<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
AMENDMENT NO. 1
ON
FORM 10-Q/A
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1998
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER 000-22647
PERITUS SOFTWARE SERVICES, INC.
(Exact Name of Registrant as Specified in Its Charter)
Massachusetts 04-3126919
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
2 Federal Street, Billerica, 01821
Massachusetts (Zip Code)
(Address of Principal Executive
Offices)
(978) 670-0800
(Registrant's Telephone Number, Including Area Code)
Not Applicable
(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 [_] No [X]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date:
<TABLE>
<CAPTION>
Shares outstanding
Title of Class at May 7, 1998
-------------- ------------------
<S> <C>
Common Stock, $.01 par value 16,161,675
</TABLE>
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<PAGE>
PERITUS SOFTWARE SERVICES INC.
FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1998
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
Part I. Financial Information ----
<C> <S> <C>
Item 1. Financial Statements
Consolidated Balance Sheet as of March 31, 1998 and December
31, 1997................................................... 3
Consolidated Statement of Operations for the Three Months
Ended March 31, 1998 and 1997.............................. 4
Consolidated Statement of Cash Flows for the Three Months
Ended March 31, 1998 and 1997.............................. 5
Notes to Unaudited Consolidated Financial Statements........ 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations.................................. 10
<CAPTION>
Part II. Other Information
<C> <S> <C>
Item 1. Legal Proceedings........................................... 17
Item 6. Exhibits and Reports on Form 8-K............................ 17
Signatures.................................................. 19
</TABLE>
The Registrant hereby amends its Quarterly Report on Form 10-Q for the
quarterly period ended March 31, 1998, as amended, by restating Part I.
Financial Information, Item 1 Financial Statements, and Item 2. Management's
Discussion and Analysis of Financial Condition and Results of Operations, Part
II. Other Information, Item 1. Legal Proceedings, and Item 6. Exhibits and
Reports on Form 8-K, Exhibit 11. Statement re Computation of Net income (loss)
per common share, and Exhibit 27. Restated Financial Data Schedule, in their
entirety.
2
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
PERITUS SOFTWARE SERVICES, INC.
CONSOLIDATED BALANCE SHEET
(In thousands, except share-related data)
(unaudited)
<TABLE>
<CAPTION>
March 31, December 31,
ASSETS 1998* 1997*
------ --------- ------------
<S> <C> <C>
Current assets:
Cash and cash equivalents.............................. $ 9,821 $ 11,340
Short-term investments................................. 2,500 3,000
Accounts receivable, net of allowance for doubtful
accounts of $445 and $95, respectively, and including
amounts receivable from related parties of $60 and
$289, respectively.................................... 8,908 12,627
Costs and estimated earnings in excess of billings on
uncompleted contracts, including amounts on
uncompleted contracts with related parties of $173 and
$250, respectively.................................... 2,208 2,547
Prepaid expenses and other current assets.............. 1,865 710
-------- --------
Total current assets.................................. 25,302 30,224
Property and equipment, net............................ 5,398 3,859
Intangible and other assets, net....................... 5,525 5,787
-------- --------
$ 36,225 $ 39,870
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current liabilities:
Current portion of capital lease obligations........... $ 255 $ 51
Current portion of long-term debt...................... 292 292
Accounts payable....................................... 1,768 1,650
Billings in excess of costs and estimated earnings on
uncompleted contracts................................. 980 976
Deferred revenue....................................... 2,285 2,818
Other accrued expenses and current liabilities......... 2,382 3,506
-------- --------
Total current liabilities............................. 7,962 9,293
Capital lease obligations............................... 379 144
Long-term debt.......................................... 196 269
-------- --------
Total liabilities..................................... 8,537 9,706
-------- --------
Minority interest in majority-owned subsidiary.......... 110 159
-------- --------
Stockholders' equity:
Common stock, $.01 par value; 50,000,000 shares autho-
rized; 16,082,214 and 15,361,800 shares issued and
outstanding, respectively............................. 161 154
Additional paid-in capital............................. 104,677 103,808
Accumulated deficit.................................... (77,173) (73,815)
Note receivable from stockholder....................... -- (58)
Cumulative translation adjustment...................... (87) (84)
-------- --------
Total stockholders' equity............................ 27,578 30,005
-------- --------
$ 36,225 $ 39,870
======== ========
</TABLE>
- --------
* Restated -- See Note 6.
The accompanying notes are an integral part of these unaudited consolidated
financial statements.
3
<PAGE>
PERITUS SOFTWARE SERVICES, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
(In thousands, except per share data)
(unaudited)
<TABLE>
<CAPTION>
Three Months
Ended
March 31,
---------------
1998* 1997
------- ------
<S> <C> <C>
Revenue:
Outsourcing services, including $1,214 and $975 from related
parties, respectively........................................ $ 2,622 $2,519
License....................................................... 4,085 4,144
Other services................................................ 2,726 1,196
------- ------
Total revenue................................................ 9,433 7,859
------- ------
Cost of revenue:
Cost of outsourcing services, including $713 and $373 from
related parties, respectively................................ 2,111 2,045
Cost of license............................................... 536 127
Cost of other services........................................ 2,453 1,289
------- ------
Total cost of revenue........................................ 5,100 3,461
------- ------
Gross profit................................................... 4,333 4,398
------- ------
Operating expenses:
Sales and marketing........................................... 3,109 1,383
Research and development...................................... 3,044 1,634
General and administrative.................................... 1,747 925
------- ------
Total operating expenses..................................... 7,900 3,942
------- ------
Income (loss) from operations................................ (3,567) 456
Interest income, net........................................... 160 27
------- ------
Income (loss) before income taxes and minority interest in
majority-owned subsidiary................................... (3,407) 483
Provision for estimated income taxes........................... -- 48
------- ------
Income (loss) before minority interest in majority-owned sub-
sidiary .................................................... (3,407) 435
Minority interest in majority-owned subsidiary................. (49) 29
------- ------
Net income (loss)............................................ (3,358) 406
Accrual of dividends on Series A and B preferred stock......... -- 233
Accretion to redemption value of redeemable stock.............. -- 26
------- ------
Net income (loss) available to common stockholders............. $(3,358) $ 147
======= ======
Net income (loss) per share:
Basic......................................................... $ (0.21) $ 0.02
======= ======
Diluted....................................................... $ (0.21) $ 0.02
======= ======
Weighted average shares outstanding:
Basic......................................................... 15,985 5,888
======= ======
Diluted....................................................... 15,985 8,719
======= ======
</TABLE>
- --------
* Restated -- See Note 6.
The accompanying notes are an integral part of these unaudited consolidated
financial statements.
4
<PAGE>
PERITUS SOFTWARE SERVICES, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
-------------------
1998* 1997
--------- --------
<S> <C> <C>
Increase (Decrease) in Cash and Cash Equivalents
Cash flows from operating activities:
Net income (loss)........................................ $ (3,358) $ 406
Adjustments to reconcile net income (loss) to net cash
used for operating activities:
Depreciation and amortization........................... 813 262
Minority interest in majority-owned subsidiary.......... (49) 18
Changes in assets and liabilities, net of effects from
acquisitions:
Accounts receivable.................................... 3,719 (498)
Costs and estimated earnings in excess of billings on
uncompleted contracts................................. 339 233
Unbilled license revenue from related parties.......... -- 200
Prepaid expenses and other current assets.............. (1,155) (102)
Other assets........................................... (48) --
Accounts payable....................................... 118 359
Billings in excess of costs and estimated earnings on
uncompleted contracts................................. 4 112
Deferred revenue....................................... (533) (2,356)
Other accrued expenses and current liabilities......... (1,124) (485)
--------- --------
Net cash used for operating activities................. (1,274) (1,851)
--------- --------
Cash flows from investing activities:
Sale of short-term investments........................... 500 --
Investment in less than majority-owned company........... -- (161)
Purchases of property and equipment...................... (1,584) (287)
--------- --------
Net cash used for investing activities................. (1,084) (448)
--------- --------
Cash flows from financing activities:
Principal payments on long-term debt..................... (73) (31)
Principal payments on capital lease obligations.......... (19) (31)
Proceeds from exercise of stock options.................. 876 2
Proceeds from payment of note receivable from stockhold-
er...................................................... 58 --
--------- --------
Net cash (used for) provided by financing activities... 842 (60)
--------- --------
Effects of exchange rates on cash and cash equivalents.... (2) (7)
--------- --------
Net decrease in cash and cash equivalents................. (1,519) (2,366)
Cash and cash equivalents, beginning of period............ 11,340 7,388
--------- --------
Cash and cash equivalents, end of period.................. $ 9,821 $ 5,022
========= ========
Supplemental disclosure of cash flows:
Cash paid for income taxes............................... $ 78 $ --
Cash paid for interest................................... 20 46
</TABLE>
- --------
* Restated -- See Note 6.
The accompanying notes are an integral part of these unaudited consolidated
financial statements.
5
<PAGE>
PERITUS SOFTWARE SERVICES, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation
The accompanying unaudited consolidated financial statements include the
accounts of Peritus Software Services, Inc. and its subsidiaries (the
"Company") and have been prepared by the Company without audit in accordance
with the Company's accounting policies, as described in the Company's Annual
Report on Form 10-K for the year ended December 31, 1997, as filed with the
Securities and Exchange Commission ("SEC"). In the opinion of management, the
accompanying unaudited consolidated financial statements contain all
adjustments, which other than the restatement adjustments described in Note 6,
consist only of those of a normal recurring nature, necessary for a fair
presentation of the Company's financial position, results of operations and
cash flows at the dates and for the periods indicated. While the Company
believes that the disclosures presented are adequate to make the information
not misleading, these financial statements should be read in conjunction with
the audited consolidated financial statements and related notes included in
the Company's 1997 Annual Report on Form 10-K. The operating results for the
three months ended March 31, 1998 are not necessarily indicative of the
results to be expected for the full year ending December 31, 1998.
2. Legal Proceedings
The Company and certain of its officers and directors were named as
defendants in purported class action lawsuits filed in the United States
District Court for the District of Massachusetts by Robert Downey on April 1,
1998, by Scott Cohen on April 7, 1998, by Timothy Bonnett on April 9, 1998, by
Peter Lindsay on April 17, 1998, by Harry Teague on April 21, 1998, by Jesse
Wijntjes on April 29, 1998, by H. Vance Johnson and H. Vance Johnson as
Trustee for the I.O.R.D. Profit-Sharing Plan on May 6, 1998, by John B.
Howard, M.D. on May 21, 1998 and by Helen Lee on May 28, 1998 (collectively,
the "complaints"). The complaints principally alleged that the defendants
violated federal securities laws by making false and misleading statements and
by failing to disclose material information concerning the Company's December
1997 acquisition of substantially all of the assets and assumption of certain
liabilities of the Millennium Dynamics, Inc. business from American Premier
Underwriters, Inc., thereby allegedly causing the value of the Company's
common stock to be artificially inflated during the purported class periods.
In addition, the Howard complaint alleged a violation of federal securities
laws as a result of the Company's purported failure to disclose material
information in connection with the Company's initial public offering on July
2, 1997, and also named Montgomery Securities, Inc., Wessels, Arnold &
Henderson, and H.C. Wainwright & Co., Inc. as defendants. The complaints
further alleged that certain officers and/or directors of the Company sold
stock in the open market during the class periods and sought unspecified
damages. On or about June 1, 1998, all of the named plaintiffs and additional
purported class members filed a motion for the appointment of several of those
individuals as lead plaintiffs, for approval of lead and liaison plaintiffs'
counsel and for consolidation of the actions. The Court granted that motion on
June 18, 1998.
On January 8, 1999, the plaintiffs filed a Consolidated Amended Complaint
applicable to all previously filed actions. The Consolidated Amended Complaint
alleges a class period of October 22, 1997 through October 26, 1998 and
principally claims that the Company, two of its former officers and its
president violated federal securities laws by purportedly making false and
misleading statements (or omitting material information) concerning the MDI
acquisition and the Company's revenue during the proposed class period,
thereby allegedly causing the value of the Company's stock to be artificially
inflated. Previously stated claims against the Company and its underwriters
alleging violations of the federal securities laws as a result of purportedly
inadequate or incorrect disclosure in connection with the Company's initial
public offering are not included in the Consolidated Amended Complaint.
Although the Company believes that it has meritorious defenses to the claims
made in the Consolidated Amended Complaint and intends to contest the action
vigorously, an adverse resolution of the lawsuit could have a material adverse
effect on the Company's financial condition and results of operations in the
period in which the litigation is resolved. The Company is not able to
reasonably estimate potential losses, if any, related to the Consolidated
Amended Complaint.
6
<PAGE>
PERITUS SOFTWARE SERVICES, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
3. Comprehensive Income (Loss)
The Company adopted Statement of Financial Accounting Standards ("SFAS") No.
130, "Reporting Comprehensive Income" effective January 1, 1998. This
statement establishes standards for the reporting and display of comprehensive
income and its components. Comprehensive income is defined as the change in
equity of a business enterprise during a period from transactions and other
events and circumstances from non-owner sources. It includes all changes in
equity during a period except those resulting from investments by owners and
distributions to owners. This standard requires that an enterprise display an
amount representing total comprehensive income for the period.
For the three months ended March 31, 1998 and 1997, the Company's
comprehensive income (loss) was as follows:
<TABLE>
<CAPTION>
Three months
ended March 31,
---------------------
1998* 1997
----------- --------
<S> <C> <C>
Net income (loss)........................................ $(3,358,000) $406,000
Cumulative translation adjustment........................ (3,000) (7,000)
----------- --------
$(3,361,000) $399,000
=========== ========
</TABLE>
- --------
* Restated--See Note 6.
4. Net Income (Loss) Per Share
In February 1997, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 128, "Earnings per Share", which supersedes Accounting Principles
Board Opinion Accounting ("APB") No. 15 and specifies the computation,
presentation and disclosure requirements of earnings per share. SFAS No. 128
requires the presentation of "basic" earnings per share and "diluted" earnings
per share. Basic earnings per share is computed by dividing the net income
(loss) available to common stockholders by the weighted average shares of
outstanding common stock. For purposes of calculating diluted earnings per
share, the denominator includes both the weighted average shares of common
stock outstanding and, when not anti-dilutive, potential common stock
including outstanding stock options.
The Company adopted SFAS No. 128 in the fourth quarter of 1997 and has
restated earnings per share amounts for all periods presented herein, as
required.
5. Recently Issued Accounting Standards
In October 1997, the Accounting Standards Executive Committee ("AcSEC") of
the American Institute of Certified Public Accountants ("AICPA") issued
Statement of Position ("SOP") 97-2, "Software Revenue Recognition." SOP 97-2
provides guidance on the timing and amount of revenue recognition when
licensing, selling, leasing or otherwise marketing computer software and is
effective for transactions entered into during fiscal years beginning after
December 15, 1997. On March 18, 1998, the FASB cleared a new SOP that provides
for the one-year deferral of certain provisions of SOP 97-2 pertaining to its
requirements for what constitutes vendor-specific evidence of the fair value
of multiple elements included in an arrangement. It is AcSEC's stated
intention to immediately begin a project to consider whether guidance is
needed on any restrictions that should be placed on what constitutes evidence
of fair value and, if so, what the guidance should be. Because of the
uncertainties with respect to the outcome of any such project, the Company
believes that the impact of the deferred provisions of SOP 97-2 on its
financial position or results of operations upon expiration of the one-year
deferral period is not currently determinable. However, the Company believes
that those provisions of SOP 97-2
7
<PAGE>
PERITUS SOFTWARE SERVICES, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
that have not been deferred, and, therefore, were effective as of January 1,
1998, have not materially affected its financial position or results of
operations.
In February 1998, AcSEC issued SOP 98-1, "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use". SOP 98-1
establishes the accounting for costs of software products developed or
purchased for internal use, including when such costs should be capitalized.
The Company does not expect SOP 98-1, which is effective for the Company
beginning January 1, 1999, to have a significant impact on the Company's
financial condition or results of operations.
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of
an Enterprise and Related Information" which supersedes SFAS No. 14. This
statement changes the way that public business enterprises report segment
information, including financial and descriptive information about their
selected segment information. Operating segments are defined as revenue-
producing components of the enterprise which are generally used internally for
evaluating segment performance. SFAS No. 131 will be effective for the
Company's fiscal year ending December 31, 1998 and will not affect the
Company's financial position or results of operations.
6. Subsequent Events
Restatement of Quarterly and Annual Results of Operations
During a review of the Company's 1998 third quarter financial results
performed by Peritus' management, the Audit Committee of the Company's Board
of Directors and the Company's independent auditor, PricewaterhouseCoopers
LLP, the Company determined that the Company's results of operations for the
quarterly period ended March 31, 1998 and the year ended December 31, 1997
required restatement. The restatement for the quarterly period ended March 31,
1998 relates primarily to the Company's incorrect interpretation of the
complex provisions regarding recognition of revenue for combined
software/services arrangements under SOP 97-2, "Software Revenue Recognition,"
issued by the AICPA, and effective for the Company as of January 1, 1998. In
applying the Statement to its new year 2000 renovation offerings which the
Company commenced in the first quarter, the Company mistimed the recognition
of revenue between quarters under certain contracts providing for the delivery
of combined software and services. The restatement for the year ended December
31, 1997 involved $571,000 of license revenue and $21,000 of associated
maintenance revenue originally recorded in the fourth quarter of 1997. The
Company has determined that the software involved was not shipped until 1998.
The Company encountered collection difficulties with the customer during 1998.
Despite entering into a settlement agreement with the customer in the second
quarter of 1998, the Company concluded in the third quarter of 1998 that it
would be unable to realize the amounts recorded. Accordingly, the Company has
restated its 1997 results to remove the $592,000 of revenue involved and has
not recorded this revenue in any subsequent period.
8
<PAGE>
PERITUS SOFTWARE SERVICES, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
In the opinion of management, all adjustments necessary to revise the
quarterly and year-end financial statements have been recorded. Following is a
summary of the results of operations for the quarterly period ended March 31,
1998 and year ended December 31, 1997 (in thousands, except per share-related
data):
<TABLE>
<CAPTION>
Quarterly Period Ended Year Ended
---------------------- -----------------
March 31, 1998 December 31, 1997
---------------------- -----------------
<S> <C> <C>
As previously reported:
Revenue................. $ 10,150 $ 40,301
Loss from operations.... (2,775) (67,582)
Net loss................ (2,566) (66,910)
Basic and diluted net
loss per share......... $ (0.16) $ (6.97)
As restated:
Revenue................. $ 9,433 $ 39,709
Loss from operations.... (3,567) (68,174)
Net loss................ (3,358) (67,490)
Basic and diluted net
loss per share......... $ (0.21) $ (7.03)
</TABLE>
Company Status
The Company's consolidated financial statements have been presented on the
basis that it is a going concern, which contemplates continuity of operations,
realization of assets and the satisfaction of liabilities in the ordinary
course of business. However, the Company experienced net losses in the years
ended December 31, 1997 and 1998, which raises doubt about its ability to
continue as a going concern. The Company's cash flow requirements depend on
the results of future operations and the Company's continued existence is
dependent upon its ability to achieve a cash flow breakeven position and/or to
obtain additional sources of financing. The Company implemented a
restructuring plan on December 2, 1998 to further reduce its expenses which
included the elimination of approximately 45 employees and related facilities
costs. The Company is also exploring strategic initiatives to raise additional
funds. In addition, the Nasdaq Stock Market, Inc. has several requirements for
listing on the Nasdaq National Market or the Nasdaq SmallCap Market. Failure
to meet listing requirements may result in the Company being moved from the
National Market to the SmallCap Market or being de-listed. There can be no
assurance that the Company will not be de-listed.
The Company's bank has indicated that it will not renew or further extend
its revolving line of credit facility and demanded that cash collateral be
provided for all amounts outstanding under its equipment financing agreement
with the Company since the Company was in default of certain financial and
operating covenants thereunder. There are no amounts outstanding under the
revolving credit facility and the Company has provided cash collateral for all
amounts outstanding under the equipment financing agreement and for a $300,000
standby letter of credit issued by the bank. There can be no assurance that
the Company will achieve a cash flow breakeven position or that it will be
able to raise additional funds through bank borrowings and/or debt and/or
equity financings. Reductions in expenses or the sale of assets may not be
adequate to bring the Company to a cash breakeven position. In addition, there
can be no assurance that such actions will not have an adverse affect on the
Company's ability to generate revenue or successfully implement any strategic
alternatives under consideration. Failure to establish a cash flow breakeven
position or raise additional funds through bank borrowings and/or equity
and/or debt financings would adversely impact the Company's ability to
continue as a going concern.
In-Process Research and Development
In the fourth quarter of 1997, the Company expensed $70,800,000 relating to
in-process research and development in connection with the acquisition of MDI
during 1997. During 1998, the Company received and
9
<PAGE>
responded to a comment letter related to the Company's Form 10-K for the year
ended December 31, 1997 from the Securities and Exchange Commission ("SEC")
regarding, among other things, the Company's accounting for this in-process
research and development. A response to the Company's letter has not yet been
received from the SEC. Although the Company believes it has properly accounted
for the item, a different conclusion would require further restatement of the
Company's results beginning with the fourth quarter of 1997.
Item 2. Management's Discussion And Analysis Of Financial Condition And
Results Of Operations
Overview
Peritus Software Services, Inc. (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 ("Vista"), a developer of
computer-aided engineering software. In 1997, the Company expanded its product
offerings by releasing an enhanced version of the AutoEnhancer/2000 software
which enables a client to perform logic correction only changes with regard to
year 2000 renovations, and through the acquisition of substantially all of the
assets and the assumption of certain of the liabilities of the business of
Millenium Dynamics, Inc. ("MDI"), a software tools company with year 2000
products for the IBM mainframe and AS/400 platforms, from American Premier
Underwriters, Inc. ("APU").
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
Europe, through value added integrators operating worldwide and through
international distributors in Canada, Europe and Japan.
Restatement of Quarterly and Annual Results of Operations
During a review of the Company's 1998 third quarter financial results
performed by Peritus' management, the Audit Committee of the Company's Board
of Directors and the Company's independent auditor, PricewaterhouseCoopers
LLP, the Company determined that the Company's results of operations for the
quarterly period ended March 31, 1998 and the year ended December 31, 1997
required restatement. The restatement for the quarterly period ended March 31,
1998 relates primarily to the Company's incorrect interpretation of the
complex provisions regarding recognition of revenue for combined
software/services arrangements under Statement of Position ("SOP") 97-2,
"Software Revenue Recognition," issued by the American Institute of Certified
Public Accountants ("AICPA"), and effective for the Company as of January 1,
1998. In applying the Statement to its new year 2000 renovation offerings
which the Company commenced in the first quarter, the Company mistimed the
recognition of revenue between quarters under certain contracts providing for
the delivery of combined software and services. The restatement for the year
ended December 31, 1997 involved $571,000 of license revenue and $21,000 of
associated maintenance revenue originally recorded in the fourth quarter of
1997. The Company has determined that the software involved was not shipped
until 1998. The Company encountered collection difficulties with the customer
during 1998. Despite entering into a settlement agreement with the customer in
the second quarter of 1998, the Company concluded in the third quarter of 1998
that it would be unable to realize the amounts recorded. Accordingly, the
Company has restated its 1997 results to remove the $592,000 of revenue
involved and has not recorded this revenue in any subsequent period.
10
<PAGE>
In the opinion of management, all adjustments necessary to revise the
quarterly and year-end financial statements have been recorded. Following is a
summary of the results of operations for the quarterly period ended March 31,
1998 and year ended December 31, 1997 (in thousands, except per share-related
data):
<TABLE>
<CAPTION>
Quarterly Period Ended Year Ended
---------------------- -----------------
March 31, 1998 December 31, 1997
---------------------- -----------------
<S> <C> <C>
As previously reported:
Revenue................. $10,150 $ 40,301
Loss from operations.... (2,775) (67,582)
Net loss................ (2,566) (66,910)
Basic and diluted net
loss per share......... $ (0.16) $ (6.97)
As restated:
Revenue................. $ 9,433 $ 39,709
Loss from operations.... (3,567) (68,174)
Net loss................ (3,358) (67,490)
Basic and diluted net
loss per share......... $ (0.21) $ (7.03)
</TABLE>
In-Process Research and Development
In the fourth quarter of 1997, the Company expensed $70,800,000 relating to
in-process research and development in connection with the acquisition of MDI
during 1997. During 1998, the Company received and responded to a comment
letter related to the Company's Form 10-K for the year ended December 31, 1997
from the Securities and Exchange Commission ("SEC") regarding, among other
things, the Company's accounting for this in-process research and development.
A response to the Company's letter has not yet been received from the SEC.
Although the Company believes it has properly accounted for the item, a
different conclusion would require further restatement of the Company's
results beginning with the fourth quarter of 1997.
Three Months Ended March 31, 1998 Compared To Three Months Ended March 31,
1997
Revenue
Total revenue increased 20.0% to $9,433,000 in the three months ended March
31, 1998 from $ 7,859,000 in the three months ended March 31, 1997. This
increase in revenue was primarily due to an increase in the licensing of the
Company's Auto Enhancer/2000 and Vantage YR2000 software products as well as
from increases in other services revenue and, to a lesser extent, outsourcing
services revenue. International revenue increased 162.8% to $1,924,000 in 1998
from $732,000 in 1997. Persist, S.A. ("Persist"), the Company's majority-owned
Spanish subsidiary, and value added integrators, distributors and end users
generated 33.6% and 66.4%, respectively, of the Company's international
revenue in the three months ended March 31, 1998. Persist generated
substantially all of the Company's international revenue in the three months
ended March 31, 1997.
Outsourcing Services. Outsourcing services revenue increased 4.1% to
$2,622,000 in the three months ended March 31, 1998 from $2,519,000 in the
three months ended March 31, 1997. The increase in outsourcing services
revenue in absolute dollars was primarily attributable to the addition of one
new significant outsourcing contract 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
during 1998. As a percentage of total revenue, outsourcing services revenue
decreased to 27.8% in the three months ended March 31, 1998 from 32.1% for the
three months ended March 31, 1997. The decrease in outsourcing services
revenue as a percentage of total revenue reflects the increased contribution
of license and other services revenue to total revenue during the three months
ended March 31, 1998 when compared to the same period 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.
11
<PAGE>
License. License revenue decreased 1.4% to $ 4,085,000 in the three months
ended March 31, 1998 or 43.3% of total revenue, compared to $4,144,000, or
52.7% of total revenue, in the three months ended March 31, 1997. The decrease
in license revenue for 1998 in absolute dollars was primarily attributable to
decrease in the delivery of licensed software to additional end users and
decreased license fees from value added integrators.
Other Services. Other services revenue increased 127.9% to $2,726,000 in the
three months ended March 31, 1998 from $1,196,000 in the three months ended
March 31, 1997. As a percentage of total revenue, other services revenue
increased to 28.9% in the three months ended March 31, 1998 from 15.2% in the
three months ended March 31, 1997. 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 and the increase in year 2000 renovation 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 3.2% to $2,111,000 in the three months ended March 31, 1998
from $2,045,000 for the three months ended March 31, 1997. Cost of outsourcing
services revenue as a percentage of outsourcing services revenue remained
relatively flat at approximately 80% in the three months ended March 31, 1998
and 1997. The increase in costs of outsourcing services revenue in absolute
dollars was due primarily to the addition of resources necessary to provide
services under one new significant outsourcing contract.
Cost of License Revenue. Cost of license revenue consists primarily of
salaries, benefits, amortization expense of intangibles related to the MDI
acquisition and related overhead costs associated with license-related
materials packaging and freight. Cost of license revenue was $536,000 in the
three months ended March 31, 1998, or 13.1% of license revenue. Cost of
license revenue was $127,000, or 3.1% of license revenue, in the three months
ended March 31, 1998. The increase in cost of license revenue in absolute
dollars was primarily attributable to the addition of employees and related
resources to support additional end users and value added integrators and
distributors and the amortization of intangibles related to the MDI
acquisition.
Cost of Other Services Revenue. Cost of other services revenue consists
primarily of salaries, benefits and related overhead costs associated with
delivering other services to clients. Cost of other services revenue increased
90.3% to $2,453,000 in the three months ended March 31, 1998 from $1,289,000
in the three months ended March 31, 1997. Cost of the other services revenue
as a percentage of other services revenue decreased to 90.0% in the three
months ended March 31, 1998 from 107.8% in the three months ended March 31,
1997. Costs exceeded revenues in the three months ended March 31, 1997
primarily as a result of expected overruns on one significant pilot
engagement, which subsequently became a significant product license in 1997.
Costs increased in absolute dollars in the three months ended March 31, 1998
due to additional staffing for the Company's client support, training and
consulting organizations related to additional customers for the Company's
year 2000 products and services, including year 2000 renovations.
Operating Expenses
Sales and Marketing. Sales and marketing expenses consist primarily of
salaries, commissions and related overhead costs for sales and marketing
personnel; sales referral fees to third parties; advertising programs; and
other promotional activities. Sales and marketing expenses increased 124.8% to
$3,109,000 in the three months ended March 31, 1998 from $1,383,000 in the
three months ended March 31, 1997. As a percentage of total revenue, sales and
marketing expenses increased to 33.0% in the three months ended March 31, 1998
from 17.6% in the three months ended March 31, 1997. The increase in expenses
in absolute dollars and as a percentage of revenue was primarily attributable
to increased staffing, commissions and promotional activities in connection
with the Company's year 2000 software products and services in 1998.
12
<PAGE>
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 86.3% to $3,044,000 in the three months ended
March 31, 1998 from $1,634,000 in the three months ended March 31, 1997. As a
percentage of total revenue, research and development expenses increased to
32.3% in the three months ended March 31, 1998 from 20.8% in the three months
ended March 31, 1997. The increase in research and development expenses in
absolute dollars was primarily attributable to increased staffing for the
product development efforts for the Company's year 2000 products and services
and mass change technologies, including an increase in staffing effected
through new hires and internal transfers.
General and Administrative. General and administrative expenses consist
primarily of salaries and related costs for the finance and accounting, human
resources, legal services, information systems and other administrative
departments of the Company, as well as legal and accounting expenses and the
amortization of intangible assets associated with the Vista acquisition.
General and administrative expenses increased 88.9% to $1,747,000 in the three
months ended March 31, 1998 from $925,000 in the three months ended March 31,
1997. As a percentage of total revenue, general and administrative expenses
increased to 18.5% in the three months ended March 31, 1998 from 11.8% in the
three months ended March 31, 1997. The increase in general and administrative
expenses in absolute dollars and as a percentage of revenues was primarily due
to additions to the Company's administrative staff to support growth, higher
professional fees and increases in other general corporate expenses as well as
increased costs associated with being a publicly traded company.
Interest Income (Expense), Net. Interest income and expense is primarily
comprised of interest income from cash balances, partially offset by interest
expense on debt. The Company had interest income, net, of $160,000 in the
three months ended March 31, 1998 compared to interest income, net, of $27,000
in the three months ended March 31, 1997. This change in interest income, net,
was primarily attributable to increased interest income derived from
additional cash balances resulting from the Company's initial public offering.
Provision for Income Taxes. The Company's income tax provision was $0 and
$48,000 in the three months ended March 31, 1998 and 1997, respectively. The
Company did not record a tax provision or benefit in the three months ended
March 31, 1998 due to operating losses incurred in this period offset by
potential international tax obligations.
Minority Interest in Majority-owned Subsidiary. The minority interest in
majority-owned subsidiary represents the equity interest in the operating
results of Persist, the Company's majority-owned Spanish subsidiary, held by
stockholders of Persist other than the Company. The minority interest in
majority-owned subsidiary increased to income of $49,000 in the three months
ended March 31, 1998 from a loss of $29,000 in the three months ended March
31, 1997. This change was the result of the decreased profitability of
Persist. As of March 31, 1998, the Company held a 63.0% equity interest in
Persist.
Liquidity And Capital Resources
Historically, the Company has financed its operations and capital
expenditures primarily with the proceeds from sales of the Company's
convertible preferred stock and common stock, borrowings, and advance payments
for services from clients. The Company's cash balances were $9,821,000 and
$11,340,000 at March 31, 1998 and December 31, 1997, respectively. The
Company's working capital was $17,340,000 and $20,931,000 at March 31, 1998
and December 31, 1997, respectively.
The Company's operating activities used cash of $1,274,000 and $1,851,000
during the three months ended March 31, 1998 and 1997, respectively. The
Company's use of cash during the three months ended March 31, 1998 was
primarily caused by a net loss of $3,358,000 less non-cash depreciation and
amortization expense of $813,000, an increase in prepaid expenses and other
current assets of $1,155,000 and a decrease in other accrued expenses and
current liabilities of $1,124,000. These decreases were partially offset by a
decrease in accounts receivable of $3,719,000.
13
<PAGE>
The Company used cash of $1,084,000 and $448,000 for investing activities
during the three months ended March 31, 1998 and 1997, respectively. Investing
activities in the three months ended March 31, 1998 consisted principally of
the purchases of property and equipment, most notably computer equipment and
software, furniture and fixtures and leasehold improvements related to the
Company's relocations of its headquarters and regional offices. Although the
Company has no significant commitments for capital expenditures in the
remainder of 1998, the Company expects to continue to purchase property and
equipment to further develop its infrastructure.
The Company's financing activities provided cash of $842,000 and used cash
of $60,000 during the three months ended March 31, 1998 and 1997,
respectively. Financing activities in the three months ended March 31, 1998
primarily reflect proceeds from the exercise of stock options.
In September 1996, the Company obtained a revolving line of credit facility
from a bank which bears interest at the bank's prime rate plus 0.5% (9.00% at
March 31, 1998). 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 expires and all borrowings are
payable in full on June 30, 1998. In addition to this line of credit, the
Company also entered into an equipment financing agreement in September 1996.
Under this agreement, the bank agreed to provide up to $1,500,000 for the
purchase of certain equipment (as defined by the agreement) through June 30,
1997. Ratable principal and interest payments are payable during the period
July 1, 1997 through June 1, 2000, and bear interest at the bank's prime rate
plus 1% (9.50% at March 31, 1998). Both of these agreements require the
Company to comply with certain financial covenants and are secured by all of
the assets of the Company. Although the Company was out of compliance with
certain of these covenants at March 31, 1998, the Bank granted the Company a
waiver thereof. As of March 31, 1998, there were no borrowings outstanding,
and $3,500,000 remained available, under the revolving credit facility and $
488,000 was outstanding under the equipment financing agreement.
To date, the Company has not invested in derivative securities or any other
financial instruments that involve a high level of complexity or risk. Excess
cash has been, and the Company contemplates that it will continue to be,
invested in interest-bearing, investment grade securities.
The Company's consolidated financial statements have been presented on the
basis that it is a going concern, which contemplates continuity of operations,
realization of assets and the satisfaction of liabilities in the ordinary
course of business. However, the Company experienced net losses in the years
ended December 31, 1997 and 1998, which raises doubt about its ability to
continue as a going concern. The Company's cash flow requirements depend on
the results of future operations and the Company's continued existence is
dependent upon its ability to achieve a cash flow breakeven position and/or to
obtain additional sources of financing. The Company implemented a
restructuring plan on December 2, 1998 to further reduce its expenses which
included the elimination of approximately 45 employees and related facilities
costs. The Company is also exploring strategic initiatives to raise additional
funds. In addition, the Nasdaq Stock Market, Inc. has several requirements for
listing on the Nasdaq National Market or the Nasdaq SmallCap Market. Failure
to meet listing requirements may result in the Company being moved from the
National Market to the SmallCap market or being de-listed. There can be no
assurance that the Company will not be de-listed.
The Company's bank has indicated that it will not renew or further extend
its revolving line of credit facility and demanded that cash collateral be
provided for all amounts outstanding under its equipment financing agreement
with the Company since the Company was in default of certain financial and
operating covenants thereunder. There are no amounts outstanding under the
revolving credit facility and the Company has provided cash collateral for all
amounts outstanding under the equipment financing agreement and for a $300,000
standby letter of credit issued by the bank. There can be no assurance that
the Company will achieve a cash flow breakeven position or that it will be
able to raise additional funds through bank borrowings and/or debt and/or
equity financings.
14
<PAGE>
Reductions in expenses on the sale of assets may no be adequate to bring the
Company to a cash breakeven position. In addition, there can be no assurance
that such actions will not have an adverse affect on the Company's ability to
generate revenue of successfully implement any strategic alternatives under
consideration. Failure to establish a cash flow breakeven position or raise
additional funds through bank borrowings and/or equity and/or debt financing
would adversely impact the Company's ability to continue as a going concern.
Foreign Currency
Assets and liabilities of the Company's subsidiaries are translated into
U.S. dollars at exchange rates in effect at the balance sheet date. Income and
expense items are translated at average exchange rates for the period.
Accumulated net translation adjustments are included in stockholders' equity.
Inflation
To date, inflation has not had a material impact on the Company's results of
operations.
Accounting Pronouncements
In October 1997, the Accounting Standards Executive Committee ("AcSEC") of
the American Institute of Certified Public Accountants issued Statement of
Position ("SOP") 97-2, "Software Revenue Recognition." SOP 97-2 provides
guidance on the timing and amount of revenue recognition when licensing,
selling, leasing or otherwise marketing computer software and is effective for
transactions entered into during fiscal years beginning after December 15,
1997. On March 18, 1998, the Financial Accounting Standards Board ("FASB")
cleared a new SOP that provides for the one-year deferral of certain
provisions of SOP 97-2 pertaining to its requirements for what constitutes
vendor specific evidence of the fair value of multiple elements included in an
arrangement. It is AcSEC's intention to immediately begin a project to
consider whether guidance is needed on any restrictions that should be placed
on what constitutes evidence of fair value and, if so, what the guidance
should be. Because of the uncertainties with respect to the outcome of any
such project, the Company believes that the impact of the deferred provisions
of SOP 97-2 on its financial position or results of operations upon expiration
of the one-year deferral period is not currently determinable. However, the
Company believes that those provisions of SOP 97-2 that have not been deferred
and, therefore, were effective as of January 1, 1998, have not materially
affected its financial position or results of operations.
In February 1998, AcSEC issued SOP 98-1, "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use". SOP 98-1
establishes the accounting for costs of software products developed or
purchased for internal use, including when such costs should be capitalized.
The Company does not expect SOP 98-1, which is effective for the Company
beginning January 1, 1999, to have a significant impact on the Company's
financial condition or results of operations.
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of
an Enterprise and Related Information" which supersedes SFAS No. 14. This
statement changes the way that public business enterprises report segment
information, including financial and descriptive information about their
selected segment information. Operating segments are defined as revenue-
producing components of the enterprise which are generally used internally for
evaluating segment performance. SFAS No. 131 will be effective for the
Company's fiscal year ending December 31, 1998 and will not affect the
Company's financial position or results of operations.
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.
15
<PAGE>
This Quarterly Report on Form 10-Q may contain forward looking statements
which involve risks and uncertainties. The Company's actual results may differ
materially from the results discussed in such statements. Certain factors that
could cause such a difference include, without limitation, the risks
specifically described in the Company's Annual Report on Form 10-K for the
year ended December 31, 1997 and other public documents, filed by the Company
with the Securities and Exchange Commission (the "Commission"), which factors
are incorporated herein by reference, and other factors such as the Company's
limited operating history, the dependence on the year 2000 market, the need to
develop additional products and services, the concentration of clients and
credit risk, the management of growth and increases in expenditures in sales
and marketing, research and development and finance and administration, the
dependence upon third-party channels and potential for channel conflict, the
impact of competitive products and services and pricing, competition for
qualified technical personnel, the offering of fixed-price, fixed time-frame
contracts rather than contracts on a time and materials basis, the potential
for contract liability related to the provision of year 2000 and other
products and services, the potential for software errors or bugs in the
Company's products, the operating difficulties and expenditures associated
with acquisitions including the Company's MDI acquisition, limited protection
of proprietary rights, dependence on third party technology, rapid
technological change, risks associated with international operations and
dependence on Indian offshore software development centers, the impact of the
government regulation of immigration, dependence on government contracts,
product or services demand and market acceptance risks, product development
and services capacity, commercialization and technological difficulties,
capacity and supply constraints or difficulties and the effect of general
business or economic conditions.
In addition, the Company's quarterly revenue, expenses and operating results
have varied significantly in the past and are likely to vary significantly
from quarter to quarter in the future. A significant portion of the Company's
revenue in any quarter is typically derived from a limited number of large
client transactions. In addition, the sales cycle associated with these
transactions is lengthy and is subject to a number of uncertainties, including
clients' budgetary constraints, the timing of clients' budget cycles and
clients' internal approval processes. Accordingly, the timing of significant
transactions is unpredictable and, as a result, the Company's revenue and
results of operations for any particular period are subject to significant
variability. The complexity of certain projects and the requirements of
generally accepted accounting principles can also result in a deferral of
revenue recognition, in whole or in part, on a particular contract during a
quarter, even though the contract has been executed or payment has actually
been received by the Company. Quarterly fluctuations may also result from
other factors such as new product and service introductions or announcements
of new products and services by the Company's competitors, changes in the
Company's or its competitors' pricing policies, changes in the mix of
distribution channels through which the Company's products and services are
sold, the timing and nature of sales and marketing expenses, changes in
operating expenses, the financial stability of major clients, changes in the
demand for software maintenance products and services, foreign currency
exchange rates and general economic conditions.
The Company began an assessment of certain of its internal computer hardware
and software in connection with the year 2000 problem and expects to complete
its assessment of such hardware and software in 1998. The Company expects that
its business systems installed in 1997 will be year 2000 compliant through
upgrades and maintenance thereto. The Company expects that costs related to
providing that its internal computer hardware and software will be year 2000
compliant will not be material to the financial condition or results of
operations of the Company are not expected to be significant.
In some cases, the Company warrants to its clients that its software will be
year 2000 compliant generally subject to certain limitations or conditions.
The Company also provides solutions consisting of products and services to
address the year 2000 problem involving key aspects of a client's computer
systems. A failure in a client's system or failure of the Company's software
to be year 2000 compliant would result in substantial damages and therefore
have a material adverse effect on the Company's business, financial condition
and results of operations.
16
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
The Company and certain of its officers and directors were named as
defendants in purported class action lawsuits filed in the United States
District Court for the District of Massachusetts by Robert Downey on April 1,
1998, by Scott Cohen on April 7, 1998, by Timothy Bonnett on April 9, 1998, by
Peter Lindsay on April 17, 1998, by Harry Teague on April 21, 1998, by Jesse
Wijntjes on April 29, 1998, by H. Vance Johnson and H. Vance Johnson as
Trustee for the I.O.R.D. Profit-Sharing Plan on May 6, 1998, by John B.
Howard, M.D. on May 21, 1998 and by Helen Lee on May 28, 1998 (collectively,
the "complaints"). The complaints principally alleged that the defendants
violated federal securities laws by making false and misleading statements and
by failing to disclose material information concerning the Company's December
1997 acquisition of substantially all of the assets and assumption of certain
liabilities of the Millennium Dynamics, Inc. business from American Premier
Underwriters, Inc., thereby allegedly causing the value of the Company's
common stock to be artificially inflated during the purported class periods.
In addition, the Howard complaint alleged a violation of federal securities
laws as a result of the Company's purported failure to disclose material
information in connection with the Company's initial public offering on July
2, 1997, and also named Montgomery Securities, Inc., Wessels, Arnold &
Henderson, and H.C. Wainwright & Co., Inc. as defendants. The complaints
further alleged that certain officers and/or directors of the Company sold
stock in the open market during the class periods and sought unspecified
damages. On or about June 1, 1998, all of the named plaintiffs and additional
purported class members filed a motion for the appointment of several of those
individuals as lead plaintiffs, for approval of lead and liaison plaintiffs'
counsel and for consolidation of the actions. The Court granted that motion on
June 18, 1998.
On January 8, 1999, the plaintiffs filed a Consolidated Amended Complaint
applicable to all previously filed actions. The Consolidated Amended Complaint
alleges a class period of October 22, 1997 through October 26, 1998 and
principally claims that the Company, two of its former officers and its
president violated federal securities laws by purportedly making false and
misleading statements (or omitting material information) concerning the MDI
acquisition and the Company's revenue during the proposed class period,
thereby allegedly causing the value of the Company's stock to be artificially
inflated. Previously stated claims against the Company and its underwriters
alleging violations of the federal securities laws as a result of purportedly
inadequate or incorrect disclosure in connection with the Company's initial
public offering are not included in the Consolidated Amended Complaint.
Although the Company believes that it has meritorious defenses to the claims
made in the Consolidated Amended Complaint and intends to contest the action
vigorously, an adverse resolution of the lawsuit could have a material adverse
effect on the Company's financial condition and results of operations in the
period in which the litigation is resolved. The Company is not able to
reasonably estimate potential losses, if any, related to the Consolidated
Amended Complaint.
Item 6. Exhibits And Reports On Form 8-K
(a) Exhibits:
Documents listed below, except for documents identified by footnotes, are
being filed as exhibits herewith. Documents identified by footnotes, if
any, are not being filed herewith and, pursuant to Rule 12b-32 of the
General Rules and Regulations promulgated by the Commission under the
Securities Exchange Act of 1934 (the "Exchange Act") reference is made to
such documents as previously filed as exhibits with the Commission. The
Company's file number under the Exchange Act is 000-22647.
Exhibit 11. *Statement re computation of per share earnings
Exhibit 27. *Financial Data Schedule
- --------
* Restated in its entirety as filed with this Amendment No. 1 on Form 10-Q/A
for the quarterly period ended March 31, 1998.
17
<PAGE>
(b) Reports on Form 8-K:
A Current Report on Form 8-K dated December 1, 1997 was filed by the Company
on December 16, 1997 and amended on February 17, 1998 to include certain
financial statements of MDI and pro forma financial information of the
Company. The Company reported under Item 2 (Acquisition or Disposition of
Assets) that on December 1, 1997, Twoquay, Inc., a wholly owned subsidiary of
the Company, acquired substantially all of the assets and assumed certain of
the liabilities of the business of MDI from APU. Financial statements filed
therewith include the following:
A. Financial Statements of MDI.
(i)Report of Independent Auditors (Ernst & Young LLP).
(ii)Balance Sheets as of December 31, 1995 and 1996 and September 30, 1997.
(iii) Statements of Operations for the Two Years in the Period Ended
December 31, 1996 and for the Nine Months Ended September 30, 1997.
(iv) Statements of Stockholder's Equity for the Two Years in the Period
Ended December 31, 1996 and for the Nine Months Ended September 30,
1997.
(v) Statements of Cash Flows for the Two years in the Period Ended December
31, 1996 and for the Nine Months Ended September 30, 1997.
(vi) Notes to Financial Statements.
B. Pro Forma Financial Information of the Company:
(i) Unaudited Pro Forma Condensed Consolidated Balance Sheet as of
September 30, 1997.
(ii) Unaudited Pro Forma Condensed Consolidated Statement of Operations for
the Year Ended December 31, 1996.
(iii) Unaudited Pro Forma Condensed Consolidated Statement of Operations
for the Nine Months Ended September 30, 1997.
18
<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: January 20, 1999
Peritus Software Services, Inc.
By: /s/ John D. Giordano
_____________________________________
John D. Giordano Vice President,
Finance and Chief Financial Officer
(Principal Financial Officer)
19
<PAGE>
Peritus Software Services, Inc.
AMENDMENT NO. 1 ON FORM 10-Q/A
For the Quarterly Period Ended March 31, 1998
Exhibit Index
<TABLE>
<CAPTION>
Exhibit No. Description
----------- -----------
<S> <C>
11* Statement Re computation of net income (loss) per common share
27* Restated Financial Data Schedule
</TABLE>
- --------
* Restated in its entirety as filed with this Amendment No. 1 on Form 10-Q/A
for the quarterly period ended March 31, 1998.
20
<PAGE>
Exhibit 11
Peritus Software Services, Inc.
Statement Re Computation of Net Income (Loss)
Per Common Share
(in thousands, except per share data)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
-------------------
1998 * 1997
---------- --------
<S> <C> <C>
Net income (loss), as reported............................ $ (3,358) $ 406
Redeemable stock preference items:
Accrual of cumulative dividends on Series A and Series B
redeemable convertible preferred stock.................. -- (233)
Accretion to redemption value of redeemable common stock
rights.................................................. -- (26)
--------- --------
Total preferred stock preference items.................... -- (259)
--------- --------
Net income (loss) attributable to common stockholders..... $ (3,358) $ 147
--------- --------
Weighted average shares outstanding--Basic................ 15,985 5,888
Adjustments thereto:
Shares attributable to common stock equivalents.......... -- 2,831
--------- --------
Weighted average shares outstanding--Diluted.............. 15,985 8,719
--------- --------
Net income (loss) per share:
Basic.................................................... $ (0.21) $ 0.02
========= ========
Diluted.................................................. $ (0.21) $ 0.02
========= ========
</TABLE>
- --------
* Restated--See Note 6 to the Unaudited Consolidated Financial Statements.
<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
THREE MONTHS ENDED MARCH 31, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS<F1>
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 9,821
<SECURITIES> 2,500
<RECEIVABLES> 9,353
<ALLOWANCES> 445
<INVENTORY> 0
<CURRENT-ASSETS> 25,302
<PP&E> 8,414
<DEPRECIATION> 3,016
<TOTAL-ASSETS> 36,225
<CURRENT-LIABILITIES> 7,962
<BONDS> 0
0
0
<COMMON> 161
<OTHER-SE> 27,417
<TOTAL-LIABILITY-AND-EQUITY> 36,225
<SALES> 4,085
<TOTAL-REVENUES> 9,433
<CGS> 536
<TOTAL-COSTS> 5,100
<OTHER-EXPENSES> 7,900
<LOSS-PROVISION> 445
<INTEREST-EXPENSE> (160)
<INCOME-PRETAX> (3,407)
<INCOME-TAX> 0
<INCOME-CONTINUING> (3,407)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 49
<NET-INCOME> (3,358)
<EPS-BASIC> (.21)
<EPS-DILUTED> (.21)
<FN>
<F1>RESTATED - SEE NOTE 6 TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS.
</FN>
</TABLE>
