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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1997
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ______________ TO
______________
COMMISSION FILE NUMBER 0-22647
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PERITUS SOFTWARE SERVICES, INC.
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(Exact Name of Registrant as Specified in Its Charter)
Massachusetts 04-3126919
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(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
304 Concord Road, Billerica, Massachusetts 01821
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(Address of Principal Executive Offices) (Zip Code)
(978) 670-0800
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(Registrant's Telephone Number, Including Area Code)
Not Applicable
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(Former Name, Former Address and Former Fiscal Year,
If Changed Since Last Report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X. No .
--- ---
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date:
Shares outstanding
Title of Class at November 7, 1997
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Common Stock, $.01 par value 13,170,356
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PERITUS SOFTWARE SERVICES INC.
FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1997
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Part I Financial Information Page
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<S> <C> <C>
Item 1. Financial Statements
Consolidated Balance Sheet
as of September 30, 1997 and December 31, 1996 3
Consolidated Statement of Operations
for the Three and Nine Months Ended September 30, 1997 and 1996 4
Consolidated Statement of Cash Flows
for the Nine Months Ended September 30, 1997 and 1996 5
Notes to Unaudited Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 8
Part II Other Information
Item 2. Changes in Securities and Use of Proceeds 16
Item 6. Exhibits and Reports on Form 8-K 17
Signatures 18
</TABLE>
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PERITUS SOFTWARE SERVICES, INC.
CONSOLIDATED BALANCE SHEET
(In thousands, except share and per share-related data)
(Unaudited)
<TABLE>
<CAPTION>
September December
30, 31,
1997 1996
--------- ----------
<S> <C> <C>
Asset
Current assets:
Cash and cash equivalents....................................................... $ 46,292 $ 7,388
Accounts receivable, net of allowance for doubtful accounts of $45 and $30,
respectively, and including amounts receivable from related parties of $114
and $260, respectively........................................................ 7,169 4,163
Costs and estimated earnings in excess of billings on uncompleted contracts,
including amounts on uncompleted contracts with related parties of $160 and
$562, respectively............................................................ 1,619 2,195
Unbilled license revenue from related party..................................... -- 1,400
Prepaid expenses and other current assets....................................... 570 119
---------- ---------
Total current assets.......................................................... 55,650 15,265
Property and equipment, net....................................................... 2,486 1,970
Other assets...................................................................... 670 490
---------- ---------
$ 58,806 $ 17,725
========== =========
Liabilities, Redeemable Stock and Stockholders' Equity
Current liabilities:
Current portion of capital lease obligations.................................... $ 53 $ 74
Current portion of long-term debt............................................... 225 225
Accounts payable................................................................ 912 497
Billings in excess of costs and estimated earnings on uncompleted contracts..... 726 902
Deferred revenue................................................................ 1,382 3,262
Other accrued expenses and current liabilities.................................. 2,604 2,087
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Total current liabilities..................................................... 5,902 7,047
Capital lease obligations......................................................... 157 201
Long-term debt.................................................................... 425 1,337
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Total liabilities............................................................. 6,484 8,585
---------- ---------
Minority interest in consolidated subsidiary...................................... 169 155
---------- ---------
Redeemable convertible preferred stock, no par value:
Series A--1,903,525 shares authorized, issued and outstanding at issuance
Cost plus accretion and accrued dividends (liquidation preference $7,281,000). -- 5,912
Series B--1,818,182 shares authorized, issued and outstanding at issuance
Cost plus accretion and accrued dividends (liquidation preference $6,000,000). -- 6,107
Redeemable common stock right..................................................... -- 268
---------- ---------
-- 12,287
---------- ---------
Stockholders' equity:
Common stock, $.01 par value; 50,000,000 and 0 shares authorized, respectively;
13,162,236 and 0 shares issued and outstanding, respectively 132 --
Class A common stock, no par value; 0 and 13,295,000 shares authorized,
respectively; 0 and 6,033,614 shares issued and outstanding, respectively..... -- 2,207
Class B non-voting common stock, no par value; 0 and 275,000 shares
authorized, respectively; 0 and 101,196 shares issued and
outstanding, respectively..................................................... -- 164
Additional paid-in capital...................................................... 56,461 --
Accumulated deficit............................................................. (4,315) (5,593)
Note receivable from stockholder................................................ (58) (58)
Cumulative translation adjustment............................................... (67) (22)
---------- ---------
Total stockholders' equity (deficit).......................................... 52,153 (3,302)
---------- ---------
$ 58,806 $ 17,725
========== =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
3
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PERITUS SOFTWARE SERVICES, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
(In thousands, except per share-related data)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Nine Months
Ended Ended
September 30, September 30,
------------------- -------------------
1997 1996 1997 1996
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Revenue:
Outsourcing services, including $959, $1,325, $2,912
and $3,770 from related parties, respectively........... $ 2,979 $ 2,611 $ 8,542 $ 7,369
License.................................................... 5,157 2,424 13,944 2,469
Other services............................................. 1,716 610 4,207 1,715
------- ------- -------- -------
Total revenue............................................ $ 9,852 $ 5,645 $ 26,693 $11,553
------- ------- -------- -------
Cost of revenue:
Cost of outsourcing services including $615, $517, $1,580
and $1,510 from related parties, respectively............ $ 2,444 $ 1,977 $ 6,847 $ 6,410
License.................................................... 155 40 430 40
Cost of other services..................................... 1,280 816 3,606 1,994
------- ------- -------- -------
Total cost of revenue.................................... 3,879 2,833 10,883 8,444
------- ------- -------- -------
Gross profit................................................. 5,973 2,812 15,810 3,109
------- ------- -------- -------
Operating expenses:
Sales and marketing........................................ 2,197 668 5,615 2,051
Research and development................................... 1,975 1,506 5,578 4,267
General and administrative................................. 1,053 763 2,853 2,218
------- ------- -------- -------
Total operating expenses................................. 5,225 2,937 14,046 8,536
------- ------- -------- -------
Income (loss) from operations............................ 748 (125) 1,764 (5,427)
Interest (expense) income, net............................... 462 (77) 482 (176)
------- ------- -------- -------
Income (loss) before estimated income taxes and
Minority interest........................................ 1,210 (202) 2,246 (5,603)
Provision for (benefit from) estimated income taxes.......... 50 (1) 222 (205)
Minority interest in consolidated subsidiary................. 6 (5) (14) 15
------- ------- -------- -------
Net income (loss)........................................ $ 1,166 $ (206) $ 2,010 $(5,383)
======= ======= ======== =======
Pro forma net income (loss) per share assuming conversion of
convertible preferred stock.................................. $ 0.07 $ (0.02) $ 0.14 $ (0.51)
======= ======= ======== =======
Shares used in computing pro forma net income
(loss) per share......................................... 16,228 11,083 13,910 10,539
======= ======= ======== =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
4
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PERITUS SOFTWARE SERVICES, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
----------------------
1997 1996
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<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 2,010 $(5,383)
Adjustments to reconcile net income (loss) to net cash provided by (used in)
operating activities:
Depreciation and amortization........................................... 797 613
Minority interest in consolidated subsidiary............................ 14 19
Non-cash employee compensation.......................................... -- 118
Changes in assets and liabilities, net of effects from acquisition:
Accounts receivable................................................ (3,006) 43
Costs and estimated earnings in excess of
billings on uncompleted contracts............................... 235 680
Unbilled license revenue from related parties...................... 1,741 (1,400)
Prepaid expenses and other current assets.......................... (451) 175
Other assets....................................................... 37 27
Accounts payable................................................... 415 (136)
Billings in excess of costs and earnings on uncompleted contracts.. (176) 226
Deferred revenue................................................... (1,880) 238
Other accrued expenses and current liabilities..................... 523 691
Deferred income taxes.............................................. -- (186)
------- -------
Net cash provided by (used in) operating activities........... 259 (4,275)
------- -------
Cash flows from investing activities:
Cash of business acquired for common stock, net of costs paid in cash........ -- 174
Investment in subsidiary..................................................... (272) --
Purchases of property and equipment.......................................... (1,262) (926)
------- -------
Net cash used in investing activities......................... (1,534) (752)
------- -------
Cash flows from financing activities:
Proceeds from short-term borrowings, net of repayments....................... -- 536
Proceeds from long-term debt................................................. 200 450
Principal payments on long-term debt......................................... (1,112) (211)
Principal payments on capital lease obligations.............................. (65) (73)
Proceeds from exercise of stock options...................................... 37 6
Proceeds from issuance of common stock, net of issuance costs................ 40,664 --
Proceeds from sale of redeemable convertible preferred
stock and redeemable common stock, net of issuance costs.................. -- 5,408
Proceeds from exercise of common stock warrants.............................. 500 --
Treasury stock acquired...................................................... -- (531)
------- -------
Net cash provided by financing activities..................... 40,224 5,585
------- -------
Effects of exchange rates on cash and cash equivalents............................ (45) (21)
------- -------
Net increase in cash and cash equivalents......................................... 38,904 537
Cash and cash equivalents, beginning of period.................................... 7,388 264
------- -------
Cash and cash equivalents, end of period.......................................... $ 46,292 $ 801
======= =======
Supplemental disclosures of cash flows:
Cash paid for income taxes................................................... $ 60 $ --
Cash paid for interest....................................................... 142 213
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
5
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PERITUS SOFTWARE SERVICES, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation
The accompanying consolidated financial statements include the accounts of
Peritus Software Services, Inc. and its subsidiaries (the "Company") and have
been prepared by the Company without audit in accordance with the Company's
accounting policies, as described in the Registration Statement on Form S-1,
Registration No. 333-27087. In the opinion of management, the accompanying
consolidated financial statements contain all adjustments, consisting only of
those of a normal recurring nature, necessary for a fair presentation of the
Company's financial position, results of operations and cash flows at the dates
and for the periods indicated. While the Company believes that the disclosures
presented are adequate to make the information not misleading, these financial
statements should be read in conjunction with the audited consolidated financial
statements and related notes included in the Company's Registration Statement on
Form S-1, Registration No. 333-27087. The operating results for the three and
nine months ended September 30, 1997 are not necessarily indicative of the
results to be expected for the full year ending December 31, 1997.
2. Unaudited Pro Forma Net Income (Loss) Per Share
Unaudited pro forma net income (loss) per share is determined by dividing
the net income (loss) attributable to common stockholders by the weighted
average number of shares of common stock and common stock equivalents
outstanding during the period, assuming the conversion of all convertible
preferred stock and the redeemable common stock right as of the beginning of
each period or date of issuance, if later. Conversion of all convertible
preferred stock and the redeemable common stock right occurred upon the closing
of the Company's initial public offering of its common stock (see Note 3).
Pursuant to Securities and Exchange Commission Staff Accounting Bulletin
No. 83, common stock equivalents, regardless of their anti-dilutive impact,
issued at prices below the offering price per share during the twelve months
preceding the initial filing of the Company's Registration Statement and through
the effective date of the initial public offering of the Company's common stock
have been included in the calculation of unaudited pro forma net income (loss)
per share using the treasury stock method as if outstanding since the beginning
of each period presented through March 31, 1997.
3. Capital Stock
On July 8, 1997, the Company closed its initial public offering of
4,025,000 shares of common stock, 2,800,000 of which were sold by the Company
and the balance by selling stockholders, at a public offering price of $16 per
share. The proceeds to the Company from the offering, net of offering expenses,
were approximately $40,664,000. The Company used a portion of the net proceeds
to repay a secured subordinated note payable. The Company plans to use the
remaining proceeds for the acquisition of Millennium Dynamics, Inc. (see Note 5)
and for research and development, working capital and general corporate
purposes. In connection with closing the initial public offering, all
outstanding shares of Series A and B preferred stock and Class B common stock
automatically converted into 3,822,903 shares of common stock, and the
redeemable common stock right automatically terminated.
4. Recently Issued Accounting Standards
In February 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 128 "Earnings Per
Share", which will require adoption during the year ending December 31, 1997.
This statement specifies the computation, presentation and disclosure
requirements of earnings per share. The new standard replaces the presentation
of primary earnings per share prescribed by Accounting Principles Board Opinion
("APB") No. 15, "Earnings per Share" with a presentation of basic earnings per
share and also requires dual presentation of basic and diluted earnings per
share on the face of the statement of operations for all entities with complex
capital structures. Basic earnings per share excludes dilution and is computed
by dividing
6
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income available to common stockholders by the weighted-average number of common
shares outstanding for the period. Diluted earnings per share is computed
similarly to fully diluted earnings per share pursuant to APB No. 15. The
Company will be required to implement SFAS No. 128 in the fourth quarter ending
December 31, 1997 and to restate all prior periods. If the Company had been
required to implement the guidance in SFAS No. 128 during the three and nine
month periods ended September 30, 1997, the following unaudited pro forma
earnings per share amounts would have been reported.
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, 1997 September 30, 1997
------------------ ------------------
Unaudited pro forma net income per common share:
<S> <C> <C>
Basic $ 0.09 $ 0.22
==== ====
Diluted $ 0.07 $ 0.14
==== ====
Weighted average number of common shares 12,432 9,207
====== =====
Weighted average number of common and potential dilutive 16,228 13,913
common shares ====== ======
</TABLE>
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income." This statement establishes standards for the reporting and display of
comprehensive income and its components. Comprehensive income is defined as the
change in equity of a business enterprise during a period from transactions and
other events and circumstances from non-owner sources. It includes all changes
in equity during a period except those resulting from investments by owners and
distributions to owners. This standard will require that an enterprise display
an amount representing total comprehensive income for the period. SFAS No. 130
will be effective for the Company's year ending December 31, 1998. Adoption of
SFAS No. 130 is for presentation only and will not affect the Company's
financial position or results of operations.
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of
an Enterprise and Related Information" which supersedes SFAS No. 14. This
statement changes the way that public business enterprises report segment
information, including financial and descriptive information about their
selected segment information. Operating segments are defined as
revenue-producing components of the enterprise which are generally used
internally for evaluating segment performance. SFAS No. 131 will be effective
for the Company's year ending December 31, 1998 and will not affect the
Company's financial position or results of operations.
In October 1997, the Accounting Standards Executive Committee of the
American Institute of Certified Public Accountants issued Statement of Position
(SOP) 97-2, "Software Revenue Recognition." SOP 97-2 provides guidance on the
timing and amount of revenue recognition when licensing, selling, leasing or
otherwise marketing computer software. SOP 97-2 supersedes SOP 91-1 (also
entitled "Software Revenue Recognition") and is effective for transactions
entered into during fiscal years beginning after December 15, 1997. The Company
will be required to adopt SOP 97-2 for its fiscal year ending December 31,
1998. The Company has determined that SOP 97-2 will not affect the Company's
financial position or results of operations.
5. Subsequent Event
On October 22, 1997, the Company entered into a purchase and sale
agreement to acquire substantially all of the assets and certain liabilities of
Millennium Dynamics, Inc. ("MDI"), a wholly-owned subsidiary of American Premier
Underwriters, Inc. ("APU"). MDI provides software tools for a broad range of
mainframe and midrange platforms and languages and consultation services that
enable organizations to address their "year 2000 problem". Upon completion of
the acquisition, the Company will pay $30 million in cash and issue 2,175,000
unregistered shares of its common stock to APU, and MDI's assets and certain of
its liabilities will be transferred to the Company. The Company will account for
the acquisition as a purchase under APB No. 16, with all assets acquired and
liabilities assumed being recorded at their fair values at the date of closing.
The acquisition is subject to certain regulatory approvals and is expected to
close during the fourth quarter of 1997.
7
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Overview
Peritus Software Services, Inc. ("Peritus" or the "Company") was founded in
1991 to address the growing market for managing and maintaining the installed
base of software in organizations. The Company focused its efforts on the
delivery of software maintenance outsourcing services until 1995, when it began
to devote significant resources to the development of software tools addressing
the problems associated with mass changes to application systems and their
associated databases, particularly the year 2000 problem. In 1996, the Company
began licensing its AutoEnhancer/2000 software, which was designed to address
the year 2000 problem, to value added integrators and directly to end users. In
1996, the Company expanded its research and development efforts through the
acquisition of Vista Technologies Incorporated, a developer of computer-aided
engineering software ("Vista"). During the quarter ended September 30, 1997, the
Company expanded its product offering by releasing an enhanced version of the
AutoEnhancer/2000 software which enables a client to perform logic correction
only changes with regard to year 2000 renovations.
The Company derives its revenue from software maintenance outsourcing
services, software and methodology licensing and other services sold directly to
end users or indirectly via value added integrators and distributors, and its
clients include primarily Fortune 1000 companies and similarly sized business
and government organizations worldwide. The Company's products and services are
marketed through its direct sales force, both domestically and in Spain, through
value added integrators operating worldwide and through international
distributors in Canada, Italy and Japan.
On July 8, 1997, the Company closed its initial public offering of
4,025,000 shares of common stock, 2,800,000 of which were sold by the Company
and the balance by selling stockholders, at a price of $16 per share. The
proceeds to the Company from the offering, net of offering expenses, were
approximately $40,664,000. The Company used $500,000 of the net proceeds to
repay a secured subordinated note payable. The Company plans to use the
remaining proceeds for the acquisition of Millennium Dynamics, Inc. ("MDI"),
research and development, and working capital and general corporate purposes. In
connection with closing the initial public offering, all outstanding shares of
Series A and B preferred stock and Class B common stock automatically converted
into 3,822,903 shares of common stock, and the redeemable common stock right
automatically terminated.
On October 22, 1997, the Company and its wholly-owned subsidiary, Twoquay,
Inc., entered into a purchase and sale agreement to acquire substantially all of
the assets and certain liabilities of MDI, a wholly owned subsidiary of American
Premier Underwriters, Inc. ("APU"). MDI provides software tools for a broad
range of mainframe and midrange platforms and languages and consultation
services that enable organizations to address their "year 2000 problem". Upon
completion of the acquisition, the Company will pay $30 million in cash and
issue 2,175,000 unregistered shares of its common stock to APU, and MDI's assets
and certain of its liabilities will be transferred to Twoquay, Inc. The Company
will account for the acquisition as a purchase under APB No. 16, with all assets
acquired and liabilities assumed being recorded at their fair values at the date
of closing. The acquisition is subject to certain regulatory approvals and is
expected to close during the fourth quarter of 1997.
Three Months Ended September 30, 1997 Compared to Three Months Ended
September 30, 1996
Revenue
Total revenue increased 74.5% to $9,852,000 in the three months ended
September 30, 1997 from $5,645,000 in the three months ended September 30, 1996.
This increase was primarily due to the licensing of the Company's
AutoEnhancer/2000 software, as well as from increases in other services revenue
and, to a lesser extent, outsourcing services revenue. International revenue
increased 21.5% to $801,000 in the three months ended September 30, 1997
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from $659,000 in the three months ended September 30, 1996. A majority of all of
the Company's international revenue for the three months ended September 30,
1997 and 1996 was attributable to revenue generated by Persist, S.A.
("Persist"), the Company's majority-owned Spanish subsidiary.
Outsourcing Services. Outsourcing services revenue increased 14.1% to
$2,979,000 in the three months ended September 30, 1997 from $2,611,000 in the
three months ended September 30, 1996. As a percentage of total revenue,
outsourcing services revenue decreased to 30.2% in the three months ended
September 30, 1997 from 46.3% in the three months ended September 30, 1996. The
increase in outsourcing services revenue in absolute dollars was primarily
attributable to the addition of two new outsourcing contracts in late 1996 and
one in 1997 and was partially offset by the recognition of lesser amounts of
revenue under the percentage-of-completion method on existing outsourcing
contracts that were in their later phases. The decrease in outsourcing services
revenue as a percentage of total revenue reflects the greater contribution of
license revenue to total revenue during the three months ended September 30,
1997 when compared to the same three months in the prior year. Outsourcing
services remain a major component of the solutions offered by the Company, and
the Company anticipates that such services will continue to account for a
significant portion of total revenue for the foreseeable future.
License. License revenue was $5,157,000 in the three months ended September
30, 1997 or 52.3% of total revenue. The Company recognized $2,424,000 in license
revenue in the three months ended September 30, 1996 or 42.9% of total revenue.
The increase in license revenue for the three months ended September 30, 1997
was primarily attributable to the delivery of licensed software to additional
end users and to increased license fees from value added integrators.
Other Services. Other services revenue increased 181.3% to $1,716,000 in
the three months ended September 30, 1997 from $610,000 in the three months
ended September 30, 1996. As a percentage of total revenue, other services
revenue was 17.4% in the three months ended September 30, 1997 compared to 10.8%
in the three months ended September 30, 1996. The increase in other services
revenue in absolute dollars was primarily attributable to an increase in
consulting, training and client support services relating to the Company's year
2000 products and services.
Cost of Revenue
Cost of Outsourcing Services Revenue. Cost of outsourcing services revenue
consists primarily of salaries, benefits and overhead costs associated with
delivering outsourcing services to clients. The cost of outsourcing services
revenue increased 23.6% to $2,444,000 in the three months ended September 30,
1997 from $1,977,000 for the three months ended September 30, 1996. Cost of
outsourcing services revenue increased as a percentage of outsourcing services
revenue to 82.0% in the three months ended September 30, 1997 from 75.7% in the
three months ended September 30, 1996. The increase in the cost of outsourcing
services revenue as a percentage of outsourcing services revenue was due
primarily to the addition of resources necessary to provide services under new
outsourcing contracts.
Cost of License Revenue. Cost of license revenue consists primarily of
salaries, benefits and related overhead costs associated with license-related
materials packaging and freight. Cost of license revenue was $155,000 in the
three months ended September 30, 1997, or 1.6% of license revenue. Cost of
license revenue was $40,000 in the three months ended September 30, 1996. The
increase in cost of license revenue in absolute dollars was primarily
attributable to the addition of employees and related resources to support
additional end users and value added integrators.
Cost of Other Services Revenue. Cost of other services revenue consists
primarily of salaries, benefits and related overhead costs associated with
delivering other services to clients. Cost of other services revenue increased
56.9% to $1,280,000 in the three months ended September 30, 1997 from $816,000
in the three months ended September 30, 1996. Cost of other services revenue as
a percentage of other services revenue decreased to 74.6% in the three months
ended September 30, 1997 from 133.7% in the three months ended September 30,
1996. Costs exceeded revenues in the three months ended September 30, 1996
primarily as a result of expected overruns on one significant pilot engagement,
which subsequently became a significant product license. Costs increased in
absolute dollars in the three months ended September 30, 1997 due to additional
staffing in the Company's client support,
9
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training and consulting organizations related to additional customers for the
Company's year 2000 products and services.
Operating Expenses
Sales and Marketing. Sales and marketing expenses consist primarily of
salaries, commissions and related overhead costs for Company personnel; sales
referral fees to third parties; advertising programs; and other promotional
activities. Sales and marketing expenses increased 228.9% to $2,197,000 in the
three months ended September 30, 1997 from $668,000 in the three months ended
September 30, 1996. As a percentage of total revenue, sales and marketing
expenses increased to 22.3% in the three months ended September 30, 1997 from
11.8% in the three months ended September 30, 1996. The increase in expenses in
absolute dollars and as a percentage of revenue was primarily attributable to
increased staffing, commissions, including an increase in sales referral fees to
third parties, and promotional activities in conjunction with the launch of the
Company's AutoEnhancer/2000 software in late 1996. The Company intends to
increase the amount of expenditures for sales and marketing in 1997, both
domestically and internationally.
Research and Development. Research and development expenses consist
primarily of salaries, benefits and related overhead costs for engineering and
technical personnel and outside engineering consulting services associated with
developing new products and enhancing existing products. Research and
development expenses increased 31.1% to $1,975,000 in the three months ended
September 30, 1997 from $1,506,000 in the three months ended September 30, 1996.
As a percentage of total revenue, research and development expenses decreased to
20.0% in the three months ended September 30, 1997 from 26.7% in the three
months ended September 30, 1996. The increase in research and development
expenses in absolute dollars was primarily attributable to increased staffing
for the product development efforts for the Company's year 2000 products and
services and mass change technologies, including an increase in staffing
effected through new hires and internal transfers. The Company intends to employ
additional research and development staff and therefore anticipates that
research and development expenses will continue to increase in absolute dollars
in 1997.
General and Administrative. General and administrative expenses consist
primarily of salaries and related costs for the finance and accounting, human
resources, legal services, information systems and other administrative
departments of the Company, as well as legal and accounting expenses and the
amortization of goodwill associated with the Vista acquisition. General and
administrative expenses increased 38.0% to $1,053,000 in the three months ended
September 30, 1997 from $763,000 in the three months ended September 30, 1996.
As a percentage of total revenue, general and administrative expenses decreased
to 10.7% in the three months ended September 30, 1997 from 13.5% in the three
months ended September 30, 1996. The increase in general and administrative
expenses in absolute dollars was primarily due to additions to the Company's
administrative staff to support growth, higher professional fees and increases
in other general corporate expenses. The Company anticipates that general and
administrative expenses will increase in absolute dollars in 1997 in part due to
increased costs associated with being a publicly held company.
Interest Income (Expense), Net. Interest income (expense), net is primarily
composed of interest income from cash balances and interest expense on debt. The
Company had interest income, net of $462,000 in the three months ended September
30, 1997 compared to interest expense, net of $77,000 in the three months ended
September 30, 1996. This change in interest income (expense), net was primarily
attributable to increased interest income from increased cash balances resulting
from the Company's initial public offering.
Provision For (Benefit From) Income Taxes. The Company recorded an income
tax provision of $50,000 in the three months ended September 30, 1997 versus a
benefit of $1,000 in the three months ended September 30, 1996. The provision
was the result of an increase in taxable income and international taxes, which
was substantially offset by the Company's expected utilization in 1997 of
previously generated net operating loss carryforwards.
Minority Interest in Consolidated Subsidiary. The minority interest in
consolidated subsidiary represents the equity interest in the operating results
of Persist, the Company's majority-owned Spanish subsidiary, held by
10
<PAGE>
stockholders of Persist other than the Company. The minority interest in
consolidated subsidiary decreased to a loss of $6,000 in the three months ended
September 30, 1997 from income of $5,000 in the three months ended September 30,
1996. This change was the result of the decreased profitability of Persist. At
September 30, 1997 and 1996, the Company held a 63.7% equity interest in
Persist.
Nine Months Ended September 30, 1997 Compared to Nine Months Ended
September 30, 1996
Revenue
Total revenue increased 131.0% to $26,693,000 in the nine months ended
September 30, 1997 from 11,553,000 in the nine months ended September 30, 1996.
This increase was primarily due to an increase in the licensing of the Company's
AutoEnhancer/2000 software, as well as from increases in other services revenue
and, to a lesser extent, outsourcing services revenue. International revenue
increased 62.7% to $2,101,000 in the nine months ended September 30, 1997 from
$1,291,000 in the nine months ended September 30, 1996. Substantially all of the
Company's international revenue for the nine months ended September 30, 1997 and
1996 was attributable to revenue generated by Persist.
Outsourcing Services. Outsourcing services revenue increased 15.9% to
$8,542,000 in the nine months ended September 30, 1997 from $7,369,000 in the
nine months ended September 30, 1996. As a percentage of total revenue,
outsourcing services revenue decreased to 32.0% in the nine months ended
September 30, 1997 from 63.8% in the nine months ended September 30, 1996. The
increase in outsourcing services revenue in absolute dollars was primarily
attributable to the addition of two new outsourcing contracts in late 1996 and
one in 1997 and was partially offset by the recognition of lesser amounts of
revenue under the percentage-of-completion method on existing outsourcing
contracts that were in their later phases. The decrease in outsourcing services
revenue as a percentage of total revenue reflects the increased contribution of
license revenue to total revenue during the nine months ended September 30, 1997
when compared to the same period in the prior year.
License. License revenue was $13,944,000 in the nine months ended September
30, 1997 or 52.2% of total revenue, compared to $2,469,000 or 21.4% of total
revenue in the nine months ended September 30, 1996. The Company's license
revenue in the nine months ended September 30, 1997 was primarily attributable
to the delivery of licensed software to additional end users and to increased
license fees from value added integrators.
Other Services. Other services revenue increased 145.3% to $4,207,000 in
the nine months ended September 30, 1997 from $1,715,000 in the nine months
ended September 30, 1996. As a percentage of total revenue, other services
revenue was 15.8% in the nine months ended September 30, 1997 compared to 14.8%
in the nine months ended September 30, 1996. The increase in other services
revenue in absolute dollars was primarily attributable to an increase in
consulting, training and client support services relating to the Company's year
2000 products and services.
Cost of Revenue
Cost of Outsourcing Services Revenue. The cost of outsourcing services
revenue increased 6.8% to $6,847,000 in the nine months ended September 30, 1997
from $6,410,000 in the nine months ended September 30, 1996. Cost of outsourcing
services revenue decreased as a percentage of outsourcing services revenue to
80.2% in the nine months ended September 30, 1997 from 87.0% in the nine months
ended September 30, 1996. The decrease in the cost of outsourcing services
revenue as a percentage of outsourcing services revenue was due primarily to the
re-deployment in late 1996 of underutilized resources to research and
development and support activities, partially offset by the addition of
resources necessary to provide services under the new outsourcing contracts.
Cost of License Revenue. Cost of license revenue was $430,000 in the nine
months ended September 30, 1997, or 1.6% of license revenue. Cost of license
revenue was $40,000 in the nine months ended September 30, 1996, or 1.6% of
license revenue.
11
<PAGE>
The increase in cost of revenue in absolute dollars was primarily attributable
to the addition of employees and related resources to support additional end
users and value added integrators.
Cost of Other Services Revenue. Cost of other services revenue increased
80.8% to $3,606,000 in the nine months ended September 30, 1997 from $1,994,000
in the nine months ended September 30, 1996. Cost of other services revenue as a
percentage of other services revenue decreased to 85.7% in the nine months ended
September 30, 1997 from 116.3% in the nine months ended September 30, 1996. Cost
of other services revenue increased in absolute dollars due to additional
staffing in the Company's client support training and consulting organization
related to increased customers of the Company's year 2000 products and services.
Costs exceeded revenue in the nine months ended September 30, 1996 primarily as
a result of expected cost overruns on one significant pilot engagement, which
subsequently became a significant product license.
Operating Expenses
Sales and Marketing. Sales and marketing expenses increased 173.8% to
$5,615,000 in the nine months ended September 30, 1997 from $2,051,000 in the
nine months ended September 30, 1996. As a percentage of total revenue, sales
and marketing expenses increased to 21.0% in the nine months ended September 30,
1997 from 17.8% in the nine months ended September 30, 1996. The increase in
expenses in absolute dollars was primarily attributable to increased staffing,
commissions, including an increase in sales referral fees to third parties, and
promotional activities in conjunction with the launch of the Company's
AutoEnhancer/2000 software in late 1996.
Research and Development. Research and development expenses increased 30.7%
to $5,578,000 in the nine months ended September 30, 1997 from $4,267,000 in the
nine months ended September 30, 1996. As a percentage of total revenue, research
and development expenses decreased to 20.9% in the nine months ended September
30, 1997 from 36.9% in the nine months ended September 30, 1996. The increase in
research and development expenses in absolute dollars was primarily attributable
to increased staffing for the product development efforts for the Company's year
2000 products and services and mass change technologies, including an increase
in staffing effected through new hires and internal transfers.
General and Administrative. General and administrative expenses increased
28.6% to $2,853,000 in the nine months ended September 30, 1997 from $2,218,000
in the nine months ended September 30, 1996. As a percentage of total revenue,
general and administrative expenses decreased to 10.7% in the nine months ended
September 30, 1997 from 19.2% in the nine months ended September 30, 1996. The
increase in general and administrative expenses in absolute dollars was
primarily due to additions to the Company's administrative staff, higher
professional fees and increases in other general corporate expenses related to
being a publicly held company.
Interest Income (Expense), Net. Interest income, net of $482,000 in the
nine months ended September 30, 1997 compares to interest expense, net of
$176,000 in the nine months ended September 30, 1996. This change was primarily
attributable to increased interest income from increased cash balances relating
to the Company's initial public offering, as well as to decreased interest
expense on lesser borrowings by the Company.
Provision For (Benefit From) Income Taxes. The Company recorded an income
tax provision of $222,000 in the nine months ended September 30, 1997 versus a
benefit of $205,000 in the nine months ended September 30, 1996. The provision
was the result of an increase in taxable income and international taxes, which
was substantially offset by the Company's expected utilization in 1997 of
previously generated net operating loss carryforwards.
Minority Interest in Consolidated Subsidiary. The minority interest in
consolidated subsidiary increased to income of $14,000 in the nine months ended
September 30, 1997 from a loss of $15,000 in the nine months ended September 30,
1996. This change was the result of the increased profitability of Persist.
At September 30, 1997 and 1996, the Company held a 63.7% equity interest in
Persist.
12
<PAGE>
Liquidity and Capital Resources
The Company has financed its operations and capital expenditures primarily
with the proceeds from sales of the Company's Convertible Preferred Stock and
Common Stock, borrowings, advance payments for services from clients and
internally generated cash flows. The Company's cash balances were $46,292,000
and $7,388,000 at September 30, 1997 and December 31, 1996, respectively. The
Company's working capital was $49,748,000 and $8,218,000, at September 30, 1997
and December 31, 1996, respectively. On July 8, 1997, the Company closed an
initial public offering of 4,025,000 shares (2,800,000 of which were offered by
the Company and the balance by selling stockholders) of common stock at a price
of $16.00 per share. The net proceeds to the Company from the offering after
deducting offering expenses were approximately $40,664,000. The Company plans to
use such proceeds for repayment of certain existing indebtedness, research and
development, working capital and general corporate purposes and possible
acquisitions, including the acquisition of MDI.
The Company's operating activities provided cash of $259,000 and used cash
of $4,275,000 during the nine months ended September 30, 1997 and September 30,
1996, respectively. The Company's generation of cash during the nine months
ended September 30, 1997 was primarily caused by net income of $2,010,000 plus
non-cash depreciation and amortization expense of $797,000 and a decrease in
unbilled license revenue from related parties of $1,741,000. These increases
were partially offset by an increase in accounts receivable of $3,006,000 and a
decrease in deferred revenue of $1,880,000.
The Company used cash of $1,534,000 and $752,000 for investing activities
during the nine months ended September 30, 1997 and September 30, 1996,
respectively. Investing activities have consisted principally of the acquisition
of property and equipment, most notably computer equipment and software to
support the growing employee base and corporate infrastructure. Although the
Company has no significant commitments for capital expenditures in 1997, the
Company expects to continue to purchase property and equipment to further
develop its infrastructure.
The Company's financing activities provided cash of $40,224,000 and
$5,585,000 during the nine months ended September 30, 1997 and 1996,
respectively. The 1997 period includes the net proceeds of the Company's July 8,
1997 initial public offering. In March 1996, the Company raised aggregate net
proceeds of $5,408,000 in private placements of the Company's convertible
preferred stock and common stock. Net proceeds from the sales of such shares
were used for the Company's general working capital needs, to make scheduled
debt payments and for treasury stock acquisitions. The Company believes that the
net proceeds from the sale of common stock in its initial public offering,
together with cash generated from operations and existing cash balances and
advances available under its revolving credit line agreement will be adequate to
finance its capital requirements for at least the next twelve months, including
the cash portion of the MDI acquisition. To the extent that such amounts are
insufficient to finance the Company's capital requirements, the Company will be
required to raise additional funds through equity or debt financing. No
assurance can be given that such financing will be available on terms acceptable
to the Company and, if available, such financing may result in further dilution
to the Company's stockholders and higher interest expense.
In May 1995, the Company issued a secured subordinated note payable for
approximately $924,000 with a face value of $1,000,000 and interest payable at
10% per annum. The note is subordinate to any bank debt and is collateralized by
a second security interest in all of the assets of the Company. In addition, the
note carries a prepayment premium and contains various restrictive covenants
including, but not limited to, minimum earnings and limitations on certain
interest coverage, debt and equity ratios. The note also included warrants with
an ascribed value of approximately $76,000 for the purchase of up to 312,500
shares of Common Stock for $1.60 per share. These warrants were exercised in
July 1997. In July 1997, the Company used $500,000 of the net proceeds of the
initial public offering to repay the note in full.
In September 1996, the Company obtained a revolving line of credit facility
from a bank which bears interest at the bank's prime rate plus 0.5% (9.0% at
September 30, 1997). The maximum borrowing under this line of credit is
$3,500,000 and is limited to 75% of certain receivables plus 50% of costs and
estimated earnings in excess of billings on uncompleted contracts, as defined by
the line of credit agreement. The line of credit, which was extended on June 20,
1997, expires and all borrowings are payable in full on June 30, 1998. In
addition to this line of credit,
13
<PAGE>
the Company also entered into an equipment financing agreement in September
1996. Under this agreement, the bank agreed to provide up to $1,500,000 for the
purchase of certain equipment (as defined by the agreement) through June 30,
1997. Ratable principal and interest payments are payable during the period July
1, 1997 through June 1, 2000, and bear interest at the bank's prime rate plus 1%
(9.5% at September 30, 1997). Both of these agreements require the Company to
comply with certain financial covenants and are secured by all of the assets of
the Company. As of September 30, 1997, there were no borrowings outstanding, and
$3,500,000 remained available, under the revolving credit facility and $650,000
was outstanding under the equipment financing agreement.
On October 22, 1997, the Company entered into a purchase and sale
agreement to acquire through its wholly-owned subsidiary, Twoquay, Inc.,
substantially all of the assets and certain liabilities of MDI, a wholly-owned
subsidiary of APU. MDI provides software tools for a broad range of mainframe
and midrange platforms and languages and consultation services that enable
organizations to address their "year 2000 problem". Upon completion of the
acquisition, the Company will pay $30 million in cash and issue 2,175,000
unregistered shares of its common stock to APU, and MDI's assets and certain of
its liabilities will be transferred to Twoquay, Inc. The Company will account
for the acquisition as a purchase under APB No. 16, with all assets acquired and
liabilities assumed being recorded at their fair values at the date of closing.
The acquisition is subject to certain regulatory approvals and is expected to
close during the fourth quarter of 1997.
To date, the Company has not invested in derivative securities or any other
financial instruments that involve a high level of complexity or risk. Cash has
been and the Company contemplates that it will continue to be invested in
interest-bearing, investment grade securities.
Accounting Pronouncements
In February 1997, the FASB issued SFAS No. 128, Earnings per Share. SFAS
No. 128 specifies modifications to the calculation of earnings per share from
those currently utilized by the Company. Under SFAS No. 128, "basic" earnings
per share will be calculated based upon the weighted average number of common
shares actually outstanding, and "diluted" earnings per share will be calculated
based upon the weighted average number of common shares and dilutive potential
common shares. SFAS No. 128 is effective in the Company's fourth quarter of 1997
and will be adopted at that time. Management believes that the adoption of SFAS
No. 128 will have no significant effect on the reporting of the Company's
results of operations, as the Company has not been required to report historical
earnings per share. In addition, management believes that the adoption of SFAS
No. 128 will have no effect on the Company's financial position or cash flows.
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income." This statement establishes standards for the reporting and display of
comprehensive income and its components. Comprehensive income is defined as the
change in equity of a business enterprise during a period from transactions and
other events and circumstances from non-owner sources. It includes all changes
in equity during a period except those resulting from investments by owners and
distributions to owners. This standard will require that an enterprise display
an amount representing total comprehensive income for the period. SFAS No. 130
will be effective for the Company's year ending December 31, 1998. Adoption of
SFAS No. 130 is for presentation only and will not affect the Company's
financial position or results of operations.
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of
an Enterprise and Related Information" which supersedes SFAS No. 14. This
statement changes the way that public business enterprises report segment
information, including financial and descriptive information about their
selected segment information. Operating segments are defined as
revenue-producing components of the enterprise which are generally used
internally for evaluating segment performance. SFAS No. 131 will be effective
for the Company's year ending December 31, 1998 and will not affect the
Company's financial position or results of operations.
In October 1997, the Accounting Standards Executive Committee of the
American Institute of Certified Public Accountants issued Statement of Position
(SOP) 97-2, "Software Revenue Recognition." SOP 97-2 provides guidance on the
timing and amount of revenue recognition when licensing, selling, leasing or
otherwise marketing computer software. SOP 97-2 supersedes SOP 91-1 (also
entitled "Software Revenue Recognition") and is effective for transactions
entered into during fiscal years beginning after December 15, 1997. The Company
will be required to adopt SOP 97-2 for its fiscal year ending December 31,
1998. The Company has determined that SOP 97-2 will not affect the Company's
financial position or results of operations.
14
<PAGE>
Factors That May Affect Future Results
From time to time, information provided by the Company or statements made by
its employees may contain "forward-looking" statements, as that term is defined
in the Private Securities Litigation Reform Act of 1995. For this purpose, any
statements contained herein that are not statements of historical fact may be
deemed to be forward-looking statements. Without limiting the foregoing, the
words "believes," "anticipates," "plans," "expects," and similar expressions are
intended to identify forward-looking statements.
This Form 10-Q may contain forward looking statements which involve risks
and uncertainties. The Company's actual results may differ materially from the
results discussed in such statements. Certain factors that could cause such a
difference include, without limitation, the risks specifically described in the
Company's Registration Statement on Form S-1, Registration No. 333-27087, filed
with the Securities and Exchange Commission in connection with its recent
initial public offering, which factors are incorporated herein by reference, and
other factors such as the Company's limited operating history, the dependence on
the year 2000 market, the need to develop additional products and services, the
concentration of clients and credit risk, the management of growth and increases
in expenditures in sales and marketing, research and development and finance and
administration, the dependence upon third-party channels and potential for
channel conflict, the impact of competitive products and services and pricing,
competition for qualified technical personnel, the offering of fixed-price,
fixed time-frame contracts rather than contracts on a time and materials basis,
the potential for contract liability related to the provision of year 2000 and
other products and services, limited protection of proprietary rights, rapid
technological change, dependence on key personnel, risks associated with
international operations and offshore development centers, the impact of the
government regulation of immigration, dependence on government contracts,
product or services demand and market acceptance risks, product development and
services capacity, commercialization and technological difficulties, capacity
and supply constraints or difficulties and the effect of general business or
economic conditions, and the operating difficulties and expenditures associated
with acquisitions including the Company's acquisition of MDI.
In addition, the Company's quarterly revenue, expenses and operating
results have varied significantly in the past and are likely to vary
significantly from quarter to quarter in the future. A significant portion of
the Company's revenue in any quarter is typically derived from a limited number
of large client transactions. In addition, the sales cycle associated with these
transactions is lengthy and is subject to a number of uncertainties, including
clients' budgetary constraints, the timing of clients' budget cycles and
clients' internal approval processes. Accordingly, the timing of significant
transactions is unpredictable and, as a result, the Company's revenue and
results of operations for any particular period are subject to significant
variability. The complexity of certain projects and the requirements of
generally accepted accounting principles can also result in a deferral of
revenue recognition, in whole or in part, on a particular contract during a
quarter, even though the contract has been executed or payment has actually been
received by the Company. Quarterly fluctuations may also result from other
factors such as new product and service introductions or announcements of new
products and services by the Company's competitors, changes in the Company's or
its competitors' pricing policies, changes in the mix of distribution channels
through which the Company's products and services are sold, the timing and
nature of sales and marketing expenses, changes in operating expenses, the
financial stability of major clients, changes in the demand for software
maintenance products and services, foreign currency exchange rates and general
economic conditions.
15
<PAGE>
PART II. OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
The Company is furnishing the following information with respect to the
use of proceeds from its initial public offering of common stock, $.01 par value
per share which closed on July 8, 1997:
(1) The effective date of the Registration Statement on Form S-1
for the offering and the commission file number were July 1,
1997 and 333-27087, respectively.
(2) The offering commenced on July 2, 1997.
(3) Not applicable.
(4)(i) The offering terminated on July 2, 1997 after all the shares
were sold.
(ii) The managing underwriters for the offering were
Montgomery Securities, Wessels, Arnold & Henderson, L.L.C. and
H.C. Wainwright & Co., Inc.
(iii) The Company registered shares of the Company's common stock,
$.01 par value per share, in the offering.
(iv) All of the 2,800,000 and 1,225,000 shares of common
stock registered for the accounts of the Company, and the
selling shareholders, respectively, were sold in the offering.
The aggregate offering price of the shares registered and sold
for the accounts of the Company and the selling shareholders
was $44,800,000 and $19,600,000, respectively.
(v) From July 1, 1997 to September 30, 1997, the actual expenses
incurred are as follows:
<TABLE>
<S> <C>
Underwriting discount.............................. $ 3,136,000
SEC registration fee............................... 15,056
NASD filing fee.................................... 5,458
Nasdaq National Market listing fee................. 56,948
Blue Sky fees and expenses......................... 16,105
Transfer Agent and Registrar fees.................. 5,000
Accounting fees and expenses....................... 281,900
Legal fees and expenses............................ 287,091
Printing and mailing expenses...................... 210,316
Miscellaneous...................................... 122,126
-------
Total..................................... $ 4,136,000*
=========
</TABLE>
Payment of expenses were to persons other than directors,
officers, general partners of the Company or their associates,
persons owning 10% or more of the equity securities of the
Company or affiliates of the Company.
* $1,000,000 of the above expenses (excluding the underwriting
discount) incurred will be recorded as offering expenses
netted against the proceeds.
(vi) The net offering proceeds to the Company after expenses were
approximately $40,664,000.
(vii) From July 1, 1997 to September 30, 1997, $500,000 of the
offering proceeds were actually used to repay certain
indebtedness under a secured subordinated note. The balance
of the offering proceeds ($40,164,000) was invested in
commercial paper and money market accounts.
Payment of the offering proceeds were to persons other than
directors, officers, general partners of the Company or their
associates, persons owning 10% or more of the equity
securities of the Company or affiliates of the Company.
(viii) Not applicable.
16
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
Documents listed below, except for documents identified by footnotes, are
being filed as exhibits herewith. Documents identified by footnotes, if
any, are not being filed herewith and, pursuant to Rule 12b-32 of the
General Rules and Regulations promulgated by the Commission under the
Securities Exchange Act of 1934 (the "Exchange Act") reference is made to
such documents as previously filed as exhibits with the Commission. The
Company's file number under the Exchange Act is 0-22647.
Exhibit 11. Statement re computation of per share earnings
Exhibit 27. Financial Data Schedule
(b) Reports on Form 8-K:
None.
17
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Dated: November 13, 1997
Peritus Software Services, Inc.
By: /s/ Allen K. Deary
-------------------------------------
Allen K. Deary
Vice President, Finance and
Chief Financial Officer (Principal
Financial Officer)
18
<PAGE>
Peritus Software Services, Inc.
Exhibit Index
Exhibit No. Description
----------- -----------
11 Computation of earnings per common share
27 Financial Data Schedule
19
<PAGE>
Exhibit 11
Peritus Software Services, Inc.
Statement re computation of unaudited pro forma net income (loss)
per common share
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------------- ----------------------------
1997 1996 1997 1996
----------- ------------- ------------ -------------
<S> <C> <C> <C> <C>
Net income (loss), as reported................................ $ 1,166,000 $ (206,000) $ 2,010,000 $ (5,383,000)
Preferred stock preference items:
Accrual of cumulative dividends on Series A and Series B
redeemable convertible preferred stock..................... -- (182,000) (677,000) (395,000)
Accretion to redemption value of Series A and Series B
redeemable convertible preferred stock..................... -- (33,000) -- (84,000)
Accretion to redemption of redeemable common stock rights..... -- (20,000) (57,000) (41,000)
----------- ------------- ------------ ------------
Total preferred stock preference items........................ (235,000) (734,000) (520,000)
----------- ------------- ------------ ------------
Net income (loss) attributable to common stockholders......... $ 1,166,000 $ (441,000) $ 1,276,000 $ (5,903,000)
----------- ------------- ------------ ------------
Weighted average shares outstanding:
A. Shares attributable to common stock outstanding............ 12,432,066 5,877,866 8,108,863 5,860,479
B. Shares attributable to convertible preferred stock
Outstanding............................................... 263,173 1,903,525 1,363,408 1,376,883
C. Shares attributable to common stock equivalents............ 3,512,442 -- 3,339,460 --
D. Shares pursuant to APB 15. Paragraph 38(a)................. -- 3,301,447 1,100,452 3,301,447
----------- ------------- ------------ ------------
Shares used in computing unaudited pro forma net income
(loss) per share........................................... 16,227,661 11,082,838 13,910,214 10,538,809
----------- ------------- ------------ ------------
Unaudited pro forma net income (loss) per share............... $ 0.07 $ (0.02) $ 0.14 $ (0.51)
==== ===== ==== =====
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED FINANCIAL STATEMENTS OF PERITUS SOFTWARE SERVICES, INC. FOR THE
NINE MONTHS ENDED SEPTEMBER 30, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 46,292
<SECURITIES> 0
<RECEIVABLES> 7,214
<ALLOWANCES> 45
<INVENTORY> 0
<CURRENT-ASSETS> 55,650
<PP&E> 4,604
<DEPRECIATION> 2,118
<TOTAL-ASSETS> 58,806
<CURRENT-LIABILITIES> 5,902
<BONDS> 0
0
0
<COMMON> 132
<OTHER-SE> 52,021
<TOTAL-LIABILITY-AND-EQUITY> 58,806
<SALES> 26,693
<TOTAL-REVENUES> 26,693
<CGS> 10,883
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 14,046
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (482)
<INCOME-PRETAX> 2,246
<INCOME-TAX> 222
<INCOME-CONTINUING> 2,024
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> (14)
<NET-INCOME> 2,010
<EPS-PRIMARY> .14
<EPS-DILUTED> .14
</TABLE>
