<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: March 31, 1999
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 INTERNATIONAL, 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 10, 1999, there were outstanding 101,637,167 shares of Common
Stock, par value $.001, of the registrant.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PLATINUM technology International, inc. AND SUBSIDIARIES
QUARTER ENDED MARCH 31, 1999
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, 1999 (unaudited) and
December 31, 1998 (unaudited)........................................ 4
Consolidated Statements of Operations for the three months ended March
31, 1999 (unaudited) and 1998 (unaudited)............................ 5
Consolidated Statements of Comprehensive Income (Loss) for the three
months ended
March 31, 1999 (unaudited) and 1998 (unaudited)...................... 6
Consolidated Statements of Cash Flows for the three months ended March
31, 1999 (unaudited) and 1998 (unaudited)............................ 7
Notes to Consolidated Financial Statements............................ 8
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.................................................. 11
Item 3. Quantitative and Qualitative Disclosures About Market Risk...... 20
PART II--OTHER INFORMATION
Item 1. Legal Proceedings............................................... 22
Item 6. Exhibits and Reports on Form 8-K................................ 22
SIGNATURES................................................................ 23
</TABLE>
2
<PAGE>
PART I--FINANCIAL INFORMATION
Item 1. Financial Statements
INDEPENDENT AUDITORS' REVIEW REPORT
The Board of Directors
PLATINUM technology International, inc.:
We have reviewed the consolidated balance sheet of PLATINUM technology
International, inc. and subsidiaries as of March 31, 1999, and the related
consolidated statements of operations, comprehensive income (loss), and cash
flows for the three month periods ended March 31, 1999 and 1998. 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.
/s/ KPMG LLP
Chicago, Illinois
May 14, 1999
3
<PAGE>
PLATINUM technology International, inc. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except per share amounts)
(unaudited)
<TABLE>
<CAPTION>
March 31, December 31,
ASSETS 1999 1998
------ ---------- ------------
<S> <C> <C>
Current assets:
Cash and cash equivalents........................... $ 206,807 $ 226,252
Short-term investment securities.................... 29,606 79,241
Trade accounts receivable, net of allowances of
$7,822 and $5,319.................................. 227,135 306,751
Installment accounts receivable, net of allowances
of $657 and $526................................... 32,966 45,568
Accrued interest and other current assets........... 38,277 47,634
Refundable income taxes............................. 667 787
---------- ----------
Total current assets.............................. 535,458 706,233
---------- ----------
Non-current investment securities..................... 31,223 36,041
Property and equipment, net........................... 100,224 103,150
Purchased and developed software, net................. 165,566 183,775
Excess of cost over net assets acquired, net of
accumulated amortization of $26,975 and $27,270...... 77,155 90,131
Non-current installment receivables, net of allowances
of $1,027 and $1,374................................. 46,870 68,210
Other assets.......................................... 51,503 28,019
---------- ----------
Total assets...................................... $1,007,999 $1,215,559
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current liabilities:
Acquisition-related payables........................ $ 10,690 $ 33,245
Income taxes payable................................ 6,792 7,888
Accounts payable.................................... 29,391 37,837
Accrued commissions and bonuses..................... 14,484 21,928
Accrued royalties................................... 12,779 13,182
Accrued restructuring costs......................... 29,712 2,390
Other accrued liabilities........................... 115,974 80,702
Current maturities of long-term obligations......... 4,422 1,392
Deferred revenue.................................... 161,123 166,880
---------- ----------
Total current liabilities......................... 385,367 365,444
---------- ----------
Acquisition-related payables.......................... 1,389 6,388
Deferred revenue...................................... 94,224 95,959
Deferred rent......................................... 6,811 6,762
Accrued restructuring costs........................... 49,289 5,285
Deferred income taxes................................. -- 5,261
Long-term obligations, net of current maturities...... 268,727 267,685
---------- ----------
Total liabilities................................. 805,807 752,784
---------- ----------
Stockholders' equity:
Class II preferred stock, $.01 par value; authorized
10,000, issued and outstanding 1,768............... 18 18
Common stock, $.001 par value; authorized 180,000,
issued and outstanding 101,370 and 100,599......... 101 101
Paid-in capital..................................... 907,749 899,223
Accumulated deficit................................. (698,643) (432,619)
Accumulated other comprehensive loss................ (7,033) (3,948)
---------- ----------
Total stockholders' equity........................ 202,192 462,775
---------- ----------
Total liabilities and stockholders' equity........ $1,007,999 $1,215,559
========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE>
PLATINUM technology International, inc. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
---------------------
1999 1998
---------- ---------
<S> <C> <C>
Revenues:
Software products........................................ $ 70,030 $ 97,956
Maintenance.............................................. 47,355 39,926
Professional services.................................... 52,692 55,544
---------- --------
Total revenues......................................... 170,077 193,426
---------- --------
Costs and expenses:
Professional services.................................... 64,576 50,493
Product development and support.......................... 76,034 58,412
Sales and marketing...................................... 96,138 64,153
General and administrative............................... 18,806 15,407
Amortization of excess cost over net assets acquired..... 3,870 2,922
Special general and administrative charges............... 40,688 --
Restructuring charges.................................... 136,338 --
Merger costs............................................. 23,679 --
---------- --------
Total costs and expenses............................... 460,129 191,387
---------- --------
Operating income (loss).................................... (290,052) 2,039
Other income (expense), net................................ (1,097) 119
---------- --------
Income (loss) before income taxes.......................... (291,149) 2,158
Income tax expense (benefit)............................... (25,125) 989
---------- --------
Net income (loss).......................................... $(266,024) $ 1,169
========== ========
Net income (loss) per share:
Basic.................................................... $ (2.64) $ 0.01
========== ========
Diluted.................................................. $ (2.64) $ 0.01
========== ========
Shares used in computing per share amounts:
Basic.................................................... 100,833 92,727
========== ========
Diluted.................................................. 100,833 101,374
========== ========
</TABLE>
See accompanying notes to consolidated financial statements.
5
<PAGE>
PLATINUM technology International, inc. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
---------------------
1999 1998
---------- ---------
<S> <C> <C>
Net income (loss)......................................... $(266,024) $ 1,169
Other comprehensive income (loss):
Foreign currency translation adjustment................. (2,820) (586)
Unrealized holding gains (losses) on marketable
securities--
unrealized holding gains (losses) arising during the
period, net of tax................................... (265) 160
---------- -------
Comprehensive income (loss)............................... $(269,109) $ 743
========== =======
</TABLE>
See accompanying notes to consolidated financial statements.
6
<PAGE>
PLATINUM technology International, inc. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
-------------------
1999 1998
--------- --------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss)....................................... $(266,024) $ 1,169
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization......................... 25,841 19,838
Unrealized net holding gains on marketable equity
securities........................................... -- (217)
Write-off of fixed assets, capitalized software and
other intangible assets in conjunction with the
restructuring plan................................... 53,185 --
Changes in assets and liabilities, net of
acquisitions:
Trade and installment receivables................... 113,558 3,583
Deferred income taxes............................... (25,071) (2,085)
Accrued interest and other current assets........... (5,800) (14,407)
Accounts payable and accrued liabilities............ 101,169 (10,906)
Deferred maintenance................................ (7,492) 15,198
Income taxes payable................................ (976) 1,602
Other............................................... (8,343) (2,386)
--------- --------
Net cash provided by (used in) operating
activities....................................... (19,953) 11,389
--------- --------
Cash flows from investing activities:
Purchases of investment securities...................... (3,026) (57,129)
Sales of available-for-sale securities.................. 3,939 252
Maturities of investment securities..................... 53,195 32,986
Purchases of property and equipment..................... (15,951) (7,224)
Purchased and developed software........................ (19,466) (11,253)
Payments for acquisitions............................... (32,231) (7,781)
Other................................................... 1,450 --
--------- --------
Net cash used in investing activities............. (12,090) (50,149)
--------- --------
Cash flows from financing activities:
Proceeds from exercise of stock options and Stock
Purchase Plan.......................................... 8,526 27,613
Additions to (payments on) borrowings................... 4,072 (458)
--------- --------
Net cash provided by financing activities......... 12,598 27,155
--------- --------
Net decrease in cash and cash equivalents................. (19,445) (11,605)
Cash and cash equivalents at the beginning of the period.. 226,252 241,804
--------- --------
Cash and cash equivalents at the end of the period........ $ 206,807 $230,199
========= ========
</TABLE>
See accompanying notes to consolidated financial statements.
7
<PAGE>
PLATINUM technology International, inc. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1--BASIS OF PRESENTATION
The accompanying unaudited interim consolidated financial statements of
PLATINUM technology International, 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 for the year ended December 31, 1998, included in
the Company's Annual Report on Form 10-K (the "1998 Form 10-K"), as filed with
the Securities and Exchange Commission. Those consolidated financial
statements and the unaudited interim consolidated financial statements have
been restated to give retroactive effect to the acquisition of Memco Software,
Ltd. ("Memco"), which has been accounted for as a pooling-of-interests (see
"Note 3--Business Combination" below).
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 are based on the weighted average number of shares
outstanding and exclude the dilutive effect of common stock equivalents.
Diluted earnings per share are based on the weighted average number of shares
outstanding and include the dilutive effect of common stock equivalents.
Note 3--BUSINESS COMBINATION
On March 29, 1999, the Company acquired all of the outstanding ordinary
shares of Memco, a leading provider of information security software, in
exchange for 13,751,923 shares of the Company's Common Stock, which had a
market value (based upon the trading price of the Common Stock on the Nasdaq
National Market at the close of business on the most recent trading day prior
to the date of the acquisition) of approximately $135,800,000. In addition,
the Company assumed stock options which converted into options to purchase
3,328,112 shares of the Company's Common Stock. This acquisition was accounted
for as a pooling-of-interests. Costs associated with the acquisition were
expensed in the first quarter of 1999.
The following unaudited information reconciles total quarterly revenue and
net loss of the Company as reported in the 1998 Form 10-K with the amounts
presented in the accompanying unaudited statements of operations for the three
months ended March 31, 1998, as well as the separate results of operations of
Memco during 1999 preceding its acquisition.
<TABLE>
<CAPTION>
Three Months
Ended Three Months Ended
March 31, 1999 March 31, 1998
----------------- --------------------
Net Income
Revenues Net Loss Revenues (Loss)
-------- -------- -------- ----------
<S> <C> <C> <C> <C>
PLATINUM (1)....................... N/A N/A $185,718 $ 3,463
Memco.............................. 1,071 (21,094) 8,401 2,140
Intercompany eliminations (2)...... N/A N/A (693) (4,434)
-------- -------
Total.......................... N/A N/A $193,426 $ 1,169
======== =======
</TABLE>
- --------
(1) Represents the historical quarterly results of the Company as reported in
the Form 10-K without considering the acquisition of Memco in 1999. All
merger costs are reflected in the historical results of the Company.
(2) The intercompany eliminations reflect adjustments to eliminate the effects
of intercompany transactions between the Company and Memco.
8
<PAGE>
PLATINUM technology International, inc. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
NOTE 4--RESTRUCTURING
During February of 1999, the Company executed a restructuring plan to
streamline operations, increase profitability, and deliver greater value to
customers and shareholders. The Company streamlined product development into
two major business units as compared with four previous business units;
consolidated offices which were close in proximity; realigned resources to
focus on areas that are most strategic to the Company's customers and core
business; and aligned the sales support and consulting resources to provide
each customer with a single point of contact and better support the field sales
organization and customers. The restructuring plan resulted in the reduction of
the Company's worldwide workforce by approximately 15%, or approximately 1,000
people.
The Company recorded a restructuring charge of $136,338,000 during the first
quarter of 1999 related to the restructuring plan. The restructuring charge
included the following expenses: facility-related costs, including a reserve
for estimated lease obligations associated with the closing of office
facilities; write-offs of equipment, furniture and fixtures no longer in use;
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 severance and other employee-related costs of the terminated
staff.
The following table summarizes the Company's restructuring activity for the
quarter ended March 31, 1999:
<TABLE>
<CAPTION>
Intangible
Assets and
Penalties
Severance for Property
Excess and Cancelled and
Facilities Benefits Agreements Equipment Total
---------- --------- ---------- --------- --------
(In thousands)
<S> <C> <C> <C> <C> <C>
1999 restructuring
charges:
Cash-related charges.. $47,213 $12,545 $16,489 $ -- $ 76,247
Non-cash charges...... -- -- 42,266 17,825 60,091
------- ------- ------- ------- --------
$47,213 $12,545 $58,755 $17,825 136,338
======= ======= ======= =======
Accrued restructuring costs at December 31, 1998 related to
previous restructurings.......................................... 7,675
--------
144,013
Payments made in 1999............................................. (11,827)
Write-offs taken in 1999.......................................... (53,185)
--------
Total accrued restructuring costs at March 31, 1999............... 79,001
Less--current portion............................................. (29,712)
--------
Long-term accrued restructuring costs............................. $ 49,289
========
</TABLE>
NOTE 5--SEGMENT INFORMATION
The Company has two reportable segments consisting of software and
professional services. The software segment develops, markets and supports
software products. The professional services segment provides professional
services related to such software products. The accounting policies of the
segments are the same as those described in the summary of significant
accounting policies in the Company's 1998 Form 10-K. Certain expenses of the
Company, including restructuring charges, merger costs, and special general and
administrative charges, are not allocated to individual segments. The Company
does not allocate total assets to its segments.
9
<PAGE>
PLATINUM technology International, inc. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The following table presents information about the Company's segments for
the quarters ended March 31, 1999 and 1998:
<TABLE>
<CAPTION>
Professional
Software Services Unallocated Total
--------- ------------ ----------- ---------
(in thousands)
<S> <C> <C> <C> <C>
1999
Revenues................... $ 117,385 $ 52,692 $ -- $ 170,077
Amortization of excess cost
over net assets acquired.. (3,870) -- -- (3,870)
Other costs and expenses... (190,978) (64,576) (200,705) (456,259)
--------- -------- --------- ---------
Operating loss............. $ (77,463) $(11,884) $(200,705) $(290,052)
========= ======== ========= =========
1998
Revenues................... $ 137,882 $ 55,544 $ -- $ 193,426
Amortization of excess cost
over net assets acquired.. (2,922) -- -- (2,922)
Other costs and expenses... (137,972) (50,493) -- (188,465)
--------- -------- --------- ---------
Operating income (loss).... $ (3,012) $ 5,051 $ -- $ 2,039
========= ======== ========= =========
</TABLE>
Note 6--PROPOSED ACQUISITION OF THE COMPANY
On March 29, 1999, the Company and Computer Associates International, Inc.
("Computer Associates") announced the execution of a merger agreement pursuant
to which Computer Associates has agreed to acquire the Company through a cash
tender offer. Under the terms of the merger agreement, on April 2, 1999,
HardMetal, Inc., a wholly-owned subsidiary of Computer Associates, offered to
purchase all outstanding shares of the Company's Common Stock for $29.25 per
share. This offer had an original expiration date of April 29, 1999, which has
been extended to May 19, 1999. The expiration date may be further extended by
HardMetal, Inc. Consummation of the tender offer is subject to certain
conditions, including the condition that at least a majority of the outstanding
shares of the Company's Common Stock be tendered and not withdrawn. Computer
Associates announced on May 10, 1999 that, based upon the latest count of
tendered shares, approximately 60,244,069 shares of the Company's Common Stock
had been validly tendered and not withdrawn pursuant to the tender offer.
Consummation of the tender offer is also subject to the expiration or
termination of any applicable antitrust waiting period. Computer Associates
announced on May 10, 1999 that (1) it was extending the tender offer to May 19,
1999 to allow the Antitrust Division of the United States Department of Justice
time to complete its investigation pursuant to the Hart-Scott-Rodino Antitrust
Improvements Act of 1976 and (2) on May 3, 1999, Computer Associates responded
to the Antitrust Division's earlier request for additional information and
documents.
Following completion of the tender offer and subject to certain conditions,
the Company will merge into HardMetal, Inc., with the Company surviving as a
wholly-owned subsidiary of Computer Associates. The transactions are currently
expected to be completed in mid-1999.
10
<PAGE>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
General
On March 29, 1999, the Company and Computer Associates International, Inc.
("Computer Associates") announced the execution of a merger agreement pursuant
to which Computer Associates has agreed to acquire the Company through a cash
tender offer. Under the terms of the merger agreement, on April 2, 1999,
HardMetal, Inc., a wholly-owned subsidiary of Computer Associates, offered to
purchase all outstanding shares of the Company's Common Stock for $29.25 per
share. This offer had an original expiration date of April 29, 1999, which has
been extended to May 19, 1999. The expiration date may be further extended by
HardMetal, Inc. Consummation of the tender offer is subject to certain
conditions, including the condition that at least a majority of the
outstanding shares of the Company's Common Stock be tendered and not
withdrawn. Consummation of the tender offer is also subject to the expiration
or termination of any applicable antitrust waiting period. Following
completion of the tender offer and subject to certain conditions, the Company
will merge into HardMetal, Inc., with the Company surviving as a wholly-owned
subsidiary of Computer Associates. The transactions are currently expected to
be completed in mid-1999. For additional information regarding these
transactions, see Note 6 to the unaudited interim consolidated financial
statements included herein.
The Company believes that its business, financial condition, liquidity and
results of operations have been materially adversely affected by the
announcement of the transactions and would be further materially adversely
affected if these transactions are not completed. In particular, the Company
believes that its relationships with its customers and employees would be
seriously damaged. Also, the merger agreement imposes extremely tight
restrictions on the Company's ability to take various actions and to conduct
its business without Computer Associates' consent. These restrictions could
have a severe detrimental effect on the Company's business.
On March 29, 1999, the Company consummated its acquisition of Memco
Software, Ltd. ("Memco"), which has been accounted for using the pooling-of-
interests method. As a result, the unaudited interim consolidated financial
statements included herein are presented as if the Company and Memco 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 ("MD&A") gives retroactive effect to this acquisition.
During February of 1999, the Company executed a restructuring plan which
included the consolidation of the Company's four previous product business
units into two product business units. The Company's database management and
systems management business units were merged to create the enterprise
management business unit. The Company's application infrastructure management
and data warehousing and decision support business units were merged to create
the application lifecycle & knowledge management business unit. This MD&A
gives retroactive effect to this business unit restructuring.
11
<PAGE>
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,
------------------
1999 1998
-------- -------
<S> <C> <C>
Statements of Operations Data:
Revenues:
Software products................................ 41% 51%
Maintenance...................................... 28 20
Professional services............................ 31 29
-------- -------
Total revenues................................. 100 100
-------- -------
Costs and expenses:
Professional services............................ 38 26
Product development and support.................. 45 30
Sales and marketing.............................. 57 33
General and administrative....................... 11 8
Amortization of excess cost over net assets
acquired........................................ 2 2
Special general and administrative charges....... 24 --
Restructuring charges............................ 80 --
Merger costs..................................... 14 --
-------- -------
Total costs and expenses....................... 271 99
-------- -------
Operating income (loss)............................ (171) 1
Other income, net.................................. -- --
-------- -------
Income (loss) from continuing operations before
income taxes...................................... (171) 1
Income taxes....................................... (15) --
-------- -------
Net income (loss).................................. (156)% 1%
======== =======
</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. A significant portion of each
quarter's revenue contracts close in the final days of the quarter. Due to the
proposed acquisition of the Company by Computer Associates, publicly announced
early in the day on March 29, 1999, a significant number of contracts were
delayed beyond March 31, 1999. Total revenues for the first quarter of 1999
were $170,077,000, a decrease of $23,349,000, or 12%, as compared with
$193,426,000 for the first quarter of 1998. The Company's enterprise management
and application lifecycle & knowledge management business units experienced
comparable decreases of 15% and 11%, respectively, in total software products
and maintenance revenues during the first quarter of 1999 as compared with the
first quarter of 1998. Revenues from international customers, principally in
Western Europe, represented 34% and 26% of total revenues for the first quarter
of 1999 and 1998, respectively.
The Company frequently enters into high 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. During the first three
months of 1999, the Company entered into 15 sales transactions
12
<PAGE>
having a total value of at least $1,000,000, of which three had a total value
of at least $3,000,000 and none had a total value of at least $10,000,000.
During the first quarter of 1998, the Company entered into 29 sales
transactions having a total value of at least $1,000,000, of which 9 had a
total value of at least $3,000,000 and one 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
Ended
March 31,
---------------
1999 1998
------ ------
<S> <C> <C>
Revenues:
Software products:
Licenses............................................ 25% 37%
Upgrades............................................ 16 14
------ ------
Total software products........................... 41 51
------ ------
Maintenance........................................... 28 20
Professional services................................. 31 29
------ ------
Total revenues.................................... 100% 100%
====== ======
</TABLE>
Software Products. Software products revenues for the first quarter of 1999
were $70,030,000, a decrease of $27,926,000, or 29%, as compared with
$97,956,000 for the first quarter of 1998. The substantial majority of the
decrease in software products revenues in the first quarter of 1999, as
compared with the first quarter of 1998, resulted from delays in the closing
of customer contracts as a result of the proposed acquisition of the Company
by Computer Associates as discussed above. In the first quarter of 1999, the
Company's enterprise management and application lifecycle & knowledge
management business units represented 69% and 31%, respectively, of total
software products revenues.
Maintenance. Maintenance revenues for the first quarter of 1999 were
$47,355,000, an increase of $7,429,000, or 19%, as compared with $39,926,000
for the first quarter of 1998. 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, new software licensing transactions
also contributed to the increase in maintenance revenues. In the first quarter
of 1999, the Company's enterprise management and application lifecycle &
knowledge management business units represented 64% and 36%, 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 1999 were $52,692,000,
a decrease of $2,852,000, or 5%, as compared with $55,544,000 for the first
quarter of 1998. The decrease in professional services revenues was primarily
the result of a decline in marketplace demand for the Company's training and
educational services.
Costs and Expenses
Total expenses for the first quarter of 1999 were $460,129,000, an increase
of $268,742,000, or 140%, over total expenses of $191,387,000 for the first
quarter of 1998. Total expenses for the first quarter of 1999, excluding
restructuring charges, merger costs and special general and administrative
charges (collectively, "Special Charges"), were $259,424,000, an increase of
$68,037,000, or 36%, as compared with $191,387,000
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<PAGE>
for the first quarter of 1998. Total expenses, excluding Special Charges,
represented 153% and 99% of total revenues for the first quarter of 1999 and
1998, respectively. As a percentage of total revenues, total expenses,
excluding Special Charges, increased primarily due to lower revenues as a
result of the proposed acquisition of the Company by Computer Associates as
discussed above, as well as increases in personnel and other costs as
discussed below.
Professional Services. Costs of professional services for the first quarter
of 1999 were $64,576,000, an increase of $14,083,000, or 28%, as compared with
$50,493,000 for the first quarter of 1998. The increase in professional
services expenses was primarily attributable to increases in salary and other
direct employment expenses resulting from an increased number of consultants.
This increase was partially offset by a reduction in the number of consultants
as a result of the Company's February 1999 restructuring plan, as discussed
below. Professional services expenses represented 123% and 91% of professional
services revenues for the first quarter of 1999 and 1998, respectively.
Expenses as a percentage of revenues increased due to the decline in
marketplace demand for the Company's training and educational services as
discussed above, as well as higher expenses resulting from an increased number
of consultants. In addition, reduced expenses resulting from the Company's
February 1999 restructuring plan were not yet fully realized during the first
quarter of 1999.
Product Development and Support. Product development and support expenses
for the first quarter of 1999 were $76,034,000, an increase of $17,622,000, or
30%, as compared with $58,412,000 for the first quarter of 1998. The increase
in these expenses during the first quarter of 1999, as compared with the first
quarter of 1998, was primarily attributable to increases in the number of
product development and support personnel and increases in information
technology support costs. Product development and support expenses represented
45% and 30% of total revenues in the first quarter of 1999 and 1998,
respectively. The increase in expenses as a percentage of revenues was
primarily due to lower revenues as a result of the proposed acquisition of the
Company by Computer Associates as discussed above.
For the first quarter of 1999 and 1998, the Company capitalized $9,817,000
and $10,622,000, 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
1999 were $96,138,000, an increase of $31,985,000, or 50%, as compared with
$64,153,000 for the first quarter of 1998. The increase in these expenses
during the first quarter of 1999, as compared with the first quarter of 1998,
was primarily attributable to costs related to the significant expansion of
the domestic and international outside sales force, as well as an increase in
expenses related to marketing promotions and advertising campaigns due to a
change in the Company's timing of marketing initiatives. Sales and marketing
expenses represented 57% and 33% of total revenues for the first quarter of
1999 and 1998, respectively. The increase in sales and marketing expenses as a
percentage of total revenues during the first quarter of 1999, as compared
with the first quarter of 1998, was attributable to lower revenues as a result
of the proposed acquisition of the Company by Computer Associates as discussed
above and the aforementioned increases in sales and marketing expenses.
General and Administrative. General and administrative expenses for the
first quarter of 1999 were $18,806,000, an increase of $3,399,000, or 22%, as
compared with $15,407,000 for the first quarter of 1998. The increase in
general and administrative expenses was primarily attributable to higher
employee-related expenses, as well as increases in legal expenses related to
certain ongoing legal proceedings. General and administrative expenses
represented 11% and 8% of total revenues for the first quarter of 1999 and
1998, respectively. The increase in general and administrative expenses as a
percentage of total revenues during the first quarter of 1999, as compared
with the first quarter of 1998, was primarily attributable to lower revenues
as a result of the proposed acquisition of the Company by Computer Associates
as discussed above.
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<PAGE>
Special General and Administrative Charges. The Company incurred special
general and administrative charges of $40,688,000 during the first quarter of
1999. The Company did not incur special general and administrative charges
during the first quarter of 1998. Special general and administrative charges
included a $20,000,000 negotiation fee to Computer Associates as required by
the merger agreement among the Company, Computer Associates and HardMetal, Inc.
The remainder of the special general and administrative charges were
principally the result of the reevaluation by the Company of the fair value of
certain assets acquired from prior acquisitions that were impacted by the
Company's restructuring plan. Specific assets that were deemed to have no
future value were written off during the first quarter of 1999.
Restructuring Charges. During February of 1999, the Company executed a
restructuring plan to streamline operations, increase profitability and deliver
greater value to customers and shareholders. The Company streamlined product
development into two major business units as compared with four previous
business units; consolidated offices which were close in proximity; realigned
resources to focus on areas that are most strategic to the Company's customers
and core business; and aligned the sales support and consulting resources to
provide each customer with a single point of contact and better support the
field sales organization and customers. The restructuring plan resulted in the
reduction of the Company's worldwide workforce by approximately 15%, or
approximately 1,000 people.
The Company recorded a one-time charge of $136,338,000 during the first
quarter of 1999 related to the restructuring plan. The restructuring charge
included the following expenses: $47,213,000 for facility-related costs,
including a reserve for estimated lease obligations associated with the closing
of office facilities; $17,825,000 for write-offs of equipment, furniture and
fixtures no longer in use; $58,755,000 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 $12,545,000
for severance and other employee-related costs of the terminated staff.
As of March 31, 1999, the Company had $79,001,000 of accrued restructuring
costs. These accrued restructuring costs included accruals related to the
Company's 1997 restructuring plan and the 1996 restructuring plan of LBMS, a
wholly-owned subsidiary of the Company (acquired during 1998). During the first
quarter of 1999, the Company paid out approximately $11,827,000 and incurred
approximately $60,091,000 of non-cash charges related to the restructuring. The
Company estimates that approximately $29,712,000 of the accrued restructuring
costs will be paid by March 31, 2000, $12,962,000 during the remainder of 2000,
$15,307,000 during 2001, $8,054,000 during 2002, $5,059,000 during 2003 and
$7,907,000 after 2003.
Merger Costs. Merger costs were $23,679,000 for the first quarter of 1999.
Merger costs related to the acquisition of Memco, which was accounted for as a
pooling-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 did not incur merger costs during the
first quarter of 1998.
Operating Income (Loss)
The Company incurred an operating loss of $290,052,000 during the first
quarter of 1999, compared with operating income of $2,039,000 during the first
quarter of 1998. The Company had operating margins of (171)% and 1% in the
first quarter of 1999 and 1998, respectively. Excluding Special Charges, the
Company would have reported an operating loss of $(89,347,000) and an operating
margin of (53)% in the first quarter of 1999. The Company did not incur Special
Charges in 1998. For all expense categories (professional services, product
development and support, sales and marketing, and general and administrative),
the Company experienced an increase in expenses as a percentage of total
revenues during the first quarter of 1999, as compared with the first quarter
of 1998, as discussed above.
Other Income (Expense), Net
Other expenses, net, for the first quarter of 1999 were $1,097,000 as
compared with other income, net, of $119,000 for the first quarter of 1998. The
decrease in other income was primarily attributable to reduced interest income
as a result of declines in interest-earning balances during the quarter ended
March 31, 1999 as compared with the quarter ended March 31, 1998.
15
<PAGE>
Income Taxes
The Company's effective tax rate for the first quarter of 1999 and 1998,
excluding the Federal tax effect of Special Charges, was 28% and 46%,
respectively. For the first quarter of 1999, the Company reported an income
tax benefit of $25,125,000 on a pre-tax loss of $291,149,000. The Company
reported an income tax expense of $989,000 on pre-tax income of $2,158,000 for
the first quarter of 1998. The Company's effective tax rate for the first
quarter of 1998 reflects the non-recognition by LBMS of a tax benefit on its
loss.
Net Income (Loss)
For the reasons discussed above, the Company incurred a net loss of
$266,024,000 in the first quarter of 1999, compared with net income of
$1,169,000 in the first quarter of 1998.
Liquidity and Capital Resources
As of March 31, 1999, the Company held approximately $267,636,000 of cash,
cash equivalents and investments, as compared with $341,534,000 as of December
31, 1998. For the three months ended March 31, 1999, cash and cash equivalents
decreased $19,445,000, from $226,252,000 at the beginning of the period to
$206,807,000 at the end of the period. This decrease was primarily
attributable to cash used in operating activities of $19,953,000, payments for
acquisitions of $32,231,000, purchased and developed software of $19,466,000
and purchases of property and equipment of $15,951,000, partially offset by
maturities of investment securities of $53,195,000 and cash provided by
financing activities of $12,598,000. For the first quarter of 1998, cash and
cash equivalents decreased $11,605,000, from $241,804,000 at the beginning of
the period to $230,199,000 at the end of the period. Cash used in investing
activities of $50,149,000 was partially offset by cash provided by the
exercise of stock options and through the Company's employee stock purchase
plan of $27,613,000 and cash provided by operating activities of $11,389,000.
In recent years, the Company's sources of liquidity have primarily been
funds from capital markets and sales of installment receivables. 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. Should
the proposed acquisition of the Company by Computer Associates not occur, the
Company's liquidity would be materially adversely affected. The Company may
need to seek additional sources of liquidity beyond cash flows from operations
or sales of installment receivables should the proposed acquisition of the
Company by Computer Associates not occur or be postponed significantly beyond
the anticipated closing date.
The Company had trade and installment accounts receivable, net of
allowances, of $306,971,000 and $420,529,000 at March 31, 1999 and December
31, 1998, 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. 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 five years, with interest
payable on the license and upgrade portions only. Over the previous three
years, the Company executed 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 increased
significantly over the previous two years.
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<PAGE>
During the first quarter of 1999, the Company and a major financial
services company announced the formation of a new finance entity, PLATINUM
technology Global Finance ("Global Finance"). Global Finance was established
to provide the Company's enterprise software customers with customized
solutions designed to better control and reduce their overall information
technology costs. The Company anticipates that the operations of Global
Finance will result in the direct financing of the receivables of the
Company's customers by Global Finance, as compared with the Company's current
practice of recording and subsequently selling certain installment receivable
balances. Global Finance was not yet operational as of March 31, 1999.
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 $82,000,000 and $60,000,000 for the first
quarter of 1999 and 1998, respectively.
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, 1999 were approximately
$18,000,000. There were no accounts receivable sold with recourse during the
first quarter of 1999 or 1998. 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 does not expect the potential liability to
have a material adverse effect on the Company's future results of operations.
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 a liability.
The deferred maintenance is recognized into income ratably over the term of
the maintenance agreement.
The Company had long-term acquisition-related payables of $1,389,000 and
$6,388,000 and other long-term obligations of $268,727,000 and $267,685,000 as
of March 31, 1999 and December 31, 1998, 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,
1999 and December 31, 1998. 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 the Company's 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. Each holder of the 1996
Notes and the 1997 Notes will have the right to require the Company to
repurchase all or some of the Notes held by such holder if the tender offer by
HardMetal, Inc. is completed. In addition, if the Company merged into
HardMetal, Inc., each Note would be convertible by HardMetal, Inc. only into
cash.
The Company currently has total debt service obligations of approximately
$28,000,000 for the remainder of 1999, 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
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<PAGE>
requirements to be approximately $18,000,000, $133,000,000 and $159,000,000
for 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.
The Company currently has an unsecured bank line of credit for an aggregate
of $65,000,000 with American National Bank and Trust Company of Chicago, under
which borrowings bear interest at rates ranging from approximately LIBOR plus
1.25% to the bank's prime rate. As of May 10, 1999, the Company had
$20,000,000 in outstanding borrowings under this line of credit. The Company
also had aggregate letters of credit outstanding for approximately $6,881,000,
with expiration dates ranging from July 1999 to June 2000. 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 (as defined in the agreement) of not less than
$275,000,000; and (iii) to maintain a ratio of total liabilities to tangible
net worth (as defined in the agreement) of not more than 1.0 to 1.0.
Additionally, the Company has a line of credit with Fuji Bank for
approximately $2,074,000 (based upon current exchange rates), under which
borrowings bear interest at a rate of 2.125%. As of May 10, 1999, the Company
had outstanding borrowings of approximately $1,037,000 under this line of
credit.
Foreign Currency Exchange Rates
Historically, the Company has derived a significant portion of its revenues
from international sales. The Company's total level of foreign sales and the
profitability of these sales could be materially adversely affected by
exchange rate fluctuations. 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, 1999, the Company held an aggregate of
approximately $25,922,000 in notional amount of forward exchange contracts. In
connection with the proposed acquisition of the Company by Computer
Associates, the Company reassessed its foreign currency exchange rate hedging
practices and ceased such hedging activities in April 1999.
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 1999 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 some customers of the Company who
have discontinued maintenance are running old product versions that are not
compliant.
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<PAGE>
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 been engaged in and is nearing the end of
an aggressive effort, working with its third party product suppliers, and
conducting its own tests, to obtain a very high level of assurance of Year
2000 compliance.
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 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 85% 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 (completed with the exception of one application which is
expected to be completed by the end of May 1999); (3) identifying the
interfaces from the mission critical business applications to third party
systems and confirming the compliance of these third party systems (completed
with the exception of one interface which is expected to be completed by the
end of May 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 (in progress since fourth quarter of 1998); (7) identifying
noncritical vendors and confirming their Year 2000 compliance (planned for the
second quarter of 1999); (8) preparing contingency plans for mission critical
business applications, technical infrastructure and critical vendors (in
progress and expected to be completed by September 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
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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 has developed a specific contingency plan to
deal with these issues. This plan provides for generator power backup at
selected key locations and the use of cellular phones and other hand-held
communication devices.
Recently Issued Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." The Company is
required to adopt the provisions of SFAS No. 133 beginning with its March 31,
2000 interim financial statements. This statement provides a comprehensive
standard for the recognition and measurement of derivatives and hedging
activities. 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, performance
and business prospects and opportunities. Words such as "anticipates,"
"believes," "estimates," "expects," "plans," "intends" 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 or business prospects and opportunities to differ
materially from those expressed in, or implied by, these statements. These
risks, uncertainties and other factors include uncertainties relating to the
transactions with Computer Associates; the Company's ability to develop and
market existing and acquired products for the IT infrastructure market; the
Company's ability to successfully implement its 1999 restructuring plan; risks
related to the Year 2000 challenge; the Company's ability to successfully
integrate its acquired products, services and businesses; 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; the risk of damage claims and costs resulting
from product defects; 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. Except as required by the federal
securities laws, the Company assumes no obligation to update or revise these
forward-looking statements to reflect new events or changed circumstances.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Interest Rate Risk--The Company is exposed to the impact of changes in
interest rates primarily due to the manner in which the Company manages its
investment portfolio. As stated in the Company's written policy, the goal of
the investment portfolio is preservation of principal and every effort is made
to limit default, market, liquidity and reinvestment risk. The vast majority
of the investment portfolio consists of money market instruments, corporate
bonds and asset backed securities. Speculative use of any security of any
kind, including derivative products, is prohibited in the investment
portfolio.
To mitigate risk associated with the investment portfolio, the Company
invests only in securities that have been rated as high quality by national
rating agencies. The vast majority of these securities have a maturity date
within six months. The portfolio is reviewed on a periodic basis and
subsequently adjusted in the event that the credit rating of any security held
in the portfolio has deteriorated. Amounts invested with any one issuer are
limited to reduce default risk. Only securities with active secondary markets
are purchased to ensure future liquidity.
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Foreign Currency Exchange Risk--The Company conducts business on a global
basis through subsidiaries in multiple countries utilizing major international
currencies. The Company is, therefore, exposed to movement in currency
exchange rates. The Company maintained a program, utilizing forward foreign
exchange contracts, designed to hedge currency exposures related to certain
nonfunctional assets and liabilities resulting from intercompany balances. In
connection with the proposed acquisition of the Company by Computer
Associates, the Company reassessed its foreign currency exchange rate hedging
practices and ceased such hedging activities in April 1999.
Gains and losses on the foreign exchange forward contracts are included in
other income and offset foreign exchange gains and losses from the revaluation
of intercompany balances denominated in currencies other than the functional
currency of the reporting entity. The forward contracts generally have a
maturity of one month and are executed only with major financial institutions.
Equity Price Risk--The Company has several minimal investments in the
marketable equity securities of publicly traded companies. All of these
investments, as of March 31, 1999, were considered available-for-sale, with
any unrealized gains or losses deferred as a component of stockholders'
equity.
The Company utilizes a "Value-at-Risk" (VaR) model to determine the maximum
potential one-day loss in the fair value of its interest rate, foreign
exchange and equity price sensitive instruments. The VaR model estimates were
made assuming normal market conditions and a 95% confidence level. There are
various modeling techniques that can be used in the VaR calculations. The
calculations the Company performed were based on the variance-covariance
statistical modeling technique and included all interest rate sensitive
instruments, foreign exchange derivative contracts and equity investments. The
VaR estimate utilized historical interest rates, foreign exchange rates and
equity prices from the past year to estimate volatility and correlation of
these rates and prices in the future.
As of March 31, 1999, the following amounts represented the potential loss
in fair value that the Company could incur from adverse changes in interest
rates, foreign exchange rates or equity prices for a one-day period.
<TABLE>
<CAPTION>
Time Confidence
Value at Risk Amount Amount Interval Level
-------------------- ------ -------- ----------
(in thousands)
<S> <C> <C> <C>
Interest rate sensitive instruments.......... $501 1 day 95%
Foreign exchange sensitive instruments....... 20 1 day 95
Equity price sensitive instruments........... 62 1 day 95
</TABLE>
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PART II--OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
The Company is subject to certain legal proceedings and claims which have
arisen in the ordinary course of business and which have not been fully
adjudicated. Management currently believes the ultimate outcome of such
matters will not have a material adverse effect on the Company's results of
operations or financial position.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
A. Exhibits
<TABLE>
<C> <S>
Exhibit 2.1 Agreement and Plan of Merger among Computer Associates,
HardMetal, Inc. and the Company, dated as of March 29, 1999,
incorporated by reference to Exhibit 1 to the Company's
Schedule 14D-9 Solicitation/Recommendation Statement, filed
April 5, 1999 (the "14D-9").
Exhibit 4.1 Rights Agreement Amendment between Harris Trust and Savings
Bank and the Company, dated as of March 29, 1999,
incorporated by reference to Exhibit 6 to the 14D-9.
Exhibit 10.1 Agreement granting certain option and proxy rights among
HardMetal, Inc., Andrew J. Filipowski, Paul L. Humenansky and
Michael Cullinane, dated as of March 29, 1999, incorporated
by reference to Exhibit 2 to the 14D-9.
Exhibit 10.2 Consulting and Non-Competition Agreement between Andrew J.
Filipowski and the Company, dated as of March 29, 1999,
incorporated by reference to Exhibit 3 to the 14D-9.
Exhibit 10.3 Consulting and Non-Competition Agreement between Michael
Cullinane and the Company, dated as of March 29, 1999,
incorporated by reference to Exhibit 4 to the 14D-9.
Exhibit 10.4 Consulting and Non-Competition Agreement between Paul L.
Humenansky and the Company, dated as of March 29, 1999,
incorporated by reference to Exhibit 5 to the 14D-9.
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 19, 1999,
pursuant to Items 5 and 7 thereof, to report the Company's filing of a
press release to announce the Company's name change and certain internal
corporate structural changes.
The Company filed a current report on Form 8-K dated January 26, 1999,
pursuant to Items 5 and 7 thereof, to report the Company's filing of a
press release to announce the Company's preliminary unaudited results of
operations for the quarter ended December 31, 1998.
The Company filed a current report on Form 8-K, dated February 9, 1999,
pursuant to Items 5 and 7 thereof, to report the Company's filing of a
press release to announce the Company's unaudited results of operations for
the quarter ended December 31, 1998.
The Company filed a current report on Form 8-K, dated February 23, 1999,
pursuant to Items 5 and 7 thereof, to report the Company's filing of a
press release to announce the Company's restructuring plan to streamline
operations, increase profitability, and deliver greater value to customers
and stockholders.
22
<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 International,
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, 14, 1999
/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 14, 1999
23
<PAGE>
EXHIBIT 11
PLATINUM technology International, inc. and subsidiaries
Basic and Diluted Earnings Per Share
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
------------------------
1999 1998
--------- ---------
<S> <C> <C>
Basic income (loss) per share:
Net income (loss) $(266,024) $ 1,169
--------- --------
Weighted average common shares outstanding 100,833 92,727
--------- --------
Per share amount $ (2.64) $ 0.01
========= ========
Diluted income (loss) per share:
Net income (loss) $(266,024) $ 1,169
--------- --------
Weighted average common shares outstanding 100,833 92,727
Add effect of dilutive securities:
Stock options N/A 6,879
Convertible preferred stock N/A 1,768
--------- --------
Diluted weighted average common shares outstanding 100,833 101,374
--------- --------
Per share amount $ (2.64) $ 0.01
========= ========
</TABLE>
<PAGE>
EXHIBIT 15
ACKNOWLEDGMENT OF INDEPENDENT
CERTIFIED PUBLIC ACCOUNTANTS
REGARDING INDEPENDENT AUDITORS' REVIEW REPORT
The Board of Directors
PLATINUM technology International, inc.:
With respect to the registration statements on Form S-8 and Form S-3 of PLATINUM
technology International, inc., we acknowledge our awareness of the use therein
of our report dated May 14, 1999 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.
/s/ KPMG LLP
Chicago, Illinois
May 14, 1999
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 3-MOS
<FISCAL-YEAR-END> DEC-31-1999 DEC-31-1998
<PERIOD-START> JAN-01-1999 JAN-01-1998
<PERIOD-END> MAR-31-1999 MAR-31-1998
<CASH> 206,807 226,252
<SECURITIES> 60,829 115,282
<RECEIVABLES> 234,957 312,070
<ALLOWANCES> 7,822 5,319
<INVENTORY> 227,135 306,751
<CURRENT-ASSETS> 535,458 706,233
<PP&E> 168,570 165,271
<DEPRECIATION> 68,346 62,121
<TOTAL-ASSETS> 1,007,999 1,215,559
<CURRENT-LIABILITIES> 385,367 365,444
<BONDS> 0 0
0 0
18 18
<COMMON> 101 101
<OTHER-SE> 202,073 462,656
<TOTAL-LIABILITY-AND-EQUITY> 1,007,999 1,215,559
<SALES> 0 0
<TOTAL-REVENUES> 170,077 193,426
<CGS> 0 0
<TOTAL-COSTS> 460,129 191,387
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 40,585 281
<INTEREST-EXPENSE> 4,458 4,463
<INCOME-PRETAX> (291,149) 2,158
<INCOME-TAX> (25,125) 989
<INCOME-CONTINUING> (266,024) 1,169
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (266,024) 1,169
<EPS-PRIMARY> (2.64) 0.01
<EPS-DILUTED> (2.64) 0.01
</TABLE>
