<PAGE>
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-Q/A
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(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
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PLATINUM technology International, 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 January 15, 1999, there were outstanding 86,858,350 shares of Common
Stock, par value $.001, of the registrant.
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<PAGE>
PLATINUM technology International, 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 Statement of Stockholders' Equity........................ 4
Notes to Consolidated Financial Statements............................ 5
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.................................................. 8
SIGNATURES................................................................ 22
</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 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, cash flows for the
nine month periods ended September 30, 1998 and 1997, and stockholders' equity
for the nine month period ended September 30, 1998. 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 International,
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 LLP
Chicago, Illinois
November 12, 1998
3
<PAGE>
PLATINUM technology International, inc. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(unaudited)
(in thousands)
<TABLE>
<CAPTION>
Nine Months
Ended September
30, 1998
-----------------
Shares Amount
------ ---------
<S> <C> <C>
Preferred stock:
Balance at beginning of year............................. 1,768 $ 18
Preferred stock subscribed............................... (1,768) (18)
Issuance of preferred stock.............................. 1,768 18
------ ---------
Balance at end of year................................. 1,768 $ 18
====== =========
Common stock:
Balance at beginning of year............................. 80,239 $ 80
Exercise of stock options................................ 2,901 3
Issuance of common stock under Stock Purchase Plan....... 1,199 1
Issuance of common stock................................. 1,925 2
Conversion of subordinated notes......................... 2 --
------ ---------
Balance at end of year................................. 86,266 $ 86
====== =========
Paid-in capital:
Balance at beginning of year............................. $ 691,609
Exercise of stock options................................ 33,398
Issuance of common stock under Stock Purchase Plan....... 18,545
Issuance of common stock................................. 33,605
Preferred stock subscribed............................... (41,848)
Issuance of preferred stock.............................. 41,848
Amortization of shelf registration costs................. (124)
Conversion of subordinated notes......................... 36
---------
Balance at end of year................................. $ 777,069
=========
Accumulated deficit:
Balance at beginning of year............................. $(352,450)
Net loss................................................. (35,157)
Adjustment for immaterial pooled businesses.............. (3,522)
Adjustment to conform fiscal years of pooled businesses.. (385)
---------
Balance at end of year................................. $(391,514)
=========
Unrealized appreciation (depreciation) in marketable
securities:
Balance at beginning of year............................. $ 8,466
Change in unrealized holding gains, net of tax........... (11,781)
---------
Balance at end of year................................. $ (3,315)
=========
Foreign currency translation adjustment:
Balance at beginning of year............................. $ (4,847)
Translation adjustment................................... (246)
---------
Balance at end of year................................. $ (5,093)
=========
Total stockholders' equity........................... $ 377,251
=========
</TABLE>
See accompanying notes to consolidated financial statements.
4
<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 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--REVENUE RECOGNITION
On January 1, 1998, the Company adopted AICPA Statement of Position ("SOP")
97-2, Software Revenue Recognition, which specifies the criteria that must be
met prior to the Company recognizing revenues from software sales. The
adoption of SOP 97-2 in 1998 has not had a material impact on the Company's
financial position or results of operations.
Note 3--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 4--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.
5
<PAGE>
PLATINUM technology International, inc. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The following unaudited information reconciles total revenue and net loss of
PLATINUM as reported in the Company's Form 10-Q for the quarter ended
September 30, 1997 (the "Form 10-Q") with the amounts presented in the
accompanying unaudited statements of operations for the nine months ended
September 30, 1997, as well as the separate results of operations for the nine
months ended September 30, 1998 of Mastering, LBMS and Logic Works during the
periods preceding their acquisition. The 1998 results for Mastering and LBMS
represent the four months ended April 30, 1998. The 1998 results for Logic
Works represent the five months ended May 31, 1998.
<TABLE>
<CAPTION>
Nine months ended Nine months ended
September 30, 1998 September 30, 1997
------------------- -------------------
Net income Net income
Revenues (loss) Revenues (loss)
-------- ---------- -------- ----------
<S> <C> <C> <C> <C>
PLATINUM (1)......................... $412,262 $(94,042)
Mastering........................... $13,428 $(5,078) 29,580 1,619
LBMS................................ 5,981 (865) 18,619 4,256
Logic Works......................... 21,191 575 35,721 2,321
-------- --------
Total.............................. $496,182 $(85,846)
======== ========
</TABLE>
- --------
(1) Represents the historical results of PLATINUM as reported in the Form 10-Q
without considering the effect of the pooling-of-interests transactions
consummated in 1998. All merger costs are reflected in the historical
results of PLATINUM.
PLATINUM has also made a number of acquisitions during the nine month period
ended September 30, 1998, that have been accounted for under the purchase
method. Accordingly, purchase prices have been allocated to identifiable
tangible and intangible assets acquired and liabilities assumed based on their
estimated fair values. Estimated amounts allocated to acquired in-process
technology have been expensed at the time of acquisition. Excess of cost over
net assets acquired is amortized on a straight-line basis over the expected
period to be benefited, generally seven to ten years. The consolidated
statements of operations reflect the results of operations of the purchased
companies since the effective dates of the acquisitions.
In June 1998, PLATINUM acquired all the outstanding common stock of Geneva
Software, Inc., a leading provider of network management tools, in exchange
for 920,615 shares of PLATINUM common stock, which had a market value of
approximately $21,700,000 at the time of the acquisition. A portion of the
purchase price was charged to acquired in-process technology in the second
quarter of 1998.
In June 1998, PLATINUM acquired all the outstanding capital stock of Systems
Management Solutions, Inc., a provider of mainframe asset management and cost
modeling tools, in exchange for approximately $5,500,000. A portion of the
purchase price was charged to acquired in-process technology in the second
quarter of 1998.
In June 1998, PLATINUM acquired all the outstanding capital stock of ICON
Computing, Inc., a provider of modeling technologies, in exchange for 142,570
shares of PLATINUM common stock, which had a market value of approximately
$5,900,000 at the time of the acquisition. A portion of the purchase price was
charged to acquired in-process technology in the second quarter of 1998.
In June 1998, PLATINUM acquired all the assets of Ergondata Do Brasil LTDA
("Ergondata") and Senior Consultores Associados LTDA ("Senior"), (together,
the "Brazil Acquisitions"), providers of consultancy services relating to the
installation and maintenance of specialized computer systems, in exchange for
138,632 shares of PLATINUM common stock, which had a market value of
approximately $3,600,000 at the time of the acquisition, and approximately
$300,000, plus contingent consideration of approximately $3,100,000, as
specified in the acquisition agreement. The amount of this additional payment
was not determinable at September 30, 1998. Additional payments will be
recorded as excess of cost over net assets acquired in the periods in which
such payments are determinable.
6
<PAGE>
PLATINUM technology International, inc. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
During the first nine months of 1998, PLATINUM also acquired certain other
software businesses and product technologies, in transactions accounted for as
purchases, for an aggregate purchase price of approximately $5,732,000.
Portions of the purchase prices were charged to acquired in-process technology
in the periods in which the acquisitions occurred.
The following summary presents information concerning the purchase price
allocations for the acquisitions accounted for under the purchase method for
the nine months ended September 30, 1998.
<TABLE>
<CAPTION>
Acquired
Purchased In-Process Purchase
Company Name Software Technology Goodwill Other Price (1)
------------ --------- ---------- -------- ----- ---------
<S> <C> <C> <C> <C> <C>
Geneva Software.................. $1,303 $18,816 $2,165 $(276) $22,008
SMS.............................. 327 4,379 826 207 5,739
ICON............................. -- 5,300 630 150 6,080
Brazil Acquisitions.............. -- -- 4,592 33 4,625
Others........................... 2,274 4,120 95 (757) 5,732
------ ------- ------ ----- -------
$3,904 $32,615 $8,308 $(643) $44,184
====== ======= ====== ===== =======
</TABLE>
- --------
(1) Purchase price includes costs associated with the acquisition.
The following unaudited pro forma summary presents the Company's results of
operations as if the acquisitions of Geneva Software and other software and
services businesses had occurred at the beginning of each period. This summary
is provided for information purposes only. It does not necessarily reflect the
actual results that would have occurred had the acquisitions been made as of
their respective dates, or of results that may occur in the future.
<TABLE>
<CAPTION>
Nine months ended
September 30,
------------------
1998 1997
-------- --------
(in thousands,
except per share
data)
<S> <C> <C>
Revenues.............................................. $660,217 $502,868
Net loss.............................................. (34,164) (84,531)
Net loss per share.................................... (0.41) (1.07)
</TABLE>
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.
7
<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%.
8
<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 recognizes revenues from its software sales using the criteria
specified in AICPA Statement of Position ("SOP") 97-2, Software Revenue
Recognition, which was adopted on January 1, 1998. The adoption of SOP 97-2
has not had a material impact on the Company's financial position or results
of operations for the nine months ended September 30, 1998.
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.
9
<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
10
<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
11
<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.
12
<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.
In June 1998, PLATINUM acquired network monitoring technology from Geneva
Software Inc. A portion of the purchase price was attributed to acquired in-
process technology, as the development work associated with the project had
not reached technological feasibility and is believed to have no alternative
future use other than as a network monitoring device. The in-process
technology involved new major monitoring capabilities for hubs, routers, and
switches along with several performance capabilities.
PLATINUM carefully assessed the fair value of the acquired in-process
technology using an income approach. Future cash flows were projected over
five years and discounted to present value using a discount rate of
approximately 20%. PLATINUM believes the discount rate is appropriate given
the level of risk of unsuccessful completion of the technology considering it
was estimated to be 73% complete as of the acquisition date. PLATINUM
anticipates incurring approximately $1,000,000 of additional research and
development costs over a short time frame with an anticipated completion date
of June 1999. In projecting the future revenue streams from the project,
PLATINUM considered many factors including competition, network management
growth estimates, time to market, and additional sales and marketing leverage,
as well as the impact of larger transactions upon global enterprises to which
Geneva Software was not accustomed.
In June 1998, PLATINUM acquired mainframe asset management and cost modeling
capabilities from Systems Management Solutions, Inc. A portion of the purchase
price was attributed to acquired in-process technology, as the development
work associated with the project had not reached technological feasibility and
is believed to have no alternative future use other than for asset management
and cost modeling. The in-process technology involved implementing the
mainframe technology design onto additional mid range platforms such as UNIX
and NT.
PLATINUM carefully assessed the fair value of the acquired in-process
technology using an income approach. Future cash flows were projected over
five years and discounted to present value using a discount rate of 20%.
PLATINUM believes the discount rate is appropriate given the level of risk of
unsuccessful completion of the technology considering it was estimated to be
over two thirds complete as of the acquisition date. PLATINUM has brought this
technology to feasibility incurring approximately $400,000 of additional
research and development costs. In projecting the future revenue streams from
the project, PLATINUM considered many factors including competition, asset
management growth estimates, time to market, and additional sales and
marketing leverage, as well as the impact of larger transactions upon global
enterprises to which Systems Management Solutions was not accustomed.
In June 1998, PLATINUM acquired modeling technologies from ICON Computing,
Inc. A portion of the purchase price was attributed to acquired in-process
technology, as the development work associated with the projects had not
reached technological feasibility and were believed to have no alternative
future use other than as modeling tools.
PLATINUM carefully assessed the fair value of the acquired in-process
technology using an income approach. Future cash flows were projected over
five years discounted to present value using a discount rate of 20%. PLATINUM
believes the discount rate is appropriate given the level of risk of
unsuccessful completion of the technologies as they were estimated to be over
fifty percent complete as of the acquisition date. PLATINUM anticipates
incurring approximately $1,200,000 of additional research and development
costs over a short time frame with an anticipated completion date of December
1999. In projecting the future revenue streams from the project, PLATINUM
considered many factors including competition, market growth estimates, time
to market, and additional sales and marketing leverage, as well as the impact
of larger transactions upon global enterprises to which ICON was not
accustomed.
During the first nine months of 1998, PLATINUM also acquired certain other
software businesses and product technologies. Portions of the purchase prices
were attributed to acquired in-process technology, as the
13
<PAGE>
development work associated with the projects had not reached technological
feasibility and were believed to have no alternative future use. PLATINUM
anticipates incurring approximately $6,000,000 of additional research and
development costs over a short time frame and expects these projects to be
completed within the next 12-18 months.
The following summary presents information concerning the purchase price
allocations for the acquisitions accounted for under the purchase method for
the nine months ended September 30, 1998.
<TABLE>
<CAPTION>
Acquired
Purchased In-Process Purchase
Company Name Software Technology Goodwill Other Price (1)
------------ --------- ---------- -------- ----- ---------
<S> <C> <C> <C> <C> <C>
Geneva Software.................. $1,303 $18,816 $2,165 $(276) $22,008
SMS.............................. 327 4,379 826 207 5,739
ICON............................. -- 5,300 630 150 6,080
Brazil Acquisitions.............. -- -- 4,592 33 4,625
Others........................... 2,274 4,120 95 (757) 5,732
------ ------- ------ ----- -------
$3,904 $32,615 $8,308 $(643) $44,184
====== ======= ====== ===== =======
</TABLE>
- --------
(1) Purchase price includes costs associated with the acquisition.
The forecasts used in valuing the acquired in-process technologies were
based upon assumptions PLATINUM believed to be reasonable but which were
inherently uncertain and unpredictable. For this reason, actual results may
vary from projected results. PLATINUM did not assume in its valuation model
any material change in its profit margins or any material increases in
selling, general administrative expenses as a result of the acquisitions.
Without successful completion of the remaining research and development
efforts on the acquired in-process technologies including integration with
PLATINUM's existing products, the end result would be to fail to fulfill the
products' design specifications and, in turn fail to meet market requirements.
As a result, PLATINUM would not realize the future revenues and profits
attributed to the acquired in-process research and development. Ultimately,
PLATINUM would fail to realize the expected return on such investments.
PLATINUM has not planned any significant expense reductions nor synergies as a
result of the acquisitions and thus does not believe that failure to achieve
the projected results from the acquired in-process technologies will have a
material impact on PLATINUM as a whole.
PLATINUM believes that it will complete the projects in a timely manner and
within original cost estimates. Significant efforts are necessary to develop
the acquired in-process technology into commercially viable products,
principally related to the completion of all designing, prototyping, coding,
scalability verification, and testing activities that are required to
establish that the proposed technologies would meet their design
specifications. The acquired in-process technology projects are expected to
begin to result in material positive cash flows in 12-24 months subsequent to
their completion, assuming their successful completion.
PLATINUM has reviewed its projections of revenues and estimated costs of
completion for acquisitions involving acquired-in-process R&D consummated from
1993 through 1997. PLATINUM has compared these projections with actual
revenues and costs and determined that, in aggregate, the average margin of
error between the estimated and actual results was 5-10%.
PLATINUM 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."
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
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<PAGE>
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 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
15
<PAGE>
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.
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 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
16
<PAGE>
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 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 does not expect the potential
liability to have a material adverse effect on the Company's future results of
operations.
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
17
<PAGE>
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.
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.
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 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
18
<PAGE>
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
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
19
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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.
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PART II--OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
A. Exhibits
<TABLE>
<S> <C>
Exhibit Acknowledgment of Independent Certified Public Accountants Regarding
15 Independent Auditors' Review Report.
</TABLE>
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<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: February 1, 1999
/s/ Michael P. Cullinane
By: _________________________________
Michael P. Cullinane
Executive Vice President, Chief
Financial
Officer (principal financial and
accounting
officer) and Treasurer
Date: February 1, 1999
22
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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-3 and Form S-8 of PLATINUM
technology International, inc., we acknowledge our awareness of the use therein
of our report dated November 12, 1998 related to our review of interim financial
information.
Pursuant to Rule 436(c) under the Securities Act of 1933, such report is not
considered part of a registration statement prepared or certified by an
accountant or a report prepared or certified by an accountant within the meaning
of sections 7 and 11 of the Act.
Very truly yours,
/s/ KPMG LLP
Chicago, Illinois
February 1, 1999
