merger must be approved and
adopted by a majority of the shares of Peritus' common stock outstanding on
May 10, 2001. Rocket Software is the holder of approximately 36.6% of the
outstanding shares of Peritus' common stock. Rocket Software has agreed to
vote in favor of approval and adoption of the agreement of merger. In
addition, all of our directors and executive officers who own common stock
have indicated that they intend to vote to approve and adopt the agreement
of merger. When combined, the shares of common stock owned by Rocket
Software and the shares of common stock beneficially owned by our directors
and executive officers represent approximately 12,279,113 shares, excluding
options to purchase common stock, or approximately 44.9% of the outstanding
common stock as of the record date. Therefore, at the special meeting, in
addition to the vote of Rocket Software and all of our directors and
officers, the vote of Peritus stockholders holding slightly less than 5.1%
of the outstanding common stock on May 10, 2001 will be sufficient to
approve the agreement of merger and the transactions contemplated thereby,
including the merger.
a
Q: Why are the special committee and the board of directors recommending the
merger?
A: A special committee of Peritus directors who are not affiliated with Rocket
Software, as well as our board of directors, evaluated the fairness and
advisability of the agreement of merger and transactions contemplated by
the agreement, including the merger. Both the special committee and the
board of directors, by unanimous vote of the special committee and the
other directors present, approved the agreement of merger and the
transactions contemplated by the agreement, including the merger. The
special committee and the board of directors considered several factors in
making those approvals, including other alternatives to the merger
previously pursued by us. A more complete description of the reasons for
the merger can be found beginning on page 16.
Q: Why was the special committee formed?
A: Because two of the six members of the board of directors are also principal
stockholders, directors and officers of Rocket Software, your board of
directors formed the special committee of directors to protect your
interests in evaluating and negotiating the agreement of merger. The
members of the special committee are Dominic K. Chan, John D. Giordano,
Axel Leblois and Roland D. Pampel. These directors are not stockholders,
employees or directors of Rocket Software. In addition to serving as a
director, Mr. Giordano is also our President, Chief Executive Officer and
Chief Financial Officer.
Q: What was the opinion of the financial advisor?
A: Each of the special committee and the board of directors considered the
opinion of Peritus' financial advisor, The Catalyst Group, LLC. Catalyst
presented a written opinion to the effect that the merger consideration is
fair, from a financial point of view, to the holders of our common stock.
Q: How will the cash merger consideration be paid?
A: It is a condition to Rocket Software's closing the merger that at the time
of the closing Peritus must have at least $4,810,000 in cash after
subtraction of the lesser of $840,000 or the actual transaction costs
experienced by Peritus in connection with the agreement of merger. This
amount will be used to fund the entire $0.19 per share cash consideration,
or an aggregate of approximately $3.3 million, to be paid to all Peritus
stockholders other than Rocket Software or Rocket Acquisition in the
merger. Rocket Software currently owns 10 million shares, or approximately
36.6% of Peritus' common stock. In lieu of receiving $0.19 per share for
the shares of Peritus' common stock that it owns, Rocket Software will
receive substantially all of the Peritus business and assets remaining
after the cash payment to other stockholders as the majority stockholder of
Peritus following the merger.
Q: How do I vote?
A: You may choose one of the following ways to cast your vote:
. by completing the accompanying proxy card and returning it in the
enclosed envelope; or
. by appearing and voting in person at the special meeting.
If your shares are held in "street name," which means that your shares are
held in the name of a bank, broker or other financial institution instead
of in your own name, you must either direct the financial institution as to
how to vote your shares or obtain a proxy from the financial institution to
vote at the special meeting.
b
Q: May I change my vote?
A: Yes. You may change your vote by following any of these procedures. For a
stockholder "of record," meaning one whose shares are registered in his or
her name, to revoke a proxy:
. send another signed proxy card with a later date to the address
indicated on the proxy card; or
. send a letter revoking your proxy to our Clerk at our principal address;
or
. attend the special meeting, notify us in writing that you are revoking
your proxy and vote in person.
A "beneficial holder" whose shares are registered in another name (for
example in "street name") must follow the procedures required by the holder
of record, which is usually a brokerage firm or bank, to revoke a proxy.
You should contact the holder of record directly for more information on
these procedures.
Q: How do I vote in person?
A: If you plan to attend the special meeting and wish to vote in person, we
will give you a ballot when you arrive. If your shares are held in "street
name," you must bring an account statement or letter from the brokerage
firm or bank showing that you were the beneficial owner of the shares on
May 10, 2001 in order to be admitted to the meeting. If you want to vote
shares that are not in your name at the special meeting, you must obtain a
"legal proxy" from the holder of record and present it at the special
meeting.
Q: Are Peritus stockholders entitled to dissenters' or appraisal rights?
A: Yes. Peritus stockholders have the opportunity to assert dissenters' rights
relating to the merger. To claim these rights, Peritus stockholders must
comply with the special requirements of Massachusetts law, which are
included as Annex C of the proxy statement. These requirements are
summarized in the section of the proxy statement called "Dissenters'
Rights".
Q: Is there a deadline for closing the merger?
A: The agreement of merger may be terminated, in general, by any party if the
merger does not close on or before June 30, 2001.
Q: How do I exchange my stock certificates for cash?
A: If the merger is completed, you will receive written instructions for
exchanging your Peritus stock certificates for cash. You should not
surrender your Peritus stock certificates prior to receiving those
instructions. Please do not send your stock certificates at this time.
Q: Whom should I call if I have any questions?
A: If you have any questions about the special meeting or your ownership of
our common stock, please contact Ronald C. Garabedian, our Vice President
and Treasurer, by telephone at (508) 870-0963.
If you have any questions about the merger and the related transactions,
please write to:
Mr. Ronald C. Garabedian
Vice President and Treasurer
Peritus Software Services, Inc.
112 Turnpike Road, Suite 111
Westborough, Massachusetts 01581
c
TABLE OF CONTENTS
Page
----
SUMMARY................................................................... 1
Date, Time and Place of the Special Meeting............................. 1
Purpose of the Special Meeting.......................................... 1
The Parties............................................................. 1
The Agreement of Merger................................................. 2
Going Private Transaction............................................... 2
Special Committee's Recommendation to Stockholders...................... 2
Board of Directors' Recommendation to Stockholders...................... 2
Peritus' Purpose and Reasons for the Merger............................. 3
Purpose and Reasons of Rocket Software for the Merger................... 3
Position of Rocket Software as to Fairness of the Merger................ 4
Opinion of Financial Advisor............................................ 5
What Stockholders Will Receive.......................................... 5
How Will Options Be Treated............................................. 5
Stockholder Vote Required to Approve the Merger......................... 5
Stock Ownership of Management, Directors and Other Affiliates........... 5
Tax Consequences........................................................ 6
Conditions to the Merger................................................ 6
Dissenters' Rights...................................................... 6
PERITUS SOFTWARE SERVICES, INC. SPECIAL MEETING........................... 7
Where and When The Special Meeting Will Be Held......................... 7
What Will Be Voted Upon................................................. 7
Only Peritus Holders of Record Are Entitled to Vote..................... 7
Quorum.................................................................. 7
Vote Required to Adopt the Peritus Agreement of Merger.................. 7
Voting Your Shares By Proxy............................................. 8
Revoking Your Proxy..................................................... 8
Voting Shares Held In "Street Name" By Proxy and Abstaining............. 8
Voting In Person........................................................ 8
Dissenting Holders...................................................... 9
Costs of Soliciting These Proxies....................................... 9
Exchanging Stock Certificates........................................... 9
Effective Time.......................................................... 9
SPECIAL FACTORS........................................................... 10
Strategic and Financing Alternatives.................................... 10
Contacts and Negotiations With Rocket Software.......................... 11
Background of the Merger................................................ 12
Peritus' Purpose and Reasons for the Merger............................. 16
Opinion of Financial Advisor............................................ 18
Rocket Software's Purpose and Reasons for the Merger.................... 23
Position of Rocket Software as to Fairness of the Merger................ 23
Identity and Background of Rocket Software and Rocket Acquisition....... 25
Directors and Executive Officers of Rocket Software..................... 25
Amount and Source of Funds and Financing of the Merger.................. 26
Certain Effects of the Merger........................................... 26
Plans for Peritus After the Merger...................................... 27
Conduct of the Business of Peritus If the Merger Is Not Completed....... 27
i
Page
----
Material Federal Income Tax Consequences.............................. 27
Regulatory Matters.................................................... 28
INTERESTS OF CERTAIN PERSONS IN THE MERGER.............................. 28
CERTAIN TRANSACTIONS.................................................... 30
THE AGREEMENT OF MERGER................................................. 31
Merger Consideration.................................................. 31
Option Awards......................................................... 31
The Surviving Corporation............................................. 31
Representations and Warranties........................................ 31
Principal Covenants................................................... 32
Principal Conditions to the Completion of the Agreement of Merger..... 34
Termination........................................................... 34
Accounting Treatment.................................................. 35
BUSINESS................................................................ 36
Peritus Products, Services and Technology............................. 37
Products and Services................................................. 37
CodeNine.............................................................. 37
SAM Relay............................................................. 37
Outsourcing Services.................................................. 37
Technology Transfer Services.......................................... 38
Mass Change Solutions................................................. 38
Technology............................................................ 39
Sales and Marketing................................................... 40
Direct Sales.......................................................... 40
Indirect Sales........................................................ 40
Marketing............................................................. 40
Clients............................................................... 40
Client Technical Support.............................................. 41
Research and Product Development...................................... 41
Competition........................................................... 41
Intellectual Property................................................. 42
Employees............................................................. 43
Properties............................................................ 43
Legal Proceedings..................................................... 43
SELECTED HISTORICAL FINANCIAL DATA...................................... 44
Selected Historical Financial Data of Peritus......................... 44
No Pro Forma Financial Information.................................... 45
Forward-Looking Statements............................................ 45
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.......................................................... 46
Company Current Condition and Current Strategy........................ 46
Company Overview...................................................... 46
Revenue Recognition Policies.......................................... 48
Client Concentration.................................................. 49
Results of Operations................................................. 50
Year Ended December 31, 2000 Compared to Year Ended December 31,
1999................................................................. 50
Cost of Revenue....................................................... 51
Operating Expenses.................................................... 52
Interest Income (Expense), Net........................................ 53
Cost of Strategic Investment.......................................... 53
Provision for Income Taxes............................................ 53
ii
Page
----
Year Ended December 31, 1999 Compared to Year Ended December 31,
1998................................................................. 53
Cost of Revenue....................................................... 54
Operating Expenses.................................................... 54
Interest Income, Net.................................................. 55
Provision for Income Taxes............................................ 55
Minority Interest in Majority-Owned Subsidiary........................ 55
Liquidity and Capital Resources....................................... 55
Foreign Currency...................................................... 56
Inflation............................................................. 56
Recently Issued Accounting Standards.................................. 56
Quantitative And Qualitative Disclosures About Market Risk............ 56
INFORMATION ABOUT STOCK OWNERSHIP....................................... 57
COMPARATIVE PER SHARE, MARKET PRICE AND DIVIDEND INFORMATION............ 59
BOARD OF DIRECTORS AND EXECUTIVE OFFICERS............................... 59
Who Are Our Directors?................................................ 59
Who Are Our Executive Officers?....................................... 60
Employment Agreement.................................................. 61
DISSENTERS' RIGHTS...................................................... 63
BUSINESS COMBINATIONS WITH INTERESTED PARTIES........................... 64
State Anti-Takeover Laws.............................................. 64
Preemptive Rights..................................................... 64
EXPENSES................................................................ 64
WHERE YOU CAN FIND MORE INFORMATION..................................... 65
INFORMATION ABOUT STOCKHOLDER PROPOSALS................................. 66
ANNEX A--Agreement and Plan of Merger
ANNEX B--Opinion of The Catalyst Group, LLC
ANNEX C--Sections 85 through 98, inclusive, of Chapter 156B of the
General Laws of Massachusetts
iii
SUMMARY
This summary highlights selected information from this proxy statement. This
summary may not contain all of the information that is important to you. To
understand the merger fully and to obtain a more complete description of the
legal terms of the agreement of merger and the transactions contemplated by it,
you should carefully read this entire document, including the Annexes and the
documents to which we refer you. See "Where You Can Find More Information" for
more details.
Date, Time and Place of the Special Meeting
The special meeting of stockholders of Peritus will be held on June , 2001,
at 10:00 a.m., local time, at the offices of Hale and Dorr LLP, 60 State
Street, Boston, Massachusetts 02109.
Purpose of the Special Meeting
At the special meeting, the stockholders of Peritus will consider and vote
on a proposal to approve and adopt the agreement of merger which is attached to
this proxy statement as Annex A, and the transactions contemplated by the
agreement of merger, including the merger of Rocket Acquisition with and into
Peritus.
The Parties
Peritus Software Services, Inc.
Principal Executive Offices:
Peritus Software Services, Inc.
112 Turnpike Road, Suite 111
Westborough, Massachusetts 01581-2860
Telephone: (508) 870-0963
Peritus Software Services, Inc., a publicly held Massachusetts corporation,
provides solutions consisting of software products and services that enable
organizations to improve the productivity, quality and effectiveness of their
information technology, or IT, systems maintenance or software evolution
functions. Peritus employs software tools, methodologies and processes,
designed to automate the typically labor-intensive processes involved in
conducting mass change and other software maintenance tasks.
Rocket Software, Inc.
Principal Executive Offices:
Rocket Software, Inc.
Two Apple Hill Drive
Natick, Massachusetts 01760
Telephone: (508) 655-4321
Rocket Software, Inc., a privately held Massachusetts corporation, is a
software engineering organization providing enterprise class software, products
and services. On March 27, 2000, Rocket Software purchased 10,000,000 shares of
Peritus' common stock at a per share purchase price equal to $0.40, or an
aggregate consideration of $4.0 million. After the transaction, Rocket Software
owned approximately 36.6% of the outstanding shares of Peritus' common stock.
Under the terms of the common stock purchase agreement, Peritus elected two
directors, Johan Magnusson and Andrew Youniss, designated by Rocket Software.
Both Mr. Magnusson and Mr. Youniss are officers, directors and principal
stockholders of Rocket Software. In addition, Matthew Kelley, who served as our
Vice President, Research and Development, from March 27, 2000 to
1
December 31, 2000, was previously employed by Rocket Software and has returned
to Rocket Software since resigning his position with Peritus.
Rocket Acquisition Company, Inc.
Principal Executive Offices:
c/o Rocket Software, Inc.
Two Apple Hill Drive
Natick, Massachusetts 01760
Telephone: (508) 655-4321
Rocket Acquisition Company, Inc., a privately held Massachusetts
corporation, is a majority-owned subsidiary of Rocket Software formed for the
purpose of engaging in the merger and has engaged in no business activities
unrelated to the agreement of merger.
The Agreement of Merger
We have attached a copy of the agreement of merger as Annex A to this proxy
statement. We encourage you to read the agreement of merger carefully because
it is the legal document that governs the merger. Under the agreement of
merger, Rocket Acquisition will merge with and into Peritus, with Peritus as
the surviving corporation. If the merger is completed, each share of Peritus'
common stock outstanding, other than shares held by Rocket Software, Rocket
Acquisition, their respective wholly owned subsidiaries and stockholders who
are entitled to and have dissenters' rights, will be canceled and converted
into the right to receive $0.19 in cash. Outstanding options to purchase
Peritus' common stock, with a per share exercise price less than $0.19, unless
exercised, will be converted into the right to receive, upon the surrender of
the instrument evidencing the stock option, a cash payment equal to the product
of (1) the number of shares underlying the option and (2) the difference
between $0.19 and the per share exercise price of the option. Such options will
then be canceled. All other outstanding options to purchase Peritus' common
stock will be canceled. In general, each of the parties has the right to
terminate the agreement of merger, if the merger is not completed on or before
June 30, 2001.
Going Private Transaction (See Page 26)
The merger constitutes a "going private" transaction for Peritus under the
federal securities laws. Following the merger, (i) Peritus' common stock no
longer will be publicly traded or quoted on the OTC Bulletin Board, and (ii)
Peritus no longer will be required to file periodic and other reports with the
United States Securities and Exchange Commission and will formally terminate
its reporting obligations under the Securities Exchange Act of 1934. As a
result of the merger, the holders of our common stock, other than Rocket
Software, Rocket Acquisition, their respective wholly owned subsidiaries and
stockholders who are entitled to and have dissenters' rights, will be entitled
to receive the cash merger price and, will no longer have any interest in
Peritus, including its future earnings or growth.
Special Committee's Recommendation to Stockholders (See Page 16)
The special committee of Peritus' board of directors believes that the terms
of the agreement of merger and the transactions contemplated by the agreement,
including the merger, are fair to, advisable, and in the best interests of the
holders of common stock. The special committee unanimously approved the
agreement of merger and recommends that you vote "FOR" the approval and
adoption of the agreement of merger and the merger. See page 16 for more
information.
Board of Directors' Recommendation to Stockholders (See Page 16)
Peritus' board of directors believes that the terms of the agreement of
merger and the transactions contemplated by the agreement, including the
merger, are fair to, advisable, and in the best interests of the
2
holders of common stock. The board of directors recommends that you vote "FOR"
the approval and adoption of the agreement of merger and the merger.
A number of members of the board of directors have interests in the merger
that are different from the interests of Peritus' stockholders generally. Two
of our directors, Johan Magnusson and Andrew Youniss, are affiliates of Rocket
Software. Mr. Magnusson is Chief Operating Officer, a director and a 40%
stockholder of Rocket Software, and Mr. Youniss is President, Chief Executive
Officer, Treasurer, Clerk, a director and a 40% stockholder of Rocket Software.
In addition, Matthew Kelley, who served as our Vice President, Research and
Development from March 27, 2000 to December 31, 2000 was previously employed by
Rocket Software and is presently Chief Technology Officer, a director and a 20%
stockholder of Rocket Software. See the table under "Information About Stock
Ownership" for more detailed information regarding the ownership interests of
Messrs. Magnusson, Youniss and our other directors in the capital stock of
Peritus.
In addition, John D. Giordano, our President, Chief Executive Officer, Chief
Financial Officer and one of our directors, will receive a $100,000 bonus if
the merger closes on or prior to June 30, 2001 and a $50,000 bonus if the
merger closes after June 30, 2001 but before January 1, 2002. Mr. Giordano will
also be entitled to severance payments and benefits under his employment
agreement with Peritus, including a cash payment of $202,800.
Pursuant to the terms of the agreement of merger, each outstanding option to
purchase Peritus' common stock, whether vested or unvested, with a per share
exercise price less than $0.19, will be converted into the right to receive,
upon the surrender of the instrument evidencing the stock option, a cash
payment equal to the product of (1) the number of shares underlying the option
and (2) the difference between $0.19 and the per share exercise price of the
option. Those options will then be canceled. The following directors will
receive the described cash payments upon conversion and cancellation of
outstanding stock options with a per share exercise price less than $0.19
pursuant to the agreement of merger:
. Dominic K. Chan will receive a cash payment equal to $272;
. John D. Giordano will receive a cash payment equal to $14,820; and
. Roland D. Pampel will receive a cash payment equal to $1,080.
See page 28 for more information.
Peritus' Purpose and Reasons for the Merger (See Page 16)
In reaching its conclusion to approve and recommend the agreement of merger,
the special committee and the board of directors considered, among other
factors, the following:
. the special committee and the board of directors, after review of the
other alternatives to the merger previously pursued by us, concluded
that the merger is the best alternative to bring value to the holders of
common stock;
. the financial presentation of Peritus' financial advisor, Catalyst,
including its opinion that the merger consideration is fair, from a
financial point of view, to the holders of Peritus' common stock; and
. other factors are described in more detail on pages 16 through 18.
Rocket Software's Purpose and Reasons for the Merger (See Page 23)
Rocket Software has informed us that its purpose for the merger is for
Rocket Software and certain of its affiliates to acquire substantially all of
the shares of Peritus that Rocket Software does not already own and to
3
combine the businesses of the two companies in Rocket Software. In determining
to enter into the merger, Rocket Software has informed us that it considered
the following factors:
. the business, operations, financial condition, operating results and
prospects of Peritus, including the fact that (a) Peritus incurred an
aggregate loss of $424,000 between January 1, 2001 and March 31, 2001,
the end of the last full quarter prior to the signing of the merger
agreement for which financial results had been reported and an aggregate
loss of $4,166,000, including a $4,000,000 non-cash charge associated
with the March 2000 investment in Peritus by Rocket Software, for the
year ended December 31, 2000 and (b) Peritus lacked prospects for
becoming profitable in the foreseeable future;
. the inability of Peritus to find an appropriate purchaser or strategic
partner for Peritus during the process conducted by Covington Associates
and The Catalyst Group, LLC and the lack of possible strategic
alternatives to the agreement of merger, which reduced the prospects of
obtaining value for Rocket Software's equity investment in Peritus
through a sale of stock;
. Rocket Software's evaluation of the synergies associated with operating
the combined companies as a single multi-channel business enterprise,
including the integration or Peritus' technical personnel and software
maintenance methodology into current Rocket Software development
projects; and
. the more detailed factors that are described on page 23.
Position of Rocket Software as to Fairness of the Merger (See Page 23)
Rocket Software believes that the merger and the consideration to be paid to
the holders of Peritus' common stock, other than Rocket Software, Rocket
Acquisition, their respective wholly owned subsidiaries and stockholders who
are entitled to and have dissenters' rights, in the merger is fair to such
holders. Rocket Software based its belief, among other factors, on the
following:
. after a thorough review with independent financial and legal advisors,
the Peritus special committee, which consisted entirely of directors of
Peritus who are not affiliated with Rocket Software, and board of
directors concluded that the merger is fair to, advisable, and in the
best interests of the holders of Peritus' common stock and the holders of
common stock who are unaffiliated with Rocket Software and approved the
agreement of merger and the merger;
. Peritus received a written fairness opinion dated April 17, 2001 from
Catalyst that subject to the various assumptions and limitations set
forth in that opinion, as of the date thereof, the $0.19 per share in
cash to be received by the holders of Peritus' common stock, except for
Rocket Software, Rocket Acquisition, their respective wholly owned
subsidiaries and stockholders who are entitled to and have dissenters'
rights, in the merger was fair to such stockholders from a financial
point of view as described under "Opinion of Financial Advisor";
. the lack of prospects for finding an alternative to the merger with
Rocket Software that would result in greater value to the unaffiliated
holders of common stock based on the inability to find an appropriate
purchaser or strategic partner for Peritus during the process conducted
by Catalyst and the lack of possible strategic alternatives to the
merger;
. the business, operations, financial condition, operating results and
prospects of Peritus, including the fact that (a) Peritus incurred an
aggregate loss of $424,000 between January 1, 2001 and March 31, 2001,
the end of the last full quarter prior to the signing of the merger
agreement for which financial results had been reported and an aggregate
loss of $4,166,000, including a $4,000,000 non-cash charge associated
with the March 2000 investment in Peritus by Rocket Software, for the
year ended December 31, 2000 and (b) Peritus lacked prospects for
becoming profitable in the foreseeable future; and
. the more detailed factors that are described on page 24.
4
Opinion of Financial Advisor (See Page 18)
In connection with the agreement of merger, each of the special committee
and the board of directors considered the opinion of Peritus' financial
advisor, The Catalyst Group, LLC. Catalyst presented an opinion to
Peritus to the effect that the merger consideration is fair, from a financial
point of view, to the holders of our common stock. The full text of Catalyst's
written opinion is attached to this proxy statement as Annex B. Catalyst's
opinion does not constitute a recommendation to any stockholder with respect to
any matter relating to the proposed merger.
We encourage you to read the opinion carefully in its entirety for a
description of the assumptions made, matters considered and limitations on the
review undertaken by Catalyst.
What Stockholders Will Receive (See Page 31)
Upon the merger, all holders of our common stock, except for Rocket
Software, Rocket Acquisition, their respective wholly owned subsidiaries and
stockholders who are entitled to and have dissenters' rights, will be entitled
to receive $0.19 in cash for each share of common stock.
How Will Options Be Treated (See Page 31)
Outstanding options to purchase Peritus' common stock, with a per share
exercise price less than $0.19, unless exercised, will be converted into the
right to receive, upon the surrender of the stock option agreement, a cash
payment equal to the product of (1) the number of shares underlying the option
and (2) the difference between $0.19 and the per share exercise price of the
option. Such options will then be canceled. All other outstanding options to
purchase Peritus' common stock will be canceled.
Stockholder Vote Required to Approve the Merger (See Page 7)
Approval and adoption of the agreement of merger and the merger requires the
vote of the holders of at least a majority of Peritus' common stock outstanding
on the record date. Rocket Software is the holder of approximately 36.6% of our
outstanding shares of common stock. Rocket Software has agreed to vote in favor
of approval and adoption of the agreement of merger.
Stock Ownership of Management, Directors and Other Affiliates (See Page 57)
On May 10, 2001, the record date for the special meeting, Rocket Software
owned and was entitled to vote 10 million shares of Peritus' common stock, or
approximately 36.6% of Peritus' outstanding common stock. On the record date,
directors and executive officers of Peritus and their associates and affiliates
beneficially owned 2.3 million shares, or approximately 8.3%, of Peritus'
outstanding common stock, excluding options to purchase common stock and shares
held by Rocket Software.
All of our directors and executive officers who own common stock have
indicated that they intend to vote to approve and adopt the agreement of
merger. When combined with the shares of common stock owned by Rocket Software,
which has agreed to vote to approve and adopt the agreement of merger, the
shares of common stock beneficially owned by our directors and executive
officers represent approximately 12,279,113 shares, excluding options to
purchase common stock, or approximately 44.9% of the outstanding common stock
as of the record date. Therefore, at the special meeting, in addition to the
vote of Rocket Software and all of our directors and executive officers, the
vote of Peritus' stockholders holding slightly less than 5.1% of the
outstanding common stock on the record date will be sufficient to approve and
adopt the agreement of merger and the transactions contemplated thereby,
including the merger.
5
Tax Consequences (See Pages 27 and 28)
Generally, for United States federal income tax purposes, stockholders will
recognize gain or loss determined as if they sold their common stock for the
cash received in the merger. Any such gain will be subject to tax, and any such
loss will be, subject to some limitations. Stockholders are advised to see
their own tax advisor regarding the tax consequences of the merger to them.
Conditions to the Merger (See Page 34)
We will complete the merger only if specific conditions are satisfied,
including the following:
. Approval and adoption of the agreement of merger and the merger by the
stockholders of Peritus;
. At the time of the closing, Peritus must have at least $4,810,000 in
cash after subtraction of the lesser of $840,000 or the actual
transaction costs experienced by Peritus in connection with the
agreement of merger;
. Absence of any law or court order prohibiting the merger;
. Absence of a material adverse effect on Peritus;
. Less than 7.5% of holders of Peritus' outstanding shares of common stock
exercise dissenters' rights;
. The representations and warranties made in the agreement of merger are
true and correct on the effective date of the merger, subject to certain
materiality qualifications; and
. Other conditions described in more detail on page 34.
Dissenters' Rights (See Page 63)
Holders of Peritus' common stock who do not vote in favor of the agreement
of merger and follow certain procedures have the right to a judicial appraisal
of the fair value of their common stock.
6
PERITUS SOFTWARE SERVICES, INC. SPECIAL MEETING
This proxy statement is being furnished in connection with the solicitation
of proxies from the holders of our common stock by the special committee and by
our board of directors. The special committee and the board of directors is
soliciting your proxy with respect to the agreement of merger and the
transactions contemplated by the agreement, including the merger of Rocket
Acquisition with and into Peritus, and any other matters to be voted upon at
the special meeting, and at any adjournment or adjournments of the special
meeting. We began mailing this proxy statement to holders of our common stock
on or about May , 2001. You should read this proxy statement carefully before
voting your shares.
Where and When The Special Meeting Will Be Held
The special meeting of stockholders of Peritus will be held on June , 2001,
at 10:00 a.m., local time, at the offices of Hale and Dorr LLP, 60 State
Street, Boston, Massachusetts 02109.
What Will Be Voted Upon
At the special meeting, you will be asked to consider and vote upon the
following items:
. to approve and adopt the agreement of merger and the transactions
contemplated by the agreement of merger, including the merger of Peritus
with and into Rocket Acquisition; and
. such other business as may properly come before the special meeting or
any adjournment or adjournments of the special meeting.
Only Peritus Holders of Record Are Entitled to Vote
The special committee has fixed the close of business on May 10, 2001 as the
record date for the determination of stockholders who are entitled to notice
of, and to vote at, the special meeting of stockholders or any adjournment or
adjournments thereof. On the record date, there were issued and outstanding
shares of common stock.
Quorum
A quorum of our stockholders is necessary to have a valid stockholders
meeting. The required quorum for the transaction of business at the special
meeting is the presence, in person or by proxy, of the holders of shares
representing a majority of the shares of stock entitled to vote. Rocket
Software, is the holder of approximately 36.6% of our outstanding shares of
common stock. Rocket Software has agreed to vote to approve and adopt the
agreement of merger and the merger. In addition, all of our directors and
executive officers who own, in the aggregate, approximately 8.3% of our common
stock have indicated that they intend to vote to approve and adopt the
agreement of merger and the merger. Therefore, at the special meeting, in
addition to the presence of Rocket Software and all of our directors and
executive officers, the presence of Peritus stockholders holding slightly less
than 5.1% of the outstanding common stock on the record date will be sufficient
to establish a quorum.
Vote Required to Adopt the Peritus Agreement of Merger
For the merger to occur, the agreement of merger must be approved and
adopted by the holders of a majority of the shares of common stock outstanding
on the record date. As of the record date, there were issued and outstanding
shares of our common stock. Common stock entitles its holders of record to
one vote for each share owned. Rocket Software is the holder of approximately
36.6% of our outstanding shares of common stock. Rocket Software has agreed to
vote to approve and adopt the agreement of merger and the transactions
contemplated by that agreement. In addition, all of our directors and executive
officers who own common stock have indicated that they intend to vote in favor
of the agreement of merger. When combined, the
7
shares of common stock owned by Rocket Software and the shares of common stock
beneficially owned by our directors and executive officers represent
approximately 12,279,113 shares, excluding options to purchase common stock, or
approximately 44.9% of the outstanding common stock as of the record date.
Therefore, at the special meeting, in addition to the vote of Rocket Software
and all of our directors and executive officers, the vote of Peritus'
stockholders holding slightly less than 5.1% of the outstanding common stock on
May 10, 2001 will be sufficient to approve the agreement of merger and the
transactions contemplated thereby, including the merger.
Voting Your Shares By Proxy
When you return your proxy card you are giving your "proxy" to the
individuals we have designated in the proxy to vote your shares as you direct
at the meeting. If you sign the proxy card but do not make specific choices,
these individuals will vote your shares for each proposal as recommended by the
board of directors. Each proxy will confer discretionary authority to vote on
any matter presented at the meeting which Peritus did not know of a reasonable
time before the mailing of this proxy statement. If any matter not specifically
listed in the notice of special meeting is presented at the special meeting,
they will vote your shares in accordance with their best judgment. At the time
we began printing this proxy statement, we knew of no matters that needed to be
acted on at the meeting other than those discussed in this proxy statement.
Where a stockholder has specified a choice on his or her proxy with respect
to certain proposals or matters, that direction will be followed. If no
direction is given, all of the shares of common stock represented by the proxy
will be voted in favor of such proposal or matter.
Revoking Your Proxy
A proxy that is properly submitted to Peritus may be revoked at any time
before it is exercised. For a stockholder "of record", meaning one whose shares
are registered in his or her own name, to revoke a proxy, the stockholder may
either:
. send in another signed proxy card with a later date; or
. send a letter revoking the stockholder's proxy to our Clerk at our
principal address; or
. attend the special meeting, notify us in writing that the stockholder is
revoking his or her proxy and vote in person.
A "beneficial holder" whose shares are registered in another name, for
example in "street name", must follow the procedures required by the holder of
record, which is usually a brokerage firm or bank, to revoke a proxy. You
should contact the holder of record directly for more information on these
procedures.
Voting Shares Held In "Street Name" By Proxy and Abstaining
If you do not provide your broker with instructions on how to vote your
"street name" shares, your broker will not be able to vote them on the merger.
This will have the effect of voting against the merger. You should therefore
instruct your broker how to vote your shares, following the directions provided
by your broker. Similarly, abstentions will not be voted for or against the
merger and will therefore have the effect of voting against the merger.
Voting In Person
Stockholders that attend the special meeting and wish to vote in person will
be given a ballot at the meeting. If your shares are held in street name and
you want to attend the meeting, you must bring an account
8
statement or letter from the brokerage firm or bank showing that you were the
beneficial owner of the shares on May 10, 2001. If you want to vote shares that
are held in street name or are otherwise not registered in your name, you will
need to obtain a "legal proxy" from the holder of record and present it at the
special meeting.
Dissenting Holders
Massachusetts law entitles stockholders who do not vote in favor of a merger
to demand a judicial appraisal of the fair value of their shares. If you do not
vote in favor of the merger and if you follow the procedures set forth
beginning on page 63, you may be a dissenting holder. Failure to follow such
procedures precisely will result in a loss of dissenters' rights.
Costs of Soliciting These Proxies
Peritus will pay all of the costs of soliciting these proxies, consisting
mostly of printing and mailing costs. Although we are mailing these proxy
materials, our directors and employees may also solicit proxies in person or by
telephone, telecopier or other electronic means of communication. Peritus may
retain a proxy solicitor to assist in the solicitation of proxies for the
special meeting at an estimated cost to Peritus of approximately $10,000 plus
reimbursement of reasonable expenses. Brokers, custodians and fiduciaries will
be requested to forward proxy soliciting material to the owners of stock held
in their names, and, as required by law, Peritus will, at their request,
reimburse them for their out-of-pocket expenses in this regard.
Exchanging Stock Certificates
Holders of common stock should not send in their stock certificates with the
proxy cards. If the merger is completed, you will receive written instructions
for exchanging your stock certificates for cash.
Effective Time
The merger will be effective as soon as practicable following stockholder
adoption of the agreement of merger at the special meeting and satisfaction or
waiver of the terms and conditions set forth in the agreement of merger, and
upon the filing of articles of merger with the Secretary of the Commonwealth of
the Commonwealth of Massachusetts. In general, each of the parties has the
right to terminate the agreement of merger, if the merger is not completed on
or before June 30, 2001.
9
SPECIAL FACTORS
Strategic and Financing Alternatives
In the second half of 1998, the overall market for our year 2000 tools and
services contracted dramatically resulting in substantial financial losses.
Despite significant cost reductions through layoffs and other means, we did not
anticipate that we would be able to return to a break-even cash flow. After
numerous meetings, our board of directors decided to engage an investment
banker to explore strategic alternatives, including our possible sale.
On December 18, 1998, we executed an engagement agreement with Covington
Associates under which Covington Associates agreed to provide Peritus with
financial advisory services and identification of strategic transactions,
including the sale of our stock. Covington Associates conducted an active
campaign to find a buyer for us and contacted more than sixty companies in the
same or related areas of business.
In late December 1998, Mr. Johan Magnusson, in his capacity as a fund
manager for an investment limited partnership, contacted John D. Giordano, our
Chief Financial Officer, expressing interest in Peritus. Mr. Giordano agreed to
meet with Mr. Magnusson for discussions.
Mr. Giordano and Dr. Dominic K. Chan, then our President and Chief Executive
Officer, met with Mr. Magnusson on January 19, 1999 to discuss Peritus and the
investment limited partnership. At the conclusion of the meeting, it was agreed
that the investment limited partnership would consider making an investment in
Peritus of up to $5 million. After execution of a confidentiality agreement,
the investment limited partnership was provided financial and other information
for its analysis.
On February 18, 1999, we publicly announced our agreement with Covington
Associates.
On February 19, 1999, Mr. Magnusson met with Mr. Giordano and indicated that
the investment limited partnership no longer had any interest in us. The
reasons given were similar to those mentioned by the other companies we
contacted in the first-half of 1999 and described below.
During the first-half of 1999, after execution of confidentiality
agreements, we held extensive meetings with six different companies to explore
our potential sale. After detailed consideration, none of the companies was
willing to go forward with any form of transaction. The specific reasons given
were:
. doubt about our ability to return to growth and reach profitability;
. the risk associated with unresolved shareholder litigation;
. the risk of potential litigation which might arise out of our year 2000
business;
. fixed cost obligations;
. the low margin rates associated with our outsourcing business; and
. the depletion in our staff as a result of layoffs.
During the meeting of our board of directors on March 29, 1999, Dr. Chan
informed the board that he was considering making an offer to acquire Peritus.
Dr. Chan resigned from the board and his position as President on April 1,
1999, and Mr. Giordano was appointed our President and Chief Executive Officer.
On May 7, 1999, Dr. Chan informed Mr. Giordano that, after careful
consideration, he would not be making an offer to acquire Peritus. On July 1,
1999, Dr. Chan was re-elected to our board of directors.
During the second half of 1999, we settled our remaining excess facilities
leases and relocated our headquarters to Westborough, Massachusetts. We also
continued development of our CodeNine tool.
We terminated our engagement agreement with Covington Associates in December
1999.
10
During our board of directors meeting on January 11, 2000, the board
directed Mr. Giordano to pursue discussions for business combinations with two
companies identified at the meeting. During the first quarter of 2000, Mr.
Giordano and certain members of our board of directors met with the chief
executive officers of two companies to discuss possible business combinations
and reached the conclusion that a merger was not currently feasible with either
of the companies.
Contacts and Negotiations With Rocket Software
On October 18, 1999, Mr. Giordano met with Mr. Magnusson. Mr. Magnusson
informed Mr. Giordano that he was part owner of a private company, Rocket
Software, Inc. The two discussed possible synergies between Rocket Software and
Peritus. During the last few months of 1999, Mr. Giordano and Mr. Magnusson
corresponded via e-mail regarding Peritus and Rocket Software.
On January 3, 2000, Mr. Giordano met with Mr. Magnusson and Mr. Andrew
Youniss, President and Chief Executive Officer of Rocket Software, to discuss
potential strategic relationships, including an investment by Rocket Software
in Peritus or a business combination between Rocket Software and Peritus. Mr.
Giordano also provided an overview of our technology, including our CodeNine
tool.
During our board of directors meeting on January 11, 2000, Mr. Giordano
informed the board of the results of his discussions with Rocket Software, and
the board directed Mr. Giordano to continue discussions with Rocket Software.
On January 17, 2000, Rocket Software and Peritus executed a confidentiality
agreement. Mr. Giordano and Mr. Magnusson discussed the possibility of an
investment by Rocket Software in Peritus to fund further product development
and additional sales and marketing expenses.
On February 10, 2000, Dr. Chan and Mr. Roland D. Pampel, both members of our
board of directors, and Mr. Giordano met with Mr. Magnusson and further
discussed the possibility of an investment by Rocket Software in Peritus in
order to fund further development of our CodeNine tool. It was agreed that a
detailed technical review should be conducted by both companies to determine
the feasibility of doing so.
On February 17, 2000, Mr. Magnusson, Mr. Youniss, and Mr. Matthew Kelley,
Rocket Software's Chief Technology Officer, met with Mr. Giordano, Dr. Chan and
Mr. Christopher Bailey, our Vice President of Research and Development, for a
detailed technology review. It was concluded at the meeting that there was a
potential to extend our CodeNine tool to support the renewal and web enablement
of legacy applications. Mr. Bailey and Mr. Kelley were instructed to study the
issue further and provide an initial detailed assessment as soon as possible.
During late February and early March, Mr. Giordano and Mr. Magnusson held
numerous discussions regarding, and negotiated, the nature, amount and pricing
for a potential Rocket Software investment. Rocket Software also conducted a
financial, legal and technical due diligence review of our business and capital
stock of Peritus.
In early March 2000, the price of our common stock rose dramatically. On
March 2, 2000, the price per share of our common stock closed at $0.3100. On
March 3, 2000, the stock price rose to $0.8750 and on March 6, 2000 it closed
at $1.7188. By March 15, 2000 the price had traded down to $1.2188. During this
period, the only public announcement made by Peritus was our earnings release
on March 1, 2000. We reported, among other things, a 74.5% decrease in total
revenue to $1,458,000 in the fourth quarter of 1999 versus $5,723,000 in the
fourth quarter of 1998, and a 99.5% decrease in our net loss to $25,000 from a
net loss of $5,344,000 in the fourth quarter of 1998. The rise in the stock
price affected the negotiations between Rocket Software and Peritus and
resulted in a higher final price for Rocket Software's investment in our
capital stock.
On March 15, 2000, a second technical review meeting was held between Rocket
Software and Peritus with the same parties who were involved in the meeting on
February 17 in attendance. Mr. Bailey and Mr. Kelley provided a report that the
extension of CodeNine appeared possible, and they provided an initial
assessment of the time frame and resources required.
11
During our board meeting on March 16, 2000, Mr. Giordano gave an update on
the status of the negotiations with Rocket Software. He summarized the proposed
transaction for the board, indicated that Rocket Software had completed its
technical, financial and legal due diligence review and stated that draft
investment agreements had been distributed to Rocket Software. He also outlined
the potential strategic and financial benefits of the transaction. Our board
discussed in detail the amount, pricing and timing of the investment, the
alternatives, if any, to the transaction, the risks associated with the
investment, the strategic benefits of the transaction and other factors. The
board noted that Covington Associates had searched for strategic alternatives
for approximately one year without success and that management had no other
investment or alternative offers to consider at the time. After discussion, the
board concluded there were no other current alternatives to the Rocket Software
transaction for it to consider and that the financial and potential strategic
benefits of the transaction were critical to us. The board authorized
management to proceed with negotiations with Rocket Software.
Between March 17 and March 22, 2000, Mr. Giordano and Mr. Magnusson had
several discussions during which they negotiated the final terms of the
investment. On March 23, 2000, Mr. Giordano sent a letter to the board of
directors explaining the details of the final negotiations and recommending
approval of the investment as negotiated. The board was also provided with
copies of the draft investment agreements. Principal elements of the
transaction as described in Mr. Giordano's letter were as follows:
. Rocket Software would purchase 10 million shares of our common stock at
a per share purchase price of $0.40, or total consideration of
$4,000,000. These shares would represent approximately 36.6% of our
total outstanding common stock after the investment. Peritus would grant
Rocket Software certain registration rights with respect to these
shares;
. Peritus would use its best efforts to have two individuals designated by
Rocket Software elected to our board of directors. It was expected that
Mr. Youniss and Mr. Magnusson would fill these seats; and
. Various strategic and operational synergies.
During its meeting on March 24, 2000, our board of directors discussed in
detail the Rocket Software investment, the risks associated with the
investment, the financial and strategic benefits of the transaction and other
factors. The board again noted that Covington Associates had searched for
strategic alternatives for approximately one year without success and that the
management and the board had no other investment or alternative offers to
consider at the time. The board then voted that we proceed with the transaction
and authorized Peritus to enter into the investment agreements. It also
authorized the hiring of Mr. Kelley as our Vice President, Research and
Development.
On March 27, 2000, Peritus and Rocket Software executed the investment
agreements under the terms outlined above. We recorded a one-time charge
related to the investment of $4,000,000 in the quarter ended March 31, 2000.
The charge represented the difference between the quoted market price on the
commitment date of $0.80 per share and the $0.40 paid by Rocket Software.
On April 14, 2000, our board of directors elected Mr. Giordano, Mr.
Magnusson and Mr. Youniss directors of Peritus.
During the second and early third quarters of 2000, we worked on the
detailed development plans for extension of our CodeNine tool to support the
renewal and web enablement of legacy applications. After extensive work and
research, we concluded that such extensions were not feasible.
Background of the Merger
During the meeting of our board of directors on August 14, 2000, Mr.
Giordano discussed our strategic business alternatives. After this discussion,
the board concluded that it should discuss the alternatives in more detail at a
subsequent meeting.
12
During our board of directors meeting on September 7, 2000, Mr. Giordano
discussed certain business alternatives prepared by management for review by
the board. After extensive discussion, the board concluded that we should
engage Catalyst as our advisor to study the strategic alternatives presented at
the meeting, to recommend other alternatives, if any, and to make
recommendations to the board at its next meeting. On September 12, 2000, we and
Catalyst executed a service agreement under which we engaged Catalyst to
conduct a strategic review of Peritus, commencing immediately.
During our board of directors meeting on October 2, 2000, Mr. John R.
Scholes and Mr. Robert Dunn, each a Principal of Catalyst, presented a review
of the strategic alternatives available to Peritus that included an executive
summary and recommendations, a summary of our value attributes and a strategic
opportunities spectrum. After extensive discussion, the board concluded that we
should engage Catalyst as our advisor to pursue strategic alternatives for us
with a principal focus on finding a complementary merger, acquisition or
investment partner for us.
On October 16, 2000, we and Catalyst executed a service agreement under
which we engaged Catalyst to render financial advisory and investment banking
services in connection with exploring strategic alternatives including the
potential sale of Peritus. We issued a press release on October 16, 2000
announcing our retention of Catalyst for those purposes. Thereafter, Catalyst
prepared an initial contact list of 48 companies. During late October and
November 2000, Catalyst began contacting companies on the contact list and
continued to expand the contact list.
During our board of directors meeting on December 12, 2000, Mr. Scholes of
Catalyst provided a report of the progress to date in their pursuit of
strategic alternatives. According to the report, the contact list had been
expanded to 55 prospects. Of the 55 prospects, 14 had been contacted and had
expressed some interest; 20 had been contacted but had provided no definite
feedback yet; ten had been contacted and indicated no interest; and 11 remained
to be contacted.
On December 21, 2000, Dr. Chan, Mr. Giordano, Mr. Pampel and Mr. Youniss,
met with a prospect's chief executive officer and members of his staff to
discuss the potential merger of the prospect with us. After review of the
prospect's technology and business plan, the directors had a detailed
discussion. They concluded that the technology and business plan did not have
enough potential to warrant further consideration.
On December 31, 2000, Mr. Kelley resigned his position with us and returned
to Rocket Software.
On January 4, 2001, Mr. Giordano and Mr. Dunn, held a teleconference with a
prospective acquiror of Peritus. On January 22, 2001, the prospect submitted a
non-binding offer to acquire Peritus for aggregate consideration of $4,000,000,
or $0.146 per share.
During our board meeting on January 23, 2001, Mr. Scholes and Mr. Alan
Hollander of Catalyst provided a report of their progress to date in their
pursuit of strategic alternatives. According to the report, the contact list
had been expanded to 61 prospects. Of the 61 prospects, eight had been
contacted and were involved in deeper discussions with Catalyst and Peritus;
ten had been contacted and had expressed some interest; 30 had been contacted
but had provided no definite feedback by that time; and 13 had been contacted
and expressed no interest. The board discussed in detail the $4,000,000 cash
offer and concluded it was too low to accept at the time, given our net book
value and the status of the Catalyst activity.
On January 26, 2001, Mr. Giordano and Mr. Dunn of Catalyst had a
teleconference with the prospect that had submitted the $4,000,000 cash offer.
Mr. Giordano informed them that the offer was too low given our book value and
suggested that they send representatives to our headquarters to review our
technology and finances in greater detail. Subsequently, two representatives of
the prospect visited us, but the prospect did not increase its offer.
On February 7, 2001, Mr. Giordano, Mr. Ronald Garabedian, our Vice President
and Treasurer, and Mr. Scholes had a teleconference with a prospect's chief
executive officer and members of his staff to discuss the
13
potential for a merger between the prospect and Peritus. On February 8, 2001,
the prospect submitted a letter to Peritus outlining a proposed merger. The
terms included an ownership split of the combined company with 5% ownership
going to our existing stockholders. In addition, $2,500,000, or $0.092 per
share, of our cash would be paid to our existing stockholders. Our management
evaluated the business plan of the prospect and determined that it had little
prospect for success. Therefore, we indicated that we were not interested in
the deal offered. Subsequently, the chief executive officer of the prospect met
with Mr. Giordano and members of his staff to further explain his business
plan. Peritus' evaluation did not change. The prospect later presented a
revised business plan and other offers, none of which were deemed acceptable.
During our board meeting on February 26, 2001, Mr. Scholes provided a report
of the progress of Catalyst to date in their pursuit of strategic alternatives.
According to the report, the contact list had been expanded to 62 prospects.
Ten of these prospects had been contacted, and Peritus and Catalyst had met
with or had detailed discussions with each of them. Of the ten, five were
viewed worthy of further consideration. Beyond that, nine of the 62 prospects
had been contacted and had expressed some interest; 30 had been contacted but
had provided no definite feedback as of that date; and 13 had been contacted
and expressed no interest.
The board carefully considered the five prospects that had been classified
as worthy of further consideration. Two of the prospects were launching new
technology, incurring losses, and were seeking our cash to fund operations
going forward. The board concluded that it was difficult to accurately assess
the potential for success of the two prospects and that they appeared more
suitable for venture funding. The third prospect had almost no revenue and was
also launching new technology. The board concluded that it was not currently a
good prospect. Of the last two prospects, one was the prospect that had
previously made the $4,000,000 cash offer, and the other was an India-based
company that Mr. Giordano had been meeting with over a prolonged period of
time. Mr. Giordano hoped to be able to solicit a cash offer from them.
Also during the board meeting on February 26, 2001, our management gave a
presentation on the financial results for the year 2000 and a preliminary
forecast for 2001. The forecast for the year 2001 indicated that, without new
business, Peritus would experience financial losses and consume cash. According
to the presentation, Peritus was not having success in its attempts to sign new
business.
On February 26, 2001, after the board meeting, Mr. Giordano met with Mr.
Magnusson, and Mr. Giordano suggested that Rocket Software should make an offer
to acquire Peritus if it were considering doing so.
Subsequent to the board meeting, Mr. Dunn telephoned the prospect that had
previously made the $4,000,000 cash offer on January 22, 2001 to try to
convince them to increase their offer. They indicated that they were unwilling
to do so.
On March 2, 2001, Mr. Giordano met with the chairman of the India-based
prospect and attempted to convince him to make a cash offer to acquire Peritus.
On March 7, 2001, the chairman of the prospect contacted Mr. Giordano,
indicating that they would not be making an offer to acquire Peritus.
On March 9, 2001, Mr. Giordano met with Mr. Magnusson and provided detailed
financial projections of Peritus, assuming a Rocket Software acquisition. The
two also discussed potential offer amounts. Mr. Giordano indicated that he
believed our board would have difficulty approving an offer that was less than
the projected book value after transaction costs. Among others, they discussed
the figures of $0.19 and $0.20 per share.
On March 23, 2001, we received a non-binding offer from Rocket Software to
acquire us. Under the terms of the offer, we would be merged into Rocket
Software or a Rocket Software subsidiary. All stockholders other than Rocket
Software would be paid $0.19 per share in cash. The offer provided that the
transaction must be completed before June 30, 2001 and that we must have at
least $5,650,000 in cash at closing prior to transaction costs. In addition,
the offer stated that completion of the transaction would be subject to the
negotiation of a definitive merger agreement, obtaining the requisite third
party and governmental consents and other customary closing conditions.
14
On March 27, 2001, Mr. Giordano had telephone conversations with the other
non-Rocket Software-affiliated members of our board of directors, Dr. Chan, Mr.
Leblois and Mr. Pampel. After detailed discussions, all agreed that we should
move forward with the offer and discuss it further at the upcoming board
meeting on April 9, 2001.
On March 28, 2001, we issued a press release announcing that we had received
the offer from Rocket Software and indicating that the parties intended to
begin promptly negotiating a definitive merger agreement.
At our board meeting on April 9, 2001, Mr. Giordano updated the board as to
the status of the negotiations and the attendant documentation and presented a
proposed timeline for the merger with Rocket Software. The board then voted to
establish a special committee of directors unaffiliated with Rocket Software to
consist of Dr. Chan, Mr. Giordano, Mr. Leblois and Mr. Pampel. The board
delegated to the special committee, among other things, authority to evaluate,
negotiate, approve and recommend to our stockholders the potential business
combination between Peritus and Rocket Software.
Throughout early to mid-April, Mr. Giordano conducted extensive negotiations
with Mr. Magnusson regarding the specific terms and details of the merger
agreement. During this period, Mr. Giordano regularly consulted with Hale and
Dorr LLP, outside counsel to Peritus, and Catalyst. In addition, Mr. Giordano
had several conversations with the members of the special committee regarding
the status of the negotiations.
On April 17, 2001, a joint meeting of all members of the special committee
and the board of directors was held. Neither Mr. Magnusson nor Mr. Youniss were
present at the meeting. Hale and Dorr LLP reviewed the special committee's and
the board's fiduciary duties, the terms of the transaction and the agreement of
merger. Catalyst reviewed its valuation analyses of Peritus and its analysis of
the fairness, as of April 17, 2001, of the merger consideration from a
financial point of view. Catalyst rendered to Peritus its oral opinion dated
April 17, 2001 to the effect that, as of such date and based on and subject to
the matters described in its opinion, the merger consideration was fair from a
financial point of view to the holders of our common stock. Catalyst advised
the special committee and the board that it would provide its written opinion,
consistent with its oral opinion, later that day.
Thereafter, the special committee and the board determined that the
agreement of merger and the transactions contemplated by the agreement of
merger, including the merger, are fair to, advisable, and in the best interests
of the holders of our common stock, including the holders of common stock who
are unaffiliated with Rocket Software. The special committee and the board also
voted that the agreement of merger and the transactions contemplated by the
agreement of merger, including the merger, should be submitted to our
stockholders at a stockholders' special meeting and recommended that the
stockholders approve these matters put before them for consideration. All
directors present at the meeting voted in favor of such determinations and
resolutions. In making their decisions, the special committee and the board
noted that they were aware of and considered the fact that a number of the
members of the board of directors and the officers of Peritus have interests in
the merger that are different from, or in addition to, the interests of Peritus
stockholders generally. See the section captioned "Interests of Certain Persons
in the Merger."
By unanimous written consent of its board of directors dated as of April 13,
2001, Rocket Software authorized the organization of Rocket Acquisition
Company, Inc. as a Massachusetts corporation and a subsidiary corporation for
the purpose of merging with and into Peritus, as contemplated by the agreement
of merger. Rocket Software's board of directors further approved the agreement
of merger and the transactions contemplated by the agreement of merger,
including the merger, and authorized Rocket Software to enter into the
agreement of merger. On April 17, 2001 Rocket Acquisition was organized as a
Massachusetts corporation. By joint unanimous written consent of its board of
directors and stockholders dated as of April 17, 2001, Rocket Acquisition's
board of directors and sole stockholder approved the agreement of merger and
the transactions contemplated by the agreement of merger, including the merger,
and authorized Rocket Acquisition to enter into the agreement of merger.
15
Subsequent to their respective board meetings, on April 18, 2001, the
respective parties entered into the agreement of merger described in this proxy
statement. Immediately thereafter, we issued a press release announcing the
execution of the agreement of merger.
Peritus' Purpose and Reasons for the Merger
Recommendation of the special committee and the board. The special committee
and the board of directors have each determined that the agreement of merger is
fair to, advisable, and in the best interests of the holders of Peritus' common
stock, including the holders of common stock who are unaffiliated with Rocket
Software. The special committee and all directors unaffiliated with Rocket
Software unanimously approved the agreement of merger and the merger. The
special committee and all directors unaffiliated with Rocket Software also
unanimously recommended the approval and adoption of the agreement of merger
and the merger by the stockholders.
In the course of reaching their decisions to approve the agreement of merger
and the transactions contemplated by the agreement, including the merger, the
special committee and the board consulted with Peritus' management, as well as
Peritus' outside legal counsel and financial advisor, and considered a number
of factors, both positive and negative, including the following material
factors:
. the financial presentation of Catalyst, including its opinion, delivered
on April 17, 2001 and attached as Annex B, that the merger consideration
is fair, from a financial point of view, to holders of common stock, and
the special committee's and the board's adoption of the conclusion and
analyses of Catalyst contained in its fairness opinion;
. that since Peritus initially engaged Catalyst in September 2000, no
offer for shares of Peritus had been received which exceeded the $0.19
per share merger consideration, which the special committee and the
board considered as weighing in favor of the merger;
. the inability to find an appropriate purchaser or strategic partner for
Peritus during the sale process undertaken by Covington Associates and
Catalyst, which the special committee and the board believed to be
appropriate based on Catalyst's presentation to the special committee
and to the board and Catalyst's discussions with the special committee,
which the special committee and the board considered as weighing in
favor of the merger;
. that Peritus only had one remaining outsourcing customer, Bull HN
Information Systems, Inc., which accounts for the vast majority of
Peritus' anticipated future revenue. The special committee noted that if
the customer elected not to purchase services in 2002, Peritus would
have virtually no revenue without new business;
. that for more than two years, Peritus had been unable to sign any new
outsourcing customers due to concerns about Peritus' size and viability;
. that Peritus had concluded that it was not feasible to extend its
CodeNine tool to support the renewal and web enablement of legacy
applications which was hoped to be a significant revenue opportunity;
. that Peritus had been unable to sign any new licenses for either its
CodeNine or SAM Relay tools since the quarter ended March 31, 2000;
. that Peritus had been unable to attract qualified sales resources and
had difficulty hiring any new employees;
. that the merger was superior to liquidating Peritus under federal and
state laws, including Catalyst's analysis of Peritus' liquidation value,
which resulted in an implied value lower than the proposed merger
consideration, which the special committee considered as weighing in
favor of the merger;
16
. the accelerated timing and relative certainty of the proposed merger,
including the fact that the merger was not conditioned on Rocket
Software's ability to obtain financing or its completion of due
diligence, which the special committee and the board considered as
weighing in favor of the merger;
. that, based on the per share closing price as of March 28, 2001, the
last full trading day prior to the public announcement that Peritus had
received an offer from Rocket Software to acquire Peritus, the
consideration to be paid to the holders of common stock in the merger
represented an approximate premium of 171% over the trading price of the
shares based upon the closing per share price on that date, which the
special committee and the board considered as weighing in favor of the
merger;
. the significant decline in trading prices for Peritus' common stock from
its initial public offering price of $16.00 per share and its high of
$32.38 and in trading prices for computer software companies in general,
which the special committee and the board considered as weighing in
favor of the merger; during the four quarters preceding the public
announcement of the transaction, the highest per share closing price of
Peritus' common stock was $2.25 and the lowest closing price was $0.055;
Peritus' common stock has not closed at or above $0.19 since October 3,
2000, and taking into account the market conditions at the time, the
technology sector in particular and the condition of Peritus, it did not
seem feasible that Peritus' common stock would approach a higher level
of trading prices in the foreseeable future;
. that the consideration to be received by Peritus stockholders in the
agreement of merger consists entirely of cash, which the special
committee and the board did not consider as weighing in favor of or
against the merger;
. that the agreement of merger permits Peritus to provide information and
participate in negotiations with respect to unsolicited acquisition
proposals if the board of directors determines, in consultation with its
outside counsel and the special committee, that such action is necessary
to comply with the fiduciary duties of the board of directors, which, as
a whole, the special committee and the board considered as weighing in
favor of the merger; and
. that holders of common stock may demand dissenters' rights under
Sections 88 through 98, inclusive, of Chapter 156B of the General Laws
of Massachusetts, which the special committee and the board considered
as weighing in favor of the merger, although the special committee and
the board also noted as a negative factor that Rocket Software has the
ability to terminate the agreement of merger if 7.5% or more of Peritus'
issued and outstanding common stock exercise dissenters' rights.
The special committee and the board also considered the potential adverse
factors of the proposed merger, including:
. that many of the holders of common stock of Peritus would lose
significant portions of their investment, which the special committee
and the board considered as weighing against the merger;
. that the merger is not conditioned upon the approval of a majority of
the stockholders who are not affiliated with Rocket Software, which the
special committee and the board considered as weighing against the
merger; however, the special committee and the board concluded that,
because of Peritus' disparate stockholder base and the inclusion in the
agreement of merger of a June 30, 2001, termination date, the certainty
and timing of completing the merger was important and did not insist
upon this condition;
. the risk of diverting management focus and resources from other
strategic opportunities and from operational matters while working to
implement the merger, which the special committee and the board
considered as weighing against the merger; and
. the risk that the merger is not completed, including because of the
termination rights of Rocket Software under the agreement of merger and
certain closing conditions, including the minimum cash and cash
17
equivalent closing condition, and the uncertainty of being able to meet
certain covenants relating to the operations of the business of Peritus in
the ordinary course of business and the payment of its "ongoing
obligations," which the special committee and the board considered as
weighing against the merger.
The special committee and the board were also aware of and considered the
fact that the interests of Rocket Software were adverse to the interests of
the public stockholders because the two groups are on opposite sides of the
proposed merger transaction and that the interests of certain directors of
Peritus were different from the interests of the public stockholders because
those directors would continue to have an indirect interest in Peritus'
business through their ownership of Rocket Software stock. The special
committee and the board of directors did not consider these facts as weighing
in favor of or against the merger. See "Interests of Certain Persons in the
Merger."
The foregoing discussion addresses the material information and factors
considered by the special committee and the board of directors in its
consideration of the merger, including factors that support the merger as well
as those that may weigh against it. In view of the variety of factors
considered in reaching its determination, the special committee and the board
of directors did not find it practicable to, and did not quantify or otherwise
assign relative weights to the specific factors considered in reaching its
recommendations. In addition, the individual members of the special committee
and the board of directors may have given different weight to different
factors.
Other than in their capacity as members of the special committee, board of
directors of Peritus or board of directors of Rocket Software, no director or
executive officer of Peritus has made a recommendation either in support of or
opposed to the transaction.
Opinion of Financial Advisor
The special committee and the board of directors retained Catalyst to
render an opinion as to the fairness, from a financial point of view, to the
holders of Peritus' common stock of the consideration to be received by them
in the merger under the agreement of merger.
The full text of Catalyst's written opinion to Peritus dated April 17,
2001, which sets forth the assumptions made, general procedures followed,
factors considered and limitations on the review undertaken, is attached as
Annex B, and is incorporated herein by reference. This summary is qualified in
its entirety by reference to the full text of the opinion. Stockholders of
Peritus are urged to, and should, read the opinion in its entirety. The
engagement of Catalyst and its opinion are for the benefit of the special
committee and Peritus' board of directors. The opinion addresses only the
fairness, from a financial point of view, of the consideration to be received
by the holders of shares of common stock in the merger and does not constitute
a recommendation to any stockholder as to how to vote with respect to the
merger.
For purposes of formulating the opinion, Catalyst, among other things:
. reviewed certain publicly-available financial statements and other
information of Peritus;
. reviewed certain internal financial statements and other operating and
financial data concerning Peritus prepared by our management;
. reviewed certain financial projections of Peritus prepared by our
management;
. discussed the operations, financial condition and the prospects of
Peritus, including certain financial projections, with our executives;
. discussed potential operational and strategic benefits of the merger with
our executives;
. reviewed the reported prices and trading activity for Peritus' common
stock;
18
. compared the financial performance of Peritus and the prices and trading
activity of Peritus' common stock with that of certain other comparable
publicly-traded companies;
. reviewed the financial terms, to the extent publicly available, of
certain comparable acquisition transactions;
. reviewed the draft agreement of merger and related documents; and
. considered such other factors as they deemed appropriate.
Catalyst relied upon the accuracy and completeness of all financial,
accounting, legal, tax, operating and other information provided to it by
Peritus and assumed that all such information was complete and accurate in all
material respects, that no material changes occurred in the information
reviewed between the date the information was provided and the date of the
opinion or in the assets, financial condition, business or prospects of Peritus
and that there were no facts or information regarding Peritus that would cause
the information supplied to Catalyst to be incomplete or misleading in any
material respect. Catalyst did not independently verify the accuracy or
completeness of the information supplied to it with respect to Peritus and does
not assume responsibility for the accuracy or completeness of such information.
With respect to the financial projections provided to Catalyst, all of which
were provided by Peritus' management, Catalyst assumed that such projections
were reasonably prepared on a basis consistent with actual historical
experience, reflected the best currently available estimates and good faith
judgments of the management of Peritus, and could reasonably be relied upon.
On September 12, 2000, Peritus engaged Catalyst to conduct a strategic
review of the company. At the October 2, 2000 board meeting of Peritus,
Catalyst presented a review of the strategic alternatives available to the
company. On October 16, 2000, Peritus engaged Catalyst to seek a complementary
merger, acquisition or investment partner for Peritus, and on the same date
issued a press release stating that Peritus had "retained [Catalyst] to render
financial advisory and investment banking services in connection with exploring
strategic alternatives including the potential sale of the Company". In
addition to this press release, Catalyst solicited interest widely.
Catalyst did not make an independent evaluation, appraisal or valuation of
any assets or liabilities of Peritus, nor was Catalyst furnished with any such
evaluations, appraisals or valuations. In its analyses, Catalyst made numerous
assumptions with respect to industry performance, general business and other
conditions and matters, many of which are beyond Peritus' control and are not
susceptible to accurate prediction. While Catalyst believes that its review, as
described herein, is an adequate basis for the opinion it expressed, the
opinion is necessarily based upon market, economic and other conditions that
exist and could be evaluated as of the date of the opinion, and any change in
such conditions could require a re-evaluation of the opinion.
The opinion addressed only the financial fairness, as of the date of the
opinion, of the consideration to be received by the holders of common stock in
the merger and did not address any other terms or conditions of the merger
agreement or any related documents, the tax or legal consequences of the
merger, including the tax or legal consequences to the stockholders, the
fairness of any aspect of the merger not expressly addressed in the opinion,
the relative merits of the merger or any alternatives to the merger, Peritus'
decision to proceed with or the effect of the merger, or any other aspect of
the merger. No restrictions or limitations were imposed by Peritus upon
Catalyst with respect to the investigation made or the procedures followed in
rendering its opinion.
The special committee and board of directors retained Catalyst based upon
Catalyst's experience in the valuation of businesses and their securities in
connection with mergers, acquisitions, recapitalizations and similar
transactions. Catalyst is a regionally recognized investment banking firm with
offices in the northeastern United States and the United Kingdom specializing
in the information technology industry that is continually engaged in providing
financial advisory services in connection with mergers and acquisitions,
financing and business valuations.
19
In addition to the $50,000 fee to be paid to Catalyst for its fairness
opinion, Catalyst was paid $12,000 for its strategic alternatives study and a
retainer of $6,000 per month (total of $45,000) while it searched for a
complementary merger, acquisition or investment partner for Peritus.
No portion of the fee which Peritus paid Catalyst for rendering its fairness
opinion and providing certain advisory services was contingent upon the opinion
being favorable or on the closing of the merger. Peritus also agreed to
indemnify Catalyst and related persons against certain liabilities, including
liabilities under federal securities laws, arising out of the engagement of
Catalyst, and to reimburse Catalyst for certain expenses.
The opinion did not constitute a recommendation to the special committee or
the board of directors on whether or not to support the merger and recommend it
to Peritus' stockholders and does not constitute a recommendation to
stockholders as to whether or not to vote in favor of the merger.
The following is a brief summary of the material analyses performed by
Catalyst in rendering its opinion to the special committee and the board of
directors of Peritus. Certain of these summaries of financial analyses include
information presented in graphical or tabular format. In order to fully
understand the financial analyses used by Catalyst, the graph and table must be
read together with the text of each summary. The graph and table alone do not
constitute a complete description of the financial analyses.
Historical Common Stock Performance. Catalyst's analysis of Peritus' common
stock performance consisted of an historical analysis of closing prices and
trading volumes over the six-month period from September 8, 2000 to March 28,
2001, the date of the public announcement of the current proposed transaction
on March 28, 2001, and, separately, from the public announcement to April 12,
2001. Within the six-month period to March 28, 2001, based on closing prices as
reported on the OTC Bulletin Board, Peritus' common stock achieved a high
closing price per share of $0.190 on October 3, 2000 and a low closing price of
$0.055 per share on December 1, 2000. In the period subsequent to the public
announcement on March 28, 2001, Peritus' common stock achieved a high closing
price per share of $0.165 on March 30, 2001, and a low closing price of $0.13
on March 29, 2001. Peritus' common stock closed at a price of $0.156 per share
on April 12, 2000, having closed at $0.070 on March 28, 2001, immediately
before the public announcement.
Comparative Stock Price Performance. Catalyst performed historical analyses
of closing prices of Peritus' common stock, the Nasdaq composite index and an
equally weighted index of companies considered by Catalyst to be in some ways
similar to Peritus.
20
Catalyst compared the performance of these companies and indices to the
performance of Peritus' common stock over the six-month period from September
28, 2000 to March 28, 2001, the date of the public announcement, and separately
from the public announcement to April 12, 2001. Over the period to March 28,
the Nasdaq composite index decreased 51%, the comparable company index
decreased 59%, and Peritus' common stock decreased 60%. From the announcement
to April 12, 2001, the Nasdaq composite index increased 6%, the comparable
company index decreased 19%, and Peritus' common stock increased 121%.
[GRAPH APPEARS HERE]
COMPARISON OF STOCK PRICE MOVEMENTS AMONG PERITUS SOFTWARE SERVICES, INC.,
NASDAQ COMPOSITE INDEX AND PEER GROUP INDEX
MEASUREMENT PERIOD PERITUS SOFTWARE NASDAQ PEER GROUP
(MONTH COVERED) SERVICES INDEX INDEX
- ------------------ ---------------- ------ ----------
09/28/00.......... 100 100 100
10/28/00.......... 49 84 71
11/28/00.......... 46 72 48
12/28/00.......... 38 68 38
01/28/01.......... 51 75 64
02/28/01.......... 46 57 48
03/28/01.......... 40 49 41
04/12/01.......... 89 52 33
Comparable Public Company Analysis. As part of its analysis, Catalyst also
compared certain publicly available financial information of the comparable
companies. None of the comparable public companies considered is exactly
identical to Peritus, but all have aspects in common with Peritus relevant to
this analysis. Catalyst compared the financial information of those companies
to the financial performance of Peritus. Such information included the ratio of
market capitalization to previous year's sales, and the ratio of market
capitalization to net asset value. The following table summarizes the
comparative value of Peritus to the comparable companies immediately before the
public announcement and on April 12, 2001, valued at the merger price.
March 28, 2001 April 12, 2001
------------------------------- -------------------------------
Mkt Cap/Sales Ratio Mkt Cap/NAV Mkt Cap/Sales Ratio Mkt Cap/NAV
------------------- ----------- ------------------- -----------
Comparable Companies
Median 0.72 0.55 0.84 0.71
Peritus 0.42 0.31 0.94 0.68
Peritus at Merger Price -- -- 1.15 0.83
Peritus as % of Median 58% 56% 112% 0.96%
Merger Price as % of
Median -- -- 137% 117%
There are inherent differences between the business, operations, and prospects
of Peritus and the comparable companies used in the analysis. Accordingly,
Catalyst believed that it was inappropriate to, and therefore did not, rely
solely on the above-described quantitative results of the analysis and
accordingly also made qualitative judgments concerning differences between the
financial and operating characteristics and prospects of Peritus and the
comparable companies that would, in Catalyst's opinion, affect the public
market valuation of such companies.
21
Analysis of Selected Precedent Transactions. Catalyst reviewed a number of
recent related transactions among companies which are in some ways comparable
to Peritus. The review was limited to the past six months, to transactions for
which value information is publicly available, and where transaction value was
less than $100 million. Over the period reviewed, the Nasdaq composite index
declined by approximately 50%. Such major public market index changes
significantly affect transaction values. For the purposes of its analysis,
Catalyst therefore applied weights to the transaction values according to the
relative Nasdaq composite index value at the time of each transaction. The only
valuation metric available for this analysis, and considered relevant by
Catalyst, was the value/sales ratio. Catalyst's analysis showed a range in the
(unweighted) value/sales ratio of 1.0 to 2.0, with a median value of 1.2, and
showed a range in the weighted value/sales ratio of 0.6 to 1.3, with a
corresponding median of 0.9. Catalyst observed that, for comparison, the
similarly calculated value/sales ratio of the current proposed transaction is
1.15. No transaction utilized as a comparison in the precedent transactions
analysis is identical to the merger. In evaluating the precedent transactions,
Catalyst made judgments and assumptions regarding business, economic, market
and financial conditions and other matters, many of which are beyond the
control of Peritus.
The Liquidation Alternative. Catalyst observed that liquidation of Peritus
provides an alternate approach to releasing significant net assets to
stockholders. Catalyst requested information from our management which detailed
the likely costs of liquidating the company. In conjunction with the forecast
balance sheet also provided by our management, Catalyst estimated that, for a
liquidation effective June 30, 2001, the net proceeds which would be
distributable to stockholders would be in the range of $0.14 per share to $0.16
per share. This range assumed that customer contractual obligations of Peritus
could be settled at no incremental cost to Peritus.
Operational Forecasts and Cash Flow. Catalyst reviewed the operational
forecasts provided by Peritus' management, which showed, without new business,
a steep decline in revenues for the year 2001 compared to 2000, and a
significant net loss. Catalyst observed that the operational configuration of
Peritus allows for no material gain in new business, while costs have already
been cut extensively to match as closely as possible the current level of
revenues. Any change in the operational configuration of the company to enable
Peritus to move towards profitable and growing operations would, in Catalyst's
opinion, require access to resources not currently within Peritus, and such
moves would engender material risk.
Alternate Transactions. On September 12, 2000, Peritus engaged Catalyst to
conduct a strategic review of Peritus. At the October 2, 2000 board of
directors meeting, Catalyst presented a review of the strategic alternatives
available to Peritus. On October 16, 2000, Peritus engaged Catalyst to seek a
complementary merger, acquisition or investment partner for Peritus, and on the
same date issued a press release stating that Peritus had "retained [Catalyst]
to render financial advisory and investment banking services in connection with
exploring strategic alternatives including the potential sale of [Peritus]". In
addition to this press release, Catalyst solicited interest widely. Details of
the companies approached, or which approached Peritus, and discussions and
negotiations with those parties were reported separately to the board of
directors in detail. As of the date of Catalyst's fairness opinion, however, no
offer for the shares of Peritus had been received which exceeded the current
proposed merger price.
The preparation of a fairness opinion is a complex process and is not
necessarily susceptible to a partial analysis or summary description. In
arriving at its opinion, Catalyst considered the results of the analyses as a
whole and did not attribute any particular weight to any particular analysis or
factor. Catalyst believes that selecting any portion of the analysis alone
would create an incomplete view of the process underlying the opinion. Catalyst
may have deemed various assumptions more or less probable than other
assumptions, so that the ranges of valuations resulting from any particular
analysis described above should not be taken to be Catalyst's view of the
actual value of Peritus.
In performing its analysis, Catalyst made numerous assumptions with respect
to business and economic conditions and other matters, many of which are beyond
the control of Peritus. Any estimates contained in
22
these analyses are not necessarily indicative of actual values, which may be
significantly more or less favorable than those suggested by such analyses.
Such analyses were prepared solely as a part of Catalyst's analysis of the
fairness from a financial point of view of the merger price. The analyses do
not purport to be appraisals of value or to reflect the prices at which Peritus
might actually be sold.
The fairness opinion rendered by Catalyst was one of the many factors taken
into consideration by the special committee and the board of directors in
making their determinations to approve the merger. The merger price was
determined through arm's-length negotiations between Peritus and Rocket
Software. Consequently, Catalyst's analyses as described above should not be
viewed as determinative of the findings of the special committee and the board
of directors with respect to the value of Peritus or of whether the special
committee or the board of directors would have been willing to agree to
different consideration.
Rocket Software's Purpose and Reasons for the Merger
Rocket Software has informed us that its purpose for the merger is for
Rocket Software and certain of its affiliates to acquire substantially all of
the shares of Peritus that Rocket Software does not already own and to combine
the businesses of the two companies in Rocket Software. In determining to enter
into the merger, Rocket Software has informed us that it considered the
following factors:
. the business, operations, financial condition, operating results and
prospects of Peritus, including the fact that (1) Peritus incurred an
aggregate loss of $424,000 between January 1, 2001 and March 31, 2001,
the end of the last full quarter prior to the signing of the merger
agreement for which financial results had been reported and an aggregate
loss of $4,166,000, including a $4,000,000 non-cash charge associated
with the March 2000 investment in Peritus by Rocket Software, for the
year ended December 31, 2000 and (2) Peritus lacked prospects for
becoming profitable in the foreseeable future;
. the inability of Peritus to find an appropriate purchaser or strategic
partner for Peritus (alone or together with Rocket Software) during the
process conducted by Covington Associates and Catalyst and the lack of
possible strategic alternatives to the agreement of merger, which
reduced the prospects of obtaining value for Rocket Software's equity
investment in Peritus through a sale of stock;
. the ability to reduce expenses on a combined basis through (1)
continuing the reductions begun by Peritus in marketing, advertising and
staffing expenses and (2) the elimination of administrative, financial
reporting, real estate and other redundant costs as well as the
elimination of costs associated with the operation of Peritus as a
public company (for example, as a private company, quarterly, annual or
other periodic reports would no longer have to be filed with the SEC and
annual reports and proxy statements would no longer need to be
distributed to stockholders);
. Rocket Software's evaluation of the synergies associated with operating
the combined companies as a single multi-channel business enterprise,
including the integration or Peritus' technical personnel and software
maintenance methodology into current Rocket Software development
projects; and
. the significant decline in trading prices for Peritus' common stock from
its initial public offering price of $16.00 per share and from its
trading price of $0.80 per share at the time of Rocket Software's
investment in Peritus, as well as the relative lack of liquidity for the
common stock, which reduced the prospects of obtaining value for Rocket
Software's equity investment in Peritus through a sale of stock.
Position of Rocket Software as to Fairness of the Merger
Rocket Software believes that the merger and the consideration to be paid in
the merger to the holders of Peritus' common stock, including the holders of
common stock who are unaffiliated with Rocket Software, is fair to such
holders. Rocket Software based its belief on the following:
23
. after a thorough review with independent financial and legal advisors,
the Peritus special committee, which consisted entirely of directors of
Peritus who are not employees or directors of Rocket Software, and the
Peritus board of directors concluded that the merger is fair to,
advisable, and in the best interests of the holders of Peritus' common
stock, including the holders of common stock who are unaffiliated with
Rocket Software and recommended that Peritus' stockholders approve the
agreement of merger and the merger;
. Peritus received a written fairness opinion dated April 17, 2001 from
Catalyst that subject to the various assumptions and limitations set
forth in that opinion, as of the date thereof, the $0.19 per share in
cash to be received by the holders of Peritus' common stock (except for
Rocket Software, Rocket Acquisition, their respective wholly owned
subsidiaries and stockholders who are entitled to and have dissenters'
rights) in the merger was fair to such stockholders from a financial
point of view as described under "Opinion of Financial Advisor";
. the agreement of merger was negotiated at arm's length with the special
committee, which acted independently, with the assistance of financial
and legal advisors and on behalf of the holders of Peritus' common
stock;
. the business, operations, financial condition, operating results and
prospects of Peritus, including the fact that (1) Peritus incurred an
aggregate loss of $424,000 between January 1, 2001 and March 31, 2001,
the last full quarter prior to the signing of the merger agreement for
which financial results had been reported, including losses of
$4,166,000, including a $4,000,000 non-cash charge associated with the
March 2000 investment in Peritus by Rocket Software, for the year ended
December 31, 2000 and (b) Peritus lacked prospects for becoming
profitable in the foreseeable future;
. the consideration to be paid to the holders of common stock in the
merger represented an approximate premium of 171% over the per share
closing price as of March 28, 2001, the last full trading day prior to
the public announcement that Peritus had received an offer from Rocket
Software to acquire Peritus, and the price of Peritus' common stock was
declining;
. the lack of prospects for finding an alternative to the merger with
Rocket Software that would result in greater value to the holders of
common stock based on the inability to find an appropriate purchaser or
strategic partner for Peritus (alone or together with Rocket Software)
during the process conducted by Catalyst and the lack of possible
strategic alternatives to the merger.
Rocket Software believes that each of the above factors supports its
conclusion that the merger is fair to the holders of Peritus' common stock,
including the holders of common stock who are unaffiliated with Rocket
Software.
In connection with its determination of the fairness of the agreement of
merger and the transactions contemplated by the agreement of merger, including
the merger, Rocket Software adopted the conclusions as to fairness set forth
under "Peritus' Purpose and Reasons for the Merger" on page 16, and the
analyses underlying such conclusions of the Peritus special committee and
board, based on their views as to the reasonableness of such analyses. Rocket
Software also reviewed the procedures followed by the special committee and the
board of directors of Peritus in its evaluations of the terms of the proposed
merger, and determined them to be reasonable grounds on which to decide that
the merger was fair to the holders of Peritus' common stock. In view of the
variety of factors considered in reaching their respective determinations,
Rocket Software quantified or otherwise assigned relative weights to the
specific factors considered in reaching its belief as to fairness. Rocket
Software is not making any recommendation as to how the holders of Peritus'
common stock should vote on the merger agreement and the merger.
Certain directors of Rocket Software are also directors of Peritus and have
interests that are in addition to, or different from, the interest of the
holders of Peritus' common stock. See "Interests of Certain Persons in the
Merger."
24
The merger will terminate all equity interests of the holders of Peritus'
common stock other than Rocket Software, Rocket Acquisition and their
respective wholly owned subsidiaries. The merger consideration to be received
by holders of Peritus' common stock was the result of arm's-length negotiation
between representatives of Rocket Software and the special committee of
Peritus' board of directors and their respective advisors following the receipt
of the initial proposal from Rocket Software.
The common stock is currently registered under the Securities Exchange Act
of 1934 and, following de-listing by Nasdaq on February 3, 1999, now trades on
the Over the Counter (OTC) Bulletin Board under the symbol "PTUS.OB". Upon
consummation of the merger, the common stock will be de-listed from the OTC
Bulletin Board and registration of the common stock under the Securities
Exchange Act will be terminated. The merger of Peritus with Rocket Software
will allow the combined entity to gain certain efficiencies by eliminating the
time devoted by its management and certain other employees to complying with
the reporting requirements of the Exchange Act, and its directors, officers and
beneficial owners of more than 10% of the shares of common stock will be
relieved of the reporting requirements and restrictions on insider trading
under Section 16 of the Exchange Act.
Rocket Software structured the transaction as a "one-step" merger because it
believed that that transaction structure would result in its acquisition of
Peritus at the earliest time and with the lowest transaction costs.
Approval of the merger requires the vote of at least a majority of the
outstanding shares of common stock of Peritus, but does not require the
separate approval of a majority of the common stock held by the stockholders
other than Rocket Software. Rocket Software did not structure the transaction
to require the approval of a majority of the other stockholders because such
approval is not required under the Massachusetts merger statutes.
Identity and Background of Rocket Software and Rocket Acquisition
Rocket Software was organized in 1990. It is a privately held Massachusetts
corporation with its principal place of business located at Two Apple Hill
Drive, Natick, Massachusetts. Rocket Software is a software engineering
organization providing enterprise class software, products and services. Rocket
Software provides a full spectrum of integrated, value added software
manufacturing services to leading software original equipment manufacturers.
Rocket Software's software manufacturing services consist primarily of the
development of software products that complement and extend strategic original
equipment manufacturers offerings in the areas of business intelligence,
relational databases, mobile computing, operating system support, and automatic
problem resolution and self-help. Value added services include product design
and prototyping, adapting software to local markets, technical support and
product maintenance, marketing support, and sales support.
Rocket Software has three stockholders, Andrew Youniss, Johan Magnusson and
Matthew Kelley, who also comprise all of its directors and executive officers.
Each of Mr. Youniss and Mr. Magnusson owns 40% of the outstanding capital stock
of Rocket Software, and Mr. Kelley owns 20%.
Set forth below is the background of the directors and executive officers of
Rocket Software and Rocket Acquisition. The address of the directors and
executive officers of Rocket Software and Rocket Acquisition is: c/o Rocket
Software, Inc., 2 Apple Hill Drive, Natick, Massachusetts 01760. All directors
and executive officers of Rocket Software and Rocket Acquisition are U.S.
citizens.
Directors and Executive Officers of Rocket Software and Rocket Acquisition
Johan Magnusson, age 42, has served on the Board of Directors of Rocket
Software since March 1998. Mr. Magnusson has served as the Chief Operating
Officer of Rocket Software since January 2000. Mr. Magnusson also has served as
President, Treasurer, Clerk and sole director of Rocket Acquisition since its
inception in April 2001. From February 1998 to present, Mr. Magnusson was a
general partner of a private investment limited partnership, Fallen Angel
Equity Fund, located at 125 Half Mile Road, Suite 202, Redbank, New Jersey
07701. From January 1994 to December 1996, Mr. Magnusson was a partner with the
Vitol Group
25
of Companies, a privately held Swiss commodities trading partnership, located
at Bowater House, 68 Knightsbridge, London SW1X 7LT, United Kingdom. Mr.
Magnusson has served on the board of directors of Peritus since April 2000.
Mr. Magnusson is a citizen of Sweden.
Andrew Youniss, age 39, has served on the board of directors of Rocket
Software since its organization in 1990. Mr. Youniss is the Chief Executive
Officer, President, Treasurer and Clerk of Rocket Software and has served in
those capacities since 1990. Mr. Youniss also has served as Vice President of
Rocket Acquisition since its inception in April 2001. Prior to founding Rocket
Software, he was the Development Manager for DB View, Inc., a software company
specializing in DB2 database utilities. Mr. Youniss has served on the board of
directors of Peritus since April 2000. Mr. Youniss is a citizen of the United
States.
Matthew Kelley, age 35, has served on the board of directors of Rocket
Software since October 2001. Mr. Kelley joined Rocket Software shortly after
its founding in 1990 and has been responsible for software development for its
business intelligence products. He served as the Chief Technology Officer of
Rocket Software from January 1996 to March 2000. From March through December of
2000, Mr. Kelley was Vice President, Research and Development of Peritus. Mr.
Kelley returned to Rocket on January 1, 2001 and serves as its Chief Technology
Officer. Prior to 1990, Mr. Kelley worked in software development for Bolt,
Beranek and Newman, a network software company. Mr. Kelley is a citizen of the
United States.
Amount and Source of Funds and Financing of the Merger
The aggregate cash consideration payable in the merger to Peritus'
stockholders other than Rocket Software, Rocket Acquisition, any of their
respective wholly owned subsidiaries and stockholders who are entitled to and
have dissenters' rights is approximately $3.3 million, and the approximate
amount of transaction expenses payable by Peritus is $500,000, excluding
payments to Mr. Giordano under his employment arrangements with Peritus. The
merger transaction is structured so that the $0.19 per share merger
consideration to be paid to all Peritus stockholders except Rocket Software
will be paid out of the cash and cash equivalents of Peritus at the closing of
the merger. It is a condition to Rocket Software's closing the merger that the
difference of (1) the aggregate amount of cash and cash equivalents held by
Peritus at the time of closing minus (2) the lesser of $840,000 and the actual
aggregate amount of out-of-pocket costs and expenses incurred by Peritus in
connection with the merger agreement and the transactions contemplated by the
merger agreement, including payments to Mr. Giordano under his employment
arrangements with Peritus, shall be equal to at least $4,810,000.
Certain Effects of the Merger
As a result of the merger, the separate corporate existence of Rocket
Acquisition will cease and Peritus will continue as the surviving corporation.
At the effective time of the merger, all outstanding common stock of Peritus,
other than dissenting shares and shares held by Rocket Software or Rocket
Acquisition, will be converted into the right to receive $0.19 in cash. The
agreement of merger will also have the following effects:
. Effect on Holders of Peritus' Common Stock. If the merger is completed,
holders of Peritus' common stock (except for Rocket Software, Rocket
Acquisition, any of their respective wholly owned subsidiaries and
stockholders who are entitled to and who have dissenters' rights) will
receive $0.19 cash per share of Peritus' common stock and, to the extent
not otherwise affiliated with Rocket Software, will not have the
opportunity to participate in any future earnings, profits and growth of
Peritus.
. Reporting Requirements. Peritus currently is subject to reporting
requirements under the Securities Exchange Act of 1934. If the merger is
completed, the registration of shares of Peritus under the Exchange Act
will be terminated, no further reports will be filed and the shares will
not be eligible for listing or trading on any exchange.
. De-listing of the Shares of Peritus' Common Stock on the OTC Bulletin
Board. The shares of Peritus' common stock are currently quoted on the
OTC Bulletin Board. If the merger is completed, the shares of Peritus
will be de-listed and no longer quoted on the OTC Bulletin Board.
26
. Effect on Rocket Software. Rocket Software expects to benefit from the
integration of its business with Peritus. Upon completion of the merger,
Peritus will continue to operate as a software company. The combined
company also expects to benefit from the reduction of overhead costs and
related costs. Rocket Software currently owns approximately 36.6% of
Peritus' outstanding common stock. As a result of the merger, Rocket
Software will own substantially all of the business and assets of
Peritus after cash payments to Peritus' stockholders under the agreement
of merger.
As a result of the merger, Rocket Software's and certain of its affiliates'
equity in the net book value and net losses of Peritus will increase from 36.6%
to 100%. After giving effect to the merger, the equity of Rocket Software and
those affiliates in the net book value of Peritus as of December 31, 2000 would
have been $6,230,000 (pro forma) compared to $2,280,000 (actual) and its equity
in the net loss of Peritus for the year ended December 31, 2000 would have been
$356,000 (pro forma) compared to $130,000 (actual).
For federal income tax purposes, the receipt of the merger consideration by
holders of common stock pursuant to the merger will be a taxable sale of the
holders' common stock. See "Material Federal Income Tax Consequences."
Plans for Peritus After the Merger
Rocket Software expects to consolidate the day-to-day business and
operations of Peritus with those of Rocket Software and to continue to operate
the combined businesses. Rocket Software intends to retain certain employees of
Peritus to conduct Peritus' business.
Conduct of the Business of Peritus If the Merger Is Not Completed
If the merger is not completed, we will likely continue our ongoing
operations and will likely continue to suffer net losses from these ongoing
operations. Due to our expected continued losses and the resulting gradual
depletion of our cash and cash equivalent assets without significant
opportunity for revenue growth, we will likely continue to explore
possibilities for the potential sale or merger of Peritus. However, there can
be no assurance that any such opportunities will be made available to us, or if
made available, will be on terms acceptable or fair to Peritus and our
stockholders. We hope to complete the merger by June 30, 2001, but we cannot
assure you that we will be able to do so. Moreover, both parties have the
option to terminate the agreement of merger if the merger is not completed by
June 30, 2001.
Material Federal Income Tax Consequences
The following discussion summarizes the material U.S. federal income tax
consequences of the merger. This discussion is based upon the provisions of the
Internal Revenue Code of 1986, as amended (the Code), the regulations
promulgated under the Code, Internal Revenue Service rulings, and judicial and
administrative rulings in effect as of the date of this proxy statement, all of
which are subject to change, possibly with retroactive effect. This discussion
does not address all aspects of federal income taxation that may be relevant to
a holder of common stock in light of the stockholder's particular circumstances
or to those holders of Peritus' common stock subject to special rules, such as
stockholders who are not citizens or residents of the United States,
stockholders who are financial institutions or broker-dealers, tax-exempt
organizations, insurance companies, dealers in securities, foreign
corporations, stockholders who acquired their Peritus' common stock through the
exercise of options or similar derivative securities or stockholders who hold
their Peritus' common stock as part of a straddle or conversion transaction.
This discussion also does not address the U.S. federal income tax consequences
to holders of stock options of Peritus' common stock. This discussion assumes
that holders of Peritus' common stock hold their respective shares as capital
assets within the meaning of Section 1221 of the Code. No ruling from the
Internal Revenue Service will be applied for with respect to the federal income
tax consequences discussed herein and accordingly there can be no assurance
that the Internal Revenue Service will agree with the positions described in
this proxy statement.
27
We intend this discussion to provide only a summary of the material federal
income tax consequences of the merger. We do not intend it to be a complete
analysis or description of all potential federal income tax consequences of the
merger. We also do not address all of the non-income U.S. tax or foreign, state
or local tax consequences of the merger. Accordingly, we strongly urge you to
consult your tax advisor to determine your particular U.S. federal, state,
local or foreign income or other tax consequences resulting from the merger,
with respect to your individual circumstances.
The receipt of cash for shares of common stock pursuant to the merger will
be a taxable transaction for United States federal income tax purposes and
probably for state and local income tax purposes as well. In general, a
stockholder who receives cash in exchange for shares pursuant to the merger
will recognize gain or loss for federal income tax purposes equal to the
difference, if any, between the amount of cash received and the stockholder's
adjusted tax basis for the shares surrendered for cash pursuant to the merger.
Gain or loss will be determined separately for each block of shares (i.e.,
shares acquired at the same cost in a single transaction) that are surrendered
for cash pursuant to the merger.
Net capital gain recognized by non-corporate taxpayers from the sale of
property held more than one year will generally be taxed at a rate not to
exceed 20% for U.S. federal income tax purposes. Net capital gain from property
held for one year or less will be subject to tax at ordinary income tax rates.
Capital gains recognized by a corporate taxpayer will be subject to tax at the
ordinary income tax rates applicable to corporations. In general, capital
losses are deductible only against capital gains and are not available to
offset ordinary income. However, individual taxpayers are allowed to offset a
limited amount of net capital losses against ordinary income.
The receipt of cash, if any, pursuant to the exercise by a holder of shares
of common stock of appraisal rights under the General Laws of Massachusetts,
will be a taxable transaction. We encourage any holder of shares of common
stock considering the exercise of any appraisal rights to consult a tax advisor
to determine the tax consequence of exercising such appraisal rights.
Certain non-corporate holders of shares of common stock may be subject to
backup withholding at a rate of 31% on cash payments received pursuant to the
merger. Backup withholding will not apply, however, to a holder of shares of
common stock who furnishes a taxpayer identification number, or TIN, and
certifies that he or she is not subject to backup withholding on the substitute
Form W-9 included in the transmittal letter, who provides a certificate of
foreign status on Form W-8, or who is otherwise exempt from backup withholding.
A holder of shares of common stock who fails to provide the correct TIN on Form
W-9 may be subject to penalties imposed by the Internal Revenue Service.
Regulatory Matters
We do not believe any material regulatory approvals are required to permit
completion of the merger from U.S. regulatory authorities, including antitrust
authorities.
INTERESTS OF CERTAIN PERSONS IN THE MERGER
In considering the recommendations of Peritus' special committee and the
board of directors with respect to the agreement of merger and the merger,
holders of Peritus' common stock should be aware that certain directors and
members of management of Peritus and Rocket Software have interests in the
merger that are different from, or in addition to, the interests of holders of
Peritus' common stock generally. The names and titles of the individuals who
are directors of Peritus and who are known to have these interests are listed
below. Peritus' special committee and the board of directors were aware of
these interests and considered them, among other matters, in approving the
merger.
Rocket Software Ownership Interests. Pursuant to the terms of the agreement
and plan of merger, if the proposed merger closes, each outstanding share of
Peritus' common stock, other than shares held by Rocket
28
Software, Rocket Acquisition, any of their respective wholly owned subsidiaries
and stockholders who are entitled to and have dissenters' rights, will be
canceled and converted into the right to receive $0.19 in cash. Rocket Software
owns of record 10,000,000 outstanding shares of Peritus' common stock. In lieu
of receiving $0.19 per share for those shares, Rocket Software will receive, as
the majority stockholder of Peritus following the proposed merger,
substantially all of the Peritus business and assets remaining after the cash
payments to Peritus' other stockholders. Pursuant to the agreement of merger,
Rocket Software is required to vote in favor of approval of the agreement of
merger and the transactions contemplated by that agreement at the special
meeting of Peritus' stockholders to be held with respect to those matters. The
following persons and entities may be deemed to beneficially own the shares of
Peritus' common stock owned of record by Rocket Software:
. Johan Magnusson, a director of Peritus and Chief Operating Officer, a
director and a 40% stockholder of Rocket Software;
. Andrew Youniss, a director of Peritus and President, Chief Executive
Officer, Treasurer, Clerk, a director and a 40% stockholder of Rocket
Software;
. Matthew Kelley, a former Vice President, Research and Development of
Peritus and Chief Technology Officer, a director and a 20% stockholder
of Rocket Software; and
. Rocket Acquisition Company, Inc., a majority-owned subsidiary of Rocket
Software.
John D. Giordano Employment Arrangements. Peritus is a party to an
employment agreement with John D. Giordano, a director of Peritus and Peritus'
President, Chief Executive Officer and Chief Financial Officer. The proposed
business combination between Peritus and Rocket Software will be deemed to be a
change in control of Peritus under the employment agreement. Pursuant to the
employment agreement, Mr. Giordano's employment by Peritus is terminated upon a
change in control of Peritus, and Mr. Giordano will be entitled to receive a
severance payment equal to his annual base compensation of $202,800, as well as
continued employee benefits until the earlier of one year following the
termination date or the date Mr. Giordano commences other employment or
consulting work. Mr. Giordano is subject to a noncompetition agreement and a
nonsolicitation agreement for a period of one year following any termination of
his employment. If the merger were to close on or prior to June 30, 2001, Mr.
Giordano will receive a cash bonus equal to $100,000, and if it were to close
after June 30, 2001 but before January 1, 2002, Mr. Giordano will receive a
cash bonus equal to $50,000. In general, the agreement of merger may be
terminated by either Peritus or Rocket Software, if the closing has not
occurred on or before June 30, 2001.
Stock Options. Pursuant to the terms of the agreement of merger, each
outstanding option to purchase Peritus' common stock, whether vested or
unvested, with a per share exercise price less than $0.19, will be converted
into the right to receive, upon the surrender of the instrument evidencing the
stock option, a cash payment equal to the product of (1) the number of shares
underlying the option and (2) the difference between $0.19 and the per share
exercise price of the option. Those options will then be canceled. Peritus has
outstanding options to purchase an aggregate of 549,375 shares of its common
stock with an exercise price less than $0.19 held by its officers, directors
and employees. The weighted average exercise price of those options is $0.1347.
Pursuant to the terms of the agreement of merger all of those options will be
canceled and converted, as described above, into the right to receive cash
payments equal to an aggregate of $30,388. Specifically, the following
individuals will receive the cash payments described below with respect to
options to purchase Peritus' common stock at an exercise price less than $0.19:
29
Cash Payment
Upon
Conversion
Exercise Pursuant to
Number of Price of Agreement of
Name Peritus Office Options Options Merger
---- -------------------------- --------- -------- ------------
Andrea Campbell..... Vice President, Sales and
Marketing 154,375 $0.0988 $14,079.00
Dominic Chan........ Director 15,000 $0.1719 $ 271.50
John D. Giordano.... President, Chief Executive
Officer, Chief Financial
Officer and Director 300,000 $0.1406 $14,820.00
Patrick Manning..... Controller 30,000 $0.1875 $ 75.00
Roland Pampel....... Director 25,000 $0.1468 $ 1,080.00
If the proposed business combination between Peritus and Rocket Software
closes, all other outstanding options to purchase Peritus' common stock,
including options held by the individuals named above, will be canceled, unless
exercised prior to the closing.
Indemnification of Directors and Officers. All rights to indemnification of
individuals who were directors and officers of Peritus as of April 18, 2001, as
provided in Peritus' bylaws and corporate charter, with respect to acts and
omissions occurring prior to the closing of the proposed business combination
will survive that closing for a period of six years. For the one-year period
following the closing of the proposed business combination, Rocket Software
will maintain in effect for the benefit of the directors and officers of
Peritus for acts and omissions occurring prior to the closing a $1.5 million
policy of directors' and officers' liability insurance comparable to Peritus'
existing policy.
Employee Benefits. If the merger closes, Rocket Software has agreed to
provide each employee of Peritus with credit for their years of service with
Peritus to the same extent as those employees are entitled to credit for
service under Rocket Software's compensation and benefit plans. Peritus
employees will be immediately eligible to participate in all benefit plans
sponsored by the surviving corporation in the proposed business combination.
CERTAIN TRANSACTIONS
On March 27, 2000, Rocket Software invested $4 million in Peritus in
exchange for 10 million shares of Peritus' common stock. Peritus granted
certain registration rights to Rocket Software with respect to such shares.
Pursuant to the terms of the common stock purchase agreement dated March 27,
2000, Rocket Software could nominate two persons to serve on Peritus' board of
directors, and Peritus agreed to use its best efforts to elect such nominees
and to fix the number of the members of the board of directors at not more than
six.
For the year ended December 31, 2000, Peritus recorded revenue related to
other services of $90,000 from Rocket Software and of $25,000 from Dr. Chan. At
December 31, 2000, there were no balances in accounts receivable or in costs
and estimated earnings in excess of billings on uncompleted contracts with
related parties.
In June 1999, we reached a settlement agreement with American Financial
Group, Inc., or AFG, and its subsidiaries and affiliates including American
Premier Underwriters, Inc. for release from our real estate lease in
Cincinnati, Ohio and certain other obligations. Under the settlement, we paid
$200,000 in cash and issued 300,000 shares of our common stock to AFG in
exchange for the release of our real estate lease in Cincinnati, Ohio and net
claims for other services and disputes. At the time of this transaction, AFG
may have been deemed an affiliate of Peritus.
Peter A. Espinosa, our former Vice President of Worldwide Sales, issued an
unsecured promissory note dated May 29, 1998 in the amount of $150,000 payable
to Peritus. The note incurred interest at 6% per annum and was payable in two
equal annual installments of $75,000 together with accrued interest. Pursuant
to a
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separation agreement and release dated March 30, 1999 between Mr. Espinosa and
Peritus, Mr. Espinosa's employment with Peritus was terminated, and we forgave
all principal and interest payments totaling $157,500 due under such note.
Peritus has adopted a policy providing that all material transactions
between Peritus and our officers, directors and other affiliates must:
. be approved by a majority of the members of our board of directors and
by a majority of the disinterested members of our board of directors;
and
. be on terms no less favorable to Peritus than could be obtained from
unaffiliated third parties.
THE AGREEMENT OF MERGER
The following is a summary of the material terms of the agreement of merger.
The following description may not contain all the information about it that is
important to you. We encourage you to read the agreement of merger itself,
which is attached as Annex A and incorporated by reference.
The agreement of merger provides that, after all of the conditions to the
agreement of merger have been satisfied or waived, Rocket Acquisition will be
merged with and into Peritus, after which Peritus will be the surviving
corporation, as a privately held, majority-owned subsidiary of Rocket Software.
The agreement of merger will become effective at the time the applicable
articles of merger are filed with the Secretary of the Commonwealth of the
Commonwealth of Massachusetts.
Merger Consideration
At the effective time of the agreement of merger, each issued and
outstanding share of Peritus' common stock, other than shares owned by Rocket
Software, Rocket Acquisition, their respective wholly owned subsidiaries and
stockholders who are entitled to and have dissenters' rights, will be converted
into the right to receive $0.19 in cash, upon the surrender of the certificate
representing such share. No interest will be paid on the merger consideration
of $0.19.
Option Awards
If the merger is completed, outstanding options to purchase Peritus' common
stock, with a per share exercise price less than $0.19, will be converted into
the right to receive, upon the surrender of the instrument evidencing the stock
option, a cash payment equal to the product of (1) the number shares underlying
the option and (2) the difference between $0.19 and the per share exercise
price of the option. Those stock options will then be canceled. All other
outstanding options to purchase Peritus' common stock will be canceled.
The Surviving Corporation
Peritus will be the surviving corporation in the merger. Following the
merger, Peritus will no longer be a publicly traded company but will be a
privately held, majority-owned subsidiary of Rocket Software.
Representations and Warranties
Peritus, Rocket Software and Rocket Acquisition make a number of reciprocal
representations and warranties as to, among other things, due incorporation and
good standing, corporate authority to enter into the contemplated transactions,
filings with governmental entities and finders' fees. Representations and
warranties made solely by Peritus relate to the following items:
capitalization, absence of certain changes, absence of undisclosed material
liabilities, encumbrances upon property, valid title to properties and assets,
subsidiaries, consents, delivery of and disclosure in required SEC filings,
compliance with applicable laws and permits, governmental authorizations,
compliance with contractual obligations and private authorizations, bank
accounts, absence of illegal payments, pending litigation, filing of tax
returns, employee benefit plans, labor matters, intellectual property, material
contracts, environmental matters, voting and noncompetition agreements,
disclosure of affiliate transactions, insurance and inapplicability of state
takeover statutes.
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Many of these representations and warranties will not be considered
breached unless the breach of the representation or warranty has a material
adverse effect on Peritus. For purposes of the agreement of merger, a
"material adverse effect" is any change, effect, event, occurrence, state of
facts or development that results in a material adverse change in the validity
of, or rights under, the agreement of merger, or that is materially adverse to
the business, financial condition or results of operations of Peritus,
provided that none of the following factors will be considered in determining
whether there has been a material adverse effect:
. net losses of Peritus in the normal, usual and customary manner
consistent with past practice;
. any adverse event attributable to conditions affecting the industries in
which Peritus participates, or the U.S. economy, as a whole;
. any failure by Peritus to meet internal projections or forecasts,
analysts' expectations or published revenue or earnings predictions for
any period ending (or for which revenues or earnings are released) on or
after the date of the merger agreement; or
. any change in the market price or trading volume of Peritus' common
stock.
The representations and warranties in the agreement of merger do not
survive the agreement of merger.
Principal Covenants
Peritus Operations. Peritus has agreed to conduct its operations according
to its ordinary and usual course of business, consistent with past practice.
Subject to certain exceptions, Peritus has agreed not to, without the
consent of Rocket Software:
. encumber any property, assets or capital stock of Peritus or authorize
or pay any dividend;
. lease, license, sell or contract to sell, transfer or otherwise dispose
of any material amount of assets, securities or property except in the
ordinary course of business; adopt new compensation and benefit plans,
or amend or modify any compensation and benefit plan;
. enter into any commitments or incur any liabilities, or discharge or pay
any liabilities other than current liabilities, except in the ordinary
course of business;
. increase the compensation of any employee or materially modify a term of
any employment agreement;
. settle any demand with respect to dissenting shares; and
. enter into an agreement to do any of the foregoing.
No Solicitation. Peritus may, in response to a bona fide acquisition
proposal, furnish information and participate in discussions to an individual
or entity making such acquisition proposal if the board of directors or
special committee determines in good faith, after consultation with its
outside counsel, that to do so is necessary to discharge properly its
fiduciary duties. Upon receiving an acquisition proposal, Peritus must
immediately notify Rocket Software of such acquisition proposal and must
indicate whether Peritus is providing or intends to provide the proposing
individual or entity with access to nonpublic information concerning Peritus.
In the event that Peritus provides a proposing individual or entity with
access to information regarding Peritus, such individual or entity must first
execute an appropriate confidentiality agreement.
The agreement of merger defines "acquisition proposal" as a bona fide
inquiry or proposal for a merger, sale of substantial assets, sale of share of
capital stock (including without limitation by way of a tender offer) or
similar transactions involving Peritus or any subsidiaries of Peritus other
than the merger involving Rocket Software and Rocket Acquisition.
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Proxy Material. Peritus and Rocket Software agree that no information
supplied to be included in this proxy statement or any other filing with the
SEC required to consummate the transactions contemplated by the agreement of
merger, or any amendment to the filings will, at the time of mailing to
stockholders, the meeting of stockholders or the effective time of the
agreement of merger contain any untrue statement of a material fact or omit to
state any material fact required, or necessary to make any statements therein
misleading.
Filings; Other Actions; Notification. Peritus and Rocket Software have
agreed to use commercially reasonable efforts to complete all necessary actions
under the agreement of merger to effect the merger including obtaining all
necessary waivers and consents to effect any necessary registrations and
filings. Peritus and Rocket Software agree to furnish the other with all
information necessary in connection with this proxy or any other necessary
filing and update the other on all matters relating to completion of the
transactions contemplated by the agreement of merger.
Access to Information. Peritus has agreed that it will give Rocket Software
reasonable access to the books and records and other information concerning the
business of Peritus.
Publicity; Communications. Peritus and Rocket Software have agreed to
consult with each other to the extent reasonably practicable before issuing any
press release or making any public statement with respect to the agreement of
merger and the transactions contemplated by such agreement, including the
merger.
Benefits. If the proposed merger between Peritus and Rocket Software closes,
Rocket Software has agreed that all employees of Peritus who continue
employment with Rocket Software, Peritus or any subsidiary of Peritus will be
eligible to continue to participate in Peritus' health and welfare benefit
plans, subject to the following conditions:
. the employment of any continuing employee will be "at will" employment;
. Rocket Software or Peritus retains the right to amend or terminate any
such health or welfare benefit plan at any time; and
. in the event that Rocket Software or Peritus terminates any such health
or welfare benefit plan, any continuing employee will be eligible to
participate in Rocket Software's health and welfare benefit plans to the
same extent as similarly situated employees of Rocket Software.
Rocket Software has agreed to provide each employee of Peritus with credit
for his or her years of service with Peritus to the same extent as those
employees are entitled to credit for service under Rocket Software's
compensation and benefit plans. Peritus will terminate, effective as of the day
immediately preceding the effective date of the agreement of merger, each
Peritus employee benefit plan that contains a cash or deferred arrangement
intended to qualify as a 401(k) plan, unless Rocket Software provides written
notice to Peritus that such 401(k) plan will remain in effect. In the event of
termination of any such 401(k) plan, Rocket Software agrees to use commercially
reasonable efforts to cover, under substantially similar terms and conditions
applicable to similarly situated employees of Rocket Software, any continuing
Peritus employees under a 401(k) plan sponsored by Rocket Software.
Expenses. Peritus is responsible for the costs and expenses, including
filing fees and printing and mailing costs, arising from the preparation,
filing and mailing of the proxy statement and Schedule 13E-3 filed with the SEC
in connection with the merger. Whether or not the merger is consummated, all
costs and expenses incurred in connection with the agreement of merger and the
related transactions, including the merger will be paid by the party incurring
such expense.
Indemnification; Directors' and Officers' Insurance. With respect to acts
and omissions occurring prior to the closing of the merger, all rights to
indemnification of individuals who were directors and officers of Peritus as of
April 18, 2001, as provided in Peritus' bylaws or corporate charter, will
survive that closing for a period of six years. For the one-year period
following the closing of the proposed merger, Rocket Software will
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maintain in effect for the benefit of the directors and officers of Peritus
for acts and omissions occurring prior to the closing a $1.5 million policy of
directors' and officers' liability insurance comparable to Peritus' existing
policy.
Principal Conditions to the Completion of the Agreement of Merger
Closing Conditions. Each party's obligation to complete the merger is
subject to the satisfaction of the following conditions:
. the merger agreement and the transactions contemplated therein shall
have been approved and adopted by the affirmative vote of the holders of
a majority of the outstanding shares of common stock entitled to vote
thereon in accordance with the General Laws of Massachusetts;
. absence of legal prohibitions to, or restraint upon, the completion of
the merger; and
. the representations and warranties of each party must be true and
correct in all material respects on the date of the closing.
Rocket Software's obligation to complete the merger is subject to
satisfaction of the following conditions:
. no legal action or other claim shall be pending or threatened at any
time prior to or on the closing date seeking to restrain or prohibit, or
damages or other relief in connection with, the execution and delivery
of the merger agreement or the consummation of the transactions
contemplated thereby or which might in the judgment of Rocket Software
have any material adverse effect on Peritus, Rocket Software or Rocket
Acquisition;
. the beneficial owners of no more than seven and one-half percent (7.5%)
of Peritus' common stock shall have asserted dissenters' rights in
connection with the merger;
. Peritus shall have obtained unconditional consents to the assignment and
continuation of all private authorizations and contractual obligations
disclosed in the disclosure schedule to the merger agreement, including
a consent from Bull HN Information Systems, Inc., but excluding a
consent from Peritus' landlord under the lease agreement for Peritus'
premises located at 112 Turnpike Road, Westborough, Massachusetts; and
. at the closing of the merger, the remainder of (i) the aggregate amount
of cash and cash equivalents held by Peritus minus (ii) the lesser of
(A) $840,000 and (B) the actual aggregate amount of out-of-pocket costs
and expenses incurred by Peritus in connection with the merger agreement
and the transactions contemplated thereby, shall be equal to at least
$4,810,000.
Termination
Termination. The agreement of merger may be terminated and the merger may
be abandoned at any time prior to the effective time of the agreement of
merger:
. by mutual written consent of the parties;
. by either party: (1) if the merger has not been completed on or before
June 30, 2001 or such later date as may be mutually agreed in writing by
the parties; or (2) if the completion of the merger is legally
prohibited by final and non-appealable order or by law;
. by Peritus, by written notice to the other parties, if both (1) it is
not in material breach of any of its representations, warranties or
covenants contained or in any merger transaction document and (2) there
has been a material breach of a representation or warranty in the merger
agreement by Rocket Software or Rocket Acquisition, or a material breach
by Rocket Software or Rocket Acquisition of any covenant set forth in
the merger agreement, or a failure of any condition to which the
obligations of Peritus are subject, and such breach or failure cannot be
cured by the termination date and has not been waived;
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. by Rocket Software and Rocket Acquisition, by written notice to Peritus,
if both (1) neither Rocket Software nor Rocket Acquisition is in
material breach of any of its representations, warranties or covenants
contained in and of the merger transaction documents and (2) there has
been a material breach of a representation or warranty in the merger
agreement by Peritus, or a material breach by Peritus of any covenant
set forth in the merger agreement, or a failure of any condition to
which the obligations of Rocket Software and Rocket Acquisition are
subject, and such breach or failure cannot be cured by the termination
date and has not been waived;
. by any party, by written notice to the other parties, if Peritus'
stockholder approval shall not have been obtained by reason of the
failure to obtain the required vote upon a vote held at the special
meeting (including any postponements or adjournments thereof); or
. by Rocket Software and Rocket Acquisition, by written notice to Peritus,
if the board of directors of Peritus shall have (1) withdrawn or
modified, in a manner adverse to Rocket Acquisition, its approval or
recommendation of the merger agreement or any of the transactions
contemplated thereby, (2) failed to include such recommendation in the
Proxy Statement, (3) approved or recommended any acquisition proposal
from any person other than Rocket Software or Rocket Acquisition or (4)
resolved to do any of the foregoing.
If the agreement of merger is terminated and abandoned, the agreement of
merger will be void and neither Peritus nor Rocket Software will have any
liability, provided, however, no such termination will relieve any party of any
liability or damages resulting from any misrepresentation or breach of the
agreement of merger.
Amendment; Waiver of Conditions. The agreement of merger may be amended by
mutual written consent of the parties, and the conditions to each of the
parties' obligations to consummate the merger may be waived by such party.
Accounting Treatment
The merger will be accounted for under the purchase method of accounting in
accordance with generally accepted accounting principles, whereby the value of
the consideration paid in the merger will be allocated based upon the estimated
fair values of the assets acquired and liabilities assumed at the effective
date of the merger.
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BUSINESS
Peritus Software Services, Inc., a Massachusetts corporation, provides
solutions consisting of software products and services that enable
organizations to improve the productivity, quality and effectiveness of their
information technology, or IT, systems maintenance or software evolution
functions. Peritus employs software tools, methodologies and processes,
designed to automate the typically labor-intensive processes involved in
conducting mass change and other software maintenance tasks. In 1996, Peritus
released its first commercially available product, its AutoEnhancer/2000
software, which was aimed at the industry's most pervasive mass change
challenge, the year 2000 problem, to value added integrators and directly to
end users. In 1996, Peritus expanded its research and development efforts
through the acquisition of Vista Technologies Incorporated, or Vista, a
developer of computer-aided engineering software. In 1997, Peritus expanded its
product offerings and research and development efforts 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 by
acquiring substantially all of the assets and assuming certain of the
liabilities of Millennium Dynamics, Inc., or MDI, a software tools company with
year 2000 products for the IBM mainframe and AS/400 platforms from American
Premier Underwriters, Inc., or APU.
In response to changes in the markets for Peritus' products and services,
Peritus emphasized the direct delivery of year 2000 renovation services and
renovation quality evaluation, or RQE, services in the beginning of 1998 and
also began to refocus Peritus' business on software maintenance outsourcing
services. In 1998, Peritus also began licensing its RQE tool, a product used to
facilitate an in-house evaluation of a completed year 2000 renovation. As the
market continued to shift from Peritus' year 2000 products and services during
the third quarter of 1998, Peritus revised its overall strategy to emphasize
the growth of its software maintenance outsourcing business over the long term
and to meet its clients needs for year 2000 renovation services and RQE
services. In July 1998, Peritus announced its software maintenance outsourcing
offerings, "Software Asset Maintenance for Software Providers", or SAMsp, and
"Software Asset Maintenance for Information Systems", or SAMis, 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.
In the second half of 1998, the overall market for the year 2000 products
and services of Peritus contracted dramatically, resulting in substantial
financial losses and, in response, Peritus substantially reduced its workforce
in September and December of 1998. As a result of Peritus' degraded financial
condition, Peritus began encountering major obstacles in obtaining new
outsourcing business. Since most outsourcing engagements are multi-year and
involve critical applications, prospective new clients, although interested in
the capabilities and technology of Peritus, were reluctant or unwilling to
commit to contracts. Based upon its continued difficulties, Peritus
substantially reduced its workforce again in April 1999 and experienced
significant voluntary attrition in its workforce.
On February 3, 1999, Peritus' common stock was delisted from trading on the
Nasdaq National Market. Peritus' common stock is now currently traded on the
Over The Counter, or OTC, Bulletin Board which has several requirements for
listing.
During the second and third quarters of 1999, Peritus settled its leases for
its facilities in Cincinnati, Ohio, Lisle, Illinois and Billerica,
Massachusetts and took other efforts to reduce its fixed costs.
During the second and third quarters of 2000, Peritus explored certain
extensions to its CodeNine tool beyond the field of application understanding
and concluded that such extensions were not feasible.
On February 8, 2001, Peritus announced that it was reducing its workforce by
nine employees effective February 23, 2001.
Peritus experienced net losses of $4,166,000, $2,583,000 and $26,673,000 in
the years ended December 31, 2000, 1999 and 1998, respectively. Based on
Peritus' current forecasted cash expenditures and its
36
cash on hand, Peritus expects to have sufficient cash to finance its operations
through the year 2001. Peritus' future beyond the year 2001 is dependent upon
its ability to execute some form of organizational transaction, achieve break-
even cash flow, or raise additional financing. There can be no assurances that
Peritus will be able to do so.
Peritus currently derives its revenue from software maintenance outsourcing
services, software and methodology licensing and other services. Historically,
Peritus' products and services have been marketed through its direct sales
force, both domestically and in Europe, and through value added integrators
operating worldwide. Peritus currently has no direct sales force
representatives. Future sales will be dependent upon the sales efforts of
senior management and the use of sales agency relationships.
Peritus Products, Services and Technology
Peritus offers products and services that enable organizations to improve
the productivity, effectiveness and quality of the software evolution process.
Peritus' solutions employ a combination of tools, processes, skilled
professionals and methodologies. Peritus' underlying technology consists of its
Peritus Intermediate Language, or PIL, and proprietary tools that can be
implemented to address mass change or other software maintenance or development
challenges.
Products and Services
Currently, Peritus' product offerings include its CodeNine and SAM Relay
tools and its service offerings include software maintenance outsourcing (SAMis
and SAMsp), technology transfer and insourcing services.
CodeNine
Peritus' CodeNine tool enables a user to understand a mainframe based
application or application set. It employs a combination of methodologies and
automated software features that enable a user to extract mainframe
applications and move the code to a PC workstation for analysis and
understanding. It provides detailed information on the application inventory
and relationships between software assets; partitions the assets into
applications, business transactions, and elementary transactions; generates
application size metrics, such as function point counts; and supports the
modeling of enhancements including function point counts. It can also provide
low-level impact analysis on individual code members. CodeNine also aids in the
understanding of legacy applications to help facilitate determining the best
strategy for enabling these applications for Internet use.
SAM Relay
SAM Relay is a web-based, groupware tool used for managing and tracking
workflow. It was developed specifically to support task management as applied
to Peritus Software Maintenance Teams and facilitates twenty-four hours, seven
days per week service through its web-based interface, enabling geographically
dispersed individuals and teams to share information in real time.
Outsourcing Services
Peritus offers customized software maintenance outsourcing services to
clients. In an outsourcing project, Peritus assumes responsibility for the
evolution of a client's software, including bug fixing, enhancements,
applications migration, modernization and porting. Peritus' outsourcing
services address the maintenance needs of application software, system
software, embedded software and software products and are designed to provide
productivity gains regardless of platform, operating system, language or
software function. In the delivery of its outsourcing services, Peritus uses a
number of proprietary technologies. Compared to traditional software
maintenance methods, Peritus' technologies allow faster de-bugging by
identifying and excluding irrelevant
37
variables and by tracing the cause of errors from the known output resulting
from such errors and Peritus' processes enable workflow management techniques
to improve a maintenance team's throughput.
Peritus offers two distinct types of software maintenance outsourcing
services, SAMsp and SAMis. SAMsp is a fixed price software maintenance
outsourcing solution designed specifically for the manufacturers of both
systems software and software products. SAMsp combines people, process, formal
mathematical techniques, computer-based tools, and continuous improvement to
improve productivity and responsiveness. SAMis is a fixed price software
maintenance solution designed specifically to assist a company's information
technology organization in managing their application portfolio.
Outsourcing services are performed at both Peritus and client locations with
a team of Peritus employees, or a team consisting of Peritus and client
employees. Peritus also selectively employs subcontractors. Formal training,
support and continuous improvement are part of every outsourcing service
offering. Peritus' self-directed outsourcing teams understand and exploit
organizational dynamics, workflow management and proprietary technology to
enhance the productivity, responsiveness and quality of the software evolution
process. Individual team members develop a deep and broad understanding of many
programming languages and applications, as well as maintenance technologies and
de-bugging methodologies. Peritus also uses its SAM Relay tool in its
outsourcing arrangements where appropriate.
In connection with the delivery of its outsourcing services, Peritus
assesses the IT costs of a client together with other factors such as quality,
productivity, and software and hardware environment and, in general, agrees to
provide IT services on a fixed price, fixed timeframe basis after a detailed
assessment.
A typical outsourcing engagement represents a multi-million dollar, multi-
year, fixed-price contract that specifies service rather than staffing levels.
Technology Transfer Services
Peritus offers technology transfer services to assist organizations that
seek to increase the productivity of their software evolution activities while
keeping their software maintenance activities in-house. This technology
transfer program transfers the organizational model and workflow methodology of
Peritus' software maintenance outsourcing solutions to enable clients to
implement enhanced, repeatable processes for software evolution.
Peritus also provides insourcing services, which combine Peritus' technology
transfer services with on-site management of the Peritus-trained client teams.
In an insourcing engagement, Peritus participates with the client management to
provide that the teams accurately implement Peritus' approach and perform at
expected productivity levels. Typical insourcing engagements have two revenue
components: a fee for services and a royalty tied to the client's productivity
gains.
Mass Change Solutions
Technology for Mass Change. Peritus' Mass Change Engine is designed to
address mass changes to IT systems (such as expansion of data fields or changes
in product or part identifiers) by accepting as input the identified data
structure and desired rules of transformation. The Mass Change Engine then
examines the entire set of computer programs to trace all related data and
instructions, computes the necessary changes that are the result of that simple
change requirement and makes corresponding adjustments in all programs and data
so that only the desired change occurs without impacting the underlying logic.
These tasks are accomplished through the use of an adaptive seed generator
based on neural network technology, the creation of a repository of
relationships between the data and instructions using PIL and the use of
propagations that determine the relationship between variables and seeds using
a set of identification rules and information embedded in the repository.
Peritus' Mass Change Engine can be adapted to address specific mass change
needs. Peritus' AutoEnhancer/2000 software is an example of an extension of the
Mass Change Engine. Peritus has received a
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United States Patent, Patent Number: 5,838,979 covering certain technology
applicable to the Mass Change Engine. The Mass Change Engine is not currently
marketed by Peritus.
Year 2000 Renovation Tools. Peritus' year 2000 products and services
provided a comprehensive renovation solution for organizations seeking to
address the year 2000 problem. Peritus' AutoEnhancer/2000 software, which is
based on its Mass Change Engine, was also designed to provide flexibility in
addressing the critical identification, correction and verification components
of a year 2000 renovation. The AutoEnhancer/2000 software was designed to be
interoperable with third-party assessment, extraction and testing tools. The
Vantage YR2000 software toolset was designed to assist and automate the code
conversion process required to make software code residing on the IBM mainframe
and AS/400 platforms year 2000 compliant. The toolset employs a combination of
methodologies and automated software tools that are designed to enhance the
productivity of the code conversion process. The underlying technology is based
on an automated parsing and conversion technology that identifies date
sensitive variables and provides correction either through date expansion or
logic conversion. Peritus' Year 2000 renovation tools are no longer marketed by
Peritus.
Year 2000 Renovation Quality Evaluation Tool. Peritus' RQE Tool was used to
facilitate an in-house evaluation of a Year 2000 renovation of C and COBOL code
by identifying and evaluating date sensitive variables in the renovated code.
It is no longer marketed by Peritus.
Technology
Peritus' core technologies consist of its CodeNine tool, SAM Relay tool, and
Mass Change Engine (as previously described) as well as the Peritus
Intermediate Language and other computer-based tools and formal mathematical
techniques.
The Peritus Intermediate Language. Peritus has developed its Peritus
Intermediate Language to support accurate analysis of why a program functions
incorrectly. PIL is based on the mathematical theory that all computations can
be expressed in a small number of abstract instructions into which existing
computer languages can be translated. PIL consists of 13 abstract instructions
and currently the COBOL, RPG, C and PL/1 programming languages have been
translated by Peritus into PIL. When data enter a computer program, their paths
can be traced by the values assigned to them by the instructions in that
program. In contrast, PIL can be used to trace the paths of all data that fall
into mathematically describable classes. As a result, if the data are in a
certain state when a program completes or aborts, it is possible, using PIL, to
determine the initial conditions of these data before the program was executed.
In addition, the use of PIL allows tools to be built that can verify whether a
program is logically correct by specifying pre and post conditions of classes
of data rather than relying on the traditional method of testing, which is
based on trial and error using selected data points. Peritus has received a
United States Patent, Patent Number: 6,029,002 relating to the use of PIL.
Other Computer-Based Tools. Currently, Peritus' other computer-based tools
include:
. Peritus Code Analyzer. Peritus Code Analyzer, or PCA, is a software
maintenance assistance tool designed to automate the process of logical
code analysis. The tool is used to discover and correct defects,
implement enhancements, verify properties of software (such as database
integrity or security properties), migrate from one language to another
and update systems or programs and data for specific enhancements (such
as those required by the year 2000 problem). Peritus has received a
United States Patent, Number: 6,029,002 covering certain technology
applicable to PCA.
. Formal Mathematical Techniques. Peritus has developed a discipline that
makes the analysis of software a more reliable activity based on the
technique of logical code analysis. Logical code analysis facilitates
the understanding of unfamiliar code and the isolation of the code
specifically related to the maintenance task and executes the required
changes without impacting the underlying logic. Peritus' formal
mathematical techniques are an integral component of its core
technologies and serve as the basis for the automation capabilities of
those technologies.
39
Sales and Marketing
Historically, Peritus offered its products and services to clients through
both direct and indirect channels, including value added integrators as well as
domestic and international distributors.
Direct Sales
In April 1999, Peritus reduced its direct sales force to one sales
representative. Thereafter, Peritus hired one other direct sales representative
and entered into a contract with a sales agent. Currently, Peritus has a Vice
President of Sales and Marketing but no direct sales representatives. Future
sales will be dependent upon the sales efforts of senior management and the use
of sales agency relationships. Prior to April 1999, Peritus sold and supported
its products and services directly in the United States.
Indirect Sales
Peritus has inactive agreements with value added integrators for its Year
2000 products. During 2000, Peritus had no sales from these value-added
integrators. Peritus' integrators are located in the United States, Canada,
Europe and Japan and are authorized by Peritus to sublicense Peritus' products
and/or services to end users or system integrators in their respective
territories.
Marketing
In April 1999, Peritus eliminated its marketing organization to minimize its
expenses. Currently, Peritus has a Vice President of Sales and Marketing and
spent a limited amount on marketing and promotional activities in 2000. Prior
to April 1999, Peritus' marketing organization worked closely with product
management and the sales organization in the development of Peritus marketing
literature, market research to assist in strategic planning and tactical
decision making, trade show programs and exhibit planning, advertising and
public relations support.
Clients
Peritus offers its products and services to end users in a variety of
industries including financial services, telecommunications, transportation,
insurance, utilities and manufacturing.
To date, Peritus' revenue has been dependent on a few major clients,
including American Telephone & Telegraph Company (AT&T), Bull HN Information
Systems, Inc. (Bull), Computer Sciences Incorporated (CSC), Compaq Computer
Corporation (Compaq), EMC Corporation (EMC), Ford Motor Company (Ford), CGI
Group Inc (CGI) International Business Machines Corporation (IBM), Merrill
Lynch, Pierce Fenner & Smith Incorporated (Merrill Lynch), Metropolitan Life
Insurance Company (Met Life), MicroAge Computer Center, Inc. (Microage), and
Telesector Resources Group Inc. (NYNEX). During 2000, Bull, Ford, EMC, and CGI
represented approximately 40.3%, 15.1%, 12.2%, and 10.4% of Peritus' total
revenue, respectively. During 1999, Bull and Compaq represented approximately
21.7% and 11.8% of Peritus' total revenue, respectively. During 1998, AT&T and
Bull represented approximately 12.2% and 10.0% of Peritus' total revenue,
respectively. In addition, Peritus' ten largest clients represented
approximately 97.6%, 70.1% and 52.4% of Peritus' total revenue in the years
ended December 31, 2000, 1999 and 1998, respectively.
Peritus has entered into agreements to provide software consulting services
and software maintenance services with Compaq, Computervision, EMC and Bull.
The Compaq agreement terminated in March 2000. The Computervision agreement
terminated in December 2000. In December 2000, EMC terminated its agreement
effective March 31, 2001. The Bull contract expires on December 31, 2006 but is
earlier cancelable by Bull or Peritus. Peritus expects Bull to cancel the
contract effective January 1, 2002.
Peritus has also entered into a license agreement with Bull that expires on
December 31, 2001. This agreement grants to Bull certain use rights,
sublicensing rights and the right to make certain derivative works
40
with regard to proprietary software programs of Peritus. In the event that
Peritus fails to fulfill any of its obligations under the Bull license
agreement for a period of 90 days, Bull has the option, upon notice to Peritus,
to elect in lieu of termination to assume performance of Peritus' obligations
and to have access to source code of Peritus' licensed software to perform such
assumed obligations.
Client Technical Support
In connection with the licensing of its products, Peritus provides its
clients with technical support and advice, including problem resolution,
installation assistance, error corrections and product enhancements released
during maintenance. Peritus provides toll-free telephone support, as well as
access to electronic bulletin boards and other forms of electronic
communication to provide clients with the latest information regarding Peritus'
products and services. Client technical support fees related to Peritus' year
2000 products were typically 15% of license fees and were typically capped at
$400,000 annually per direct licensee. Peritus notified customers of its
Vantage YR2000 software toolset that it was terminating client technical
support for that product in the first quarter of the year 2000.
Research and Product Development
Historically, Peritus has invested significantly in enhancing existing
technology and developing new products and services. As a result of Peritus'
restructurings in 1998 and 1999, the majority of Peritus' research and
development resources were eliminated. Peritus plans to continue limited
maintenance of and enhancements to its existing products. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations" in
this proxy statement for a description of research and development expenses
incurred from 1998 through 2000.
Peritus has its remaining development facility at Peritus' Westborough,
Massachusetts headquarters. Peritus closed its development and support center
in Bangalore, India in 1999.
Peritus has generally relied on internal efforts and resources to develop
its software and methodologies. However, in some limited cases, Peritus has
contracted with various firms, certain of which were located in India and
Canada, to develop materials, processes, software or portions of software for
and on behalf of Peritus.
Competition
The market for Peritus' software products and services is intensely
competitive and characterized by rapid changes in technology and user needs and
the frequent introduction of new products. Peritus' competitors include
outsourcing service providers and software maintenance tools vendors. Peritus
faces competition with its CodeNine tool from vendors whose products include
some of the functionality of CodeNine, such as Merant PLC, SEEC Inc., Viasoft
Inc., and Relativity Technologies, Inc. Peritus faces competition with its SAM
Relay tool from vendors whose products include some of the functionality of SAM
Relay, such as Instinctive Inc., Starbase Inc, Rational Inc. and Interliant
Inc.
Peritus also faces competition in the provision of its software maintenance
outsourcing services. Peritus believes that the principal competitive factors
in the market for outsourcing services include company size, price, the ability
to provide productivity guarantees, strong client relationships, comprehensive
delivery methodologies, responsiveness to client needs, depth of technical
skills and reputation. Peritus' principal competitors in this market include
not only in-house IT departments and systems integrators such as the major
accounting firms but also outsourcing service providers such as Computer
Sciences Corp., Electronic Data Systems Corporation, IBM Global Services,
Keane, Inc. and PKS Information Services, Inc.
A number of Peritus' competitors are more established, benefit from greater
name recognition and have substantially greater financial, technical and
marketing resources than Peritus. Moreover, other than the need for technical
expertise, there are no significant proprietary or other barriers to entry in
Peritus' market.
41
Intellectual Property
Peritus relies on a combination of copyright, trade secret, patent, service
mark, and trademark laws and license agreements to protect its proprietary
rights in technology. In addition, Peritus currently requires its employees and
consultants to enter into nondisclosure and assignment of invention agreements
to limit use of, access to and distribution of its proprietary information.
Peritus' business includes the maintenance, evolution, repair and
development of software applications, system software and other deliverables,
including written specifications and documentation in connection with specific
client engagements. Ownership of software and associated deliverables created
for clients is generally retained by or assigned to the client, and Peritus
does not retain an interest in such software or deliverables. The source code
for Peritus' proprietary software is generally protected as a trade secret and
an unpublished copyrighted work. However, Peritus has entered into source code
escrow agreements with certain of its licensees requiring release of source
code in certain circumstances. Such source code escrow agreements usually limit
the use and disclosure of such source code in the event that it is released.
In addition, Peritus has entered into license agreements with a limited
number of clients that allow these clients access to and use of Peritus'
AutoEnhancer/2000 and Vantage YR2000 software toolset and SAM Relay and RQE
tools source code for certain purposes. Access to the source code may increase
the likelihood of misappropriation or misuse by third parties.
Peritus' business also includes licensing of Peritus' proprietary software,
methodologies and related services to end users, as well as to value added
integrators authorized to provide services to third parties. In general, such
licensing of Peritus' proprietary software, methodologies and related services
to a licensee is a limited term, limited use, non-exclusive license that
contains restrictions on copying, disclosure, usage, decompiling and
transferability. In particular cases, however, a license agreement may have
certain provisions that are exclusive in some manner. Within these licensing
agreements, Peritus seeks to avoid disclosure of its trade secrets, including,
but not limited to, generally requiring those persons with access to Peritus'
proprietary information to execute confidentiality agreements restricting use
of and access to Peritus' confidential information.
Peritus generally relies on internal efforts in order to develop its
software and methodologies. However, in some limited cases, Peritus has
contracted with various firms, certain of which were located in India and
Canada, to develop software or portions of software for and on behalf of
Peritus. Software development by a contractor for Peritus is done pursuant to
agreements that generally assign all rights to Peritus and contain
nondisclosure provisions. Such software developed by a contractor may be merged
with software that Peritus has developed internally using its employees. In
January 1996, Peritus acquired Vista and was assigned all of Vista's
intellectual property rights, consisting mainly of unregistered copyrights. In
December 1997, Peritus acquired additional year 2000 technology in connection
with the MDI acquisition.
Peritus has been granted three patents by the United States Patent and
Trademark Office pertaining to technologies, processes and methodologies used
by Peritus' software:
. United States Patent Number: 5,838,979, that covers certain technology
applicable to the Mass Change Engine;
. United States Patent Number: 5,911,142, that covers a system and method
that automatically converts field lengths of data fields in a data file
that are accessed by a computer program and correspond to date-related
data; and
. United States Patent Number: 6,029,002 that covers an analyzer for
maintaining and analyzing source code that includes a software
translator for converting source code into an intermediate language,
slicing capability based upon weakest precondition determination, dual
direction flow analysis and incorporation of a computational model to
facilitate iterative code.
42
There can be no assurance that such patents would survive a legal challenge
to their validity or provide meaningful or significant protection to Peritus.
Peritus has abandoned all outstanding patent applications. Some competitors of
Peritus have announced the filing with the United States Patent and Trademark
Office of patent applications relating to fixing and assessing the year 2000
problem. Peritus expects that the risk of infringement claims against Peritus
might increase because its competitors might successfully obtain patents for
software products and processes. Peritus has become aware of a patent relating
to fixing the year 2000 problem based on a "windowing" method. Certain of
Peritus' technology incorporated in some of its products may infringe on such
patent.
There can be no assurance that Peritus' means of protecting its proprietary
rights in the United States or abroad will be adequate. The laws of some
foreign countries may not protect Peritus' proprietary rights as fully or in
the same manner as do the laws of the United States. Also, despite the steps
taken by Peritus to protect its proprietary rights, it may be possible for
unauthorized third parties to copy aspects of Peritus' products, reverse
engineer, develop similar technology independently, or obtain and use
information that Peritus regards as proprietary. Furthermore, there can be no
assurance that others will not develop technologies similar or superior to
Peritus' technology or design around the proprietary rights owned by Peritus.
However, Peritus believes that, because of the rapid pace of technological
change in the software industry, patent, trade secret and copyright protection
is less significant to Peritus' competitive position than factors such as the
knowledge, ability and experience of its personnel, new product development,
frequent product enhancements, name recognition and ongoing product maintenance
support with regard to developing, establishing and maintaining a technology
leadership position.
Employees
As of April 23, 2001, Peritus employed 20 employees. It is important for
Peritus to retain highly skilled and qualified personnel. Competition for such
personnel is intense in the computer software industry, particularly for
software developers, service consultants, and sales and marketing personnel.
There can be no assurance that Peritus will be able to retain or attract
qualified personnel in the future. Peritus' employees are not represented by
any labor unions. Peritus considers its relations with its employees to be
good.
Properties
Peritus is headquartered in Westborough, Massachusetts, where it leases
approximately 11,600 square feet under a lease expiring in December 2001.
Legal Proceedings
Peritus is not currently subject to any material legal proceedings. From
time to time, Peritus is subject to various legal proceedings incidental to the
conduct of its business.
43
SELECTED HISTORICAL FINANCIAL DATA
Selected Historical Financial Data of Peritus
The selected financial data set forth below as of December 31, 2000 and
1999, and for each of the three years ended December 31, 2000, are derived from
Peritus' Consolidated Financial Statements, which appear elsewhere in this
proxy statement. The selected financial data set forth below as of December 31,
1998, 1997 and 1996 and for the years ended December 31, 1997 and 1996 are
derived from Peritus' audited financial statements, which are not included in
this proxy statement. The data set forth below should be read in conjunction
with "Management's Discussion and Analysis of Financial Condition and Results
of Operations" and Peritus' Consolidated Financial Statements, including the
Notes thereto, included elsewhere in this proxy statement.
Year Ended December 31,
---------------------------------------------
2000 1999 1998 1997 1996
------- ------- -------- -------- -------
(In Thousands, Except Per Share Data)
Statement of operations data:
Revenue:
Outsourcing services.......... $ 2,664 $ 5,923 $ 9,925 $ 11,447 $10,190
License....................... 1,045 2,087 9,444 21,255 6,526
Other services................ 814 3,188 12,163 7,007 2,519
------- ------- -------- -------- -------
Total revenue (1)........... $ 4,523 $11,198 $ 31,532 $ 39,709 $19,235
------- ------- -------- -------- -------
Cost of revenue:
Cost of outsourcing services.. 1,465 4,778 7,577 9,536 8,488
Cost of license............... -- 238 1,631 690 162
Cost of other services........ 295 2,013 9,110 5,357 2,931
------- ------- -------- -------- -------
Total cost of revenue (1)... 1,760 7,029 18,318 15,583 11,581
------- ------- -------- -------- -------
Gross profit.................... 2,763 4,169 13,214 24,126 7,654
------- ------- -------- -------- -------
Operating expenses:
Sales and marketing........... 368 1,450 13,244 8,864 3,116
Research and development...... 1,189 1,316 8,528 8,324 6,033
General and administrative.... 1,766 3,570 7,466 4,312 3,249
Write-off of acquired in-
process research and
development.................. -- -- -- 70,800 --
Impairment of long-lived
assets....................... -- 961 5,218 -- --
Restructuring charges
(credit)..................... -- (455) 5,906 -- --
Gain on sale of assets........ (24) -- -- -- --
------- ------- -------- -------- -------
Total operating expenses.... 3,299 6,842 40,362 92,300 12,398
------- ------- -------- -------- -------
Loss from operations............ (536) (2,673) (27,148) (68,174) (4,744)
Interest income (expense), net.. 342 92 485 948 (296)
------- ------- -------- -------- -------
Loss before gain on sale of
majority-owned subsidiary, cost
of strategic investment, income
taxes, minority interest and
equity in loss of less than
majority-owned company......... (194) (2,581) (26,663) (67,226) (5,040)
Gain on sale of majority-owned
subsidiary..................... -- -- (11) -- --
Cost of strategic investment.... 4,000 -- -- -- --
Provision (benefit) for income
taxes.......................... (28) 2 25 260 (143)
------- ------- -------- -------- -------
Loss before minority interest in
majority-owned subsidiary...... (4,166) (2,583) (26,677) (67,486) (4,897)
Minority interest in majority-
owned subsidiary............... -- -- (4) 4 24
------- ------- -------- -------- -------
Net loss........................ $(4,166) $(2,583) $(26,673) $(67,490) $(4,921)
======= ======= ======== ======== =======
Basic and diluted net loss per
share........................ $ (0.17) $ (0.15) $ (1.65) $ (7.03) $ (1.02)
======= ======= ======== ======== =======
Weighted average shares
outstanding--basic and
diluted........................ 24,939 16,670 16,177 9,708 5,876
======= ======= ======== ======== =======
44
December 31,
-----------------------------------
2000 1999 1998 1997 1996
------ ------ ------ ------- ------
(In Thousands)
Balance sheet data:
Cash and cash equivalents, including
restricted cash......................... $3,716 $2,475 $3,378 $11,340 $7,388
Short-term investments................... 1,411 -- 500 3,000 --
Working capital.......................... 5,025 1,640 1,805 20,931 8,218
Total assets............................. 7,113 4,293 13,723 39,870 17,725
Long-term debt, net of current portion... -- -- -- 413 1,538
Redeemable stock......................... -- -- -- -- 12,287
Stockholders' equity (deficit)........... 6,230 2,372 4,810 30,005 (3,302)
- --------
(1) Revenue (in thousands) from related parties in the years ended December
31, 2000, 1999, 1998, 1997 and 1996 was $115, $0, $1,331, $4,478, and
$6,443, respectively. Cost of revenue from related parties in the years
ended December 31, 2000, 1999, 1998, 1997 and 1996 was $90, $0, $806,
$2,467, and $1,984, respectively. See Peritus' Consolidated Financial
Statements contained within this proxy statement.
No Pro Forma Financial Information
We have not provided any pro forma data giving effect to the proposed
merger. We do not believe such information is material to you in evaluating the
merger proposal since:
. the proposed merger consideration is all cash; and
. if the proposed merger is completed, Peritus' common stock would cease
to be publicly traded and the holders of common stock would not retain
or receive a continuing interest in Peritus' business.
Forward-Looking Statements
The statements contained in this report that are not purely historical are
forward-looking statements, including statements regarding Peritus' beliefs,
expectations, intentions or strategies regarding the future. All forward-
looking statements included in this report are based upon information available
to Peritus as of the date hereof. Peritus assumes no obligation to update any
such forward-looking statements. Forward-looking statements involve risks and
uncertainties, which could cause actual results to differ materially from those
set forth in such forward-looking statements. These and other risks and
uncertainties relating to Peritus are detailed in Peritus' Annual Report on
Form 10-K for the year ended December 31, 2000, and other reports filed by
Peritus from time to time with the SEC.
45
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Company Current Condition and Current Strategy
In the second half of 1998 and in 1999, the overall market for the year 2000
tools and services of Peritus contracted dramatically, resulting in substantial
financial losses. In response, Peritus substantially reduced its workforce in
September and December of 1998 and again in April of 1999. During the second
and third quarters of 1999, Peritus also settled its leases for its facilities
in Cincinnati, Ohio, Lisle, Illinois and Billerica, Massachusetts and took
other efforts to reduce its fixed costs. As a result of Peritus' degraded
financial condition, Peritus began encountering major obstacles in obtaining
new outsourcing business. Since most outsourcing engagements are multi-year and
involve critical applications, prospective new clients, although interested in
the capabilities and technology of Peritus, were reluctant or unwilling to
commit to contracts. Despite the significant reduction in the overall cost
structure as a result of the foregoing and other actions, Peritus was unable to
achieve a cash flow break-even position in the years ended December 31, 1999
and 2000.
Peritus' primary strategy is to seek some form of organizational
transaction. Beyond that, Peritus intends to continue to service its existing
outsourcing customer and to attempt to convince the customer to continue to
purchase services after December 31, 2001. At the same time, Peritus is
pursuing new business through:
. the licensing of, and associated consulting and training for, its
software maintenance methodology (technology transfer services), its SAM
Relay tool and selectively its CodeNine tool; and
. the provision of various service offerings including, without
limitation, general software consulting.
Since its receipt of a non-binding offer letter from Rocket Software,
Peritus' primary focus has been the negotiation, evaluation and preparation of
the agreement of merger, and once executed, the performance of that agreement
and the satisfaction of the various conditions to closing that agreement.
Company Overview
Peritus provides solutions consisting of software products and services that
enable organizations to improve the productivity, quality and effectiveness of
their IT systems maintenance or software evolution functions. Peritus employs
software tools, methodologies and processes, designed to automate the typically
labor-intensive processes involved in conducting mass change and other software
maintenance tasks. In 1996, Peritus released its first commercially available
product, its AutoEnhancer/2000 software, which was aimed at the industry's most
pervasive mass change challenge, the year 2000 problem, to value added
integrators and directly to end users. In 1996, Peritus expanded its research
and development efforts through the acquisition of Vista Technologies
Incorporated, a developer of computer-aided engineering software. In 1997,
Peritus expanded its product offerings and research and development efforts 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 by acquiring substantially all of the assets and assuming
certain of the liabilities of Millennium Dynamics, Inc., a software tools
company with year 2000 products for the IBM mainframe and AS/400 platforms from
American Premier Underwriters, Inc.
In response to changes in the markets for Peritus' products and services,
Peritus emphasized the direct delivery of year 2000 renovation services and
renovation quality evaluation services in the beginning of 1998 and also began
to refocus Peritus' business on software maintenance outsourcing services. In
1998, Peritus also began licensing its RQE tool, a product used to facilitate
an in-house evaluation of a completed year 2000 renovation. As the market
continued to shift from Peritus' year 2000 products and services during the
third quarter of 1998, Peritus revised its overall strategy to emphasize the
growth of its software maintenance outsourcing business over the long term and
to meet its clients needs for year 2000 renovation services and RQE services.
In July 1998, Peritus announced its software maintenance outsourcing offerings,
"Software Asset Maintenance for Software Providers" and "Software Asset
Maintenance for Information Systems,"
46
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.
In the second half of 1998, the overall market for the year 2000 products
and services of Peritus contracted dramatically, resulting in substantial
financial losses, and, in response, Peritus substantially reduced its workforce
in September and December of 1998. As a result of Peritus' degraded financial
condition, Peritus began encountering major obstacles in obtaining new
outsourcing business. Since most outsourcing engagements are multi-year and
involve critical applications, prospective new clients, although interested in
the capabilities and technology of Peritus, were reluctant or unwilling to
commit to contracts. Based upon its continued difficulties, Peritus
substantially reduced its workforce again in April 1999 and experienced
significant voluntary attrition in its workforce.
In June 1999, Peritus reached a settlement with American Financial Group,
Inc., or AFG, and its subsidiaries and affiliates for release from its real
estate lease in Cincinnati, Ohio and certain other obligations. Under the
settlement, Peritus agreed to pay $200,000 in cash and issue 300,000 shares of
Peritus' common stock in exchange for release of its real estate lease for
20,500 square feet that required average monthly payments, excluding operating
expenses, of $36,000 through November 2002. Peritus had not made any payments
since October 1998. The settlement also released Peritus from net claims for
other services and disputes of $334,500.
In August 1999, Peritus executed a lease termination agreement for its
Lisle, Illinois facility. Under that agreement, Peritus agreed to pay $100,000
in cash and relinquish its $16,000 security deposit. The real estate lease for
9,000 square feet required average lease and operating expense payments of
$18,000 per month through February 2003. Peritus had not made any payments
since March 1999.
Effective September 27, 1999, Peritus relocated its corporate headquarters
from Billerica, Massachusetts to its existing facility located at 112 Turnpike
Road, Westborough, Massachusetts. In September of 1999, Peritus also reached a
settlement agreement with BCIA New England Holdings LLC for release from its
real estate lease at 2 Federal Street, Billerica, Massachusetts. Under the
settlement, Peritus agreed to pay $200,000 in cash, relinquish its $300,000
security deposit, issue 500,000 shares of Peritus' common stock and transfer
miscellaneous furnishings and equipment. In exchange, Peritus was released from
its real estate lease for 100,000 square feet which required average lease and
operating expense payments of $145,000 per month through February 2006. Peritus
had not made any payment since July 1999.
On March 27, 2000, Rocket Software invested $4,000,000 in Peritus in
exchange for 10 million shares ($.40 per share) of restricted common stock (37%
of outstanding stock after the investment). Peritus granted Rocket Software
certain registration rights with respect to the shares. Peritus recorded a one-
time charge related to the investment of approximately $4,000,000 in the
quarter ended March 31, 2000. The charge represented the difference between the
quoted market price on the commitment date and the price paid by Rocket
Software. Under certain sections of the Internal Revenue Code, a change in
ownership of greater than 50% within a three-year period places an annual
limitation on Peritus' ability to utilize its existing net operating loss and
research and development tax credit carry-forwards. The investment by Rocket
Software triggered such limitation.
During the second and third quarters of 2000, Peritus explored certain
extensions to its CodeNine tool beyond the field of application understanding
and concluded that such extensions were not feasible.
On October 16, 2000, Peritus announced that it retained Catalyst to render
financial advisory and investment banking services in connection with exploring
strategic alternatives, including the potential sale of Peritus.
47
On February 8, 2001, Peritus announced that it was reducing its workforce by
nine employees effective February 23, 2001.
Peritus experienced net losses of $4,166,000, $2,583,000 and $26,673,000 in
the years ended December 31, 2000, 1999 and 1998, respectively. Based on
Peritus' current forecasted cash expenditures and its cash on hand, Peritus
expects to have sufficient cash to finance its operations through the year
2001. Peritus' future beyond the year 2001 is dependent upon its ability to
execute some form of organizational transaction, achieve break-even cash flow,
or raise additional financing. There can be no assurances that Peritus will be
able to do so.
Peritus currently derives its revenue from software maintenance outsourcing
services, software and methodology licensing and other services. Historically,
Peritus' products and services have been marketed through its direct sales
force, both domestically and in Europe, and through value added integrators
operating worldwide. As a result of its downsizings in 1998, 1999, and 2001,
Peritus currently has no direct sales force representatives. Future sales will
be dependent upon the sales efforts of senior management and the use of sales
agency relationships.
Revenue Recognition Policies
Revenue under contracts to provide outsourced software maintenance,
reengineering and development services is recognized using the percentage-of-
completion method and is based on the ratio that labor-hours incurred to date
bear to estimated total labor-hours at completion, provided that a contract or
purchase order has been executed, fees are fixed or determinable and collection
of the related receivable is probable. Adjustments to contract cost estimates
are made in the periods in which the facts which require such revisions become
known. When the revised estimates indicate a loss, such loss is provided for
currently in its entirety. Costs and estimated earnings in excess of billings
on uncompleted contracts represent revenue recognized in excess of amounts
billed. Billings in excess of costs and estimated earnings on uncompleted
contracts represent billings in excess of revenue recognized.
Peritus licenses its software products and methodologies to end users and to
value added integrators for their use in serving their clients. License fees
charged to end users are fixed, with the amount of the fee based on the
estimated total lines of code to be processed, the number of CPUs licensed, or
other defined factors. License fees charged to value added integrators are
generally royalties based on lines of code processed or to be processed or
number of CPUs licensed. Revenue from software licenses to end users is
recognized when licensed software and methodologies have been delivered to the
end user, a contract or purchase order has been executed, fees are fixed or
determinable, collection of the related receivable is probable, and customer
acceptance provisions do not exist. In arrangements where customer acceptance
provisions exist, Peritus defers revenue recognition until customer acceptance
occurs or the acceptance provisions have lapsed. Peritus generally does not
provide its customers with the right to return software licenses and, once due,
license fees are non-refundable. Revenue from software licenses to value added
integrators is recognized when the licensed software and methodologies have
been delivered to the value added integrator, the fee is fixed or determinable
and collection of the related receivable is probable. Under arrangements
combining software and services, all revenue is recorded using the percent of
completion method as described for other services below. Under such combined
arrangements, vendor specific objective evidence, or VSOE, for software license
is used for income statement classification purposes only and is determined
based upon the prices that exist or are charged for the same software when
licensed separately and distinctly. The VSOE for the service component under
combined arrangements is based upon hourly rates.
Other services provided by Peritus include direct delivery contracts as well
as technology transfer arrangements, product training, value added integrator
sales training, consulting services and software product maintenance. Under
direct delivery contracts, Peritus provides full and pilot year 2000
renovations and renovation quality evaluation services for clients using
Peritus' AutoEnhancer/2000, RQE tool, and/or Vantage YR2000 software. Revenue
from full year 2000 renovation and RQE contracts is recognized using the
48
percentage-of-completion method and is based on the ratio that labor-hours
incurred to date bear to estimated total labor-hours at completion, provided
that a contract or purchase order has been executed, fees are fixed or
determinable and collection of the related receivable is probable. Revenue from
pilot direct delivery contracts is recognized over the duration of such
contracts as work is performed and defined milestones are attained. Adjustments
to contract cost estimates are made in the periods in which the facts which
require such revisions become known. When the revised estimates indicate a
loss, such loss is provided for currently in its entirety. In cases where VSOE
of fair value of both the license and service component exists under a direct
delivery contract, revenue recognized is allocated between license revenue and
other services revenue for income statement classification purposes based on
their relative fair values. Revenue from technology transfer arrangements,
product and sales training and consulting services is billed on a time-and-
materials basis and is recognized as the services are provided. Revenue from
software product maintenance contracts on Peritus' licensed software products,
including client support bundled with the initial license fee, is deferred and
recognized ratably over the contractual periods during which the services are
provided.
Client Concentration
For the year ended December 31, 2000, Bull, Ford, EMC, and CGI accounted for
40.3%, 15.1%, 12.2%, and 10.4% of Peritus' total revenue, respectively. For the
year ended December 31, 1999, Bull and Compaq accounted for 21.7% and 11.8% of
Peritus' total revenue, respectively. For the year ended December 31, 1998,
AT&T and Bull accounted for 12.2% and 10.0% of Peritus' total revenue,
respectively. Peritus' ten largest clients in the years ended December 31,
2000, 1999 and 1998 accounted for approximately 97.6%, 70.1% and 52.4% of
Peritus' total revenue, respectively.
49
Results of Operations
The following table sets forth for the periods indicated the percentage of
total revenue of certain line items included in Peritus' consolidated statement
of operations:
Year Ended December 31
---------------------------
2000 1999 1998
------- ------- -------
Revenue:
Outsourcing services........................... 58.9% 52.9% 31.5%
License........................................ 23.1 18.6 30.0
Other.......................................... 18.0 28.5 38.5
------- ------- -------
Total revenue................................ 100.0 100.0 100.0
------- ------- -------
Cost of revenue:
Cost of outsourcing services................... 32.4 42.7 24.0
Cost of license................................ 0.0 2.1 5.2
Cost of other services......................... 6.5 18.0 28.9
------- ------- -------
Total cost of revenue........................ 38.9 62.8 58.1
------- ------- -------
Gross profit..................................... 61.1 37.2 41.9
Operating expenses:
Sales and marketing............................ 8.1 12.9 42.0
Research and development....................... 26.3 11.8 27.1
General and administrative..................... 39.0 31.9 23.7
Impairment of long-lived assets................ 0.0 8.6 16.5
Restructuring charges (credits)................ 0.0 (4.1) 18.7
Gain on sale of assets......................... (0.5) -- --
------- ------- -------
Total operating expenses..................... 72.9 61.1 128.0
------- ------- -------
Loss from operations............................. (11.9) (23.9) (86.1)
Interest income, net............................. 7.6 0.8 1.5
------- ------- -------
Loss before gain on sale of majority-owned
subsidiary, cost of strategic investment, income
taxes, and minority interest in majority-owned
subsidiary...................................... (4.3) (23.1) (84.6)
Gain on sale of majority-owned subsidiary........ -- -- (0.1)
Cost of strategic investment..................... (88.4) -- --
Provision (benefit) for income taxes............. (0.6) -- 0.1
------- ------- -------
Loss before minority interest.................... (92.1) (23.1) (84.6)
Minority interest in majority-owned subsidiary... -- -- --
------- ------- -------
Net loss..................................... (92.1)% (23.1)% (84.6)%
======= ======= =======
Year Ended December 31, 2000 Compared to Year Ended December 31, 1999
Total revenue decreased 59.6% to $4,523,000 in the year ended December 31,
2000 from $11,198,000 in the year ended December 31, 1999. This decrease in
revenue was primarily due to a decrease in outsourcing services revenue as well
as other services revenue, and to a lesser extent, the licensing of Peritus'
products.
Peritus anticipates that total revenue for the year 2001 will be
substantially below the level achieved in 2000.
Outsourcing Services. Outsourcing services revenue decreased 55.0% to
$2,664,000 in the year ended December 31, 2000 from $5,923,000 in the year
ended December 31, 1999. As a percentage of total revenue, outsourcing services
revenue increased to 58.9% in the year ended December 31, 2000 from 52.9% in
the year ended December 31, 1999. The increase in outsourcing services revenue
as a percentage of total revenue
50
primarily reflects the decreased contribution of other services revenue to
total revenue during the year ended December 31, 2000 when compared to the
prior year. The decrease in outsourcing revenue in absolute dollars in the year
ended December 31, 2000 compared to December 31, 1999 was primarily
attributable to the recording of lower amounts of revenue under existing
outsourcing engagements due to reduced workload or contract terminations.
Outsourcing revenue in 1999 included $2,068,000 associated with six contracts
that terminated during 1999. Outsourcing revenue in 2000 included $244,000
associated with two contracts that terminated during 2000 and $546,000
associated with a contract that terminates on March 31, 2001. Outsourcing
services remain a major component of Peritus' business. Without the addition of
new business, Peritus' outsourcing revenue in the future will be significantly
below the $2,664,000 recorded in 2000.
License. License revenue decreased 49.9% to $1,045,000 in the year ended
December 31, 2000 from $2,087,000 in the year ended December 31, 1999. As a
percentage of total revenue, license revenue increased to 23.1% in the year
ended December 31, 2000 from 18.6% in the year ended December 31, 1999. The
decrease in license revenue for 2000 in absolute dollars was primarily
attributable to the cessation of revenue associated with Peritus' Year 2000
products. The increase in license revenue as a percentage of total revenue
primarily reflects the decreased contribution of outsourcing services and other
services revenue to total revenue during the year when compared to the prior
year. Peritus will continue to pursue licenses of its outsourcing methodology
and SAM Relay product and selectively pursue licenses for its CodeNine product.
Future revenue is dependent on the success of such efforts.
Other Services. Other services revenue decreased 74.5% to $814,000 in the
year ended December 31, 2000 from $3,188,000 in the year ended December 31,
1999. As a percentage of total revenue, other services revenue decreased to
18.0% in the year ended December 31, 2000 from 28.5% in the year ended December
31, 1999. The decrease in other services revenue both in absolute dollars and
as a percentage of total revenue was primarily attributable to a decrease in
direct delivery, consulting and client support services relating to Peritus'
year 2000 products and services. Peritus does not anticipate any revenue from
its Year 2000 products and services in the future. Future revenue from other
services is dependent on Peritus' success in licensing its software maintenance
methodology, and its SAM Relay and CodeNine tools which would generate
maintenance, consulting, and training revenue.
Cost of Revenue
Cost of Outsourcing Services Revenue. Cost of outsourcing services revenue
consists primarily of salaries, benefits, networking, and overhead costs
associated with delivering outsourcing services to clients. The cost of
outsourcing services revenue decreased 69.3% to $1,465,000 in the year ended
December 31, 2000 from $4,778,000 in the year ended December 31, 1999 due
primarily to reduced staffing associated with contract terminations. Cost of
outsourcing services revenue as a percentage of outsourcing services revenue
decreased to 55.0% in the year ended December 31, 2000 from 80.7% in the year
ended December 31, 1999. Costs in 1999 were negatively impacted by expenditures
made in anticipation of new business that did not materialize.
Cost of License Revenue. Cost of license revenue consists primarily of
amortization of intangibles related to the MDI acquisition and salaries,
benefits and related overhead costs associated with license-related materials
packaging and freight. Cost of license revenue was $0 in the year ended
December 31, 2000. Cost of license revenue was $238,000, or 11.4% of license
revenue, in the year ended December 31, 1999. The decrease in cost of license
revenue in absolute dollars was primarily related to the termination (in the
fourth quarter of 1999) of amortization expense of intangibles related to
Peritus' December 1997 acquisition of MDI.
Cost of Other Services Revenue. Cost of other services revenue consists
primarily of salaries, benefits, subcontracting costs and related overhead
costs associated with delivering other services to clients. Cost of other
services revenue decreased 85.3% to $295,000 in the year ended December 31,
2000 from $2,013,000 in the year ended December 31, 1999 due to reduced
staffing for Peritus' client support, training and consulting organizations
related to fewer customers for Peritus' year 2000 products and services. Cost
of other services revenue as a percentage of other services revenue decreased
to 36.2% in the year ended December 31, 2000
51
from 63.1% in the year ended December 31, 1999. Peritus incurred costs in 1999
without any associated revenue in connection with an agreement with Micah
Technology Services, Inc. A dispute relating to that agreement was settled on
December 18, 2000 resulting in revenue recognition of $320,000 in the fourth
quarter of 2000.
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 decreased 74.6% to
$368,000 in the year ended December 31, 2000 from $1,450,000 in the year ended
December 31, 1999. As a percentage of total revenue, sales and marketing
expenses decreased to 8.1% in the year ended December 31, 2000 from 12.9% in
the year ended December 31, 1999. The decrease in sales and marketing expenses
in absolute dollars was primarily attributable to dramatically reduced
staffing, commissions and promotional activities.
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 decreased 9.7% to $1,189,000 in the year ended December
31, 2000 from $1,316,000 in the year ended December 31, 1999. As a percentage
of total revenue, research and development expenses increased to 26.3% in the
year ended December 31, 2000 from 11.8% in the year ended December 31, 1999.
The decrease in research and development expenses in absolute dollars was
primarily attributable to a reduction in outside consulting services. Peritus
plans to continue limited maintenance of and enhancements to its existing
products.
General and Administrative. General and administrative expenses consist
primarily of salaries and related costs for the finance and accounting, human
resources, legal, information systems, and other administrative departments of
Peritus, as well as contracted legal and accounting services. General and
administrative expenses decreased 50.5% to $1,766,000 in the year ended
December 31, 2000 from $3,570,000 in the year ended December 31, 1999. As a
percentage of total revenue, general and administrative expenses increased to
39.0% in the year ended December 31, 2000 from 31.9% in the year ended December
31, 1999. In the year ended December 31, 2000, the decrease in general and
administrative expenses in absolute dollars was primarily due to the reductions
in staffing, the cost of excess space, and legal and consulting fees.
Impairment of Long-Lived Assets. Peritus periodically assesses whether any
events or changes in circumstances have occurred that would indicate that the
carrying amount of a long-lived asset might not be recoverable. When such an
event or change in circumstance occurs, Peritus evaluates whether the carrying
amount of such asset is recoverable by comparing the net book value of the
asset to estimated future undiscounted cash flows, excluding interest charges,
attributable to such asset. If it is determined that the carrying amount is not
recoverable, Peritus recognizes an impairment loss equal to the excess of the
carrying amount of the asset over the estimated fair value of such asset.
Peritus did not record an impairment charge in the year ended December 31,
2000.
Peritus recorded impairment charges totaling $961,000 for the year ended
December 31, 1999. For details of the 1999 charges, refer to Note 4 of Notes to
Peritus' Consolidated Financial Statements contained within this proxy
statement.
Restructuring Charges. An overview of Peritus' restructuring activities is
presented at the beginning of Note 5 of Notes to Peritus' Consolidated
Financial Statements contained within this proxy statement.
Peritus had no restructuring charges in the year ended December 31, 2000.
Peritus recorded a net favorable impact to operations of $455,000 associated
with its restructuring activities in the year ended December 31, 1999. For
details of the 1999 activities, refer to Note 5 of Notes to Peritus'
Consolidated Financial Statements contained within this proxy statement.
52
Gain on the Sale of Assets. For the year ended December 31, 2000, Peritus
recorded a gain on the sale of assets of $24,000 that represented the excess of
the sales proceeds over the net book value of the fixed assets of Peritus'
India subsidiary that were sold during the first quarter of 2000.
Interest Income (Expense), Net
Interest income and expense consists primarily of interest income from
investments and cash balances, partially offset by interest expense on debt.
Peritus had interest income, net, of $342,000 in the year ended December 31,
2000 compared to interest income, net, of $92,000 in the year ended December
31, 1999. This change in interest income (expense), net, was primarily
attributable to increased interest income from interest bearing investments as
a result of the Rocket Software investment.
Cost of Strategic Investment
On March 27, 2000, Rocket Software invested $4,000,000 in Peritus in
exchange for 10 million shares ($0.40 per share) of restricted common stock
(approximately 37% of the outstanding shares of common stock after investment).
For the year ended December 31, 2000, Peritus recorded a non-cash charge of
$4,000,000 for the cost of this strategic investment equal to the difference
between the purchase price per share of $0.40 and the market price per share of
$0.80 on March 27, 2000.
Provision for Income Taxes
Peritus' income tax provision was a credit of $28,000 for the year ended
December 31, 2000 compared to a charge of $2,000 for the year ended December
31, 1999. During the year ended December 31, 2000, Peritus received refunds
totaling $28,000 for foreign taxes withheld from customer payments in 1999 and
2000. The provision of $2,000 for the year ended December 30, 1999 was for
several small city and state tax obligations.
Year Ended December 31, 1999 Compared to Year Ended December 31, 1998
Total revenue decreased 64.5% to $11,198,000 in the year ended December 31,
1999 from $31,532,000 in the year ended December 31, 1998. This decrease in
revenue was primarily due to a decrease in other services revenue as well as
the licensing of Peritus' products, and to a lesser extent, outsourcing
services revenue.
Outsourcing Services. Outsourcing services revenue decreased 40.3% to
$5,923,000 in the year ended December 31, 1999 from $9,925,000 in the year
ended December 31, 1998. As a percentage of total revenue, outsourcing services
revenue increased to 52.9% in the year ended December 31, 1999 from 31.5% in
the year ended December 31, 1998. The increase in outsourcing services revenue
as a percentage of total revenue reflects the decreased contribution of other
services and license revenue to total revenue during the year ended December
31, 1999 when compared to the same period in the prior year. The decrease in
outsourcing revenue in absolute dollars in the year ended December 31, 1999
compared to December 31, 1998 was primarily attributable to the sale of a
foreign subsidiary in July 1998, and the recording of lower amounts of revenue
under existing outsourcing engagements due to reduced workload or contract
terminations. Outsourcing revenue in 1999 included $2,068,000 associated with
six contracts that terminated during the year.
License. License revenue decreased 77.9% to $2,087,000 in the year ended
December 31, 1999 from $9,444,000 in the year ended December 31, 1998. As a
percentage of total revenue, license revenue decreased to 18.6% in the year
ended December 31, 1999 from 30.0% in the year ended December 31, 1998. The
decrease in license revenue for 1999 in absolute dollars was primarily
attributable to a decrease in the delivery of licensed software to end users
and decreased license fees from value-added integrators. The market for
Peritus' year 2000 tools significantly eroded in 1998 and 1999 resulting in
substantial declines in license revenue.
Other Services. Other services revenue decreased 73.8% to $3,188,000 in the
year ended December 31, 1999 from $12,163,000 in the year ended December 31,
1998. As a percentage of total revenue, other services
53
revenue decreased to 28.5% in the year ended December 31, 1999 from 38.5% in
the year ended December 31, 1998. The decrease in other services revenue in
absolute dollars was primarily attributable to a decrease in direct delivery,
consulting and client support services relating to Peritus' year 2000 products
and services.
Cost of Revenue
Cost of Outsourcing Services Revenue. The cost of outsourcing services
revenue decreased 36.9% to $4,778,000 in the year ended December 31, 1999 from
$7,577,000 for the year ended December 31, 1998. Cost of outsourcing services
revenue as a percentage of outsourcing services revenue increased to 80.7% in
the year ended December 31, 1999 from 76.3% in the year ended December 31,
1998. Costs in 1999 were negatively impacted by expenditures in anticipation of
and to generate new business that did not materialize.
Cost of License Revenue. Cost of license revenue was $238,000 in the year
ended December 31, 1999, or 11.4% of license revenue. Cost of license revenue
was $1,631,000, or 17.3% of license revenue, in the year ended December 31,
1998. The decrease in cost of license revenue in absolute dollars was primarily
related to the reduction of amortization expense of intangibles related to the
MDI acquisition as a result of the impairment charge recorded against the MDI
related intangibles by Peritus in the third quarter of 1998.
Cost of Other Services Revenue. Cost of other services revenue decreased
77.9% to $2,013,000 in the year ended December 31, 1999 from $9,110,000 in the
year ended December 31, 1998. Cost of other services revenue as a percentage of
other services revenue decreased to 63.1% in the year ended December 31, 1999
from 74.9% in the year ended December 31, 1998. Costs decreased in absolute
dollars in the year ended December 31, 1999 due to reduced staffing for
Peritus' client support, training and consulting organizations related to fewer
customers for Peritus' year 2000 products and services, including year 2000
renovations and RQE services.
Operating Expenses
Sales and Marketing. Sales and marketing expenses decreased 89.1% to
$1,450,000 in the year ended December 31, 1999 from $13,244,000 in the year
ended December 31, 1998. As a percentage of total revenue, sales and marketing
expenses decreased to 12.9% in the year ended December 31, 1999 from 42.0% in
the year ended December 31, 1998. The decrease in expenses in absolute dollars
was primarily attributable to dramatically reduced staffing, commissions and
promotional activities.
Research and Development. Research and development expenses decreased 84.6%
to $1,316,000 in the year ended December 31, 1999 from $8,528,000 in the year
ended December 31, 1998. As a percentage of total revenue, research and
development expenses decreased to 11.8% in the year ended December 31, 1999
from 27.1% in the year ended December 31, 1998. The decrease in research and
development expenses in absolute dollars was primarily attributable to
dramatically reduced staffing for the product development efforts for Peritus'
year 2000 products and services, mass change technologies and other software
tools.
General and Administrative. General and administrative expenses decreased
52.2% to $3,570,000 in the year ended December 31, 1999 from $7,466,000 in the
year ended December 31, 1998. As a percentage of total revenue, general and
administrative expenses increased to 31.9% in the year ended December 31, 1999
from 23.7% in the year ended December 31, 1998. In the year ended December 31,
1999, the decrease in general and administrative expenses in absolute dollars
was primarily due to changes to charges related to accounts receivable and
reduced staffing. In 1999, general and administrative expenses included a
$321,000 credit associated with a reduction in Peritus' allowance for doubtful
accounts as a result of the successful collection of receivables for which
specific allowances had been established in 1998. In 1998, general and
administrative expenses included a $1,481,000 increase in Peritus' allowance
for doubtful accounts. In 1999, excess space that could not be segregated and
included in restructuring was charged to general and administrative expenses.
The total of such excess facility-related charges was approximately $500,000
for the year 1999.
54
Impairment of Long-Lived Assets. Peritus recorded impairment charges
totaling $961,000 in the year ended December 31, 1999 and $5,218,000 in the
year ended December 31, 1998. For details of the 1999 and 1998 charges, refer
to Note 4 of Notes to Peritus' Consolidated Financial Statements contained
within this proxy statement.
Restructuring Charges. Peritus recorded a net favorable impact to operations
of $455,000 associated with its restructuring activities in the year ended
December 31, 1999. In the year ended December 31, 1998, Peritus recorded
restructuring charges totaling $5,906,000. For details of the 1999 and 1998
activities, refer to Note 5 of Notes to Peritus' Consolidated Financial
Statements contained within this proxy statement.
Interest Income, Net
Peritus had interest income, net, of $92,000 in the year ended December 31,
1999 compared to interest income, net, of $485,000 in the year ended December
31, 1998. This change in interest income, net, was primarily attributable to
decreased interest income from decreased cash balances.
Provision for Income Taxes
Peritus' income tax provision was $2,000 and $25,000 in 1999 and 1998,
respectively. Peritus recorded no U.S. federal or state tax provision in 1999
or 1998 due to the taxable losses incurred. The $2000 in 1999 was for city-
related income taxes and the $25,000 in 1998 was for foreign income tax
provisions.
Minority Interest in Majority-Owned Subsidiary
The minority interest in majority-owned subsidiary represents the equity
interest in the operating results of Persist, Peritus' majority-owned Spanish
subsidiary, held by stockholders of Persist, S.A. other than Peritus. Peritus
had no minority interest in majority-owned subsidiary in the twelve months
ended December 31, 1999 since it divested its majority interest in July 1998.
Peritus established a branch in Spain in 1999 to provide outsourcing services
and its operations terminated at the end of 1999.
Liquidity and Capital Resources
Peritus has financed its operations and capital expenditures primarily with
the proceeds from sales of Peritus' convertible preferred stock and common
stock, borrowings, advance payments for services from clients and internally
generated cash flows. Peritus' cash balances were $3,716,000 and $2,475,000 at
December 31, 2000 and 1999, respectively. Peritus' working capital was
$5,025,000 and $1,640,000, at December 31, 2000 and 1999, respectively.
Peritus' operating activities used cash of $405,000 and $1,178,000 during
the years ended December 31, 2000 and 1999, respectively. Peritus' use of cash
during the year ended December 31, 2000 was primarily caused by a net loss of
$4,166,000 (less the non-cash cost of the strategic investment of $4,000,000 by
Rocket Software, depreciation and amortization expense of $463,000, and the
gain from the sale of assets of $24,000). Other uses included a decrease in
other accrued liabilities of $751,000, a decrease in deferred revenue of
$195,000, a decrease in billings in excess of costs and earnings on uncompleted
contracts of $95,000, an increase in accounts receivable of $33,000 and a
decrease in proceeds from customer advances of $7,000. These amounts were
partially offset by a decrease in costs and estimated earnings in excess of
billings on uncompleted contracts of $273,000, a decrease in other assets of
$55,000, a decrease in prepaid expenses and other current assets of $52,000,
and a increase in accounts payable of $23,000.
Peritus' investing activities used cash of $2,365,000 during the year ended
December 31, 2000 and provided cash of $732,000 during the year ended December
31, 1999. Investing activities in the year ended December 31, 2000 consisted
principally of the purchases of short-term investments of $1,411,000, long-term
investments of $1,000,000 and property and equipment of $11,000 partially
offset by proceeds from the sale of property and equipment of $57,000.
55
Peritus' financing activities provided cash of $4,017,000 and $114,000
during the year ended December 31, 2000 and 1999, respectively. Financing
activities in the year ended December 31, 2000 primarily reflect an increase
from the proceeds of issuance of new common stock of $4,000,000 and the
exercise of stock options of $30,000, partially offset by payments on capital
lease obligations of $13,000.
Peritus had an accounts receivable purchase agreement with a lender to
permit borrowing against certain acceptable receivables at a rate of 80% of the
face amount of such receivables up to a maximum of $4,000,000. In exchange for
such agreement, Peritus granted the lender security interest on substantially
all of its assets. Peritus terminated this agreement on April 18, 2001.
On March 27, 2000, Rocket Software invested $4,000,000 in Peritus in
exchange for 10 million shares ($.40 per share) of restricted common stock
(approximately 37% of the outstanding shares of stock after the investment).
Peritus granted Rocket Software certain registration rights with respect to the
shares.
Peritus experienced net losses of $4,166,000, $2,583,000 and $26,673,000 in
the years ended December 31, 2000, 1999 and 1998, respectively. Based on our
current forecasted cash expenditures and our cash on hand, we expect to have
sufficient cash to finance our operations through the year 2001. Our future
beyond the year 2001 is dependent upon our ability to execute some form of
organizational transaction, achieve break-even cash flow, or raise additional
financing. There can be no assurances that we will be able to do so.
To date, we have not invested in derivative securities or any other
financial instruments that involve a high level of complexity or risk. Excess
cash has been, and we contemplate that it will continue to be, invested in
interest-bearing, investment grade securities.
Foreign Currency
Assets and liabilities of our majority-owned foreign subsidiary are
translated into U.S. dollars at exchange rates in effect at the balance sheet
date. Income and expense items are translated at average exchange rates for the
period. Accumulated net translation adjustments are included in stockholders'
equity.
Inflation
To date, inflation has not had a material impact on our results of
operations.
Recently Issued Accounting Standards
In June 1998, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting for
Derivative Instruments and Hedging Activities" as amended by SFAS No. 137,
which was issued in June 2000. We adopted SFAS No. 133 in the first quarter of
2001. SFAS No. 133 requires that all derivative instruments be reported on the
balance sheet at their fair value. Changes in the fair value of derivatives are
recorded each period in current earnings or other comprehensive income,
depending on whether a derivative is designated as part of a hedge transaction
and, if it is, the type of hedge transaction. We do not expect the adoption of
SFAS No. 133 to have any impact on our financial condition, results of
operations, or business practices.
Quantitative And Qualitative Disclosures About Market Risk
As of March 31, 2001, we were exposed to market risks which primarily
include changes in U.S. interest rates. We maintain a substantial portion of
our cash, cash equivalents and investments in financial instruments with
purchased maturities of two years or less. These financial instruments are
subject to interest rate risk and will decline in value if interest rates
increase. Due to the short duration of these financial instruments, an
immediate increase in interest rates would not have a material effect on our
financial condition or results of operations.
56
INFORMATION ABOUT STOCK OWNERSHIP
The following table sets forth certain information as of April 23, 2001
(unless otherwise specified) with respect to the beneficial ownership of shares
of our common stock by:
. each person or entity known by us to own beneficially more than five
percent (5%) of the outstanding shares of our common stock;
. each of our executive officers and directors; and
. all directors and executive officers as a group.
Number of Shares of Percentage of Common
Common Stock Stock Outstanding
Beneficial Owner Beneficially Owned (1) (2)
- ---------------- ---------------------- --------------------
5% Stockholders
Rocket Software, Inc. (3)......... 10,000,000 36.6%
Two Apple Hill Drive
Natick, Massachusetts 01760
Directors and Named Executive
Officers
Dominic K. Chan (4)............... 2,173,363 7.9
c/o Peritus Software Services,
Inc.
112 Turnpike Road, Suite 111
Westborough, Massachusetts 01581-
2860
John D. Giordano (5).............. 820,000 2.9
Andrea C. Campbell (6)............ 479,152 1.7
Christopher R. M. Bailey (7)...... 363,467 1.3
James F. Dunleavy (8)............. 237,175 *
Ronald C. Garabedian (9).......... 150,000 *
Roland D. Pampel (10)............. 124,000 *
Axel Leblois (11)................. 88,500 *
Johan Magnusson (3)............... 10,025,000 36.7
c/o Rocket Software, Inc.
Two Apple Hill Drive
Natick, Massachusetts 01760
Matthew Kelley (3)................ 10,000,000 36.6
c/o Rocket Software, Inc.
Two Apple Hill Drive
Natick, Massachusetts 01760
Andrew Youniss (3)................ 10,025,000 36.7
c/o Rocket Software, Inc.
Two Apple Hill Drive
Natick, Massachusetts 01760
All executive officers and
directors, as a group (11
persons) (12).................... 14,531,907 49.2%
- --------
* Less than 1% of outstanding common stock.
(1) The number of shares beneficially owned by each 5% stockholder, director
or executive officer is determined under rules promulgated by the SEC,
and the information is not necessarily indicative of beneficial ownership
for any other purpose. Share ownership is based upon information as of
April 23, 2001 provided by EquiServe L.P., the service agent of our
transfer agent and registrar, Fleet Bank, N.A. Under such rules,
beneficial ownership includes any shares as to which the individual has
sole or shared voting power or investment power and also any shares which
the individual has the right to acquire
57
within sixty days of April 23, 2001 through the exercise of any stock
option, warrant or other right. Unless otherwise indicated, each person or
entity has sole investment and voting power (or shares the power with his
or her spouse) with respect to the shares set forth in this table. The
inclusion in this table of such shares, however, does not constitute an
admission that the named stockholder is a direct or indirect beneficial
owner of those shares.
(2) Number of shares of common stock deemed outstanding represents
27,319,903 shares issued and outstanding as of April 23, 2001 plus any
shares subject to options held by the referenced beneficial owner(s).
(3) Rocket Software acquired 10 million shares of common stock on March 27,
2000 pursuant to a common stock purchase agreement dated as of March 27,
2000. This information is taken from Amendment No. 1 to the Schedule 13D
filed with the SEC by Rocket Software on April 2, 2001 and Amendment No.
2 to the Schedule 13D filed with the SEC by Rocket Software on April 24,
2001. Johan Magnusson, Matthew Kelley and Andrew Youniss may be deemed
controlling persons with respect to Rocket Software. Each of Messrs.
Magnusson and Youniss hold outstanding stock options to purchase 25,000
shares of common stock which are exercisable within sixty days of April
23, 2001.
(4) Represents 2,108,363 shares of common stock held jointly with his wife,
Marsha C. Chan, and 65,000 shares of common stock subject to outstanding
stock options which are exercisable within sixty days of April 23, 2001.
(5) Includes 820,000 shares of common stock subject to outstanding stock
options which are exercisable within sixty days of April 23, 2001.
(6) Includes 479,152 shares of common stock subject to outstanding stock
options which are exercisable within sixty days of April 23, 2001.
(7) Represents 126,000 shares of common stock held by Mr. Bailey and 10,250
shares held by his daughter, Gillian Z. Bailey, and 227,217 shares of
common stock subject to outstanding stock options which are exercisable
within sixty days of April 23, 2001.
(8) Represents 8,000 shares of common stock and 229,175 shares of common
stock subject to outstanding stock options which are exercisable within
sixty days of April 23, 2001.
(9) Includes 150,000 shares of common stock subject to outstanding stock
options which are exercisable within sixty days of April 23, 2001.
(10) Represents 17,300 shares of common stock and 1,200 shares of common
stock held by four trusts of which Carol P. Pampel, Mr. Pampel's wife,
is sole trustee, and as to which shares Mr. Pampel disclaims beneficial
ownership. Also includes 105,500 shares of common stock subject to
outstanding stock options which are exercisable within sixty days of
April 23, 2001.
(11) Represents 8,000 shares of common stock and 80,500 shares of common
stock subject to outstanding stock options which are exercisable within
sixty days of April 23, 2001.
(12) Includes an aggregate of 2,281,544 shares of common stock subject to
outstanding options which are exercisable within sixty days of April 23,
2001.
On April 13, 2000, the Securities and Exchange Commission instituted cease-
and-desist proceedings against Peritus. In anticipation of the initiation of
those proceedings and without admitting or denying any findings of the SEC,
Peritus consented to the issuance of an administrative cease-and-desist order
by the SEC concerning Peritus' previously announced revenue restatements for
the first and second quarters of 1998, the third quarter of 1997 and the year
ended December 31, 1997. The SEC order, entered on April 13, 2000, requires
Peritus to cease and desist from committing future violations of the public
company reporting, record keeping and internal control provisions of the
Securities Exchange Act of 1934. Other than those proceedings, neither Peritus,
Rocket Software, Rocket Acquisition, nor any of their respective current
executive officers, directors or controlling persons have been party to any
judicial or administrative proceeding during the past five years, except for
matters that were dismissed without sanction or settlement, that resulted in a
judgment, decree or final order enjoining the person or entity from future
violations of, or prohibiting activities subject to, federal or state
securities laws, or a finding of any violation of federal or state securities
laws. In addition, neither Peritus, Rocket Software, Rocket Acquisition nor any
of their respective current executive officers, directors or controlling
persons have been convicted in a criminal proceeding during the past five
years, excluding traffic violations or similar misdemeanors.
58
COMPARATIVE PER SHARE, MARKET PRICE AND DIVIDEND INFORMATION
The following table sets forth, for the periods indicated, the range of high
and low sales prices for Peritus' common stock, as reported by the Nasdaq Stock
Market, Inc. and the OTC Bulletin Board. Peritus' securities were traded on the
Nasdaq National Market through February 3, 1999. Thereafter, they have been
traded on the OTC Bulletin Board. Peritus' common stock was traded under the
symbol "PTUS" from Peritus' initial public offering on July 2, 1997 through
February 3, 1999, and it has been traded under the symbol "PTUS.OB" since
Peritus' de-listing from Nasdaq in February 1999. These prices reflect inter-
dealer prices, without retail mark-ups, mark-downs or commissions, and do not
necessarily represent actual transactions.
2001 2000 1999
--------------- --------------- ---------------
High Low High Low High Low
------- ------- ------- ------- ------- -------
First Quarter................. $0.1719 $0.0625 $2.2500 $0.0781 $1.1875 $0.1875
Second Quarter (for 2001,
through May , 2001)......... $ $ $1.0000 $0.2969 $0.3281 $0.1250
Third Quarter................. $ -- $ -- $0.3281 $0.1563 $0.3125 $0.1250
Fourth Quarter................ $ -- $ -- $0.1875 $0.0550 $0.1406 $0.0781
On March 27, 2000, Rocket Software entered into a common stock purchase
agreement with Peritus pursuant to which Rocket Software purchased 10 million
shares of common stock at a per share purchase price of $0.40, or aggregate
consideration of $4,000,000.
Historically, we have not declared or paid cash dividends on our common
stock and do not plan to pay cash dividends to our stockholders in the
foreseeable future. Moreover, the agreement of merger prohibits us from paying
dividends. We presently intend to retain any earnings to finance our business.
As of May , 2001, there were stockholders of record of our common stock.
The number does not include shareholders who hold their stock in "street name"
or through broker or nominee accounts.
On March 28, 2001, the last full trading day prior to the public
announcement of the proposed merger, the closing price for Peritus' common
stock was $0.07. On April 18, 2001, the last full trading day prior to the
public announcement of the parties' execution of the agreement of merger, the
closing price of Peritus' common stock was $0.16. On May , 2001, the most
recent practicable date prior to the printing of this document, the closing
price per Peritus' common stock was $ . You should obtain current market
price quotations for Peritus' common stock in connection with the voting of
your common stock. Peritus had outstanding shares of common stock as of May
, 2001.
BOARD OF DIRECTORS AND EXECUTIVE OFFICERS
For each member of the Board of Directors and each person serving as an
executive officer of Peritus, there follows information given by each
concerning his principal occupation and business experience for the past five
years. For directors, the information below also includes the names of other
publicly held companies of which such person serves as a director and such
person's age and length of service as a director of Peritus. All of our
directors and executive officers are U.S. citizens, except for Johan Magnusson,
who is a Swedish citizen.
Who Are Our Directors?
Dominic K. Chan, age 52, has served on the Board of Directors since July
1999. Dr. Chan also served as a Director of Peritus from our inception until
April 1999 and as Chairman of the Board from December 1996 to April 1999. From
November 1998 to April 1999, Dr. Chan served as Peritus' President and Chief
Executive Officer. From October 1997 to November 1998, he served as Peritus'
Chief Technology Officer. From December 1996 to October 1997, Dr. Chan served
as Peritus' Chief Executive Officer. He co-founded Peritus in 1991 and served
as our President from inception until December 1996. Since 2000, Dr. Chan has
been Chairman and Chief Executive Officer of Univessence Digital Studios, a
privately owned company. Prior to co-
59
founding Peritus, Dr. Chan held the position of Executive Vice President of
Research and Development for Bull HN Information Systems Inc., a manufacturer
of computer products.
John D. Giordano, age 44, has served as Peritus' President and Chief
Executive Officer since April 1999 and has served on the Board of Directors
since April 2000. He joined Peritus in September 1998 as Vice President,
Finance and Chief Financial Officer and still holds those offices. From March
1997 to December 1997, Mr. Giordano served on the Board of Directors of
Peritus. Prior to joining Peritus and since 1978, Mr. Giordano held various
positions at Bull HN Information Systems Inc., a manufacturer of computer
products, where he most recently served as Vice President, Chief Financial
Officer and Treasurer.
Axel Leblois, age 52, has served on the Board of Directors of Peritus since
February 1995. Since January 1996, Mr. Leblois has served as the Chairman of
World Times Inc., a publishing company. From July 1997 to December 2000, he
served as President and Chief Executive Officer of ExecuTrain Corp., a computer
training company. From May 1991 to December 1995, he served as President and
Chief Executive Officer of Bull HN Information Systems Inc. Mr. Leblois is a
director of IDG Books, Inc., an online book publisher. Mr. Leblois is a member
of the Audit Committee and Compensation Committee of the Board of Directors of
Peritus.
Johan Magnusson, age 42, has served on the Board of Directors of Peritus
since April 2000. He was elected a director pursuant to the terms of a common
stock purchase agreement dated March 27, 2000 between Peritus and Rocket
Software. Mr. Magnusson has served as the Chief Operating Officer of Rocket
Software since January 2000 and has served as a member of the Board of
Directors of Rocket Software since March 1998.
Roland D. Pampel, age 66, has served on the Board of Directors of Peritus
since November 1995. Mr. Pampel is retired. From March 1994 to January 1997,
Mr. Pampel held the positions of President, Chief Executive Officer and
director of Microcom, Inc., a manufacturer of computer equipment. From October
1991 to September 1993, prior to joining Microcom, Mr. Pampel was President and
Chief Executive Officer of Nicolet Instrument Inc., a manufacturer of medical
instruments. He currently serves on the Board of Directors of Infinium
Software, Inc., a provider of client-server business software applications. Mr.
Pampel is a member of the Audit Committee and Compensation Committee of the
Board of Directors of Peritus.
Andrew Youniss, age 39, has served on the Board of Directors of Peritus
since April 2000. He was elected a director pursuant to the terms of a common
stock purchase agreement dated March 27, 2000 between Peritus and Rocket
Software. Mr. Youniss is the President, Chief Executive Officer, Treasurer,
Clerk and a member of the Board of Directors of Rocket Software and has served
in those capacities since 1990. Prior to founding Rocket Software, he was the
Development Manager for DB View, Inc., a software company specializing in DB2
database utilities.
Who Are Our Executive Officers?
Christopher R.M. Bailey, age 50, co-founded Peritus and since April 1999 has
served as our Vice President, Research and Development. From 1995 through 1999,
Mr. Bailey served as a director in the R&D organization of Peritus. From 1992
through 1995, he was responsible for working on various outsourcing engagements
for Peritus. Prior to joining Peritus, Mr. Bailey was previously employed at
Bull HN Information Systems from 1977 to 1992.
Andrea C. Campbell, age 49, co-founded Peritus and since May 1999 has served
as its Vice President, Sales and Marketing. From June 1998 to May 1999, she
served as our Vice President, Outsourcing Research and Development. She served
as Peritus' Vice President, Outsourcing Operations from June 1996 to June 1998
and as Vice President, Consulting and Technology Transfer Services from
September 1992 to June 1996. Ms. Campbell was previously employed as Human
Resources Director at Bull HN Information Systems Inc., a manufacturer of
computer products, from March 1990 to August 1992.
60
James F. Dunleavy, age 59, joined Peritus in September 1994 as a Director of
Outsourcing Services and since May 1999 has served as Vice President of
Outsourcing Services. From December 1996 to April 1999 he served as Director of
Engineering as well as a Director of Outsourcing Services. Prior to joining
Peritus, Mr. Dunleavy held various positions at Bull HN Information Systems,
where he most recently served as a Director of Hardware and Software
development and maintenance.
Ronald C. Garabedian, age 49, joined Peritus in February 1999 and has served
as our Vice President and Treasurer since April 1999. Mr. Garabedian was
engaged as an outside consultant for Peritus from November 1998 until February
1999. From 1995 to 1998, Mr. Garabedian was the Treasurer and Controller of
Japonica Partners, a private investment company. From 1980 to 1994, he held
various positions at Bull HN Information Systems Inc., a manufacturer of
computer products, where he most recently served as Controller of Public Sector
Operations.
Patrick J. Manning, age 57, joined Peritus in September 1999 and has served
as our Controller since March 2000. From 1996 to 1999, Mr. Manning was the
Corporate Controller of KAO Infosystems Company, a software manufacturing and
services company. From 1990 to 1995, he served as a Group Controller for
certain North American operations for Logica, a United Kingdom based software
company.
Employment Agreement
On August 13, 1998, Peritus entered into an employment agreement with Mr.
Giordano that was subsequently amended on September 9, 1999, October 5, 1998,
April 9, 1999 and January 21, 2000. The term of Mr. Giordano's employment
agreement expires on January 21, 2003 unless earlier terminated under the terms
of the employment agreement. Under the agreement, Mr. Giordano's employment:
. is terminable by either party without cause upon 30 days' prior notice;
. terminates upon a change of control of Peritus;
. is terminable by either party pursuant to a breach of the employment
agreement by the other party and failure to remedy the breach by such
party upon 30 days' prior notice;
. is terminable immediately by Peritus for cause; or
. terminates upon the death or disability of the employee.
The employment agreement provides for an initial annual base salary of
$195,000 (currently set at $202,800) as well as bonus compensation to be
determined in accordance with Peritus' policies, with a minimum bonus of
$25,000 for 1998. If Mr. Giordano's employment is terminated by Peritus without
cause or terminates upon a change of control of Peritus, he will be entitled to
receive:
. a severance payment equal to his base compensation for one year; and
. benefits in accordance with Peritus' then current policies until the
earlier of the date of one year following the termination date or the
date Mr. Giordano commences employment or consulting with a third party.
The employment agreement also provides for the vesting of all of Mr.
Giordano's unvested options and for the extension of the date to exercise those
options for up to one year after termination of his employment if his
employment is terminated by Peritus without cause or terminates upon a change
of control of Peritus. The employment agreement contains a non-solicitation
covenant and a non-competition covenant pursuant to which Mr. Giordano, during
the term of his employment, is prohibited from engaging in any business
activity that would compete directly or indirectly with products or services of
the kind or type developed by Peritus. The non-competition and non-solicitation
covenants extend for a one-year period after termination. The employment
agreement provided for retention payments of $60,000, $40,000, $30,000 and
$30,000 on December 1, 1998, January 1, 1999, February 1, 1999 and March 1,
1999, respectively, together with a payment of $280,000
61
minus the foregoing payments, if made, in the event of a change in control of
Peritus. The employment agreement provided for the payment of a retention bonus
of $120,000 on September 30,1999. The foregoing retention bonus was in place of
the change in control payment referenced above. The employment agreement
provided for a retention payment of $70,000 on January 1, 2000. The employment
agreement also provided for retention payments of $60,000 and $100,000 on April
1, 2000 and July 1, 2000.
On February 26, 2001, Peritus provided Mr. Giordano with a letter agreement
establishing the goals for his 50% bonus for the year 2001 (as referenced in
the employment agreement dated January 21, 2000). Pursuant to this letter
agreement, Mr. Giordano will receive a bonus equal to 50% of his total base
salary for the year 2001 if certain financial results for Peritus are achieved.
In addition, the letter agreement provides that Mr. Giordano will receive a
bonus of $100,000 in lieu of the above bonus if a merger, or any sale of
substantially all of the assets, of Peritus occurs on or prior to June 30,
2001. If such change of control occurs after July 1, 2001 through and including
December 31, 2001, the letter agreement provides that Mr. Giordano will be paid
a bonus of $50,000 in lieu of the above bonuses.
62
DISSENTERS' RIGHTS
Sections 85 through 98 of Chapter 156B of the Massachusetts General Laws,
which we call the Massachusetts appraisal statute, entitle any holder of
Peritus stock, who files a written objection to the proposal to approve the
merger and merger agreement before the vote at the special meeting and does not
vote in favor of that proposal, to demand in writing that Peritus pay that
holder, in cash, the fair value of such shares exclusive of any element of
value arising from the expectation or accomplishment of the merger. Peritus
stockholders who follow the procedures set out in the Massachusetts appraisal
statute for any of their Peritus shares will be entitled to have a court
appraise those shares and receive that fair value, together with interest, if
the merger closes.
The following is a summary of certain features of the Massachusetts
appraisal statute. It is qualified by reference to the full text of the
statute, a copy of which is attached as Annex C to this proxy statement.
A stockholder who intends to exercise appraisal rights must deliver to
Peritus, before the vote of Peritus' stockholders on the merger and merger
agreement, a written objection to the merger and merger agreement, stating that
the stockholder intends to demand payment for shares held by the stockholder if
the merger closes. The written objection should be addressed to Peritus
Software Services, Inc., 112 Turnpike Road, Suite 111, Westborough,
Massachusetts 01581-2860, Attention: Clerk. A vote against the merger proposal,
not coupled with a timely written objection, will not serve to perfect
appraisal rights. The written objection must be in addition to and separate
from any proxy or vote against the proposal.
Peritus stockholders should execute any demand for appraisal in the
stockholder's name as it appears on the stockholders' stock certificates. If
the stockholder owns shares in a fiduciary capacity, such as a trustee,
guardian or custodian, the stockholder should execute the demand in that
capacity. If more than one person owns the shares (for example, a joint tenancy
or tenancy in common), all the joint owners should execute the demand.
A record holder, such as a broker who holds shares of Peritus' common stock
as a nominee for beneficial owners, must exercise appraisal rights on behalf of
those beneficial owners. Any person having a beneficial interest in any Peritus
shares held of record in the name of another person (for example, a broker or
nominee) must act promptly to cause the record holder to take the steps
summarized here, in a timely manner, in order to perfect the beneficial owner's
appraisal rights. The written demand should set forth the number of shares
covered by the demand. Unless a demand specifies a lesser number of shares,
Peritus will treat the demand as applying to all the shares held in the name of
the record holder.
Stockholders who wish to exercise appraisal rights may not vote in favor of
the proposal to approve the merger and merger agreement. A stockholder who
votes in favor of that proposal will not be entitled to exercise appraisal
rights. The submission of a signed blank proxy card will serve to waive
appraisal rights. However, failure to return a proxy card or vote (or
abstaining from voting) will not waive appraisal rights.
Within ten days after the merger closes, Peritus will notify each record
holder of shares of Peritus stock who has purported to comply with the
Massachusetts appraisal statute and whose shares were not voted in favor of the
merger and the merger agreement that the merger closed. That notice will not be
deemed to confer any rights. In other words, if the Peritus stockholder has not
properly perfected appraisal rights, the notice will not change that. Peritus
or its agent will send the notice by registered or certified mail, addressed to
the stockholder at the stockholder's last known address as it appears on the
records of Peritus' transfer agent immediately before the merger. Within 20
days after that notice is mailed, the Peritus stockholder must demand an
appraisal in writing. Failure to make such a demand, within that period, will
serve to waive appraisal rights.
Once a Peritus stockholder submits a demand for appraisal, the stockholder
may withdraw the demand only with Peritus' approval. If the demand is
effectively withdrawn, then, absent an agreement between the stockholder and
Peritus to the contrary, the stockholder would receive the cash payable to
stockholders who did not exercise appraisal rights.
63
A Peritus stockholder who perfects appraisal rights and reaches agreement
with Peritus on the fair value of the stockholder's shares will receive that
value, with interest, by check. If the stockholder and Peritus do not reach
agreement on fair value within 30 days after the end of the 20-day period
during which stockholders must make their demands for appraisal, either Peritus
or the stockholder may bring an action, within four months after the end of
those 30 days, to have the fair value determined through judicial proceedings
in Massachusetts Superior Court. Neither Peritus nor Rocket Software will have
any obligation, and currently do not have any intention, to elect to cause the
fair value of the shares of dissenting stockholders to be determined through
judicial proceedings.
Although Massachusetts courts have broad discretion in determining the fair
value of stock of dissenting stockholders, they generally have used a weighted
average of the market, earnings and asset values for the stock. The
Massachusetts Supreme Judicial Court recently held that this method is an
appropriate, but not required, method for determining the fair value of stock
of dissenting stockholders. The trial judge may determine the appropriate
valuation method to apply. The Massachusetts appraisal statute requires that
Peritus pay a fair rate of interest on any award determined by the court.
Interest runs from the date the Peritus board approved the merger.
For federal income tax purposes, Peritus stockholders who receive cash for
their shares of Peritus stock after exercising appraisal rights will recognize
taxable gain or loss. See "Material United States Federal Income Tax
Consequences of the Merger."
BUSINESS COMBINATIONS WITH INTERESTED PARTIES
State Anti-Takeover Laws
There are provisions of Massachusetts law that may be deemed to have an
anti-takeover effect. These provisions are designed to protect stockholders
against coercive, unfair or inadequate tender offers and other abusive tactics
and to encourage any person contemplating a business combination with Peritus
to negotiate with the board of directors for the fair and equitable treatment
of all stockholders.
Under Massachusetts law, no Massachusetts corporation shall engage in a
"business combination" with an "interested stockholder" for a period of three
years following the date that the stockholder became an interested stockholder,
except in certain circumstances. "Business combination" includes a merger,
consolidation, asset sale or other transaction resulting in a financial benefit
to the interested stockholder. "Interested stockholder" is a person who,
together with affiliates and associates, owns, or within three years, did own
5% or more of the corporation's voting stock.
A Massachusetts corporation may elect not to be governed by these
restrictions. Peritus has not so elected. The board has taken the necessary
action to make the above restrictions on business combinations inapplicable to
the merger and the related transactions.
Preemptive Rights
Under Massachusetts law, stockholders do not have any pre-emptive rights
unless they are provided in the corporation's articles of incorporation or in
bylaw provisions adopted by stockholders. Neither Peritus' articles of
organization nor bylaws provide for preemptive rights.
EXPENSES
The parties have agreed to pay their own costs and expenses incurred in
connection with the agreement of merger and the transactions contemplated
thereby, including the merger, consisting primarily of SEC filing fees, fees
and expenses of investment bankers, attorneys and accountants, financial
printing and other related
64
charges. Assuming the merger is completed, Peritus estimates such fees and
expenses, excluding amounts to be paid to John D. Giordano pursuant to his
employment arrangements with Peritus, will be approximately $700,000. Those
fees and expenses are as follows:
Filing Fees....................................................... $
Financial Advisor's Fees and Expenses (estimated total for board
of directors and the special committee)..........................
Legal Fees and Expenses (estimated total for board of directors
and the special committee).......................................
Legal Fees and Expenses (estimated total for Rocket Software and
Rocket Acquisition)..............................................
Accounting Fees and Expenses......................................
Paying Agent Fees.................................................
Printing and Mailing Costs........................................
Miscellaneous.....................................................
--------
Total........................................................... $700,000
WHERE YOU CAN FIND MORE INFORMATION
Peritus files annual, quarterly and special reports, proxy statements and
other information with the SEC. You may read and copy any reports, statements
or other information that Peritus files at the SEC's public reference rooms in
Washington, D.C., New York, New York and Chicago, Illinois. Please call the SEC
at 1-800-SEC-0330 for further information on the public reference rooms.
You may also obtain copies of this information by mail from the Public
Reference Section of the SEC, 450 Fifth Street, N.W., Room 1024, Washington,
D.C. 20549, at prescribed rates. The SEC also maintains an Internet world wide
web site that contains reports, proxy statements and other information about
issuers, including Peritus, who file electronically with the SEC. The address
of that site is http://www.sec.gov.
Peritus and Rocket Software have filed with the SEC a Rule 13e-3 Transaction
Statement on Schedule 13E-3 with respect to the merger. As permitted by the
SEC, this proxy statement omits certain information contained in the Schedule
13E-3. The Schedule 13E-3, including any amendments and exhibits filed or
incorporated by reference as a part thereof, is available for inspection or
copying as set forth above.
You should rely only on the information contained in this proxy statement to
vote on the agreement of merger and the transactions contemplated by such
agreement, including the merger. We have not authorized anyone to provide you
with information that is different from what is contained in this document.
This proxy statement is dated May , 2001. You should not assume that the
information in it is accurate as of any date other than that date, and its
mailing to stockholders shall not create any implication to the contrary.
65
INFORMATION ABOUT STOCKHOLDER PROPOSALS
Peritus has not held an annual meeting of its stockholders since 1998 and
has not yet determined whether it will hold an annual meeting in 2001. Peritus
will not hold an annual meeting prior to June 30, 2001, the date on which if
the merger has not closed, any of Peritus, Rocket Software and Rocket
Acquisition may terminate the agreement of merger. If Peritus holds an annual
meeting in 2001, stockholder proposals submitted pursuant to Rule 14a-8 under
the Securities Exchange Act of 1934 for inclusion in Peritus' proxy materials
for that meeting must be received by Peritus' Clerk at Peritus' principal
offices a reasonable time before Peritus begins to print and mail its proxy
materials.
By Order of the Board of Directors,
John D. Giordano
President, Chief Executive Officer
and
Chief Financial Officer
May , 2001
The Board of Directors hopes that stockholders will attend the meeting.
Whether or not you plan to attend, you are urged to complete, date, sign and
return the enclosed proxy in the accompanying envelope. A prompt response will
facilitate arrangements for the meeting. Your cooperation is appreciated.
66
PERITUS SOFTWARE SERVICES, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Financial Statements:
Report of Independent Accountants........................................ F-2
Consolidated Balance Sheet as of December 31, 2000 and 1999.............. F-3
Consolidated Statement of Operations for the three years ended December
31, 2000................................................................ F-4
Consolidated Statement of Comprehensive Loss for the three years ended
December 31, 2000....................................................... F-5
Consolidated Statement of Changes in Stockholders' Equity for the three
years ended December 31, 2000........................................... F-6
Consolidated Statement of Cash Flows for the three years ended December
31, 2000................................................................ F-7
Notes to Consolidated Financial Statements............................... F-8
F-1
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of Peritus Software Services, Inc.:
In our opinion, the accompanying balance sheet and the related consolidated
statements of operations, comprehensive loss, changes in stockholders' equity
and of cash flows present fairly, in all material respects, the financial
position of Peritus Software Services, Inc. and its subsidiaries at December
31, 2000 and 1999, and the results of their operations and their cash flows for
each of the three years in the period ended December 31, 2000, in conformity
with accounting principles generally accepted in the United States of America.
These financial statements are the responsibility of the Company's management;
our responsibility is to express an opinion on these financial statements based
on our audits. We conducted our audits of these statements in accordance with
auditing standards generally accepted in the United States of America, which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
PricewaterhouseCoopers LLP
Boston, Massachusetts
February 20, 2001
F-2
PERITUS SOFTWARE SERVICES, INC.
CONSOLIDATED BALANCE SHEET
(In Thousands, Except Share-Related Data)
December 31,
--------------------
2000 1999
--------- ---------
ASSETS
Current assets:
Cash and cash equivalents.............................. $ 3,716 $ 2,475
Short-term investments................................. 1,411 --
Accounts receivable, net of allowance for doubtful
accounts of $25 and $25, respectively................. 565 532
Costs and estimated earnings in excess of billings on
uncompleted contracts................................. 8 281
Prepaid expenses and other current assets.............. 196 248
--------- ---------
Total current assets................................. 5,896 3,536
Long-term investments.................................... 1,000 --
Property and equipment, net.............................. 217 702
Other assets............................................. -- 55
--------- ---------
$ 7,113 $ 4,293
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of capital lease obligations........... $ 13 $ 13
Customer advances...................................... 289 296
Accounts payable....................................... 34 11
Billings in excess of costs and estimated earnings on
uncompleted contracts................................. 158 253
Deferred revenue....................................... -- 195
Other accrued expenses and current liabilities......... 377 1,128
--------- ---------
Total current liabilities............................ 871 1,896
Capital lease obligations................................ 12 25
--------- ---------
Total liabilities.................................... 883 1,921
--------- ---------
Commitments and contingencies (Notes 5, 15 and 17)....... -- --
Stockholders' equity:
Common stock, $.01 par value; 50,000,000 shares
authorized; 27,319,903 and 17,173,975 shares issued
and outstanding at December 31, 2000 and 1999,
respectively.......................................... 273 172
Additional paid-in capital............................... 113,208 105,279
Accumulated deficit...................................... (107,237) (103,071)
Accumulated other comprehensive loss..................... (14) (8)
--------- ---------
Total stockholders' equity........................... 6,230 2,372
--------- ---------
$ 7,113 $ 4,293
========= =========
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
PERITUS SOFTWARE SERVICES, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
(In Thousands, Except Share-Related Data)
Year Ended December 31,
--------------------------
2000 1999 1998
------- ------- --------
Revenue:
Outsourcing services, including $872 from related
parties, in 1998................................ $ 2,664 $ 5,923 $ 9,925
License, including $255 from related parties in
1998............................................ 1,045 2,087 9,444
Other services, including $115, $0, and $204 from
related parties, respectively................... 814 3,188 12,163
------- ------- --------
Total revenue.................................. 4,523 11,198 31,532
------- ------- --------
Cost of revenue:
Cost of outsourcing services, including $750 from
related parties in 1998......................... 1,465 4,778 7,577
Cost of license.................................. -- 238 1,631
Cost of other services, including $90, $0, and
$56 from related parties, respectively.......... 295 2,013 9,110
------- ------- --------
Total cost of revenue.......................... 1,760 7,029 18,318
------- ------- --------
Gross profit....................................... 2,763 4,169 13,214
------- ------- --------
Operating expenses:
Sales and marketing.............................. 368 1,450 13,244
Research and development......................... 1,189 1,316 8,528
General and administrative....................... 1,766 3,570 7,466
Impairment of long-lived assets.................. -- 961 5,218
Restructuring charges (credits).................. -- (455) 5,906
Gain on sale of assets........................... (24) -- --
------- ------- --------
Total operating expenses....................... 3,299 6,842 40,362
------- ------- --------
Loss from operations............................. (536) (2,673) (27,148)
Interest income.................................. 342 116 548
Interest expense................................. -- (24) (63)
------- ------- --------
Loss before gain on sale of majority-owned
subsidiary, cost of strategic investment, income
taxes, and minority interest in majority-owned
subsidiary...................................... (194) (2,581) (26,663)
Gain on sale of majority-owned subsidiary........ -- -- (11)
Cost of strategic investment..................... 4,000 -- --
Provision for income taxes....................... (28) 2 25
------- ------- --------
Loss before minority interest in majority-owned
subsidiary.................................... (4,166) (2,583) (26,677)
Minority interest in majority-owned subsidiary... -- -- (4)
Net loss......................................... $(4,166) $(2,583) $(26,673)
======= ======= ========
Basic and diluted net loss per share............. $ (0.17) $ (0.15) $ (1.65)
======= ======= ========
Weighted average shares outstanding--basic and
diluted......................................... 24,939 16,670 16,177
======= ======= ========
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
PERITUS SOFTWARE SERVICES, INC.
CONSOLIDATED STATEMENT OF COMPREHENSIVE LOSS
(In Thousands)
Year Ended December 31,
--------------------------
2000 1999 1998
------- ------- --------
Net loss............................................ $(4,166) $(2,583) $(26,673)
Other comprehensive income (loss) net of taxes:
Foreign currency translation adjustments.......... (6) (7) 83
------- ------- --------
Comprehensive loss.................................. $(4,172) $(2,590) $(26,590)
======= ======= ========
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
PERITUS SOFTWARE SERVICES, INC.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
(In Thousands, Except Share-Related Data)
Common Stock Accumulated
----------------- Additional Receivable Other Total
Number of Paid-in Accumulated from Comprehensive Stockholder's
Shares Amount Capital Deficit Stockholder Loss Equity
---------- ------ ---------- ----------- ----------- ------------- -------------
Balance, December 31,
1997................... 15,366,801 $154 $103,808 $ (73,815) $(58) $(84) $ 30,005
Sale of common stock
pursuant to exercise of
stock options.......... 883,185 9 1,018 -- -- -- 1,027
Sale of common stock
pursuant to employee
stock purchase plan.... 100,000 1 309 -- -- -- 310
Repayment of receivable
from stockholder....... -- -- -- -- 58 -- 58
Cumulative translation
adjustment............. -- -- -- -- -- 83 83
Net loss................ -- -- -- (26,673) -- -- (26,673)
---------- ---- -------- --------- ---- ---- --------
Balance, December 31,
1998................... 16,349,986 164 105,135 (100,488) -- (1) 4,810
Sale of common stock
pursuant to exercise of
stock options.......... 1,000 -- -- -- -- -- --
Sale of common stock
pursuant to employee
stock purchase plan.... 22,989 -- 4 -- -- -- 4
Issuance of common
stock.................. 800,000 8 140 -- -- -- 148
Cumulative translation
adjustment............. -- -- -- -- -- (7) (7)
Net Loss................ -- -- -- (2,583) -- -- (2,583)
---------- ---- -------- --------- ---- ---- --------
Balance, December 31,
1999................... 17,173,975 172 105,279 (103,071) -- (8) 2,372
Sale of common stock
pursuant to exercise of
stock options.......... 145,928 1 29 -- -- -- 30
Sale of common stock
pursuant to strategic
investment............. 10,000,000 100 7,900 -- -- -- 8,000
Cumulative translation
adjustment............. -- -- -- -- -- (6) (6)
Net Loss................ -- -- -- (4,166) -- -- (4,166)
---------- ---- -------- --------- ---- ---- --------
Balance, December 31,
2000................... 27,319,903 $273 $113,208 $(107,237) $-- $(14) $ 6,230
========== ==== ======== ========= ==== ==== ========
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
PERITUS SOFTWARE SERVICES, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(In Thousands, Except Share-Related Data)
Year Ended December 31,
--------------------------
2000 1999 1998
------- ------- --------
Increase (Decrease) in Cash and Cash Equivalents
Cash flows from operating activities:
Net loss......................................... $(4,166) $(2,583) $(26,673)
Adjustments to reconcile net loss to net cash
used for operating activities:
Depreciation and amortization.................... 463 1,442 3,083
Minority interest in majority-owned subsidiary... -- -- (4)
Impairment of long-lived assets.................. -- 961 5,218
Gain on sale of majority-owned subsidiary........ -- -- (11)
Gain on sale of assets........................... (24) -- --
Cost of strategic investment..................... 4,000 -- --
Changes in assets and liabilities:
Accounts receivable.............................. (33) 3,188 8,671
Costs and estimated earnings in excess of
billings on uncompleted contracts............... 273 670 1,596
Prepaid expenses and other current assets........ 52 568 (137)
Other assets..................................... 55 116 (125)
Accounts payable................................. 23 (451) (979)
Proceeds from customer advance................... (7) 296 --
Billings in excess of costs and estimated
earnings on uncompleted contracts............... (95) (182) 331
Deferred revenue................................. (195) (1,695) (928)
Other accrued expenses and current liabilities,
excluding accrued restructuring................. (751) (1,673) (383)
Accrued restructuring............................ -- (1,835) 2,680
------- ------- --------
Net cash used for operating activities........... (405) (1,178) (7,661)
------- ------- --------
Cash flows from investing activities:
Sale (purchase) of short-term investments........ (1,411) 500 2,500
Sale of long-term investments.................... 1,000 -- --
Purchase of long-term investments................ (2,000) -- --
Cash of majority-owned subsidiary disposed, net
of cash received................................ -- -- (1,074)
Proceeds from sale of property and equipment..... 57 288 --
Purchases of property and equipment.............. (11) (56) (2,739)
------- ------- --------
Net cash provided by (used for) investing
activities...................................... (2,365) 732 (1,313)
------- ------- --------
Cash flows from financing activities:
Restricted cash.................................. $ -- $ 569 (569)
Principal payments on long-term debt............. -- (269) (292)
Principal payments on capital lease obligations.. (13) (338) (106)
Proceeds from issuance of common stock, net of
issuance costs.................................. 4,030 152 1,337
Proceeds from repayment of note receivable from
stockholder..................................... -- -- 58
------- ------- --------
Net cash provided by financing activities......... 4,017 114 428
------- ------- --------
Effects of exchange rates on cash and cash
equivalents...................................... (6) (2) 15
------- ------- --------
Net increase (decrease) in cash and cash
equivalents...................................... 1,241 (334) (8,531)
Cash and cash equivalents, beginning of year...... 2,475 2,809 11,340
------- ------- --------
Cash and cash equivalents, end of year............ $ 3,716 $ 2,475 $ 2,809
======= ======= ========
Supplemental Disclosure of Cash Flows:
Cash paid for income taxes....................... -- $ 29 $ 78
Cash paid for interest........................... -- 24 63
Supplemental Disclosure of Non-cash Investing and Financing Activities:
In the year ended December 31, 1998, the Company incurred capital lease
obligations of $458.
The accompanying notes are an integral part of these consolidated financial
statements.
F-7
PERITUS SOFTWARE SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Nature of the Business and Current Financial Condition
Peritus Software Services, Inc. (the "Company") was incorporated in
Massachusetts in August 1991. The Company provides software products and
services that enable organizations to improve the productivity, quality and
effectiveness of their information technology systems maintenance, or "software
evolution" functions. The Company derives its revenue from software maintenance
outsourcing services, software and methodology licensing and other services
sold directly to end users or indirectly via value added integrators, and its
clients have included primarily Fortune 1000 companies and similarly sized
business and government organizations worldwide.
On March 27, 2000, Rocket Software, Inc. ("Rocket"), a privately held
company, invested $4,000,000 in the Company in exchange for 10,000,000 shares
($.40 per share) of restricted common stock (37% of outstanding stock after the
investment). The Company granted Rocket certain registration rights with
respect to the shares. The Company recorded a $4,000,000 non-cash charge
related to the investment in the quarter ended March 31, 2000. The charge
represented the difference between the quoted market price on the commitment
date and the price paid by Rocket. Under certain sections of the Internal
Revenue Code, a change in ownership of greater than 50% within a three-year
period places an annual limitation on the Company's ability to utilize its
existing net operating loss and research and development tax credit carry-
forwards. The investment by Rocket triggered the limitation.
During the second and third quarters of 2000, the Company explored certain
extensions to its CodeNine tool beyond the field of application understanding
and concluded that such extensions were not feasible.
On October 16, 2000, the Company announced that it retained Catalyst to
render financial advisory and investment banking services in connection with
exploring strategic alternatives, including the potential sale of the Company.
The Company is currently engaged in exploring a number of possibilities for the
potential sale or merger of the Company.
On February 8, 2001, the Company announced that it was reducing its
workforce by nine employees effective February 23, 2001.
The Company's consolidated financial statements have been presented on the
basis that it is a going concern, which contemplates continuity of operations,
realization of assets and the satisfaction of liabilities in the ordinary
course of business. The Company experienced net losses of $4,166,000,
$2,583,000 and $26,673,000 in the years ended December 31, 2000, 1999 and 1998,
respectively. Based on the Company's current forecasted cash expenditures and
its cash on hand, the Company expects to have sufficient cash to finance its
operations through the year 2001. The Company's future beyond the year 2001 is
dependent upon its ability to execute some form of organizational transaction,
achieve break-even cash flow, or raise additional financing. There can be no
assurances that the Company will be able to do so.
2. Summary of Significant Accounting Policies
Principles of Consolidation
The consolidated financial statements include the accounts of the Company
and its wholly-owned and majority-owned subsidiaries. All significant
intercompany balances and transactions have been eliminated.
Revenue Recognition
Revenue under contracts to provide outsourced software maintenance,
reengineering and development services is recognized using the percentage-of-
completion method and is based on the ratio that labor-hours incurred to date
bear to estimated total labor-hours at completion, provided that a contract or
purchase order has
F-8
PERITUS SOFTWARE SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
been executed, fees are fixed or determinable and collection of the related
receivable is probable. Adjustments to contract cost estimates are made in the
periods in which the facts which require such revisions become known. When the
revised estimates indicate a loss, such loss is provided for currently in its
entirety. Costs and estimated earnings in excess of billings on uncompleted
contracts represent revenue recognized in excess of amounts billed. Billings in
excess of costs and estimated earnings on uncompleted contracts represent
billings in excess of revenue recognized.
The Company licenses its software products and methodologies to end users
and to value added integrators for their use in serving their clients. License
fees charged to end users are fixed, with the amount of the fee based on the
estimated total lines of code to be processed, the number of CPUs licensed, or
other defined factors.
License fees charged to value added integrators are generally royalties
based on lines of code processed or to be processed or number of CPUs licensed.
Revenue from software licenses to end users is recognized when licensed
software and methodologies have been delivered to the end user, a contract or
purchase order has been executed, fees are fixed or determinable, collection of
the related receivable is probable, and customer acceptance provisions do not
exist. In arrangements where customer acceptance provisions exist, the Company
defers revenue recognition until customer acceptance occurs or the acceptance
provisions have lapsed. The Company generally does not provide its customers
with the right to return software licenses and, once due, license fees are non-
refundable. Revenue from software licenses to value added integrators is
recognized when the licensed software and methodologies have been delivered to
the value added integrator, the fee is fixed or determinable and collection of
the related receivable is probable. Under arrangements combining software and
services, all revenue is recorded using the percent of completion method as
described for other services below. Under such combined arrangements, vendor
specific objective evidence ("VSOE") for software license is used for income
statement classification purposes only and is determined based upon the prices
that exist or are charged for the same software when licensed separately and
distinctly. The VSOE for the service component under combined arrangements is
based upon hourly rates.
Other services provided by the Company include direct delivery contracts as
well as technology transfer arrangements, product training, value added
integrator sales training, consulting services and software product
maintenance. Under direct delivery contracts, the Company provides full and
pilot year 2000 renovations and renovation quality evaluation ("RQE") services
for clients using the Company's AutoEnhancer/2000, RQE tool, and/or Vantage
YR2000 software. Revenue from full year 2000 renovation and RQE contracts is
recognized using the percentage-of-completion method and is based on the ratio
that labor-hours incurred to date bear to estimated total labor-hours at
completion, provided that a contract or purchase order has been executed, fees
are fixed or determinable and collection of the related receivable is probable.
Revenue from pilot direct delivery contracts is recognized over the duration of
such contracts as work is performed and defined milestones are attained.
Adjustments to contract cost estimates are made in the periods in which the
facts which require such revisions become known. When the revised estimates
indicate a loss, such loss is provided for currently in its entirety. In cases
where VSOE of fair value of both the license and service component exists under
a direct delivery contract, revenue recognized is allocated between license
revenue and other services revenue for income statement classification purposes
based on their relative fair values. Revenue from technology transfer
arrangements, product and sales training and consulting services is billed on a
time-and-materials basis and is recognized as the services are provided.
Revenue from software product maintenance contracts on the Company's licensed
software products, including client support bundled with the initial license
fee, is deferred and recognized ratably over the contractual periods during
which the services are provided.
Concentration of Credit Risk
Financial instruments which potentially expose the Company to concentrations
of credit risk include trade accounts receivable. The Company primarily sells
to Fortune 1000 companies or other organization determined
F-9
PERITUS SOFTWARE SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
to be creditworthy, and therefore, generally does not require collateral.
Reserves for potential credit losses are maintained.
Fair Value of Financial Instruments
The Company's financial instruments consist of cash and cash equivalents,
short-term investments, accounts receivable, costs and estimated earnings in
excess of billings on uncompleted contracts, long-term investments, accounts
payable, accrued expenses and, billings in excess of costs and estimated
earnings on uncompleted contracts. The carrying amounts of these instruments
approximate their fair values.
Cash and Cash Equivalents
The Company considers all highly liquid debt instruments purchased with an
original maturity of three months or less to be cash equivalents. The Company
invests its excess cash primarily in money market accounts, commercial paper
and corporate bonds. Accordingly, these investments are subject to minimal
credit and market risk.
Investments
The Company investments are in debt securities of U.S. government agencies
and U.S. corporations. These investment grade securities are classified at
purchase as held-to-maturity. Investments with remaining maturities of less
than twelve months from the balance sheet date are classified as short-term
investments. Investments with remaining maturities of more than twelve months
are classified as long-term investments.
The Company accounts for its investments in accordance with Statement of
Financial Accounting Standards ("SFAS") No. 115, "Accounting for Certain
Investments in Debt and Equity Securities." SFAS No. 115 requires the Company
to classify its investments among three categories: held-to-maturity, which are
reported at amortized cost; trading securities, which are reported at fair
value, with unrealized gains and losses included in earnings; and available-
for-sale securities, which are reported at fair value, with unrealized gains
and losses excluded from earnings and reported as a separate component of
stockholders' equity. At December 31, 2000, the Company's cash and cash
equivalents included money market accounts and overnight deposits of $2,955,000
and $492,000, respectively. At December 31, 1999, the Company's cash and cash
equivalents included money market accounts and overnight deposits of $1,151,000
and $1,197,000, respectively. These investments are classified as available for
sale and the fair market value of these investments approximated their
amortized cost.
Property and Equipment
Property and equipment are stated at cost less accumulated depreciation and
amortization. Depreciation of property and equipment is provided using the
straight-line method over the estimated useful lives of the assets or, where
applicable, over the lease term.
Software Development Costs
The Company capitalizes qualifying software development costs after
technological feasibility of the software has been established. Costs incurred
prior to the completion of a working model, which is the Company's primary
basis for determining technological feasibility, are charged to research and
development expense. Amortization of capitalized software costs, which is
charged to cost of revenue, is calculated based upon the ratio of current year
revenue from the related software to total revenue or ratably over the useful
life of the software, whichever is greater. During the years ended December 31,
2000, 1999 and 1998, costs subject
F-10
PERITUS SOFTWARE SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
to capitalization were not significant and therefore, were not capitalized. At
December 31, 2000 and 1999 there were no unamortized capitalized software
development costs. Amortization expense related to capitalized software
development costs for the years ended December 31, 2000, 1999 and 1998 was $0,
$8,000 and $46,000, respectively.
Accounting for Impairment of Long-Lived Assets
In accordance with SFAS No. 121, "Accounting for the Impairment of Long-
Lived Assets and Long-Lived Assets to be Disposed Of," the Company records
impairment losses on long-lived assets used in operations when indicators of
impairment are present and the undiscounted cash flows estimated to be
generated by those assets are less than the assets' carrying amount. The
Company recorded impairment charge of $961,000 during the year ended December
31, 1999. (Note 4).
Foreign Currency
Assets and liabilities of the Company's foreign subsidiaries are translated
into U.S. dollars at exchange rates in effect at the balance sheet date. Income
and expense items are translated at average exchange rates for the period.
Accumulated net translation adjustments are included in stockholders' equity.
Advertising Expense
The Company recognizes advertising expense as incurred. Advertising expense
was approximately $842,000 in the year ended December 31, 1998.
Accounting for Stock-Based Compensation
The Company accounts for stock-based awards to its employees using the
intrinsic value based method as prescribed by Accounting Principles Board
Opinion ("APB") No. 25, "Accounting for Stock Issued to Employees," and related
interpretations. Accordingly, no compensation expense is recorded for options
issued to employees in fixed amounts and with exercise prices equal to the fair
market value of the Company's common stock at the date of grant. The Company
has adopted the provisions of SFAS No. 123, "Accounting for Stock- Based
Compensation," and related Interpretations, for disclosure only (Note 12). All
stock-based awards to non-employees are accounted for at their fair value in
accordance with SFAS No. 123.
Net Loss Per Share
The Company accounts for net loss per share in accordance with SFAS No. 128,
"Earnings per Share." SFAS No. 128 requires the presentation of "basic"
earnings per share and "diluted" earnings per share. Basic earnings per share
is computed by dividing the net income (loss) available to common stockholders
by the weighted average shares of outstanding common stock. For purposes of
calculating diluted earnings per share, the denominator includes both the
weighted average shares of common stock outstanding and dilutive potential
common stock.
Antidilutive potential common stock excluded from the 2000, 1999, and 1998
diluted earnings per share computation includes approximately 3,234,000,
3,212,000, and 4,036,000 of common stock shares, respectively, issuable upon
the exercise of stock options.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make certain estimates
and assumptions that affect the reported amounts of assets and
F-11
PERITUS SOFTWARE SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
liabilities and disclosures of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenue and expenses
during the reporting period. Areas particularly subject to estimation include
revenue based on percentage-of-completion, the valuation allowance on deferred
tax assets, cash flow projections and salvage value of assets used in
impairment analyses and the timing and amount of future sublease income on
restructured facilities. Actual amounts could differ from those estimates.
Recently Issued Accounting Standards
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for
Derivative Instruments and Hedging Activities" as amended by SFAS No. 137,
which was issued in June 2000. The Company will adopt SFAS No. 133 in the first
quarter of 2001. SFAS No. 133 requires that all derivative instruments be
reported on the balance sheet at their fair value. Changes in the fair value of
derivatives are recorded each period in current earnings or other comprehensive
income, depending on whether a derivative is designated as part of a hedge
transaction and, if it is, the type of hedge transaction. The Company does not
expect the adoption of SFAS No. 133 to have any impact on its financial
condition, results of operations, or business practices.
3. Investments
The Company's investments are held-to-maturity securities. The following
table summarizes the composition of these short and long-term investments at
December 31, 2000:
U.S. corporate debt securities................................... $ 476,000
U.S. government agencies......................................... 935,000
----------
Total due within one year........................................ $1,411,000
U.S. government agencies......................................... $1,000,000
----------
Total due after one year......................................... $1,000,000
At December 31, 2000, the estimated fair value of each investment
approximated its amortized costs and therefore, there were no material
unrealized gains or losses.
There were no short or long term investments at December 31, 1999.
4. Impairment of Long-Lived Assets
The Company periodically assesses whether any events or changes in
circumstances have occurred that would indicate that the carrying amount of a
long-lived asset might not be recoverable. When such an event or change in
circumstance occurs, the Company evaluates whether the carrying amount of such
asset is recoverable by comparing the net book value of the asset to estimated
future undiscounted cash flows, excluding interest charges, attributable to
such asset. If it is determined that the carrying amount is not recoverable,
the Company recognizes an impairment loss equal to the excess of the carrying
amount of the asset over the estimated fair value of such asset.
Year Ended 1999
In June 1999, as a result of the continuing downsizing of the Company's
operations and continuing decline in operating results, the Company reviewed
the carrying amount of its property and equipment and committed to a plan to
dispose certain of its assets, primarily excess computer equipment and
furniture relating to its restructured operations, either by sale or by
abandonment. The fair value of the assets to be disposed of was
F-12
PERITUS SOFTWARE SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
measured at management's best estimate of salvage value, by using the current
market values or the current selling prices for similar assets. Based upon
management's review, the carrying amount of assets having a net book value of
$1,143,000 was written-down to a total amount of $389,000, representing the
lower of carrying amount or fair value (salvage value) and the Company recorded
an impairment charge totaling $754,000. The reduction in depreciation expenses
resulting from this write-down was approximately $82,000 on a quarterly basis
beginning in the third quarter of 1999. The Company completed its sale of
assets associated with its June 1999 impairment charge in the third quarter of
1999 and the sale proceeds received were not significantly different from
original estimates.
During the third quarter of 1999, the Company made a decision to transfer
the research and development responsibility for its CodeNine tool from India to
the United States. As a result of that decision, the personnel of its Indian
subsidiary were no longer required and were transferred (with the exception of
one) to another company without cost. After the personnel transfer which
occurred in September 1999, the Company ceased using the assets and anticipated
no future productive use for such assets. Accordingly, the Company recorded an
impairment charge of $145,000 against assets having a net book value of
$182,000 to write down the assets involved, which consisted of primarily of
leasehold improvements and computer equipment, to their estimated fair value
(salvage value) of $37,000. The estimated salvage value of 20% of book value
was determined through discussions with the Company's subsidiary manager in
India regarding selling prices for similar assets. The Company concluded a sale
agreement for the assets in February 2000 for $55,000 and the facility lease in
India was extended by one month to facilitate completion of the sale of assets.
The reduction in depreciation expense from the asset write-down was
approximately $10,000 on a quarterly basis beginning in the fourth quarter of
1999.
Also, in the third quarter of 1999, the Company completed its review of its
product offering going forward. This review included its patent associated with
its mass change engine that had a remaining capitalized cost of $62,000. The
Company concluded that it could not afford and, therefore, would not develop
any future products based upon the patented technology. Further, the Company
was no longer generating revenue from its existing products based on the
patented technology. In addition, during the third quarter, the Company
investigated whether there was an opportunity to generate any income from the
pursuit of possible patent infringements and concluded such generation was
unlikely. The Company does not believe there is any opportunity to sell or
license its patented mass change engine technology. Therefore, according to
Paragraphs 6 and 7 of SFAS 121, the Company recorded an impairment charge for
the entire remaining capitalized cost. The write-down was included in the third
quarter impairment charge. Savings in amortization expense from this write-down
was $17,000 on a quarterly basis beginning in the fourth quarter of 1999.
The combination of the $754,000 impairment charge in June 1999 for writedown
of the Company's assets in the United States, the $145,000 impairment charge in
September of 1999 for writedown of the Company's assets in India, and the
$62,000 impairment charge for the remaining patent book value resulted in a
total impairment charge of $961,000 for the year ended December 31, 1999.
Year Ended 1998
Due to lower than anticipated revenue and greater than expected losses
during the quarter ended September 30, 1998, the Company adopted a plan to stop
development of all existing and in-process products originally acquired from
MDI in December 1997, including all Vantage YR2000 renovation and testing
software tools and the generic mass change product. Substantially all direct
sales efforts relating to existing Vantage YR2000 products were also stopped.
In connection with these actions, the Company also undertook a restructuring of
its operations (See Note 5 of Notes to the Company's Consolidated Financial
Statements) which included the closure of the Company's research and
development facilities in Cincinnati, Ohio and Lisle,
F-13
PERITUS SOFTWARE SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Illinois and the termination of substantially all the employees at these
facilities. As a result of these events, management concluded that an
assessment of the recoverability of intangible assets recorded in connection
with the acquisition of MDI in December 1997 was required at September 30,
1998. The Company determined that its property and equipment at these locations
were not subject to impairment as substantially all such assets were scheduled
to be re-deployed.
In connection with the assessment, management prepared forecasts of the
expected future cash flows related to these intangible assets on an
undiscounted basis and without interest charges. Due to the fact that product
development efforts had been stopped, the Company concluded that the existing
technology acquired as part of the MDI acquisition would only be used in
existing Vantage YR2000 products. As a result of this analysis, management
determined that the estimated undiscounted net cash flows to be generated by
acquired technology recorded as part of the MDI acquisition were less than the
asset's net book value as of September 30, 1998. Accordingly, the acquired
technology was written-down to $289,000, its estimated fair value, using a
discounted cash flow model. With regard to intangible assets relating to
assembled workforce and goodwill acquired from MDI, management concluded that
the net book value of these amounts could no longer be supported due to the
termination of all former MDI employees and the shift of the Company's strategy
away from MDI-related products. Accordingly, the Company recorded an impairment
charge totaling $4,294,000 during the quarter ended September 30, 1998.
In December 1998, as a result of the significant downsizing of the Company's
operations (See Note 5 of Notes to the Company's Consolidated Financial
Statements) and continuing decline in operating results, the Company reviewed
the carrying amount of its property and equipment at December 31, 1998 and
committed to a plan to dispose certain of its assets, primarily excess computer
equipment and furniture relating to the restructured operations, either by sale
or abandonment. The plan was completed by September 30, 1999. The fair value of
the assets to be disposed of was measured at management's best estimate of
salvage value, by using the current market values or the current selling prices
for similar assets. Costs to sell were estimated to be insignificant. Based
upon management's review, the carrying amounts of assets having a net book
value of $1,145,000 were written-down to a total amount of $221,000,
representing the lower of carrying amount or fair value (salvage value) and the
Company recorded an impairment charge totaling $924,000. The assets to be
disposed of were not depreciated or amortized while they were held for disposal
and the reduction in depreciation expense resulting from the write-down was
approximately $48,000 on a quarterly basis beginning in the first quarter of
1999.
The combination of the $4,294,000 impairment charge recorded in September
1998 and the $924,000 recorded in December of 1998 resulted in a total
impairment charge of $5,218,000 for the year ended December 31, 1998.
5. Restructuring Charges
Overview
Under the Company's restructurings in 1998 and 1999, the Company terminated
more than 220 people. Severance benefits generally included salary continuation
for varying periods of up to one year, benefit continuation over the same
period, and outplacement support. Under the Company's severance offerings,
employees were required to sign a release before receiving any payments. In
addition, salary continuation benefits stopped if a person obtained other
employment.
The Company's facility related restructuring charges included amounts
related to closure or reduction in space for facilities in Billerica,
Massachusetts; Westborough, Massachusetts; Cincinnati, Ohio; Lisle, Illinois;
and Nashua, New Hampshire. In most cases, the Company had many years remaining
under non-cancelable
F-14
PERITUS SOFTWARE SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
leases. The Company's largest lease was for its 100,000 square foot
headquarters facility in Billerica which had a lease termination in February
2006. Under its restructuring accruals, the Company recorded charges for the
estimated difference between anticipated sublease income and the estimated
expenses that would be incurred for the space in the future. The estimates
included the following factors:
(1) the difference between estimated sublease income and rent payments
(2) estimated time the space would remain unoccupied earning no sublease
income
(3) estimated marketing costs including brokerage commissions
(4) estimated building operating expense charges in the future
(5) estimated costs to make the facilities ready for sublease
The estimates were complicated by the fact that the facilities were located
in several different real estate markets. The Company's estimates included
input from the Company's real estate brokers.
Due to the Company's degrading financial condition, there was a change
between the original estimates and the final charges incurred. Rather than
sublease the buildings, the Company entered into settlement agreements with the
landlords for its Nashua, Cincinnati, Lisle and Billerica facilities. The
Company believes that the settlements were very favorable to the Company
(resulting in releases from the restructuring accrual) because the Company had
ceased making rent payments for three facilities (Cincinnati, Lisle and
Billerica), and had discussed filing for protection from creditors in its
public filings. If the Company had not settled the leases under such distressed
conditions, the charges incurred would undoubtedly have been higher resulting
in a lower or zero release.
Year Ended 1999
On March 29, 1999, the Company announced its intention to restructure. The
restructure plan was finalized on March 31, 1999 and the Company recorded a
charge of $291,000, consisting of severance payments associated with the
termination of approximately 30% of the Company's employees representing
substantially all of its sales, marketing and year 2000 delivery personnel (40
employees). Payments related to terminated employees were completed by May 28,
1999. The restructuring resulted in a quarterly reduction of approximately
$1,000,000 in salary and related costs beginning in the third quarter of 1999.
The amounts accrued to and payments against the accrued restructuring during
the first quarter of 1999 and the composition of the remaining balance at March
31, 1999 were as follows:
Balance Q1 1999 Q1 1999 Balance
December 31, 1998 Accrual Payments March 31, 1999
----------------- ------- -------- --------------
(in thousands)
Provision for severance
and benefit payments to
terminated employees... $ 536 $291 $(212) $ 615
Provisions related to
closure of facilities
and reduction of
occupied space......... 2,144 -- (361) 1,783
------ ---- ----- ------
Total................. $2,680 $291 $(573) $2,398
====== ==== ===== ======
In April 1999, the Company decided to further reduce the amount of space it
occupied in its Billerica, Massachusetts headquarters facility. The space
consolidation was completed in the second quarter of 1999 and the Company
increased the amount of space it was offering for sublease from 50,000 to
75,000 square feet. Accordingly, in June 1999, the Company recorded an
additional restructure accrual of $517,000 consisting primarily of the cost of
lease expenses and real estate commissions associated with the additional
vacated 25,000 square feet net of estimated sublease income. The assumptions
underlying the charge for the newly
F-15
PERITUS SOFTWARE SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
vacated space and the space vacated in previous quarters were modified from
previous assumptions based on the progress in marketing the vacated space and
changes in market conditions. The estimated sublease date was changed from
December 1, 1999 to January 1, 2000. The assumed sublease discount from the
lease-related payments due under lease was lowered to 12%. The assumption
regarding the discount period was changed to cover the entire lease term.
Finally, estimated construction costs and commissions were also updated. The
additional restructuring resulted in a quarterly reduction in lease-related
costs of approximately $87,000 beginning in the third quarter of 1999.
Due to the Company's degraded financial condition, in June 1999, the Company
reached a settlement with American Financial Group, Inc. ("AFG") and its
subsidiaries and affiliates for release from its real estate lease in
Cincinnati, Ohio and certain other obligations. The Company had completely
vacated the facility by June 30, 1999 and had no remaining obligations or
liabilities associated with the facility. Of the total settlement, $136,000 was
associated with the real estate lease and is included within the restructuring
payments and reclassifications during the second quarter of 1999. The
settlement was more favorable than the Company's original sublease assumptions
and resulted in a release of $272,000 from the original estimated charges. The
second quarter payments and reclassifications also includes a $296,000
adjustment to reclassify the rent levelization accrual associated with the
vacated space in its Billerica headquarters facility from other accrued
expenses into the restructure accrual.
The Company's lease for its Billerica, MA facility that commenced in
February 1998 contained lower rent payments during the early years offset by
higher payments in later years. In accordance with paragraph 15 of SFAS 13, the
Company therefore recorded monthly rent expense on a straight-line (levelized)
basis (total of all months' rent divided by the number of lease months).
Through June 1999, the rent expense recorded exceeded the rent payments due
under the lease and the difference between the two amounts was credited to a
rent levelization accrual. The presumption underlying this accounting was that
the Company would eventually pay rents that exceeded the levelized rent and
draw down the liability. In the second quarter of 1999, the Company concluded
that the levelization liability associated with space included in restructuring
should have been relieved at the time the space was included in restructuring.
It therefore reclassified the rent levelization liability associated with the
vacated portion of the building to the restructuring accrual. Of the total
adjustment, $142,000 related to the 25,000 square feet that was added to
restructuring in the second quarter of 1999 and the balance of the $154,000 was
associated with earlier restructurings. The levelization liability associated
with the portion of the building, which was still being used by the Company,
remained as part of operating liabilities.
The total facilities related payments/reclassifications for the second
quarter of 1999 were as follows:
Rent levelization reclassification................................ $ 296,000
Cincinnati settlement (facility portion).......................... (136,000)
All other net payments............................................ (55,000)
---------
Total........................................................... $ 105,000
=========
At the end of the second quarter of 1999, the Company re-evaluated its
estimated costs associated with its previous restructure charges based upon
activity and experience to date. This evaluation included a re-estimate of the
remaining costs to be incurred in the future under the previous restructurings.
The $813,000 release in the second quarter of 1999 represented the difference
between the remaining restructure accrual and the future estimated costs. Of
the total release, $75,000 was related to the provision of severance and
benefit payments for terminated employees and $738,000 was related to the
provision related to the closure of facilities and the reduction of occupied
space. The $75,000 employee-related release resulted from differences in actual
experience and original estimates due primarily to the fact that several
employees obtained early employment or did not sign releases, and therefore,
received lesser or no payments.
F-16
PERITUS SOFTWARE SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The $738,000 facility related release in the second quarter of 1999 broke
down as follows:
Billerica related................................................. $(502,000)
Cincinnati related................................................ (272,000)
Lisle related..................................................... 36,000
---------
Total........................................................... $(738,000)
=========
The Billerica related release resulted from the change in sublease
assumptions discussed above. The Cincinnati related release resulted from the
favorable settlement discussed above. The Lisle related negative amount was due
to the fact that a settlement agreement had been negotiated (but not concluded)
and it exceeded the remaining accrual.
The combination of the 1999 second quarter accrual of $517,000 and the 1999
second quarter release of $813,000 resulted in a net favorable impact of
$296,000 to the results of operations for the three months ended June 30, 1999
The amounts accrued to and released from and payments and adjustments made
against the restructure accrual during the second quarter of 1999 along with
the composition of the remaining balance at June 30, 1999 were as follows:
Balance Q2 1999 Payments/ Q2 1999 Q2 1999 Balance
March 31, 1999 Reclassifications Accrual Release June 30, 1999
-------------- ----------------- ------- ------- -------------
(in thousands)
Provisions for severance
and benefit payments to
terminated employees... $ 615 $(425) $-- $ (75) $ 115
Provision related to
closure of facilities
and reduction of
occupied space......... 1,783 105 517 (738) 1,667
------ ----- ---- ----- ------
Total................. $2,398 $(320) $517 $(813) $1,782
====== ===== ==== ===== ======
In August 1999, the Company executed a lease termination agreement for its
Lisle, Illinois facility. Under the agreement, the Company paid $100,000 and
relinquished its $16,000 security deposit. These amounts were charged against
the accrued restructuring liability during the third quarter of 1999.
During the third quarter of 1999, the Company developed a workable plan to
relocate its headquarters from Billerica to its existing facility in
Westborough, Massachusetts. The plan, along with the Company's degraded
financial condition, enabled the Company to negotiate a favorable settlement of
its Billerica lease. In September 1999, the Company entered into a settlement
agreement with BCIA New England Holdings LLC. Under the settlement, the Company
agreed to pay $200,000 in cash, relinquish its $300,000 security deposit, issue
500,000 shares of common stock and provide $71,000 of furniture and equipment.
All of these items were charged against the accrued restructuring liability
during the third quarter of 1999. The Company also charged the liability for a
$734,000 write-off of leasehold improvements and other fixed assets directly
tied to its Billerica facility. The favorable Billerica settlement resulted in
a release from the restructuring accrual of $392,000.
The third quarter payments and reclassifications also include a $110,000
payment for the settlement of two telephone leases and the elimination of the
associated $270,000 capital lease liability, and a $149,000 adjustment to
reclassify the remaining rent levelization accrual for the Billerica facility
from other accrued expenses into the restructure accrual.
F-17
PERITUS SOFTWARE SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The total facilities related restructuring payments/reclassifications for
the third quarter of 1999 broke down as follows:
Lisle settlement................................................. $(116,000)
Billerica cash payment........................................... (200,000)
Billerica security deposit....................................... (300,000)
Billerica stock issued (valued at 90% of closing price).......... (89,000)
Rent levelization reclassification............................... 149,000
All other net payments........................................... (30,000)
---------
Total.......................................................... $(586,000)
=========
The total payments/reclassifications related to write-off of fixed assets,
leasehold improvements, and telephone lease related items for the third quarter
of 1999 broke down as follows:
Billerica furniture provided..................................... $ (71,000)
Leasehold and other fixed asset write-off........................ (734,000)
Telephone leases settlement payment.............................. (110,000)
Elimination of telephone capital leases.......................... 270,000
---------
Total.......................................................... $(645,000)
=========
The $436,000 facility related release in the third quarter of 1999 broke
down as follows:
Billerica related................................................. $(392,000)
Lisle related..................................................... (44,000)
---------
Total........................................................... $(436,000)
=========
The Lisle related release resulted from the settlement of the Lisle
telephone system lease for less than the capitalized lease liability.
In total, the Company recorded a net favorable impact of $450,000 associated
with restructuring to the results of operations for the three months ended
September 30, 1999.
The amounts accrued to and released from and payments and adjustments made
against the restructure accrual during the third quarter of 1999 along with the
composition of the remaining balance at September 30, 1999 were as follows:
Balance
Balance Q3 1999 Payments/ Q3 1999 September 30,
June 30, 1999 Reclassifications Release 1999
------------- ----------------- ------- -------------
(in thousands)
Provisions for severance
and benefit payments to
terminated employees... $ 115 $ (101) $ (14) $ --
Provision related to
closure of facilities
and reduction of
occupied space......... 1,667 (586) (436) 645
Write-off of fixed
assets, leasehold
improvements, and
telephone lease related
items.................. -- (645) -- (645)
------ ------- ----- -----
Total................. $1,782 $(1,332) $(450) $ --
====== ======= ===== =====
F-18
PERITUS SOFTWARE SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Year Ended 1998
In March 1998, the Company announced its intention 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 total charge of $1,439,000. The charge
included severance-related payments of $947,000 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, $165,000 of the
total restructuring charge related to support costs for a discontinued product.
The final $327,000 of the restructuring charge related to the closure of two
research and development and outsourcing centers (Westborough, Massachusetts,
and Nashua, New Hampshire) consisting primarily of accrual of lease costs, net
of estimated sublease income. Under its plan, the Company committed to vacate
the majority of its Westborough facility effective June 1998. The $162,000
accrued for Westborough was computed as 100% of the lease-related payments for
the period from June 1998 through the expiration of the lease for only that
portion of the facility which was vacated. The Company estimated that it would
be unable to sublease the space prior to the expiration of lease in December
1998, primarily due to the short period of time for which the space would be
available to potential sublessees. The lease did expire in December 1998 and
was not renewed. The assumption underlying the $165,000 charge recorded for the
Nashua facility was that it would remain unoccupied for nine months and that it
would be subleased thereafter at a 20% discount from the lease-related payments
due under the Company's lease. Payments related to terminated employees were
completed in June 1998 for 45 employees and were completed by September 1999
for the remaining 3 employees. Payments related to the closure and reduction of
facilities were originally expected to be complete by April 2003. However,
payments ended as of December 31, 1998, upon the execution of a settlement
agreement with the Company's Nashua landlord. The restructuring resulted in a
reduction of approximately $950,000 in salary and related costs and $90,000 in
facility-related costs on a quarterly basis beginning in second quarter of
1998.
In September 1998, the Company announced its intention to restructure and
recorded a total restructuring charge of $3,372,000. The charge included
$1,909,000 for severance-related payments associated with the termination of
approximately 33% of the Company's employees at that time (89 employees). At
September 30, 1998, all 89 employees had been terminated with no further
terminations remaining under the restructuring. The charge also included
$1,463,000 related to the closure of two research and development centers
(Cincinnati, Ohio and Lisle, Illinois) and a 30,000 square foot reduction of
occupied space at the Company's headquarters facility in Billerica, MA. The
accrual consisted primarily of estimated lease costs, net of estimated sublease
income. The $837,000 charge associated with Billerica, assumed that the vacated
space would remain empty for nine months and would be subsequently subleased
thereafter at a 20% discount from the lease-related payments due under the
Company's lease for the following four years. Thereafter, for the last two and
one-half years of the lease, the Billerica sublease income was estimated to
equal the amounts due under the Company's lease. The assumption for the
Cincinnati charge of $442,000 and the Lisle charge of $184,000 was that space
would remain empty for six months and would be subsequently subleased
thereafter at a 20% discount from the lease-related payments due under the
Company's lease until lease termination. Payments related to terminated
employees were completed by December 1998 for 82 employees and were completed
by September 1999 for the remaining 7 employees. Payments related to the
closure of facilities and reduction of occupied space were originally expected
to be completed by June 2003; however, payments ended as of September 30, 1999
upon the execution of a settlement agreement with the Company's Billerica
landlord. The restructuring resulted in a reduction of approximately $1,900,000
in salary and related costs and $250,000 in lease-related costs on a quarterly
basis beginning in the fourth quarter of 1998.
In December 1998, the Company announced its intention to restructure and
recorded a total restructuring charge of $1,316,000. The charge included
$408,000 for severance-related payments associated with the termination of
approximately 22% of the Company's employees at that time (45 employees). At
December 31,
F-19
PERITUS SOFTWARE SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
1998, all 45 employees had been terminated with no further terminations
remaining under the restructuring. In addition, $908,000 of the restructuring
charge related to its Billerica headquarters facility including a further
reduction (20,000 additional square feet) of occupied space and consisted
primarily of accrual of lease costs, net of estimated sublease income generally
consistent with previous assumptions. However, the assumption on the amount of
time the total 50,000 square feet of vacated space would remain unoccupied was
extended from June 30, 1999 until November 30, 1999 based on the progress of
the marketing efforts to date. Payments related to the terminated employees
were completed by December 31, 1998. Payments related to the reduction of
occupied space were originally expected to be complete by June 2003; however,
payments ended as of September 30, 1999 upon the execution of a settlement
agreement with the Company's Billerica landlord. The restructuring resulted in
a reduction of approximately $950,000 in salary and related costs and $70,000
in lease-related costs on a quarterly basis beginning in the first quarter of
1999. In December of 1998, through its marketing activity, the Company found a
new tenant for its Nashua, New Hampshire facility and executed a settlement
agreement with its landlord rather than entering into a sublease. The
settlement resulted in a $58,000 release from the restructuring accrual.
The amounts accrued to, charged against and other adjustments made to the
restructuring accrual during the year ended December 31, 1998 and the
composition of the remaining balance at December 31, 1998 were as follows:
Balance Balance
December 31, 1998 1998 Other December 31,
1997 Accrual Charges Adjustments 1998
------------ ------- ------- ----------- ------------
(in thousands)
Provision for severance
and benefit payments to
terminated employees... $-- $3,264 $(2,558) $(170) $ 536
Provisions related to
closure of facilities
and reduction of
occupied space......... -- 2,698 (503) (51) 2,144
Support costs for
discontinued Product... -- 165 (165) -- --
---- ------ ------- ----- ------
Total................. $-- $6,127 $(3,226) $(221) $2,680
==== ====== ======= ===== ======
6. Disposition of Majority-Owned Subsidiary
In July 1998, the Company divested 100% of its equity interest in its
majority-owned Spanish subsidiary, Persist, S. A. ("Persist"), to Persist for
cash proceeds totaling $470,000. Accordingly, the results of operations of
Persist subsequent to the date of disposition have been excluded from the
Company's consolidated results for the year ended December 31, 1998. The gain
on this transaction was determined as the excess of cash proceeds received by
the Company over the net assets of Persist at the date of disposition and
reflects the realization of the cumulative impact of foreign exchange rate
fluctuations on the balance sheet of Persist while a subsidiary of the Company.
7. Property and Equipment
Property and equipment consist of the following:
Estimated December 31,
Useful Lives ---------------------
(Years) 2000 1999
------------ ---------- ----------
Equipment.............................. 3-7 $1,480,000 $1,734,000
Furniture, fixtures and internal use
software.............................. 5-7 1,040,000 1,040,000
Leasehold improvements................. 2-5 43,000 43,000
---------- ----------
2,563,000 2,817,000
Less: Accumulated depreciation and
amortization.......................... 2,346,000 2,115,000
---------- ----------
$ 217,000 $ 702,000
========== ==========
F-20
PERITUS SOFTWARE SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Equipment under capital leases at December 31, 2000 and 1999 was $53,000 and
$53,000 with related accumulated depreciation of $26,000 and $15,000,
respectively. Amortization expense related to assets under capital leases was
$11,000, $69,000 and $48,000 for the years ended December 31, 2000, 1999 and
1998, respectively. Depreciation expense on all fixed assets amounted to
$463,000, $1,166,000 and $2,063,000 for the years ended December 31, 2000, 1999
and 1998, respectively.
8. Other Accrued Expenses and Current Liabilities
Other accrued expenses and current liabilities consist of the following:
December 31,
-------------------
2000 1999
-------- ----------
Sales and use tax accrual............................... $ 90,000 $ 484,000
Employee-related costs.................................. 57,000 223,000
Professional costs...................................... 96,000 168,000
Miscellaneous accruals.................................. 134,000 253,000
-------- ----------
$377,000 $1,128,000
======== ==========
Miscellaneous accruals include items such as warranty costs exposure and
accruals for expenses where no invoices had been received.
9. Related Party Transactions
For the year ended December 31, 2000, the Company recorded revenue of
$90,000 and $25,000 related to other services revenue with shareholders, Rocket
Software Inc, and Mr. Dominic Chan, respectively. At December 31, 2000, there
were no balances in accounts receivable or in costs and estimated earnings in
excess of billings on uncompleted contracts with related parties.
For the year ended December 31, 1998, the Company recorded revenue of
$204,000 and $255,000 related to software services and licensing agreements,
respectively, with Great American Insurance Company ("GAI"), an affiliated
company of a significant shareholder, APU. At December 31, 1998, $42,000 was
included in accounts receivable from related parties with respect to this
customer.
For the years ended December 31, 1998 and 1997, Persist, S.A. ("Persist'),
the Company's majority-owned Spanish subsidiary, recorded revenue of $872,000
and $1,183,000, respectively, related to outsourcing services to a corporation
owning a majority of and 27% of the outstanding stock of Persist at December
31, 1998 and 1997, respectively. The Company divested 100% of its equity
interest in Persist in July of 1998.
10. ACCOUNTS RECEIVABLE PURCHASE AGREEMENT
The Company concluded an accounts receivable purchase agreement in 1999 with
a lender to permit borrowing against certain acceptable receivables at a rate
of 80% of the face amount of such receivables up to a maximum of $4 million. In
exchange for such agreement, the Company granted the lender a security interest
in substantially all of its assets. There can be no assurance that the Company
will be able to successfully borrow against such agreement, negotiate other
borrowing arrangements or raise additional funds through bank borrowings and/or
debt and/or equity financings. To date, the Company has not had any borrowings
under this agreement.
F-21
PERITUS SOFTWARE SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
11. Income Taxes
The components of loss before income taxes are as follows:
Year Ended December 31,
--------------------------------------
2000 1999 1998
----------- ----------- ------------
Domestic............................. $(4,199,000) $(2,222,000) $(26,393,000)
Foreign.............................. 5,000 (359,000) (255,000)
----------- ----------- ------------
$(4,194,000) $(2,581,000) $(26,648,000)
=========== =========== ============
The provision (benefit) for income taxes consists of the following:
Year Ended December 31,
------------------------------------
2000 1999 1998
----------- --------- ------------
Current:
Federal.............................. $ -- $ -- $ --
State................................ $ -- $ -- $ --
Foreign.............................. (28,000) 2,000 25,000
----------- --------- ------------
(28,000) 2,000 25,000
----------- --------- ------------
Deferred:
Federal.............................. (1,550,000) (513,000) (9,546,000)
State................................ (245,000) 37,000 (1,902,000)
----------- --------- ------------
(1,795,000) (476,000) (11,448,000)
Change in deferred tax asset
valuation allowance................. 1,795,000 476,000 11,448,000
----------- --------- ------------
$ (28,000) $ 2,000 $ 25,000
=========== ========= ============
No current federal or state income taxes were payable in the years ended
December 31, 2000, 1999 or 1998 as a result of taxable losses incurred.
The components of deferred tax assets and liabilities follow:
December 31,
--------------------------
2000 1999
------------ ------------
Deferred tax assets:
Net operating loss carry-forwards.............. $ 36,718,000 $ 33,703,000
Tax credit carry-forwards...................... 746,000 778,000
Nondeductible accrued expenses and reserves.... 166,000 525,000
Other deferred tax assets...................... 165,000 1,106,000
------------ ------------
Gross Deferred Assets.......................... 37,795,000 36,112,000
------------ ------------
Deferred tax liabilities:
Estimated costs and earnings in excess of
billings on uncompleted contracts............. (4,000) (116,000)
Gross deferred tax liabilities................. (4,000) (116,000)
------------ ------------
Net deferred tax (liabilities) assets.......... 37,791,000 35,996,000
Deferred tax asset valuation allowance......... (37,791,000) (35,996,000)
------------ ------------
$ -- $ --
============ ============
F-22
PERITUS SOFTWARE SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
At December 31, 2000 and 1999, the Company has provided a valuation
allowance for the full amount of its net deferred tax assets since, based on
the weight of available evidence, management has concluded that it is more
likely than not (defined as a likelihood of slightly more than 50%) that these
future benefits will not be realized. If the Company achieves profitability,
these net deferred tax assets may be available to offset future income tax
liabilities and expense.
A reconciliation between the amount of reported income tax provision
(benefit) and the amount determined by applying the U.S. federal statutory rate
to the loss before income taxes and minority interest in majority-owned
subsidiary follows:
Year Ended December 31,
-----------------------------------
2000 1999 1998
----------- --------- -----------
Loss at statutory rate................ $(1,468,000) $(903,000) $(9,327,000)
Tax credit carry-forwards............. -- -- (655,000)
Permanent differences and other, net.. (96,000) 571,500 191,000
State tax benefit, net of federal
effect............................... (259,000) (142,500) (1,632,000)
Change in deferred tax asset valuation
allowance............................ 1,795,000 476,000 11,448,000
----------- --------- -----------
$ (28,000) $ 2,000 $ 25,000
=========== ========= ===========
At December 31, 2000, the Company had available net operating loss carry-
forwards of approximately $89.1 million and $89.4 million for federal and state
income tax reporting purposes, respectively. At December 31, 2000, the Company
had research and development credit carry-forwards of $508,000 and $237,000
available to offset future federal and state income tax, respectively. These
carry-forwards and credits will expire at various times during the period 2001
through 2019 if not utilized.
In accordance with certain provisions of the Internal Revenue Code, a change
in ownership of greater than 50% within a three-year period places an annual
limitation on the Company's ability to utilize its existing net operating loss
and research and development tax credit carry-forwards. As a result of the $4
million investment by Rocket Software, Inc. on March 27, 2000, the limitation
was triggered.
12. Stock Plans
1992 Long-Term Incentive Plan and 1997 Stock Incentive Plan
In January 1992, the Board of Directors established the Long-Term Incentive
Plan (the "1992 Incentive Plan"). In May 1997, the Board of Directors
established the 1997 Stock Incentive Plan (the "1997 Incentive Plan") which
replaced the 1992 Incentive Plan. The 1992 Incentive Plan and the 1997
Incentive Plan allow for the grant of awards in the form of incentive and
nonqualified stock options, restricted stock awards and other stock-based
awards, including the grant of shares based upon certain conditions, the grant
of securities convertible into common stock and the grant of stock appreciation
rights (collectively, the "Awards") to officers, employees, directors,
consultants and advisors of the Company. At December 31, 2000, 3,950,000 shares
of common stock were authorized under the 1997 Incentive Plan, and no further
grants may be made under the 1992 Incentive Plan. Incentive stock options are
granted at an exercise price equal to the fair market value of the Company's
common stock at the grant date (or no less than 110% of the fair market value
in the case of optionees holding more than 10% of the voting stock of the
Company) and expire 10 years from the date of grant or upon termination of
employment. Non-qualified stock options are granted at an exercise price
determined by the Board of Directors and expire 10 years from the date of
grant. Both the incentive and non-qualified stock options are exercisable at
various dates as determined by the Board of Directors. Through December 31,
1999, no awards other than incentive stock options and non-qualified stock
options were issued under the 1992 Incentive and 1997 Incentive Plans.
F-23
PERITUS SOFTWARE SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
1997 Director Stock Option Plan
The Company's 1997 Director Stock Option Plan (the "Director Plan") was
adopted by the Board of Directors and approved by the stockholders of the
Company in May 1997. Under the terms of the Director Plan, directors of the
Company who are not employees of the Company or any subsidiary of the Company
are eligible to receive non-statutory options to purchase shares of Common
Stock. A total of 200,000 shares of Common Stock were initially available for
issuance upon exercise of options granted under the Director Plan. On March 24,
2000, the Board of Directors amended the Director Plan to increase the number
of shares available for issuance thereunder to 600,000. The Director Plan was
also amended to provide (i) that commencing in 2001, on the last trading day in
April, options to purchase 25,000 shares will be granted to each director
serving on the Board of Directors on such date who has been a director for the
entire preceding twelve months, (ii) for an initial grant of options to
purchase 25,000 shares to each new non-employee director elected after April 1,
2000, and (iii) for a grant of options to purchase 50,000 shares on the first
trading day in April 2000 for each director serving on the Board of Directors
on such date.
Summary of Activity Under Stock Option Plans
At December 31, 2000, there were 1,651,944 options available for future
grant under the 1997 Incentive Plan and the Director Plan.
The following table summarizes stock option activity during the years ended
December 31, 2000, 1999, 1998:
Year Ended December 31,
-------------------------------------------------------------
2000 1999 1998
------------------- -------------------- --------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
--------- -------- ---------- -------- ---------- --------
Outstanding at beginning
of year................ 2,874,418 $1.2135 4,331,572 $4.0008 4,160,967 $5.9797
Granted................. 920,000 0.5723 1,823,500 0.2026 3,166,340 3.9877
Exercised............... (145,928) 0.2077 (1,000) 0.0004 (883,185) 1.1507
Forfeited............... (416,629) 1.4200 (3,279,654) 4.2350 (2,112,550) 9.0704
--------- ---------- ----------
Outstanding at end of
year................... 3,231,861 1.0498 2,874,418 1.2135 4,331,572 4.0008
========= ========== ==========
Options exercisable at
end of year............ 2,859,826 0.9754 1,508,288 1.2605 1,254,326 2.7785
========= ========== ==========
F-24
PERITUS SOFTWARE SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The following summarizes information regarding stock options outstanding and
exercisable at December 31, 2000:
Options Outstanding Options Exercisable
-------------------------------------- --------------------------
Weighted
Average
Remaining
Contractual Weighted Weighted
Number Life Average Number Average
Range of Exercise Prices Outstanding (years) Exercise Price Outstanding Exercise Price
------------------------ ----------- ----------- -------------- ----------- --------------
$ 0.000-$ 0.100......... 154,375 2.2 $ 0.10 154,375 $ 0.10
$ 0.101-$ 0.250......... 1,872,736 7.6 $ 0.19 1,837,736 $ 0.19
$ 0.251-$ 0.500......... 50,250 9.2 $ 0.44 250 $ 0.48
$ 0.501-$ 1.000......... 716,800 6.4 $ 0.87 521,800 $ 0.87
$ 1.001-$ 2.000......... 17,000 4.1 $ 1.60 17,000 $ 1.60
$ 2.001-$ 5.000......... 278,230 5.8 $ 2.91 215,930 $ 2.91
$ 5.001-$10.000......... 91,220 6.4 $ 8.14 61,610 $ 8.43
$10.001-$15.000......... 15,000 0.1 $13.00 15,000 $13.00
$15.001-$20.000......... 36,250 5.5 $16.47 36,125 $16.47
--------- --- ------ --------- ------
3,231,861 6.8 $ 1.05 2,859,826 $ 0.98
========= === ====== ========= ======
No compensation expense was recorded under APB No. 25 during the years ended
December 31, 2000, 1999 and 1998. Had compensation cost been determined based
upon the fair value of options at their grant dates as prescribed in SFAS No.
123, the Company's net loss and basic and diluted net loss per share would have
been as follows:
Year Ended December 31,
--------------------------------------
2000 1999 1998
----------- ----------- ------------
Net Loss:
As reported....................... $(4,166,000) $(2,583,000) $(26,673,000)
Pro forma......................... $(5,756,000) (7,671,000) (36,204,000)
Basic diluted net loss per share:
As reported....................... $ (0.17) $ (0.15) $ (1.65)
Pro forma......................... $ (0.23) $ (0.46) (2.24)
The fair value of options at the date of grant was estimated using the
Black-Scholes option pricing model with the following weighted average
assumptions:
Year Ended
December 31,
-------------------
2000 1999 1998
----- ----- -----
Expected life (years)................................. 2 2 5
Volatility............................................ 224% 198% 90%
Risk-free interest rate............................... 6.26% 5.43% 5.02%
Dividend yield........................................ 0% 0% 0%
Fair value of option grants-exercise price equal to
the fair value of the related stock.................. $0.51 $0.17 $2.90
1997 Employee Stock Purchase Plan
In May 1997, the Board of Directors adopted the 1997 Employee Stock Purchase
Plan (the "Purchase Plan"). As amended, the Purchase Plan provided for the
issuance of up to 300,000 shares of the Company's common stock to participating
employees. All employees of the Company whose customary employment is
F-25
PERITUS SOFTWARE SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
more than 20 hours per week and who own no more than 5% of the total combined
voting power or value of the stock of the Company were eligible to participate
in the Purchase Plan. Under the terms of the Purchase Plan, the option price
was an amount equal to 85% of the average market price per share of the common
stock on either the first day or the last day of the offering period, whichever
was lower. As amended, the Purchase Plan provided for four consecutive six-
month offering periods beginning with the six-month period extending from
October 1, 1997 through March 31, 1998. A total of 50,000 and 50,000 shares
were sold on April 1, 1998 and October 1, 1998, respectively, under the
Purchase Plan. No awards were made under the Purchase Plan in 1997. The Board
of Directors terminated the Purchase Plan on April 1, 1999.
13. Defined Contribution Plan
The Company maintains a defined contribution plan under Section 401(k) of
the Internal Revenue Code covering substantially all employees. Under the plan,
employees may contribute the lower of up to 20% of their salaries or a dollar
amount prescribed by the Internal Revenue Code. The Board of Directors may
elect to make a discretionary contribution to the plan. For the years ended
December 31, 2000, 1999 and 1998, the Company contributed $53,000, $89,000 and
$251,000 respectively, to the Plan.
14. Segment, Geographic, and Product Information
The Company operates in one reportable segment due to its centralized
structure and single industry segment: software maintenance, tools and
services. The Company currently derives its revenue from software maintenance
outsourcing services, software and methodology licensing and other services.
Information by geographic area at December 31, 2000, 1999 and 1998 and for the
years then ended, is summarized below (in thousands):
Outsourcing Services License Revenue Other Services Revenue
----------------------- ----------------------- ----------------------- Long Lived
Unaffiliated Affiliated Unaffiliated Affiliated Unaffiliated Affiliated Assets
------------ ---------- ------------ ---------- ------------ ---------- ----------
2000
United States.......... $2,664 $ -- $1,045 $ -- $ 699 $ 115 $ 217
Foreign................ -- -- -- -- -- -- --
------ ----- ------ ----- ------- ----- ------
$2,664 $ -- $1,045 $ -- $ 699 $ 115 $ 217
====== ===== ====== ===== ======= ===== ======
1999
United States.......... $5,923 $ -- $2,087 $ -- $ 3,188 $ -- $ 668
Foreign................ -- -- -- -- -- -- 34
------ ----- ------ ----- ------- ----- ------
$5,923 $ -- $2,087 $ -- $ 3,188 $ -- $ 702
====== ===== ====== ===== ======= ===== ======
1998
United States.......... $8,802 $ -- $9,189 $ 255 $11,850 $ 204 $4,027
Foreign................ 251 872 -- -- 109 -- 211
------ ----- ------ ----- ------- ----- ------
$9,053 $ 872 $9,189 $ 255 $11,959 $ 204 $4,238
====== ===== ====== ===== ======= ===== ======
The geographic classification of revenue is determined based on the country
in which the legal entity providing the services is located. Revenue from no
single foreign country was greater than 10% of the consolidated revenues of the
Company in 2000, 1999 or 1998.
Significant Customers
Revenue from four customers, Bull, Ford Motor Company, EMC Corporation, and
CGI Group Inc., accounted for 40%, 15%, 12% and 10% of the Company's total
revenue for the year ended December 31, 2000, respectively. For the year ended
December 31, 1999, Bull and Compaq represented 22% and 12%, respectively, of
the Company's total revenue. Revenue from two customers, AT&T and Bull,
accounted for 12% and 10%,
F-26
PERITUS SOFTWARE SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
respectively, of the Company's total revenue for the year ended December 31,
1998. At December 31, 2000, the Company had billed accounts receivable from
Bull, Ford Motor Company, EMC Corporation, and CGI Group Inc., of $135,000, $0,
$134,000 and $0, respectively. At December 31, 2000, the Company had billings
in excess of costs and estimated earnings in excess of billings on uncompleted
contracts with Bull and EMC of $29,000 and $129,000, respectively, and $8,000
of unbilled revenue with Bull. At December 31, 1999, the Company had accounts
receivable from Bull of $236,000 for billed accounts receivable, $59,000 for
costs and estimated earnings in excess of billings on uncompleted contracts and
$116,000 for unbilled revenue. At December 31, 1999, the Company had no amounts
receivable from Compaq. At December 31, 1998, the Company had amounts
receivable from Bull of $164,000 for billed accounts receivable, $114,000 for
costs and estimated earnings in excess of billings on uncompleted contracts and
$77,000 for unbilled revenue.
15. Commitments
The Company leases its operating facilities and certain equipment under non-
cancelable operating and capital lease agreements. Rent expense for the years
ended December 31, 2000, 1999 and 1998 was $315,000, $850,000 and $2,244,000,
respectively. Future minimum lease payments under non-cancelable leases as of
December 31, 2000 are as follows:
Operating Capital
Year Ending December 31,: Leases Leases
------------------------- --------- -------
2001....................................................... 270,000 13,000
2002....................................................... -- 12,000
------- ------
270,000 25,000
Less--Amount representing interest......................... -- 1,000
------- ------
Present value of minimum lease payments.................... 270,000 24,000
======= ======
16. Selected Quarterly Financial Data (Unaudited)
Q1 2000 Q2 2000 Q3 2000 Q4 2000
------- ------- ------- -------
(In Thousands, Except Share-
Related Data)
Total revenue........................... $ 1,565 $ 926 $1,047 $ 985
Gross Profit............................ 985 467 678 633
Net income (loss)....................... (3,810) (433) 41 36
Net income (loss) per basic and diluted
share.................................. $ (0.21) $(0.02) $ 0.00 $ 0.00
Q1 1999 Q2 1999 Q3 1999 Q4 1999
------- ------- ------- -------
Total revenue........................... $ 4,667 $3,113 $1,960 $1,458
Gross Profit............................ 1,620 1,156 835 558
Net loss................................ (1,959) (528) (71) (25)
Net loss per basic and diluted share.... $ (0.12) $(0.03) $(0.00) $(0.00)
17. Legal Proceedings
In December 1999, while continuing to deny any liability, the Company agreed
to settle a then-pending class action lawsuit filed in the United States
District Court for the District of Massachusetts relating to events during the
period October 22, 1997 through October 26, 1998. The settlement was funded
entirely by the Company's directors and officers liability insurer and became
final on March 29, 2000.
On or about April 28, 1999, the Company filed a lawsuit in the United States
District Court for the District of Massachusetts against Micah Technology
Services, Inc. and Affiliated Computer Services, Inc. (collectively,
F-27
PERITUS SOFTWARE SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
"Micah"). The lawsuit principally alleged that Micah breached its contract with
the Company by failing to pay for services performed by the Company under such
contract. The lawsuit further alleged that since Micah was unjustly enriched by
the services performed by the Company, the Company was entitled to recovery
based on quantum meruit, and that Micah engaged in unfair and/or deceptive
trade practices or acts in violation of Massachusetts General Laws ("M.G.L.")
Chapter 93A by allowing the Company to perform services when Micah did not pay
for such services. The lawsuit sought unspecified damages on the breach of
contract and quantum meruit claims and double or triple damages on the Chapter
93A claim. Micah denied the Company's allegations and filed a counterclaim
against the Company principally alleging fraud, negligent misrepresentations,
breach of contract and that the Company engaged in unfair and/or deceptive
trade practices or acts in violation of M.G.L. Chapter 93A by its
misrepresentations and breach of contract. The Company denied the allegations
contained in Micah's counterclaim. A non-binding mediation hearing was held on
March 17, 2000 and no settlement was reached. On December 18, 2000, the Company
and Micah agreed to settlement terms whereby Micah agreed to pay, and has paid
$320,000 and both parties agreed to a general release from any and all claims
relating to or arising out of this litigation.
In addition to the matters noted above, the Company is from time to time
subject to legal proceedings and claims which arise in the normal course of its
business. In the opinion of management, the amount of ultimate liability with
respect to these other actions, currently known, will not have a material
adverse effect on the Company's financial position or results of operations.
F-28
ANNEX A
AGREEMENT AND PLAN OF MERGER
By and Among
Peritus Software Services, Inc.
("Company"),
Rocket Software, Inc.
("Rocket")
and
Rocket Acquisition Company, Inc.
("Acquiror")
April 18, 2001
A-1
AGREEMENT AND PLAN OF MERGER
THIS AGREEMENT AND PLAN OF MERGER is made as of April 18, 2001, by and among
Peritus Software Services, Inc., a Massachusetts corporation ("Company"),
Rocket Software, Inc., a Massachusetts corporation ("Rocket"), and Rocket
Acquisition Company, Inc., a Massachusetts corporation ("Acquiror").
RECITALS
A. The respective Boards of Directors of Company, Rocket and Acquiror deem
the merger of Acquiror into Company on the terms and conditions set forth in
this Agreement and Plan of Merger (as from time to time amended in accordance
herewith, this "Agreement") to be desirable and generally to the welfare and
advantage of each, and in the best interests of the stockholders of each.
B. The respective Boards of Directors of Company, Rocket and Acquiror have
approved this Agreement and the merger of Acquiror into Company, with Company
as the surviving corporation, and the other transactions contemplated by this
Agreement, upon the terms and subject to the conditions set forth herein.
C. The Board of Directors of Company has determined that the consideration
to be paid for each share of Company Common Stock in the Merger is fair to and
in the best interests of the stockholders of Company.
D. The Board of Directors of Company has approved the transactions
contemplated by this Agreement in accordance with the provisions of Section 1
of Massachusetts General Laws ch. 110F.
E. The Board of Directors of Company has directed that this Agreement be
submitted to the stockholders of Company for their approval, and Rocket, the
majority stockholder of Acquiror, has heretofore approved and adopted this
Agreement.
F. Certain capitalized terms used herein are defined in Section 7 of this
Agreement or elsewhere in this Agreement.
NOW, THEREFORE, in consideration of the premises and the mutual covenants
herein contained and other valuable consideration, the receipt and adequacy
whereof are hereby acknowledged, the parties hereto, intending to be legally
bound, hereby represent, warrant, covenant and agree as follows:
Section 1. The Merger and Related Matters.
1.1 The Merger.
(a) Upon the terms and subject to the conditions set forth in this
Agreement, and in accordance with the Massachusetts Business Corporation Law
(the "MBCL"), at the Effective Time, Acquiror shall be merged with and into
Company (the "Merger"). At the Effective Time, the separate corporate existence
of Acquiror shall cease, and Company shall continue as the surviving
corporation under the name Peritus Software Services, Inc. (the "Surviving
Corporation").
(b) Upon the terms and subject to the conditions set forth in this
Agreement, the Merger shall become effective at the time of filing of articles
of merger with the Secretary of State of the Commonwealth of Massachusetts in
accordance with the provisions of the MBCL (the "Articles of Merger"), or at
such later time in accordance with the provisions of the MBCL as is specified
in the Articles of Merger. The Articles of Merger shall be substantially in the
form of Articles of Merger attached hereto as Exhibit A. Company and Acquiror
agree to file the Articles of Merger at the time of the Closing. The date and
time when the Merger shall become effective is hereinafter referred to as the
"Effective Time."
A-2
(c) From and after the Effective Time, the Surviving Corporation shall
possess all the rights, privileges, powers and franchises and be subject to all
of the restrictions, disabilities and duties of Acquiror and Company, and the
Merger shall otherwise have the effects provided for under the MBCL.
1.2 Closing. Unless this Agreement shall have been terminated and the
transactions contemplated hereby abandoned pursuant to Section 8, the closing
of the transactions contemplated by this Agreement (the "Closing") shall take
place at the offices of Hale and Door LLP, 60 State Street, Boston,
Massachusetts at 10:00 a.m., local time, on the first (1st) Business Day after
the date on which the last of the conditions set forth in Sections 5 and 6 is
fulfilled or waived, or at such other time, date or place as Company, Rocket
and Acquiror may mutually agree in writing. The date on which the Closing
actually takes place is hereinafter referred to as the "Closing Date".
1.3 Articles of Organization; By-Laws; Directors and Officers.
(a) The Articles of Organization of Company, as in effect immediately prior
to the Effective Time, shall be the Articles of Organization of the Surviving
Corporation until amended in accordance with the terms thereof and the MBCL.
The name of the Surviving Corporation shall be "Peritus Software Services,
Inc."
(b) The By-laws of Company, as in effect immediately prior to the Effective
Time, shall be the By-laws of the Surviving Corporation until amended in
accordance with the terms thereof, the Articles of Organization of the
Surviving Corporation and the MBCL.
(c) The directors and officers of Acquiror immediately prior to the
Effective Time shall be the directors and officers of the Surviving
Corporation, each to hold office in accordance with the Articles of
Organization and By-Laws of the Surviving Corporation.
1.4 Conversion of Shares. At the Effective Time, by virtue of the Merger and
without any action on the part of Acquiror or Company or their respective
stockholders:
(a) Each share of common stock, par value $0.01 per share, of Company (the
"Company Common Stock"), issued and outstanding immediately prior to the
Effective Time (other than Dissenting Shares and shares held by Rocket or any
of its wholly owned Subsidiaries or by Acquiror or any of its wholly owned
Subsidiaries and shares held in the treasury of Company or by any of its wholly
owned Subsidiaries) shall, by virtue of the Merger and without any action on
the part of the holder thereof, be converted into the right to receive $0.19
(the "Merger Price"), in cash, upon the surrender of the certificate
representing such share.
(b) Prior to the Effective Time, the Board of Directors of Company shall
adopt appropriate resolutions and take all other actions necessary to provide
that, except as may be otherwise agreed in writing between Acquiror and any
holder of any Company Option Securities, each Company Option Security issued
and outstanding immediately prior to the Effective Time (other than Company
Option Securities held by Rocket or any of its wholly owned Subsidiaries or
held in the treasury of Company or by any of its wholly owned Subsidiaries)
shall, by virtue of the Merger and without any action on the part of the holder
thereof, (i) in the case of Company Option Securities with a per share exercise
price that is less than the Merger Price, be converted into the right to
receive, upon the surrender of the instrument evidencing such Company Option
Security, a cash payment equal to the product (the "Company Option Security
Price") of (A) the number of shares of Company Common Stock subject to such
Company Option Security and (B) the excess, if any, of the Merger Price over
the per share exercise price of the Company Option Security, and each Company
Option Security so converted will, upon such payment, be canceled, and, (ii) in
the case of all other Company Option Securities, shall be canceled without
payment of any consideration therefor or any cost or penalty to or other
recourse to or against any of Company, Rocket and the Surviving Corporation and
without any conversion thereof. In no event shall the holder of any Company
Option Security be entitled, from and after the Effective Time, to acquire
securities of the Surviving Corporation or Rocket. Anything herein to the
contrary notwithstanding, no interest or dividends shall accrue or be payable
or paid on the Company Option Security Price to any Person hereunder.
A-3
(c) Each share of common stock, par value $0.01 per share, of Acquiror
issued and outstanding immediately prior to the Effective Time shall, by virtue
of the Merger and without any action on the part of the holder thereof, be
converted into one share of common stock, par value $0.01 per share, of the
Surviving Corporation.
(d) Each share of Company Common Stock then held by Rocket or any direct or
indirect wholly owned Subsidiary of Rocket, or held by Acquiror or any direct
or indirect wholly owned Subsidiary of Acquiror, or held in the treasury of
Company or by any direct or indirect wholly owned Subsidiary of Company, shall
be canceled without payment of any consideration therefor and without any
conversion thereof.
(e) Notwithstanding anything in this Agreement to the contrary but only in
the circumstances and to the extent provided by the MBCL, shares of Company
Common Stock which are outstanding immediately prior to the Effective Time and
which are held by stockholders who were entitled to and did not vote such
shares in favor of the Merger or consented thereto in writing and who shall
have properly and timely delivered to Company a written demand for payment of
the fair cash value of shares of Company Common Stock in the manner provided in
and complied with all of the relevant provisions of Sections 86 and 89 of the
MBCL ("Dissenting Shares") shall not be converted into or represent the right
to receive the Merger Price. Instead, the holders thereof shall be entitled to
payment of the fair cash value of such shares in accordance with the provisions
of Sections 86 through 98 of the MBCL; provided, however, that (i) if any
holder of Dissenting Shares shall subsequently deliver a written withdrawal of
his demand for payment of the fair cash value of such shares and the Board of
Directors of Company or the Surviving Corporation, as the case may be, shall
consent thereto, or (ii) if any holder fails to establish and perfect his
entitlement to the relief provided in such Sections 86 through 98 of the MBCL
or if the right of such holder to receive the fair cash value of such shares of
Company Common Stock as to which he seeks relief otherwise terminates pursuant
to any of Sections 86 through 98 of the MBCL, such shares shall thereupon cease
to be deemed to be Dissenting Shares and shall be deemed to have been converted
into and represent the right to receive, upon the surrender of the certificate
or certificates representing such shares, as of the Effective Time, the Merger
Price. Company will not settle any demand with respect to any Dissenting Shares
without the consent of Rocket and Acquiror.
1.5 Payment. (a) Pursuant to an agreement reasonably satisfactory to
Company, Rocket and Acquiror (the "Disbursing Agent Agreement") to be entered
into before the Closing Date among Rocket, Acquiror and a disbursing agent to
be selected by Company and reasonably satisfactory to Rocket and Acquiror (the
"Disbursing Agent"), at or immediately following the Effective Time, Company
shall deposit or cause to be deposited in trust for the benefit of Company's
stockholders cash to which holders of Company Common Stock and holders of the
Company Option Securities shall be entitled at the Effective Time pursuant to
the provisions of Section 1.4. The Disbursing Agent shall invest the cash
deposited with it in such manner as the Surviving Corporation directs;
provided, however, that substantially all of such investments shall be in
obligations of or guaranteed by the United States of America, in commercial
paper obligations receiving the highest rating from either Moody's Investors
Service, Inc. or Standard & Poor's Corporation, or in certificates of deposit,
bank repurchase agreements or bankers' acceptances of commercial banks with
capital exceeding $1,000,000,000 (collectively, "Permitted Investments") or in
money market funds which are invested solely in Permitted Investments; provided
further, however, that the maturities of Permitted Investments shall be such as
to permit the Disbursing Agent to make prompt payment of the Merger Price. Any
net profit from, or interest or income produced by, Permitted Investments shall
be payable to the Surviving Corporation as and when requested by the Surviving
Corporation. The Surviving Corporation shall be required to replace any funds
lost as a result of any investment. Any funds remaining unclaimed following the
expiration of the twelfth (12th) month after the Effective Time shall be
released and repaid or redelivered by the Disbursing Agent to the Surviving
Corporation upon demand, after which time Persons entitled thereto may look,
subject to applicable escheat and other similar laws, only to the Surviving
Corporation and to Rocket, which shall remain responsible for payment thereof.
Notwithstanding the foregoing, neither the Surviving Corporation, Rocket nor
the Disbursing Agent shall be liable to any holder of a share of Company Common
Stock for any Merger Price delivered in respect of such share to a public
official pursuant to any applicable escheat or other similar law.
A-4
(b) As soon as practicable after the Effective Time, the Disbursing Agent
shall send a notice and transmittal form to each holder of a certificate or
certificates theretofore evidencing shares of Company Common Stock, other than
certificates representing Dissenting Shares (such certificates, other than
those representing shares to be canceled pursuant to Section 1.4(d) and
Dissenting Shares, are collectively referred to herein as the "Certificates"),
advising such holder of the effectiveness of the Merger and the procedure for
surrendering to the Disbursing Agent such Certificate for payment of the Merger
Price. Upon the surrender of a Certificate to the Disbursing Agent together
with and in accordance with such transmittal form, the holder thereof shall be
entitled to receive in exchange therefor the Merger Price payable in respect of
each share of Company Common Stock represented thereby. Upon such surrender,
the Disbursing Agent will promptly pay the Merger Price. Except as otherwise
provided in Section 1.4, until so surrendered, each such Certificate shall be
deemed for all purposes to evidence only the right to receive the Merger Price.
(c) If the Merger Price (or any portion thereof) is to be paid to a Person
other than the Person in whose name the Certificate surrendered in exchange
therefor is registered, it shall be a condition to the payment of the Merger
Price that the Certificate so surrendered shall be properly endorsed or
accompanied by appropriate stock powers and otherwise be in proper form for
transfer, that such transfer otherwise be proper and that the Person requesting
such transfer pay to the Disbursing Agent any transfer or other taxes payable
by reason of the foregoing or establish to the satisfaction of the Disbursing
Agent and the Surviving Corporation that such taxes have been paid or are not
required to be paid.
(d) In the event any Certificate shall have been lost, stolen or destroyed,
upon the making of an affidavit of that fact by the Person claiming such
Certificate to be lost, stolen or destroyed and subject to such other
reasonable conditions as the Board of Directors of the Surviving Corporation
may impose, the Surviving Corporation shall issue in exchange for such lost,
stolen or destroyed Certificate the Merger Price deliverable in respect thereof
as determined in accordance with Section 1.4. When authorizing such issue of
the Merger Price in exchange therefor, the Board of Directors of the Surviving
Corporation may, in its discretion and as a condition precedent to the issuance
thereof, require the owner of such lost, stolen or destroyed Certificate to
give the Surviving Corporation a bond or other surety in such sum as it may
reasonably direct as indemnity against any claim that may be made against the
Surviving Corporation with respect to the Certificate alleged to have been
lost, stolen or destroyed.
(e) Anything herein to the contrary notwithstanding, no interest or
dividends shall accrue or be payable or paid on any portion of the Merger Price
payable to any Person hereunder.
(f) At and after the Effective Time, each holder of a Certificate or of a
certificate representing shares of Company Common Stock to be canceled pursuant
to Section 1.4(d) or of Dissenting Shares shall cease to have any rights as a
stockholder of Company, except, in the case of the holder of a Certificate for
the right to surrender Certificates in the manner prescribed by Section 1.5(b)
in exchange for payment of the Merger Price or, in the case of the holder of
Dissenting Shares, the right to perfect the right to receive payment for
Dissenting Shares pursuant to Sections 86 through 98 of the MBCL. No transfer
of Company Common Stock shall be made on the stock transfer books of the
Surviving Corporation at or after the Effective Time.
(g) The Disbursing Agent Agreement shall also contain provisions of a nature
similar to those set forth in this Section with respect to payment of the
Company Option Security Price required to be made with respect to Company
Option Securities as provided for in Section 1.4(b).
Section 2. Representations, Warranties, Covenants and Agreements of Company.
Except as otherwise disclosed in the Company SEC Documents or in the
Disclosure Schedule (the "Disclosure Schedule") delivered by Company to Rocket
herewith, Company hereby represents and warrants to Rocket and Acquiror as
follows:
A-5
2.1 Organization and Business; Power and Authority; Effect of Transaction.
(a) Company (i) is a corporation duly organized, validly existing and in
good standing under the laws of the Commonwealth of Massachusetts, (ii) has all
requisite power and authority (corporate and other) to own or hold under lease
its properties and to conduct its business as now conducted and as presently
proposed to be conducted, and has made and has in full force and effect all
Governmental Authorizations and, to Company's knowledge, Private Authorizations
to the extent required for such ownership and lease of its property and conduct
of its business, and (iii) has duly qualified and is authorized to do business
and is in good standing as a foreign corporation in each jurisdiction in which
it is required to be so qualified or authorized to do business, except where
the failure to be so qualified or authorized to do business (individually or in
the aggregate) would not have a Material Adverse Effect on Company. Complete
and correct copies of the Articles of Organization and By-laws of Company, each
as amended to date, have heretofore been made available by Company to Rocket.
Such Articles of Organization and By-laws are in full force and effect.
(b) Company has all requisite corporate power and authority necessary to
enable it to execute and deliver, and to perform its obligations under, and to
consummate the transactions contemplated by, this Agreement and each
Transaction Document executed or to be executed by Company; and the execution,
delivery and performance of this Agreement and each Transaction Document
executed or to be executed by Company have been duly authorized by all
requisite corporate action, other than the Company Stockholder Approval. This
Agreement has been duly executed and delivered by Company and constitutes, and
each Transaction Document when executed and delivered by Company will
constitute, legal, valid and binding obligations of Company, enforceable in
accordance with their respective terms, subject as to enforcement of remedies
to applicable bankruptcy, insolvency, reorganization, moratorium or similar
laws affecting generally the enforcement of creditors' rights and subject to a
court's discretionary authority with respect to the granting of a decree
ordering specific performance or other equitable remedies.
(c) The authorized and outstanding capital stock of Company is as set forth
in the Disclosure Schedule. All of such outstanding capital stock has been duly
authorized and validly issued, is fully paid and nonassessable and is not
subject to any preemptive or similar rights. Except as set forth in the
Disclosure Schedule, (i) there is neither outstanding nor has Company or any
Subsidiary agreed to grant or issue any shares of capital stock or any Option
Security or Convertible Security and (ii) neither Company nor any Subsidiary is
a party to or is bound by any agreement, put or commitment pursuant to which it
is obligated to purchase, redeem or otherwise acquire any shares of capital
stock or any Option Security or Convertible Security. Complete and correct
copies of each of (A) the Long-Term Incentive Plan (1992), (B) the 1997 Stock
Incentive Plan and (C) the 1997 Director Stock Option Plan of Company, together
with representative forms of option agreements issued thereunder, have
heretofore been delivered by Company to Rocket.
(d) Subject to obtaining the Company Stockholder Approval, neither the
execution and delivery of this Agreement or any Transaction Document, nor the
consummation of the transactions herein or therein contemplated, nor compliance
with the terms, conditions and provisions hereof or thereof by Company or any
of its Subsidiaries:
(i) (A) will conflict with, or result in a breach or violation of, or
constitute a default under, any Applicable Law on the part of Company or
any of its Subsidiaries or (B) will conflict with or result in a breach or
violation of, or constitute a default under, any of the Organic Documents
of Company or any of its Subsidiaries or (C) will conflict with, or result
in a breach or violation of, or constitute a default under, or permit the
acceleration of any obligation or liability under, or but for any
requirement of giving of notice or passage of time or both would constitute
such a conflict with, breach or violation of, or default under, or permit
any such acceleration of, any Contractual Obligation of Company or any of
its Subsidiaries, or
(ii) will result in or permit the creation or imposition of any
Encumbrance upon any property now owned or leased by Company or any such
other party, except, with respect to the immediately preceding
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clauses (i)(C) and (ii), in cases where such conflicts, breaches,
violations, defaults, accelerations or Encumbrances would not (individually
or in the aggregate) result in a Material Adverse Effect on Company.
(e) Company does not have any Subsidiaries other than those set forth in on
the Disclosure Schedule, each of which (i) is wholly owned, is a corporation
which is duly organized, validly existing and in good standing under the laws
of the respective state of incorporation set forth opposite its name on the
Disclosure Schedule, (ii) has duly qualified and is authorized to do business
and is in good standing as a foreign corporation in each jurisdiction in which
it is required to be so qualified or authorized to do business, except where to
failure to be so qualified or authorized to do business (individually or in the
aggregate) would not have a Material Adverse Effect on Company, and (iii) has
full corporate power and authority to carry on the business in which it is
engaged. Each such Subsidiary has made and has in full force and effect all
Governmental Authorizations and, to Company's knowledge, Private Authorizations
required for such ownership and lease of its property and conduct of its
business. Company owns all of the outstanding capital stock as shown on the
Disclosure Schedule of each such Subsidiary, free and clear of all
Encumbrances, and all such stock has been duly authorized and validly issued
and is fully paid and nonassessable. There are no outstanding Option Securities
or Convertible Securities, or agreements, puts, commitments or understandings
with respect to any of the foregoing, of any nature whatsoever relating to the
authorized and unissued or the outstanding capital stock of any such
Subsidiaries. Except as shown on the Disclosure Schedule, neither Company nor
any of its Subsidiaries owns directly or indirectly any capital stock or equity
or proprietary interest in any other Entity or enterprise, however organized
and however such interest may be denominated or evidenced, or is party to or
bound by any agreements, puts, commitments or understandings pursuant to which
it is obligated to purchase or otherwise acquire any of the foregoing. None of
the Entities, if any, so set forth in the Disclosure Schedule is a Subsidiary
of Company except as so set forth.
2.2 Company SEC Documents; Undisclosed Liabilities.
(a) Each form, report, schedule, registration statement, definitive proxy
statement and other document filed or required to be filed by Company with the
Commission (as such documents have since the time of their filing been amended,
the "Company SEC Documents"), including any financial statements filed or
required to be filed as a part thereof, has been duly and timely filed by the
Company and complied in all material respects with the requirements of the
Securities Act or the Exchange Act, as applicable, and none of the Company SEC
Documents contained an untrue statement of a material fact or omitted to state
a material fact required to be stated therein or necessary to make the
statements therein, in light of the circumstances under which they were made,
not false or misleading. Company has heretofore made available to Rocket true
and complete copies of the Company SEC Documents. None of Company's
Subsidiaries is required to file any forms, reports, schedules, registration
statements, definitive proxy statements or other documents with the Commission.
(b) The audited consolidated financial statements and unaudited interim
consolidated financial statements of Company and its Subsidiaries included in
the Company SEC Documents (i) comply in all material respects with applicable
accounting requirements and the published rules and regulations of the
Commission with respect thereto, (ii) have been prepared in accordance with
GAAP applied on a consistent basis throughout the periods covered thereby
(except as may be indicated therein or in the notes thereto, and in the case of
quarterly financial statements, as permitted by Form 10-Q under the Exchange
Act), (iii) fairly present the consolidated financial condition, results of
operations and cash flows of the Company and its Subsidiaries as of the
respective dates thereof and for the periods referred to therein, and (iv) are
substantially consistent with the books and records of the Company. Except as
set forth in the Company SEC Documents, neither Company nor any of its
Subsidiaries has any liabilities or obligations of any nature (whether accrued,
absolute, contingent or otherwise) required by GAAP to be set forth on a
consolidated balance sheet of Company and its Subsidiaries or in the notes
thereto, as of the respective dates thereof and for the periods referred to
therein.
(c) Company has delivered to Rocket a true and complete copy of Company's
budget for the year ending December 31, 2001, as in effect at the date hereof.
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2.3 Absence of Certain Changes or Events. Since the date of the most recent
audited financial statements of Company and its Subsidiaries included in the
Company SEC Documents: (i) there has been no Material Adverse Effect on
Company; (ii) there has been no damage, destruction or loss, whether or not
covered by insurance, that has or is likely to have a Material Adverse Effect
on Company; (iii) none of the Company and its Subsidiaries has incurred any
material liability or obligation (whether accrued, absolute, contingent or
otherwise) other than in the ordinary course of business consistent with past
practice, nor entered into any material transaction or agreement not in the
ordinary course of business; (iv) there has been no dividend or distribution of
any kind declared, paid or made by the Company or, except for dividends paid to
the Company or any of its Subsidiaries on any class of capital stock or
repurchase or redemption by the Company or any of its Subsidiaries of any class
of capital stock; (v) there has been no change in accounting methods,
principles or practices by Company or any of its Subsidiaries materially
affecting its assets, liabilities or business, except insofar as may have been
required by a change in GAAP; (vi) there has been no revaluation by Company of
any of its or any of its Subsidiaries assets, other than any indirect
revaluation effected via a change in the market price or trading volume of the
Company Common Stock; (vii) each of Company and its Subsidiaries has operated
its business in the normal, usual and customary manner in the ordinary and
regular course of business consistent with past practice, including the
maintenance of working capital at normal operating levels consistent with prior
practice; and (viii) none of Company and its Subsidiaries has Encumbered any of
its property or assets, other than Permitted Encumbrances.
2.4 Title to Properties; Leases. Each of Company and its Subsidiaries has
good and valid title to all the properties and assets reflected as owned on the
most recent balance sheet of Company and its Subsidiaries included in the
Company SEC Documents or used by Company or any of its Subsidiaries in its
business if not so reflected, or purported to have been acquired by Company or
any of its Subsidiaries since such date (other than inventory sold, or
property, plant and other equipment used up or retired, since such date, in
each case in the ordinary course of business consistent with past practice of
Company and its Subsidiaries), in each case free and clear of all Encumbrances
other than Permitted Encumbrances. The real property, improvements, equipment
and personal property held under lease by any of Company and its Subsidiaries
are held under valid and enforceable Leases, with such exceptions as are not
material and do not materially interfere with the use made or proposed to be
made of such real property, improvements, equipment or personal property by the
Company or such Subsidiary, and Company or such Subsidiary enjoys peaceful and
undisturbed possession under all Leases pursuant to which it holds any real
property, improvements, equipment or personal property. The Disclosure Schedule
contains a true, correct and complete list of all real estate owned or leased
by Company or any of its Subsidiaries and all Leases and a list of all material
items of fixed assets and machinery and equipment.
2.5 Compliance with Contractual Obligations and Private Authorizations. The
Disclosure Schedule sets forth a true, accurate and complete list of each
Private Authorization and each Contractual Obligation which individually is
material to any of Company and its Subsidiaries, all of which are in full force
and effect. True and complete copies of each such Private Authorization and
Contractual Obligation have been made available by Company to Rocket. Each of
Company and its Subsidiaries has obtained and maintained all Private
Authorizations which are necessary for the ownership by it of its properties
and the conduct of its business as now conducted which, if not obtained and
maintained, would (individually or in the aggregate) have a Material Adverse
Effect on Company. Neither Company nor any Subsidiary is in breach or violation
of, or is in default in the performance, observance or fulfillment of, any
Contractual Obligation or Private Authorization, and no Event exists or has
occurred, which constitutes, or but for any requirement of giving of notice or
passage of time or both would constitute, such a breach, violation or default,
under any Contractual Obligation or Private Authorization, except for such
defaults, breaches or violations as would (individually or in the aggregate)
have a Material Adverse Effect on Company. No Private Authorization is the
subject of any pending or, to Company's knowledge, threatened repudiation,
revocation or termination.
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2.6 Litigation; Governmental Authorizations; Compliance with Applicable Law.
(a) The Disclosure Schedule contains a list of all Legal Actions which are
pending or in which Company or any of its Subsidiaries or any of its business,
operations or properties, or any of its officers or directors in connection
therewith, is engaged, or, to Company's knowledge, which involves the business,
operations or properties of Company or any of its Subsidiaries, or, to
Company's knowledge, which is threatened or contemplated against Company or any
of its Subsidiaries or any of their business, operations or properties, or any
of their officers or directors in connection therewith.
(b) The Company and each of its Subsidiaries has obtained and maintained all
Governmental Authorizations which are necessary for the ownership of its
properties and the conduct of its business as now conducted which, if not
obtained and maintained, would (individually or in the aggregate) have a
Material Adverse Effect on Company. No such Governmental Authorization is the
subject of any pending or, to Company's knowledge, threatened revocation on
termination.
(c) The Company is not in violation of or in default with respect to any
Applicable Law which (individually or in the aggregate) would have a Material
Adverse Effect on Company.
2.7 Intellectual Property Rights. Company and its Subsidiaries own or
possess sufficient trademarks, trade names, service marks, patent rights,
copyrights, licenses, approvals, trade secrets and other similar rights
(collectively, "Intellectual Property Rights") necessary to conduct their
businesses as now conducted; and the expected expiration of any of such
Intellectual Property Rights could not reasonably be expected to result in a
Material Adverse Effect on Company. None of Company and its Subsidiaries has
received any notice of infringement or conflict with asserted intellectual
property rights of others, which infringement or conflict, if the subject of an
unfavorable decision, would have a Material Adverse Effect on Company. The
Disclosure Schedule sets forth a true, accurate and complete list of (i) each
trademark, trade name, service mark, patent right or application, registered
copyright owned by any of Company and its Subsidiaries and (ii) each other item
of Intellectual Property Rights owned by any of Company and its Subsidiaries
which, in the good faith judgment of management of Company, individually is
material to any of Company and its Subsidiaries, all of which are in full force
and effect. To the knowledge of Company, none of such items of Intellectual
Property Rights is being infringed or violated by any other Person. No
licenses, sublicenses or agreements pertaining to any of such items of
Intellectual Property Rights are in effect except as set forth in the
Disclosure Schedule.
2.8 Employees.
(a) To Company's knowledge, no employee of any of Company and its
Subsidiaries is in violation of any material term of any employment contract,
patent disclosure or invention agreement or non-competition agreement. There is
no pending or, to Company's knowledge, threatened action, suit, proceeding or
claim, or to its knowledge any basis therefor or threat thereof, with respect
to any contract, agreement, covenant or obligation referred to in the preceding
sentence. Company does not have any collective bargaining agreement covering
any of its employees.
(b) The Disclosure Schedule lists all employment, management, consulting,
management retention or other personal service, or compensation agreements or
arrangements covering one or more non-employees (including severance,
termination or change-of-control arrangements) and all material employment,
management, consulting, management retention or other personal service, or
compensation agreements or arrangements covering one or more employees
(including severance, termination or change-of-control arrangements), in each
case entered into by Company or any of its Subsidiaries, and a true and
complete copy of each such agreement has been delivered to Rocket.
(c) The Disclosure Schedule sets forth a true and complete list as of April
9, 2001 of the names and positions of all employees of Company or any of its
Subsidiaries and their respective base rate of compensation.
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2.9 Related Party Transactions. The Disclosure Schedule sets forth a fair
and accurate list of any Contractual Obligation, or transaction occurring after
the date of the most recent financial statements contained in the Company SEC
Documents, between Company or any of its Subsidiaries and any of the officers,
directors, employees, stockholders of any of Company or its Subsidiaries or, to
Company's knowledge, any Affiliate of any of the foregoing (other than
reasonable and customary compensation for services as officers, directors and
employees), including any providing for the furnishing of services to or by,
providing for rental of property, real, personal or mixed, to or from, or
providing for the lending or borrowing of money to or from or otherwise
requiring payments to or from, any such officer, director, employee,
stockholder or Affiliate.
2.10 Insurance. The Company and its Subsidiaries are insured by recognized
institutions with policies in such amounts and with such deductibles and
covering such risks as are generally deemed adequate and customary for their
businesses including, but not limited to, policies covering real and personal
property owned or leased by the Company and its subsidiaries against theft,
damage, destruction and acts of vandalism. The nature, amount and carriers of
all such insurance are set forth in the Disclosure Schedule. The Company has no
reason to believe that it or any Subsidiary will not be able (i) to renew its
existing insurance coverage as and when such policies expire or (ii) to obtain
comparable coverage from similar institutions as may be necessary or
appropriate to conduct its business as now conducted and at a cost that would
not result in a Material Adverse Change. Neither the Company nor any Subsidiary
has been denied any insurance coverage which it has sought or for which it has
applied.
2.11 Tax Matters. Company and its Subsidiaries have heretofore filed the Tax
Returns with respect to Tax periods ending after December 31, 1997, in the
jurisdictions specified in, the Disclosure Schedule and have paid, or made
adequate provision in accordance with GAAP consistently applied, for the
payment of, all Taxes shown to be due and payable on such Tax Returns. All
payroll and income Taxes which any of Company or its Subsidiaries is required
by law to withhold and collect have been duly withheld and collected, and have
been paid over, in a timely manner, to the proper Authorities to the extent due
and payable. Neither Company nor any of its Subsidiaries has executed any
waiver to extend, or otherwise taken any action that would have the effect of
extending, the applicable statute of limitations in respect of any Tax
liabilities of Company or any of its Subsidiaries for the fiscal years prior to
and including the most recently completed fiscal year. Neither Company nor any
of its Subsidiaries is a "consenting corporation" within the meaning of Section
341(f) of the Code. Company and each of its Subsidiaries have at all times been
taxable as a Subchapter C corporation under the Code. Neither Company nor any
Subsidiary has ever been a member of any consolidated group (other than with
Company and its Subsidiaries) for Tax purposes. Federal and state income tax
returns of Company and its Subsidiaries have been examined by the IRS or
applicable state Authority as shown in the Disclosure Schedule. At the date
hereof, there are no Encumbrances on any of the assets of Company or any of its
Subsidiaries that arose in connection with any failure (or alleged failure) to
pay any Tax. Neither Company nor any of its Subsidiaries (i) is a party to any
Tax allocation or sharing agreement, or (ii) has any liability or obligation
for the Taxes of any Person (other than Company or any of its Subsidiary) under
Treas. Reg. (S)1.1502-6 (or any similar provision of any other Applicable Law),
as a transferee or successor, by contract, or otherwise. Company is not and has
not been a United States real property holding corporation within the meaning
of Section 897(c)(2) of the Code.
2.12 Employee Benefit Plans.
(a) The Disclosure Schedule lists each material Company Employee Benefit
Plan and Company Benefit Arrangement. The Company has delivered to Rocket with
respect to each such Company Employee Benefit Plan and Company Benefit
Arrangement true and complete copies of (i) all written documents comprising
such plans and arrangements (including amendments and individual, trust or
insurance agreements relating thereto); (ii) the most recent Form 5500 series
annual reports (including all schedules thereto) filed with respect to each
such Company Employee Benefit Plan; (iii) the two most recent financial
statements and actuarial reports, if any, pertaining to each such plan or
arrangement; (iv) the summary plan description currently in effect and all
material modifications thereto, if any, for each such Company Employee Benefit
Plan; and (v) written
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communications to employees to the extent the substance of any Company Employee
Benefit Plan described therein differs materially from the other documentation
furnished under this Section.
(b) None of Company or any of its Subsidiaries nor any ERISA Affiliate of
any of them has at any time during the 6-year period preceding the date hereof
participated in or been required to make or accrue a contribution to any
Multiemployer Plan.
(c) Other than pursuant to the provisions of COBRA or other Applicable Law,
no Company Employee Benefit Plan provides benefits described in Section 3(1) of
ERISA to any former employees or retirees of Company or any of its
Subsidiaries. No condition exists that would prevent Company or any of its
Subsidiaries from amending or terminating Company Employee Benefit Plan or
Company Benefit Arrangement providing health or medical benefits in respect of
any active or retired employee other than limitations imposed by law. The
Company is in compliance in all material respects with COBRA, including all
notification requirements thereunder. Set forth in the Disclosure Schedule is a
list identifying each former employee of Company or any of its Subsidiaries or
other Person who is entitled to receive health continuation coverage under
COBRA at the date hereof, including a brief description of the coverage and the
date at which such right to coverage shall terminate.
(d) All Company Employee Benefit Plans that are Pension Plans intended to be
qualified under Section 401 of the Code are so qualified and have been so
qualified during the period since their adoption; each trust created under any
such plan is exempt from tax under Section 501(a) of the Code and has been so
exempt since its creation. A true and correct copy of the most recent
determination letter from the Internal Revenue Service regarding such qualified
status for each such plan has been delivered to Rocket. No Company Employee
Benefit Plan has incurred an accumulated funding deficiency (as defined in
section 412 of the Code), whether or not waived. As of the last applicable
annual valuation date on a termination basis, using the assumptions established
by the Pension Benefit Guaranty Corporation as in effect on such date, no
Company Employee Benefit Plan subject to Title IV of ERISA had accrued benefit
obligations which exceed the current fair market value of the assets of such
plan. None of Company and its Subsidiaries nor any ERISA Affiliate of any of
them has incurred, or reasonably expects to incur prior to the Closing Date,
any material liability under Title IV of ERISA, other than with respect to the
payment of premiums to the Pension Benefit Guaranty Corporation.
(e) Except as set forth in the Disclosure Schedule, no Company Employee will
receive or be entitled to, and none of Company or any of its Subsidiaries shall
be liable for, any additional benefits, bonuses, service or accelerated rights
to payment of benefits under any Company Plan, including the right to receive
any parachute payment, as defined in Section 280G of the Code, or become
entitled to any severance, termination allowance or similar payments as a
result of the transactions contemplated by this Agreement.
(f) Each Company Plan has at all times prior hereto been maintained, in all
material respects, in accordance with all Applicable Laws. Each Company or any
of its Subsidiaries and the ERISA Affiliates of Company or any of its
Subsidiaries have made full and timely payment of all amounts required to be
contributed under the terms of each Company Plan and Applicable Law or required
to be paid as expenses under such Company Plan. No Prohibited Transaction has
occurred with respect to any Company Employee Benefit Plan or any other
employee benefit plan or arrangement maintained by Company or any of its
Subsidiaries or any ERISA Affiliate of Company or any of its Subsidiaries which
is covered by Title I of ERISA which has resulted in or could result in
material liability of any kind to any of Company and its Subsidiaries, other
than any liability to the extent reflected in the financial statements of
Company contained in the Company SEC Documents. No Reportable Event for which
reporting has not been waived, and no event described in Section 4062 or 4063
of ERISA, has occurred in connection with any Company Employee Benefit Plan
within the last six (6) years. Neither Company or any of its Subsidiaries nor
any of its current or former ERISA Affiliates (while an ERISA Affiliate) has
within the last six (6) years engaged in, or is a successor or parent
corporation to any entity that has engaged in, a transaction described in
Section 4069 of ERISA.
2.13 Absence of Sensitive Payments. None of Company and its Subsidiaries has
(a) made any contributions, payments or gifts to or for the private use of any
governmental official, employee or agent where
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either the payment or the purpose of such contribution, payment or gift is
illegal under any Applicable Law, (b) established or maintained any unrecorded
fund or asset for any purpose or made any false or artificial entries on its
books, or (c) made any payments to any Person with the intention or
understanding that any part of such payment was to be used for any purpose
other than that described in the documents supporting the payment.
2.14 Bank Accounts, Etc. The Disclosure Schedule contains a true and correct
and complete list as of the date hereof of all banks, trust companies, savings
and loan associations and brokerage firms in which Company or any of its
Subsidiaries has an account or a safe deposit box and the names of all Persons
authorized to draw thereon, to have access thereto, or to authorize
transactions therein, the names of all Persons, if any, holding powers of
attorney from Company or any such Subsidiary and a summary statement as to the
terms thereof.
2.15 Broker or Finder. No Person assisted in or brought about the
negotiation of this Agreement or the subject matter of the transactions
contemplated hereby in the capacity of broker, agent or finder or in any
similar capacity on behalf of Company or any of its Subsidiaries other than as
set forth in the Disclosure Schedule, which sets forth a true, accurate and
complete description of the arrangements with any such Person.
2.16 Environmental Matters. Except as set forth in the Disclosure Schedule:
(a) The operations of each of Company and its Subsidiaries are in
compliance in all material respects with all applicable Environmental Laws.
(b) To Company knowledge, all real property currently or formerly owned,
leased or operated by Company or any of its Subsidiaries is free from
contamination by any Hazardous Material, and none of Company nor any of its
Subsidiaries has disposed or arranged for the disposal of Hazardous
Material so as to give rise to liability for any off-site disposal or
contamination.
(c) To the knowledge of Company, each of Company and its Subsidiaries
currently maintains all Environmental Permits necessary for their
operations and are in compliance in all material respects with such
Environmental Permits.
(d) There are no Legal Actions or Environmental Claims pending or, to
Company's knowledge, threatened, nor, to Company's knowledge,
investigations with respect to any Environmental Claim pending or
threatened, against any of Company or its Subsidiaries alleging the
violation of any Environmental Law or asserting claims regarding
Environmental Costs and Liabilities under any Environmental Law. None of
Company or its Subsidiaries has received any claims or notices alleging
liability under any Environmental Law.
(e) None of Company or its Subsidiaries nor, to the knowledge of
Company, any owner of premises leased or operated by any of Company or its
Subsidiaries has with respect to such premises, filed any formal notice
under any Environmental Law or other Law indicating past or present
generation, treatment, storage, or disposal of Hazardous Material or
reporting an Environmental Release of Hazardous Material into the
environment.
(f) There is not now nor, to the knowledge of Company, has there been in
the past on, in or under any real property owned, leased or operated by any
of Company or its Subsidiaries (i) any underground storage tanks,
aboveground storage tanks, dikes or impoundments, (ii) any friable
asbestos-containing materials or (iii) any polychlorinated biphenyls.
2.17 Certain State Statutes Inapplicable. The Board of Directors of the
Company has approved, within the meaning of Section 1 of the Massachusetts
General Laws ch. 110F, this Agreement, the Merger and the other the
transactions contemplated by this Agreement, and such approval is sufficient to
render inapplicable to this Agreement, the Merger and the other the
transactions contemplated by this Agreement the provisions of Massachusetts
General Laws ch. 110F.
2.18 Information Supplied. Neither the proxy statement relating to the
approval by the stockholders of Company of this Agreement and the Merger (such
proxy statement, including the exhibits thereto and the
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information incorporated therein by reference, as amended or supplemented from
time to time, the "Proxy Statement") nor the Transaction Statement on Schedule
13E-3 ("Schedule 13E-3") to be filed by the Company under the Exchange Act with
the Proxy Statement shall, at the respective dates first mailed to Company's
stockholders, at the time of the Company Stockholders Meeting or at the
Effective Time, as the case may be, contain an untrue statement of a material
fact or omit to state a material fact required to be stated therein or
necessary to make the statements therein, in light of the circumstances under
which they were made, not false or misleading or necessary to correct any
statement in any earlier communication with respect to the solicitation of
Proxies for the Company Stockholders Meeting which shall have become false or
misleading, except that no representation or warranty is made by Company with
respect to information supplied in writing by Rocket or Acquiror for inclusion
in the Proxy Statement or Schedule 13E-3. The Proxy Statement and Schedule 13E-
3 shall comply in all material respects as to form and content with the
requirements of the Exchange Act.
2.19 Voting Agreements and Noncompetition Agreements. To Company's
knowledge, there are no voting trusts or other agreements or understandings
with respect to the voting of Company Common Stock. Except as set forth on the
Disclosure Schedule, none of Company, its Subsidiaries or any Person in which
Company or its Subsidiaries own any interest is a party to any noncompetition
agreement or other agreement or arrangement which restrains, limits or impedes
the current or contemplated business or operations of Company or any of its
Subsidiaries or would apply to Acquiror or any of its Affiliates following the
Effective Time.
2.20 Vote Required. The vote of a majority of the outstanding shares of
Company Common Stock (the "Company Stockholder Approval") is the only vote of
the holders of any class or series of Company capital stock necessary or
required (under Applicable Law or otherwise) to approve this Agreement, the
Merger and the transactions contemplated hereby. The shares of Company Common
Stock held by Rocket at the date hereof are entitled to be voted by Rocket in
respect of this Agreement, the Merger and the other transactions contemplated
hereby.
2.21 Special Committee and Board Recommendation; Opinion of Financial
Advisor.
(a) Each of the special committee of the Board of Directors of Company
established by the Board of Directors of Company on April 9, 2001 (the "Special
Committee") and the Board of Directors of Company, at a joint meeting duly
called and held on April 17, 2001, has by unanimous vote of those Special
Committee members and directors present (who constituted 100% of the directors
then in office other than Messrs. Magnusson and Youniss, who absented
themselves from such meeting) (i) determined that this Agreement, the Merger
and the other transactions contemplated hereby are fair to and in the best
interests of the stockholders of Company and has approved the same, and (ii)
resolved to recommend that the holders of the shares of Company Common Stock
approve this Agreement and the transactions contemplated hereby, including the
Merger.
(b) On or prior to the date of this Agreement, Company, its Board of
Directors and the Special Committee have received the Fairness Opinion of The
Catalyst Group (the "Company Financial Advisor"). The Company has been
authorized by the Company Financial Advisor, subject to prior review by the
Company Financial Advisor, to include the Fairness Opinion in the Proxy
Statement and in Schedule 13E-3. A true and complete copy of the Fairness
Opinion has been furnished by Company to Rocket.
2.22 Consents. Except (i) as set forth in the Disclosure Schedule, (ii) for
the filing with the SEC of the Proxy Statement and such reports under the
Exchange Act as may be required in connection with this Agreement and the
transactions contemplated hereby, (iii) for the filing of the Articles of
Merger with the Secretary of State of the Commonwealth of Massachusetts and
appropriate documents with the relevant authorities of other states in which
the Company is qualified to do business, (iv) for the filing of Schedule 13E-3
with the Commission, and (v) for such filings in connection with any state or
local tax which is attributable to the change in beneficial ownership of
Company's or its Subsidiaries' real property, if any (collectively, "Gains
Taxes"), (the items in clauses (i) through (iv) being collectively referred to
herein as
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("Company Consents"), no Governmental Authorizations or Private Authorizations
are required to be obtained or made by or with respect to Company or any of its
Subsidiaries on or prior to the Closing Date in connection with (A) the
execution, delivery and performance of this Agreement or any of the Transaction
Documents to which Company is a party, the consummation of the transactions
contemplated hereby and thereby or the taking by Company of any other action
contemplated hereby or thereby, (B) the continuing validity and effectiveness
of (and prevention of any material default under or violation of the terms of)
any Lease, or Private Authorization or Contractual Obligation disclosed in the
Disclosure Schedule pursuant to the first sentence of Section 2.5 above, to
which any of Company or its Subsidiaries is a party or any Governmental
Authorization of any of Company of its Subsidiaries or (C) the conduct by
Company or any of its Subsidiaries of their respective businesses following the
Closing as conducted on the date hereof.
2.23 Disclosure. No representation or warranty by Company in this Agreement,
or in any list, statement, document or information set forth in or attached to
any schedule (including the Disclosure Schedule) delivered or to be delivered
pursuant hereto, contains or will contain any untrue statement of a material
fact or omits or will omit any material fact necessary in order to make the
statements contained herein or therein, in light of the circumstances under
which they were made, not misleading.
Section 3. Representations and Warranties of Rocket and Acquiror.
Rocket and Acquiror represent and warrant to Company that:
3.1 Organization and Business; Power and Authority; Effect of Transaction.
(a) Each of Rocket and Acquiror (i) is a corporation duly organized, validly
existing and in good standing under the laws of its jurisdiction of
incorporation, and (ii) has all requisite corporate power and authority to own
or hold under lease its properties and to conduct its business as now conducted
and as presently proposed to be conducted.
(b) Each of Rocket and Acquiror has all requisite corporate authority, and
has made and has in full force and effect all Governmental Authorizations and
Private Authorizations necessary to enable it, to execute and deliver, and to
perform its obligations under, and to consummate the transactions contemplated
by, this Agreement and each Transaction Document executed or to be executed by
it; and the execution, delivery and performance of this Agreement and each such
Transaction Document have been duly authorized by all requisite corporate
action, including that, if required, of Acquiror's stockholders. This Agreement
has been duly executed and delivered by each of Rocket and Acquiror and
constitutes, and each Transaction Document executed or to be executed by it
when executed and delivered by Rocket or Acquiror will constitute, its legal,
valid and binding obligations, enforceable against it in accordance with their
respective terms, subject as to enforcement of remedies to applicable
bankruptcy, insolvency, reorganization, moratorium or similar laws affecting
generally the enforcement of creditors' rights and subject to a court's
discretionary authority with respect to the granting of a decree ordering
specific performance or other equitable remedies.
(c) Neither the execution and delivery of this Agreement or any Transaction
Document executed or to be executed by Rocket or Acquiror, nor the consummation
of the transactions herein or therein contemplated, nor compliance with the
terms, conditions and provisions hereof or thereof by Rocket or Acquiror:
(i) (A) will conflict with, or result in a breach or violation of, or
constitute a default under, any Applicable Law on the part of Rocket or
Acquiror or (B) will conflict with or result in a breach or violation of,
or constitute a default under, any of the Organic Documents of Rocket or
Acquiror or (C) will conflict with, or result in a breach or violation of,
or constitute a default under, or permit the acceleration of any obligation
or liability under, or but for any requirement of giving of notice or
passage of time or both would constitute such a conflict with, breach or
violation of, or default under, or permit any such acceleration of, any
material Contractual Obligation of Rocket or Acquiror, or
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(ii) will require any Governmental Authorization or Private
Authorization, except for the filing with the Secretary of State of the
Commonwealth of Massachusetts of the Articles of Merger,
except, with respect to clauses (i)(A), (i)(C) and (ii) above, such conflicts,
breaches, defaults, violations, accelerations, authorizations or filings, that
(individually or in the aggregate) are not reasonably likely to result in a
Material Adverse Effect on Rocket or Acquiror or on the ability of Rocket or
Acquiror to perform any of its obligations set forth in this Agreement or any
Transaction Document.
3.3 Broker or Finder. No Person assisted in or brought about the negotiation
of this Agreement or the subject matter of the transactions contemplated hereby
in the capacity of broker, agent or finder or in any similar capacity on behalf
of Acquiror or Rocket.
3.4 Information Supplied. The information supplied in writing by Rocket or
Acquiror for inclusion in the Proxy Statement or Schedule 13E-3 will not, at
the respective dates first mailed to Company's stockholders, at the time of the
Company Stockholders Meeting or at the Effective Time, as the case may be,
contain an untrue statement of a material fact or omit to state a material fact
required to be stated therein or necessary to make the statements therein, in
light of the circumstances under which they were made, not false or misleading
or necessary to correct any statement in any earlier communication with respect
to the solicitation of Proxies for the Company Stockholders Meeting which shall
have become false or misleading, except that no representation or warranty is
made by Rocket with respect to information supplied by Company or any other
Person (other than Rocket or Acquiror) for inclusion in the Proxy Statement or
Schedule 13E-3.
3.5 Transitory Subsidiary. Acquiror was formed for the purpose of engaging
in the transactions contemplated by this Agreement and has engaged in no
business activities unrelated to this Agreement and the transactions
contemplated hereby.
3.6 Company Representations. Neither Rocket nor Acquiror nor any officer or
director of either of them, by virtue of its status as a stockholder, director
or other Affiliate of Company, has any knowledge of any breaches or violations
of any representation or warranty of Company contained in this Agreement.
3.7 Rocket Ownership of Company Common Stock. As of the date hereof, Rocket
owns of record an aggregate of 10,000,000 shares of Company Common Stock.
Section 4. Certain Covenants.
4.1 Access to Information. Company shall afford to each of Rocket and
Acquiror and their accountants, counsel, financial advisors, financing sources
and other representatives (the "Representatives") all reasonable access during
normal business hours throughout the period prior to the Effective Time to all
of its and its Subsidiaries properties, books, contracts, commitments and
records (including Tax Returns) and, during such period, shall furnish promptly
(i) a copy of each report, schedule and other document filed or received by it
pursuant to the requirements of any federal or state securities laws or
submitted to or filed with or received from the Commission or any other
Authority in connection with the transactions contemplated by this Agreement or
which management of Company has determined in good faith may have a material
effect on its business, operations, properties, prospects, personnel,
condition, financial or other, or results of operations and (ii) such other
information concerning any of the foregoing as Rocket and Acquiror shall
reasonably request; provided, however, that no investigation pursuant to this
Section shall affect any representations or warranties made herein or the
conditions to the obligations of the respective parties to consummate the
transactions contemplated hereby. Rocket and Acquiror acknowledge and agree
that, to the extent that any such information constitutes "Confidential
Information" within the meaning of that certain Confidentiality Agreement,
dated as of January 17, 2001 (the "Confidentiality Agreement"), such
information shall be and remain subject to the terms and provisions of such
Confidentiality Agreement, which remains in force and effect in accordance with
its terms.
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4.2 Agreement to Cooperate.
(a) Subject to the terms and conditions of this Agreement, each of the
parties hereto agrees to use all commercially reasonable efforts or take, or
cause to be taken, all actions and to do, or cause to be done, all things
necessary, proper or advisable under Applicable Laws to consummate and make
effective the transactions contemplated by this Agreement, including using its
commercially reasonable efforts to obtain all necessary or appropriate waivers,
consents and approvals, if any, to effect all necessary registrations, filings
and submissions (and, in such case, to proceed with the Merger as expeditiously
as possible), subject, however, to the Company Stockholder Approval.
(b) In addition to the covenants set forth in the preceding subsection of
this Section, Company agrees to use all commercially reasonable efforts on or
prior to the Closing Date to obtain the satisfaction of the conditions
specified in Sections 5 and 6. Rocket and Acquiror agree to cooperate with and
to assist Company with respect to securing all necessary Governmental
Authorizations and Private Authorizations to the consummation of the Merger.
4.3 Expenses. Except as otherwise expressly provided herein, each party
shall pay its own expenses incident to the negotiation, execution, delivery and
performance of this Agreement (including, without limitation, all filing fees,
printing and mailing expenses and all fees and expenses of its counsel,
accountants, advisors and other consultants and representatives for all
activities undertaken in connection with this Agreement), whether or not the
transactions contemplated hereby are consummated. To the fullest extent
practicable, Company agrees not to pay such expenses prior to the Closing,
provided that all such expenses shall be paid within five (5) Business Days
after the Closing.
4.4 Public Announcements. No party shall, without the approval of the other
parties, make or cause to be made any press release or other public
announcement with respect to this Agreement or the transactions contemplated
hereby, except as and to the extent that it is required by Applicable Law to
make such press release or other public announcement. To the extent reasonably
practicable under the circumstances, the parties shall consult with each other
prior to issuing any press release or other public announcement with respect to
this Agreement or the transactions contemplated hereby. Each of the parties
hereto acknowledges and consents to that certain press release issued by
Company on March 28, 2001 entitled "Peritus Software Services Announces It Has
Received a Non-Binding Offer for Acquisition of the Company".
4.5 Stockholders' Approval.
(a) Company shall as soon as practicable submit this Agreement and the
transactions contemplated hereby for the approval of its stockholders at a duly
called and held meeting of its stockholders (the "Company Stockholders
Meeting", which term shall include any postponements or adjournments of such
meeting). Unless otherwise required by the applicable fiduciary duties of the
Board of Directors of Company, as determined in good faith by such directors
after consultation with and based upon the advice of outside legal counsel,
Company shall (i) recommend approval of this Agreement and the transactions
contemplated hereby to the stockholders of Company, (ii) include in the Proxy
Statement and Schedule 13E-3 such recommendation and the of the Board of
Directors of Company and the Special Committee described in Section 2.21 above,
and (iii) use all commercially reasonable efforts to solicit from its
stockholders proxies in favor of approval of this Agreement and the
transactions contemplated hereby and otherwise to obtain the Company
Stockholder Approval in accordance with all Applicable Law. Without limiting
the generality of the foregoing, Company agrees that its obligations under the
first sentence of this Section shall not be affected by (A) the commencement,
public proposal, public disclosure or communication to Company of any
Acquisition Proposal or (B) the withdrawal or modification by the Board of
Directors of Company or Special Committee of its approval or recommendation of
this Agreement and the transactions contemplated hereby. Company shall take all
action necessary to hold the Company Stockholders Meeting as soon as
practicable following the date hereof.
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(b) To the extent permitted by Applicable Law, each of Rocket and Acquiror
agrees to vote all shares of Company Common Stock held of record by it in favor
of this Agreement and the Merger and other transactions contemplated hereby at
the Company Stockholders Meeting; provided that (i) Company is not in material
breach of any of its representations, warranties or covenants contained herein
or in any Transaction Document, (ii) there is no bona fide written Acquisition
Proposal with respect to Company which has been received by Company and not
rejected in writing by Company, and (iii) neither the Board of Directors of
Company nor the Special Committee shall have withdrawn or modified its approval
or recommendation of this Agreement and the Merger and other transactions
contemplated hereby.
4.6 Proxy Statement; Schedule 13E-3.
(a) Company shall prepare and file with the Commission as soon as is
reasonably practicable after the date hereof, the Proxy Statement and Schedule
13E-3, and shall use its best efforts to have the Proxy Statement and Schedule
13E-3 cleared by the Commission as promptly as practicable. Company shall be
responsible for the costs and expenses, including filing fees and printing and
mailing costs, arising from the preparation, filing and mailing of the Proxy
Statement and Schedule 13E-3. Company shall also take any other action required
to be taken under Applicable Law in connection with the consummation of the
transactions contemplated by this Agreement. Rocket and Acquiror and Company
shall promptly furnish to each other all information, and take such other
actions and otherwise cooperate, as may reasonably be requested in connection
with any action by any of them in connection with the provisions of this
Section.
(b) Prior to the date of approval of the Merger by Company's stockholders,
each of Company, Rocket and Acquiror shall correct promptly any information
provided by it to be used specifically in the Proxy Statement or Schedule 13E-3
that shall have become false or misleading in any material respect and shall
take all steps necessary to file with the Commission and have cleared by the
Commission any amendment or supplement to the Proxy Statement and Schedule 13E-
3, as so corrected, to be disseminated to the stockholders of Company to the
extent required by Applicable Law. Without limiting the generality of the
foregoing, Company shall notify Rocket promptly of the receipt of the comments
of the Commission and of any request by the Commission for amendments or
supplements to the Proxy Statement or Schedule 13E-3, or for additional
information, and shall supply Rocket with copies of all correspondence between
Company or its representatives, on the one hand, and the Commission or members
of its staff, on the other hand, with respect to the Proxy Statement or
Schedule 13E-3. If at any time prior to the Company Stockholders Meeting any
event should occur relating to Company, Rocket or Acquiror or their respective
officers or directors which should be described in an amendment or supplement
to the Proxy Statement or Schedule 13E-3, the parties shall promptly inform
each other. Whenever any event occurs which should be described in an amendment
or a supplement to the Proxy Statement or Schedule 13E-3, Company, Rocket and
Acquiror shall, upon learning of such event, cooperate in promptly preparing,
filing and clearing with the Commission and mailing to the stockholders of
Company such amendment or supplement; provided, however, that, prior to such
mailing, (i) Company, Rocket and Acquiror shall consult with each other with
respect to such amendment or supplement, (ii) shall afford each other
reasonable opportunity to comment thereon, and (iii) each such amendment or
supplement shall be reasonably satisfactory to the other.
4.7 No Solicitation; Other Offers.
(a) Nothing contained in this Section 4.7(a) shall prevent the Board of
Directors of Company or Special Committee from considering, discussing, or
providing any nonpublic information to any Person relating to, an bona fide
inquiry or proposal regarding any merger, sale of substantial assets, sale of
share of capital stock (including without limitation by way of a tender offer)
or similar transactions involving Company or any Subsidiaries of Company other
than the Merger (any such inquiry or proposal being referred to herein as an
"Acquisition Proposal") not solicited in violation of this Agreement, provided
the Board of Directors of Company or the Special Committee, as the case may be,
determines in good faith (upon consultation of outside counsel) that it is
required to do so in order to discharge properly its fiduciary duties. Nothing
contained in this
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Section shall prohibit the Board of Directors of Company or the Special
Committee from complying with Rule 14e-2 promulgated under the Exchange Act
with regard to a tender or exchange offer.
(b) Company shall immediately notify Rocket and Acquiror after receipt of
any Acquisition Proposal, or any modification of or amendments to any
Acquisition Proposal, or any request for nonpublic information relating to
Company or any of its Subsidiaries in connection with an Acquisition Proposal
or for access to the properties, books or records of Company or any Subsidiary
of Company by any Person or entity that informs the Board of Directors of
Company or the Special Committee or such Subsidiary that it is considering
making, or has made, an Acquisition Proposal. Such notice to Rocket and
Acquiror shall be made orally and in writing, and shall indicate whether
Company is providing or intends to provide the Person making the Acquisition
Proposal with access to information concerning Company as provided in Section
4.7(c).
(c) If the Board of Directors of Company or the Special Committee receives a
request for material nonpublic information by a Person who makes, or indicates
that it is considering making, an Acquisition Proposal, and the Board of
Directors or the Special Committee, as the case may be, determines in good
faith after consultation with outside counsel that it would be in the best
interests of Company and its stockholders to provide such information, then,
provided such Person has executed an appropriate confidentiality agreement,
Company may provide such Person with access to information regarding Company.
Company agrees not to release any third party from the confidentiality and
standstill provisions of any confidentiality agreement to which Company is a
party.
(d) Company shall use its commercially reasonable efforts to inform the
officers, directors and employees of Company and its Subsidiaries and any
outside counsel, financial advisor, investment banker or other advisor or
representative retained by Company of the restrictions described in this
Section.
4.8 Tax Returns. Without the prior written consent of Rocket, neither
Company nor any of its Subsidiaries shall make or change any election, change
an annual accounting or Tax period, adopt or change any accounting method, file
any amended Tax Return, enter into any closing agreement, settle any Tax claim
relating to Company or its Subsidiaries, surrender any right to claim a refund
of Taxes, take or omit to take any similar action with respect to Taxes (other
than the filing of any original Tax Return), if any such election, adoption,
change, amendment, agreement, settlement, surrender or other action or omission
would have the effect of increasing the Tax liability of Company and its
Subsidiaries, by more than an aggregate amount of $25,000; provided, however,
that Company may consent to an extension of a limitation period applicable to a
Tax claim without Rocket's prior written consent (and Company will notify
Rocket of any such extension no later than five (5) Business Days after taking
such action if it would relate to the Company or its Subsidiaries).
4.9 Conduct of Business by Company Prior to the Effective Time. Except as
may be required by the terms of this Agreement or as may be consented to by
Rocket in writing, between the date hereof and the Closing Company covenants
that each of Company and its Subsidiaries:
(a) will not issue or sell or purchase or agree to issue or sell or
purchase any capital stock or any Option Security or Convertible Security,
otherwise than pursuant to any Company Option Securities or Company
Convertible Securities outstanding at the date hereof and listed on the
Disclosure Schedule pursuant to Section 2.1(c) above;
(b) will (i) operate its business in the normal, usual and customary
manner in the ordinary and regular course of business consistent with past
practice, including the maintenance of working capital at normal operating
levels consistent with past practice and the payment of accounts payable
and other expenses consistent with past practice, (ii) use its commercially
reasonable efforts consistent with past practice to preserve intact its
business organization, and (iii) use its commercially reasonable efforts to
keep available the services of its officers and employees;
(c) will not sell or otherwise dispose of or contract to sell or
otherwise dispose of, any of its properties or assets, other than inventory
sold or otherwise disposed of in the ordinary course of business consistent
with past practice;
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(d) except in each case in the ordinary course of business consistent
with past practice or with the prior written consent of Rocket (which shall
not be unreasonably withheld or delayed), (i) will not incur any
obligations or liabilities (fixed, contingent or other), (ii) will not
enter into any commitments, and (iii) will not sell or transfer any
material asset or canceled or cancel any material debts or claims;
(e) except in each case in the ordinary course of business consistent
with past practice or with the prior written consent of Rocket (which shall
not be unreasonably withheld or delayed), will not discharge or satisfy any
Encumbrance or pay any obligation or liability (absolute or contingent)
other than current liabilities or obligations under contracts existing on
the date hereof or thereafter entered into in the ordinary course of
business, and commitments under Leases existing on the date hereof or
thereafter incurred in the ordinary course of business;
(f) except in each case with the prior written consent of Rocket, will
not Encumber any of its property or assets, other than Permitted
Encumbrances;
(g) will not increase the compensation or severance payable or to become
payable to any of its officers, employees, advisers, consultants, salesmen
or agents or otherwise alter, modify or change in any material respect the
terms of their employment or engagement;
(h) except in each case with the prior written consent of Rocket (which
shall not be unreasonably withheld or delayed) or as otherwise contemplated
hereby, will not amend or terminate or enter into any Lease, Governmental
Authorization, Private Authorization, Lease, any Lease, Contractual
Obligation disclosed in the Disclosure Schedule pursuant to the first
sentence of Section 2.5 above, Company Benefit Arrangement or Company
Employee Benefit Plan, or any Contractual Obligation or transaction with
any Affiliate;
(i) will not declare, make or pay, or agree to declare, make or pay, any
Distribution other than any Distribution from a Subsidiary of Company to
Company or to another Subsidiary of Company;
(j) will not split, reclassify, combine or redeem any shares of any
class of capital stock or amend or modify any of its Organic Documents;
(l) will not take any action that would result in any representation or
warranty of Company being untrue in any material respect;
(m) will not make any change to its accounting (including Tax
accounting) methods, principles, practices, or policies, other than those
required by GAAP or Applicable Law;
(n) will not, and shall cause the Company not to, agree to do any of the
foregoing;
(o) will not make or permit to be made any change affecting any bank,
trust company, savings and loan association, brokerage firm account or safe
deposit box or in the names of the Persons authorized to draw thereon, to
have access thereto or to authorize transactions therein or in such powers
of attorney, or open any additional accounts or boxes or grant any
additional powers of attorney, without in each case promptly notifying
Rocket in writing thereof; and
(p) will timely keep Rocket informed with respect to all material
capital expenditures or other material developments with respect to Company
or any of its Subsidiaries.
4.10 Certain Notices. Company will promptly notify Rocket of any and all
Events which would require any change to be made in the Disclosure Schedule or
which could cause or result in any breach or inaccuracy in any material respect
of any of Company's representations and warranties, including without
limitation those set forth in Section 2, or which are reasonably likely to
impair the likelihood that all of the conditions specified in Sections 5 and 6
will be satisfied on or prior to the Closing Date.
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4.11 Indemnification of Officers and Directors.
(a) All rights to indemnification existing in favor of those Persons who are
directors and officers of the Company as of the date of this Agreement (the
"Indemnified Persons") for their acts and omissions occurring prior to the
Effective Time, as provided in the Company's Bylaws or Articles of Organization
(as in effect at the date of this Agreement), shall survive the Merger and
shall be observed by the Surviving Corporation to the fullest extent permitted
by Massachusetts law for a period of six (6) years from the Effective Time.
(b) From the Effective Time until the first anniversary of the Effective
Time, the Surviving Corporation shall maintain in effect, for the benefit of
the Indemnified Persons with respect to their acts and omissions occurring
prior to the Effective Time the existing $1.5 million policy of directors' and
officers' liability insurance maintained by the Company as of the date of this
Agreement in the form of disclosed by the Company to Rocket prior to the date
of this Agreement (the "Existing Policy"), provided, however, that the
Surviving Corporation may substitute for the Existing Policy a policy or
policies of comparable coverage.
4.12 Employee Benefits.
(a) Rocket agrees that all employees of Company who continue employment with
Rocket, the Surviving Corporation or any Subsidiary of the Surviving
Corporation after the Effective Time ("Continuing Employees") shall be eligible
to continue to participate in the Surviving Corporation's health and welfare
benefit plans; provided, however, that (i) the employment of each Continuing
Employee shall be "at will" employment, (ii) nothing in this Section or
elsewhere in this Agreement shall limit the right of Rocket or the Surviving
Corporation to amend or terminate any such health or welfare benefit plan at
any time, and (iii) if Rocket or the Surviving Corporation terminates any such
health or welfare benefit plan, then (upon expiration of any appropriate
transition period), the Continuing Employees shall be eligible to participate
in Rocket's health and welfare benefit plans to substantially the same extent
as similarly situated employees of Rocket. Nothing in this Section or elsewhere
in this Agreement shall be construed to create a right in any Continuing
Employee or other Person to employment with Rocket, the Surviving Corporation
or any other Subsidiary of Rocket.
(b) Company shall terminate, effective as of the day immediately preceding
the Effective Time, each Company Employee Benefit Plan sponsored or maintained
by any of Company and its Subsidiaries (or in which any of any of Company and
its Subsidiaries participate) that contains a cash or deferred arrangement
intended to qualify under Section 401(k) of the Code (a "Company 401(k) Plan")
unless Rocket provides written notice to Company prior to the Effective Time
that any such Company 401(k) Plans shall not be terminated. Rocket shall
receive from the Company prior to Closing evidence that the Company 401(k)
Plan(s) have been terminated pursuant to resolutions of the Board of Directors
of Company or the Special Committee (the form and substance of such resolutions
shall be subject to review and approval of Rocket), effective as of the day
immediately preceding the Effective Time. If Rocket has not given the notice
referred to in the first sentence of this Section 4.12(b), Rocket agrees to use
its commercially reasonable efforts to cause to be taken all actions necessary
or appropriate to cover, under substantially similar terms and conditions
applicable to similarly situated Rocket employees, the Continuing Employees
under a plan sponsored by Rocket that includes a cash or deferred arrangement
intending to qualify under Section 401(k) of the Code ("Rocket 401(k) Plan"),
effective with respect to Rocket's first full regular pay period beginning
after the Closing Date. Rocket agrees to use its commercially reasonable
efforts to cause the Rocket 401(k) Plan to accept rollover contributions of
amounts properly distributed to participants from the Company 401(k) Plan(s),
including any outstanding participant loan that is not in default as of the
time of the rollover; provided however, that neither Rocket nor any plan
administrator or trustee for the Rocket 401(k) Plan shall be obligated to
accept on behalf of the Rocket 401(k) Plan any such rollover contributions
unless (i) the participant requesting such rollover is otherwise eligible to
participate in the Rocket 401(k) Plan at the time of the rollover and (ii) a
favorable determination letter has been received from the IRS with respect to
the qualification of the applicable Company 401(k) Plan in connection with the
termination of such Company 401(k) Plan. Rocket agrees that, notwithstanding
the foregoing provisions of this Section 4.12(b), participants in Company's
401(k) Plan(s) shall continue to direct the investment of their account
balances, in accordance with applicable Plan terms, during
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the period after termination date of any such Plan until Plan distribution
elections are made available to participants in connection with the Plan's
termination.
(c) The Continuing Employees will be given credit under Rocket employee
benefit plans for services performed for Company for purposes of participation,
vesting and benefit levels, to the same extent such services are so credited
under Rocket's existing benefit plans; provided, however, that this Section
4.12(c) shall not apply for purposes of vesting under an option or other equity
incentive award granted after the Effective Time.
Section 5. Conditions Precedent to Rocket's and Acquiror's Obligations.
The obligations of Rocket and Acquiror to consummate the Merger and other
transactions contemplated hereby are subject to the satisfaction on the Closing
Date of the following conditions except to the extent that any such condition
may have been waived in writing by Rocket at or prior to the Closing Date:
5.1 No Opposition. No Legal Action or other claim shall be pending or
threatened at any time prior to or on the Closing Date before or by any
Authority seeking to restrain or prohibit, or damages or other relief in
connection with, the execution and delivery of this Agreement or the
consummation of the transactions contemplated hereby or which might in the
judgment of Rocket have any Material Adverse Effect on Company, Rocket or
Acquiror.
5.2 Representations, Warranties and Covenants. The representations and
warranties of Company contained in this Agreement or otherwise made in writing
by it or on its behalf pursuant hereto shall be true and correct in all
material respects at and as of the Closing Date with the same force and effect
as though made on and as of such date (except those which speak as of a date
certain which shall continue to be true and correct in all material respects as
of such date) on the Closing Date; each and all of the covenants, agreements
and conditions to be performed or satisfied by Company or its Board of
Directors or the Special Committee hereunder at or prior to the Closing Date
(including but not limited to the obligations of the Board of Directors of
Company set forth in Section 1.4(b) above) shall have been duly performed or
satisfied in all material respects; and Company shall have furnished Rocket
with such certificates and other documents evidencing the truth of such
representations and warranties and the performance and satisfaction of such
agreements or conditions as Rocket shall have reasonably requested.
5.3 Company's Stockholders' Approval. Company shall have duly and validly
obtained the Company Stockholder Approval.
5.4 Dissenters' Rights. The beneficial owners of no more than seven and one-
half percent (7.5%) of Company Common Stock shall have asserted dissenters'
rights in connection with the Merger.
5.5 Consents. Company shall have obtained unconditional consents to the
assignment and continuation of all Private Authorizations and Contractual
Obligations disclosed in the Disclosure Schedule pursuant to the first sentence
of Section 2.5 above, including a consent from Bull HN Information Systems,
Inc. substantially in the form included in the Disclosure Schedule or in such
other form as may be reasonably acceptable to Rocket, but excluding a consent
from Southborough/Westborough LLC under the Lease Agreement for Company's
premises located at 112 Turnpike Road, Westborough, Massachusetts.
5.6 No Material Adverse Change. As of the Closing Date, there shall not have
occurred and be continuing any Material Adverse Change affecting any of Company
and its Subsidiaries from those reflected in the most recently audited
financial statements of Company and its Subsidiaries included in the Company
SEC Documents, other than any material adverse change in the financial
condition, operations or results of operations of Company and its Subsidiaries
since December 31, 2001 arising out of matters of a general economic nature or
matters affecting the industry generally, and none of Company and its
Subsidiaries shall have sustained any loss or damage to its assets that
materially affects its ability to operate its assets and business in the
ordinary course of business.
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5.7 Cash at Closing. At Closing, the remainder of (i) the aggregate amount
of cash and cash equivalents held by Company minus (ii) the lesser of (A)
$840,000 and (B) the actual aggregate amount of out-of-pocket costs and
expenses incurred by Company in connection with this Agreement and the
transactions contemplated hereby, shall be equal to at least $4,810,000.
5.8 Certain Certificates and Documents. Each of Company and its Subsidiaries
shall have furnished Rocket and Acquiror with the following:
(a) A certificate of its Clerk or Assistant Clerk as to (i) the by-laws,
(ii) all resolutions of its Board of Directors and stockholders relating to
this Agreement and (iii) incumbency of any officers signing any Transaction
Document on its behalf.
(b) A copy of each of Company's and its Subsidiaries' respective
articles of organization or certificate of incorporation or similar
document, as the case may be, as certified by the Secretary of State or
other appropriate official of the jurisdiction of organization or
incorporation of such Entity, each dated within a recent date prior to the
Closing Date.
(c) A certificate of legal existence and good standing for each of
Company and its Subsidiaries from the Secretary of State or other
appropriate official of the jurisdiction of organization or incorporation
of such Entity, each dated within a recent date prior to the Closing Date.
(d) Such other certificates, documents and instruments as may be
necessary to effect the intent of this Agreement or consummate the
transactions contemplated hereby or as Rocket or Acquiror may reasonably
request.
Section 6. Conditions Precedent to Company's Obligations.
The obligations of Company to consummate the Merger and the other the
transactions contemplated by this Agreement are subject to the satisfaction at
or prior to the Closing Date of the following conditions except to the extent
that any such condition may have been waived in writing by Company at or prior
to the Closing Date:
6.1 Representations and Covenants. The representations and warranties of
Rocket and Acquiror contained in this Agreement or otherwise made in writing by
them or on their behalf pursuant hereto shall be true and correct in all
material respects at and as of the Closing Date with the same force and effect
as though made on and as of such date except those which speak as of a date
certain which shall continue to be true and correct in all material respects as
of such date on the Closing Date; each and all of the agreements and conditions
to be performed or satisfied by Rocket or Acquiror hereunder at or prior to the
Closing Date shall have been duly performed or satisfied in all material
respects; and Rocket shall have furnished Company with such certificates and
other documents evidencing the truth of such representations and warranties and
the performance and satisfaction of such agreements and conditions as Company
shall have reasonably requested.
6.2 No Opposition. As of the Closing Date, no injunction, writ or
preliminary restraining order or order of any nature issued by any Authority of
competent jurisdiction shall be in effect preventing the consummation of the
transactions contemplated by this Agreement.
6.3 Stockholder Approval. Company shall have duly and validly obtained the
Company Stockholder Approval.
Section 7. Definitions.
7.1 Principles of Construction. As used herein, unless the context otherwise
requires, the following terms have the following respective meanings. Terms
defined in the singular shall have a comparable meaning when used in the
plural, and vice versa, and the reference to any gender shall be deemed to
include all genders. Except where the context otherwise requires, references to
"this Section" or words of similar import shall be
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deemed to refer to the entire section and not a particular subsection and
references to "hereunder," "herein," "hereof" or words of similar import shall
be deemed to refer to the entire Agreement and not the particular Section or
subsection or other provision. The words "includes" and "including" are not
limiting and mean "including without limitation." In computation or periods of
time from a specified date to a later specified date, the word "from" means
"from and including," the words "to" and "until" each means "to but excluding,"
and the word "through" means "to and including." Unless otherwise defined or
the context otherwise clearly requires, terms for which meanings are provided
in this Agreement shall have such meanings when used in any schedule hereto
(including the Disclosure Schedule) and each Instrument, notice, certificate,
communication, opinion or other document executed or required to be executed
pursuant hereto or thereto or otherwise delivered, from time to time, pursuant
hereto or thereto. All accounting terms not specifically defined herein shall
be construed in accordance with GAAP. References to any statute or regulation
are to be construed as including all statutory and regulatory provisions
consolidating, amending or replacing such statute or regulation.
7.2 Certain Defined Terms. The following terms shall have the respective
meanings specified therefor below.
"Acquiror" is defined in the preamble preceding the Recitals.
"Acquisition Proposal" is defined in Section 4.7.
"Affiliate," when used with respect to any specified Person, shall mean any
Person that directly, or indirectly through one or more intermediaries,
controls or is controlled by or is under common control with such specified
Person.
"Agreement" is defined in the Recitals.
"Applicable Law" shall mean any Law of any Authority, whether domestic or
foreign, including all federal and state Laws, to which the Person in question
is subject or by which it or any of its property is bound, and including
without limitation any: (a) administrative, executive, judicial, legislative or
other statute, code, consent decree, constitution, decree, directive,
enactment, finding, guideline, injunction, interpretation, judgment, law,
order, ordinance, policy statement, proclamation, promulgation, regulation,
requirement, rule, rule of law, rule of public policy, settlement agreement, or
writ, of any Authority, domestic or foreign; (b) common law or other legal or
quasi-legal precedent; or (c) arbitrator's, mediator's or referee's award,
decision, finding or recommendation, or, in any case, any particular section,
part or provision thereof.
"Articles of Merger" is defined in Section 1.1.
"Authority" shall mean any governmental or quasi-governmental authority,
whether administrative, executive, judicial, legislative or other, or any
combination thereof, including any federal, state, territorial, county,
municipal or other government or governmental or quasi-governmental agency,
arbitrator, authority, board, body, branch, bureau, central bank or comparable
agency or entity, commission, corporation, court, department, instrumentality,
master, mediator, panel, referee, system or other political unit or subdivision
or other entity of any of the foregoing, whether domestic or foreign.
"Benefit Arrangement" shall mean any benefit arrangement (whether or not
written), including (a) any employment or consulting agreement, (b) any
arrangement providing for insurance coverage or workers' compensation benefits,
(c) any incentive bonus or deferred bonus arrangement, (d) any arrangement
providing termination allowance, severance or similar benefits, (e) any equity
compensation plan, (f) any deferred compensation plan and (g) any compensation
policy and practice, but excluding in any event any Employee Benefit Plan.
"Certificates" is defined in Section 1.5.
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"Closing" is defined in Section 1.2.
"Closing Date" is defined in Section 1.2.
"COBRA" shall mean the Consolidated Omnibus Budget Reconciliation Act of
1985, as amended, as set forth in Section 4980B of the Code and Part 6,
Subtitle B of Title I of ERISA.
"Code" shall mean the United States Internal Revenue Code of 1986, and the
rules and regulations thereunder, all as from time to time in effect, or any
successor law, rules or regulations, and any reference to any statutory or
regulatory provision shall be deemed to be a reference to any successor
statutory or regulatory provision.
"Commission" shall mean the Securities and Exchange Commission or any
successor Authority thereto.
"Company" is defined in the preamble preceding the Recitals.
"Company 401(k) Plan" is defined in Section 4.12.
"Company Benefit Arrangement" shall mean any Benefit Arrangement maintained
by Company or any of its Subsidiaries, or any ERISA Affiliates of Company or
any of its Subsidiaries, covering any employees, former employees, directors
or former directors of Company or any of its Subsidiaries or any ERISA
Affiliates of Company or any of its Subsidiaries, and the beneficiaries of any
of them.
"Company Common Stock" is defined in Section 1.4.
"Company Consents" is defined in Section 2.22.
"Company Convertible Securities" shall mean any Convertible Securities
directly or indirectly convertible into or exchangeable for shares of Company
Common Stock.
"Company Employee" shall mean any present or former employee of Company or
any of its Subsidiaries.
"Company Employee Benefit Plan" shall mean any Employee Benefit Plan that
is sponsored or contributed to by Company or any of its Subsidiaries, or any
of ERISA Affiliates of Company or any of its Subsidiaries covering the
employees or former employees of Company or any of its Subsidiaries or any
ERISA Affiliates of Company or any of its Subsidiaries.
"Company Financial Advisor" is defined in Section 2.21.
"Company Option Securities" shall mean any Option Securities for the
purchase or other acquisition of shares of Company Common Stock or Company
Convertible Securities.
"Company Plan" shall mean any Company Employee Benefit Plan or Company
Benefit Arrangement.
"Company SEC Documents" is defined in Section 2.2.
"Company Stockholder Approval" is defined in Section 2.20.
"Company Stockholder Meeting" is defined in Section 4.5.
"Confidentiality Agreement" is defined in Section 4.1.
"Continuing Employees" is defined in Section 4.12.
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"Contractual Obligation" shall mean, with respect to any Person, any term,
condition, provision, representation, warranty, agreement, covenant,
undertaking, commitment, indemnity or other obligation set forth or which is
outstanding or existing under any Instrument (including without limitation any
Instrument relating to or evidencing any indebtedness or capital lease
obligation) to which such Person is a party or by which it or any of its
properties is bound.
"Convertible Securities" shall mean any evidences of indebtedness, shares of
capital stock or other securities directly or indirectly convertible into or
exchangeable for shares of common stock, whether or not the right to convert or
exchange thereunder is immediately exercisable or is conditioned upon the
passage of time, the occurrence or non-occurrence or existence or non-existence
of some other Event, or both.
"Disbursing Agent" is defined in Section 1.5.
"Disbursing Agent Agreement" is defined in Section 1.5.
"Dissenting Shares" is defined in Section 1.4.
"Distribution" shall mean, with respect to any Person: (a) the declaration
or payment of any dividend on or in respect of any shares of any class of
capital stock of such Person; (b) the purchase, redemption or other retirement
of any shares of any class of capital stock of such Person or any shares of
capital stock of any Subsidiary owned by a Person other than such Person or a
wholly owned Subsidiary of such Person; and (c) any other distribution on or in
respect of any shares of any class of capital stock of such Person or any
shares of capital stock of any Subsidiary owned by a Person other than such
Person or a wholly owned Subsidiary of such Person.
"Effective Time" is defined in Section 1.1.
"Employee Benefit Plan" shall mean any benefit plan, as defined in Section
3(3) of ERISA.
"Encumber" or "Encumbrance" shall mean any of the following: mortgage; lien
(statutory or other); preference, priority or other security agreement,
arrangement or interest; hypothecation, pledge or other deposit arrangement;
assignment; charge; levy; executory seizure; attachment; garnishment;
encumbrance (including any easement, exception, variance, reservation or
limitation, right of way, zoning restriction, building or use restriction, and
the like); conditional sale, title retention or other similar agreement,
arrangement, device or restriction; preemptive or similar right; any financing
lease involving substantially the same economic effect as any of the foregoing;
the filing of any financing statement under the Uniform Commercial Code or
comparable law of any jurisdiction; restriction on sale, transfer, assignment,
disposition or other alienation; or any option, equity, claim or right of or
obligation to, any other Person, of whatever kind and character.
"Entity" shall mean any corporation, firm, unincorporated organization,
association, partnership, limited liability company, a trust (inter vivos or
testamentary), an estate of a deceased, insane or incompetent individual,
business trust, joint stock company, joint venture or other organization,
entity or business, whether acting in an individual, fiduciary or other
capacity, or any Authority.
"Environmental Claim" means any notice received by Company or any of its
Subsidiaries of violation, action, claim, Environmental Lien, demand, abatement
or other order or direction (conditional or otherwise) by any Authority or any
other Person for personal injury (including sickness, disease or death),
tangible or intangible property damage, damage to the environment, pollution,
contamination or other adverse effects on the environment, or for fines,
penalties or restrictions resulting from or based upon (a) the existence of an
Environmental Release (including, without limitation, a sudden or non-sudden
accidental or non-accidental Environmental Release) of, or exposure to, any
Hazardous Material, noxious odor or illegal audible noise in, into or onto the
environment (including, without limitation, the air, soil, surface water or
groundwater) at, in, by, from or related to any property presently or formerly
owned, operated or leased by any of Company or its Subsidiaries or any
activities or operations thereon; (b) the transportation, storage, treatment or
disposal of
A-25
Hazardous Material in connection with any property presently or formerly owned,
operated or leased by any of Company or its Subsidiaries or their operations or
facilities; or (c) the violation, or alleged violation, of any Environmental
Law relating to environmental matters connected with any property presently or
formerly owned, leased or operated by any of Company or its Subsidiaries.
"Environmental Costs and Liabilities" means any and all losses, liabilities,
obligations, damages, fines, penalties, judgments, actions, claims, costs and
expenses (including, without limitation, fees, disbursements and expenses of
legal counsel, experts, engineers and consultants and the costs of
investigation and feasibility studies and Remedial Action) arising from or
under any Environmental Law or contract, agreement or similar arrangement with
any Authority or other Person required under any Environmental Law.
"Environmental Law" shall mean any Law relating to or otherwise imposing
liability or standards of conduct concerning pollution or protection of the
environment or health or safety, occupational or other, including without
limitation Laws relating to emissions, discharges, releases or threatened
releases of pollutants, contaminants, chemicals, noises, odors or industrial,
toxic or hazardous substances, materials or wastes, including without
limitation Hazardous Materials, whether solid, liquid or gaseous in nature and
whether as matter or energy, into the environment (including, without
limitation, ambient air, surface water, ground water, mining or reclamation or
mined land, land surface or subsurface strata) or otherwise relating to the
manufacture, processing, generation, distribution, use, treatment, storage,
disposal, cleanup, transport or handling of pollutants, contaminants, chemicals
or industrial, toxic or hazardous substances or wastes, whether solid, liquid
or gaseous in nature, including without limitation any Law relating to
reporting, licensing, permitting, investigation and remediation of any of the
foregoing. Environmental Laws shall include without limitation the
Comprehensive Environmental Response, compensation and Liability Act (42 U.S.C.
Section 9601 et seq.), the Hazardous Material Transportation Act (49 U.S.C.
Section 1801 et seq.), the Resource Conservation and Recovery Act (42 U.S.C.
Section 6901 et seq.), the Clean Water Act (Federal Water Pollution Control
Act) (33 U.S.C. Section 1251 et seq.), the Clean Air Act (42 U.S.C. Section
7401 et seq.), the Toxic Substances Control Act (15 U.S.C. Section 2601 et
seq.), the Safe Drinking Water Act (42 U.S.C. Section 300f et seq.), the
Endangered Species Act (16 U.S.C. Section 1531 et seq.), the Emergency Planning
and Community Right-to-Know Act of 1986 (42 U.S.C. Section 11001 et seq.), the
Occupational Safety and Health Act (29 U.S.C. Section 651 et seq.), the Federal
Insecticide, Fungicide Rodenticide Act (7 U.S.C. Section 136 et seq.), the
Food, Drug and Cosmetic Act (21 U.S.C. Section 301 et seq.), the Medical Waste
Tracking Act of 1988, Pub. L. No. 100-582, 102 Stat. 2950 (1988), and the
Surface Mining Control and Reclamation Act of 1977 (30 U.S.C. Section 1201 et
seq.), as such laws have been amended or supplemented from time to time, and
any analogous present or future federal, state, local or foreign statutes,
including transfer of ownership notification statutes.
"Environmental Lien" means any Encumbrance arising under any Environmental
Law.
"Environmental Permit" means any permit, approval, authorization, license,
variance, registration or permission required under any applicable
Environmental Law.
"Environmental Release" means any release, spill, emission, leaking,
pumping, pouring, dumping, emptying, injection, deposit, disposal, discharge,
dispersal, leaching, or migration on or into the indoor or outdoor environment
or into or out of any property not authorized under any Environmental Permit
and requiring notification under any applicable Environmental Law.
"ERISA" shall mean the Employee Retirement Income Security Act of 1974, as
amended, and the rules and regulations thereunder, all as from time to time in
effect, or any successor law, rules or regulations, and any reference to any
statutory or regulatory provision shall be deemed to be a reference to any
successor statutory or regulatory provision.
"ERISA Affiliate" shall mean a Person and/or such Person's Subsidiaries or
any trade or business (whether or not incorporated) which is under common
control with such Person's or such Person's Subsidiaries or which
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is treated as a single employer with such Person or any Subsidiary of such
Person under Section 414(b), (c), (m) or (o) of the Code or Section 4001(b)(f)
of ERISA.
"Event" shall mean the occurrence or existence of any act, action, activity,
circumstance, condition, event, fact, failure to act, incident or practice, or
any set or combination of any of the foregoing.
"Exchange Act" shall mean the Securities Exchange Act of 1934, and the rules
and regulations of the Commission thereunder, all as from time to time in
effect, or any successor law, rules or regulations, and any reference to any
statutory or regulatory provision shall be deemed to be a reference to any
successor statutory or regulatory provision.
"Existing Policy" is defined in Section 4.11.
"Fairness Opinion" shall mean the written opinion, dated April [17], 2001 of
the Company Financial Advisor to the effect, without limitation, that the
consideration to be received by the holders of shares of Company Common Stock
and Company Option Securities in the Merger is fair from a financial point of
view to such holders.
"GAAP" shall mean, with respect to any Person, except to the extent that a
deviation therefrom is expressly required by this Agreement, generally accepted
accounting principles applied on a consistent basis (a) as set forth in
Opinions of the Accounting Principles Board of the American Institute of
Certified Public Accountants ("AICPA") and/or in statements of the Financial
Accounting Standards Board that are applicable in the circumstances as of the
date in question, (b) when not inconsistent with such opinions and statements,
as set forth in other AICPA publications and guidelines and/or (c) that
otherwise arise by custom for the particular industry. The requirement that
such principles be consistently applied means that the accounting principles in
a current period are comparable in all material respects to those applied in
preceding period. All accounting and financial terms used in this Agreement,
all determinations and computations required to be made pursuant to the
provisions of this Agreement, and the compliance with each covenant contained
in this Agreement that relates to financial matters shall, except as otherwise
specifically provided to the contrary, be determined in accordance with GAAP as
defined in this paragraph.
"Gains Taxes" is defined in Section 2.22.
"Governmental Authorizations" shall mean all approvals, concessions,
consents, exemptions, franchises, licenses, permits, plans, registrations and
other authorizations of and all reports and notices to and filings with all
Authorities.
"Hazardous Material" means any substance, material or waste which is
regulated by any Authority in jurisdictions in which any of Company or its
Subsidiaries operates, including, (a) any material, substance or waste which is
defined as a "hazardous waste," "hazardous material," "hazardous substance,"
"extremely hazardous waste," "restricted hazardous waste," "contaminant,"
"toxic waste" or "toxic substance" under any provision of Environmental Law,
and (b) petroleum, petroleum products, asbestos and polychlorinated biphenyls.
"Indemnified Person" is defined in Section 4.11.
"Instrument" shall mean any agreement, bond, contract, debenture, indenture,
lease, letter of credit, mortgage, note, commitment, memorandum, certificate,
notice, document or other writing (whether by formal agreement, letter or
otherwise), or any oral arrangement, understanding or commitment, under which
any debt, liability or other obligation is evidenced, assumed or undertaken, or
any lien (or right or interest therein) is granted, perfected or exists.
"Intellectual Property Rights" is defined in Section 2.7.
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"IRS" or the "Service" shall mean the United States Internal Revenue Service
or any successor Authority thereto.
"Law" shall mean any action, approval, authorization, code, consent decree,
constitution, demand, decree, directive, enactment, finding, guideline,
injunction, interpretation, judgment, law, license, order, ordinance, permit,
policy statement, proclamation, promulgation, regulation, requirement, rule,
rule of law, rule of public policy, settlement agreement, statute, or writ, or
the common law, or any particular section, part or provision thereof, or any
interpretation, directive, guideline or request (whether or not having the
force of law), of any Authority, including without limitation the judicial
systems thereof, or any particular section, part or provision thereof.
"Lease" shall mean any lease of property, whether real, personal or mixed.
"Legal Action" shall mean, with respect to any Person, any litigation or
legal or other actions, arbitrations, investigations, proceedings or suits, at
law or in arbitration, equity or admiralty (whether or not purported to be
brought on behalf of such Person) affecting such Person or any of its business
or property or assets.
"Material Adverse" or "Materially and Adversely" when used alone or in
conjunction with other terms (including without limitation "Affect," "Change"
and "Effect") in respect of any Person shall mean any Event or set of Events
which could be expected to (a) have any material adverse effect upon or result
in any material adverse change in the validity or enforceability of this
Agreement, or any of the Transaction Documents, (b) materially and adversely
affect the business, operations, management, properties or prospects, or the
condition, financial or other, or results of operation of such Person and its
Subsidiaries taken as a whole, (c) materially impair such Person's ability to
fulfill its obligations under the terms of this Agreement or any Transaction
Document, or (d) materially and adversely affect the aggregate rights and
remedies of Rocket or Acquiror under this Agreement or any Transaction
Document; provided that in no event shall any of the following constitute a
Material Adverse Effect on Company: (i) net losses of Company and its
Subsidiaries from operations in the normal, usual and customary manner in the
ordinary and regular course of business, consistent with past practice, of
Company and its Subsidiaries, (ii) a change in the market price or trading
volume of the Company Common Stock, (iii) any adverse Event principally
attributable to conditions affecting the industries in which Company and its
Subsidiaries participate, or the U.S. economy, as a whole, or (iv) any failure
by Company to meet internal projections or forecasts, analysts' expectations or
published revenue or earnings predictions for any period ending (or for which
revenues or earnings are released) on or after the date of this Agreement.
"MBCL" is defined in Section 1.1.
"Merger" is defined in Section 1.1.
"Merger Price" is defined in Section 1.4.
"Multiemployer Plan" shall mean a multiemployer plan, as defined in Sections
3(37) and 4001(a)(3) of ERISA.
"Option Securities" shall mean all rights, options and warrants, and calls
or commitments evidencing the right, to subscribe for, purchase or otherwise
acquire shares of capital stock or Convertible Securities, whether or not the
right to subscribe for, purchase or otherwise acquire is immediately
exercisable or is conditioned upon the passage of time, the occurrence or non-
occurrence or the existence or non-existence of some other Event.
"Organic Documents" shall mean, with respect to any Entity, the instrument,
as from time to time in effect, filed by such Entity under the laws of its
jurisdiction of organization for the purpose of effecting such organization,
its by-laws, partnership agreement, management agreement, operating agreement
and all
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stockholder, partner and member agreements, voting trusts and similar
arrangements applicable to any of its capital stock, partnership interests or
membership interests.
"Pension Plan" shall mean any employer pension benefit plan, as defined in
Section 3(2) of ERISA.
"Permitted Encumbrances" shall mean the following: (a) liens for taxes,
assessments and governmental charges not yet due and payable; (b) rights
reserved to any Authority to regulate the affected property; (c) as to leased
assets, interests of lessors and encumbrances affecting the interests of the
lessors; and (d) leases, encumbrances or restrictions that do not in any
material respect, individually or in the aggregate, affect or impair the value
or use of the affected asset or property.
"Permitted Investments" is defined in Section 1.5.
"Person" shall mean any human being or any Entity.
"Private Authorizations" shall mean all franchises, permits, licenses,
approvals, consents, concessions and other authorizations of or notices to or
filings with all Persons (other than Authorities) including without limitation
those with respect to patents, trademarks, service marks, trade names,
copyrights, computer software programs, technology and know-how.
"Prohibited Transaction" shall mean a transaction that is prohibited under
Section 4975 of the Code or Section 406 of ERISA and not exempt under Section
4975 of the Code or Section 408 of ERISA, respectively.
"Proxy Statement" is defined in Section 2.18.
"Remedial Action" means all actions required under any applicable
Environmental Law or otherwise undertaken by any Authority, including any
capital expenditures, required or undertaken to (a) clean up, remove, treat, or
in any other way address any Hazardous Material; (b) prevent an Environmental
Release or the threat of an Environmental Release, or minimize any further
Environmental Release so it does not migrate or endanger or threaten to
endanger public health or welfare or the indoor or outdoor environment; (c)
perform pre-remedial studies and investigations or post-remedial monitoring and
care; or (d) bring facilities on any property owned, operated or leased by any
of Company or its Subsidiaries and operations conducted thereon into compliance
with any applicable Environmental Law or Environmental Permit.
"Representatives" is defined in Section 4.1.
"Reportable Event" shall mean a "reportable event", as defined in Section
4043 of ERISA, whether or not the reporting of such event to the Pension
Benefit Guaranty Corporation has been waived.
"Rocket" is defined in the preamble preceding the Recitals.
"Rocket 401(k) Plan" is defined in Section 4.12.
"Schedule 13E-3" is defined in Section 2.18.
"Subsidiary" shall mean, with respect to any Person, any Entity a majority
of the capital stock ordinarily entitled to vote for the election of directors,
or if no such voting stock is outstanding a majority of the equity interests,
of which is owned directly or indirectly by such Person or any other Person
which is a Subsidiary of such Person.
"Special Committee" is defined in Section 2.21.
"Surviving Corporation" is defined in Section 1.1.
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"Tax" or "Taxes" shall mean all taxes, charges, fees, imposts, levies or
other assessments, including, without limitation, all net income, franchise,
profits, gross receipts, capital, sales, use, ad valorem, value added,
transfer, transfer gains, inventory, capital stock, license, withholding,
payroll, employment, social security, unemployment, excise, severance, stamp,
occupation, real or personal property, and estimated taxes, water, rent and
sewer service charges, custom duties, fees, assessments and charges of any kind
whatsoever, together with any interest and any penalties, fines, additions to
tax or additional amounts thereon, imposed by any taxing authority or other
Authority (federal, state, local or foreign) and shall include any transferee
liability in respect of Taxes.
"Tax Return" shall mean any return, declaration, report, estimate,
information return or statement required to be filed in respect of any Taxes.
"Termination Date" is defined in Section 8.1.
"Transfer" shall mean any sale, assignment, conveyance, transfer or other
disposition, mortgage, pledge or other Encumbrance, lease, exchange,
abandonment, parting with control of, gift, granting of an option or proxy or
other act of alienation.
"Transaction Document" shall mean any Instrument executed or to be executed
in connection with the consummation of the Merger and the other transactions
contemplated hereby, whether or not expressly referred to in this Agreement.
Section 8. Termination.
8.1 Termination. Anything contained in this Agreement to the contrary
notwithstanding, this Agreement may be terminated, whether before or after the
Company Stockholder Approval:
(a) By mutual written agreement of the parties; or
(b) By any party, by written notice to the other parties, if, other than
as a result of a breach of this Agreement by the terminating party, the
Closing shall not have occurred on or before June 30, 2001 or such later
date as may be mutually agreed in writing by the parties (the "Termination
Date"); or
(c) By any party, by written notice to the other parties, if a court of
competent jurisdiction or governmental, regulatory or administrative agency
or commission shall have issued an order, decree or ruling (which order,
decree, ruling or action the parties hereto shall use their best efforts to
lift or reverse), in each case permanently restraining, enjoining or
otherwise prohibiting the transactions contemplated by this Agreement, and
such order, decree, ruling or other action shall have become final and
nonappealable; or
(d) (i) By Company, by written notice to the other parties, if both (A)
it is not in material breach of any of its representations, warranties or
covenants contained herein or in any Transaction Document and (B) there has
been a material breach of a representation or warranty in this Agreement by
Rocket or Acquiror, or a material breach by Rocket or Acquiror of any
covenant set forth herein, or a failure of any condition to which the
obligations of Company hereunder are subject, and such breach or failure
cannot be cured by the Termination Date and has not been waived, or (ii) by
Rocket and Acquiror, by written notice to Company, if both (A) neither
Rocket nor Acquiror is in material breach of any of its representations,
warranties or covenants contained herein or in any Transaction Document and
(B) there has been a material breach of a representation or warranty in
this Agreement by Company, or a material breach by Company of any covenant
set forth herein, or a failure of any condition to which the obligations of
Rocket and Acquiror hereunder are subject, and such breach or failure
cannot be cured by the Termination Date and has not been waived.
(e) By any party, by written notice to the other parties, if the Company
Stockholder Approval shall not have been obtained by reason of the failure
to obtain the required vote upon a vote held at the
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Company Stockholders Meeting contemplated by Section 4.5 (including any
postponements or adjournments thereof).
(f) By Rocket and Acquiror, by written notice to Company, if the Board
of Directors of Company shall have (i) withdrawn or modified, in a manner
adverse to Acquiror, its approval or recommendation of this Agreement or
any of the transactions contemplated hereby, (ii) failed to include such
recommendation in the Proxy Statement, (iii) approved or recommended any
Acquisition Proposal from any Person other than Rocket or Acquiror or (iv)
resolved to do any of the foregoing.
In the event of any termination pursuant to this Section (other than
pursuant to clause (a) above), written notice setting forth the reasons thereof
shall forthwith be given by the terminating party to the other party and, in
the case of paragraph (d) the breach or failure set forth in such notice shall
not have been cured within seven (7) days of such written notice.
8.2 Effect of Termination. In the event of termination of this Agreement
pursuant to Section 8.1, this Agreement shall forthwith become void, there
shall be no liability on the part of any party, or any of its respective
stockholders, partners, officers or directors, to the other and all rights and
obligations of each party shall cease, except that such termination shall not
relieve any party from liability for any misrepresentation or breach of any of
its warranties, covenants or agreements set forth in this Agreement occurring
prior to termination.
Section 9. General Provisions.
9.1 Nature and Survival of Representations and Warranties.
(a) All representations, warranties, covenants and agreements made in this
Agreement or in any agreement, instrument, other document or certificates
delivered in connection with the transactions contemplated hereby shall be
deemed material and relied on by each party notwithstanding any investigation
made by it or on its behalf. All representations, warranties, covenants and
agreements made in this Agreement shall terminate at the Effective Time or upon
termination of this Agreement pursuant to Section 8.1, except for those
covenants and agreements herein that by their terms are to be performed in
whole or in part after the Effective Time. Nothing in this Section shall
relieve any party from liability for any misrepresentation or breach of any of
its warranties, covenants or agreements set forth in this Agreement occurring
prior to its termination.
(b) All statements contained in the Disclosure Schedule or in any
certificate delivered by or on behalf of Company or any of its Subsidiaries
pursuant to or in connection with this Agreement or any amendments to any
thereof, shall constitute representations and warranties made under this
Agreement.
9.2 Entire Agreement. This Agreement (which term, unless the context
otherwise specifically requires, includes any exhibits or schedules hereto and
all agreements, instruments and certificates delivered pursuant hereto or
thereto) and the Confidentiality Agreement constitute the entire agreement
between the parties with respect to the subject matter hereof and supersede all
prior agreements, arrangements, covenants, promises, conditions,
understandings, inducements, representations and negotiations, expressed or
implied, written or oral, between them as to such subject matter, including,
without limitation, any so-called "letters of intent" with respect thereto.
9.3 Specific Performance; Other Rights and Remedies. The parties recognize
that certain of their rights under this Agreement are unique and, accordingly,
the parties shall, in addition to such other remedies as may be available to
any of them at law or in equity, have the right to enforce their rights
hereunder by actions for injunctive relief and specific performance to the
extent permitted by law. The parties hereby waive any requirement for security
or the posting of any bond or other surety in connection with any temporary or
permanent award of injunctive, mandatory or other equitable relief. The rights
and remedies of the parties under this Agreement are cumulative and are not in
lieu of, but are in addition to, any other rights and remedies
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which the parties shall have under or by virtue of any statute, rule or
regulation or any rule of law, or in equity, or any other agreement or
obligation between the parties or any of them.
9.4 Waivers; Amendments. Anything in this Agreement to the contrary
notwithstanding, required consents and approvals may be granted, compliance
with any term, covenant, agreement, condition or other provision set forth
herein may be omitted or waived, and misrepresentations and breaches of
warranties may be waived, either generally or in a particular instance and
either retroactively or prospectively with, but only with, the written consent
of the party entitled to the benefit thereof. This Agreement may be altered or
amended only by an instrument in writing, duly executed by each of the parties
hereto, at any time before or after the Company Stockholder Approval, but after
such approval no alteration or amendment shall be made which by Applicable Law
requires further approval by the stockholders of Company.
9.5 Assignment; Successors and Assigns. This Agreement shall not be
assignable by any party without the prior written consent of the other parties.
This Agreement shall be binding upon and shall inure to the benefit of the
parties hereto and their respective heirs, executors, legal representatives,
successors and permitted assigns, including, without limitation, successors by
operation of law pursuant to any merger, consolidation or sale of assets
involving any of the parties. Nothing in this Agreement expressed or implied is
intended to and shall not be construed to confer upon or create in any person
(other than the parties hereto and their permitted successors and assigns) any
rights or remedies under or by reason of this Agreement, including without
limitation any rights to enforce this Agreement.
9.6 Notices. All notices and other communications which by any provision of
this Agreement are required or permitted to be given shall be given in writing
and shall be (a) mailed by first-class or express mail, postage prepaid, (b)
sent by telegram, telecopy or other form of rapid transmission, confirmed by
mailing (by first class or express mail, postage prepaid) written confirmation
at substantially the same time as such rapid transmission, or (c) personally
delivered to the receiving party (which if other than an individual shall be an
officer or other responsible party of the receiving party). All such notices
and communications shall be mailed, sent or delivered as follows:
If to Rocket or Acquiror, at:
Rocket Software, Inc.
2 Apple Hill Drive
Natick, MA 01760
Attention: Mr. Johan Magnusson
Facsimile: 508-652-4730
with a copy to:
Lucash Gesmer & Updegrove LLP
40 Broad Street
Boston, MA 02109
Attention: Peter Moldave, Esq.
Facsimile: 617-350-6878
If to Company, at:
Peritus Software Services, Inc.
112 Turnpike Road, Suite 111
Westborough, MA 01581
Attention: Mr. John D. Giordano
President
Facsimile: 508-870-0764
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with a copy to:
Hale and Dorr LLP
60 State Street
Boston, MA 02109
Attention: Peter B. Tarr, Esq.
Facsimile: 617-526-5000
or to such other person(s), telex or facsimile number(s) or address(es) as the
party to receive any such communication or notice may have designated by
written notice to the other party.
9.7 Severability. If any provision of this Agreement shall be held or deemed
to be, or shall in fact be, invalid, inoperative, illegal or unenforceable as
applied to any particular case in any jurisdiction or jurisdictions, or in all
jurisdictions or in all cases, because of the conflicting of any provision with
any constitution or statute or rule of public policy or for any other reason,
such circumstance shall not have the effect of rendering the provision or
provisions in question invalid, inoperative, illegal or unenforceable in any
other jurisdiction or in any other case or circumstance or of rendering any
other provision or provisions herein contained invalid, inoperative, illegal or
unenforceable to the extent that such other provisions are not themselves
actually in conflict with such constitution, statute or rule of public policy,
but this Agreement shall be reformed and construed in any such jurisdiction or
case as if such invalid, inoperative, illegal or unenforceable provision had
never been contained herein and such provision reformed so that it would be
valid, operative and enforceable to the maximum extent permitted in such
jurisdiction or in such case, except when such reformation and construction
would operate as an undue hardship on either party, or constitute a substantial
deviation from the general intent and purpose of such party as reflected in
this Agreement.
9.8 Counterparts. This Agreement may be executed in several counterparts,
each of which shall be deemed an original, but all of which together shall
constitute one and the same instrument, binding upon all the parties hereto,
notwithstanding that all the parties are not signatories to the original or the
same counterpart. In pleading or proving any provision of this Agreement, it
shall not be necessary to produce more than one of such counterparts.
9.9 Section Headings. The headings contained in this Agreement are for
reference purposes only and shall not in any way affect the meaning or
interpretation of this Agreement.
9.10 Further Acts. Each of the parties hereto agrees to do all such things
and execute and deliver all such further instruments, agreements and documents
and to take all such further action as any other party may reasonably request
in order to effectuate the terms and conditions of this Agreement.
9.11 Governing Law. Except for provisions required to be governed by the
MBCL, the validity, interpretation, construction and performance of this
Agreement shall be governed by, and construed in accordance with, the laws of
the Commonwealth of Massachusetts applicable to contracts made and performed in
such jurisdiction and, in any event, without giving effect to any choice or
conflict of laws provision or rule that would cause the application of domestic
substantive laws of any other jurisdiction.
9.12 Consent to Jurisdiction and Service. To the extent permitted by
Applicable Law, each of the parties hereto absolutely and irrevocably consents
and submits to the jurisdiction of the courts of the Commonwealth of
Massachusetts and of any Federal Court located in the said jurisdiction in
connection with any actions or proceedings brought against it by any other
party to this Agreement arising out of or relating to this Agreement and hereby
irrevocably agrees that all claims in respect of any such action or proceeding
may be heard and determined in any such court.
9.13 No Presumption. This Agreement shall be construed without regard to any
presumption or other rule requiring construction against the party causing this
Agreement to be drafted.
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IN WITNESS WHEREOF, each of the undersigned parties has caused this
Agreement to be entered into and signed, effective and delivered as of the date
first-above written.
COMPANY:
Peritus Software Services, Inc.
/s/ John D. Giordano
By:__________________________________
Name: John D. Giordano
Title: President and Chief
Executive Officer
ROCKET:
Rocket Software, Inc.
/s/ Johan Magnusson
By: _________________________________
Name: Johan Magnusson
Title: Director, Chief Operating
Officer
ACQUIROR:
Rocket Acquisition Company, Inc.
/s/ Johan Magnusson
By: _________________________________
Name: Johan Magnusson
Title: President
A-34
Exhibit A
FEDERAL FEDERAL
IDENTIFICATION IDENTIFICATION NO.
NO. 04-3126919 04-
The Commonwealth of Massachusetts
William Francis Galvin
Secretary of the Commonwealth
One Ashburton Place, Boston, Massachusetts 02108-1512
ARTICLES OF MERGER
(General Laws, Chapter 156B, Section 78)
merger of
Peritus Software Services, Inc.
and
Rocket Acquisition Company, Inc.
the constituent corporations, into
Peritus Software Services, Inc.
one of the constituent corporations.
The undersigned officers of each of the constituent corporations certify
under the penalties of perjury as follows:
1. An agreement of merger has been duly adopted in compliance with the
requirements of General Laws, Chapter 156B, Section 78, and will be kept as
provided by Subsection (d) thereof. The surviving corporation will furnish a
copy of said agreement to any of its stockholders, or to any person who was a
stockholder of any constituent corporation, upon written request and without
charge.
2. The effective date of the merger determined pursuant to the agreement of
merger shall be the date approved and filed by the Secretary of the
Commonwealth. If a later effective date is desired, specify such date which
shall not be more than thirty days after the date of filing:
3. (For a merger)
**The following amendments to the Articles of Organization of the surviving
corporation have been effected pursuant to the agreement of merger:
Article III is hereby amended to change the authorized capital to:
200,000 shares common, $.01 par value per share
- --------
* Delete the inapplicable word
** If there are no provisions state "None".
Note: If the space provided under any article or item on this form is
insufficient, additions shall be set forth on separate 8 1/2 x 11 sheets of
paper with a left margin of at least 1 inch. Additions to more than one article
may be made on a single sheet as long as each article requiring each addition
is clearly indicated.
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(For a consolidation)
(a) The purpose of the resulting corporation is to engage in the following
business activities:
(b) State the total number of shares and the par value, if any, of each
class of stock which the resulting corporation is authorized to issue.
Without Par Value With Par Value
- ------------------------------ -----------------------------------------------
Type Number of Shares Type Number of Shares Par Value
- ---------- ---------------- ---------- ---------------- ---------
Common: Common:
Preferred: Preferred:
**(c) If more than one class of stock is authorized, state a distinguishing
designation for each class and provide a description of the preferences,
voting powers, qualifications, and special or relative rights or privileges of
each class and of each series then established.
**(d) The restrictions, if any, on the transfer of stock contained in the
agreement of consolidation are:
**(e) Other lawful provisions, if any, for the conduct and regulation of
the business and affairs of the corporation, for its voluntary dissolution, or
for limiting, defining, or regulating the powers of the corporation, or of its
directors or stockholders, or of any class of stockholders:
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4. The information contained in Item 4 is not a permanent part of the
Articles of Organization of the surviving corporation.
(a) The street address of the surviving corporation in Massachusetts is:
(post office boxes are not acceptable)
2 Apple Hill Drive, Natick, Massachusetts 01760
(b) The name, residential address, and post office address of each director
and officer of the *resulting / *surviving corporation is:
Name Residential Address Post Office Address
---- ------------------- -------------------
President: Johan Magnusson 2320 Ocean Boulevard
Rye Beach, New Hampshire
03871
Treasurer: Johan Magnusson same as above
Clerk: Johan Magnusson same as above
Directors: Johan Magnusson same as above
Asst. Andrew Youniss 26 Bogastow Circle
Clerk: Millis, Massachusetts 02054
Asst. Timothy Lindamood 15 Ethan Allen Drive
Clerk: Acton, Massachusetts 01720
(c) The fiscal year (i.e. tax year) of the surviving corporation shall end
on the last day of the month of:
December
(d) The name and business address of the resident agent, if any, of the
surviving corporation is:
Andrew Youniss, 2 Apple Hill Drive, Natick, Massachusetts 01760
The undersigned officers of the several constituent corporations listed
above further state under the penalties of perjury as to their respective
corporations that the agreement of merger has been duly executed on behalf of
such corporation and duly approved by the stockholders of such corporation in
the manner required by General Laws, Chapter 156B, Section 78.
____________________________________________________________________, President
Johan Magnusson
________________________________________________________________________, Clerk
Johan Magnusson
of Rocket Acquisition Company, Inc.
_______________________________________________________________________________
(Name of constituent corporation)
____________________________________________________________________, President
John D. Giordano
________________________________________________________________________, Clerk
Peter B. Tarr
of Peritus Software Services, Inc.
_______________________________________________________________________________
(Name of constituent corporation)
A-37
THE COMMONWEALTH OF MASSACHUSETTS
ARTICLES OF *CONSOLIDATION / *MERGER
(General Laws, Chapter 156B, Section 78)
----------------
I hereby approve the within Articles of
*Consolidation/*Merger and, the filing fee in the amount
of $ , having been paid, said articles are deemed to
have been filed with me this day of , .
Effective date: __________________________________________
WILLIAM FRANCIS GALVIN
Secretary of the Commonwealth
TO BE FILLED IN BY CORPORATION
Photocopy of document to be sent to:
Leslie Martello, Legal Specialist
Lucash, Gesmer & Updegrove LLP
40 Broad Street, Boston, Massachusetts 02109
Telephone: (617) 350-6800
A-38
ANNEX B
April 17, 2001
The Board of Directors
Peritus Software Services, Inc.
112 Turnpike Road, Suite 111
Westborough, MA 01581-2860
Gentlemen:
We understand that Peritus Software Services, Inc. ("Peritus" or the
"Company"), Rocket Software, Inc. ("Rocket") and Rocket Acquisition Company,
Inc., a wholly-owned subsidiary of Rocket ("Acquiror"), propose to enter into
an Agreement and Plan of Merger, dated April 18, 2001 (the "Merger Agreement"),
which provides, among other things, for the merger (the "Merger") of Acquiror
with and into Peritus. Pursuant to the Merger, each issued and outstanding
share of common stock, par value $0.01 per share, of Peritus (the "Peritus
Common Stock"), other than Dissenting Shares and shares held by Rocket or any
of its wholly owned Subsidiaries and shares held in the treasury of Company or
by any of its wholly owned Subsidiaries, shall be converted into the right to
receive $0.19 (the "Merger Price"), in cash, upon the surrender of the
certificate representing such share. The terms and conditions of the Merger are
more fully set forth in the Merger Agreement.
You have asked for our opinion (the "Opinion") as to whether the Merger
Price pursuant to the Merger Agreement is fair from a financial point of view
to holders of shares of the Peritus Common Stock.
On September 12, 2000, the Company engaged The Catalyst Group, LLC
("Catalyst") to conduct a strategic review of the Company. At the October 2,
2000 Board Meeting of the Company, Catalyst presented a review of the strategic
alternatives available to the Company. On October 16, 2000 the Company engaged
Catalyst to seek a complementary merger, acquisition or investment partner for
the Company, and on the same date issued a press release stating that the
Company had "retained The Catalyst Group, LLC to render financial advisory and
investment banking services in connection with exploring strategic alternatives
including the potential sale of the Company". In addition to this press
release, Catalyst solicited interest widely. As at the date of this letter, no
offer for the shares of the Company has been received which exceeds the current
proposed Merger Price.
Catalyst provided these financial advisory services for the Company and
received fees for the rendering of these services.
In connection with this Opinion, we have made such reviews, analyses and
inquiries as we have deemed necessary and appropriate under the circumstances.
Among other things, we have:
(i) reviewed certain publicly-available financial statements and other
information of the Company;
(ii) reviewed certain internal financial statements and other operating
and financial data concerning the Company prepared by its management;
(iii) reviewed certain financial projections of the Company prepared by
its management;
(iv) discussed the operations, financial condition and the prospects of
the Company, including certain financial projections, with executives of
the Company;
(v) discussed potential operational and strategic benefits of the Merger
with executives of the Company;
(vi) reviewed the reported prices and trading activity for the Peritus
Common Stock;
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(vii) compared the financial performance of the Company and the prices
and trading activity of the Peritus Common Stock with that of certain other
comparable publicly-traded companies;
(viii) reviewed the financial terms, to the extent publicly available,
of certain comparable acquisition transactions;
(ix) reviewed the draft Merger Agreement and related documents;
(x) considered such other factors as we have deemed appropriate.
We have assumed and relied upon without independent verification the
accuracy and completeness of the information reviewed by us for the purposes of
the Opinion. With respect to the financial projections, we have assumed that
they have been reasonably prepared to reflect the best currently available
estimates and judgments of the future financial performance and prospects of
the Company.
We have assumed that the Merger will be consummated in accordance with the
terms set forth in the draft Merger Agreement. We have not made any independent
valuation or appraisal of the assets or liabilities of the Company, nor have we
been furnished with any such appraisals. Our opinion is necessarily based the
information made available to us as at the current date, and on financial,
economic, market and other conditions currently in effect.
It is understood that this letter is for the information of the Board of
Directors of the Company and may not be used for any other purpose without our
prior written consent, except that this opinion may be included in its entirety
in any filing made by the Company in respect of the transaction with the
Securities and Exchange Commission and the proxy statement mailed to holders of
the Peritus Common Stock in connection with the Merger. Catalyst expresses no
opinion or recommendation as to how the shareholders of the Company should vote
at any shareholders' meeting held in connection with the Merger.
Based on the foregoing, we are of the opinion on this date that the Merger
Price specified in the Merger Agreement is fair from a financial point of view
to holders of shares of the Peritus Common Stock.
Very truly yours,
The Catalyst Group, LLC
/s/ John R. Scholes
By: _________________________________
John R Scholes
Partner
B-2
ANNEX C
DISSENTERS' RIGHTS PROVISIONS OF THE
MASSACHUSETTS BUSINESS CORPORATION LAW
(S) 85. Dissenting stockholder; right to demand payment for stock; exception
A stockholder in any corporation organized under the laws of Massachusetts
which shall have duly voted to consolidate or merge with another corporation or
corporations under the provisions of sections seventy-eight or seventy-nine who
objects to such consolidation or merger may demand payment for his stock from
the resulting or surviving corporation and an appraisal in accordance with the
provisions of sections eighty-six to ninety-eight, inclusive, and such
stockholder and the resulting or surviving corporation shall have the rights
and duties and follow the procedure set forth in those sections. This section
shall not apply to the holders of any shares of stock of a constituent
corporation surviving a merger if, as permitted by subsection (c) of section
seventy-eight, the merger did not require for its approval a vote of the
stockholders of the surviving corporation.
(S) 86. Sections applicable to appraisal; prerequisites
If a corporation proposes to take a corporate action as to which any section
of this chapter provides that a stockholder who objects to such action shall
have the right to demand payment for his shares and an appraisal thereof,
sections eighty-seven to ninety-eight, inclusive, shall apply except as
otherwise specifically provided in any section of this chapter. Except as
provided in sections eighty-two and eighty-three, no stockholder shall have
such right unless (1) he files with the corporation before the taking of the
vote of the shareholders on such corporate action, written objection to the
proposed action stating that he intends to demand payment for his shares if the
action is taken and (2) his shares are not voted in favor of the proposed
action.
(S) 87. Statement of rights of objecting stockholders in notice of meeting;
form
The notice of the meeting of stockholders at which the approval of such
proposed action is to be considered shall contain a statement of the rights of
objecting stockholders. The giving of such notice shall not be deemed to create
any rights in any stockholder receiving the same to demand payment for his
stock, and the directors may authorize the inclusion in any such notice of a
statement of opinion by the management as to the existence or non-existence of
the right of the stockholders to demand payment for their stock on account of
the proposed corporate action. The notice may be in such form as the directors
or officers calling the meeting deem advisable, but the following form of
notice shall be sufficient to comply with this section:
"If the action proposed is approved by the stockholders at the meeting and
effected by the corporation, any stockholder (1) who files with the
corporation before the taking of the vote on the approval of such action,
written objection to the proposed action stating that he intends to demand
payment for his shares if the action is taken and (2) whose shares are not
voted in favor of such action has or may have the right to demand in
writing from the corporation (or, in the case of a consolidation or merger,
the name of the resulting or surviving corporation shall be inserted),
within twenty days after the date of mailing to him of notice in writing
that the corporate action has become effective, payment for his shares and
an appraisal of the value thereof. Such corporation and any such
stockholder shall in such cases have the rights and duties and shall follow
the procedure set forth in sections 88 to 98, inclusive, of chapter 156B of
the General Laws of Massachusetts."
(S) 88. Notice of effectiveness of action objected to
The corporation taking such action, or in the case of a merger or
consolidation the surviving or resulting corporation, shall, within ten days
after the date on which such corporate action became effective, notify each
stockholder who filed a written objection meeting the requirements of section
eighty-six and whose shares were not voted in favor of the approval of such
action, that the action approved at the meeting of the corporation of which he
is a stockholder has become effective. The giving of such notice shall not be
deemed to create any
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rights in any stockholder receiving the same to demand payment for his stock.
The notice shall be sent by registered or certified mail, addressed to the
stockholder at his last known address as it appears in the records of the
corporation.
(S) 89. Demand for payment; time for payment
If within twenty days after the date of mailing of a notice under subsection
(e) of section eighty-two, subsection (f) of section eighty-three, or section
eighty-eight, any stockholder to whom the corporation was required to give such
notice shall demand in writing from the corporation taking such action, or in
the case of a consolidation or merger from the resulting or surviving
corporation, payment for his stock, the corporation upon which such demand is
made shall pay to him the fair value of his stock within thirty days after the
expiration of the period during which such demand may be made.
(S) 90. Demand for determination of value; bill in equity; venue
If during the period of thirty days provided for in section eighty-nine the
corporation upon which such demand is made and any such objecting stockholder
fail to agree as to the value of such stock, such corporation or any such
stockholder may within four months after the expiration of such thirty-day
period demand a determination of the value of the stock of all such objecting
stockholders by a bill in equity filed in the superior court in the county
where the corporation in which such objecting stockholder held stock had or has
its principal office in the commonwealth.
(S) 91. Parties to suit to determine value; service
If the bill is filed by the corporation, it shall name as parties respondent
all stockholders who have demanded payment for their shares and with whom the
corporation has not reached agreement as to the value thereof. If the bill is
filed by a stockholder, he shall bring the bill in his own behalf and in behalf
of all other stockholders who have demanded payment for their shares and with
whom the corporation has not reached agreement as to the value thereof, and
service of the bill shall be made upon the corporation by subpoena with a copy
of the bill annexed. The corporation shall file with its answer a duly verified
list of all such other stockholders, and such stockholders shall thereupon be
deemed to have been added as parties to the bill. The corporation shall give
notice in such form and returnable on such date as the court shall order to
each stockholder party to the bill by registered or certified mail, addressed
to the last known address of such stockholder as shown in the records of the
corporation, and the court may order such additional notice by publication or
otherwise as it deems advisable. Each stockholder who makes demand as provided
in section eighty-nine shall be deemed to have consented to the provisions of
this section relating to notice, and the giving of notice by the corporation to
any such stockholder in compliance with the order of the court shall be a
sufficient service of process on him. Failure to give notice to any stockholder
making demand shall not invalidate the proceedings as to other stockholders to
whom notice was properly given, and the court may at any time before the entry
of a final decree make supplementary orders of notice.
(S) 92. Decree determining value and ordering payment; valuation date
After hearing the court shall enter a decree determining the fair value of
the stock of those stockholders who have become entitled to the valuation of
and payment for their shares, and shall order the corporation to make payment
of such value, together with interest, if any, as hereinafter provided, to the
stockholders entitled thereto upon the transfer by them to the corporation of
the certificates representing such stock if certificated or, if uncertificated,
upon receipt of an instruction transferring such stock to the corporation. For
this purpose, the value of the shares shall be determined as of the day
preceding the date of the vote approving the proposed corporate action and
shall be exclusive of any element of value arising from the expectation or
accomplishment of the proposed corporate action.
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(S) 93. Reference to special master
The court in its discretion may refer the bill or any question arising
thereunder to a special master to hear the parties, make findings and report
the same to the court, all in accordance with the usual practice in suits in
equity in the superior court.
(S) 94. Notation on stock certificates of pendency of bill
On motion the court may order stockholder parties to the bill to submit
their certificates of stock to the corporation for the notation thereon of the
pendency of the bill and may order the corporation to note such pendency in its
records with respect to any uncertificated shares held by such stockholder
parties, and may on motion dismiss the bill as to any stockholder who fails to
comply with such order.
(S) 95. Costs; interest
The costs of the bill, including the reasonable compensation and expenses of
any master appointed by the court, but exclusive of fees of counsel or of
experts retained by any party, shall be determined by the court and taxed upon
the parties to the bill, or any of them, in such manner as appears to be
equitable, except that all costs of giving notice to stockholders as provided
in this chapter shall be paid by the corporation. Interest shall be paid upon
any award from the date of the vote approving the proposed corporate action,
and the court may on application of any interested party determine the amount
of interest to be paid in the case of any stockholder.
(S) 96. Dividends and voting rights after demand for payment
Any stockholder who has demanded payment for his stock as provided in this
chapter shall not thereafter be entitled to notice of any meeting of
stockholders or to vote such stock for any purpose and shall not be entitled to
the payment of dividends or other distribution on the stock (except dividends
or other distributions payable to stockholders of record at a date which is
prior to the date of the vote approving the proposed corporate action) unless:
(1) A bill shall not be filed within the time provided in section ninety;
(2) A bill, if filed, shall be dismissed as to such stockholder; or
(3) Such stockholder shall with the written approval of the corporation,
or in the case of a consolidation or merger, the resulting or
surviving corporation, deliver to it a written withdrawal of his
objections to and an acceptance of such corporate action.
Notwithstanding the provisions of clauses (1) to (3), inclusive, said
stockholder shall have only the rights of a stockholder who did not so demand
payment for his stock as provided in this chapter.
(S) 97. Status of shares paid for
The shares of the corporation paid for by the corporation pursuant to the
provisions of this chapter shall have the status of treasury stock, or in the
case of a consolidation or merger the shares or the securities of the resulting
or surviving corporation into which the shares of such objecting stockholder
would have been converted had he not objected to such consolidation or merger
shall have the status of treasury stock or securities.
(S) 98. Exclusive remedy; exception
The enforcement by a stockholder of his right to receive payment for his
shares in the manner provided in this chapter shall be an exclusive remedy
except that this chapter shall not exclude the right of such stockholder to
bring or maintain an appropriate proceeding to obtain relief on the ground that
such corporate action will be or is illegal or fraudulent as to him.
C-3
Preliminary Copy
Filed on April 27, 2001
APPENDIX I
DETACH HERE
PERITUS SOFTWARE SERVICES, INC.
PROXY SOLICITED ON BEHALF OF THE SPECIAL COMMITTEE OF THE
BOARD OF DIRECTORS AND THE BOARD OF DIRECTORS
Special Meeting of Stockholders to be held
June , 2001
The undersigned, revoking all prior proxies, hereby appoints John D.
Giordano and Peter B. Tarr, and each of them, with full power of substitution,
as proxies for the undersigned to act and to vote at the special meeting of
stockholders of Peritus Software Services, Inc. to be held on June , 2001 and
at any adjournment or adjournments of the meeting as designated in this proxy
upon all matters referred to on the reverse side of this proxy and as described
in the proxy statement for the meeting and, in their discretion, upon any
matters that may properly come before the meeting.
THIS PROXY, WHEN PROPERLY EXECUTED, WILL BE VOTED AS DIRECTED HEREIN BY THE
UNDERSIGNED STOCKHOLDER(S). IF NO DIRECTION IS MADE, THE PROXIES WILL VOTE FOR
PROPOSAL 1.
PLEASE VOTE, DATE AND SIGN ON THE REVERSE SIDE OF THIS PROXY AND RETURN
PROMPTLY IN THE ENCLOSED ENVELOPE.
CONTINUED AND TO BE SIGNED ON REVERSE SIDE
SEE REVERSE SIDE SEE REVERSE SIDE
DETACH HERE
[X] Please mark votes as in this example.
THE SPECIAL COMMITTEE OF THE BOARD OF DIRECTORS AND THE BOARD OF DIRECTORS
RECOMMEND THAT YOU INSTRUCT THE PROXIES TO VOTE FOR PROPOSAL 1.
1. Approval and adoption of the Agreement and Plan of Merger dated as of
April 18, 2001 by and among Peritus Software Services, Inc., Rocket Software,
Inc. and Rocket Acquisition Company, Inc. and the transactions contemplated by
that agreement, including the merger of Rocket Acquisition Company, Inc. with
and into Peritus Software Services, Inc., with Peritus Software Services, Inc.
as the surviving corporation and with each outstanding share of Peritus
Software Services, Inc.'s common stock, other than shares held by Rocket
Software, Inc., Rocket Acquisition Company, Inc. and their respective wholly
owned subsidiaries, being converted into the right to receive $0.19 in cash.
[_] FOR [_] AGAINST [_] ABSTAIN
MARK HERE FOR ADDRESS CHANGE AND NOTE AT LEFT [_]
Please sign exactly as name(s) appear(s) on this proxy. Joint owners should
each sign. When signing as attorney, executor, administrator, trustee or
guardian, please give full title as such. If a corporation or partnership,
please sign by authorized person.
Signature: Date: Signature: Date: