SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
______________________
FORM 8-K/A
AMENDMENT NO. 1 TO CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
DATE OF REPORT (Date of earliest event reported): December 1, 1997
PERITUS SOFTWARE SERVICES, INC.
-------------------------------
(Exact Name of Registrant as Specified in Its Charter)
Massachusetts 0-22647 04-3126919
- --------------------------------------------------------------------------------
(State or Other Jurisdiction (Commission (IRS Employer
of Incorporation) File Number) Identification No.)
304 Concord Road, Billerica, Massachusetts 01821
- --------------------------------------------------------------------------------
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (978) 670-0800
--------------
Not Applicable
- --------------------------------------------------------------------------------
(Former Name or Former Address, if Changed Since Last Report)
This Amendment No. 1 to Current Report on Form 8-K/A is filed for the purpose
of filing financial statements of Millennium Dynamics, Inc. required by Item
7(a) and the pro forma financial information required by Item 7(b).
Table of Contents
-----------------
Item 7. Financial Statements, Pro Forma Financial Information and Exhibits.
-------------------------------------------------------------------
(a) Financial Statements of Millennium Dynamics, Inc.
Report of Independent Auditors (Ernst & Young LLP) 3
Balance Sheets as of December 31, 1995 and 1996 and
September 30, 1997 4
Statements of Operations for the Two Years in the Period Ended
December 31, 1996 and for the Nine Months Ended
September 30, 1997 5
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 6
Statements of Cash Flows for the Two Years in the Period Ended
December 31, 1996 and for the Nine Months Ended
September 30, 1997 7
Notes to Financial Statements 8
(b) Pro Forma Financial Information 15
Unaudited Pro Forma Condensed Consolidated Balance Sheet as of
September 30, 1997 17
Unaudited Pro Forma Condensed Consolidated Statement of
Operations for the Year Ended December 31, 1996 18
Unaudited Pro Forma Condensed Consolidated Statement of
Operations for the Nine Months Ended September 30, 1997 19
(c) Exhibits 20
2
Report of Independent Auditors
Board of Directors
Millennium Dynamics, Inc.
We have audited the accompanying balance sheets of Millennium Dynamics, Inc. as
of December 31, 1995 and 1996 and September 30, 1997, and the related statements
of operations, shareholder's equity and cash flows for each of the two years in
the period ended December 31, 1996 and for the nine months ended September 30,
1997. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Millennium Dynamics, Inc. as of
December 31, 1995 and 1996 and September 30, 1997, and the results of its
operations and its cash flows for each of the two years in the period ended
December 31, 1996 and for the nine months ended September 30, 1997, in
conformity with generally accepted accounting principles.
/s/ Ernst & Young LLP
October 29, 1997
3
Millennium Dynamics, Inc.
Balance Sheets
(In thousands, except share amounts)
December 31 September 30
1995 1996 1997
--------------------------------------
Assets
Current assets:
Cash and short-term investments $ 1 $ 177 $ 215
Accounts receivable 95 992 3,208
Prepaid expenses and other assets - 10 182
--------------------------------------
Total current assets 96 1,179 3,605
Furniture and equipment, net 19 36 1,096
--------------------------------------
$ 115 $ 1,215 $ 4,701
======================================
Liabilities and shareholder's equity
Current liabilities:
Payable to parent company $ 268 $ 850 $ 3,730
Accounts payable, accrued expenses and other
liabilities 81 362 771
Deferred revenue 13 46 126
--------------------------------------
Total current liabilities 362 1,258 4,627
Deferred revenue, less current portion 8 14 8
--------------------------------------
370 1,272 4,635
Shareholder's equity:
Common stock, $10.00 par value, 100 shares
authorized, issued and outstanding 1 1 1
Capital surplus - - 1,836
Accumulated deficit (256) (58) (1,771)
--------------------------------------
Total shareholder's equity (deficit) (255) (57) 66
--------------------------------------
$ 115 $ 1,215 $ 4,701
======================================
See accompanying notes.
4
Millennium Dynamics, Inc.
Statements of Operations
(In thousands)
Nine Months
Year ended ended
December 31 September 30
1995 1996 1997
------------------------------------
Revenues:
Software license fees $ 100 $2,137 $ 8,221
Professional services fees 101 976 1,433
------------------------------------
Total revenues 201 3,113 9,654
Operating expenses:
Costs of software license fees 5 94 609
Costs of professional service fees 56 587 1,089
Selling 434 927 3,620
General and administrative 156 393 4,051
Research and development 79 807 2,905
------------------------------------
Total operating expenses 730 2,808 12,274
------------------------------------
Earnings (loss) from operations (529) 305 (2,620)
Provision (credit) for income taxes (186) 107 (907)
------------------------------------
Net earnings (loss) $(343) $ 198 $(1,713)
====================================
See accompanying notes.
5
Millennium Dynamics, Inc.
Statements of Shareholder's Equity
(Dollars in thousands)
Common Stock Net
--------------------- Retained Parent
Number Capital Earnings Company
of Shares Amount Surplus (Deficit) Investment* Total
------------------------------------------------------------------------------------
Common stock issued July
1995 100 $ 1 $ - $ - $ - $ 1
Net loss - - - (256) (87) (343)
Capital contribution - - - - 87 87
------------------------------------------------------------------------------------
Balance at December 31,
1995 100 1 - (256) - (255)
Net earnings - - - 198 - 198
------------------------------------------------------------------------------------
Balance at December 31,
1996 100 1 - (58) - (57)
Net loss - - - (1,713) - (1,713)
Capital contribution - - 1,836 - - 1,836
------------------------------------------------------------------------------------
Balance at September 30,
1997 100 $ 1 $1,836 ($1,771) $ - $ 66
====================================================================================
(*) The cancellation of $87,000 due the parent company for net losses prior to
incorporation has been reflected as a capital contribution.
See accompanying notes.
6
Millennium Dynamics, Inc.
Statements of Cash Flows
(in thousands)
Nine Months
Year ended ended
December 31 September 30
1995 1996 1997
-----------------------------------------------------------
Operating activities
Net earnings (loss) ($343) $ 198 $(1,713)
Adjustments:
Depreciation 1 11 98
Increase in accounts receivable (95) (897) (2,216)
Increase in prepaid expenses and other assets - (10) (172)
Increase in accounts payable, accrued expenses
and other liabilities 81 281 409
Increase (decrease) in payable to parent company 355 (77) (884)
Increase in deferred revenue 21 39 74
-----------------------------------------------------------
20 (455) (4,404)
Investing activities
Purchases of equipment (20) (28) (1,158)
Financing activities
Borrowings from parent company - 659 5,600
Issuance of common stock 1 - -
-----------------------------------------------------------
1 659 5,600
-----------------------------------------------------------
Net increase in cash and short-term investments 1 176 38
Cash and short-term investments, beginning of
period - 1 177
-----------------------------------------------------------
Cash and short-term investments, end of period $ 1 $177 $ 215
===========================================================
See accompanying notes.
7
Millennium Dynamics, Inc.
Notes to Financial Statements
December 31, 1995 and 1996 and September 30, 1997
1. Organization
Millennium Dynamics, Inc. ("MDI" or the "Company") provides software and
consultative services that enable organizations to solve their "Year 2000
problem" in an automated, highly efficient manner. The Company's "Year 2000
solution" is a suite of software tools for a broad range of mainframe and
midrange platforms and languages complemented by a variety of software-assisted
services.
The Company was incorporated in July 1995 in the state of Ohio and is an
indirect wholly-owned subsidiary of American Financial Group, Inc. ("AFG").
Prior to its incorporation, MDI operated as a division of Great American
Insurance Company ("GAI"), an indirect wholly-owned subsidiary of AFG. The
Company's results prior to incorporation include allocations of GAI's historical
costs and expenses related to the Company's operations. Management believes
these allocations were reasonable. The cancellation of $87,000 due the parent
company for net losses prior to incorporation has been reflected as a
contribution to capital. During 1995, the Company operated as a development
stage company; operations prior to 1995 were not significant.
2. Significant Accounting Policies
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Changes in circumstances could cause actual results to differ from these
estimates.
Cash and Short-Term Investments
For financial statement purposes all investments with a maturity of three months
or less when purchased are considered to be cash equivalents. Short-term
investments are stated at cost, which approximates market.
8
Millennium Dynamics, Inc.
Notes to Financial Statements (continued)
2. Significant Accounting Policies (continued)
Concentrations of Credit Risk
Financial instruments which potentially expose the Company to concentrations of
credit risk, as defined by Statement of Financial Accounting Standards No.105,
consist primarily of trade accounts receivable. Management performs credit
evaluations of customers when deemed appropriate and has not experienced any
significant losses to date. The Company's customer base consists primarily of
Fortune 1000 companies or subsidiaries thereof, and its international
distributor network. Collateral is not required upon delivery of products. The
Company had 3 customers in 1995, each accounting for more than 10% of 1995
revenues. No individual non-affiliated customer accounted for more than 10% of
revenues during the year ended December 31, 1996 or nine months ended September
30, 1997.
Furniture and Equipment
Furniture and equipment represents primarily computer equipment and is stated at
cost. Depreciation is computed using the straight-line method based upon the
estimated useful life of the assets.
Revenue Recognition
Software License Fees. Software license fee revenue is recognized when a non-
cancelable license agreement has been signed, the software has been shipped and
all significant contractual obligations have been satisfied. The Company has
deferred a portion of its software license fee revenue to cover its obligation
to provide post-contract support services for periods in excess of one year.
Such deferred revenue is recognized on a straight-line basis over the contract
support period. Revenue from software license fees related to the Company's
obligation to provide certain post-contract support services for periods of one
year or less is not deferred; estimated costs of providing these services are
accrued. Revenue from renewals of maintenance contracts is deferred and
recognized straight-line over the term of the contracts.
Professional Services Fees. Professional services fee revenue is recognized as
the related services are provided.
9
Millennium Dynamics, Inc.
Notes to Financial Statements (continued)
2. Significant Accounting Policies (continued)
Software Development
According to generally accepted accounting principles, capitalization of
software development costs begins upon the establishment of technological
feasibility and concludes when the software product is available for general
release to customers. For the Company's products, this time span has been very
short and the associated costs were insignificant. Accordingly, no software
development costs have been capitalized and all research and development costs
have been expensed as incurred.
Income Taxes
The Company files consolidated federal income tax returns with its parent
company. Deferred income taxes are calculated using the liability method. Under
this method, deferred income tax assets and liabilities are determined based on
differences between financial reporting and tax bases and are measured using
enacted tax rates. Current and deferred tax assets and liabilities are
aggregated with other amounts receivable from or payable to parent company.
Benefit Plans
The Company provides retirement benefits to qualified employees through a
contributory defined contribution plan established by AFG, effective January 1,
1997, for its participating companies. Company contributions under this plan are
invested in securities of AFG and affiliates for the benefit of its employees.
In addition, the Company participates in the employee savings plan sponsored by
AFG whereby MDI may match a specified portion of contributions made by eligible
employees. Prior to January 1, 1997, the Company participated in the Employee
Stock Ownership Retirement Plan ("ESORP") managed by AFG. The ESORP was a
noncontributory, qualified plan, which invested in securities of AFG and
affiliates for the benefit of its employees. Contributions to benefit plans are
charged against earnings in the year for which they are declared.
The Company provides health care and life insurance benefits to eligible
retirees through plans sponsored by AFG. The Company also provides
postemployment benefits to former or inactive employees who were not deemed
retired under other company plans. The projected future cost of providing these
benefits is not material.
10
Millennium Dynamics, Inc.
Notes to Financial Statements (continued)
2. Significant Accounting Policies (continued)
Statement of Cash Flows
For cash flow purposes, "investing activities" are defined as acquiring and
disposing of investments and property and equipment. "Financing activities"
include obtaining resources from owners and providing them with a return on
their investments, borrowing money and repaying amounts borrowed. All other
activities are considered "operating". Short-term investments, having original
maturities of three months or less when purchased, are considered to be cash
equivalents for purposes of the financial statements.
3. Furniture and Equipment, Net
Furniture and equipment consisted of the following (in thousands):
Estimated
Useful
Lives December 31 September 30
(Years) 1995 1996 1997
----------------------------------------------
EDP equipment 3-7 $20 $48 $ 951
Furniture and fixtures 5-7 - - 255
-------------------------------
20 48 1,206
Less: accumulated depreciation 1 12 110
-------------------------------
$19 $36 $1,096
===============================
Depreciation expense on all fixed assets amounted to $1,000 and $11,000 for the
years ended December 31, 1995 and 1996 and for the nine months ended September
30, 1997 was $98,000.
11
Millennium Dynamics, Inc.
Notes to Financial Statements (continued)
4. Payable to Parent Company
Since inception, the Company has funded its operations primarily through
borrowings from its parent company in the form of advances. On March 31, 1997,
the parent company made a $1,836,000 capital contribution in the form of
forgiveness of MDI's payable to the parent company. Borrowings bear interest at
prime rate plus 2% and along with accrued interest is payable on demand. For the
nine months ended September 30, 1997, interest expense was $101,000. At
September 30, 1997, MDI had borrowed $4.7 million from its parent company. The
payable also includes accrued interest of $101,000 and was offset by $1,071,000
for tax payments due MDI under its tax agreement (see Note 5). On November 14,
1997, MDI's parent company made a $3,000,000 capital contribution in the form of
forgiveness of a portion of MDI's payable to parent. MDI's parent has also
agreed to forgive additional amounts of payable to parent.
5. Income Taxes
The Company's tax agreement with the parent company calls for payments to (or
benefits from) its parent company based on book taxable income without regard to
temporary differences (differences between the book basis and tax basis of
assets and liabilities that will result in future taxable income or deductions).
The effects of temporary differences at December 31, 1996 and 1995 and September
30, 1997 were not material.
6. Commitments and Contingencies
The Company is not presently a party to any material litigation, nor is
management aware of any material litigation threatened against MDI.
7. Related Party Transactions
In August 1995, the Company entered into an agreement with GAI, whereby it
provides GAI with a variety of computer conversion services. Revenues related to
this agreement totaled $95,000 for the year ended December 31, 1995 (47% of
total revenues), $714,000 for the year ended December 31, 1996 (23% of total
revenues) and $788,000 (8% of total revenues) for the nine months ended
September 30, 1997.
12
Millennium Dynamics, Inc.
Notes to Financial Statements (continued)
7. Related Party Transactions (continued)
For 1996, the Company was charged $30,000 by GAI for the use of a portion of
GAI's home office facilities. Early in 1997, the Company moved to an office
building owned by an AFG affiliate. For the first nine months of 1997, the
Company was charged $230,000 to rent these spaces under a month-to-month lease.
In 1996, in exchange for assistance in its marketing efforts overseas, the
Company granted a Vantage YR2000 license at no cost to an AFG affiliate with
international operations. In 1996, the Company also granted a Vantage YR2000
license to an AFG affiliate for $10,000 as an incentive to the affiliate to
install and utilize a test version of the toolset.
8. Additional Information
Segment and Geographic Area Information. The Company operates in one industry
segment, the development and marketing of computer software tools and related
services, and markets its products throughout the United States, Canada and
Europe. The following table presents a summary of revenues by geographic region.
Nine Months
Year ended ended
December 31 September 30
1995 1996 1997
-----------------------------------------
Region:
United States 84% 93% 81%
Canada 16 2 3
Europe - 5 16
-----------------------------------------
Total 100% 100% 100%
=========================================
Benefit Plans. The Company expensed retirement plan contributions of $42,000 for
the year ended December 31, 1996 and $55,000 for the first nine months of 1997.
Advertising Costs. MDI expenses advertising costs as incurred. Advertising
expense for the years ended December 31, 1995 and 1996 totaled $63,000 and
$118,000, respectively, and this expense for the nine months ended September 30,
1997 was $400,000.
13
Millennium Dynamics, Inc.
Notes to Financial Statements (continued)
9. Quarterly Operating Results (Unaudited)
The following are quarterly results (in thousands).
1st 2nd 3rd 4th Total
Quarter Quarter Quarter Quarter Year
------------------------------------------------
1995
- ----
Revenues $28 $ 1 $ 1 $171 $201
Earnings (loss) from
operations 3 (56) (155) (321) (529)
Net earnings (loss) 2 (36) (101) (208) (343)
1996
- ----
Revenues $319 $392 $673 $1,729 $3,113
Earnings (loss) from
operations (204) (108) 40 577 305
Net earnings (loss) (133) (70) 26 375 198
1997
- ----
Revenues $2,905 $3,229 $3,520
Earnings (loss) from
operations 468 (708) (2,380)
Net earnings (loss) 304 (465) (1,552)
10. Subsequent Event
In October 1997, MDI and its parent company agreed to sell MDI's assets to
Peritus Software Services, Inc. Just prior to the close of the transaction, MDI
will be merged into its parent company. The transaction is subject to certain
conditions, including regulatory approvals.
14
Pro Forma Financial Information
-------------------------------
The accompanying unaudited pro forma condensed consolidated financial
information reflects the acquisition of substantially all of the
assets and the assumption of certain liabilities of the business of
Millennium Dynamics, Inc. ("MDI") from American Premier Underwriters,
Inc. ("APU") by Twoquay, Inc. ("Twoquay"), a wholly-owned subsidiary
of Peritus Software Services, Inc. (the "Registrant"). The purchase
price paid by Registrant in this transaction, which was consummated
on December 1, 1997, consisted of $30 million in cash and 2,175,000
unregistered shares of the Registrant's common stock (the "Registrant
Shares"). Pursuant to a Registration Rights Agreement dated December
1, 1997 between the Registrant and APU, the Registrant agreed to file
a Registration Statement on Form S-3 covering up to all of the
Registrant Shares by July 6, 1998 and to use its best efforts to
cause such Registration Statement to become effective prior to August
1, 1998. The Registrant also granted APU certain incidental rights to
register up to 500,000 of the Registrant Shares prior to July 6, 1998
in the event of a secondary offering of its common stock. Under the
terms of the Registration Rights Agreement, APU also agreed that up
to 837,500 of the Registrant Shares would be subject to restrictions
on sale through December 31, 1998. In determining the purchase price
for accounting purposes, the Registrant Shares have been assigned a
value of $47.3 million based on the average closing sale price of the
Registrant's common stock during the six trading days beginning on
the second trading day immediately preceding the completion and
public announcement of the terms of the acquisition on October 22,
1997, less a discount of approximately 13% primarily reflecting the
illiquid nature of the Registrant Shares over the periods defined
above.
The unaudited pro forma condensed consolidated financial information
is based on the historical consolidated financial statements of the
Registrant (not presented herein) and the historical financial
statements of MDI and reflects certain pro forma adjustments and
assumptions that the Registrant believes to be reasonable based upon
available information. The acquisition is being accounted for under
the purchase method of accounting, with the total purchase price
being allocated to tangible and identifiable intangible assets
acquired and liabilities assumed from APU based upon their estimated
fair market values, with the remainder being allocated to goodwill,
if any. Based upon the results of an independent appraisal, a
significant portion of the purchase price has been allocated to
identified intangible assets, including approximately $70 million of
in-process research and development which will be expensed
immediately by the Registrant.
15
The unaudited pro forma condensed consolidated balance sheet as of
September 30, 1997 gives effect to the acquisition as if it had been
consummated on that date, while the unaudited pro forma condensed
consolidated statements of operations for the year ended December 31,
1996 and for the nine months ended September 30, 1997 give effect to
the acquisition as if it had been consummated on January 1, 1996. The
unaudited pro forma condensed consolidated financial information is
not necessarily indicative of the financial position or results of
operations which would have actually been reported had the
acquisition been consummated as presented, or which may be reported
in the future. The unaudited pro forma condensed consolidated
financial information should be read in conjunction with the
historical consolidated financial statements and notes thereto of the
Registrant included in the Registrant's Registration Statement on
Form S-1 dated July 2, 1997.
16
PERITUS SOFTWARE SERVICES, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
AS OF SEPTEMBER 30, 1997
(IN THOUSANDS)
Historical
----------------- Pro Forma
Peritus MDI Adjustments Combined
----------------- ----------- --------
ASSETS
Current assets:
Cash, cash equivalents and short-term
investments $46,292 $ 215 $ (215)(2) $ 16,292
(30,000)(4)
Accounts receivable 7,169 3,208 -- 10,377
Costs and estimated earnings in excess of
billings on uncompleted contracts 1,619 -- -- 1,619
Prepaid expenses and other current assets 570 182 -- 752
------- ------ ------------ --------
Total current assets 55,650 3,605 (30,215) 29,040
Fixed assets, net 2,486 1,096 -- 3,582
Other assets 670 -- 75,739 (5) 6,037
(70,372)(6)
------- ------ ----------- --------
$58,806 $4,701 $(24,848) $ 38,659
======= ====== =========== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Current portion of current lease obligations $ 53 $ -- $ -- $ 53
Current portion of long-term debt 225 -- -- 225
Accounts payable 912 771 -- 1,683
Billings in excess of costs and estimated earnings
on uncompleted contracts 726 -- -- 726
Payable to parent company -- 3,730 (3,730)(1) --
Deferred revenue 1,382 126 -- 1,508
Other accrued expenses and current liabilities 2,604 -- 1,988 (4) 4,592
------- ------ ----------- --------
Total current liabilities 5,902 4,627 (1,742) 8,787
Capital lease obligations 157 -- -- 157
Long-term debt 425 -- -- 425
Deferred revenue -- 8 -- 8
------- ------ ----------- --------
Total liabilities 6,484 4,635 (1,742) 9,377
Minority interest in majority-owned subsidiary 169 -- -- 169
------- ------ ----------- --------
Stockholders' equity
Common stock 132 1 (1)(3) 154
22 (4)
Additional paid-in capital 56,461 1,836 (1,836)(3) 103,771
47,310 (4)
Accumulated deficit (4,315) (1,771) 1,771 (3) (74,687)
(70,372)(6)
Note receivable from shareholder (58) -- -- (58)
Cumulative translation adjustment (67) -- -- (67)
------- ------ ----------- --------
Total stockholders' equity 52,153 66 (23,106) 29,113
------- ------ ----------- --------
$58,806 $ 4,701 $(24,848) $ 38,659
======= ====== ============ =======
Note 1: The following is a description of each of the pro forma adjustments:
(1) The elimination of amounts due to APU by MDI which will not be assumed by
the Registrant.
(2) The elimination of MDI's cash and short-term investments which will not be
acquired by the Registrant.
(3) The elimination of MDI's historical equity.
(4) The payment of the purchase price by the Registrant, net of discount on
unregistered shares issued, including costs of the Registrant relating
directly to the acquisition.
(5) Identified intangible assets acquired by the Registrant.
(6) The immediate write-off of in-process research and development acquired by
the Registrant.
17
PERITUS SOFTWARE SERVICES, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1996
(IN THOUSANDS EXCEPT PER SHARE DATA)
Historical
------------------- Pro Forma
Peritus MDI Adjustments Combined
------------------- ----------- --------
Revenue:
Outsourcing services $10,190 $ -- $ -- $10,190
License 6,526 2,137 -- 8,663
Other services 2,519 976 -- 3,495
------- ------ ------- -------
Total revenue 19,235 3,113 -- 22,348
------- ------ ------- -------
Cost of revenue:
Cost of outsourcing services 8,488 -- -- 8,488
Cost of license 162 94 1,073(1) 1,329
Cost of other services 2,931 587 -- 3,518
------- ------ ------- -------
Total cost of revenue 11,581 681 1,073 13,335
------- ------ ------- -------
Gross profit 7,654 2,432 (1,073) 9,013
------- ------ ------- -------
Operating expenses:
Sales and marketing 3,116 927 -- 4,043
Research and development 6,033 393 -- 6,426
General and administrative 3,249 807 -- 4,056
------- ------ ------- -------
Total operating expenses 12,398 2,127 -- 14,525
------- ------ ------- -------
Income (loss) from operations (4,744) 305 (1,073) (5,512)
Interest (expense) income, net (296) -- -- (296)
------- ------ ------- -------
Income (loss) before estimated income taxes
and minority interest (5,040) 305 (1,073) (5,808)
Provision for (benefit from) estimated income taxes (143) 107 (107)(2) (143)
Minority interest in consolidated subsidiary (24) -- -- (24)
------- ------ ------- -------
Net income (loss) (4,921) $ 198 $ (966) (5,689)
====== =======
Accrual of dividend on Series A and B preferred stock (689) (689)
Accretion to redemption value of redeemable stock (413) (413)
------- -------
$(6,023) $(6,791)
======= =======
Pro forma net loss per share assuming conversion
of convertible preferred stock $(0.46) $ (0.44)
===== =======
Shares used in computing pro forma net loss
per share 10,695 2,175 (3) 12,870
====== ======== ======
NOTE 1: For purposes of this pro forma condensed consolidated statement of
operations, the write-off of the acquired in-process research and
development has been excluded due to its non recurring nature.
NOTE 2: The following is a description of each of the pro forma adjustments:
(1) Represents the amortization of identified intangible assets
(excluding in process research and development) on a straight-
line basis over five years.
(2) Elimination of tax provision recorded by MDI pursuant to a tax
sharing agreement with APU.
(3) Pro forma net loss per share is computed assuming the 2,175,000
shares issued in connection with the acquisition were outstanding
for the entire period.
18
PERITUS SOFTWARE SERVICES, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1997
(IN THOUSANDS EXCEPT PER SHARE DATA)
Historical
----------------- Pro Forma
Peritus MDI Adjustments Combined
----------------- ----------- --------
Revenue:
Outsourcing services $ 8,542 $ -- $ -- $ 8,542
License 13,944 8,221 -- 22,165
Other services 4,207 1,433 -- 5,640
------- -------- ---------- -------
Total revenue 26,693 9,654 -- 36,347
------- -------- ---------- -------
Cost of revenue:
Cost of outsourcing services 6,847 -- -- 6,847
Cost of license 430 609 805(1) 1,844
Cost of other services 3,606 1,089 -- 4,695
------- -------- ---------- -------
Total cost of revenue 10,883 1,698 805 13,386
------- -------- ---------- -------
Gross profit 15,810 7,956 (805) 22,961
------- -------- ---------- -------
Operating expenses:
Sales and marketing 5,615 3,620 -- 9,235
Research and development 5,578 2,905 -- 8,483
General and administrative 2,853 4,051 -- 6,904
------- -------- ---------- -------
Total operating expenses 14,046 10,576 -- 24,622
------- -------- ---------- -------
Income (loss) from operations 1,764 (2,620) (805) (1,661)
Interest (expense) income, net 482 -- -- 482
------- -------- ---------- -------
Income (loss) before estimated income taxes
and minority interest 2,246 (2,620) (805) (1,179)
Provision for (benefit from) estimated income taxes 222 (907) 907 (2) 222
Minority interest in consolidated subsidiary (14) -- -- (14)
------- -------- ---------- -------
Net income (loss) $ 2,010 $ (1,713) $ (1,712) $(1,415)
======= ======== ========== =======
Pro forma net income (loss) per share assuming
conversion of convertible preferred stock $0.14 $(0.11)
======= =======
Shares used in computing pro forma net income 2,175 (3)
(loss) per share 13,910 (3,339)(4) 12,746
======= ========== =======
NOTE 1: For purposes of this pro forma condensed consolidated statement of
operations, the write-off of the acquired in-process research and
development has been excluded due to its non recurring nature.
NOTE 2: The following is a description of each of the pro forma adjustments:
(1) Represents the amortization of identified intangible assets
(excluding in process research and development) on a straight-line
basis over five years.
(2) Elimination of tax benefit recorded by MDI pursuant to a tax
sharing agreement with APU.
(3) Pro forma net loss per share is computed assuming the 2,175,000
shares issued in connection with the acquisition were outstanding
for the entire period.
(4) Common stock equivalents have been excluded as they would be
anti-dilutive on a combined basis.
19
EXHIBITS
Exhibit No. Description
2/1/ Asset Purchase Agreement dated as of October 22, 1997 by and
among the Registrant and Twoquay, Inc. and American Premier
Underwriters Inc. ("APU") and Millennium Dynamics, Inc.
4/2/ Specimen certificate for shares of Common Stock.
23 Consent of Ernst & Young LLP.
99/1/ Registration Rights Agreement dated as of December 1, 1997 by
and among the Registrant and APU.
- --------------
/1/ Previously filed with the Registrant's Current Report on Form
8-K, dated December 1, 1997.
/2/ Incorporated herein by reference to the Registrant's
Registration Statement on Form S-1 dated July 2, 1997,
Commission file number 333-27087.
20
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: February 17, 1998
PERITUS SOFTWARE SERVICES, INC.
By: /s/ Allen K. Deary
------------------------------
Allen K. Deary
Vice President, Finance and
Chief Financial Officer (Principal
Financial Officer)
21
EXHIBIT INDEX
Exhibit No. Description
2/1/ Asset Purchase Agreement dated as of October 22, 1997 by and
among the Registrant and Twoquay, Inc. and American Premier
Underwriters Inc. ("APU") and Millennium Dynamics, Inc.
4/2/ Specimen certificate for shares of Common Stock.
23 Consent of Ernst & Young LLP.
99/1/ Registration Rights Agreement dated as of December 1, 1997 by
and among the Registrant and APU.
- --------------
/1/ Previously filed with the Registrant's Current Report on Form
8-K, dated December 1, 1997.
/2/ Incorporated herein by reference to the Registrant's
Registration Statement on Form S-1 dated July 2, 1997,
Commission file number 333-27087.
22