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
[_] Preliminary Proxy Statement[_] Confidential, For Use of the Commission
Only (as permitted by Rule 14a-6(e)(2))
[X] Definitive Proxy Statement
[_] Definitive Additional Materials
[_] Soliciting Material Pursuant to Rule 14a-11 (c) or Rule 14a-12
PERITUS SOFTWARE SERVICES, INC.
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(NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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(NAME OF PERSON(S) FILING PROXY STATEMENT, IF OTHER THAN THE REGISTRANT)
Payment of Filing Fee (Check the appropriate box):
[X] No fee required.
[_] Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.
(1) Title of each class of securities to which transaction applies:
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(2) Aggregate number of securities to which transaction applies:
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(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):
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(4) Proposed maximum aggregate value of transaction:
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(5) Total fee paid:
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[_] Fee paid previously with preliminary materials:
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[_] 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:
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(2) Form, Schedule or Registration Statement no.:
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(3) Filing Party:
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(4) Date Filed:
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PERITUS SOFTWARE SERVICES, INC.
2 FEDERAL STREET
BILLERICA, MA 01821-3540
----------------
PROXY STATEMENT
----------------
FOR ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD JUNE 10, 1998
This Proxy Statement is furnished in connection with the solicitation of
proxies by the Board of Directors of Peritus Software Services, Inc. (the
"Company") for use at the Annual Meeting of Stockholders to be held on
Wednesday, June 10, 1998 at 9:30 a.m., local time, at the offices of Hale and
Dorr LLP, 60 State Street, Boston, Massachusetts 02109 and at any adjournment
or adjournments thereof (the "Meeting").
All proxies will be voted in accordance with the instructions of the
stockholder. If no choice is specified, the proxies will be voted in favor of
the matters set forth in the accompanying Notice of Meeting. Any proxy may be
revoked by a stockholder at any time before its exercise by delivery of a
written revocation or a subsequently dated proxy to the Clerk of the Company.
Attendance at the Meeting will not itself be deemed to revoke a Proxy unless
the stockholder gives affirmative notice at the Meeting that the stockholder
intends to revoke the Proxy and vote in person.
On April 16, 1998, the record date for determination of stockholders
entitled to vote at the Meeting, there were outstanding and entitled to vote
an aggregate of 16,137,219 shares of Common Stock of the Company, $.01 par
value per share (the "Common Stock"). Each such share entitles the record
holder to one vote on each of the matters to be voted upon at the Meeting.
THE NOTICE OF MEETING, THIS PROXY STATEMENT, THE ENCLOSED PROXY AND THE
COMPANY'S ANNUAL REPORT TO STOCKHOLDERS FOR THE YEAR ENDED DECEMBER 31, 1997
ARE BEING MAILED TO STOCKHOLDERS ON OR ABOUT MAY 7, 1998. THE COMPANY WILL,
UPON WRITTEN REQUEST OF ANY STOCKHOLDER, FURNISH WITHOUT CHARGE A COPY OF ITS
ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 1997, INCLUDING
FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES, AS FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION, WITHOUT EXHIBITS. PLEASE ADDRESS ALL SUCH
REQUESTS TO THE COMPANY, ATTENTION OF ALLEN K. DEARY, VICE PRESIDENT, 2
FEDERAL STREET, BILLERICA, MASSACHUSETTS 01821-3540. EXHIBITS WILL BE PROVIDED
UPON WRITTEN REQUEST AND PAYMENT OF AN APPROPRIATE PROCESSING FEE.
VOTES REQUIRED
Under the Company's Amended and Restated By-Laws (the "By-Laws"), the
holders of a majority of the shares of Common Stock issued and outstanding and
entitled to vote at the Meeting shall constitute a quorum for the transaction
of business at the Meeting. Shares of Common Stock present in person or
represented by proxy (including shares which abstain or do not vote with
respect to one or more of the matters presented for stockholder approval) will
be counted for purposes of determining whether a quorum exists at the Meeting.
The affirmative vote of the holders of a plurality of the votes cast by the
stockholders entitled to vote at the Meeting is required for the election of
directors. The affirmative vote of the holders of a majority of the shares of
Common Stock present or represented by proxy and voting on the matter is
required to approve the amendments to the Company's 1997 Stock Incentive Plan
(the "1997 Plan") and the Company's 1997 Employee Stock Purchase Plan (the
"Purchase Plan").
Shares which abstain from voting as to a particular matter, and shares held
in "street name" by brokers or nominees who indicate on their proxies that
they do not have discretionary authority to vote such shares as to a
particular matter, will not be counted as votes in favor of such matter, and
will also not be counted as votes cast or shares voting on such matter.
Accordingly, abstentions and "broker non-votes" will have no effect on the
voting of the matters being presented for stockholder approval at the Meeting.
VOTING SECURITIES AND PRINCIPAL HOLDERS HEREOF
The following table sets forth certain information as of March 31, 1998
(unless otherwise specified) with respect to the beneficial ownership of
shares of Common Stock by (i) each person or entity known to the Company to
own beneficially more than 5% of the outstanding shares of Common Stock, (ii)
the directors and director nominees of the Company, (iii) each executive
officer of the Company named in the Summary Compensation Table set forth under
the caption "Compensation of Directors and Excutive Officers--Executive
Compensation" below, and (iv) all directors and executive officers of the
Company as a group.
NUMBER OF
SHARES OF PERCENTAGE OF
COMMON STOCK COMMON STOCK
BENEFICIAL OWNER BENEFICIALLY OWNED(1) OUTSTANDING(2)
---------------- --------------------- --------------
Dominic K. Chan(3)....................... 2,362,113 14.6%
c/o Peritus Software Services, Inc.
2 Federal Street
Billerica, MA 01821-3540
American Premier Underwriters, Inc.(4)... 2,093,433 13.0%
One East Fourth Street
Cincinnati, OH 45202
Greylock Equity Limited Partnership
And Henry F. McCance
c/o Greylock Equity Limited
Partnership(5).......................... 1,144,258 7.1%
One Federal Street
Boston, MA 02110
W. Michael Humphreys(6).................. 700,561 4.3%
Douglas A. Catalano(7)................... 334,571 2.1%
Allen K. Deary(8)........................ 320,831 2.0%
Adarsh K. Arora(9)....................... 129,106 *
Leonard Miller(10)....................... 71,000 *
Robert D. Savoia(11)..................... 68,750 *
Roland Pampel(12)........................ 52,250 *
Arthur Carr(13).......................... 33,750
Axel Leblois(14)......................... 14,250 *
William W. Verity(15).................... 0 *
All executive officers and directors, as
a group (17 persons)(16)................ 3,632,845 22.5%
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* Less than 1% of outstanding Common Stock.
(1) The number of shares beneficially owned by each stockholder is determined
under rules promulgated by the Securities and Exchange Commission, and
the information is not necessarily indicative of beneficial ownership for
any other purpose. Under such rules, beneficial ownership includes any
shares as to which the individual has sole or shared voting power or
investment power and also any shares which the individual has the right
to acquire within 60 days of March 31, 1998 through the exercise of any
stock option, warrant or other right. The inclusion herein of such
shares, however, does not constitute an admission that the named
stockholder is a direct or indirect beneficial owner of such shares.
Unless otherwise indicated each person or entity listed above has sole
voting and investment power with respect to the shares listed. The number
of shares of Common Stock held by each beneficial owner has been
determined by information provided to the Company by its transfer agent.
(2) Number of shares of Common Stock deemed outstanding includes 16,137,219
shares issued and outstanding as of March 31, 1998, plus any shares
subject to options held by the referenced beneficial owner(s) that such
owner(s) have the right to acquire within 60 days of such date.
(3) Includes 18,750 shares of Common Stock subject to outstanding stock
options which are exercisable within 60 days of March 31, 1998; 2,143,363
shares of Common Stock held jointly with his wife, Marsha C.
2
Chan; and 200,000 shares of Common Stock held in the name of the Chan
Family Irrevocable Trust of which Julian Chan, Marsha C. Chan and Theodore
Tedeschi are trustees and of which Dominic K. Chan's present and future
offspring are beneficiaries and as to which shares Dominic K. Chan
disclaims beneficial ownership. Julian Chan is Dominic Chan's son.
(4) Based upon a Schedule 13D dated December 1, 1997 provided by American
Financial Group, Inc. ("AFG"), American Financial Corporation ("AFC"),
Carl H. Lindner, Carl H. Lindner III, S. Craig Lindner and Keith E.
Lindner, which states that such persons have shared voting power and
shared dispositive power over the shares indicated, and other information
available to the Company. At September 30, 1997, the foregoing Lindners
owned approximately 36% of the outstanding shares of AFG, and AFG
beneficially owned all of the common stock of AFC. As a result of such
ownership, the Lindners may be deemed controlling persons of AFG and AFC.
AFG owns all of the outstanding common stock of American Premier
Underwriters, Inc. ("APU").
(5) Mr. McCance, a general partner of Greylock Equity GP Limited Partnership
("Greylock"), the general partner of Greylock Equity Limited Partnership,
is a director of the Company. Mr. McCance, together with the other
general partners of Greylock, shares voting and investment power with
respect to the shares owned by Greylock. Mr. McCance does not own any
shares of the Company in his individual capacity and disclaims beneficial
ownership of the shares held by Greylock Equity Limited Partnership,
except to the extent of his pecuniary interest therein.
(6) Mr. Humphreys, a general partner of Matrix IV Management Co. L.P., the
general partner of Matrix Partners IV, L.P. ("Matrix") and the general
partner of Matrix IV Entrepreneurs Fund, L.P., is a director of the
Company. Mr. Humphreys, together with the other managing members of
Matrix, shares voting and investment power with respect to the shares
owned by Matrix. Mr. Humphreys owns 13,471 shares of the Company in his
individual capacity and disclaims beneficial ownership of shares owned by
Matrix, except to the extent of his pecuniary interest therein. Matrix
and Matrix IV Entrepreneurs Fund, L.P. own 687,045 and 45 shares,
respectively.
(7) Includes 125,213 shares of Common Stock subject to outstanding stock
options which are exercisable within 60 days of March 31, 1998.
(8) Includes 131,567 shares of Common Stock subject to outstanding stock
options which are exercisable within 60 days of March 31, 1998. Also
includes 10,713 shares held by Mr. Deary's wife and two children, as to
which Mr. Deary disclaims beneficial ownership.
(9) Includes 50,298 shares of Common Stock subject to outstanding stock
options which are exercisable within 60 days of March 31, 1998.
(10) Includes 70,000 shares of Common Stock subject to outstanding stock
options which are exercisable within 60 days of March 31, 1998. Also
includes 1,000 shares held by Mr. Miller's son, as to which Mr. Miller
claims no beneficial ownership.
(11) Represents shares of Common Stock subject to outstanding stock options
which are exercisable within 60 days of March 31, 1998.
(12) Includes 31,250 shares of Common Stock subject to outstanding stock
options which are exercisable within 60 days of March 31, 1998.
(13) Includes 6,250 shares of Common Stock subject to outstanding stock
options which are exercisable within 60 days of March 31, 1998. Also
includes 10,000 shares of Common Stock held by Virginia L. Carr, Mr.
Carr's wife, and 5,000 shares of Common Stock held by a trust, of which
Virginia L. Carr is sole trustee, as to which shares Mr. Carr disclaims
beneficial ownership.
(14) Includes 6,250 shares of Common Stock subject to outstanding stock
options which are exercisable within 60 days of March 31, 1998.
(15) Mr. Verity is a director of Chiquita Brands International, Inc., an
affiliate of AFG and APU.
(16) Includes an aggregate of 711,137 shares of Common Stock subject to
outstanding stock options which are exercisable within 60 days of March
31, 1998. Messrs. Espinosa, Taube, Wilkie and Verity were elected to
their respective positions on April 21, 1998 and none of them
beneficially owns any shares of Common Stock or shares of common stock
subject to outstanding stock options which are exercisable within 60 days
of March 31, 1998.
3
DIRECTORS AND EXECUTIVE OFFICERS
For each member of the Board of Directors and each person serving as an
executive officer of the Company, there follows information given by each
concerning his principal occupation and business experience for the past five
years, 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 the
Company.
Arthur Carr, age 66, has served on the Board of Directors of the Company
since November 1995. Mr. Carr has been a private investor since December 1993.
From 1991 to November 1993, Mr. Carr served as Chairman, President and Chief
Executive Officer of Bytex Corporation, a manufacturer of data communications
equipment. He is a director of Bay Networks, Inc., a manufacturer of computer
network systems.
Douglas A. Catalano, age 47, joined the Company in December 1996 as
President and Chief Operating Officer and as a director. Since October 1997 he
has served as the Company's President and Chief Executive Officer. From
November 1982 to December 1996, Mr. Catalano held various positions at
Computer Sciences Corp., a company which provides systems integration
services, where he most recently served as President of CSC Consulting, Inc.
("CSC").
Dominic K. Chan, age 49, co-founded the Company in 1991 and served as its
President from inception to December 1996. From December 1996 until October
1997, Dr. Chan served as the Company's Chief Executive Officer. Dr. Chan has
served as a Director of the Company since inception and as Chairman of the
Board since December 1996. Since October 1997, he has served as the Company's
Chief Technology Officer and Chairman of the Board of Directors. Prior to co-
founding the Company, Dr. Chan held the position of Executive Vice President
of Research and Development for Bull HN Information Systems, Inc. a
manufacturer of computer products. He holds a patent for a voice and data
integration device.
Allen K. Deary, age 39, co-founded the Company in 1991, and has served as
its Vice President, Finance and Chief Financial Officer and as a director
since inception. Mr. Deary previously served as Director, Product Life Cycle
Process at Bull Worldwide Information Systems, where his primary focus was to
develop and implement worldwide cross-functional product teams.
W. Michael Humphreys, age 46, has served on the Board of Directors of the
Company since March 1996. Mr. Humphreys has been a partner of Matrix Partners,
a private venture capital firm, since 1982. Prior to his association with
Matrix Partners, he was a general partner of Hellman, Ferri Investment
Associates, a private venture capital partnership. Mr. Humphreys is a director
of GeoTel Communications Corporation, a developer of telecommunications
software, as well as several privately held companies.
Axel Leblois, age 49, has served on the Board of Directors of the Company
since February 1995. Since July 1997, he has served as President and Chief
Executive Officer of ExecuTrain Corp., a computer training company, and since
January 1996, Mr. Leblois has served as the Chairman of World Times Inc., a
publishing company. From May 1991 to December 1995, he served as President and
Chief Executive Officer of Bull. Mr. Leblois is a director of Wang
Laboratories, Inc., a software and services provider, and Boston Private Bank
& Trust Company, a private banking and asset management firm.
Henry F. McCance, age 55, has served on the Board of Directors of the
Company since March 1996. Mr. McCance has been a general partner of Greylock,
a private venture capital firm, since 1973. He is Chairman of the Board,
President and Secretary of Greylock Management Corporation, the service
organization to the Greylock venture capital partnerships. Mr. McCance is a
director of Shiva Corporation, a manufacturer of remote access products, and
of several privately held companies.
Roland D. Pampel, age 63, has served on the Board of Directors of the
Company since November 1995. Mr. Pampel is recently retired. From March 1994
to January 1997, Mr. Pampel held the positions of President, Chief Executive
Officer and director of Microcom, Inc. ("Microcom"), a manufacturer of
computer equipment. Prior to joining Microcom, Mr. Pampel was President and
Chief Executive Officer of Nicolet Instrument Inc., a manufacturer of medical
instruments, from October 1991 to September 1993. He currently serves on the
Board of Directors of Infinium Software, Inc., a provider of client-server
business software applications, and Cayenne Software, Inc., a provider of
computer-aided software engineering products.
4
William W. Verity, age 39, was elected to the Board of Directors of the
Company on April 21, 1998. Mr. Verity is the Managing Partner of Ideation LLC,
a business development firm that was formed in 1997. He has served as Chief
Executive Officer of ENCOR Holdings since 1991. ENCOR Holdings develops and
manufactures plastic products and components through two affiliated companies,
Compression Inc. and ENCOR Technologies, Inc. ENCOR Holdings is a subsidiary
of Leaver Corporation, a private investment company, of which Mr. Verity
serves as Chairman. Mr. Verity is a Director of Chiquita Brands International,
Inc. ("Chiquita"). Chiquita is an affiliate of American Premier Underwriters,
Inc.
Adarsh J. Arora, age 45, joined the Company in January 1996 as Vice
President, Research and Development. Prior to joining the Company, he co-
founded and served as President and Chief Executive Officer from January 1986
to January 1996 of Vista Technologies Incorporated, a manufacturer of high-end
computer aided engineering and computer aided software engineering products.
Donald M. Beck, age 41, joined the Company in January 1998 as Vice President
and General Manager of Outsourcing. Prior to joining the Company, Mr. Beck was
employed at International Business Machines Corporation ("IBM") for 18 years,
most recently as Alliance General Manager.
Kathleen V. Betts, age 42, joined the Company in July 1995 and became Vice
President, Human Resources, in December 1997. Prior to joining the Company,
she was a Manager and Director in Human Resources at Magee Hospital, an
affiliate of the University of Pittsburgh, from 1990-1995.
Andrea C. Campbell, age 46, co-founded the Company and served as Vice
President, Consulting and Technology Transfer Services, from September 1992 to
June 1996. Since June 1996, Ms. Campbell has served as Vice President,
Outsourcing Operations. Ms. Campbell was previously employed as Human
Resources Director at Bull Worldwide Information Services, Inc., a
manufacturer of computer products, from March 1990 to August 1992.
Eugene J. DiDonato, age 41, joined the Company in June 1997 and since July
1997 served as Vice President and General Counsel. Prior to joining the
Company, Mr. DiDonato was Vice President and General Counsel of Cayenne
Software, Inc. ("Cayenne") from November 1993 to June 1997, and General
Counsel of Cayenne from August 1993 to November 1993. Mr. DiDonato was
employed as a securities lawyer at Foley, Hoag & Eliot, a law firm in Boston,
from April 1986 to July 1993.
Peter Espinosa, age 38, joined the Company in March 1998 and since April
1998 served as Vice President, Worldwide Sales. Prior to joining the Company,
Mr. Espinosa held various positions at IBM, starting in 1981, most recently as
Vice President, Distribution Industry USA.
John E. MacPhee, age 37, joined the Company in July 1996 as Director of
Finance and as Treasurer. Prior to joining the Company, Mr. MacPhee served as
Corporate Controller at Bachman Information Systems, Inc., a manufacturer of
computer aided software-engineering products, from April 1986 to June 1996.
Leonard Miller, age 58, joined the Company in September 1996 as Vice
President, Strategic Programs. Mr. Miller was previously employed from January
1964 to August 1996 at Metropolitan Life Insurance Company, most recently as
its Chief Information Officer of Individual Business.
Robert D. Savoia, age 55, joined the Company in January 1997 as Vice
President, Business Development and Marketing. Prior to joining the Company,
he served as Vice President and Managing Partner of CSC from 1989 to December
1996. During his eight years at CSC, he was a member of the Operating and
Executive Committees, Vice President of Business Development, and was the
partner in charge of the New York consulting practice.
William J. Sawyer, age 51, joined the Company in October 1997 as Vice
President, Client Operations. From June 1978 to October 1997, Mr. Sawyer held
various positions at Project Software & Development, Inc., a computerized
maintenance management systems company, where he most recently served as
Executive Vice President, Operations.
5
Gareth S. Taube, age 48, joined the Company in March 1998 and since April
1998 has served as Vice President, Worldwide Marketing. From 1996 until he
joined the Company, Mr. Taube was Vice President, Marketing & Corporate
Alliances at Segue Software, Inc. a software testing tools company. From 1994
to 1996, he was Vice President, Marketing & Business Development at Praxis
International Inc., a developer of data warehousing and data replication
products. Mr. Taube held various positions at Digital Equipment Corporation
from 1980 to 1994, where he most recently served as Senior Director, OLTP
Business Group.
Richard Wilkie, age 40, joined the Company in March 1998 and since April
1998 served as Vice President, Development. From 1989 until he joined the
Company, Mr. Wilkie held various positions at Hewlett-Packard Company, a
computer and peripherals manufacturer, most recently as Manager of Intimate
Security Research & Development.
BOARD AND COMMITTEE MEETINGS
The Board of Directors met 14 times (including by telephone conference) and
acted by written consent two times during 1997. All directors except Messrs.
Leblois and Pampel attended at least 75% of the aggregate of all of the
meetings of the Board of Directors and of the committees on which they served.
The Board of Directors has a Compensation Committee, which makes
recommendations concerning the salaries and incentive compensation for
employees of and consultants to the Company and administers and grants stock
options pursuant to the Company's stock option plans. The Compensation
Committee held four meetings and acted by written consent three times during
1997. The members of the Compensation Committee are Messrs. Carr, Humphreys
and McCance.
The Board of Directors has an Audit Committee which reviews the results and
scope of the audit and other services provided by the Company's independent
public accountants. The Audit Committee held one meeting during 1997. During
1997, the members of the Audit Committee were Messrs. Giordano, Leblois and
Pampel. Mr. Giordano served as a member of the Audit Committee until his
resignation on December 29, 1997. Mr. Verity was elected to serve as a member
of the Audit Committee on April 21, 1998.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), requires the Company's directors, executive officers and
holders of more than 10% of the Company's Common Stock ("Reporting Persons")
to file with the Securities and Exchange Commission initial reports of
ownership and reports of changes in ownership of Common Stock and other equity
securities of the Company. Based solely on its review of copies of reports
filed by Reporting Persons with the Securities and Exchange Commission or
written representations from certain Reporting Persons that no Form 5 filing
was required for such person, the Company believes that, during 1997, all
filings required to be made by its Reporting Persons were timely made in
accordance with the requirements of the Exchange Act, except as follows: Mr.
Miller reported on Form 5 ownership of 1,000 shares acquired by a member of
his household in July 1997.
COMPENSATION OF DIRECTORS AND EXECUTIVE OFFICERS
Director Compensation
All directors are reimbursed for expenses incurred in connection with their
attendance at Board of Directors and committee meetings. Mr. Pampel was also
compensated $3,750 for providing three days of services rendered as a member
of the Board of Directors.
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 nonstatutory options to purchase shares of Common
Stock. A total of 200,000 shares of Common Stock may be issued upon exercise
of options granted under the Director Plan.
6
Pursuant to the terms of the Director Plan, options to purchase 15,000
shares of Common Stock were granted to all non-employee directors upon the
effective date of the Company's initial public offering. In addition, options
to purchase 15,000 shares of Common Stock are granted to each director elected
after the Company's initial public offering upon his or her initial election
as a director. On July 2, 1997 each of Messrs. Carr, Humphreys, Leblois,
Giordano and McCance received an option to purchase 15,000 shares of the
Company's Common Stock at an exercise price of $16.00 per share. On April 21,
1998, Mr. Verity received an option to purchase 15,000 shares of the Company's
Common Stock at an exercise price of $5.875 per share. In addition, options to
purchase 3,000 shares of Common Stock are granted to each non-employee
director on the date of each annual meeting of stockholders of the Company
provided, however, that such director is serving on the Board of Directors at
the adjournment of such meeting. The exercise price per share of such options
will be the closing price of a share of Common Stock on the date of the grant.
All options granted under the Director Plan vest at a rate of one-third of the
shares per year over a period of three years from the date of grant so long as
the optionee remains a director of the Company.
Executive Compensation
The following table sets forth the total compensation paid or accrued for
each of the two fiscal years ended December 31, 1997 for the Company's Chief
Executive Officer, the Company's Chairman of the Board and former Chief
Executive Officer and the Company's four other most highly compensated
executive officers in 1997 (the Chief Executive Officer, the Company's
Chairman of the Board and former Chief Executive Officer and such other
executive officers are hereinafter referred to as the "Named Executive
Officers"):
SUMMARY COMPENSATION TABLE
LONG-TERM
COMPENSATION
ANNUAL COMPENSATION(1) AWARDS
---------------------- ------------
SECURITIES
NAME AND UNDERLYING ALL OTHER
PRINCIPAL POSITION(2) YEAR SALARY BONUS(3) OPTIONS(4) COMPENSATION(5)
--------------------- ---- -------- -------- ------------ ---------------
Douglas A. Catalano....... 1997 $250,000 $35,000 -- $2,250
President and Chief
Executive Officer 1996 -- -- 780,000 --
Dominic K. Chan(6)........ 1997 241,577 35,000 -- 1,736
Chairman of the Board and 1996 202,613 40,000 -- 3,131
Chief Technology Officer
Allen K. Deary............ 1997 191,850 35,000 150,000 3,088
Vice President, Finance
and 1996 147,903 40,000 14,200 3,002
Chief Financial Officer
Adarsh Arora.............. 1997 185,863 35,000 150,000 1,363
Vice President, Research
and 1996 120,891 40,000 51,192 1,395
Development
Leonard Miller............ 1997 201,500 15,000 -- --
Vice President, Strategic
Programs 1996 66,077 -- 200,000 --
Robert D. Savoia.......... 1997 173,847 35,000 250,000 1,231
Vice President, Business 1996 -- -- -- --
Development
and Marketing
- --------
(1) Excludes perquisites and other personal benefits because the aggregate
amount of such compensation was in all cases less than the lesser of
$50,000 or 10% of the total of annual salary and bonus for the Named
Executive Officer.
(2) Lists principal position with the Company as of December 31, 1997.
(3) Amounts in this column represent bonuses earned under the Company's
executive compensation programs during 1996 and 1997.
(4) Reflects the grant of options to purchase Common Stock. The Company has
never granted stock appreciation rights.
(5) Consists of the Company's matching contributions to the Company's 401(k)
Plan.
(6) Dr. Chan was the Company's Chief Executive Officer through October 19,
1997. Thereafter, Mr. Catalano became Chief Executive Officer.
The following table sets forth certain information concerning grants of
stock options to each of the Named Executive Officers during the year ended
December 31, 1997:
Option Grants, Exercises and Year-End Values
OPTION GRANTS IN LAST FISCAL YEAR
INDIVIDUAL GRANTS
--------------------------------------------------
POTENTIAL
REALIZABLE VALUE
AT ASSUMED
ANNUAL RATES OF
NUMBER OF PERCENT OF TOTAL STOCK PRICE
SECURITIES OPTIONS APPRECIATION FOR
UNDERLYING GRANTED TO EXERCISE OR OPTION TERM(3)
OPTIONS EMPLOYEES IN BASE PRICE EXPIRATION ------------------
NAME GRANTED(1) FISCAL YEAR ($/SH)(2) DATE 5% 10%
---- ---------- ---------------- ----------- ---------- ------- ----------
Douglas A. Catalano..... -- -- $ -- -- $ -- $ --
Dominic K. Chan......... -- -- -- -- -- --
Allen K. Deary.......... 150,000 9.9% 10.00 05/28/07 943,500 2,391,000
Adarsh Arora............ 150,000 9.9% 10.00 05/28/07 943,500 2,391,000
Leonard Miller.......... -- -- -- -- -- --
Robert D. Savoia........ 175,000 11.5% 4.65 01/27/07 511,000 1,296,750
75,000 5.0% 8.20 03/19/07 387,000 980,250
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(1) All options were granted pursuant to the 1997 Plan and generally grant a
right to purchase shares of Common Stock which vests in four equal annual
installments beginning one year after the date of grant. See "Employment
Agreements" below.
(2) Represents the per share fair market value of the Common Stock, as
determined by the Board of Directors, on the date of grant.
(3) Amounts reported in these columns represent amounts that may be realized
upon exercise of the options immediately prior to the expiration of their
term assuming the specified compound rates of appreciation (5% and 10%) on
the market value of the Common Stock on the date of option grant over the
term of the options. These numbers are calculated based on rules
promulgated by the Securities and Exchange Commission and do not reflect
the Company's estimate of future stock price growth. Actual gains, if any,
on stock option exercises and Common Stock holdings are dependent on the
timing of such exercise and the future performance of the Common Stock.
There can be no assurance that the rates of appreciation assumed in this
table can be achieved or that the amounts reflected will be received by
the individuals. No gain to the optionees is possible without an
appreciation in stock price, which will benefit all stockholders
commensurately.
The following table sets forth certain information concerning stock options
exercised during 1997 and stock options held by each of the Named Executive
Officers on December 31, 1997:
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION VALUES
NUMBER OF SHARES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
OPTIONS AT FISCAL IN-THE-MONEY OPTIONS
YEAR-END AT FISCAL YEAR-END(2)
------------------------- --------------------------
SHARES
ACQUIRED
ON VALUE
NAME EXERCISE REALIZED(1) EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE
---- -------- ----------- ------------------------- --------------------------
Douglas A. Catalano..... -- -- 188,061 563,940 $3,211,142 9,629,276
Dominic K. Chan......... -- -- 18,750 -- 367,031 --
Allen K. Deary.......... 100,000 $329,960 194,067 167,718 3,882,513 1,869,057
Adarsh Arora............ -- -- 12,798 188,394 224,925 2,231,025
Leonard Miller.......... -- -- 100,000 100,000 1,757,500 1,757,500
Robert D. Savoia........ -- -- 43,750 131,250 687,969 2,063,906
-- -- -- 75,000 -- 913,125
- --------
(1) Represents the difference between the exercise price and the fair market
value of the Common Stock on the date of exercise, as determined by the
Board of Directors of the Company.
(2) Value based on the closing sale price per share ($20.375) of the Common
Stock on December 31, 1997, as reported on the Nasdaq National Market,
less the exercise price.
8
Employment Agreements
The Company entered into an employment agreement with Mr. Catalano on
December 30, 1996, (the "Catalano Agreement") pursuant to which Mr. Catalano
agreed to serve as President and Chief Operating Officer of the Company.
Although the Catalano Agreement has no set term, it is terminable (i) by the
Company or Mr. Catalano without cause upon 45 days' prior notice, (ii) by
either party pursuant to a breach of the Catalano Agreement by the other party
and failure to remedy the breach by such party after 30 days' prior notice, or
(iii) immediately by the Company with cause (as defined). The Catalano
Agreement provides that Mr. Catalano is entitled to receive a base salary of
$250,000 in 1997 and is eligible to receive a bonus in an amount to be
determined by the Board of Directors, an appropriate committee or a designee
thereof. Mr. Catalano's base salary will be reviewed annually thereafter.
Pursuant to the Catalano Agreement, the Company granted Mr. Catalano, and Mr.
Catalano subsequently exercised, an option to purchase 151,515 shares of
Common Stock. The Company also granted Mr. Catalano an incentive stock option
to purchase an additional 149,212 shares of Common Stock at an exercise price
of $3.30 per share (the "Catalano ISO"), which was exercised as to 27,999
shares on the date of grant, and a nonstatutory stock option to purchase an
additional 630,788 shares of Common Stock (the "Catalano NSO"), both at an
exercise price of $3.30 per share. The Catalano ISO and Catalano NSO became
exercisable as to 30,303 and 157,697 shares of common stock, respectively, on
December 30, 1997. The Catalano ISO and Catalano NSO both vest as to the
remaining shares in 12 equal portions, the first of which was exercisable on
the last day of the first calendar quarter of 1998, and the remaining of which
will become exercisable on the last day of each succeeding calendar quarter.
Mr. Catalano's options will be fully vested as of the fourth anniversary of
the Catalano Agreement. If his employment is terminated by the Company without
cause (as defined), Mr. Catalano will be entitled to receive severance
compensation for 52 weeks thereafter in an amount equal to the base salary
which would otherwise be payable to Mr. Catalano during that period. In
addition, upon any such termination, the Catalano ISO and Catalano NSO will
become exercisable as to that number of shares which would have become
exercisable if Mr. Catalano's had terminated one year after the actual date of
termination. Throughout the term of the Catalano Agreement, the Chairman of
the Board of the Company agrees to nominate Mr. Catalano as a candidate for
election to the Board of Directors of the Company. The Catalano Agreement also
contains a non-solicitation covenant and a non-competition covenant pursuant
to which Mr. Catalano is prohibited, during the term of his employment, from
engaging in any business activity that would compete directly or indirectly
with the products or services of the kind or type developed by the Company.
The non-competition covenant extends for a one-year period after termination,
but is limited during this period to prohibit Mr. Catalano from engaging in
business activities competitive with the Company's products or services
related to the Company's year 2000 business activities.
In January 1997, the Company and Mr. Savoia entered into an employment
agreement (the "Savoia Agreement") providing for the employment of Mr. Savoia
as a Vice President of the Company. Although the Savoia Agreement has no set
term, it is terminable (i) by the Company or Mr. Savoia without cause upon 45
days' prior notice, (ii) by either party pursuant to a breach of the Savoia
Agreement by the other party and failure to remedy the breach by such party
upon 30 days' prior notice, or (iii) immediately by the Company with cause (as
defined). The Savoia Agreement provides for an annual base salary of $200,000
as well as annual incentive compensation in an amount determined by the Board
of Directors of the Company, an appropriate committee or a designee thereof.
If his employment is terminated by the Company without cause (as defined), Mr.
Savoia will be entitled to receive severance compensation for 52 weeks in an
amount equal to the base salary otherwise payable to Mr. Savoia during such
period. In addition, upon any such termination options to purchase 75,000
shares of Common Stock granted to Mr. Savoia within six months of January 27,
1997 will become exercisable as to that number of shares which would have
become exercisable if Mr. Savoia's employment had terminated one year after
the actual date of termination. The Savoia Agreement also contains a non-
solicitation covenant and a non-competition covenant pursuant to which Mr.
Savoia, during the term of his employment, is prohibited from engaging in any
business activity that would compete directly or indirectly with products or
services of the kind or type developed by the Company. The non-competition
covenant extends for a one-year period after termination, but is limited
during this period to prohibit Mr. Savoia from engaging in business activities
competitive with the Company's products or services related to the Company's
year 2000 business activities.
9
On August 15, 1996, the Company entered into a letter agreement with Leonard
Miller (the "Miller Letter"). Pursuant to the Miller Letter, the term of Mr.
Miller's employment extends from September 1, 1996 through August 31, 2000.
The Miller Letter provides for an annual base salary of $200,000 as well as an
annual bonus to be determined in accordance with the Company's policies. In
connection with the commencement of his employment, the Company granted Mr.
Miller an option to purchase 200,000 shares of Common Stock at an exercise
price of $2.80 per share. The option was exercisable with respect to 50,000
shares on the date of commencement of Mr. Miller's employment and is
exercisable as to an additional 50,000 shares on each of August 31, 1997, 1998
and 1999. In the event that Mr. Miller's employment by the Company is
terminated without cause, any of the 200,000 shares subject to this option
that remain unvested as of the date of termination will vest immediately upon
termination. In addition, upon termination without cause Mr. Miller shall
receive severance compensation paid biweekly for a period of one year
thereafter in an amount equal to one year's base salary at the time of the
Miller Letter. In the event that the Company is liquidated, all of Mr.
Miller's unvested options will vest immediately prior to liquidation.
On March 15, 1996, the Company entered into a Non-Competition Agreement with
Dominic K. Chan (the "Chan Agreement") which terminates on the first
anniversary of the date on which Mr. Chan's employment with the Company
terminates. The Chan Agreement provides for severance payments to Mr. Chan in
quarterly installments over a one-year period following termination, in an
aggregate amount not to exceed the amount paid to Mr. Chan by the Company in
combined salary and bonus for the 12-month period immediately preceding the
date of termination. The Company's obligation to pay such severance is
conditional upon Mr. Chan's continued compliance with the terms of the Chan
Agreement. The Chan Agreement prohibits Mr. Chan, during the term thereof,
from engaging in any business activity that is directly or indirectly
competitive in the United States with any of the products or services being
developed or otherwise provided by the Company at the date of his termination.
On January 20, 1998, the Company entered into an employment agreement with
Adarsh K. Arora (the "Arora Agreement"). Pursuant to the Arora Agreement, the
term of Mr. Arora's employment extends from January 20, 1998 through May 31,
2001. The Arora Agreement provides for an annual base salary of $185,000 as
well as bonus compensation to be determined in accordance with the Company's
policies. The Arora Agreement may be terminated (i) by Mr. Arora without cause
upon 45 days' prior notice or by the Company without cause upon 52 weeks,
prior notice (ii) by either party pursuant to a breach of the Arora Agreement
by the other party and failure to remedy the breach by such party within 30
days after notice, (iii) immediately by the Company with cause (as defined),
or (iv) upon death or disbility of the employee. If his employment is
terminated by the Company without cause, Mr. Arora will be entitled to receive
base compensation until expiration of the notice period or the date Mr. Arora
commences employment or consulting with a third party during the notice
period. The Arora Agreement also contains a non-solicitation covenant and a
non-competition covenant pursuant to which Mr. Arora, during the term of his
employment, is prohibited from engaging in any business activity that would
compete directly or indirectly with the products and services of the kind or
type developed by the Company. The non-competition covenant extends for a one-
year period after termination (unless terminated by the Company without
cause), but is limited during this period to prohibit Mr. Arora from engaging
in business activities competitive with the Company's Year 2000 business
activities.
On January 19, 1998, the Company entered into an employment agreement with
Donald M. Beck (the "Beck Agreement"). Although the Beck Agreement has no set
term, it is terminable (i) by Mr. Beck without cause upon 15 days' prior
notice or by the Company without cause upon 52 weeks prior notice, (ii) by
either party pursuant to a breach of the Beck Agreement by the other party and
failure to remedy the breach by such party within 30 days' after notice, (iii)
immediately by the Company with cause (as defined), or (iv) upon the death or
disability of the Employee. The Beck Agreement provides for an annual base
salary of $225,000 as well as bonus compensation to be determined in
accordance with the Company's policies and a $15,000 bonus in 1998 and 1999.
If his employment is terminated by the Company without cause, Mr. Beck will be
entitled to receive base compensation until the expiration of the notice
period or the date Mr. Beck commences employment or consulting with a third
party during the notice period, together with any bonus compensation payable
as provided under the terms of any related bonus plan or arrangement through
the date of the notice of termination.
10
The Beck Agreement also contains a non-solicitation covenant and a non-
competition covenant pursuant to which Mr. Beck, during the term of his
employment, is prohibited from engaging in any business activity that would
compete directly or indirectly with products or services of the kind or type
developed by the Company. The non-competition covenant extends for a one-year
period after termination (unless terminated without cause), but is limited
during this period to prohibit Mr. Beck from engaging in business activities
competitive with the Company's Year 2000 business activities. Mr. Beck issued
an unsecured promissory note dated January 30, 1998 in the amount of $130,000
payable to the Company. The note incurs interest at 6% per annum and is
payable in two equal annual installments of $65,000 together with accrued
interest.
COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION
The Compensation Committee of the Company's Board of Directors (the
"Compensation Committee") is responsible for recommending compensation
policies with respect to the Company's executive officers, and for making
decisions about awards under certain of the Company's stock-based compensation
plans. Each member of the Compensation Committee is a "non-employee director"
within the meaning of rule 16b-3 under the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), and an "outside director" within the meaning of
Section 162(m) of the Internal Revenue Code. This report addresses the
Company's compensation policies for 1997 as they affected the Chief Executive
Officer, the Chairman of the Board and the former Chief Executive Officer and
the Company's other executive officers, including the Named Executive
Officers.
Compensation Policies
The Compensation Committee's executive compensation policies are designed to
provide competitive compensation opportunities, reward executives consistent
with the Company's performance, recognize individual performance and
responsibility, underscore the importance of shareholder value creation, and
assist the Company in attracting and retaining qualified executives. The
principal elements of compensation employed by the Compensation Committee to
meet these objectives are base salaries, annual cash bonuses, and long-term
stock-based incentives. In order to attract and retain qualified executives,
the Compensation Committee has and may continue to approve employment
agreements between the Company and such executives.
All compensation decisions are determined following a review of factors that
the Compensation Committee believes are relevant, including external
competitive data, the Company's achievement data, external and internal
compensation surveys and studies, the Company's achievements over the past
year, the individual's contributions to the Company's success, any significant
changes in role or responsibility, and the internal equity of compensation
relationships.
In general, the Compensation Committee intends that the overall total
compensation opportunities provided to the executive officers should reflect
competitive compensation for executives with corresponding responsibilities in
comparable firms providing similar products and services. To the extent
determined to be appropriate, the Compensation Committee also considers
general economic conditions, economic conditions particular to the Company's
industry, the Company's financial performance, and the individual's
performance in establishing the compensation opportunities of the executive
officers. Total compensation opportunities for the executive officers are
adjusted over time as necessary to meet this objective. Actual compensation
earned by the executive officers reflects both their contributions to the
Company's creation of actual shareholder value and the Company's actual
financial performance.
The competitiveness of the Company's total compensation program--including
base salaries, annual cash bonuses, and long-term stock-based incentives--may
be periodically assessed with the assistance of an outside compensation
consultant. Data for external comparisons are drawn from a number of sources,
including the publicly available disclosures of selected comparable firms with
similar products and national compensation surveys of information technology
firms of similar size.
While the targeted total compensation levels for the executive officers are
intended to be competitive, compensation paid in any particular year may be
more or less than the average, depending upon the Company's actual performance
and other competitive factors.
11
Base Salary. Base salaries for all executive officers, including the Chief
Executive Officer, are reviewed by the Compensation Committee on an annual
basis. In determining appropriate base salaries, the Compensation Committee
considers external competitiveness, the roles and responsibilities of the
individual, the internal equity of compensation relationships, and the
contributions of the individual to the Company's success. A number of the
Company's executive officers are parties to employment agreements with the
Company that set base salary and other terms of compensation for such
officers. See "Compensation of Directors and Executive Officers."
Annual Cash Bonus Opportunities. The Company believes that executives should
be rewarded for their contributions to the success and operating performance
of the business and, as such, approves annual cash bonus awards. Incentive
awards are typically linked to the achievement of revenue and/or net income
and/or other financial goals by the Company and/or specific business units,
and the achievement by the executives of certain assigned objectives. The
individual objectives set for executive officers of the Company are generally
objective in nature and include such goals as revenue, net income and budget
objectives, increased departmental productivity, cost control, process
improvements, and improved quality control. The Compensation Committee
believes that these arrangements tie the executive's performance closely to
key measures of success of the Company or the executive's business unit. All
executive officers, including the Chief Executive Officer, are eligible to
participate in this program.
Long-Term Stock-Based Incentives. The Compensation Committee also believes
that it is essential to link executive and shareholder interests. As such,
from time to time the Compensation Committee grants stock options to executive
officers and other employees under the Company's 1997 Plan and in the past its
1992 Long Term Incentive Plan. In determining actual awards, the Compensation
committee considers the externally competitive market, the contributions of
the individual to the success of the Company, and the need to retain the
individual over time. All executive officers, including the Chief Executive
Officer, are eligible to participate in the 1997 Plan. In addition, all
executive officers, including the Chief Executive Officer are eligible to
participate in the Purchase Plan.
Section 162(m) of the Internal Revenue Code generally disallows a tax
deduction to public companies for compensation over $1,000,000 paid to its
Named Executive Officers. Qualifying performance-based compensation will not
be subject to the deduction limit if certain requirements are met. Although no
Named Executive Officer received compensation exceeding this limit in 1997,
the Company has limited the number of shares subject to stock options which
may be granted to Company employees in a manner that complies with the
performance-based requirements of Section 162(m).
1997 Compensation
Base salaries paid in 1997, for all executive officers other than the Chief
Executive Officer, reflect the Compensation Committee's subjective review of
external competitiveness, the roles and responsibilities of the individuals,
the internal equity of compensation relationships, and the contributions of
the individual. For 1997, the base salaries for Messrs. Catalano and Chan were
$250,000 and $241,577, respectively. Mr. Catalano's salary is set by the terms
of the Catalano Agreement. The Committee believes that such base salaries were
comparable to salaries of Chief Executive Officers of other software companies
within the Company's industry.
Annual cash bonuses paid to all executive officers, including the Chief
Executive Officer, for 1997 were determined in conjunction with the
Compensation Committee's assessment of the Company's performance and
individual objectives as outlined above. For 1997, Messrs. Catalano and Chan
each received a bonus of $35,000.
Submitted by the Compensation Committee
Arthur Carr
W. Michael Humphreys
Henry F. McCance
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The current members of the Company's Compensation Committee are Messrs.
Carr, Humphreys and McCance. No executive officer of the Company has served as
a director or member of the compensation committee (or other committee serving
an equivalent function) of any other entity, one of whose executive officers
served as a director of or member of the Compensation Committee of the
Company.
12
COMPARATIVE STOCK PERFORMANCE
The graph below compares the cumulative total stockholder return on the
Common Stock for the period from July 2, 1997 through December 31, 1997 with
the cumulative total return on (i) Nasdaq Stock Market U.S. Companies Index,
and (ii) Nasdaq Stock Market Computer and Data Processing Index. The comparison
assumes the investment of $100 on July 2, 1997 in the Company's Common Stock
and in each of the indices and, in each case assumes reinvestment of all
dividends, if any. Prior to July 2, 1997, the Company's Common Stock was not
traded on the Nasdaq National Market.
[GRAPH APPEARS HERE]
COMPARISON OF FIVE YEAR CUMULATIVE RETURN
AMONG PERITUS, NASDAQ U.S. INDEX AND NASDAQ C&D INDEX
Measurement period NASDAQ U.S. NASDAQ C&D
(Fiscal Year Covered) Peritus Index Index
- --------------------- -------- -------- --------
Measurement PT -
07/03/97 $100.00 $100.00 $100.00
FYE 07/31/97 $100 $108.65 $108.39
FYE 08/29/97 $ 98.04 $108.49 $105.5
FYE 09/30/97 $100.49 $114.91 $107.38
FYE 10/31/97 $ 72.55 $108.96 $105.15
FYE 11/28/97 $ 67.16 $109.50 $107.81
FYE 12/31/97 $ 79.90 $107.78 $101.35
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Effective December 1, 1997, Twoquay, Inc., a wholly owned subsidiary of the
Company, acquired substantially all of the assets and assumed certain
liabilities of the business of Millennium Dynamics, Inc. ("MDI") from APU in
exchange for $30 million in cash and 2,175,000 unregistered shares of Common
Stock. Pursuant to a Registration Rights Agreement between the Company and APU,
the Company agreed to file a Registration Statement on Form S-3 covering up to
all of the related common shares issued to APU by July 6, 1998 and to use its
best efforts to cause such Registration Statement to become effective prior to
August 1, 1998. The Company also granted APU certain incidental rights to
register up to 500,000 of the related common shares prior to July 6, 1998 in
the event of a secondary offering of Common Stock by the Company. Under the
terms of the Registration Rights Agreement, APU also agreed that up to 837,500
of the related common shares issued by the Company would be subject to certain
restrictions on sale through December 31, 1998. Twoquay changed its name to MDI
after the closing of the acquisition. In connection with the acquisition,
Twoquay assumed certain license agreements for certain technology and certain
service agreements (under which the Company received payments of $98,000 since
December 1, 1997) between MDI and APU or APU's affiliates related to the MDI
business. The license agreements also include provisions for maintenance for
which APU or APU's affiliates pay no or set maintenance fees. The Company also
has an agreement to permit its use of APU's or APU's affiliates' computer
systems for a fee. In addition, the Company leases space for its Cincinnati
facility from an affiliate of APU's which the Company paid approximately
$191,000 in rent since December 1, 1997. Mr. Verity, a member of the Company's
Board, is also a director of Chiquita, an affiliate of APU.
13
On January 3, 1995, the Company entered into a General Computer Consulting
Services Agreement, with Metropolitan Life Insurance Company ("Met Life")
pursuant to which the Company provided certain software conversion services to
Met Life. In connection with the General Computer Consulting Services
Agreement, the Company entered into two Authorization Letters with Met Life,
dated January 3, 1995 and November 27, 1995, respectively. On October 1, 1996,
the Company entered into a License Agreement with Met Life providing for the
grant of non-exclusive licenses to use certain proprietary software products
developed by the Company, as specified in certain subsequent purchase orders
entered into between the Company and Met Life. Mr. Miller, the Company's Vice
President, Strategic Programs, was previously employed at Met Life from
January 1964 to August 1996, most recently in the position of Chief
Information Officer of Individual Business. The Company derived revenue of
$2,770,000 from Met Life from January 1, 1997 through March 31, 1998.
On May 1, 1996, the Company entered into a License and Alliance Agreement
with CSC providing for a grant of a non-exclusive license to CSC to use the
Company's AutoEnhancer/2000 software and related services, and for the
collaboration of the Company and CSC in connection with providing year 2000
services to CSC's clients. The Company derived revenue of $2,928,000 from
January 1, 1997 through March 31, 1998 under the License and Alliance
Agreement. The initial term of the License and Alliance Agreement terminated
May 1, 1997. On March 15 and June 25, 1997, the Company executed Amendments to
the License and Alliance Agreement--Agreement for the Purchase of a Special
Inventory Package providing for the grant of a $2,500,000 usage-based license
payable by CSC during 1997. Prior to joining the Company as President and
Chief Operating Officer and as a director, Mr. Catalano was employed by CSC
from November 1982 to December 1996, and most recently served as its
President. Mr. Savoia served as Vice President and Managing Partner of CSC
from 1989 to December 1996 before joining the Company in the position of Vice
President, Business Development and Marketing.
For a description of certain employment and other arrangements between the
Company and its executive officers and directors, see "Compensation of
Directors and Executive Officers--Employment Agreements."
The Company has adopted a policy providing that all material transactions
between the Company and its officers, directors and other affiliates must (i)
be approved by a majority of the members of the Company's Board of Directors
and by a majority of the disinterested members of the Company's Board of
Directors and (ii) be on terms no less favorable to the Company than could be
obtained from unaffiliated third parties.
PROPOSAL 1--ELECTION OF DIRECTORS
Pursuant to the By-laws, the Company has a classified Board of Directors
consisting of three Class I directors, three Class II directors and three
Class III directors. The Class I, Class II and Class III Directors will serve
until the annual meeting of stockholders to be held in 1998, 1999 and 2000,
respectively, and until their respective successors are elected and qualified.
Messrs. Catalano, McCance and Verity presently serve as Class I Directors.
Messrs. Deary, Humphreys and Pampel presently serve as Class II Directors
Messrs. Carr, Chan and Leblois presently serve as class III Directors. At each
annual meeting of stockholders, directors are elected for a full term of three
years to succeed those whose terms are expiring.
The persons named in the enclosed proxy will vote to elect, as Class I
directors, Douglas C. Catalano, Henry F. McCance and William W. Verity, unless
the proxy is marked otherwise. Messrs. Catalano, McCance and Verity are
currently directors of the Company. John Giordano, formerly a Class I director
of the Company, resigned from the Board of Directors, effective as of December
29, 1997. Mr. Verity was elected by the Board as a Class I Director on April
21, 1998.
Each Class I director will be elected to hold office until the 2001 annual
meeting of stockholders and until his successor is elected and qualified. Each
of the nominees has indicated his willingness to serve, if elected; however,
if any nominee should be unable to serve, the person acting under the proxy
may vote the proxy for a substitute nominee. The Board of Directors has no
reason to believe that any of the nominees will be unable to serve if elected.
14
PROPOSAL 2--APPROVAL OF AMENDMENT TO THE COMPANY'S 1997 STOCK INCENTIVE PLAN
On February 11, 1998, the Board of Directors voted that, subject to
shareholder approval at the 1998 Annual Meeting, the 1997 Plan be amended to
increase the number of shares of Common Stock reserved for issuance under the
1997 Plan from 1,950,000 to 3,950,000.
The Board of Directors believes that stock options are an important element
of compensation to attract and retain employees.
THE BOARD OF DIRECTORS BELIEVES THAT THE AMENDMENT TO THE 1997 PLAN IS IN
THE BEST INTERESTS OF THE COMPANY AND ITS STOCKHOLDERS AND RECOMMENDS A VOTE
FOR THIS PROPOSAL.
The Company's 1997 Plan was adopted by the Board of Directors and approved
by the stockholders of the Company in May 1997. As of December 31, 1997,
options to purchase 1,159,350 shares of Common Stock at a weighted average
exercise price of $14.34 per share were outstanding under the 1997 Plan. On
April 15, 1998, the closing sale price of a share of Common Stock on the
Nasdaq National Market was $5.688.
The 1997 Plan provides for the grant of incentive stock options intended to
qualify under Section 422 of the Internal Revenue Code of 1986, as amended
(the "Code"), nonstatutory stock options, restricted stock awards and other
stock-based awards, including the grant of shares based upon certain
conditions, the grant of securities convertible into Common Stock and the
grant of stock appreciation rights (collectively, "Awards").
Officers, employees, directors, consultants and advisors of the Company and
its subsidiaries are eligible to be granted Awards under the 1997 Plan. Under
present law, however, incentive stock options may only be granted to
employees. The maximum number of shares with respect to which an Award may be
granted to any participant under the 1997 Plan may not exceed 1,000,000 shares
per calendar year. As of March 31, 1998, approximately 349 persons were
eligible to receive Awards under the 1997 Plan, including the Company's
executive officers and non-employee directors. The granting of Awards under
the 1997 Plan is discretionary.
Optionees may receive the right to purchase a specified number of shares of
Common Stock at a specified option price and subject to such other terms and
conditions as are specified in connection with the option grant. Options may
be granted at an exercise price which may be less than, equal to or greater
than the fair market value of the Common Stock on the date of grant. Under
present law, incentive stock options and options intended to qualify as
performance-based compensation under Section 162(m) of the Code may not be
granted at an exercise price less than the fair market value of the Common
Stock on the date of grant (or less than 110% of the fair market value in the
case of incentive stock options granted to optionees holding more than 10% of
the voting power of the Company). The 1997 Plan permits the Board to determine
the manner of payment of the exercise price of options, including through
payment by cash, check or in connection with a "cashless exercise" through a
broker, by surrender to the Company of shares of Common Stock, by delivery to
the Company of a promissory note, or by any combination of the permitted forms
of payment.
The 1997 Plan is administered by the Board of Directors. The Board has the
authority to adopt, amend and repeal the administrative rules, guidelines and
practices relating to the 1997 Plan and to interpret the provisions thereof.
Pursuant to the terms of the 1997 Plan, the Board of Directors may delegate
authority under the 1997 Plan to one or more committees of the Board, and
subject to certain limitations, to one or more executive officers of the
Company. The Board has authorized the Compensation Committee to administer the
1997 Plan, including the granting of options to executive officers. Subject to
any applicable limitations contained in the 1997 Plan, the Board of Directors,
the Compensation Committee, or any other committee or executive officer to
whom the Board delegates authority, as the case may be, selects the recipients
of Awards, may amend, modify or terminate
15
any outstanding Award and determines (i) the number of shares of Common Stock
covered by options and the dates upon which such options become exercisable,
(ii) the exercise price of options, (iii) the duration of options, and (iv)
the number of shares of Common Stock subject to any restricted stock or other
stock-based Awards and the terms and conditions of such Awards, including
conditions for repurchase, issue price and repurchase price.
In the event of a merger, liquidation or other Acquisition Event (as defined
in the 1997 Plan), the Board of Directors is authorized to provide for
outstanding options or other stock-based Awards to be assumed or substituted
for, or to accelerate the Awards to make them fully exercisable prior to
consummation of the Acquisition Event.
No Award may be made under the 1997 Plan after May 2007, but Awards
previously granted may extend beyond that date. The Board of Directors may at
any time amend, suspend or terminate the 1997 Plan, except that no Award
designated as subject to Section 162(m) of the Code by the Board of Directors
after the date of such amendment shall become exercisable, realizable or
vested (to the extent such amendment was required to grant such Award) unless
and until such amendment is approved by the Company's stockholders.
Since the adoption of the 1997 Plan, options to purchase 150,000, 150,000,
492,000, and 674,613 shares of Common Stock were granted under the 1997 Plan
to Mr. Arora, Mr. Deary, all current executive officers, as a group, and all
employees, including all current officers who are not executive officers, as a
group, respectively, at exercise prices ranging from $10.00 per share to
$28.75 per share. Other than such grants, no other grants have been made to
Named Executive Officers, Directors who are not executive officers or their
respective associates under the 1997 Plan since adoption of the 1997 Plan. The
dollar value of such options may be calculated by multiplying the number of
shares subject to options by the difference between the per share exercise
price and the fair market value of a share of Common Stock quoted on the
Nasdaq National Market. The number of award recipients and quantity of awards
under the 1997 Plan is discretionary and varies from year to year based on a
number of factors. Thus, the Company cannot now determine specific awards
under the 1997 Plan. However, the Compensation Committee expects to grant
options to employees including executive officers prior to the Meeting which
in the aggregate will not exceed the number of options then available for
grant under the 1997 Plan.
Federal Income Tax Consequences. The following is a summary of the United
States federal income tax consequences that generally will arise with respect
to stock options granted under the 1997 Plan and with respect to the sale of
Common Stock acquired under the 1997 Plan.
Incentive Stock Options. In general, a participant will not recognize
taxable income upon the grant or exercise of any incentive stock option.
Instead, a participant will recognize taxable income with respect to an
incentive stock option only upon the sale of Common Stock acquired through the
exercise of the option ("ISO Stock"). The exercise of an incentive stock
option may subject a participant to alternative minimum tax.
Generally, the tax consequences of selling ISO Stock will vary with the
length of time that the participant has owned the ISO Stock at the time it is
sold. If the participant sells ISO Stock after having owned it for at least
two years from the Grant Date (the "Grant Date") and one year from the
exercise date (the "Exercise Date"), then the participant will recognize long-
term capital gain in an amount equal to the excess of the sale price of the
ISO Stock over the exercise price.
If the participant sells ISO Stock prior to having owned it for at least two
years from the Grant Date and one year from the Exercise Date (a
"Disqualifying Disposition"), then all or a portion of the gain recognized by
the participant will be ordinary compensation income and the remaining gain,
if any, will be a capital gain. This capital gain will be a long-term capital
gain if the participant has held the ISO Stock for more than one year prior to
the date of sale.
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If a participant sells ISO Stock for less than the exercise price, then the
participant will recognize capital loss equal to the excess of the exercise
price over the sale price of the ISO Stock. This capital loss will be a long-
term capital loss if the participant has held the ISO Stock for more than one
year prior to the date of the sale.
Nonstatutory Options. As in the case of an incentive stock option, a
participant will not recognize taxable income upon the grant of a nonstatutory
option. However, a participant generally will recognize ordinary compensation
income upon the exercise of a nonstatutory option in an amount equal to the
excess of the fair market value of the Common Stock acquired through the
exercise of the option (the "NSO Stock") on the Exercise Date over the
exercise price.
With respect to any NSO stock, a participant will have a tax basis equal to
the exercise price plus any income recognized upon the exercise of the option.
Upon selling NSO Stock, a participant generally will recognize capital gain or
loss in an amount equal to the difference between the sale price of the NSO
Stock and the participant's tax basis in the NSO Stock. This capital gain or
loss will be a long-term capital gain or loss if the participant has held the
NSO Stock for more than one year prior to the date of the sale.
Tax Consequences to the Company. The grant of a stock option under the 1997
Plan will have no tax consequences to the Company. Moreover, in general,
neither the exercise of an incentive stock option acquired under the 1997 Plan
nor the sale of any common Stock acquired under the 1997 Plan will have any
tax consequences to the Company. The Company generally will be entitled to a
business-expense deduction, however, with respect to any ordinary compensation
income recognized by a participant under the 1997 Plan, including as a result
of the exercise of an nonstatutory stock option or Disqualifying Disposition.
Any such deduction will be subject to the limitations of Section 162(m) of the
Code.
PROPOSAL 3--APPROVAL OF AMENDMENTS TO THE COMPANY'S 1997 EMPLOYEE STOCK
PURCHASE PLAN
On April 21, 1998, the Board of Directors voted that, subject to shareholder
approval at the 1998 Annual Meeting, the Purchase Plan be amended to increase
the number of shares of Common Stock authorized for issuance under the
Purchase Plan from 200,000 to 300,000 and to increase the number of shares of
Common Stock for issuance under each of the Purchase Plan's third and last
Offering Periods (as defined below) from 50,000 to 100,000 per Offering
Period.
The Board of Directors believes that the Purchase Plan provides employees of
the Company with an opportunity to acquire a proprietary interest in the
Company through the purchase of Common Stock, which the Board of Directors
believes will help the Company attract and retain employees.
THE BOARD OF DIRECTORS BELIEVES THAT THE AMENDMENTS TO THE PURCHASE PLAN ARE
IN THE BEST INTERESTS OF THE COMPANY AND ITS STOCKHOLDERS AND RECOMMENDS A
VOTE FOR THIS PROPOSAL.
The Purchase Plan was adopted by the Board of Directors and approved by the
stockholders of the Company in May 1997. The Purchase Plan authorizes the
issuance of up to a total of 200,000 shares of Common Stock to participating
employees.
All employees of the Company, including directors of the Company who are
employees, and all employees of any participating subsidiaries, whose
customary employment is more than 20 hours per week are eligible to
participate in the Purchase Plan. Employees who would immediately after the
grant own 5% or more of the total combined voting power or value of the stock
of the Company or any subsidiary are not eligible to participate. As of March
31, 1998, approximately 344 of the Company's employees would have been
eligible to participate in the Purchase Plan.
17
On the first day of a designated payroll deduction period (the "Offering
Period"), the Company will grant to each eligible employee who has elected to
participate in the Purchase Plan an option to purchase shares of Common Stock
as follows: the employee may authorize an amount (a whole percentage from 1%
to 10% of such employee's base pay) to be deducted by the Company from such
pay during the Offering Period. On the last day of the Offering Period, the
employee is deemed to have exercised the option, at the option exercise price,
to the extent of accumulated payroll deductions. Under the terms of the
Purchase Plan, the option price is an amount equal to 85% of the average
market price (as defined) per share of the Common Stock on either the first
day or the last day of the Offering Period, whichever is lower. In no event
may an employee purchase in any one Offering Period a number of shares which
exceeds the number of shares determined by dividing $12,500 by the average
market price of a share of Common Stock on the commencement date of the
Offering Period. The Purchase Plan provides for four consecutive six-month
Offering Periods beginning with the six-month period extending from October 1,
1997 through March 31, 1998.
If an employee is not a participant on the last day of the Offering Period,
such employee is not entitled to exercise any option, and the amount of such
employee's accumulated payroll deductions will be refunded. An employee's
rights under the Purchase Plan terminate upon voluntary withdrawal from the
Purchase Plan at any time, or when such employee ceases employment for any
reason, except that upon termination of employment because of death, the
employee's beneficiary has certain rights to elect to exercise the option to
purchase the shares which the accumulated payroll deductions in the
participant's account would purchase at the date of death.
As of December 31, 1997, no shares were purchased by participants pursuant
to the Purchase Plan. None of the Company's executive officers has
participated in the Purchase Plan to date. Because participation in the
Purchase Plan is voluntary, the Company cannot now determine the number of
shares of Common Stock to be purchased by any Named Executive Officer, by all
current executive officers, as a group, or by employees including officers who
are not executive officers, as a group. Directors who are not employees may
not participate in the Purchase Plan.
Federal Income Tax Consequences The following is a summary of the United
States federal income tax consequences, that generally will arise with respect
to purchases made under the Purchase Plan and with respect to the sale of
Common Stock acquired under the Purchase Plan.
Tax Consequences to Participants. In general, a participant will not
recognize taxable income upon enrolling in the Plan or upon purchasing shares
of Common Stock at the end of an Offering. Instead, if a participant sells
Common stock acquired under the Plan at a sale price that exceeds the price at
which the participant purchased the Common Stock, then the participant will
recognize taxable income in an amount equal to the excess of the sale price of
the Common Stock over the price at which the participant purchased the Common
Stock. A portion of that taxable income will be ordinary compensation income,
and a portion may be capital gain.
If the participant sells the Common Stock more than one year after acquiring
it and more than two years after the date on which the Offering commenced (the
"Grant Date"), then the participant will be taxed as follows. If the sale
price of the Common Stock is higher than the price at which the participant
purchased the Common Stock, then the participant will recognize ordinary
compensation income in an amount equal to the lesser of:
(i) fifteen percent of the fair market value of the Common Stock on the
Grant Date; and
(ii) the excess of the sale price of the Common Stock over the price at
which the participant purchased the Common Stock.
Any further income will be long-term capital gain. If the sale price of the
Common Stock is less than the price at which the participant purchased the
Common Stock, then the participant will recognize long-term capital
18
loss in an amount equal to the excess of the price at which the participant
purchased the Common Stock over the sale price of the Common Stock.
If the participant sells the Common Stock within one year after acquiring it
or within two years after the Grant Date (a "Disqualifying Disposition"), then
the participant will recognize ordinary compensation income in an amount equal
to the excess of the fair market value of the Common Stock on the date that it
was purchased over the price at which the participant purchased the Common
Stock. The participant will also recognize capital gain in an amount equal to
the excess of the sale price of the Common Stock over the fair market value of
the Common Stock on the date that it was purchased, or capital loss in an
amount equal to the excess of the fair market value of the Common Stock on the
date that it was purchased over the sale price of the Common Stock. This
capital gain or loss will be a long-term capital gain or loss if the
participant has held the Common Stock for more than one year prior to the date
of the sale and will be a short-term capital gain or loss if the participant
has held the Common Stock for a shorter period.
Tax Consequences to the Company. The offering of Common Stock under the Plan
will have no tax consequences to the Company. Moreover, in general, neither
the purchase nor the sale of Common Stock acquired under the Plan will have
any tax consequences to the Company. The Company generally will be entitled to
a business-expense deduction, however, with respect to any ordinary
compensation income recognized by a participant upon making a Disqualifying
Disposition. Any such deduction will be subject to the limitations of Section
162(m) of the Code.
Withholding. The amount that a participant elects to have deducted from his
or her base pay for the purchase of Common Stock under the Plan constitutes
taxable wages and is subject to withholding. Moreover, the Company will have a
withholding obligation with respect to ordinary compensation income recognized
by a participant upon making a Disqualifying Disposition. The Company will
require affected participants to make the arrangements to satisfy this
withholding obligation.
SELECTION OF AUDITORS
The Board of Directors has selected the firm of Price Waterhouse LLP,
independent accountants, to serve as the Company's independent auditors for
the fiscal year ending December 31, 1998. The Company has been advised that a
representative of Price Waterhouse LLP will be present at the Meeting. This
representative will have the opportunity to make a statement if he or she
wishes and will be available to respond to appropriate questions presented at
the Meeting.
STOCKHOLDER PROPOSALS FOR THE 1999 ANNUAL MEETING
Any proposal that a stockholder intends to present at the 1999 Annual
Meeting of Stockholders must be submitted to the Clerk of the Company at its
offices, 2 Federal Street, Billerica, Massachusetts 01821, no later than
January 5, 1999 in order to be considered for inclusion in the Proxy Statement
relating to that meeting.
OTHER MATTERS
The Board of Directors knows of no other business which will be presented
for consideration at the Meeting other than that described above. However, if
any other business should come before the Meeting, it is the intention of the
persons named in the enclosed Proxy to vote, or otherwise act, in accordance
with their best judgment on such matters.
19
The Company will bear the costs of soliciting proxies. In addition to
solicitations by mail, the Company's directors, officers and regular employees
may, without additional remuneration, solicit proxies by telephone, telegraph,
facsimile and personal interviews. The Company will also request brokerage
houses, custodians, nominees and fiduciaries to forward copies of the proxy
materials to those persons for whom they hold shares and request instructions
for voting the Proxies. The Company will reimburse such brokerage houses and
other persons for their reasonable expenses in connection with this
distribution.
By Order of the Board of Directors,
Eugene J. DiDonato
Clerk
Billerica, MA
May 7, 1998
THE BOARD OF DIRECTORS HOPES THAT STOCKHOLDERS WILL ATTEND THE MEETING.
WHETHER OR NOT YOU PLAN ATTEND, YOU ARE URGED TO COMPLETE, DATE, SIGN AND
RETURN THE ENCLOSED PROXY IN THE ACCOMPANYING ENVELOPE. PROMPT RESPONSE WILL
GREATLY FACILITATE ARRANGEMENTS FOR THE MEETING AND YOUR COOPERATION IS
APPRECIATED. STOCKHOLDERS WHO ATTEND THE MEETING MAY VOTE THEIR STOCK
PERSONALLY EVEN THOUGH THEY HAVE SENT IN THEIR PROXIES.
20
APPENDIX A
PERITUS SOFTWARE SERVICES, INC.
2 Federal Street
Billerica, Massachusetts 01821-3540
PROXY SOLICITED BY THE BOARD OF DIRECTORS
FOR THE ANNUAL MEETING OF STOCKHOLDERS
The undersigned, revoking all prior proxies, hereby appoint(s) Dominic K.
Chan, Allen K. Deary and Peter B. Tarr, each with the power to appoint their
substitute, and hereby authorizes them to represent and to vote, as designated
on the reverse side, all shares of common stock of Peritus Software Services,
Inc. (the "Company") held of record by the undersigned on April 16, 1998 at the
Annual Meeting of Shareholders to be held on June 10, 1998 and at any
adjournment or adjournments thereof.
THIS PROXY WHEN PROPERLY EXECUTED WILL BE VOTED AS DIRECTED. IF NO
DIRECTION IS GIVEN WITH RESPECT TO A PARTICULAR PROPOSAL, THIS PROXY WILL BE
VOTED FOR SUCH PROPOSAL.
PLEASE MARK, DATE, SIGN AND RETURN THIS PROXY CARD PROMPTLY, USING THE
ENCLOSED ENVELOPE. NO POSTAGE IS REQUIRED IF MAILED IN THE UNITED STATES.
CONTINUED AND TO BE SIGNED ON REVERSE SIDE
PERITUS SOFTWARE SERVICES, INC.
Dear Stockholder:
Please take note of the important information enclosed with this Proxy. There
are a number of issues related to the operation of the Company that require your
immediate attention as disclosed in the accompanying proxy statement.
Your vote counts, and you are strongly encouraged to exercise your right to
vote your shares.
Please mark the boxes on the proxy card to indicate how your shares will be
voted. Then sign the card, detach it and return your proxy in the enclosed
postage paid envelope.
Thank you in advance for your prompt consideration of these matters.
Sincerely,
Peritus Software Services, Inc.
[X] Please mark votes
as in this example.
The Board of Directors recommends that you vote FOR the following proposals.
1. Election of Class I Directors 2. Approve the amendment to the Company's 1997 Stock
Incentive Plan For Against Abstain
Nominees: Douglas A. Catalano, Henry F. McCance [ ] [ ] [ ]
and William W. Verity
For Withheld 3. Approve the amendments to the Company's 1997
[ ] [ ] Employee Stock Purchase Plan For Against Abstain
[ ] [ ] [ ]
[ ] _______________________________________
For all nominees except as noted above. 4. In their discretion, the proxies are authorized to
vote upon any other business that may properly come
before the Annual Meeting. For Against Abstain
[ ] [ ] [ ]
MARK HERE FOR ADDRESS [ ]
CHANGE AND NOTE AT LEFT
SHAREHOLDER NAME
STREET ADDRESS Please sign exactly as name appears hereon. Joint owners
CITY, STATE, ZIP CODE should each sign. Executors, administrators, trustees,
Guardians or other fiduciaries should give full title as such.
If signing for a corporation, please sign in full corporate
name by a duly authorized officer.
Signature: _______________________________________ Signature: ________________________________________________
Date: _______________________________
APPENDIX B
PERITUS SOFTWARE SERVICES, INC.
1997 STOCK INCENTIVE PLAN
1. PURPOSE
The purpose of this 1997 Stock Incentive Plan (the "Plan") of Peritus
Software Services, Inc., a Massachusetts corporation (the "Company"), is to
advance the interests of the Company's shareholders by enhancing the Company's
ability to attract, retain and motivate persons who make (or are expected to
make) important contributions to the Company by providing such persons with
equity ownership opportunities and performance-based incentives and thereby
better aligning the interests of such persons with those of the Company's
shareholders. Except where the context otherwise requires, the term "Company"
shall include any present or future subsidiary corporations of Peritus
Software Services, Inc. as defined in Section 424(f) of the Internal Revenue
Code of 1986, as amended, and any regulations promulgated thereunder (the
"Code").
2. ELIGIBILITY
All of the Company's employees, officers, directors, consultants and
advisors are eligible to be granted options, restricted stock, or other stock-
based awards (each, an "Award") under the Plan. Any person who has been
granted an Award under the Plan shall be deemed a "Participant".
3. ADMINISTRATION, DELEGATION
a. Administration by Board of Directors. The Plan will be administered by
the Board of Directors of the Company (the "Board"). The Board shall have
authority to grant Awards and to adopt, amend and repeal such administrative
rules, guidelines and practices relating to the Plan as it shall deem
advisable. The Board may correct any defect, supply any omission or reconcile
any inconsistency in the Plan or any Award in the manner and to the extent it
shall deem expedient to carry the Plan into effect and it shall be the sole
and final judge of such expediency. No member of the Board shall be liable for
any action or determination relating to the Plan. All decisions by the Board
shall be made in the Board's sole discretion and shall be final and binding on
all persons having or claiming any interest in the Plan or in any Award. No
director or person acting pursuant to the authority delegated by the Board
shall be liable for any action or determination under the Plan made in good
faith.
b. Delegation to Officers. To the extent permitted by applicable law, the
Board may delegate to one or more officers of the Company the power to make
Awards and exercise such other powers under the Plan as the Board may
determine, provided that the Board shall fix the maximum number of shares
subject to Awards and the maximum number of shares for any one Participant to
be made by such executive officers.
c. Appointment of Committees. To the extent permitted by applicable law, the
Board may delegate any or all of its powers under the Plan to one or more
committees or subcommittees of the Board (a "Committee"). If and when the
Class A common stock, no par value per share, of the Company (the "Common
Stock") is registered under the Securities Exchange Act of 1934 (the "Exchange
Act"), the Board shall appoint one such Committee of not less than two
members, each member of which shall be an "outside director" within the
meaning of Section 162(m) of the Code and a "non-employee director" as defined
in Rule 16b-3 promulgated under the "Exchange Act." All references in the Plan
to the "Board" shall mean a Committee or the Board or the officer referred to
in Section 3(b) to the extent that the Board's powers or authority under the
Plan have been delegated to such Committee or executive officer.
4. STOCK AVAILABLE FOR AWARDS
a. Number of Shares. Subject to adjustment under Section 4(c), Awards may be
made under the Plan for up to 1,950,000 shares of Common Stock. If any Award
expires or is terminated, surrendered or canceled without
B-1
having been fully exercised or is forfeited in whole or in part or results in
any Common Stock not being issued, the unused Common Stock covered by such
Award shall again be available for the grant of Awards under the Plan,
subject, however, in the case of Incentive Stock Options (as hereinafter
defined), to any limitation required under the Code. Shares issued under the
Plan may consist in whole or in part of authorized but unissued shares or
treasury shares.
b. Per-Participant Limit. Subject to adjustment under Section 4(c), for
Awards granted after the Common Stock is registered under the Exchange Act,
the maximum number of shares with respect to which an Award may be granted to
any participant under the Plan shall be 1,000,000 per calendar year. The per-
Participant limit described in this Section 4(b) shall be construed and
applied consistently with Section 162(m) of the Code.
c. Adjustment to Common Stock. In the event of any stock split, stock
dividend, recapitalization, reorganization, merger, consolidation,
combination, exchange of shares, liquidation, spin-off or other similar change
in capitalization or event, or any distribution to holders of Common Stock
other than a normal cash dividend, (i) the number and class of securities
available under this Plan, (ii) the number and class of security and exercise
price per share subject to each outstanding Option, (iii) the repurchase price
per security subject to each outstanding Restricted Stock Award, and (iv) the
terms of each other outstanding stock-based Award shall be appropriately
adjusted by the Company (or substituted Awards may be made, if applicable) to
the extent the Board shall determine, in good faith, that such an adjustment
(or substitution) is necessary and appropriate. If this Section 4(c) applies
and Section 8(e)(1) also applies to any event, Section 8(e)(1) shall be
applicable to such event, and this Section 4(c) shall not be applicable.
5. STOCK OPTIONS
a. General. The Board may grant options to purchase Common Stock (each, an
"Option") and determine the number of shares of Common Stock to be covered by
each Option, the exercise price of each Option and the conditions and
limitations applicable to the exercise of each Option, including conditions
relating to applicable federal or state securities laws, as it considers
necessary or advisable. An Option which is not intended to be an Incentive
Stock Option (as hereinafter defined) shall be designated a "Nonstatutory
Stock Option".
b. Incentive Stock Options. An Option that the Board intends to be an
"incentive stock option" as defined in Section 422 of the Code (an "Incentive
Stock Option") shall only be granted to employees of the Company and shall be
subject to and shall be construed consistently with the requirements of
Section 422 of the Code. The Company shall have no liability to a Participant,
or any other party, if an Option (or any part thereof) which is intended to be
an Incentive Stock Option is not an Incentive Stock Option.
c. Exercise Price. The Board shall establish the exercise price at the time
each Option is granted and specify it in the applicable option agreement.
d. Duration of Options. Each Option shall be exercisable at such times and
subject to such terms and conditions as the Board may specify in the
applicable option agreement.
e. Exercise of Option. Options may be exercised only by delivery to the
Company of a written notice of exercise signed by the proper person together
with payment in full as specified in Section 5(f) for the number of shares for
which the Option is exercised.
f. Payment Upon Exercise. Common Stock purchased upon the exercise of an
Option granted under the Plan shall be paid for as follows:
i. in cash or by check, payable to the order of the Company;
ii. except as the Board may otherwise provide in an Option, delivery of
an irrevocable and unconditional undertaking by a credit worthy broker to
deliver promptly to the Company sufficient funds to pay the exercise price,
or delivery by the Participant to the Company of a copy of irrevocable and
B-2
unconditional instructions to a credit worthy broker to deliver promptly to
the Company cash or a check sufficient to pay the exercise price;
iii. (i) by delivery of shares of Common Stock owned by the Participant
valued at their fair market value as determined by the Board in good faith
("Fair Market Value"), which Common Stock was owned by the Participant at
least six months prior to such delivery, (ii) by delivery of a promissory
note of the Participant to the Company on terms determined by the Board, or
(iii) by payment of such other lawful consideration as the Board may
determine; or
iv. any combination of the above permitted forms of payment.
6. RESTRICTED STOCK
a. Grants. The Board may grant Awards entitling recipients to acquire shares
of Common Stock, subject to the right of the Company to repurchase all or part
of such shares at their issue price or other stated or formula price (or to
require forfeiture of such shares if issued at no cost) from the recipient in
the event that conditions specified by the Board in the applicable Award are
not satisfied prior to the end of the applicable restriction period or periods
established by the Board for such Award (each, "Restricted Stock Award").
b. Terms and Conditions. The Board shall determine the terms and conditions
of any such Restricted Stock Award, including the conditions for repurchase
(or forfeiture) and the issue price, if any. Any stock certificates issued in
respect of a Restricted Stock Award shall be registered in the name of the
Participant and, unless otherwise determined by the Board, deposited by the
Participant, together with a stock power endorsed in blank, with the Company
(or its designee). At the expiration of the applicable restriction periods,
the Company (or such designee) shall deliver the certificates no longer
subject to such restrictions to the Participant or if the Participant has
died, to the beneficiary designated, in a manner determined by the Board, by a
Participant to receive amounts due or exercise rights of the Participant in
the event of the Participant's death (the "Designated Beneficiary"). In the
absence of an effective designation by a Participant, Designated Beneficiary
shall mean the Participant's estate.
7. OTHER STOCK-BASED AWARDS
The Board shall have the right to grant other Awards based upon the Common
Stock having such terms and conditions as the Board may determine, including
the grant of shares based upon certain conditions, the grant of securities
convertible into Common Stock and the grant of stock appreciation rights.
8. GENERAL PROVISIONS APPLICABLE TO AWARDS
a. Transferability of Awards. Except as the Board may otherwise determine or
provide in an Award, Awards shall not be sold, assigned, transferred, pledged
or otherwise encumbered by the person to whom they are granted, either
voluntarily or by operation of law, except by will or the laws of descent and
distribution, and, during the life of the Participant, shall be exercisable
only by the Participant. References to a Participant, to the extent relevant
in the context, shall include references to authorized transferees.
b. Documentation. Each Award under the Plan shall be evidenced by a written
instrument in such form as the Board shall determine. Each Award may contain
terms and conditions in addition to, and not inconsistent with, those set
forth in the Plan.
c. Board Discretion. Except as otherwise provided by the Plan, each type of
Award may be made alone in addition or in relation to any other type of Award.
The terms of each type of Award need not be identical, and the Board need not
treat Participants uniformly.
d. Termination of Status. The Board shall determine the effect on an Award
of the disability, death, retirement, authorized leave of absence or other
change in the employment or other status of a Participant and
B-3
the extent to which, and the period during which, the Participant, the
Participant's legal representative, conservator, guardian or Designated
Beneficiary may exercise rights under the Award.
e. Acquisition Events
i. Consequences of Acquisition Events. Except to the extent otherwise
provided in the instrument evidencing the Award or in any other agreement
between the Participant and the Company, upon the occurrence of an
Acquisition Event or with respect to Options or any other similar Awards
only, upon the execution by the Company of any agreement with respect to an
Acquisition Event, (i) the Board shall cause all Options then outstanding
to become immediately exercisable in full as of a specified date (the
"Acceleration Date") prior to the Acquisition Event and shall provide
written notice to the Participants informing them that all such options
have become exercisable in full and will terminate immediately prior to the
consummation of such Acquisition Event, except to the extent exercised by
the Participants between the Acceleration Date and the consummation of such
Acquisition Event; (ii) all Restricted Stock Awards then outstanding shall
become immediately free of all restrictions; (iii) all other stock-based
Awards all become immediately exercisable, realizable or vested in full, or
shall be immediately free of all restrictions or conditions, as the case
may be.
An "Acquisition Event" shall mean: (a) any merger or consolidation which
results in the voting securities of the Company outstanding immediately
prior thereto continuing to represent (either by remaining outstanding or
by being converted into voting securities of the surviving or acquiring
entity) less than 60% of the combined voting power of the voting securities
of the Company or such surviving or acquiring entity outstanding
immediately after such merger or consolidation; (b) any sale of all or
substantially all of the assets of the Company; (c) the complete
liquidation of the Company; or (d) the acquisition of "beneficial
ownership" (as defined in Rule 13d-3 under the Exchange Act) of securities
of the Company representing 50% or more of the combined voting power of the
Company's then outstanding securities (other than through a merger or
consolidation or an acquisition of securities directly from the Company) by
any "person", as such term is used in Sections 13(d) and 14(d) of the
Exchange Act other than the Company, any trustee or other fiduciary holding
securities under an employee benefit plan of the Company or any corporation
owned directly or indirectly by the shareholders of the Company in
substantially the same proportion as their ownership of stock of the
Company.
ii. Assumption of Options Upon Certain Events. The Board may grant Awards
under the Plan in substitution for stock and stock-based awards held by
employees of another corporation who become employees of the Company as a
result of a merger or consolidation of the employing corporation with the
Company or the acquisition by the Company of property or stock of the
employing corporation. The substitute Awards shall be granted on such terms
and conditions as the Board considers appropriate in the circumstances.
f. Withholding. Each Participant shall pay to the Company, or make provision
satisfactory to the Board for payment of, any taxes required by law to be
withheld in connection with Awards to such Participant no later than the date
of the event creating the tax liability. The Board may allow Participants to
satisfy such tax obligations in whole or in part in shares of Common Stock,
including shares retained from the Award creating the tax obligation, valued
at their Fair Market Value. The Company may, to the extent permitted by law,
deduct any such tax obligations from any payment of any kind otherwise due to
a Participant.
g. Amendment of Award. The Board may amend, modify or terminate any
outstanding Award, including but not limited to, substituting therefor another
Award of the same or a different type, changing the date of exercise or
realization, and converting an Incentive Stock Option to a Nonstatutory Stock
Option, provided that the Participant's consent to such action shall be
required unless the Board determines that the action, taking into account any
related action, would not materially and adversely affect the Participant.
h. Conditions on Delivery of Stock. The Company will not be obligated to
deliver any shares of Common Stock pursuant to the Plan or to remove
restrictions from shares previously delivered under the Plan until (i) all
conditions of the Award have been met or removed to the satisfaction of the
Company, (ii) in the opinion of the
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Company's counsel, all other legal matters in connection with the issuance and
delivery of such shares have been satisfied, including any applicable
securities laws and any applicable stock exchange or stock market rules and
regulations, and (iii) the Participant has executed and delivered to the
Company such representations or agreements as the Company may consider
appropriate to satisfy the requirements of any applicable laws, rules or
regulations.
i. Acceleration. The Board may at any time provide that any Options shall
become immediately exercisable in full or in part, that any Restricted Stock
Awards shall be free of all restrictions or that any other stock-based Awards
may become exercisable in full or in part or free of some or all restrictions
or conditions, or otherwise realizable in full or in part, as the case may be.
9. MISCELLANEOUS
a. No Right To Employment or Other Status. No person shall have any claim or
right to be granted an Award, and the grant of an Award shall not be construed
as giving a Participant the right to continued employment or any other
relationship with the Company. The Company expressly reserves the right at any
time to dismiss or otherwise terminate its relationship with a Participant
free from any liability or claim under the Plan, except as expressly provided
in the applicable Award.
b. No Rights As Stockholder. Subject to the provisions of the applicable
Award, no Participant or Designated Beneficiary shall have any rights as a
stockholder with respect to any shares of Common Stock to be distributed with
respect to an Award until becoming the record holder of such shares.
c. Effective Date and Term of Plan. The Plan shall become effective on the
date on which it is adopted by the Board. No Awards shall be granted under the
Plan after the completion of ten years from the earlier of (i) the date on
which the Plan was adopted by the Board or (ii) the date the Plan was approved
by the Company's shareholders, but Awards previously granted may extend beyond
that date.
d. Amendment of Plan. The Board may amend, suspend or terminate the Plan or
any portion thereof at any time, provided that no amendment shall be made
without stockholder approval if such approval is necessary to comply with any
applicable tax or regulatory requirements. Amendments requiring stockholder
approval shall become effective when adopted by the Board, but no Award
granted to a Participant designated as subject to Section 162(m) by the Board
shall become exercisable, realizable or vested (to the extent that such
amendment to the Plan was required to grant such Award to a particular
Participant) unless and until such amendment shall have been approved by the
Company's shareholders.
e. Governing Law. The provisions of the Plan and all Awards made hereunder
shall be governed by and interpreted in accordance with the laws of the
Commonwealth of Massachusetts, without regard to any applicable conflicts of
law.
Adopted by the Board of Directors on
May 5, 1997
Approved by the Stockholders on May
28, 1997
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AMENDMENT NO. 1 TO THE
PERITUS SOFTWARE SERVICES, INC.
1997 STOCK INCENTIVE PLAN
Subsection 4(a) of the Peritus Software Services, Inc. 1997 Stock Incentive
Plan (the "Plan"), is hereby amended, subject to stockholder approval, to
increase from 1,950,000 to 3,950,000 the number of shares of Common Stock,
$.01 par value per share, authorized for issuance under the Plan (subject to
adjustment under Subsection 4(c) of the Plan).
Adopted by the Board of Directors on
February 11, 1998
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APPENDIX C
PERITUS SOFTWARE SERVICES, INC.
1997 EMPLOYEE STOCK PURCHASE PLAN
The purpose of this Plan is to provide eligible employees of Peritus
Software Services, Inc. (the "Company") and certain of its subsidiaries with
opportunities to purchase shares of the Company's Class A common stock, no par
value (the "Common Stock"), commencing on October 1, 1997. Two hundred
thousand (200,000) shares of Common Stock in the aggregate have been approved
for this purpose.
1. ADMINISTRATION
The Plan will be administered by the Company's Board of Directors (the
"Board") or by a Committee appointed by the Board (the "Committee"). The Board
or the Committee has authority to make rules and regulations for the
administration of the Plan and its interpretation and decisions with regard
thereto shall be final and conclusive.
2. ELIGIBILITY
Participation in the Plan will neither be permitted nor denied contrary to
the requirements of Section 423 of the Internal Revenue Code of 1986, as
amended (the "Code"), and regulations promulgated thereunder.
All employees of the Company, including Directors who are employees, and all
employees of any subsidiary of the Company (as defined in Section 424(f) of
the Code) designated by the Board or the Committee from time to time (a
"Designated Subsidiary"), are eligible to participate in any one or more of
the offerings of Options (as defined in Section 9) to purchase Common Stock
under the Plan provided that:
a. they are customarily employed by the Company or a Designated
Subsidiary for more than 20 hours a week; and
b. they are employees of the Company or a Designated Subsidiary on the
first day of the applicable Plan Period (as defined below).
No employee may be granted an option hereunder if such employee,
immediately after the option is granted, owns 5% or more of the total
combined voting power or value of the stock of the Company or any
subsidiary. For purposes of the preceding sentence, the attribution rules
of Section 424(d) of the Code shall apply in determining the stock
ownership of an employee, and all stock which the employee has a
contractual right to purchase shall be treated as stock owned by the
employee.
3. OFFERINGS
The Company will make four offerings ("Offerings") to employees to purchase
stock under this Plan. Unless the Board determines otherwise, Offerings will
begin each October 1 and April 1, or the first business day thereafter (the
"Offering Commencement Dates") and each Offering Commencement Date will begin
a 6-month period (a "Plan Period") during which payroll deductions will be
made and held for the purchase of Common Stock at the end of the Plan Period.
The first Plan Period shall begin on October 1, 1997 and end on March 31,
1997. The last Plan Period shall begin on April 1, 1999 and end on March 31,
1999 unless the Board determines otherwise. The maximum number of shares
available under each Offering shall not exceed 50,000 shares during each Plan
Period together with any shares remaining unsold from any prior Plan Period.
If the total number of shares for which options are exercised exceeds the
maximum number available for each Plan Period, the Board or Committee shall
make a pro-rata allocation of the shares available and the excess payroll
deduction shall be automatically refunded to the employee, except that any
balance which is less than the purchase price of one share of Common Stock
shall be carried forward into the employee's payroll deduction account for the
next Offering. If the employee elects to discontinue participation in the
Plan, such amount shall promptly be refunded to the employee, without
interest.
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4.PARTICIPATION
An employee eligible on the Offering Commencement Date of any Offering may
participate in such Offering by completing and forwarding a payroll deduction
authorization form to the employee's appropriate payroll office at least 20
days prior to the applicable Offering Commencement Date. The form will
authorize a regular payroll deduction from the Compensation received by the
employee during the Plan Period. Unless an employee files a new form or
withdraws from the Plan, his deductions and purchases will continue at the
same rate for future Offerings under the Plan as long as the Plan remains in
effect.
5.DEDUCTIONS
The Company will maintain payroll deduction accounts for all participating
employees. With respect to any Offering made under this Plan, an employee may
authorize a payroll deduction of any whole number percentage of Compensation
from 1% through 10% of Compensation with any change in compensation during the
Plan Period to result in an automatic corresponding change in the dollar
amount withheld. An employee's Compensation shall be the employee's Base Pay.
An employee's Base Pay is his or her regular straight-time earnings, as the
same may be adjusted from time to time, and amounts paid for vacation,
holiday, sick time and short-term disability. Base Pay excludes all special
payments including the following without limitation: overtime, incentive
compensation, bonuses, sales commissions, automobile allowances, relocation
expense reimbursements, insurance payments made pursuant to any long-term
disability policies and any other type of special payment.
No employee may be granted an Option (as defined in Section 9) which permits
his rights to purchase Common Stock under this Plan and any other stock
purchase plan of the Company and its subsidiaries, to accrue at a rate which
exceeds $25,000 of fair market value of such Common Stock (determined at the
Offering Commencement Date of the Plan Period) for each calendar year in which
the Option is outstanding at any time.
6.DEDUCTION CHANGES
An employee may not increase or decrease his payroll deduction during a Plan
Period. However, an employee may discontinue his payroll deduction once during
any Plan Period, by filing a new payroll deduction authorization form. If an
employee elects to discontinue his payroll deductions during a Plan Period,
such election shall constitute an election to withdraw his funds pursuant to
Section 8 hereof.
7.INTEREST
Interest will not be paid on any employee accounts, except to the extent that
the Board or the Committee, in its sole discretion, elects to credit employee
accounts with interest at such per annum rate as it may from time to time
determine.
8.WITHDRAWAL OF FUNDS
An employee may at any time twenty (20) days prior to the close of business
on the last business day in a Plan Period and for any reason permanently draw
out the balance accumulated in the employee's account and thereby withdraw
from participation in an Offering. Partial withdrawals are not permitted. The
employee may not begin participation again during the remainder of the Plan
Period. The employee may participate in any subsequent Offering by filing a
new payroll authorization form no later than 20 days prior to the beginning
date of such Offering.
9.PURCHASE OF SHARES
On the Offering Commencement Date of each Plan Period, the Company will
grant to each eligible employee who is then a participant in the Plan an
option ("Option") to purchase on the last business day of such Plan Period
(the "Exercise Date"), at the Option Price hereinafter provided for, the
largest number of whole
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shares of Common Stock of the Company reserved for the purposes of the Plan as
does not exceed the number of shares determined by dividing $12,500 by the
Average Market Price on the Offering Commencement Date of such Plan Period.
The Average Market Price on any date shall be (a) the average (on that date)
of the high and low prices of the Common Stock on any national securities
exchange on which the Common Stock is listed, (b) the last reported sale price
of the Common Stock on the Nasdaq National Market or (c) the average of the
closing bid and asked prices last quoted on that date in the over-the-counter-
market, whichever is applicable, as published in The Wall Street Journal. If
no sales of Common Stock were made on such a day, the price of the Common
Stock for purposes of clauses (a) and (b) above shall be the reported price
for the next preceding day on which sales were made.
The purchase price for each share purchased (the "Option Price") will be 85%
of the Average Market Price of the Common Stock on (i) the first business day
of such Plan Period or (ii) the Exercise Date, whichever is less. Each
employee who continues to be a participant in the Plan on the Exercise Date
shall be deemed to have exercised his Option at the Option Price on such date
and shall be deemed to have purchased from the Company the number of full
shares of Common Stock reserved for the purpose of the Plan that his
accumulated payroll deductions on such date will pay for pursuant to the
formula set forth above (but not in excess of the maximum number determined in
the manner set forth above). The Board may set a higher purchase price for an
Offering at any time at least 30 days prior to the Offering Commencement Date
of such Offering.
Any balance remaining in an employee's payroll deduction account at the end
of a Plan Period will be automatically refunded to the employee, except that
any balance which is less than the purchase price of one share of Common Stock
will be carried forward into the employee's payroll deduction account for the
following Offering, unless the employee elects not to participate in the
following Offering under the Plan, in which case the balance in the employee's
account shall be refunded.
10.ISSUANCE OF CERTIFICATES
Certificates representing shares of Common Stock purchased under the Plan
may be issued only in the name of the employee, in the name of the employee
and another person of legal age as joint tenants with rights of survivorship,
or (in the Company's sole discretion) in the street name of a brokerage firm,
bank or other nominee holder designated by the employee.
11.RIGHTS ON RETIREMENT, DEATH OR TERMINATION OF EMPLOYMENT
In the event of a participating employee's termination of employment prior
to the last business day of a Plan Period, no payroll deduction shall be taken
from any pay due and owing to an employee and the balance in the employee's
account shall be paid to the employee or, in the event of the employee's
death, (a) to a beneficiary previously designated in a revocable notice signed
by the employee (with any spousal consent required under state law) or (b) in
the absence of such a designated beneficiary, to the executor or administrator
of the employee's estate or (c) if no such executor or administrator has been
appointed to the knowledge of the Company, to such other person(s) as the
Company may, in its discretion, designate. If, prior to the last business day
of the Plan Period, the Designated Subsidiary by which an employee is employed
shall cease to be a subsidiary of the Company, or if the employee is
transferred to a subsidiary of the Company that is not a Designated
Subsidiary, the employee shall be deemed to have terminated employment for the
purposes of this Plan. Employment shall be defined in accordance with Treasury
Regulation (S)1.421-7(h).
12.OPTIONEES NOT STOCKHOLDERS
Neither the granting of an Option to an employee nor the deductions from his
pay shall constitute such employee a stockholder of the shares of Common Stock
covered by an Option under this Plan until such shares have been purchased by
and issued to him.
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13.RIGHTS NOT TRANSFERABLE
Rights under this Plan are not transferable by a participating employee
other than by will or the laws of descent and distribution, and are
exercisable during the employee's lifetime only by the employee.
14.APPLICATION OF FUNDS
All funds received or held by the Company under this Plan may be combined
with other corporate funds and may be used for any corporate purpose.
15.ADJUSTMENT IN CASE OF CHANGES AFFECTING COMMON STOCK
In the event of a subdivision of outstanding shares of Common Stock, or the
payment of a dividend in Common Stock, the number of shares approved for this
Plan, and the share limitation set forth in Section 9, shall be increased
proportionately, and such other adjustment shall be made as may be deemed
equitable by the Board or the Committee. In the event of any other change
affecting the Common Stock, such adjustment shall be made as may be deemed
equitable by the Board or the Committee to give proper effect to such event.
16.MERGER
If the Company shall at any time merge or consolidate with another
corporation and the holders of the capital stock of the Company immediately
prior to such merger or consolidation continue to hold at least 80% by voting
power of the capital stock of the surviving corporation ("Continuity of
Control"), the holder of each Option then outstanding will thereafter be
entitled to receive at the next Exercise Date upon the exercise of such Option
for each share as to which such Option shall be exercised the securities or
property which a holder of one share of the Common Stock was entitled to upon
and at the time of such merger, and the Committee shall take such steps in
connection with such merger as the Committee shall deem necessary to assure
that the provisions of Paragraph 15 shall thereafter be applicable, as nearly
as reasonably may be, in relation to the said securities or property as to
which such holder of such Option might thereafter be entitled to receive
thereunder.
In the event of a merger or consolidation of the Company with or into
another corporation which does not involve Continuity of Control, or of a sale
of all or substantially all of the assets of the Company while unexercised
Options remain outstanding under the Plan, (a) subject to the provisions of
clauses (b) and (c), after the effective date of such transaction, each holder
of an outstanding Option shall be entitled, upon exercise of such Option, to
receive in lieu of shares of Common Stock, shares of such stock or other
securities as the holders of shares of Common Stock received pursuant to the
terms of such transaction; or (b) all outstanding Options may be cancelled by
the Board or the Committee as of a date prior to the effective date of any
such transaction and all payroll deductions shall be paid out to the
participating employees; or (c) all outstanding Options may be cancelled by
the Board or the Committee as of the effective date of any such transaction,
provided that notice of such cancellation shall be given to each holder of an
Option, and each holder of an Option shall have the right to exercise such
Option in full based on payroll deductions then credited to his account as of
a date determined by the Board or the Committee, which date shall not be less
than ten (10) days preceding the effective date of such transaction.
17.AMENDMENT OF THE PLAN
The Board may at any time, and from time to time, amend this Plan in any
respect, except that (a) if the approval of any such amendment by the
shareholders of the Company is required by Section 423 of the Code, such
amendment shall not be effected without such approval, and (b) in no event may
any amendment be made which would cause the Plan to fail to comply with
Section 16 of the Exchange Act and the rules promulgated thereunder, as in
effect from time to time, or Section 423 of the Code.
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18.INSUFFICIENT SHARES
In the event that the total number of shares of Common Stock specified in
elections to be purchased under any Offering plus the number of shares
purchased under previous Offerings under this Plan exceeds the maximum number
of shares issuable under this Plan, the Board or the Committee will allot the
shares then available on a pro rata basis.
19.TERMINATION OF THE PLAN
This Plan may be terminated at any time by the Board. Upon termination of
this Plan all amounts in the accounts of participating employees shall be
promptly refunded.
20.GOVERNMENTAL REGULATIONS
The Company's obligation to sell and deliver Common Stock under this Plan is
subject to listing on a national stock exchange or quotation on the Nasdaq
National Market and the approval of all governmental authorities required in
connection with the authorization, issuance or sale of such stock.
The Plan shall be governed by Massachusetts law except to the extent that
such law is preempted by federal law.
The Plan is intended to comply with the provisions of Rule 16b-3 promulgated
under the Securities Exchange Act of 1934. Any provision inconsistent with
such Rule shall to that extent be inoperative and shall not affect the
validity of the Plan.
21.ISSUANCE OF SHARES
Shares may be issued upon exercise of an Option from authorized but unissued
Common Stock, from shares held in the treasury of the Company, or from any
other proper source.
22.NOTIFICATION UPON SALE OF SHARES
Each employee agrees, by entering the Plan, to promptly give the Company
notice of any disposition of shares purchased under the Plan where such
disposition occurs within two years after the date of grant of the Option
pursuant to which such shares were purchased.
23.EFFECTIVE DATE AND APPROVAL OF SHAREHOLDERS
The Plan as amended hereby shall take effect on May 5, 1997, subject to
approval by the shareholders of the Company as required by Section 423 of the
Code, which approval must occur within twelve months of the adoption of such
amendment by the Board.
Adopted by the Board of Directors on
May 5, 1997
Approved by the shareholders on May
28, 1997
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AMENDMENT NO. 1 TO THE
PERITUS SOFTWARE SERVICES, INC.
1997 EMPLOYEE STOCK PURCHASE PLAN
The first paragraph of the Peritus Software Services, Inc. 1997 Employee
Stock Purchase Plan (the "Plan") is hereby amended, subject to stockholder
approval, to increase from 200,000 to 300,000 the number of shares of Common
Stock, $.01 par value per share, authorized for issuance under the Plan
(subject to adjustment under Section 15 of the Plan).
Section 3 of the Plan is hereby amended, subject to stockholder approval, to
increase from 50,000 to 100,000 the maximum number of shares, together with
any shares remaining unsold from any prior Plan Period, of Common Stock
available under each Offering during each of the third and last Plan Periods.
Capitalized terms used and not otherwise defined herein shall have the
meanings ascribed to them in the Plan.
Adopted by the Board of Directors on
April 21, 1998
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