<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
FORM 10-Q
----------------
(Mark
One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended: September 30, 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
OF INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
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 NOVEMBER 11, 1998, THERE WERE OUTSTANDING 86,373,707 SHARES OF COMMON
STOCK, PAR VALUE $.001, OF THE REGISTRANT.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
PLATINUM TECHNOLOGY, INC. AND SUBSIDIARIES
QUARTER ENDED SEPTEMBER 30, 1998
INDEX
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PART I--FINANCIAL INFORMATION
Item 1. Financial Statements
Independent Auditors' Review Report................................... 3
Consolidated Balance Sheets as of September 30, 1998 (unaudited) and
December 31, 1997.................................................... 4
Consolidated Statements of Operations for the Three Months and Nine
Months Ended September 30, 1998 (unaudited) and 1997 (unaudited)..... 5
Consolidated Statements of Comprehensive Income for the Three Months
and Nine Months Ended September 30, 1998 (unaudited) and 1997
(unaudited).......................................................... 6
Consolidated Statements of Cash Flows for the Nine Months Ended
September 30, 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.................................................. 10
PART II--OTHER INFORMATION
Item 1. Legal Proceedings............................................... 21
Item 6. Exhibits and Reports on Form 8-K................................ 21
SIGNATURES................................................................ 22
</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, 1998, and the related consolidated
statements of operations and comprehensive income for the three and nine month
periods ended September 30, 1998 and 1997 and cash flows for the nine month
periods ended September 30, 1998 and 1997. These consolidated financial
statements are the responsibility of the Company's management.
We conducted our reviews 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 reviews, 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, 1997, 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 May 28, 1998, which was based
in part on the reports of other auditors, 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,
1997 is fairly stated, in all material respects, in relation to the
consolidated balance sheet from which it has been derived.
/s/ KPMG Peat Marwick LLP
Chicago, Illinois
November 12, 1998
3
<PAGE>
PLATINUM TECHNOLOGY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1998 1997
------------- ------------
(UNAUDITED)
ASSETS
------
<S> <C> <C>
Current assets:
Cash and cash equivalents............................. $ 110,809 $ 233,024
Short-term investment securities...................... 144,567 79,699
Trade accounts receivable, net of allowances of $2,322
and $4,788........................................... 248,753 227,964
Installment accounts receivable, net of allowances of
$412 and $878........................................ 31,685 30,043
Accrued interest and other current assets............. 51,194 37,090
Refundable income taxes............................... 858 753
---------- ---------
Total current assets.............................. 587,866 608,573
---------- ---------
Non-current investment securities....................... 28,290 45,481
Property and equipment, net............................. 90,179 92,165
Purchased and developed software, net................... 152,258 117,213
Excess of cost over net assets acquired, net of
accumulated amortization of $22,666 and $15,975........ 62,338 52,759
Non-current installment receivables, net of allowances
of $736 and $1,616..................................... 66,419 21,912
Other assets............................................ 29,784 34,804
---------- ---------
Total assets...................................... $1,017,134 $ 972,907
========== =========
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
<S> <C> <C>
Current liabilities:
Acquisition-related payables.......................... $ 20,470 $ 15,717
Income taxes payable.................................. 6,173 4,165
Accounts payable...................................... 22,547 23,294
Accrued commissions and bonuses....................... 17,381 16,237
Accrued royalties..................................... 4,136 7,215
Accrued restructuring costs........................... 3,761 7,391
Other accrued liabilities............................. 65,529 51,946
Current maturities of long-term obligations........... 1,489 1,619
Deferred revenue...................................... 128,580 128,326
---------- ---------
Total current liabilities......................... 270,066 255,910
---------- ---------
Acquisition-related payables............................ 8,044 18,320
Deferred revenue........................................ 76,089 60,435
Deferred rent........................................... 6,553 6,197
Accrued restructuring costs............................. 10,463 21,930
Long-term obligations, net of current maturities........ 268,668 267,239
---------- ---------
Total liabilities................................. 639,883 630,031
---------- ---------
Stockholders' equity:
Class II preferred stock, $.01 par value; authorized
10,000 shares, issued and outstanding 1,768 in 1998.. 18 --
Subscribed Class II preferred stock, $.01 par value;
1,768 shares subscribed in 1997...................... -- 18
Common stock, $.001 par value; authorized 180,000
shares, issued and outstanding 86,266 and 80,239..... 86 80
Paid-in capital....................................... 777,069 691,609
Accumulated deficit................................... (391,514) (352,450)
Accumulated other comprehensive income:
Unrealized holding gains (losses) on marketable
securities......................................... (3,315) 8,466
Foreign currency translation adjustment............. (5,093) (4,847)
---------- ---------
Total stockholders' equity........................ 377,251 342,876
---------- ---------
Total liabilities and stockholders' equity........ $1,017,134 $ 972,907
========== =========
</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 NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------ ------------------
1998 1997 1998 1997
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenues:
Software products.................... $138,793 $107,050 $343,654 $260,419
Maintenance.......................... 43,165 35,095 124,782 102,159
Professional services................ 68,368 48,665 185,043 133,604
-------- -------- -------- --------
Total revenues..................... 250,326 190,810 653,479 496,182
-------- -------- -------- --------
Costs and expenses:
Professional services................ 61,376 42,853 166,529 122,019
Product development and support...... 61,048 51,520 178,018 150,439
Sales and marketing.................. 82,240 67,212 217,054 184,805
General and administrative........... 16,617 14,699 49,430 38,983
Special general and administrative
charges ............................ 6,525 -- 6,525 13,513
Restructuring charges................ (6,525) -- (6,525) 56,063
Merger costs......................... -- -- 39,965 3,706
Acquired in-process technology....... 2,150 -- 32,615 17,164
-------- -------- -------- --------
Total costs and expenses........... 223,431 176,284 683,611 586,692
-------- -------- -------- --------
Operating income (loss)................ 26,895 14,526 (30,132) (90,510)
Other income, net...................... 1,710 5,534 11,729 14,721
-------- -------- -------- --------
Income (loss) from continuing
operations before income taxes........ 28,605 20,060 (18,403) (75,789)
Income taxes........................... 9,220 6,295 16,754 9,032
-------- -------- -------- --------
Net income (loss) from continuing
operations............................ 19,385 13,765 (35,157) (84,821)
-------- -------- -------- --------
Discontinued operations:
Loss from discontinued operations,
net of tax benefit of $365 and
$1,196.............................. -- (580) -- (1,858)
Gain on disposal, net of tax expense
of $394 and $394.................... -- 833 -- 833
-------- -------- -------- --------
Total discontinued operations...... -- 253 -- (1,025)
-------- -------- -------- --------
Net income (loss)...................... $ 19,385 $ 14,018 $(35,157) $(85,846)
======== ======== ======== ========
Net income (loss) per share--basic..... $ 0.23 $ 0.18 $ (0.42) $ (1.11)
======== ======== ======== ========
Net income (loss) per share--diluted... $ 0.21 $ 0.17 $ (0.42) $ (1.11)
======== ======== ======== ========
Shares used in computing per share
amounts--basic........................ 85,568 78,253 82,965 77,457
======== ======== ======== ========
Shares used in computing per share
amounts--diluted...................... 101,093 82,437 82,965 77,457
======== ======== ======== ========
</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 NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------ ------------------
1998 1997 1998 1997
------- ------- -------- --------
<S> <C> <C> <C> <C>
Net income (loss)......................... $19,385 $14,018 $(35,157) $(85,846)
Other comprehensive income (loss), net of
tax:
Foreign currency translation
adjustment............................. 1,340 26 (246) (2,090)
------- ------- -------- --------
Unrealized holding gains (losses) on
marketable securities:
Unrealized holding gains (losses)
arising during the period............ (4,974) 5,211 (5,266) 5,749
Less reclassification adjustment for
gains included in net income (loss).. -- (2,927) (6,515) (9,887)
------- ------- -------- --------
Change in unrealized holding gains
(losses) for the period............ (4,974) 2,284 (11,781) (4,138)
------- ------- -------- --------
Comprehensive income (loss)............... $15,751 $16,328 $(47,184) $(92,074)
======= ======= ======== ========
</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>
NINE MONTHS ENDED
SEPTEMBER 30,
-------------------
1998 1997
--------- --------
<S> <C> <C>
Cash flows from operating activities:
Net loss................................................ $ (35,157) $(85,846)
Adjustments to reconcile net loss to net cash provided
by (used in) operating activities:
Depreciation and amortization......................... 60,634 47,324
Acquired in-process technology........................ 32,615 17,164
Write-off of fixed assets, capitalized software and
other intangible assets in conjunction with the
restructuring plan................................... -- 19,687
Recovery related to restructuring liability........... (6,525) (1,256)
Gain on sale of discontinued operations............... -- (6,709)
Unrealized net holding gains on marketable equity
securities........................................... (2,232) (10,274)
Realized net gain on sales of investment securities... (12,079) (4,370)
Noncash compensation.................................. -- 79
Sales of trading securities............................. 13,918 5,565
Changes in assets and liabilities, net of acquisitions:
Trade and installment receivables..................... (66,592) (97)
Deferred income taxes................................. 11,412 5,180
Accrued interest and other current assets............. (12,995) (11,085)
Accounts payable and accrued liabilities.............. 18,527 24,164
Deferred revenue...................................... 14,880 13,294
Income taxes payable.................................. 1,784 (489)
Other................................................. (171) (9,669)
--------- --------
Net cash provided by operating activities........... 18,019 2,662
--------- --------
Cash flows from investing activities:
Purchases of investment securities...................... (237,473) (34,810)
Sales of available-for-sale securities.................. 14,591 8,056
Maturities of investment securities..................... 156,152 18,505
Purchases of property and equipment..................... (25,833) (18,544)
Proceeds from the sale of discontinued operations....... -- 17,574
Purchased and developed software........................ (60,489) (48,952)
Payments for acquisitions............................... (36,050) (11,444)
Other assets............................................ (1,366) (5,708)
--------- --------
Net cash used in investing activities............... (190,468) (75,323)
--------- --------
Cash flows from financing activities:
Proceeds from exercise of stock options and Stock
Purchase Plan.......................................... 51,946 16,691
Payments on borrowings.................................. (1,327) (5,795)
Other................................................... -- (282)
--------- --------
Net cash provided by financing activities........... 50,619 10,614
--------- --------
Adjustment to conform fiscal years of pooled businesses... (385) 254
--------- --------
Net decrease in cash and cash equivalents................. (122,215) (61,793)
Cash and cash equivalents at the beginning of the period.. 233,024 178,661
--------- --------
Cash and cash equivalents at the end of the period........ $ 110,809 $116,868
========= ========
</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 unaudited interim consolidated financial statements should be read in
conjunction with the Company's audited annual consolidated financial
statements and notes thereto included in the Company's Current Report on Form
8-K dated August 4, 1998 (the "Form 8-K"), as filed with the Securities and
Exchange Commission. The Company filed the Form 8-K to include "Selected
Consolidated Financial Data," "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and Consolidated Financial
Statements of the Company, and related notes and schedules thereto, for the
periods, and as of the dates, covered by the Company's Annual Report on Form
10-K for the year ended December 31, 1997, as previously filed. This financial
information has been restated to give retroactive effect to the acquisitions
of Mastering, Inc. ("Mastering"), Learmonth and Burchett Management Systems
Plc ("LBMS") and Logic Works, Inc. ("Logic Works"), each of which has been
accounted for as a pooling of interests (see "Note 3--Business Combinations"
below).
Certain prior period amounts 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--BUSINESS COMBINATIONS
On April 21, 1998, the Company acquired all of the outstanding capital stock
of 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 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 LBMS, a leading provider of process management solutions, in exchange for
2,775,595 shares of Common Stock, which had a Market Value of approximately
$72,000,000 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.
On May 28, 1998, the Company acquired all of the outstanding capital stock
of Logic Works, a leading provider of data modeling tools, in exchange for
7,424,447 shares of Common Stock, which had a Market Value of approximately
$197,200,000 on the date the acquisition was consummated. In addition, the
Company assumed stock options which converted into options to purchase
1,160,609 shares of Common Stock.
Each of the above transactions was accounted for as a pooling of interests.
8
<PAGE>
PLATINUM TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
On June 12, 1998, the Company acquired all of the outstanding capital stock
of Geneva Software, Inc. ("Geneva Software"), a leading provider of network
management tools, in exchange for 920,615 shares of Common Stock, which had a
Market Value of approximately $22,200,000 on the date the acquisition was
consummated. 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 second quarter of 1998. The pro forma operating results (as
if Geneva Software had been acquired at the beginning of each period
presented) are not material to the accompanying consolidated financial
statements.
During the first nine months of 1998, the Company also acquired certain
other software and services businesses and product technologies, in
transactions accounted for as purchases, for an aggregate purchase price of
approximately $22,200,000. A significant portion of the aggregate purchase
price was charged to acquired in-process technology during the first nine
months of 1998.
The Company incurred significant costs and expenses in connection with these
acquisitions, including investment banking and other professional fees,
employees' severance and various other expenses. Such expenses were recorded
as part of the purchase price in connection with the acquisitions accounted
for as purchases. For the acquisitions accounted for as poolings of interests,
these expenses were recorded as merger costs in the second quarter of 1998.
9
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
During the second quarter of 1998, the Company consummated acquisitions of
Mastering, Inc. ("Mastering"), Learmonth and Burchett Management Systems Plc
("LBMS") and Logic Works, Inc. ("Logic Works"), each of which has been
accounted for using the pooling-of-interests method. As a result, the
Company's Consolidated Financial Statements included herein are presented as
if the Company and such acquired companies had been consolidated for all
periods presented. Information regarding the Company in this Management's
Discussion and Analysis of Financial Condition and Results of Operations gives
retroactive effect to these acquisitions. In addition, the Company has
consummated a number of acquisitions accounted for as purchases, in which
cases the acquired businesses have been included in the Company's results of
operations beginning with the effective dates of the acquisitions.
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 NINE MONTHS
ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------- ----------------
1998 1997 1998 1997
------ ------ ------ ------
<S> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA:
Revenues:
Software products.................. 56% 56% 53% 52%
Maintenance........................ 17 18 19 21
Professional services.............. 27 26 28 27
------ ------ ------ ------
Total revenues................... 100 100 100 100
------ ------ ------ ------
Costs and expenses:
Professional services.............. 25 22 26 25
Product development and support.... 24 27 27 30
Sales and marketing................ 33 35 33 37
General and administrative......... 6 8 8 8
Special general and administrative
charge............................ 3 -- 1 3
Restructuring charges.............. (3) -- (1) 11
Merger costs....................... -- -- 6 1
Acquired in-process technology..... 1 -- 5 3
------ ------ ------ ------
Total costs and expenses......... 89 92 105 118
------ ------ ------ ------
Operating income (loss).............. 11 8 (5) (18)
Other income, net.................... 1 3 2 3
------ ------ ------ ------
Income (loss) from continuing
operations before income taxes...... 12 11 (3) (15)
Income taxes......................... 4 4 2 2
------ ------ ------ ------
Net income (loss) from continuing
operations.......................... 8 7 (5) (17)
------ ------ ------ ------
Income (loss) from discontinued
operations, net of taxes............ -- * -- *
------ ------ ------ ------
Net income (loss).................... 8% 7% (5)% (17)%
====== ====== ====== ======
</TABLE>
- --------
*Less than 1%.
10
<PAGE>
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) fees from the
Company's professional services business. Total revenues for the third quarter
of 1998 were $250,326,000, an increase of $59,516,000, or 31%, as compared to
$190,810,000 for the third quarter of 1997. Total revenues for the first nine
months of 1998 were $653,479,000, an increase of $157,297,000, or 32%, as
compared to $496,182,000 for the same period in 1997. The Company's database
management (principally products relating to IBM's DB2 relational database
management software), systems management, application lifecycle, and data
warehousing and decision support business units experienced growth of 32%,
69%, 3% and 5%, respectively, in total software products and maintenance
revenues during the first nine months of 1998, as compared to the same period
in 1997. Revenues from international customers, principally in Western Europe,
represented 29% and 24% of total revenues for the third quarter of 1998 and
1997, respectively, and 28% and 26% for the first nine months of 1998 and
1997, respectively.
The Company has continued to enter into an increasing number of higher
dollar value sales transactions with customers, primarily attributable to
sales of product bundles and integrated product suites. These transactions are
typically completed pursuant to multi-year contracts and include product
licenses, future upgrades and maintenance, sometimes also bundled with
professional services. In the first nine months of 1998, the Company entered
into 92 sales transactions having a total value of at least $1,000,000, of
which 22 had a total value of at least $3,000,000 and two had a total value of
at least $10,000,000. In the first nine months of 1997, the Company entered
into 62 sales transactions having a total value of at least $1,000,000, of
which 13 had a total value of at least $3,000,000 and none had a total value
of at least $10,000,000.
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 NINE MONTHS
ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------- ---------------
1998 1997 1998 1997
------ ------ ------ ------
<S> <C> <C> <C> <C>
Revenues:
Software products:
Licenses.......................... 43% 43% 38% 41%
Upgrades.......................... 13 13 15 11
------ ------ ------ ------
Total software products......... 56 56 53 52
------ ------ ------ ------
Maintenance......................... 17 18 19 21
Professional services............... 27 26 28 27
------ ------ ------ ------
Total revenues.................. 100% 100% 100% 100%
====== ====== ====== ======
</TABLE>
Software Products. Software products revenues for the third quarter of 1998
were $138,793,000, an increase of $31,743,000, or 30%, as compared to
$107,050,000 for the third quarter of 1997. Software products revenues for the
first nine months of 1998 were $343,654,000, an increase of $83,235,000, or
32%, as compared to $260,419,000 for the first nine months of 1997. The
substantial majority of the increase in software products revenues in the
third quarter and first nine months of 1998, as compared to the same periods
in 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 nine months of 1998, the Company's database
management, systems management, application lifecycle, and data warehousing
and decision support business units represented 35%, 34%, 17% and 14%,
respectively, of total software products revenues.
11
<PAGE>
Maintenance. Maintenance revenues for the third quarter of 1998 were
$43,165,000, an increase of $8,070,000, or 23%, as compared to $35,095,000 for
the third quarter of 1997. Maintenance revenues for the first nine months of
1998 were $124,782,000, an increase of $22,623,000, or 22%, as compared to
$102,159,000 for the same period in 1997. The increase in maintenance revenues
in the third quarter and first nine months of 1998, as compared to the same
periods in 1997, 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 nine months of 1998, the Company's
database management, systems management, application lifecycle, and data
warehousing and decision support business units represented 39%, 22%, 21% and
18%, respectively, of total maintenance revenues.
Professional Services. Professional services revenues for the third quarter
of 1998 were $68,368,000, an increase of $19,703,000, or 40%, as compared to
$48,665,000 for the third quarter of 1997. Professional services revenues for
the first nine months of 1998 were $185,043,000, an increase of $51,439,000,
or 39%, as compared to $133,604,000 for the same period in 1997. The growth in
professional services revenues during the third quarter and first nine months
of 1998 was primarily attributable to an increase in billable consultants, as
well as a higher ratio of billable hours to total hours worked ("utilization
rate"). To a lesser extent, increases in rates charged per billable hour, as
well as revenues associated with recently acquired consulting businesses,
contributed to this growth. For the third quarter of 1998, the growth in
consulting services revenues was offset in small part by a slight decline in
revenues from the Company's educational programs. For the first nine months of
1998, educational program revenues increased slightly over the first nine
months of 1997.
Costs and Expenses
Total expenses for the third quarter of 1998 were $223,431,000, an increase
of $47,147,000, or 27%, over total expenses of $176,284,000 for the third
quarter of 1997. Total expenses for the first nine months of 1998 were
$683,611,000, an increase of $96,919,000, or 17%, as compared to $586,692,000
for the same period in 1997. Excluding restructuring charges, merger costs,
acquired in-process technology charges and special general and administrative
charges (collectively, "Special Charges"), total expenses for the third
quarter of 1998 of $221,281,000 represented an increase of $44,997,000, or
26%, as compared to $176,284,000 for the third quarter of 1997. Excluding
Special Charges, total expenses for the first nine months of 1998 of
$611,031,000 represented an increase of $114,785,000, or 23%, as compared to
$496,246,000 for the same prior-year period. Total expenses, excluding Special
Charges, represented 88% and 94% of total revenues for the third quarter and
first nine months of 1998, respectively, as compared to 92% and 100% for the
same periods in 1997.
Professional Services. Costs of professional services for the third quarter
of 1998 were $61,376,000, an increase of $18,523,000, or 43%, as compared to
$42,853,000 for the third quarter of 1997. Costs of professional services for
the first nine months of 1998 were $166,529,000, an increase of $44,510,000,
or 36%, as compared to $122,019,000 for the first nine months of 1997. The
increase in professional services expenses in the third quarter and first nine
months of 1998, as compared to the same periods in 1997, was primarily
attributable to an increase in the number of consultants resulting from the
Company's continued hiring to support this business, as well as recent
acquisitions. Greater commission and bonus expenses associated with higher
professional services revenues during these periods also contributed to the
increase. Professional services expenses represented 90% of professional
services revenues for both the third quarter and first nine months of 1998, as
compared to 88% and 91% for the same periods in 1997. During the third quarter
of 1998, the Company incurred significant expenses related to the integration
of consulting businesses acquired in the second quarter of 1998. The increase
in these integration expenses contributed to the lower margins experienced by
the Company's professional services business during the third quarter of 1998,
as compared to the same period in 1997.
Product Development and Support. Product development and support expenses
for the third quarter of 1998 were $61,048,000, an increase of $9,528,000, or
18%, as compared to $51,520,000 for the third quarter of 1997. Product
development and support expenses for the first nine months of 1998 were
$178,018,000, an increase of $27,579,000, or 18%, as compared to $150,439,000
for the same period in 1997. The increase in these expenses
12
<PAGE>
during the third quarter and first nine months of 1998, as compared to the
same periods in 1997, was primarily attributable to higher employee-related
expenses and internal information technology support costs associated with
expanded product offerings and recent acquisitions of businesses and
technologies. Additionally, the Company incurred higher performance bonus
expenses during these periods. Product development and support expenses
represented 24% and 27% of total revenues in the third quarter and first nine
months of 1998, respectively, as compared to 27% and 30% for the same periods
in 1997. The decrease in product development and support expenses as a
percentage of total revenues for the third quarter and first nine months of
1998 resulted from the Company's continued cost containment efforts and the
spreading of facility-related and other fixed costs over a greater revenue
base.
For the third quarters of 1998 and 1997, the Company capitalized $16,560,000
and $9,747,000, 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." For the first nine months of 1998 and
1997, the Company capitalized $39,009,000 and $28,791,000, respectively, of
software development costs, net of related amortization expense.
Sales and Marketing. Sales and marketing expenses for the third quarter of
1998 were $82,240,000, an increase of $15,028,000, or 22%, as compared to
$67,212,000 for the third quarter of 1997. Sales and marketing expenses for
the first nine months of 1998 were $217,054,000, an increase of $32,249,000,
or 17%, as compared to $184,805,000 for the first nine months of 1997. The
increase in these expenses during the third quarter and first nine months of
1998, as compared to the same prior-year periods, was primarily attributable
to costs associated with the significant expansion of the domestic and
international outside sales forces, as well as higher commission and bonus
expenses related to the increase in software products revenues. Sales and
marketing expenses represented 33% of total revenues in both the third quarter
and first nine months of 1998, as compared to 35% and 37% for the same periods
in 1997. The decrease in sales and marketing expenses as a percentage of total
revenues during the third quarter and first nine months of 1998, as compared
to the same periods in 1997, was attributable in part to the spreading of
facility-related and other fixed costs over a greater revenue base.
Additionally, commission expenses represented a lower percentage of total
revenues in the third quarter and first nine months of 1998, because the
Company had greater revenues associated with software licensing transactions
in the third quarter of 1998 that were not attributable to the Company's
direct sales force.
General and Administrative. General and administrative expenses for the
third quarter of 1998 were $16,617,000, an increase of $1,918,000, or 13%, as
compared to $14,699,000 for the third quarter of 1997. General and
administrative expenses for the first nine months of 1998 were $49,430,000, an
increase of $10,447,000, or 27%, as compared to $38,983,000 for the first nine
months in 1997. The increase for the third quarter and first nine months of
1998 was attributable primarily to higher employee-related expenses resulting
from recent acquisitions. Additionally, in the third quarter and first nine
months of 1998, the Company incurred higher legal expenses related to certain
on-going legal proceedings, as well as greater amortization expense of excess
of cost over net assets acquired and greater amortization expense of
intangible assets relating to the Company's convertible debt offering executed
in December 1997. General and administrative expenses represented 6% and 8% of
total revenues for the third quarter and first nine months of 1998,
respectively, as compared to 8% for both the third quarter and first nine
months of 1997. See "--Liquidity and Capital Resources" below.
Special General and Administrative Charges. Special general and
administrative charges for write-offs of certain assets in connection with
integration procedures were $6,525,000 for the third quarter and first nine
months of 1998, as compared to none for the third quarter of 1997 and
$13,513,000 for the first nine months of 1997. In the second quarter of 1997,
the Company performed integration procedures related to past acquisition
activity in conjunction with, but not specifically as part of, the
restructuring plan executed during that period. Accordingly, the Company
evaluated the fair value of assets recorded through prior acquisitions and
identified certain trade receivables, prepaid expenses and intangible assets
which had no future value.
The respective balances of these assets were written off during the second
quarter of 1997. The Company
also expensed severance and other employee benefits for certain employees of
acquired companies
13
<PAGE>
who were terminated as a result of the integration efforts. The Company
recorded total charges of $13,513,000 in the quarter ended June 30, 1997 in
connection with the integration procedures discussed above. In the third
quarter of 1998, the company re-evaluated the fair value of certain assets
acquired from prior acquisitions in conjunction with the integration
procedures initiated in the second quarter of 1997. Specific assets were
deemed to have no future value as of September 30, 1998 were written off
during the third quarter of 1998.
Restructuring Charges. During the third quarter of 1998, the Company
recognized a restructuring benefit of $6,525,000 related to the Company's
occupation of previously vacated facilities and the relief of obligations
under cancelled lease agreements, as well as sublease rental activity. This
restructuring benefit represents a recovery of certain restructuring charges
recorded by the Company in the second quarter of 1997, as discussed below.
During the second quarter of 1997, the Company executed a restructuring plan
to consolidate its sales, marketing, business development and product
development operations to achieve cost efficiencies through the elimination of
redundant functions. These redundancies resulted primarily from acquired
businesses. The Company also realigned its business units and inside sales
force to redirect focus on its strongest product lines and better integrate
the efforts of certain product development teams. As part of the plan, the
Company reduced its worldwide work force by approximately 10%, eliminating
approximately 400 positions, primarily in the areas of product development and
support, marketing and inside sales and, to a lesser extent, professional
services and administration.
The Company recorded a one-time charge of $57,319,000 during the second
quarter of 1997 related to the restructuring plan. The restructuring charge
included the following: $24,032,000 for facility-related costs, including a
reserve for estimated lease obligations associated with the closing of office
facilities; $3,510,000 for write-offs of excess equipment, furniture and
fixtures; $19,413,000 for write-offs of capitalized software costs and other
intangible assets related to the termination of development efforts for
certain discontinued products, as well as penalties for the cancellation of
distributorship agreements for such products; and $10,364,000 for severance
and other employee-related costs of terminated staff.
During the first nine months of 1997, LBMS recorded a restructuring benefit
of $1,256,000 related to sublease rental activity. This benefit was offset
against the Company's restructuring charge discussed above.
As of September 30, 1998, the Company had $14,224,000 of accrued
restructuring costs recorded. The Company anticipates that approximately
$2,500,000 of these costs will be paid out during the last quarter of 1998.
The Company estimates that annual restructuring payments will range from
approximately $1,700,000 to approximately $2,000,000 for the years 1999
through 2002 and will be approximately $1,000,000 for the year 2003. The
Company expects to pay out approximately $300,000 annually in the years 2004
through 2014.
Merger Costs. The Company did not incur merger costs during the third
quarter of either 1998 or 1997. The Company incurred merger costs of
$39,965,000 and $3,706,000 during the first nine months of 1998 and 1997,
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 significant merger costs incurred in the first nine months
of 1998 related primarily to the Company's acquisitions of Mastering, LBMS and
Logic Works. The Company from time to time engages 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 future acquisitions accounted
for as poolings of interests. These costs will be expensed in the periods in
which the transactions are consummated, which will reduce operating and net
income for these periods. See "--Recent Developments" below.
14
<PAGE>
Acquired In-Process Technology. Acquired in-process technology costs were
$2,150,000 for the third quarter of 1998. The Company did not incur acquired
in-process technology costs for the third quarter of 1997. Acquired in-process
technology costs were $32,615,000 and $17,164,000 for the first nine months of
1998 and 1997, respectively. These acquired in-process technology charges
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. 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. See "--
Recent Developments" below.
Operating Income (Loss)
The Company earned operating income of $26,895,000 and $14,526,000 during
the third quarter of 1998 and 1997, respectively. The Company incurred an
operating loss of $30,132,000 and $90,510,000 in the first nine months of 1998
and 1997, respectively. The Company had operating margins of 11% and (5)% in
the third quarter and first nine months of 1998, respectively, as compared to
operating margins of 8% and (18)% for the same periods in 1997. Excluding
Special Charges, the Company had operating income of $29,045,000 and
$42,448,000 for the third quarter and first nine months of 1998, respectively,
as compared to operating income of $14,526,000 and an operating loss of
$64,000 for the third quarter and first nine months of 1997, respectively.
Excluding Special Charges, the Company had operating margins of 12% and 7% for
the third quarter and first nine months of 1998, respectively, as compared to
an operating margin of 8% and a negative operating margin of less than one
percent for the same periods in 1997.
Other Income, Net
Other income, net, for the third quarter of 1998 was $1,710,000, a decrease
of $3,824,000, or 69%, as compared to $5,534,000 for the third quarter of
1997. Other income, net, for the first nine months of 1998 was $11,729,000, a
decrease of $2,992,000, or 20%, as compared to $14,721,000 for the first nine
months of 1997. The decrease in other income, net, during the third quarter of
1998, as compared to the third quarter of 1997, was primarily attributable to
a decrease in unrealized holding gains on trading securities and an increase
in interest expense resulting from the Company's issuance of convertible
subordinated notes in December 1997 (see "--Liquidity and Capital Resources"),
as well as a decrease in realized gains on sales of investment securities.
This decrease was offset in part by an increase in interest income due to
higher cash and investment balances during the third quarter of 1998, as
compared to the same period in 1997. The decrease in other income, net, during
the first nine months of 1998, as compared to the first nine months of 1997,
was primarily attributable to a decrease in unrealized holding gains on
trading securities and the increase in interest expense discussed above. This
decrease was partially offset by an increase in realized gains on sales of
investment securities, as well as the increase in interest income due to
higher cash and investment balances during the first nine months of 1998, as
compared to the same period in 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. When these
securities are ultimately sold, the Company reclassifies the respective
unrealized holding gains to realized gains. During the third quarter of 1998,
the Company reclassified its investment in Memco Software Ltd. ("Memco") from
trading securities to available-for-sale securities. This reclassification
resulted from the Company's execution on August 13, 1998 of an agreement to
acquire Memco. The Company's holdings in Memco represented a substantial
majority of its trading securities portfolio. See "--Recent Developments"
below.
Income Taxes
The Company's effective tax rates for the third quarter and the first nine
months of 1998, excluding the Federal tax effect of Special Charges, were 30%
and 31%, respectively. This compares to effective tax rates, excluding the
Federal tax effect of Special Charges, of 31% and 27% for the same periods in
1997. For the third quarter of 1998, the Company reported income tax expense
of $9,220,000, on pre-tax income of $28,605,000, as compared to income tax
expense of $6,295,000, on pre-tax income of $20,060,000, for the third quarter
of 1997. The Company reported income tax expense of $16,754,000, on a pre-tax
loss of $18,403,000, for the first nine
15
<PAGE>
months of 1998, as compared to income tax expense of $9,032,000, on a pre-tax
loss of $75,789,000, for the first nine months of 1997. For the nine months
ended September 30, 1997, the Company's total income tax expense included an
additional $5,070,000 to reduce the deferred tax asset balance.
Net Income (Loss)
For the reasons discussed above, the Company earned net income of
$19,385,000 and $14,018,000 in the third quarter of 1998 and 1997,
respectively, and the Company incurred a net loss of $35,157,000 and
$85,846,000 for the first nine months of 1998 and 1997, respectively. During
the third quarter of 1998 and the first nine months of both 1998 and 1997, the
Company incurred Special Charges, as well as expenses related to the
integration of acquired businesses, which had a significant impact on the
Company's net losses for the nine-month periods ended September 30, 1998 and
1997. Because acquisitions remain an integral part of the Company's growth
strategy, the Company expects to continue to incur acquisition-related Special
Charges (as well as expenses related to the integration of acquired
businesses) in future periods, which would materially adversely affect
operating results in the periods in which such acquisitions are consummated
and in subsequent periods. See "--Recent Developments" below.
RECENT DEVELOPMENTS
On August 13, 1998, the Company entered into an agreement, pursuant to which
the Company has agreed to acquire Memco, a leading provider of information
security software. Under the terms of the agreement, Memco will become a
wholly-owned subsidiary of the Company. The Company has agreed to exchange
approximately 13,700,000 shares of the Company's Common Stock, $.001 par value
("Common Stock"), for all of the outstanding ordinary shares of Memco and to
assume stock options which will convert into options to purchase approximately
3,050,000 shares of Common Stock. This acquisition, which the Company
anticipates will be consummated in the first quarter of 1999, is subject to
the approval of the shareholders of Memco 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.
On September 9, 1998, the Company filed Hart-Scott-Rodino Notification and
Report Forms for the proposed acquisition of Memco. On October 9, 1998, the
Department of Justice issued a request for additional information for
documents related to the acquisition. This request extends the waiting period
until twenty days after the Company and Memco have provided the requested
information. The proposed acquisition may not be consummated during this
waiting period. The Company is working diligently to respond to the Department
of Justice's request and continues to be committed to the transaction.
Subsequent to the Company's execution of its agreement to acquire Memco, the
Company, Memco and Tivoli Systems ("Tivoli") agreed to a new strategic
relationship. Pursuant to this arrangement, Tivoli will integrate the Memco
security technology with Tivoli's security offering, and the Company will
distribute the Memco security products to Tivoli and provide Tivoli with
related support services.
On October 2, 1998, the Company acquired the business and certain assets of
OpenDirectory Pty Limited and OpenDirectory Inc. (collectively,
"OpenDirectory"), together a leading provider of enterprise-wide directory
service and software solutions, for approximately $20,000,000. The Company may
be required to make additional payments of up to $15,000,000 over a period of
less than two years, contingent upon the operating results of OpenDirectory
during this period. This acquisition will be accounted for under the purchase
method, and a portion of the purchase price will be charged to acquired in-
process technology in the fourth quarter of 1998.
LIQUIDITY AND CAPITAL RESOURCES
As of September 30, 1998, the Company held approximately $283,666,000 of
cash, cash equivalents and investments, as compared to $358,204,000 as of
December 31, 1997.
For the nine months ended September 30, 1998, cash and cash equivalents
decreased $122,215,000, from $233,024,000 at the beginning of the period to
$110,809,000 at the end of the period. This decrease was primarily
16
<PAGE>
attributable to cash used in investing activities of $190,468,000. The
principal components of investing activities were purchases of investments,
net of maturities and sales, of $66,730,000; purchased and developed software
costs of $60,489,000; and payments for acquisitions of $36,050,000. The cash
used in investing activities was partially offset by cash provided by
financing and operating activities of $50,619,000 and $18,019,000,
respectively. Cash flows from operating activities for the first nine months
of 1998 included proceeds from sales of trading securities of $13,918,000. For
the first nine months of 1997, cash and cash equivalents decreased
$61,793,000, from $178,661,000 at the beginning of the period to $116,868,000
at the end of the period. Cash used in investing activities of $75,323,000 was
partially offset by cash provided by financing and operating activities of
$10,614,000 and $2,662,000, respectively.
In recent years, the Company's sources of liquidity have primarily been
funds from capital markets and 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 condition of financial markets.
The Company had trade and installment accounts receivable, net of
allowances, of $346,857,000 and $279,919,000 at September 30, 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
majority 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.
Installment receivables represent amounts collectible on long-term financing
arrangements and include fees for product licenses, future 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.
The Company sells a significant portion of its installment receivables to
third parties. 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. 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 installment receivables
were approximately $63,000,000 and $193,000,000 for the third quarter and
first nine months of 1998, respectively, as compared to $52,000,000 and
$145,000,000 for the same periods in 1997. The proceeds received in the first
nine months of 1998 related to transactions for which a substantial portion of
the associated revenues were recognized in the first nine months of 1998 and
prior periods, while the remaining portion related to deferred maintenance and
services revenues. The Company also recognized deferred maintenance and
services revenues in the first nine months of 1998 for which the Company had
previously received proceeds from sales of the related installment
receivables.
There were no accounts receivable sold with specific recourse during the
first nine months of 1998 or 1997, and as of September 30, 1998, there were no
remaining potential recourse obligations for accounts receivable
17
<PAGE>
sold with specific recourse. However, 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 September 30, 1998 were approximately $18,800,000. 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 $8,044,000 and
$18,320,000 and other long-term obligations of $268,668,000 and $267,239,000
as of September 30, 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 September
30, 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
1997 Notes are redeemable at the option of the Company, in whole or in part,
at any time during the 12-month period commencing December 15, 2000 at 102.5%
of their principal amount and during the 12-month period commencing December
15, 2001 at 101.25% of their principal amount. 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 1996 Notes are redeemable at the
option of the Company, in whole or in part, at any time during the 12-month
period commencing November 15, 1999 at 102.7% of their principal amount and
during the 12-month period commencing November 15, 2000 at 101.35% of their
principal amount. 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. These amounts include the
outstanding principal balance of the 1996 Notes in 2001 and the outstanding
principal balance of the 1997 Notes in 2002.
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 November 11, 1998, the Company had no
outstanding borrowings under this line of credit, but had aggregate letters of
credit outstanding for approximately $4,436,000, with expiration dates ranging
from February 1999 to December 1999. These letters of credit reduce the
balance available under this line of credit. Under the 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) to maintain a ratio of total liabilities
to tangible net worth of not more than 1.0 to 1.0. Additionally, the Company
has a line of credit with a Japanese bank for approximately $2,152,000 (based
upon current exchange rates), under which borrowings bear interest at a rate
of 2.125%. As of November 11, 1998, the Company had outstanding borrowings of
approximately $1,333,000 under this line of credit.
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
September 30, 1998, the Company held an aggregate of approximately $14,500,000
in notional amount of forward exchange contracts. As the Company's
18
<PAGE>
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
Demand for the Company's Products and Services
The Company sells certain software products, and provides related consulting
services, which assist customers in solving their own Year 2000 problems. For
obvious reasons, the demand for these products has been created by the
impending arrival of the Year 2000. Demand for certain of the Company's other
products may also be generated by customers who are replacing or upgrading
software to accommodate the Year 2000 date change. As a result, demand for
some of the Company's products and services may diminish as the Year 2000
arrives, which could negatively impact the Company's revenue growth rate.
Additionally, because the Company believes that some of its customers are
allocating a substantial portion of their 1998 and 1999 information technology
("IT") budgets to Year 2000 compliance, sales of certain of the Company's
traditional product offerings may be adversely affected through the end of
1999.
Compliance of the Company's Products
The Company believes that substantially all of the products that it
currently sells or maintains are now Year 2000 compliant. These products have
met rigorous compliance criteria and have undergone extensive testing to
detect any Year 2000 failures. In general, these Year 2000 compliance efforts
have been part of the Company's ongoing software development process, and the
Company estimates that the associated incremental costs have totaled less than
$15,000,000. Despite these efforts, certain of the Company's products may
contain undetected Year 2000 problems, and customers of the Company who have
discontinued maintenance may be running old product versions that are not
compliant.
The Company licenses a small percentage of the products that it sells from
third parties. Although these products have generally been warranted to the
Company as Year 2000 compliant, they have generally not been subject to the
same extensive Company testing as those products developed or acquired by the
Company. The Company has therefore initiated an aggressive effort to work with
its third party product suppliers to obtain a very high level of assurance of
Year 2000 compliance.
As discussed above, acquisitions are a critical part of the Company's growth
strategy. Under certain circumstances, the Company may decide to acquire
software products that are not currently Year 2000 compliant. There can be no
assurance that the Company will be successful in bringing such products into
compliance prior to January 1, 2000, particularly any products acquired in
late 1999. The Company is developing contingency plans to inform customers if
any Year 2000 problems remain.
Because the Company's products are typically used in high volume information
systems that are critical to its customers' operations, business
interruptions, loss or corruption of data or other major problems resulting
from a failure of a product to process data correctly could have significant
adverse consequences to its customers. Although the Company believes that its
software license agreements provide it with substantial protection against
liability, the Company cannot 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 consequence
to its customers. Similarly, the Company may face legal claims or suffer other
adverse consequences as a result of any information system failures of
companies for which the Company has provided consulting services.
Internal Systems and Technical Infrastructure
The Company has implemented a comprehensive program, with a dedicated
project manager, to address Year 2000 issues in the Company's internal
systems, including IT and non-IT systems, and technical infrastructure. As
part of this program, the Company is analyzing Year 2000 compliance with
respect to the
19
<PAGE>
services, building systems and equipment at the properties at which the
Company operates. It is also verifying that other third parties upon which the
Company relies, including payroll and employee benefit-related service
providers and financial institutions, are or will be compliant.
The Company believes that its Year 2000 internal systems and technical
infrastructure compliance program is approximately 75% complete and that the
remainder will be completed well in advance of January 1, 2000. This program
includes eight phases: (1) inventorying of all of the Company's software and
hardware (completed); (2) identifying and testing all internal mission
critical business applications and correcting any Year 2000 problems in these
applications (expected to be completed by November 1998); (3) identifying the
interfaces from the mission critical business applications to third party
systems and confirming the compliance of these third party systems (all of
these systems are expected to be compliant by the first quarter of 1999); (4)
identifying critical vendors in purchasing and travel (vendor questionnaire
responses are now being reviewed); (5) informing the Company's internal user
community about this Year 2000 program (an intranet site has been established
and is regularly updated); (6) educating the Company's internal user community
about Year 2000 issues and monitoring user compliance (planned for November
and December of 1998); (7) identifying noncritical vendors and confirming
their Year 2000 compliance (planned for the first quarter of 1999); (8)
preparing contingency plans for mission critical business applications,
technical infrastructure and critical vendors (planned for the fourth quarter
of 1998 and first quarter of 1999).
The Company expects that it will not incur any significant incremental costs
for replacement or upgrading of systems that are not Year 2000 compliant, and
it estimates that total personnel expenses relating to the Company's
remediation program will be approximately $2,000,000. Therefore, the Company
does not believe that the costs associated with the program will have a
material effect on the Company's financial condition or results of operations.
The Company believes that, although its risk of operational disruption from
systems failures due to Year 2000 problems is minimal, the Company could
suffer adverse consequences as a result of interruptions in electrical power,
telecommunications or other critical third party infrastructure services. In a
worst case scenario, Company computer systems could be rendered inoperable,
and the Company could be unable to develop or support its products. The
Company is currently developing a specific contingency plan to deal with these
issues. This plan, which is expected to be completed by May 1999, is expected
to provide for relocation of employees and reliance on Company owned
electrical generators and cellular telephones.
20
<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, has been involved in a suit in France concerning copyright
infringement claims identical to those on which Altai previously prevailed
against Computer Associates International, Inc. ("CAI") in the United States.
In January 1995, the French court issued a decision rejecting CAI's claim of
copyright infringement. CAI subsequently appealed this decision to a French
appellate court. 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. On October 23, 1998, the French appellate court
upheld in all pertinent parts the decision of the French lower court. 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 2 Agreement dated as of August 13, 1998 by and between the
Company and Memco (incorporated by reference to Exhibit 99.2 to
the Company's Current Report on Form 8-K dated August 13,
1998).
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 (Items 5 and 7) dated
July 14, 1998 to report the Company's issuance of a press release
announcing its results of operations for the second quarter of 1998.
The Company filed a Current Report on Form 8-K (Items 5 and 7) dated
August 4, 1998 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 acquisitions in the second
quarter of 1998 of Mastering, LBMS and Logic Works (collectively, the
"Acquisitions"). This 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, 1997 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, 1997.
The Company filed a Current Report on Form 8-K (Items 5 and 7) dated
August 13, 1998 (i) to report the Company's execution of an agreement
to acquire Memco and the issuance of a press release in connection
therewith and (ii) to file certain related exhibits.
21
<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: November 16, 1998
/s/ Michael P. Cullinane
By: _________________________________
Michael P. Cullinane
Executive Vice President, Chief
Financial
Officer (principal financial and
accounting
officer) and Treasurer
Date: November 16, 1998
22
<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 Nine Months Ended
September 30, September 30,
1998 1997 1998 1997
------------------------------------------------------
<S> <C> <C> <C> <C>
Basic income (loss) per share:
Net income (loss) $ 19,385 $ 14,018 $ (35,157) $ (85,846)
------------------------------------------------------
Weighted-average common shares outstanding 85,568 78,253 82,965 77,457
------------------------------------------------------
Per share amount $ 0.23 $ 0.18 $ (0.42) $ (1.11)
======================================================
Diluted income (loss) per share:
Net income (loss) $ 19,385 $ 14,018 $ (35,157) $ (85,846)
Add back of tax-effected interest expense(1) 1,358 - - -
------------------------------------------------------
$ 20,743 $ 14,018 $ (35,157) $ (85,846)
------------------------------------------------------
Weighted-average common shares outstanding 85,568 78,253 82,965 77,457
Add: Effect of dilutive securities:
Stock options 5,517 4,184 - -
Convertible preferred stock 1,768 - - -
Convertible subordinated notes (1) 8,240 - - -
------------------------------------------------------
Diluted weighted average common shares outstanding 101,093 82,437 82,965 77,457
------------------------------------------------------
Per share amount $ 0.21 $ 0.17 $ (0.42) $ (1.11)
======================================================
</TABLE>
(1) The dilutive effect of the convertible subordinated notes due November 15,
2001 (the "1996 Notes") is determined by using the "if-converted" method.
For the third quarter of 1998, the 1996 Notes have a dilutive effect on
earnings per share. To reflect the assumed conversion of the 1996 Notes,
approximately 8,240,000 shares were included as common stock equivalents
and approximately $1,358,000 of tax-effected interest expense was added
back to net income.
<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 and Form S-3 of PLATINUM
technology, inc., we acknowledge our awareness of the use therein of our reports
dated July 14, 1998 and November 12, 1998 related to our reviews of interim
financial information.
Pursuant to Rule 436(c) under the Securities Act of 1933, such reports are 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.
/s/ KPMG Peat Merwick LLP
Chicago, Illinois
November 12, 1998
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 9-MOS 9-MOS
<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1997
<PERIOD-START> JAN-01-1998 JAN-01-1997
<PERIOD-END> SEP-30-1998 SEP-30-1997
<CASH> 110,809 233,024
<SECURITIES> 172,857 125,180
<RECEIVABLES> 251,075 232,752
<ALLOWANCES> 2,322 4,788
<INVENTORY> 0 0
<CURRENT-ASSETS> 587,866 608,573
<PP&E> 163,940 153,335
<DEPRECIATION> 73,761 61,170
<TOTAL-ASSETS> 1,017,134 972,907
<CURRENT-LIABILITIES> 270,066 255,910
<BONDS> 0 0
0 0
18 18
<COMMON> 86 80
<OTHER-SE> 377,147 342,778
<TOTAL-LIABILITY-AND-EQUITY> 1,017,134 972,907
<SALES> 0 0
<TOTAL-REVENUES> 653,479 496,182
<CGS> 0 0
<TOTAL-COSTS> 683,611 586,692
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 1,236 1,154
<INTEREST-EXPENSE> 13,482 6,572
<INCOME-PRETAX> (18,403) (75,789)
<INCOME-TAX> 16,754 9,032
<INCOME-CONTINUING> (35,157) (84,821)
<DISCONTINUED> 0 (1,025)
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (35,157) (85,846)
<EPS-PRIMARY> (0.42) (1.11)
<EPS-DILUTED> (0.42) (1.11)
</TABLE>
