<PAGE>
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED: SEPTEMBER 30, 1996
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER : 0-19058
PLATINUM TECHNOLOGY, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 36-3509662
(STATE OR OTHER JURISDICTION (IRS EMPLOYER IDENTIFICATION NO.)
OF INCORPORATION OR ORGANIZATION)
1815 SOUTH MEYERS ROAD, OAKBROOK TERRACE, ILLINOIS 60181
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES AND ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (630) 620-5000
----------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes X No
As of October 31, 1996, there were outstanding 55,966,105 shares of common
stock, par value $.001, of the registrant.
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<PAGE>
PLATINUM TECHNOLOGY, INC. AND SUBSIDIARIES
QUARTER ENDED SEPTEMBER 30, 1996
INDEX
<TABLE>
<CAPTION>
PAGE
----
<C> <S> <C>
PART I--FINANCIAL INFORMATION
Item 1. Financial Statements
Independent Auditors' Review Report........................... 3
Consolidated Balance Sheets as of September 30, 1996
(unaudited) and December 31, 1995............................ 4
Consolidated Statements of Operations for the three months and
nine months ended September 30, 1996 (unaudited) and 1995
(unaudited).................................................. 5
Consolidated Statements of Cash Flows for the nine months
ended September 30, 1996 (unaudited) and 1995 (unaudited).... 6
Notes to Consolidated Financial Statements.................... 7-8
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations.................................... 9-15
PART II--OTHER INFORMATION
Item 1. Legal Proceedings............................................. 16
Item 6. Exhibits and Reports on Form 8-K.............................. 16
SIGNATURES................................................................ 17
</TABLE>
2
<PAGE>
PART I--FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
INDEPENDENT AUDITORS' REVIEW REPORT
The Board of Directors
PLATINUM technology, inc.:
We have reviewed the consolidated balance sheet of PLATINUM technology, inc.
and subsidiaries as of September 30, 1996, and the related consolidated
statements of operations for the three and nine month periods ended September
30, 1996 and 1995 and cash flows for the nine month periods ended September
30, 1996 and 1995. These consolidated financial statements are the
responsibility of the Company's management.
We conducted our review in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures
to financial data and making inquiries of persons responsible for financial
and accounting matters. It is substantially less in scope than an audit
conducted in accordance with generally accepted auditing standards, the
objective of which is the expression of an opinion regarding the financial
statements taken as a whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that
should be made to the consolidated financial statements referred to above for
them to be in conformity with generally accepted accounting principles.
We have previously audited, in accordance with generally accepted auditing
standards, the consolidated balance sheet of PLATINUM technology, inc. and
subsidiaries as of December 31, 1995, and the related consolidated statements
of operations, stockholders' equity, and cash flows for the year then ended
(not presented herein); and in our report dated March 29, 1996, we expressed
an unqualified opinion on those consolidated financial statements. In our
opinion, the information set forth in the accompanying consolidated balance
sheet as of December 31, 1995, is fairly stated, in all material respects, in
relation to the consolidated balance sheet from which it has been derived.
KPMG Peat Marwick LLP
Chicago, Illinois
October 30, 1996
3
<PAGE>
PLATINUM TECHNOLOGY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
ASSETS 1996 1995
------ ------------- ------------
(UNAUDITED)
<S> <C> <C>
Current assets:
Cash and cash equivalents......................... $ 50,542 $ 111,847
Short-term investment securities.................. 2,000 7,802
Trade accounts receivable, net of allowances of
$2,245 and $2,695................................ 118,630 115,876
Installment accounts receivable, net.............. 8,355 6,058
Accrued interest and other current assets......... 9,346 10,545
Refundable income taxes........................... 308 355
--------- ---------
Total current assets............................ 189,181 252,483
--------- ---------
Noncurrent investment securities.................... 3,966 13,126
Property and equipment.............................. 66,526 51,004
Purchased and developed software.................... 70,335 52,268
Excess of cost over net assets acquired, net of
accumulated amortization of $9,189 and $5,100...... 34,825 35,494
Other assets........................................ 49,751 33,813
--------- ---------
$414,584 $ 438,188
========= =========
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
<S> <C> <C>
Current liabilities:
Acquisition-related payables...................... $ 7,412 $ 12,518
Income taxes payable.............................. -- 1,068
Accounts payable.................................. 11,991 16,001
Accrued commissions and bonuses................... 8,922 8,598
Accrued royalties................................. 2,458 1,637
Other accrued liabilities......................... 19,759 27,700
Current maturities of long-term obligations....... 3,436 1,313
Deferred maintenance.............................. 53,145 56,969
--------- ---------
Total current liabilities....................... 107,123 125,804
--------- ---------
Acquisition-related payables........................ 8,026 9,756
Deferred maintenance................................ 27,763 3,795
Deferred rent....................................... 7,730 8,795
Long-term obligations, net of current maturities.... 931 1,586
Stockholders' equity:
Class II preferred stock, $.01 par value.
Authorized 10,000, none outstanding.............. -- --
Common stock, $.001 par value. Authorized 180,000,
issued and outstanding 55,954 and 53,194......... 56 53
Paid-in capital................................... 446,265 433,103
Notes receivable.................................. (315) (515)
Accumulated deficit............................... (182,605) (144,662)
Foreign currency translation adjustment........... (390) 473
--------- ---------
Total stockholders' equity...................... 263,011 288,452
--------- ---------
$ 414,584 $ 438,188
========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
See accompanying independent auditors' review report.
4
<PAGE>
PLATINUM TECHNOLOGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS
ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------ ------------------
1996 1995 1996 1995
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenues:
Software products.................... $ 59,952 $ 34,352 $152,074 $101,578
Maintenance.......................... 27,029 19,297 74,694 54,872
Professional services................ 26,449 18,138 69,618 50,193
-------- -------- -------- --------
Total revenues..................... 113,430 71,787 296,386 206,643
-------- -------- -------- --------
Costs and expenses:
Professional services................ 21,001 16,887 59,012 47,213
Product development and support...... 43,049 24,772 117,480 62,952
Sales and marketing.................. 47,808 31,395 130,063 82,275
General and administrative........... 8,118 8,955 26,036 23,042
Merger costs......................... -- 22,612 5,782 24,764
Acquired in-process technology....... 4,090 5,300 11,095 25,453
-------- -------- -------- --------
Total costs and expenses........... 124,066 109,921 349,468 265,699
-------- -------- -------- --------
Operating loss......................... (10,636) (38,134) (53,082) (59,056)
Other income........................... 462 570 2,566 2,991
-------- -------- -------- --------
Loss before income taxes............... (10,174) (37,564) (50,516) (56,065)
Income taxes........................... (2,481) (8,820) (12,528) (11,004)
-------- -------- -------- --------
Net loss............................... $ (7,693) $(28,744) $(37,988) $(45,061)
======== ======== ======== ========
Net loss per share..................... $ (0.14) $ (0.69) $ (0.69) $ (1.09)
======== ======== ======== ========
Shares used in computing per share
amounts............................... 55,678 41,460 55,271 41,212
======== ======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
See accompanying independent auditors' review report.
5
<PAGE>
PLATINUM TECHNOLOGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
------------------
1996 1995
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net loss................................................. $(37,988) $(45,061)
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities:
Depreciation and amortization.......................... 25,799 14,408
Acquired in-process technology......................... 11,095 25,453
Changes in assets and liabilities, net of acquisitions:
Trade and installment receivables........................ (85,127) (11,147)
Deferred income taxes.................................... (16,908) (7,160)
Accrued interest and other current assets................ 1,415 (5,570)
Accounts payable......................................... (4,272) 3,952
Accrued liabilities...................................... (9,096) 8,303
Deferred maintenance..................................... 19,272 5,000
Income taxes payable..................................... (1,106) (79)
Other.................................................... (2,333) (823)
-------- --------
Net cash used in operating activities................ (99,249) (12,724)
-------- --------
Cash flows from investing activities:
Purchases of investment securities....................... (17,765) (17,484)
Sales of investment securities........................... 18,779 47,503
Maturities of investment securities...................... 13,948 7,527
Purchases of property and equipment...................... (25,546) (22,233)
Capitalized software development costs................... (27,269) (13,844)
Payments for acquisitions................................ (12,819) (43,203)
Other assets............................................. (2,156) (13,586)
-------- --------
Net cash used in investing activities................ (52,828) (55,320)
-------- --------
Cash flows from financing activities:
Proceeds from exercise of stock options.................. 3,392 4,336
Proceeds from the sale of receivables.................... 85,776 --
Borrowings under line of credit.......................... -- 12,500
Long-term borrowings, net................................ 1,604 1,475
-------- --------
Net cash provided by financing activities............ 90,772 18,311
-------- --------
Adjustment to conform fiscal years of pooled businesses.... -- (1,139)
-------- --------
Net decrease in cash and cash equivalents.................. (61,305) (50,872)
Cash and cash equivalents at the beginning of the period... 111,847 78,458
-------- --------
Cash and cash equivalents at the end of the period......... $ 50,542 $ 27,586
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
See accompanying independent auditors' review report.
6
<PAGE>
PLATINUM TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1--BASIS OF PRESENTATION
The accompanying unaudited interim consolidated financial statements reflect
all adjustments which, in the opinion of management, are necessary for a fair
presentation of the results of the interim periods presented. All such
adjustments are of a normal recurring nature. Because the Company's
acquisitions of Prodea Software Corporation (Prodea), Paradigm Systems
Corporation (Paradigm), and Axis Systems International, Inc. (Axis) during the
first quarter of 1996 are being treated as poolings of interests for
accounting purposes, all consolidated financial statements for the periods
prior to the acquisitions have been restated to include the assets,
liabilities, and operating results of these companies (See "Business
Combinations" at Note 3). All intercompany accounts and transactions have been
eliminated.
These consolidated financial statements should be read in conjunction with
the Company's audited consolidated financial statements and notes thereto for
the year ended December 31, 1995, included in the Company's Registration
Statement on Form S-1, as amended, Registration No. 333-07783, as filed with
the Securities and Exchange Commission.
Certain prior period costs and expenses have been reclassified to conform to
the current period presentation.
NOTE 2--EARNINGS PER SHARE
Net loss per share is based on the weighted average number of shares
outstanding and does not include the effect of unexercised stock options.
NOTE 3--BUSINESS COMBINATIONS
On January 17, 1996, the Company acquired all of the outstanding capital
stock of Advanced Systems Technologies, Inc. (AST), a developer of performance
management tools, in exchange for approximately $445,000 in cash plus 344,640
shares of the Company's common stock ("Common Stock"), which had a market
value (based upon the trading price on the Nasdaq National Market) of
approximately $5,800,000 at the time of the acquisition. This acquisition was
accounted for under the purchase method, and a significant portion of the
purchase price was charged to acquired in-process technology in the first
quarter of 1996.
On February 8, 1996, the Company acquired all of the outstanding capital
stock of Prodea, a leading provider of data warehousing and business
intelligence tools, in exchange for 2,126,913 shares of Common Stock. In
addition, the Company assumed stock options which converted into options to
purchase 212,426 shares of Common Stock.
On March 26, 1996, the Company acquired all of the outstanding capital stock
of Paradigm, a leading provider of information technology consulting services,
in exchange for 762,503 shares of Common Stock. In addition, the Company
assumed stock options which converted into options to purchase 55,228 shares
of Common Stock.
On March 29, 1996, the Company acquired all of the outstanding capital stock
of Axis, a leading provider of information technology consulting services, in
exchange for 319,926 shares of Common Stock. In addition, the Company assumed
stock options which converted into options to purchase 59,986 shares of Common
Stock.
The acquisitions of Prodea, Paradigm, and Axis were accounted for as
poolings of interests.
The Company incurred significant costs and expenses in connection with the
acquisitions accounted for as poolings of interests, including investment
banking and other professional fees, employees' severance, and various other
expenses. These costs were expensed in the first quarter of 1996.
7
<PAGE>
On July 3, 1996, the Company purchased all of the outstanding shares of
Software Alternatives, Inc. (d/b/a System Software Alternatives), a leading
provider of production scheduling software, for approximately $1,900,000. The
acquisition was accounted for under the purchase method, and a significant
portion of the purchase price was charged to acquired in-process technology in
the third quarter of 1996.
On July 29, 1996, the Company acquired all of the outstanding shares of
Grateful Data, Inc. (d/b/a TransCentury Data Systems), a Year 2000 solution
provider, for $100,000 in cash plus 333,333 shares of Common Stock, which had
a market value (based upon the trading price on the Nasdaq National Market) of
approximately $4,000,000 at the time of the acquisition. This acquisition was
accounted for under the purchase method, and a significant portion of the
purchase price was charged to acquired in-process technology in the third
quarter of 1996.
For the acquisitions accounted for as purchases, the pro forma operating
results (as if the companies had been combined at the beginning of the period)
are not material to the accompanying consolidated financial statements.
8
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
OVERVIEW
The Company offers enterprise infrastructure software products through five
business units: systems management, database management, application
lifecycle, business intelligence and data warehouse. The Company is now
leveraging the breadth of its product lines and its professional service
capabilities, and is devoting substantial resources to integrate its products
and technologies, to provide complete, customized solutions for enterprise
infrastructure problems. These solutions range from a single product to a set
of integrated products from multiple business units bundled into a product
suite, along with design and implementation services provided by the Company's
consulting staff. These solutions also include ongoing product upgrades,
maintenance and support, sometimes pursuant to multi-year contracts.
Evidencing the increasing demand of the Company's customers for such
comprehensive solutions, the Company executed 32 transactions of over $1
million each during the first nine months of 1996, as compared to only one
such transaction during the first nine months of 1995.
RESULTS OF OPERATIONS
The following table sets forth the percentages that selected items in the
Consolidated Statements of Operations bear to total revenues. The Consolidated
Statements of Operations give retroactive effect to the Company's acquisitions
of Prodea Software Corporation as of February 8, 1996, Paradigm Systems
Corporation as of March 26, 1996, and Axis Systems International, Inc. as of
March 29, 1996, each of which was accounted for using the pooling-of-interests
method, and, as a result, the Company's results of operations for the three
and nine months ended September 30, 1996 and 1995 are presented as if the
combining companies had been consolidated for all periods presented.
<TABLE>
<CAPTION>
NINE MONTHS
THREE MONTHS ENDED
ENDED SEPTEMBER
SEPTEMBER 30, 30,
---------------- --------------
1996 1995 1996 1995
------ ------ ----- -----
<S> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA:
Revenues:
Software products..................... 53% 48% 51% 49%
Maintenance........................... 24 27 25 27
Professional services................. 23 25 24 24
------ ------ ----- -----
Total revenues:..................... 100 100 100 100
------ ------ ----- -----
Costs and expenses:
Professional services................. 18 24 20 23
Product development and support....... 38 35 39 30
Sales and marketing................... 42 44 44 40
General and administrative............ 7 12 9 11
Merger costs.......................... -- 31 2 12
Acquired in-process technology........ 4 7 4 12
------ ------ ----- -----
Total costs and expenses............ 109 153 118 128
------ ------ ----- -----
Operating loss.......................... (9) (53) (18) (28)
Other income............................ * 1 1 1
------ ------ ----- -----
Loss before income taxes................ (9) (52) (17) (27)
Income taxes............................ (2) (12) (4) (5)
------ ------ ----- -----
Net loss................................ (7)% (40)% (13)% (22)%
====== ====== ===== =====
</TABLE>
- --------
*Not meaningful.
9
<PAGE>
REVENUES
The Company's revenues currently are derived from three sources: 1) license
fees for licensing the Company's proprietary software products, 2) maintenance
fees for maintaining, supporting, and providing current
upgrades of the Company's software products, and 3) revenues from the
Company's professional services business. Total revenues for the third quarter
of 1996 were $113,430,000, an increase of $41,643,000, or 58%, as compared to
$71,787,000 for the same period in 1995. Total revenues for the first nine
months of 1996 were $296,386,000, an increase of $89,743,000, or 43%, as
compared to $206,643,000 for the same period in 1995.
Revenues from customers in North America, as a percentage of total revenues,
represented 76% and 78% for the third quarter of 1996 and 1995, respectively,
and 77% and 80%, for the first nine months of 1996 and 1995, respectively.
North American revenue is generated primarily by the Company's direct sales
force and telemarketing organization.
Revenue from international customers, as a percentage of total revenues,
represented 24% and 22% for the third quarter of 1996 and 1995, respectively,
and 23% and 20% in the first nine months of 1996 and 1995, respectively. The
increased proportion of international revenue to total revenue was the result
of the Company's significant investment in the global marketplace.
International revenue is now generated almost entirely by the Company's
international subsidiaries. For the first nine months of 1996, less than 3% of
the Company's international revenue was provided by the Company's
international affiliates, which were independent businesses through which the
Company previously generated a substantial portion of the Company's
international product and service revenue.
SOFTWARE PRODUCTS. Software products revenue for the third quarter of 1996
was $59,952,000, an increase of $25,600,000, or 75%, as compared to
$34,352,000 for the third quarter of 1995. Software products revenue for the
first nine months of 1996 was $152,074,000, an increase of $50,496,000, or
50%, as compared to $101,578,000 for the first nine months of 1995. The growth
in software products revenue resulted from increased sales of both individual
point products and integrated product suites and was the result of revenue
increases of 66%, 44%, 60%, 47%, and 9%, respectively, experienced by the
Company's database management, systems management, application lifecycle,
business intelligence and data warehouse business units during the first nine
months of 1996. The Company believes this growth was primarily attributable to
the continued marketplace acceptance of the Company's products and the
Company's aggressive expansion of its sales and marketing efforts, as well as
new product offerings. During the first nine months of 1996, the Company has
expanded its customer base through more sales of integrated product suites,
resulting in larger sales transactions.
MAINTENANCE. Maintenance revenue for the third quarter of 1996 was
$27,029,000, an increase of $7,732,000, or 40%, as compared to $19,297,000 for
the third quarter of 1995. Maintenance revenue for the first nine months of
1996 was $74,694,000, an increase of $19,822,000, or 36%, as compared to
$54,872,000 for the first nine months of 1995. Maintenance revenue is derived
from recurring fees charged to perpetual license customers and the implicit
first year maintenance fees bundled in software product sales. The Company
provides maintenance customers with technical support and product
enhancements. The increase in maintenance revenue was primarily attributable
to the expansion of the installed customer base, which supports recurring fees
for maintenance, and to a lesser extent, increased revenues associated with
maintenance fees implicit in certain software product sales. Management
believes that maintenance revenue should continue to increase as the installed
base of the Company's software products increases and matures.
PROFESSIONAL SERVICES. Professional services revenue is revenue associated
with the Company's consulting services business and educational programs.
Professional services revenue for the third quarter of 1996 was $26,449,000,
an increase of $8,311,000, or 46%, as compared to $18,138,000 for the third
quarter of 1995. Professional services revenue for the first nine months of
1996 was $69,618,000, an increase of $19,425,000, or 39%, as compared to
$50,193,000 for the first nine months of 1995. The growth in revenue was due
primarily to the addition of established consulting practices through various
acquisitions.
10
<PAGE>
In attempt to further integrate its products and services and offer a more
comprehensive solution to enterprise systems problems, the Company is
beginning to package its professional services as a feature of its product
sales. Professional services are also offered separate from product sales to
generate revenue and follow-on product sales. The Company expects its
professional services business will continue to grow as it focuses on
providing support for its full range of products, as well as comprehensive
enterprise infrastructure business solutions.
COSTS AND EXPENSES
Total expenses for the third quarter of 1996, excluding merger costs and
acquired in-process technology costs, were $119,976,000, an increase of
$37,967,000, or 46%, as compared to $82,009,000 for the third quarter of 1995.
Total expenses for the nine months ended September 30, 1996, excluding merger
costs and acquired in-process technology costs, were $332,591,000, an increase
of $117,109,000, or 54%, as compared to $215,482,000 for the nine months ended
September 30, 1995. Total expenses, excluding merger costs and acquired in-
process technology costs, as a percentage of total revenues for the third
quarter and first nine months of 1996, were 106% and 112%, respectively, as
compared to 114% and 104% for the same periods in 1995. During the first nine
months of 1996, the Company continued to incur significant costs in supporting
its development laboratories and in building the infrastructure to support the
significantly larger Company that is the result of recent acquisitions. These
costs were primarily associated with the hiring of product developers,
technical writers, and in-house and field technical support personnel;
expanding the inside and outside sales forces; informing customers of the
Company's technical strategy; training all personnel in enterprise
infrastructure issues and new products; accelerated hiring of key management
personnel; and augmenting internal support systems. Management believes that
such investments have been, and continue to be, necessary to fully exploit the
market opportunity for the newly acquired products and to adequately manage
the significantly larger Company.
PROFESSIONAL SERVICES. Costs of professional services for the third quarter
of 1996 were $21,001,000, an increase of $4,114,000, or 24%, as compared to
$16,887,000 for the third quarter of 1995. Costs of professional services for
the first nine months of 1996 were $59,012,000, an increase of $11,799,000, or
25%, as compared to $47,213,000 for the first nine months of 1995.
Professional services expenses as a percentage of professional services
revenue for the third quarter and first nine months of 1996 were 79% and 85%,
respectively, as compared to 93% and 94% for the same periods in 1995. The
increase in these expenses was related to salaries and other direct employment
expenses resulting primarily from the addition of established consulting
practices through various acquisitions. The decrease in these expenses as a
percentage of professional services revenue was primarily attributable to the
streamlining of the professional services workforce and better containment of
occupancy and overhead costs.
PRODUCT DEVELOPMENT AND SUPPORT. Product development and support expenses
for the third quarter of 1996 were $43,049,000, an increase of $18,277,000, or
74%, as compared to $24,772,000 for the third quarter of 1995. Product
development and support expenses for the first nine months of 1996 were
$117,480,000, an increase of $54,528,000, or 87%, as compared to $62,952,000
for the first nine months of 1995. Product development and support expenses as
a percentage of total revenues for the third quarter and first nine months of
1996 were 38% and 39%, respectively, as compared to 35% and 30% for the same
periods in 1995. The increase in these expenses in total and as a percentage
of revenues for the third quarter and for the first nine months of 1996, as
compared to the same periods in 1995, was primarily attributable to the hiring
of additional product developers, in-house as well as field technical support
personnel and technical writers; increased allocated charges for office space
and overhead; and increased hardware and software costs relating to the
product development effort. Also contributing to the increase were higher
bonus and royalty expenses associated with increased software products revenue
and the costs of producing software documentation for an expanding product
line and growing customer base.
The Company has invested heavily in the development of infrastructure
software products for enterprise-wide information systems that integrate
mainframes, minicomputers, workstations, PC's, client/server networks and
intranets. As a result, through the second quarter of 1996, the Company hired
a significant number of product
11
<PAGE>
development and support personnel. The Company believes this investment in
product development and support has been necessary to strengthen its
competitive position in the enterprise infrastructure marketplace, enhance
existing products, and satisfactorily support the Company's growing customer
base. Although these costs will continue to be a significant component of
annual operating expenses, the Company anticipates that these expenses will
decrease as a percentage of total revenues as hiring is tempered and the
Company's infrastructure is solidified.
For the third quarters of 1996 and 1995, the Company capitalized $6,505,000
and $3,099,000, respectively, of software development costs net of related
amortization expense, in accordance with Statement of Financial Accounting
Standards No. 86, "Accounting for the Costs of Computer Software to Be Sold,
Leased, or Otherwise Marketed." For the first nine months of 1996 and 1995,
the Company capitalized $18,494,000 and $9,151,000, respectively, of software
development costs net of related amortization expense.
SALES AND MARKETING. Sales and marketing expenses for the third quarter of
1996 were $47,808,000, an increase of $16,413,000, or 52%, as compared to
$31,395,000 for the third quarter of 1995. Sales and marketing expenses for
the first nine months of 1996 were $130,063,000, an increase of $47,788,000,
or 58%, as compared to $82,275,000 for the first nine months of 1995. Sales
and marketing expenses as a percentage of total revenues for the third quarter
and first nine months of 1996 were 42% and 44%, respectively, as compared to
44% and 40% for the same periods in 1995. The increase in these expenses in
total and as a percentage of revenues for the first nine months of 1996, as
compared to the same period in 1995, was primarily attributable to costs
associated with the significant expansion of the outside sales force, inside
sales force, and telemarketing organizations in the U.S. and in international
subsidiaries. Also contributing to the increase were higher commission
expenses associated with the increase in software products revenue, increased
product marketing costs associated with an expanded product line, higher costs
for sponsorship of seminars and user groups, and increased allocated charges
for office space and overhead. The Company believes the large investment in
sales and marketing has been necessary in order to build the sales
organization required to distribute the Company's expanded product line and
exploit significant new market opportunities. The decrease in these expenses
as a percentage of revenue for the third quarter of 1996, as compared to the
third quarter of 1995, was a result of increased productivity of the sales
force. The Company expects sales and marketing expenses will continue to
decrease as a percentage of revenues as the sales force gains tenure and as
the Company continues to focus on consolidating marketing resources for its
global marketing strategy.
GENERAL AND ADMINISTRATIVE. General and administrative expenses for the
third quarter of 1996 were $8,118,000, a decrease of $837,000, or 9%, as
compared to $8,955,000 for the third quarter of 1995. General and
administrative expenses for the first nine months of 1996 were $26,036,000, an
increase of $2,994,000, or 13%, as compared to $23,042,000 for the first nine
months of 1995. General and administrative expenses as a percentage of total
revenues for the third quarter and first nine months of 1996 were 7% and 9%,
respectively, as compared to 12% and 11% for the same periods in 1995. The
increase in these expenses for the first nine months of 1996, as compared to
the same period in 1995, was primarily related to salaries and other direct
employment expenses attributable to an expanded administrative staff. Also
contributing to the increase were amortization of costs in excess of net
assets acquired related to the Company's acquisitions accounted for as
purchases and increased professional fees. During the third quarter of 1996, a
concerted effort to consolidate redundant administrative functions at the
Company's various domestic locations resulted in a significant reduction in
these expenses in total and as a percentage of revenue.
MERGER COSTS. The Company did not incur merger costs during the third
quarter of 1996. Merger costs were $5,782,000 for the nine months ended
September 30, 1996. The Company incurred merger costs of $22,612,000 and
$24,764,000 for the third quarter and first nine months of 1995, respectively.
Merger costs relate to acquisitions accounted for as poolings of interests and
include investment banking and other professional fees, employee severance
payments, costs of closing excess office facilities, and various other
expenses. The Company may continue to incur such costs and expenses in
connection with possible future mergers. These costs will be expensed in the
period in which the transactions are consummated.
12
<PAGE>
ACQUIRED IN-PROCESS TECHNOLOGY. Acquired in-process technology costs for the
third quarter and first nine months of 1996 were $4,090,000 and $11,095,000,
respectively, as compared to $5,300,000 and $25,453,000 for the same periods
in 1995. These costs relate to acquisitions accounted for under the purchase
method.
Acquired in-process technology costs incurred in the third quarter and first
nine months of 1996 related primarily to the acquisitions of Advanced Systems
Technologies, Inc., Software Alternatives, Inc. and Grateful Data, Inc. Prior
to completing these acquisitions, the Company conducted reviews, which
included the evaluation of existing products and of research and development
in process (projects that had not reached technological and economic
feasibility and had no alternative future use to the Company). The Company
also conducted reviews of customers and financial and other matters in order
to determine fair market value. These acquisitions were completed primarily
for the research and development in process, and were based upon the expected
cash flows in future periods. All of the acquired in-process research and
development represents unique and emerging technologies, the application of
which is limited to the Company's enterprise infrastructure strategy.
Accordingly, these acquired technologies have no alternative future use. The
Company believes it has budgeted adequate research and development resources
to complete the contemplated projects over time periods ranging from six to
eighteen months from the date of acquisition. The Company may continue to
incur charges for acquired in-process technology in connection with future
acquisitions, which will reduce operating and net income for the periods in
which the acquisitions are consummated.
OTHER INCOME
Other income for the third quarter of 1996 was $462,000, a decrease of
$108,000, or 19%, as compared to $570,000 for the third quarter of 1995. Other
income for the first nine months of 1996 was $2,566,000, a decrease of
$425,000, or 14%, as compared to $2,991,000 for the first nine months of 1995.
The decrease in other income for these periods was primarily attributable to
lower interest income on lower cash and investment balances during the first
nine months of 1996 as compared to the same period in 1995.
INCOME TAXES
The Company's effective tax rate, excluding the Federal tax effect of
charges for acquired in-process technology relating to certain acquisitions,
was 33% for the third quarter and first nine months of 1996, as well as the
same periods in 1995. The Company reported an income tax benefit of
$2,481,000, on a pre-tax loss of $10,174,000, for the third quarter of 1996.
The Company recorded an income tax benefit of $12,528,000, on a pre-tax loss
of $50,516,000, for the first nine months of 1996.
LIQUIDITY AND CAPITAL RESOURCES
As of September 30, 1996, the Company held approximately $56,508,000 of
cash, cash equivalents, and investments as compared to $132,775,000 as of
December 31, 1995. See "Cash Flows" below.
The Company had trade and installment accounts receivable, net of
allowances, of $133,758,000 and $126,539,000 at September 30, 1996 and
December 31, 1995, respectively. Total trade and installment receivables
include non-current installment receivables which are classified in other
assets in the consolidated balance sheets. The Company sells software products
and services to customers in diversified industries and geographic regions
and, therefore, has no significant concentration of credit risk. Historically,
a substantial amount of the Company's revenues have been recorded in the third
month of any given quarter, with a concentration of such revenues in the last
week of the third month. This trend results in a high balance of accounts
receivable relative to reported revenues at the end of any quarterly reporting
period.
The Company had long-term acquisition-related payables of $8,026,000 and
$9,756,000 as of September 30, 1996 and December 31, 1995, respectively. The
Company currently has an unsecured bank line of credit of $25,000,000, under
which borrowings bear interest at rates ranging from approximately LIBOR plus
1% to the bank's prime rate. As of October 30, 1996, the Company had no
outstanding borrowings under this line of credit. The Company is in the
process of increasing its line of credit.
13
<PAGE>
The Company's sources of liquidity have traditionally been cash generated
from operations and funds from capital markets, including bank facilities.
During 1996, the sale of receivables has become a significant source of
liquidity. The Company believes the funding available to it from these sources
will be sufficient to satisfy its working capital requirements for the
foreseeable future. The Company's capital requirements are dependent on
management's business plans regarding the levels and timing of investments in
existing and newly-acquired businesses and technologies. These plans and the
related capital requirements may change, based upon various factors, such as
the Company's strategic opportunities, developments in the Company's markets,
the timing of closing and integrating acquisitions, and the conditions of
financial markets.
The Company sells a significant portion of its installment accounts
receivables to third parties. Proceeds from the sale of receivables for the
first nine months of 1996 were $85,776,000. Sales of installment receivables
for the same period in 1995 were minimal. In 1996, a portion of the
receivables were sold with recourse. As of September 30, 1996, the Company's
maximum exposure under the recourse provisions was $32,422,000. The Company
has assessed the exposure related to these recourse provisions and determined
the potential liability to be remote.
The installment accounts receivable are recorded net of unamortized
discounts and maintenance fees. When these receivables are sold, the Company
reduces the related receivable balance and records the deferred maintenance as
an obligation. This obligation is recognized into income ratably over the term
of the maintenance agreement.
CASH FLOWS
Cash used in operating activities were $99,249,000 for the first nine months
of 1996 compared to $12,724,000 used in operating activities for the same
period in 1995. A number of factors resulted in this utilization of cash. The
Company incurred a loss before income taxes of $50,516,000 (net loss of
$37,988,000 grossed up for $12,528,000 of non-cash deferred tax benefits),
which was substantially offset by non-cash expenditures, including $25,799,000
of depreciation and amortization and $11,095,000 in the write-off of acquired
in-process technology. The most significant utilization of cash was due to an
increase in trade and installment receivables (prior to financing) of
$85,127,000, which increase resulted primarily from the concentration of sales
volume near the end of the third quarter. This was partially offset by cash
provided by an increase in deferred maintenance of $19,272,000. Other changes
in cash resulted from fluctuations in various working capital accounts, the
most significant being a reduction of $9,096,000 of accrued liabilities.
Cash used in investing activities was $52,828,000 for the first nine months
of 1996 compared to $55,320,000 for the same period in 1995. The cash
utilization was primarily due to $25,546,000 in purchases of property and
equipment, $27,269,000 capitalization of software development costs, and
$12,819,000 in payments for acquisitions. In the first nine months of 1995,
payments for acquisitions were significantly higher at $43,203,000. The
acquisitions in 1995 were primarily financed through the sale and maturities
of $37,546,000 of investment securities.
Cash provided by financing activities was $90,772,000 for the first nine
months of 1996 compared to $18,311,000 for the same period in 1995. The
primary source of cash was an $85,776,000 sale of receivables.
SAFE HARBOR PROVISION
This Management's Discussion and Analysis of Financial Condition and Results
of Operations and other Items of this Form 10-Q contain forward-looking
statements (as such term is defined in the rules promulgated pursuant to the
Securities Act of 1933, as amended) that are based on the beliefs of the
Company's management, as well as assumptions made by, and information
currently available to, the Company's management. Such forward-looking
statements are subject to the safe harbor created by the Private Securities
Litigation Reform Act of 1995. When used in this Form 10-Q, the words
"anticipate," "believe," "estimate," "expect" and similar expressions, as they
relate to the Company or its management, are intended to identify such
forward-looking statements. A number of important factors could cause the
Company's actual results, performance, or achievements for 1996, 1997, and
beyond to differ materially from the results, performance, or achievements
14
<PAGE>
expressed in, or implied by, any such forward-looking statements made by, or
on behalf of, the Company or its management. These factors include, without
limitation, the maturation and success of the Company's enterprise
infrastructure system strategy, risks inherent in conducting international
business, risks associated with conducting a professional services business,
general economic and business conditions, charges and costs related to
acquisitions, and the ability of the Company to: develop and market existing
and acquired products for the enterprise infrastructure market; successfully
integrate its acquired products, services and businesses and continue its
acquisition strategy; adjust to changes in technology, customer preferences,
enhanced competition and new competitors in the enterprise infrastructure
software and professional services markets; protect its proprietary software
rights from infringement or misappropriation; maintain or enhance its
relationships with relational database vendors; and attract and retain key
employees. These and other factors are more fully described in the Company's
other filings with the Securities and Exchange Commission, including, without
limitation, in the "Risk Factors" section of the Company's Registration
Statement on Form S-1, Registration No. 333-07783, filed July 8, 1996. The
Company undertakes no obligation to release publicly the results of any
revisions to any such forward-looking statements that may be made to reflect
events or circumstances after the date of this Form 10-Q, or to reflect
unanticipated events.
15
<PAGE>
PART II--OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Computer Associates International, Inc. v. Altai, Inc., Case No. 89-08911
(E.D.N.Y.)
In 1988, a complaint was filed against Altai, Inc. ("Altai"), now a wholly-
owned subsidiary of the Company, alleging copyright infringement and
misappropriation of trade secrets. In 1991, a judgment related solely to the
copyright infringement claim was awarded to Computer Associates International,
Inc. ("CA"). The judgment was recorded in 1991 and paid during 1992. Altai
prevailed in a subsequent appeal of the alleged misappropriation of trade
secrets. On June 8, 1995, the Texas Supreme Court issued a decision finding in
favor of Altai with regards to the alleged misappropriation of trade secrets.
CA subsequently requested a rehearing, and the Texas Supreme Court has
overruled the motion for rehearing, withdrawn the June 8, 1995 opinion and
substituted a new opinion in favor of Altai. The time for CA to appeal the
appellate decisions has now expired without CA taking an appeal.
Computer Associates International, Inc., and L'Agence pour la Protection des
Programmes v. La Societe Faster, S.A.R.L. (Commercial Court of Bobigny, Paris,
France).
Altai is also involved in a related suit in France which concerns only
copyright infringement claims identical to those on which Altai prevailed in
the U.S. The French appellate court granted Altai's request that the U.S.
appellate court's copyright ruling should bind the Commercial Court of Bobigny
as a matter of law. In January 1995, the French appellate court issued a
decision rejecting CA's claim of copyright infringement. CA's subsequent
appeal is still pending as well as motions from Altai that the U.S. court
decisions are binding with respect to the French case.
BeaconWare v. Reltech Group, Inc., PLATINUM technology, inc. and Software
Interfaces, Inc.
BeaconWare, a Maine software developer, has sued in the Maine Superior Court
the Company, Reltech Group, Inc. ("Reltech") and Software Interfaces, Inc.
("SII"), two wholly-owned subsidiaries, seeking compensatory and punitive
damages and equitable relief, on tort and contract theories, with respect to
Reltech's alleged failure to market SQLPro, a BeaconWare query tool. The suit
was removed to the U.S. District Court of the District of Maine and
subsequently transferred to the District Court for the Eastern District of
Virginia. Summary judgment has been granted in favor of the Defendants in all
tort claims, including claims for punitive damages, and the court has reserved
ruling on Defendants' summary judgment motion with respect to the balance of
the counts.
Transaction Management Technologies, Maximilian J. Winters, Jr. and the Max
J. Winters, Jr. Trust, v. PLATINUM technology, inc.
This action was settled on April 22, 1996, as described in the Company's
Form 10-Q for the quarter ended March 31, 1996.
The Company is also subject to certain other legal proceedings and claims
which have arisen in the ordinary course of business and which have not been
fully adjudicated. Management currently believes the ultimate outcome of such
matters and those described above will not have a material adverse effect on
the Company's results of operations or financial position.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
A. Exhibits
<TABLE>
<C> <S>
Exhibit 15 Acknowledgment of Independent Certified Public Accountants
Regarding Independent Auditors' Review Report.
Exhibit 27 Financial Data Schedule
</TABLE>
B. Reports on Form 8-K:
None.
16
<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.
Platinum technology, inc.
/s/ Andrew J. Filipowski
Date: November 1, 1996 By: __________________________________
Andrew J. Filipowski,
President and Chief Executive
Officer (Principal Executive
Officer) andChairman of the Board
of Directors
/s/ Michael P. Cullinane
Date: November 1, 1996 By: __________________________________
Michael P. Cullinane,
Executive Vice President, Chief
Financial Officer (Principal
Financial and Accounting
Officer), Treasurer and a
Director
17
<PAGE>
EXHIBIT 15
ACKNOWLEDGMENT OF INDEPENDENT
CERTIFIED PUBLIC ACCOUNTANTS
REGARDING INDEPENDENT AUDITORS' REVIEW REPORT
The Board of Directors
PLATINUM technology, inc.:
With respect to the registration statements on Form S-8 of PLATINUM technology,
inc., we acknowledge our awareness of the use therein of our report dated
October 30, 1996 related to our review of interim financial information.
Pursuant to Rule 436(c) under the Securities Act of 1933, such report is not
considered part of a registration statement prepared or certified by an
accountant or a report prepared or certified by an accountant within the meaning
of sections 7 and 11 of the Act.
KPMG Peat Marwick LLP
Chicago, Illinois
October 30, 1996
<TABLE> <S> <C>
<PAGE>
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<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> SEP-30-1996
<CASH> 50,542
<SECURITIES> 5,966
<RECEIVABLES> 120,875
<ALLOWANCES> 2,245
<INVENTORY> 0
<CURRENT-ASSETS> 189,181
<PP&E> 105,479
<DEPRECIATION> 38,953
<TOTAL-ASSETS> 414,584
<CURRENT-LIABILITIES> 107,123
<BONDS> 0
<COMMON> 56
0
0
<OTHER-SE> 262,955
<TOTAL-LIABILITY-AND-EQUITY> 414,584
<SALES> 0
<TOTAL-REVENUES> 296,386
<CGS> 0
<TOTAL-COSTS> 349,468
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 657
<INCOME-PRETAX> (50,516)
<INCOME-TAX> (12,528)
<INCOME-CONTINUING> (37,988)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
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<NET-INCOME> (37,988)
<EPS-PRIMARY> (0.69)
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