<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: 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: 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 May 11, 1998, there were outstanding 71,596,165 shares of Common
Stock, par value $.001, of the registrant.
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<PAGE>
PLATINUM TECHNOLOGY, INC. AND SUBSIDIARIES
QUARTER ENDED MARCH 31, 1998
INDEX
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PART I--FINANCIAL INFORMATION
Item 1. Financial Statements............................................ 3
Independent Auditors' Review Report................................... 3
Consolidated Balance Sheets as of March 31, 1998 (unaudited) and
December 31, 1997.................................................... 4
Consolidated Statements of Operations for the three months ended March
31, 1998 (unaudited) and 1997 (unaudited)............................ 5
Consolidated Statements of Comprehensive Income for the three months
ended March 31, 1998 (unaudited) and 1997 (unaudited)................ 6
Consolidated Statements of Cash Flows for the three months ended March
31, 1998 (unaudited) and 1997 (unaudited)............................ 7
Notes to Consolidated Financial Statements............................ 8
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.................................................. 9
PART II--OTHER INFORMATION
Item 1. Legal Proceedings............................................... 17
Item 6. Exhibits and Reports on Form 8-K................................ 17
SIGNATURES................................................................ 18
</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 March 31, 1998, and the related consolidated statements
of operations, comprehensive income, and cash flows for the three month
periods ended March 31, 1998 and 1997. 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.
KPMG Peat Marwick LLP
Chicago, Illinois
April 14, 1998
3
<PAGE>
PLATINUM TECHNOLOGY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
ASSETS 1998 1997
------ ----------- ------------
(UNAUDITED)
<S> <C> <C> <C>
Current assets:
Cash and cash equivalents....................... $130,241 $178,138
Short-term investment securities................ 133,271 57,597
Trade accounts receivable, net of allowances of
$1,608 and $1,613.............................. 197,750 212,731
Installment accounts receivable, net of
allowances of $442 and $878.................... 25,432 30,043
Accrued interest and other current assets....... 45,856 32,132
Refundable income taxes......................... 447 547
-------- --------
Total current assets........................ 532,997 511,188
-------- --------
Non-current investment securities................. 7,254 25,553
Property and equipment, net....................... 76,311 77,842
Purchased and developed software, net ............ 126,762 116,717
Excess of cost over net assets acquired, net of
accumulated amortization of $18,872 and $15,975.. 49,853 52,759
Non-current installment receivables, net of
allowances of $680 and $1,616.................... 41,066 21,912
Other assets...................................... 25,641 28,206
-------- --------
Total assets................................ $859,884 $834,177
======== ========
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
<S> <C> <C> <C>
Current liabilities:
Acquisition-related payables.................... $ 16,654 $ 15,717
Income taxes payable............................ 3,616 3,698
Accounts payable................................ 20,869 16,091
Accrued commissions and bonuses................. 7,182 13,357
Accrued royalties............................... 5,839 7,070
Accrued restructuring costs..................... 5,671 6,308
Other accrued liabilities....................... 38,926 42,905
Current maturities of long-term obligations..... 1,319 1,319
Deferred revenue................................ 119,027 116,374
-------- --------
Total current liabilities................... 219,103 222,839
-------- --------
Acquisition-related payables...................... 15,102 18,320
Deferred revenue.................................. 71,601 60,435
Deferred rent..................................... 6,379 6,197
Accrued restructuring costs....................... 15,308 16,002
Long-term obligations, net of current maturities . 266,439 266,824
-------- --------
Total liabilities........................... 593,932 590,617
-------- --------
Stockholders' equity:
Class II preferred stock, $.01 par value;
authorized 10,000, issued and outstanding
1,768.......................................... 18 --
Subscribed Class II preferred stock, $.01 par
value; 1,768 shares subscribed in 1997......... -- 18
Common stock, $.001 par value; authorized
180,000, issued and outstanding 64,853 and
63,860......................................... 65 64
Paid-in capital................................. 579,365 565,371
Accumulated deficit............................. (321,893) (325,558)
Accumulated other comprehensive income:
Unrealized holding gains on marketable
securities................................... 13,340 8,262
Foreign currency translation adjustment....... (4,943) (4,597)
-------- --------
Total stockholders' equity.................. 265,952 243,560
-------- --------
Total liabilities and stockholders' equity.. $859,884 $834,177
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE>
PLATINUM TECHNOLOGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
MARCH 31,
----------------
1998 1997
------- --------
<S> <C> <C>
Revenues:
Software products.......................................... $81,344 $ 57,639
Maintenance................................................ 34,403 28,947
Professional services...................................... 42,514 29,037
------- --------
Total revenues........................................... 158,261 115,623
------- --------
Costs and expenses:
Professional services...................................... 37,504 28,510
Product development and support............................ 53,329 44,136
Sales and marketing........................................ 52,774 50,472
General and administrative................................. 13,659 11,468
Merger costs............................................... -- 3,706
Acquired in-process technology............................. -- 10,417
------- --------
Total costs and expenses................................. 157,266 148,709
------- --------
Operating income (loss)...................................... 995 (33,086)
Other income, net............................................ 4,248 2,306
------- --------
Income (loss) before income taxes............................ 5,243 (30,780)
Income taxes................................................. 1,578 (5,511)
------- --------
Net income (loss)............................................ $ 3,665 $(25,269)
======= ========
Net income (loss) per share:
Basic...................................................... $ 0.06 $ (0.41)
======= ========
Diluted.................................................... $ 0.05 $ (0.41)
======= ========
Shares used in computing per share amounts:
Basic...................................................... 64,249 60,947
======= ========
Diluted.................................................... 70,756 60,947
======= ========
</TABLE>
See accompanying notes to consolidated financial statements.
5
<PAGE>
PLATINUM TECHNOLOGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
-------------------------------
1998 1997
------------- ----------------
<S> <C> <C> <C> <C>
Net income (loss)............................. $3,665 $(25,269)
------ --------
Other comprehensive income (loss), net of tax:
Foreign currency translation adjustment..... (346) (2,376)
Unrealized holding gains (losses) on
marketable securities:
Unrealized holding gains (losses) arising
during the period........................ 6,058 (4,736)
Less reclassification adjustment for gains
included in net income (loss)............ (980) (1,980)
----- ------
Net..................................... 5,078 (6,716)
------ --------
Comprehensive income (loss)................... $8,397 $(34,361)
====== ========
</TABLE>
See accompanying notes to consolidated financial statements.
6
<PAGE>
PLATINUM TECHNOLOGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
MARCH 31,
------------------
1998 1997
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss)........................................ $ 3,665 $(25,269)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization.......................... 18,764 12,244
Acquired in-process technology......................... -- 10,417
Unrealized net holding losses (gains) on marketable eq-
uity securities....................................... 4,564 (2,511)
Realized net gain on sales of investment securities.... (10,854) (39)
Sales of trading securities.............................. 12,975 77
Changes in assets and liabilities, net of acquisitions:
Trade and installment receivables...................... 438 38,915
Deferred income taxes.................................. 125 (5,696)
Accrued interest and other current assets.............. (13,724) (4,227)
Accounts payable and accrued liabilities............... (7,938) (16,731)
Deferred maintenance................................... 13,440 4,589
Income taxes payable................................... 18 (479)
Other.................................................. (634) (3,964)
-------- --------
Net cash provided by operating activities............ 20,839 7,326
-------- --------
Cash flows from investing activities:
Purchases of investment securities....................... (57,129) (18,005)
Sales of available-for-sale securities................... 252 --
Maturities of investment securities...................... 1,252 1,000
Purchases of property and equipment...................... (4,567) (5,444)
Purchased and developed software......................... (17,273) (12,081)
Payments for acquisitions................................ (3,281) (4,128)
Other assets............................................. -- (1,685)
-------- --------
Net cash used in investing activities................ (80,746) (40,343)
-------- --------
Cash flows from financing activities:
Proceeds from exercise of stock options and Stock
Purchase Plan........................................... 12,395 2,470
Payments on borrowings................................... (385) (2,615)
-------- --------
Net cash provided by (used in) financing activities.. 12,010 (145)
-------- --------
Net decrease in cash and cash equivalents.................. (47,897) (33,162)
Cash and cash equivalents at the beginning of the period... 178,138 141,472
-------- --------
Cash and cash equivalents at the end of the period......... $130,241 $108,310
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
7
<PAGE>
PLATINUM TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1--BASIS OF PRESENTATION
The accompanying unaudited interim consolidated financial statements of
PLATINUM technology, inc. and its subsidiaries (collectively, the "Company" or
"PLATINUM") 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. 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, 1997, included in the Company's Annual Report on
Form 10-K (the "Form 10-K"), 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
Basic earnings per share is based on the weighted average number of shares
outstanding and excludes the dilutive effect of common stock equivalents.
Diluted earnings per share is based on the weighted average number of shares
outstanding and includes the dilutive effect of common stock equivalents.
NOTE 3--SUBSEQUENT EVENTS
On April 21, 1998, the Company acquired all of the outstanding capital stock
of Mastering, Inc. ("Mastering"), a leading provider of information technology
training, in exchange for 6,497,094 shares of the Company's Common Stock,
$.001 par value ("Common Stock"), which had a market value, based upon the
closing price of the Common Stock on the Nasdaq National Market ("Market
Value"), of approximately $168,100,000 million on the date the acquisition was
consummated. In addition, the Company assumed stock options which converted
into options to purchase 2,193,219 shares of Common Stock.
On May 12, 1998, the Company acquired all of the outstanding capital stock
of Learmonth and Burchett Management Systems PLC ("LBMS"), a leading provider
of process management solutions, in exchange for 2,775,897 shares of the
Company's Common Stock, which had a Market Value of approximately $71,900,000
on the date the acquisition was consummated. In addition, the Company
exchanged options to purchase 430,736 shares of Common Stock for outstanding
LBMS stock options.
The acquisitions of Mastering and LBMS will be accounted for as poolings of
interests. The Company has incurred, and expects to continue to incur,
significant costs and expenses in connection with these acquisitions,
including investment banking and other professional fees, employees' severance
and various other expenses. Such expenses will be recorded as merger costs in
the second quarter of 1998.
8
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
RESULTS OF OPERATIONS
The following table sets forth the percentages that selected items in the
Consolidated Statements of Operations bear to total revenues.
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
MARCH 31,
---------------
1998 1997
------ ------
<S> <C> <C>
STATEMENTS OF OPERATIONS DATA:
Revenues:
Software products........................................ 51% 50%
Maintenance.............................................. 22 25
Professional services.................................... 27 25
------ ------
Total revenues......................................... 100 100
------ ------
Costs and expenses:
Professional services.................................... 24 25
Product development and support.......................... 34 38
Sales and marketing...................................... 33 44
General and administrative............................... 8 10
Merger costs............................................. -- 3
Acquired in-process technology........................... -- 9
------ ------
Total costs and expenses............................... 99 129
------ ------
Operating income (loss).................................... 1 (29)
Other income, net.......................................... 2 2
------ ------
Income (loss) before income taxes.......................... 3 (27)
Income taxes............................................... 1 (5)
------ ------
Net income (loss).......................................... 2% (22)%
====== ======
</TABLE>
Revenues
The Company's revenues are derived from three sources: (1) license and
upgrade fees for licensing the Company's proprietary and other parties'
software products and providing additional processing capacity on already-
licensed products, (2) maintenance fees for maintaining, supporting and
providing updates and enhancements to software products, and (3) revenues from
the Company's professional services business. Total revenues for the first
quarter of 1998 were $158,261,000, an increase of $42,638,000, or 37%, as
compared to $115,623,000 for the first quarter of 1997. The Company's database
management, systems management and application infrastructure management
business units experienced growth of 67%, 48% and 17%, respectively, in total
software products and maintenance revenues during the first quarter of 1998 as
compared to the first quarter of 1997. Total software products and maintenance
revenues for the Company's data warehousing and decision support business unit
decreased by 18% in the first quarter of 1998. Revenues for this business unit
were higher in the first quarter of 1997 because the Company executed an
approximately $6,000,000 data warehousing and decision support transaction in
that quarter and did not execute a comparable transaction in the first quarter
of 1998.
The Company has a diversified customer base, with no single customer
representing greater than 10% of its total revenues generated in the first
quarter of either 1998 or 1997.
9
<PAGE>
Revenues from domestic (U.S.) customers represented 70% of total revenues
for the first quarter of both 1998 and 1997. Domestic revenues are generated
primarily by the Company's direct sales force (which visits customer sites to
assist with trials, demonstrate product features and close sales transactions)
and inside sales force (which predominantly supports the direct sales force by
developing sales leads and arranging product evaluations), as well as a
telemarketing organization.
Revenues from international customers, principally in Western Europe,
represented 30% of total revenues for the first quarter of both 1998 and 1997.
The Company generates the majority of its international revenues through a
network of wholly-owned subsidiaries, primarily utilizing a direct sales
force.
The table below sets forth, for the periods indicated, the Company's primary
sources of revenues expressed as a percentage of total revenues.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
---------------------
1998 1997
--------- ---------
<S> <C> <C>
Revenues:
Software products:
Licenses...................................... 34% 40%
Upgrades...................................... 17 10
--------- ---------
Total software products..................... 51 50
--------- ---------
Maintenance..................................... 22 25
Professional services........................... 27 25
--------- ---------
Total revenues.............................. 100% 100%
========= =========
</TABLE>
Software Products. Software products revenues for the first quarter of 1998
were $81,344,000, an increase of $23,705,000, or 41%, as compared to
$57,639,000 for the first quarter of 1997. The substantial majority of the
increase in software products revenues in the first quarter of 1998, as
compared to the first quarter of 1997, resulted from increases in the volume
of sales of existing products. A smaller, but still significant, portion of
the increase related to sales of newly introduced products, while only a small
percentage was attributable to price increases. In the first quarter of 1998,
the Company's database management, systems management, application
infrastructure management and data warehousing and decision support business
units represented 49%, 28%, 9% and 14%, respectively, of total software
products revenues.
Maintenance. Maintenance revenues for the first quarter of 1998 were
$34,403,000, an increase of $5,456,000, or 19%, as compared to $28,947,000 for
the first quarter of 1997. Maintenance revenues are derived from recurring
fees charged to perpetual license customers and the implicit first-year
maintenance fees bundled in certain software product sales. The Company
provides maintenance customers with technical support and product
enhancements. Maintenance revenues are deferred and recognized ratably over
the term of the agreement. The increase in maintenance revenues was primarily
attributable to the expansion of the Company's installed customer base, from
which maintenance fees are derived. Because maintenance fees are implicit in
certain new software product licenses, the increase in software licensing
transactions also contributed to the increase in maintenance revenues. In the
first quarter of 1998, the Company's database management, systems management,
application infrastructure management and data warehousing and decision
support business units represented 41%, 25%, 13% and 21%, respectively, of
total maintenance revenues.
Professional Services. Professional services revenues are associated with
the Company's consulting services business and educational programs.
Professional services revenues for the first quarter of 1998 were $42,514,000,
an increase of $13,477,000, or 46%, as compared to $29,037,000 for the first
quarter of 1997. The growth in professional services revenues was primarily
attributable to an increase in billable consultants, as well as a higher ratio
of billable hours to total hours worked. To a lesser extent, increases in
rates charged per billable hour and revenues associated with a recently
acquired consulting business contributed to this growth.
10
<PAGE>
Costs and Expenses
Total expenses for the first quarter of 1998 were $157,266,000, an increase
of $8,557,000, or 6%, over total expenses of $148,709,000 for the first
quarter of 1997. Total expenses for the first quarter of 1998 represented an
increase of $22,680,000, or 17%, as compared to $134,586,000 in total
expenses, excluding merger costs and acquired in-process technology charges,
for the first quarter of 1997. The Company did not incur any merger costs or
acquired in-process technology charges in the first quarter of 1998. Total
expenses, excluding merger costs and acquired in-process technology costs in
the first quarter of 1997, represented 99% and 116% of total revenues for the
first quarter of 1998 and 1997, respectively. As a percentage of total
revenues, total expenses, excluding merger costs and acquired in-process
technology charges, decreased primarily due to overall cost containment
efforts and the savings realized from the restructuring plan which was
implemented in the second quarter of 1997.
Professional Services. Costs of professional services for the first quarter
of 1998 were $37,504,000, an increase of $8,994,000, or 32%, as compared to
$28,510,000 for the first quarter of 1997. The increase in professional
services expenses was attributable primarily to higher salary and other direct
employment expenses resulting from the Company's continued hiring to support
this business. Greater commission and bonus expenses associated with higher
professional services revenues and the achievement of management bonus
targets, which targets were not achieved during the first quarter of 1997,
also contributed to the increase. Professional services expenses represented
88% and 98% of professional services revenues for the first quarter of 1998
and 1997, respectively. In conjunction with the restructuring plan executed in
the second quarter of 1997, the Company realigned its professional services
business through the consolidation of redundant functions. The savings
realized from this restructuring plan, as well as the increased productivity
of the consulting staff and the heightened focus by management on operating
margins, resulted in the decrease in professional services expenses as a
percentage of professional services revenues.
Product Development and Support. Product development and support expenses
for the first quarter of 1998 were $53,329,000, an increase of $9,193,000, or
21%, as compared to $44,136,000 for the first quarter of 1997. The increase in
these expenses during the first quarter of 1998, as compared to the first
quarter of 1997, was primarily attributable to higher bonus and royalty
expenses related to greater revenues and the achievement of management bonus
targets, which targets were not achieved during the first quarter of 1997.
Additionally, the Company incurred higher employee-related expenses associated
with expanded product offerings. Product development and support expenses
represented 34% and 38% of total revenues in the first quarter of 1998 and
1997, respectively. During the second quarter of 1997, the Company began
consolidating certain product development and support efforts to coincide with
its product integration focus. As a result of these consolidation initiatives
and overall cost containment efforts, the Company reduced product development
and support expenses as a percentage of total revenues during the first
quarter of 1998, as compared to the first quarter of 1997. The Company
anticipates that product development and support expenses should continue to
decrease as a percentage of total revenues during 1998.
For the first quarter of 1998 and 1997, the Company capitalized $10,411,000
and $9,022,000, respectively, of software development costs net of related
amortization expense, in accordance with Statement of Financial Accounting
Standards ("SFAS") No. 86, "Accounting for the Costs of Computer Software to
Be Sold, Leased, or Otherwise Marketed."
Sales and Marketing. Sales and marketing expenses for the first quarter of
1998 were $52,774,000, an increase of $2,302,000, or 5%, as compared to
$50,472,000 for the first quarter of 1997. The increase in these expenses
during the first quarter of 1998, as compared to the first quarter of 1997,
was primarily attributable to costs related to the significant expansion of
the domestic and international outside sales force and higher commission
expenses related to the increase in software products revenues. This increase
was partially offset by a decrease in expenses related to marketing promotions
and advertising campaigns due to a change in the Company's marketing strategy
and timing of marketing initiatives. During the first quarter of 1997, the
Company incurred substantial expenses associated with a large corporate image
marketing campaign. Sales and marketing
11
<PAGE>
expenses represented 33% and 44% of total revenues for the first quarter of
1998 and 1997, respectively. The decrease in sales and marketing expenses as a
percentage of total revenues during the first quarter of 1998, as compared to
the first quarter of 1997, was primarily attributable to the decrease in
marketing expenses discussed above, as well as the overall savings realized by
the restructuring plan executed during the second quarter of 1997.
General and Administrative. General and administrative expenses for the
first quarter of 1998 were $13,659,000, an increase of $2,191,000, or 19%, as
compared to $11,468,000 for the first quarter of 1997. The increase in general
and administrative expenses was primarily attributable to higher bonus
expenses associated with the achievement of executive bonus targets, which
targets were not achieved during the first quarter of 1997. Additionally, the
Company incurred higher amortization expense of intangible assets relating to
the Company's convertible debt offering executed in December 1997 (see "--
Liquidity and Capital Resources") and higher amortization expense of excess of
cost over net assets acquired. General and administrative expenses represented
8% and 10% of total revenues for the first quarter of 1998 and 1997,
respectively. The Company's continued focus on overall cost containment
efforts contributed to the decrease in general and administrative expenses as
a percentage of total revenues.
Merger Costs. The Company did not incur merger costs during the first
quarter of 1998. Merger costs were $3,706,000 for the first quarter of 1997.
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 from time to time engages in, and is currently engaged
in, discussions relating to acquisitions that may be material in size and/or
scope and may involve issuances by the Company of a significant number of
shares of Common Stock. The Company continues to pursue merger and acquisition
opportunities, because it believes that acquisitions are an essential part of
the Company's strategy to compete effectively in its rapidly evolving
marketplace. The Company expects to incur merger costs in connection with
recently completed and future acquisitions accounted for as poolings of
interests. These costs will be expensed in the periods in which the
transactions are consummated. See "--Recent Developments" for a description of
certain recently completed and pending acquisitions.
Acquired In-Process Technology. The Company did not incur acquired in-
process technology charges during the first quarter of 1998. Acquired in-
process technology charges were $10,417,000 for the first quarter of 1997. The
acquired in-process technology charges in the first quarter of 1997 related to
acquisitions of software companies and product technologies accounted for
under the purchase method. In these cases, portions of the purchase prices
were allocated to acquired in-process technology.
Prior to completing these acquisitions, the Company conducted reviews in
order to determine the fair market value of the organizations and technologies
to be acquired. These reviews consisted of an evaluation of existing products,
research and development in process (projects that had not reached
technological feasibility and had no alternative future use), customers,
financial position and other matters. The acquired in-process research and
development represents unique and emerging technologies, the application of
which is limited to the Company's IT 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 generally ranging from
six to 18 months from the dates of acquisition.
The Company expects to 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.
Operating Income (Loss)
The Company earned operating income of $995,000 during the first quarter of
1998, compared to an operating loss of $33,086,000 incurred during the first
quarter of 1997. The Company had operating margins of 1% and (29)% in the
first quarter of 1998 and 1997, respectively. Excluding merger costs and
acquired in-process
12
<PAGE>
technology charges, the Company would have reported an operating loss of
$18,963,000 and an operating margin of (16)% in the first quarter of 1997. For
all expense categories (professional services, product development and
support, sales and marketing, and general and administrative), the Company
experienced a decrease in expenses as a percentage of total revenues during
the first quarter of 1998, as compared to the first quarter of 1997. The
Company's overall focus on cost containment efforts and the savings realized
from the restructuring plan contributed to the improved operating margin in
the first quarter of 1998. Although no merger costs or other acquisition-
related charges were incurred in the first quarter of 1998, the Company
expects to continue to incur such charges (as well as expenses related to the
integration of acquired businesses) in future periods, including the second
quarter of 1998, which could materially adversely affect operating results in
the periods in which such acquisitions are consummated and in subsequent
periods.
Other Income
Other income for the first quarter of 1998 was $4,248,000, an increase of
$1,942,000, or 84%, as compared to $2,306,000 for the first quarter of 1997.
The increase in other income was primarily attributable to realized gains on
the sales of investment securities; unrealized holding gains on trading
securities, the market values of which increased from December 31, 1997 to
March 31, 1998; and an increase in interest income on higher cash and
investment balances during the first quarter of 1998, as compared to the first
quarter of 1997. Because unrealized holding gains and losses for trading
securities are reflected in pre-tax earnings, fluctuations in the market value
of these securities are continuously recorded as additions to or deductions
from other income until the securities are sold. The increase in other income
for the first quarter of 1998, as compared to the first quarter of 1997, was
partially offset by interest expense on the Company's convertible subordinated
notes issued in December 1997. See "--Liquidity and Capital Resources."
Income Taxes
The Company's effective tax rate was 30% for the first quarter of 1998, as
compared to 33% for the first quarter of 1997, excluding the Federal tax
effect of merger costs and acquired in-process technology charges. For the
first quarter of 1998, the Company reported income tax expense of $1,578,000
on pre-tax income of $5,243,000. The Company reported an income tax benefit of
$5,511,000 on a pre-tax loss of $30,780,000 for the first quarter of 1997.
Net Income (Loss)
For the reasons discussed above, the Company earned net income of $3,665,000
in the first quarter of 1998, compared to a net loss of $25,269,000 incurred
in the first quarter of 1997. During the first quarter of 1997, the Company
incurred merger costs and acquired in-process technology charges, as well as
expenses related to the integration of acquired businesses, which contributed
significantly to the net loss experienced by the Company. See "--Operating
Income (Loss)" above for further discussion.
RECENT DEVELOPMENTS
On March 14, 1998, the Company entered into an agreement and plan of merger,
pursuant to which the Company has agreed to acquire Logic Works, Inc.
("Logic"), a leading provider of data modeling tools. Under the terms of this
acquisition, Logic will become a wholly-owned subsidiary of the Company. The
Company has agreed to exchange approximately 7,240,095 shares of the Company's
Common Stock, $.001 par value ("Common Stock"), for all of the outstanding
common shares of Logic and to assume stock options which will convert into
options to purchase approximately 1,272,072 shares of Common Stock. This
acquisition, which is expected to be consummated in the second quarter of
1998, is subject to the approval of the stockholders of Logic and customary
legal and regulatory conditions. This acquisition is expected to be accounted
for as a pooling of interests. Costs incurred in connection with this
transaction will be expensed in the quarter in which the acquisition is
consummated.
13
<PAGE>
On April 21, 1998, the Company acquired all of the outstanding capital stock
of Mastering, Inc. ("Mastering"), a leading provider of information technology
training, in exchange for 6,497,094 shares of Common Stock, which had a market
value, based upon the closing price of the Common Stock on the Nasdaq National
Market ("Market Value"), of approximately $168,100,000 million on the date the
acquisition was consummated. In addition, the Company assumed stock options
which converted into options to purchase 2,193,219 shares of Common Stock.
On May 12, 1998, the Company acquired all of the outstanding capital stock
of Learmonth and Burchett Management Systems PLC ("LBMS"), a leading provider
of process management solutions, in exchange for 2,775,897 shares of Common
Stock, which had a Market Value of approximately $71,900,000 million on the
date the acquisition was consummated. In addition, the Company exchanged
options to purchase 430,736 shares of Common Stock for outstanding LBMS stock
options.
The acquisitions of Mastering and LBMS will be accounted for as poolings of
interests. The Company has incurred, and expects to continue to incur,
significant costs and expenses in connection with these acquisitions,
including investment banking and other professional fees, employees' severance
and various other expenses. Such expenses will be recorded as merger costs in
the second quarter of 1998.
LIQUIDITY AND CAPITAL RESOURCES
As of March 31, 1998, the Company held approximately $270,766,000 of cash,
cash equivalents and investments, as compared to $261,288,000 as of December
31, 1997. For the three months ended March 31, 1998, cash and cash equivalents
decreased $47,897,000, from $178,138,000 at the beginning of the period to
$130,241,000 at the end of the period. This decrease was primarily
attributable to cash used in investing activities of $80,746,000. The
principal components of investing activities were purchases of investments of
$57,129,000 and purchased and developed software costs of $17,273,000. The
cash used in investing activities was partially offset by cash provided by
operating and financing activities of $20,839,000 and $12,010,000,
respectively. The positive cash flow from operating activities was reduced by
an increase in accrued interest and other current assets of $13,724,000 and a
decrease in accounts payable and accrued liabilities of $7,938,000. Cash flows
from operating activities in the first quarter of 1998 included proceeds from
the sales of trading securities of $12,975,000. Proceeds of $12,395,000 from
certain employees' exercises of stock options and purchases of Common Stock
under the Company's Stock Purchase Plan represented the primary source of cash
provided by financing activities. Prior to the fourth quarter of 1997, the
Company reported trade and installment receivables on a gross basis and the
sales of installment receivables as a financing activity. The Company now
reports trade and installment receivables, net of such sales, as an operating
activity. For the first quarter of 1997, cash and cash equivalents decreased
$33,162,000, from $141,472,000 at the beginning of the period to $108,310,000
at the end of the period. Cash used in investing activities of $40,343,000 was
partially offset by cash provided by operating activities of $7,326,000.
In recent years, the Company's sources of liquidity have primarily been
funds from capital markets and the sales of installment receivables. The
Company believes the funding available to it from these sources, as well as
cash flows from operations, will be sufficient to satisfy its working capital
and debt service requirements for the foreseeable future. The Company's
capital requirements are primarily dependent on management's business plan
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 had trade and installment accounts receivable, net of
allowances, of $264,248,000 and $264,686,000 at March 31, 1998 and December
31, 1997, respectively. 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.
14
<PAGE>
This trend results in a high balance of accounts receivable relative to
reported revenues at the end of any quarterly reporting period.
The Company sells a significant portion of its installment receivables to
third parties. Installment receivables represent amounts collectible on long-
term financing arrangements and include fees for product licenses, upgrades
and maintenance, sometimes also bundled with professional services contracts.
Installment receivables are generally financed over three to five years, with
interest payable on the license and upgrade portions only. The Company's
installment receivables are recorded net of unamortized discounts and deferred
maintenance fees. When these receivables are sold, the Company reduces the
gross installment receivable balance. Additionally, the Company reclassifies
the deferred maintenance, which was previously reflected as a reduction of the
related installment receivable balance, to an obligation. The deferred
maintenance is recognized into income ratably over the term of the maintenance
agreement.
The Company has continued to execute an increasingly greater number and
higher dollar value of sales transactions having long-term financing
arrangements, primarily attributable to sales of product bundles and
integrated product suites. Consequently, the Company's volume of installment
receivable sales has continued to increase since 1995. The Company receives
proceeds equal to the entire installment receivable balance sold to a third
party finance company, net of an amount representing the interest to be earned
by the finance company. The finance company collects customer remittances over
the term of the agreement. Proceeds from the sale of receivables were
approximately $60,000,000 and $40,000,000 for the first quarter of 1998 and
1997, respectively. The proceeds received in the first quarter of 1998 related
to transactions for which a substantial portion of the associated revenues
were recognized in the first quarter of 1998 and prior periods, while the
remaining portion related to deferred maintenance and services revenues.
However, the Company also recognized deferred maintenance and services
revenues in the first quarter of 1998 for which the Company had previously
received proceeds from sales of the related installment receivables.
There were no accounts receivable sold with recourse during the first
quarter of 1998 or 1997, and as of March 31, 1998, there were no remaining
potential recourse obligations for accounts receivable sold with recourse. The
Company has an agreement with a third party that provides for potential
recourse obligations in the form of a loss pool based on the performance of
the related accounts receivable portfolio. Under the terms of that agreement,
potential recourse obligations at March 31, 1998 and 1997 were approximately
$14,672,000 and $8,558,000, respectively. Based on the credit ratings of the
underlying obligors to the accounts receivable and the performance history of
the accounts receivable portfolio, the Company has assessed the exposure
related to these recourse obligations and determined the potential liability
to be minimal.
The Company had long-term acquisition-related payables of $15,102,000 and
$18,320,000 and other long-term obligations of $266,439,000 and $266,824,000
as of March 31, 1998 and December 31, 1997, respectively. The convertible
subordinated notes issued by the Company in November 1996 and December 1997
constituted the majority of the balances in long-term obligations at March 31,
1998 and December 31, 1997. The Company completed an offering of convertible
subordinated notes due December 15, 2002 in December 1997 (the "1997 Notes").
The 1997 Notes bear interest at 6.25% annually, and the holders of the 1997
Notes have the option to convert them into shares of Common Stock, at any time
prior to maturity, at a conversion price of $36.05 per share. The Company
received proceeds, net of issuance costs, of $144,967,000 from the offering of
the 1997 Notes. The Company completed an offering of convertible subordinated
notes due November 15, 2001 in November 1996 (the "1996 Notes"). The 1996
Notes bear interest at 6.75% annually, and the holders of the 1996 Notes have
the option to convert them into shares of Common Stock, at any time prior to
maturity, at a conversion price of $13.95 per share. The Company received
proceeds, net of issuance costs, of $110,783,000 from the offering of the 1996
Notes. The Company currently has total debt service obligations of
approximately $35,000,000 for 1998, consisting primarily of obligations to pay
interest on the 1996 Notes and the 1997 Notes, as well as acquisition-related
payables. Based on current outstanding indebtedness, the Company estimates its
debt service requirements to be approximately $36,000,000, $18,000,000,
$132,000,000 and $160,000,000 for 1999, 2000, 2001 and 2002, respectively,
which amounts include the outstanding principal balance of the 1996 Notes in
2001 and the outstanding principal balance of the 1997 Notes in 2002.
15
<PAGE>
The Company currently has an unsecured bank line of credit of $55,000,000,
under which borrowings bear interest at rates ranging from approximately LIBOR
plus 1% to the bank's prime rate. As of May 11, 1998, the Company had no
outstanding borrowings under this line of credit, but had aggregate letters of
credit outstanding for approximately $2,933,000, with expiration dates ranging
from September 1998 to July 1999. These letters of credit reduce the available
line of credit balance. Under this credit agreement, the Company has agreed:
(i) to maintain a ratio of current assets to current liabilities of at least
1.0 to 1.0; (ii) to maintain a tangible net worth of not less than
$100,000,000; and (iii) not to permit its ratio of total liabilities to
tangible net worth to at any time exceed 1.0 to 1.0.
FOREIGN CURRENCY EXCHANGE RATES
To date, fluctuations in foreign currency exchange rates have not had a
material effect on the Company's results of operations or liquidity. However,
the Company closely monitors its foreign operations and net asset position to
ascertain the need for hedging foreign currency exchange risk. Since 1997, the
only exposure related to foreign currency exchange for which the Company has
considered hedging appropriate has been related to short-term intercompany
balances. These non-functional currency balances are hedged by purchases and
sales of forward exchange contracts to reduce this exchange rate exposure. At
March 31, 1998, the Company held an aggregate of approximately $31,557,000 in
notional amount of forward exchange contracts. As the Company's operations
expand in international regions outside Western Europe, where the Company's
international operations are currently concentrated, the Company may
increasingly hedge foreign currency exchange risk.
YEAR 2000 CONSIDERATIONS
During 1997, the Company substantially completed the implementation of an
enterprise-wide financial accounting system which is Year 2000 compliant.
Further, the Company has evaluated its internal software and computer systems
and believes its costs associated with addressing, and risk of operational
disruption from internal software or systems failures relating to, Year 2000
issues will be minimal.
The Company believes that some of its customers may allocate a substantial
portion of their 1998 and 1999 IT budgets to products and services addressing
the Year 2000 problem. The Company is unable to determine whether this trend
will negatively impact sales of its traditional product offerings, but
believes that it may lead to increased sales of its Year 2000 products and
services.
All of the software products which the Company currently sells or maintains
are Year 2000 compliant. However, certain of the Company's customers who have
discontinued maintenance may be running old product versions that are not Year
2000 compliant. Because the Company's products are typically used in high
volume information systems that are critical to customers' operations,
business interruptions, loss or corruption of data or other major problems
resulting from a failure of a product to process Year 2000 data correctly
could have significant adverse consequences to customers. Although the Company
believes that its software license agreements provide it with substantial
protection against liability, the Company cannot currently predict whether or
to what extent any legal claims will be brought against the Company, or
whether the Company will otherwise be adversely affected, as a result of any
such adverse consequences to its customers.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board issued SFAS No. 131,
"Disclosures about Segments of an Enterprise and Related Information." The
Company is required to adopt the disclosures of SFAS No. 131 beginning with
its December 31, 1998 annual financial statements. This statement establishes
standards for the way companies are to report information about operating
segments. It also establishes standards for related disclosures about products
and services, geographic areas and major customers. The Company is currently
evaluating the impact of this standard on its financial statements.
SAFE HARBOR PROVISION
This Form 10-Q contains certain "forward-looking statements" (as defined in
Section 21E of the Securities Exchange Act of 1934) that reflect the Company's
expectations regarding its future growth, results of operations,
16
<PAGE>
performance and business prospects and opportunities. Words such as
"anticipates," "believes," "plans," "expects," "estimates" and similar
expressions have been used to identify these forward-looking statements, but
are not the exclusive means of identifying these statements. These statements
reflect the Company's current beliefs and are based on information currently
available to the Company. Accordingly, these statements are subject to known
and unknown risks, uncertainties and other factors that could cause the
Company's actual growth, results, performance and business prospects and
opportunities to differ from those expressed in, or implied by, these
statements. These risks, uncertainties and other factors include the Company's
ability to develop and market existing and acquired products for the IT
infrastructure market; the Company's ability to successfully integrate its
acquired products, services and businesses and continue its acquisition
strategy; risks relating to the Year 2000 challenge; the Company's ability to
adjust to changes in technology, customer preferences, enhanced competition
and new competitors in the IT infrastructure and professional services
markets; currency exchange rate fluctuations, collection of receivables,
compliance with foreign laws and other risks inherent in conducting
international business; risks associated with conducting a consulting services
business; general economic and business conditions, which may reduce or delay
customers' purchases of the Company's products and services; charges and costs
related to acquisitions; and the Company's ability to protect its proprietary
software rights from infringement or misappropriation, to maintain or enhance
its relationships with relational database vendors, and to attract and retain
key employees. The Company is not obligated to update or revise these forward-
looking statements to reflect new events or circumstances or otherwise.
17
<PAGE>
PART II--OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
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, Inc. ("Altai"), a wholly-owned subsidiary of the
Company, is involved in a suit in France which concerns copyright infringement
claims identical to those on which Altai previously prevailed against Computer
Associates International, Inc. ("CAI") in the United States. 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
CAI's claim of copyright infringement. CAI's subsequent appeal in the French
appellate court is still pending. In May 1998, the U.S. Supreme Court denied
Altai's petition for certiorari on motions that the U.S. court decisions are
binding with respect to the French case. Therefore, CAI's appeal in the French
appellate court can proceed. See the Company's Annual Report on Form 10-K for
the year ended December 31, 1997.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
A. Exhibits
<TABLE>
<C> <S>
Exhibit 11 Basic and Diluted Earnings Per Share Calculations.
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:
The Company filed a Current Report on Form 8-K dated January 27, 1998 (the
"January Form 8-K"), pursuant to Item 5 thereof, to update and amend certain
information and disclosures previously reported by the Company pursuant to the
Securities Exchange Act of 1934, to reflect the Company's 1997 acquisitions of
Australian Technology Resources Pty Limited and I&S Informationstechnik and
Services GmbH (collectively, the "Acquisitions"). The January Form 8-K
includes the following audited consolidated financial statements of the
Company, restated to reflect the Acquisitions as poolings of interests: (i)
balance sheets as of December 31, 1995 and 1996, and (ii) statements of
operations, stockholders' equity and cash flows for each of the years in the
three-year period ended December 31, 1996.
The Company filed a Current Report on Form 8-K dated March 3, 1998, pursuant
to Items 5 and 7 thereof, (i) to report the issuance of a press release
announcing the Company's results of operations for the fourth quarter of 1997
and the year ended December 31, 1997, (ii) to report the Company's execution
of an agreement to acquire Mastering, Inc. and the issuance of a press release
in connection therewith; and (iii) to file certain related exhibits.
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.
Platinum technology, inc.
/s/ Andrew J. Filipowski
By: _________________________________
Andrew J. Filipowski
President, Chief Executive Officer
(principal executive officer) and
Chairman of the Board of Directors
Date: May 15, 1998
/s/ Michael P. Cullinane
By: _________________________________
Michael P. Cullinane
Executive Vice President, Chief
Financial
Officer (principal financial and
accounting
officer), Treasurer and a Director
Date: May 15, 1998
19
<PAGE>
Exhibit 11
PLATINUM technology, inc. and subsidiaries
Basic and Diluted Earnings Per Share
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
------------------
1998 1997
------- --------
<S> <C> <C>
Basic income (loss) per share:
Net income (loss) $ 3,665 $(25,269)
------- --------
Weighted average common shares outstanding 64,249 60,947
------- --------
Per share amount $ 0.06 $ (0.41)
======= ========
Diluted income (loss) per share:
Net income (loss) $ 3,665 $(25,269)
------- --------
Weighted average common shares outstanding 64,249 60,947
Add: Effect of dilutive securities
Stock options 4,739 --
Convertible preferred stock 1,768 --
------- --------
Diluted weighted average common shares outstanding 70,756 60,947
------- --------
Per share amount $ 0.05 $ (0.41)
======= ========
</TABLE>
<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 April
14, 1998 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
April 14, 1998
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 130,241
<SECURITIES> 140,525
<RECEIVABLES> 199,358
<ALLOWANCES> 1,608
<INVENTORY> 0
<CURRENT-ASSETS> 532,997
<PP&E> 135,653
<DEPRECIATION> 59,342
<TOTAL-ASSETS> 859,884
<CURRENT-LIABILITIES> 219,103
<BONDS> 0
0
18
<COMMON> 65
<OTHER-SE> 265,869
<TOTAL-LIABILITY-AND-EQUITY> 859,884
<SALES> 0
<TOTAL-REVENUES> 158,261
<CGS> 0
<TOTAL-COSTS> 157,266
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 4,460
<INCOME-PRETAX> 5,243
<INCOME-TAX> 1,578
<INCOME-CONTINUING> 3,665
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,665
<EPS-PRIMARY> 0.06
<EPS-DILUTED> 0.05
</TABLE>
