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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM _______ TO _______
COMMISSION FILE NO. 0-20740
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PLATINUM SOFTWARE CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 33-0277592
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
195 TECHNOLOGY DRIVE
IRVINE, CALIFORNIA 92618-2402
(Address of principal executive offices, zip code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (949) 453-4000
---------------------------------
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 5, 1998, there were 25,915,275 shares of common stock
outstanding.
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INDEX
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PART I - FINANCIAL INFORMATION
<S> <C>
Item I - Financial Statements
Unaudited Condensed Consolidated Balance Sheets.............................................3
Unaudited Condensed Consolidated Statements of Operations...................................4
Unaudited Condensed Consolidated Statements of Cash Flows...................................5
Notes to Unaudited Condensed Consolidated Financial Statements..............................6
Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations.......8
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings..........................................................................16
Item 6 - Exhibits and Reports on Form 8-K...........................................................16
SIGNATURE.......................................................................................................17
</TABLE>
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PART I
FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS:
PLATINUM SOFTWARE CORPORATION
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
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<CAPTION>
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March 31, June 30,
1998 1997
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<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 9,047 $ 6,724
Short-term investments 6,999 9,542
Accounts receivable, net 21,494 11,976
Prepaid expenses and other 4,105 2,858
- --------------------------------------------------------------------------------------------------------
Total current assets 41,645 31,100
Property and equipment, net 7,542 8,587
Software development costs, net 2,260 2,660
Other assets 969 809
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$ 52,416 $ 43,156
========================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 3,445 $ 4,752
Accrued expenses 7,329 8,293
Accrued restructuring costs 1,733 2,609
Deferred revenue 14,142 11,638
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Total current liabilities 26,649 27,292
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Long-term liabilities 46 277
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Stockholders' equity:
Preferred stock 20,788 30,292
Common stock 23 20
Additional paid-in capital 129,756 116,849
Less: notes receivable from officers for issuance of restricted stock (11,563) (11,563)
Accumulated foreign currency translation adjustments 118 291
Accumulated deficit (113,401) (120,302)
- --------------------------------------------------------------------------------------------------------
Total stockholders' equity 25,721 15,587
- --------------------------------------------------------------------------------------------------------
$ 52,416 $ 43,156
========================================================================================================
</TABLE>
The accompanying notes are an integral part of these unaudited condensed
consolidated financial statements.
3
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PLATINUM SOFTWARE CORPORATION
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
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Three Months Ended Nine Months Ended
March 31, March 31,
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1998 1997 1998 1997
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<S> <C> <C> <C> <C>
Revenues:
License fees $ 15,410 $ 8,358 $ 37,157 $ 22,054
Services 10,828 7,158 28,801 19,561
Royalty income 135 869 330 1,142
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26,373 16,385 66,288 42,757
Cost of revenues 7,726 5,799 20,973 15,241
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Gross profit 18,647 10,586 45,315 27,516
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Operating expenses:
Sales and marketing 10,292 6,462 25,291 17,926
Software development 2,943 2,540 9,018 7,368
General and administrative 1,219 762 4,625 4,399
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14,454 9,764 38,934 29,693
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Income (loss) from operations 4,193 822 6,381 (2,177)
Other income, net 150 335 1,289 677
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Income (loss) before provision for income taxes 4,343 1,157 7,670 (1,500)
Provision for income taxes -- -- -- --
- -----------------------------------------------------------------------------------------------------------
Net income (loss) $ 4,343 $ 1,157 $ 7,670 $ (1,500)
===========================================================================================================
Basic net income (loss) per share $ 0.18 $ 0.05 $ 0.33 $ (0.07)
===========================================================================================================
Shares used in computing basic
net income (loss) per share 24,713 21,740 23,389 21,618
===========================================================================================================
Diluted net income (loss) per share $ 0.15 $ 0.04 $ 0.26 $ (0.07)
===========================================================================================================
Shares used in computing diluted
net income (loss) per share 29,945 28,221 29,413 21,618
===========================================================================================================
</TABLE>
The accompanying notes are an integral part of these unaudited condensed
consolidated financial statements.
4
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PLATINUM SOFTWARE CORPORATION
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
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Nine Months Ended
March 31,
1998 1997
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<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 7,670 $ (1,500)
Adjustments to reconcile net income (loss) to net
cash used in operating activities
Depreciation and amortization 3,894 4,130
Change in operating assets and liabilities:
(Increase) decrease in accounts receivable, net (9,518) (990)
(Increase) decrease in prepaid expenses and other (1,247) 14
(Increase) decrease in other assets (219) 85
Increase (decrease) in accounts payable (1,307) (435)
Increase (decrease) in accrued expenses (964) (1,572)
Increase (decrease) in accrued restructuring costs (876) (467)
Increase (decrease) in deferred revenue 2,504 (1,029)
- ---------------------------------------------------------------------------------------------------
Cash used in operating activities (63) (1,764)
- ---------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Payments received on notes receivable from divestitures -- 825
Capital expenditures, net (1,947) (1,917)
Capitalized software development costs (443) (1,001)
Purchase of short-term investments (7,000) (9,500)
Sale of short-term investments 9,543 10,050
Payments of long-term liabilities (231) (12)
- ---------------------------------------------------------------------------------------------------
Cash used in investing activities (78) (1,555)
- ---------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Subchapter S distributions to FocusSoft shareholders (769) --
Exercise of common stock options 3,175 2,633
Issuance of common stock under the Employee Stock Purchase Plan 231 237
Decrease in restricted cash -- 1,006
- ---------------------------------------------------------------------------------------------------
Cash provided by financing activities 2,637 3,876
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Effect of exchange rates on cash (173) 149
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Net increase in cash and cash equivalents 2,323 706
Cash and cash equivalents, beginning of period 6,724 5,774
- ---------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of period $ 9,047 $ 6,480
===================================================================================================
</TABLE>
The accompanying notes are an integral part of these unaudited condensed
consolidated financial statements.
5
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PLATINUM SOFTWARE CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1998
BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements present
the financial position of Platinum Software Corporation (the "Company") as of
March 31, 1998 and June 30, 1997, the results of its operations for the three
and nine months ended March 31, 1998 and 1997, and its cash flows for the nine
months ended March 31, 1998 and 1997, and have been prepared by the Company in
accordance with generally accepted accounting principles and pursuant to the
rules and regulations of the Securities and Exchange Commission (the "SEC").
Certain information and footnote disclosures normally included in the financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted pursuant to such rules and regulations, although
the Company believes that the disclosures in these financial statements are
adequate to make the information presented not misleading. The unaudited
condensed consolidated financial statements should be read in conjunction with
the financial statements and notes thereto included in the Company's Annual
Report on Form 10-K for the year ended June 30, 1997.
In the opinion of management, the unaudited condensed consolidated financial
statements contain all adjustments (consisting only of normal recurring
adjustments) necessary for a fair presentation of the Company's financial
position, results of operations and cash flows.
The results of operations for the nine months ended March 31, 1998, are not
necessarily indicative of the results of operations to be expected for the
entire fiscal year ending June 30, 1998.
Certain prior period amounts have been reclassified to conform to the current
period presentation.
REVENUE RECOGNITION
Revenue is recognized from licenses of software upon contract execution,
shipment of products and when the Company has performed all of its significant
contractual obligations. When a software license agreement obligates the Company
to provide more than one software module, all license revenue under the
agreement is deferred until all modules achieve general availability and are
delivered, except when the license agreement contains a specific financial
remedy in the event the unavailable module is not delivered. In such instance,
revenue is deferred in the amount attributable to the specific financial remedy.
The Company generally does not provide any post-contract customer service or
support as part of the software license fee; however, when such services are
provided for in the license agreement, an appropriate portion of the license fee
is deferred and amortized over the service or support period. The Company's
customers may enter into maintenance agreements with the Company and such
revenue is recognized ratably over the term of the agreement. Revenue from
consulting services is recognized as services are provided.
In October 1997, the AICPA issued Statement of Position (SOP) 97-2, Software
Revenue Recognition, which supercedes SOP 91-1. The Company will be required to
adopt SOP 97-2 for software transactions entered into beginning July 1, 1998.
The Company's management anticipates that the adoption of SOP 97-2 will not have
a material impact on the Company's results of operations.
BASIC AND DILUTED NET INCOME (LOSS) PER SHARE
In 1997, the Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 128, Earnings Per Share. Statement 128 replaced the
previously reported primary and fully diluted earnings per share with basic and
diluted earnings per share. Basic net income (loss) per share is computed by
dividing net income (loss) by the weighted average number of shares of common
stock outstanding during the period. Diluted income (loss) per share is computed
by dividing net income (loss) by the weighted average number of shares of common
stock and common stock equivalents outstanding during the period. Common stock
equivalents were antidilutive for the nine months ended March 31, 1997, and,
therefore, excluded from the calculation of diluted net loss per
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share for such periods. All earnings per share amounts for all periods have been
presented and, where necessary, restated to conform with the provisions of
Statement 128.
The following table sets forth the computation of basic and diluted net income
(loss) per share:
<TABLE>
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Three Months Ended Nine months Ended
March 31, March 31,
1998 1997 1998 1997
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(in thousands, except per share amounts)
<S> <C> <C> <C> <C>
Numerator:
Net income (loss) - Numerator for basic $ 4,343 $ 1,157 $ 7,670 $ (1,500)
and diluted net income (loss) per share
Denominator:
Demonimator for basic net income (loss) 24,713 21,740 23,389 21,618
per share - weighted average shares
Effect of dilutive securities:
Employee stock options 2,162 1,730 1,952 --
Preferred stock 3,070 4,751 4,072 --
-------- -------- -------- --------
Dilutive potential common shares 5,232 6,481 6,024 --
Denominator for diluted net income (loss) 29,945 28,221 29,413 21,618
======== ======== ======== ========
per share - adjusted weighted average
shares and assumed conversions
Basic net income (loss) per share $ 0.18 $ 0.05 $ 0.33 $ (0.07)
======== ======== ======== ========
Diluted net income (loss) per share $ 0.15 $ 0.04 $ 0.26 $ (0.07)
======== ======== ======== ========
</TABLE>
FISCAL 1998 ACQUISITION
On November 14, 1997, the Company acquired FocusSoft, Inc. ("FocusSoft"), a
privately held provider of enterprise resource planning and distribution
software based in Louisville, Kentucky. The acquisition was structured as a
triangular merger whereby FocusSoft became a wholly owned subsidiary of the
Company. As consideration for the acquisition, the Company issued 2,474,794
shares of common stock in exchange for all of the outstanding shares of common
stock of FocusSoft. The exchange ratio used with respect to the FocusSoft shares
was 24.747937 (i.e., each share of FocusSoft common stock converted into
24.747937 shares of the Company's common stock.) In addition, the Company
assumed all of the employee stock options of FocusSoft, which translated into
stock options to acquire 225,206 shares of common stock of the Company. Ten
percent of the shares issued in the merger, or 247,480 shares, were placed into
an escrow for a period of one year to cover indemnification claims in connection
with the transaction. The transaction was accounted for as a pooling of
interests, and accordingly, the accompanying condensed consolidated financial
statements have been restated to incorporate the financial position, results of
operations and cash flows of FocusSoft for all periods presented.
FISCAL 1997 ACQUISITION
On June 30, 1997 the Company acquired Clientele Software, Inc. ("Clientele") a
privately held provider of help desk automation software based in Portland,
Oregon. As consideration for the acquisition, the Company issued 887,636 shares
of common stock in exchange for all of the outstanding shares of common stock of
Clientele. The exchange ratio used with respect to the conversion of the
Clientele shares was .19761 (i.e., each share of Clientele common stock
converted into .19761 shares of the Company's common stock). In addition, the
Company assumed all of the outstanding employee stock options of Clientele,
which translated into stock options to acquire 212,356 shares of common stock of
the Company. Ten percent of the shares issued in the merger, or 88,764 shares,
were placed into an escrow for a period of one year to cover indemnification
claims in connection with the transaction.
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The transaction was accounted for as a pooling of interests, and accordingly,
the accompanying condensed consolidated financial statements have been restated
to incorporate the financial position, results of operations and cash flows of
Clientele for all periods presented.
FISCAL 1996 AND 1997 RESTRUCTURINGS
During the second quarter of fiscal 1996, the Company restructured its business
operations. The restructuring included the cessation of the marketing of the
version of the Company's Platinum SQL Enterprise product that runs on the
Sybase/UNIX server platform as well as the elimination of the Company's direct
sales force for its Platinum SQL Enterprise product line. The restructuring
resulted in a charge of $3.3 million which was recorded in the second quarter of
fiscal 1996. Such amount included approximately $1.2 million for severance and
other extended benefit costs related to the reduction in force, $1.2 million for
lease termination and buyout costs related to the closure of facilities and
$872,000 in asset write-downs and other costs.
In February 1996, the Company had another reduction in force of approximately 40
people. This reduction in force resulted in an additional restructuring charge
of $2.3 million which was recorded in the third quarter of fiscal 1996. Such
amount included approximately $300,000 for severance and other extended benefit
costs related to the reduction in force, $625,000 in lease termination and
buyout costs related to the closure of facilities and $1.4 million in asset
write-downs and other costs.
In June 1997, the Company underwent another restructuring as a result of the
Clientele acquisition. This resulted in an additional restructuring charge of
$1.6 million which was recorded in the fourth quarter of fiscal 1997. Such
amount included approximately $1.1 million for excess facility costs, as well as
approximately $500,000 for severance and other extended benefit costs. During
the nine months ended March 31, 1998, the Company paid approximately $876,000
for severance, lease termination and other costs relating to the 1996 and 1997
restructurings.
CONTINGENCIES
The Company is subject to miscellaneous legal proceedings in the normal course
of business and other legal proceedings. The Company is currently defending
these proceedings and claims, and anticipates that it will be able to resolve
these matters in a manner that will not have a material adverse effect on the
Company's financial position, results of operations or cash flows.
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS:
RESULTS OF OPERATIONS
Net income for the third quarter of fiscal 1998 was $4.3 million, or $0.15 per
share, as compared to a net income of $1.2 million, or $0.04 per share, for the
comparable quarter of fiscal 1997. Net income for the first nine months of
fiscal 1998 was $7.7 million or $0.26 per share, as compared to a net loss of
$1.5 million, or $(0.07) per share, for the comparable period of fiscal 1997.
The following summarizes the significant aspects related to the Company's
results of operations.
Revenues
Revenues were approximately $26.4 million and $16.4 million for the three months
ended March 31, 1998 and 1997, respectively, representing an increase of 61%.
Revenues were approximately $66.3 million and $42.8 million for the nine months
ended March 31, 1998 and 1997, respectively, representing an increase of 55%.
The increases for the three and nine months ended March 31, 1998 reflected a
general increase in license and service revenues, as discussed below, as well as
the Company's broader product offering following the Clientele and FocusSoft
acquisitions.
Total license fee revenues were approximately $15.4 million and $8.4 million for
the three months ended March 31, 1998 and 1997, respectively, representing an
increase of 84% and approximately $37.2 million and $22.1 million for the nine
months ended March 31, 1998 and 1997, respectively, representing an increase of
68%.
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License fee revenues for the Company's Platinum SQL product were approximately
$9.6 million and $4.6 million for the three months ended March 31, 1998 and
1997, respectively, representing an increase of 111% and approximately $22.2
million and $12.2 million for the nine months ended March 31, 1998 and 1997,
respectively, representing an increase of 82%. The increases resulted primarily
from an overall increase in personnel in the direct sales force, the Company's
broader product offering following the FocusSoft acquisition, additional lead
generation efforts and an increased effort to sell Platinum SQL internationally.
License fee revenues for the Platinum for DOS and Platinum for Windows products
were approximately $1.9 million and $1.7 million for the three months ended
March 31, 1998 and 1997, respectively, representing an increase of 14% and
approximately $5.6 million and $5.2 million for the nine months ended March 31,
1998 and 1997, respectively, representing an increase of 8%. The increases
resulted primarily from increased domestic demand created by the commercial
availability of a complete suite of the Platinum for Windows core modules during
the nine months ended March 31, 1998. The complete set of Platinum for Windows
core modules were first available in December 1996.
License fee revenues for the Clientele products were approximately $2.8 million
and $1.2 million for the three months ended March 31, 1998 and 1997,
respectively, representing an increase of 133% and approximately $6.2 million
and $3.0 million for the nine months ended March 31, 1998 and 1997,
respectively, representing an increase of 104%. The increases resulted primarily
from the release of the Clientele 3.0 product in February 1998 which included
sales force automation functionality, the Company's broader product offering
following the Clientele acquisition, the addition of a direct sales force, as
well as improvements in the telesales and marketing efforts during the three and
nine months ended March 31, 1998.
License fee revenues for the Platinum SQL Advanced Distribution and Advanced
Manufacturing applications (formerly named FocusSoft Millenia) were
approximately $992,000 and $582,000 for the three months ended March 31, 1998
and 1997, respectively, representing an increase of 71% and approximately $3.1
million and $844,000 for the nine months ended March 31, 1998 and 1997,
respectively, representing an increase of 264%. The increases resulted from the
expansion of the direct sales force for the product, the sale of the product
through the Platinum SQL direct sales force, the release of version 5.0 of the
product with enhanced distribution and manufacturing functionality and increased
marketing efforts.
International license fee revenues were approximately $4.2 million and $2.6
million for the three months ended March 31, 1998 and 1997, respectively,
representing an increase of 62% and approximately $9.9 million and $6.5 million
for the nine months ended March 31, 1998 and 1997, respectively, representing an
increase of 52%. The increases were primarily due to an overall increase in
international sales personnel as well as increased sales efforts in the
international markets for the Platinum SQL product.
Services revenue were approximately $10.8 million and $7.2 million for the three
months ended March 31, 1998 and 1997, respectively, representing an increase of
51% and approximately $28.8 million and $19.6 million for the nine months ended
March 31, 1998 and 1997, respectively, representing an increase of 47%. The
increases in the three and nine months ended March 31, 1998 were primarily
attributable to the Company's efforts to increase the utilization of
professional services personnel, an overall rise in the installed base of
end-users of Platinum SQL, and an increase in the number of professional service
personnel.
Gross Profit
Gross profit increased as a percentage of revenues from 65% for the three months
ended March 31, 1997 to 71% for the three months ended March 31, 1998. Gross
profit increased as a percentage of revenues from 64% for the nine months ended
March 31, 1997 to 68% for the nine months ended March 31, 1998. The increase in
gross profit percentage was primarily due to higher license fee revenues as a
percentage of total revenues, which have higher margins than consulting and
professional service revenues.
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Operating Expenses
Total operating expenses increased from $9.8 million for the three months ended
March 31, 1997 to $14.5 million for the three months ended March 31, 1998. Total
operating expenses increased from $29.7 million for the nine months ended March
31, 1997 to $38.9 million for the nine months ended March 31, 1998. The
increases were primarily attributable to an overall increase in direct sales and
professional services personnel. Total operating expenses as a percentage of
revenues were 55% and 60% for the three months ended March 31, 1998 and 1997,
respectively. Total operating expenses as a percentage of revenues were 59% and
69% for the nine months ended March 31, 1998 and 1997, respectively. Included in
operating expenses for the three and nine months ended March 31, 1998 were
approximately $800,000 in one-time charges for the FocusSoft acquisition. See
"Notes to Unaudited Condensed Consolidated Financial Statements - Fiscal 1998
Acquisition." The Company expects the dollar amount of its operating expenses to
increase during the fourth quarter of fiscal 1998 due to anticipated profit
sharing accruals for employees and bonus accruals for executives and middle
management employees based on anticipated fourth quarter results, as well as
additional sales commissions which result from accelerated commission rates that
occur in the fourth quarter of a fiscal year. See "Certain Factors That May
Affect Future Results - Forward Looking Statements." These amounts are of a
one-time nature to the fourth quarter of fiscal 1998 and are not expected to
reoccur in the first quarter of fiscal 1999. See "Certain Factors That May
Affect Future Results - Forward Looking Statements." The Company expects
operating expenses as a percentage of revenue to decrease during the fourth
quarter of fiscal 1998 as compared to the prior quarter. See "Certain Factors
That May Affect Future Results - Forward Looking Statements."
Sales and marketing expenses were approximately $10.3 million and $6.5 million
for the three months ended March 31, 1998 and 1997, respectively, or
approximately 39% of total revenues in both periods. Sales and marketing
expenses were approximately $25.3 million and $17.9 million for the nine months
ended March 31, 1998 and 1997, respectively, or approximately 38% and 42% of
total revenues. The dollar amount increases resulted from the growth of the
direct sales force for the Company's Platinum SQL (including the advanced
distribution and manufacturing applications) and Clientele products. In the
fourth quarter, the Company expects to continue to add additional direct sales
and professional services employees in an effort to take advantage of additional
sales opportunities. See "Certain Factors That May Affect Future Results -
Forward Looking Statements."
Software development expenditures were approximately $3.1 million and $2.8
million for the three months ended March 31, 1998 and 1997, respectively, before
capitalization of software costs of approximately $192,000 and $232,000,
respectively, or approximately 12% and 17% of total revenues. Software
development expenditures were approximately $9.5 million and $8.4 million for
the nine months ended March 31, 1998 and 1997, respectively, before
capitalization of software costs of approximately $443,000 and $1.0 million,
respectively, or approximately 14% and 20% of total revenues. Upon the release
for general availability of the Company's software products, the Company
amortizes capitalized software development costs over a five year period. Such
amortization is included in cost of revenues. The percentage of capitalized
software development costs to total software development costs was 6% for the
three months ended March 31, 1998 and 8% for the three months ended March 31,
1997. The percentage of capitalized software development costs to total software
development costs was 5% for the nine months ended March 31, 1998 and 12% for
the nine months ended March 31, 1997. During the three and nine months ended
March 31, 1998, costs were capitalized for the creation of translations into
different languages for the Platinum SQL and Platinum for Windows products and
the Job Cost module for Platinum for Windows and Job Shop and Engineer to Order
for the Platinum SQL Advanced Distribution and Advanced Manufacturing
applications, certain applications of the Platinum SQL 4.2 release and
Clientele's 3.0 sales force automation functionality. During the three and nine
months ended March 31, 1997, costs were capitalized for the multi-currency
functionality for Platinum SQL, development of Platinum for Windows Inventory
and Order Entry modules and development of Platinum SQL Customization Workbench.
General and administrative expenses were approximately $1.2 million and $800,000
for the three months ended March 31, 1998 and 1997, respectively, or
approximately 5% of total revenues in both periods. General and administrative
expenses were approximately $4.6 million and $4.4 million for the nine months
ended March 31, 1998 and 1997, respectively, or approximately 7% and 10% of
total revenues. Included in the nine months ended March 31, 1998 were
approximately $800,000 of one-time acquisition costs related to the FocusSoft
acquisition. Excluding the acquisition costs, the decreases were primarily due
to the reduction of legal reserves of $500,000 from the nine months ended March
31, 1997 to the nine months ended March 31, 1998, and the increase in the fair
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value of a note receivable from a divestiture as part of the fiscal 1994
restructuring which was previously written off, which were offset in part by an
increase in the provision for additional bad debts.
Other Income
Other income for the three months ended March 31, 1998 and 1997, was
approximately $150,000 and $335,000, respectively. Other income for the nine
months ended March 31, 1998 and 1997, was approximately $1.3 million and
$677,000, respectively. The increase in the nine month period primarily resulted
from additional interest earned on the Company's cash and cash equivalents and
short-term investments, and an increase of $298,000 in the fair value of an
investment.
Provision for Income Taxes
The Company has not provided a provision for income taxes for the quarter ended
March 31, 1998 due to the Company's utilization of operating loss carryforwards.
A valuation allowance had been provided against such operating loss
carryforwards.
Year 2000 Problems of Third Parties
It is possible that the currently installed computer systems, software products
or other business systems of the Company's distributors, resellers, suppliers,
manufacturers or customers, working either alone or in conjunction with other
software systems, will not accept input of, store, manipulate and output dates
in the Year 2000 or thereafter without error or interruption (the "Year 2000
Problem"). Management believes the Company's software products are not subject
to the Year 2000 Problem with the exception of the Platinum for DOS product line
which is expected to be Year 2000 compliant in the first quarter of fiscal 1999.
See "Certain Factors That May Affect Future Results - Forward Looking
Statements." The Company is querying its distributors, resellers, suppliers,
manufacturers and customers as to their progress in identifying and addressing
Year 2000 Problems. The expenses of the Company's efforts or the expenses or
liabilities to which the Company may become subject as a result of such
problems, are not expected to have a material adverse effect on the Company's
business, results of operations, cash flows and financial condition.
FINANCIAL CONDITION
Liquidity and Capital Resources
As of March 31, 1998, the Company's principal sources of liquidity included cash
and cash equivalents of approximately $9.0 million. Cash and cash equivalents
increased by approximately $2.3 million over the June 30, 1997 balance primarily
due to cash generated from stock option exercises. The Company had working
capital of $3.8 million at June 30, 1997 as compared to working capital of $15.0
million at March 31, 1998. The increase was primarily attributable to the
increase in accounts receivable and to the reduction of accounts payable and
accrued expenses.
The Company paid approximately $876,000 in severance, lease and other costs
related to the fiscal 1996 and 1997 restructurings during the nine months ended
March 31, 1998. At March 31, 1998, the Company had a $1.7 million cash
obligation related to lease termination and other costs of the fiscal 1996 and
1997 restructurings. These obligations will be funded from existing cash
reserves, working capital and operations.
The Company has taken steps to significantly reduce its operating expenses
through several reductions in work force over the past two years, as well as the
disposition of several business units. In connection with such restructurings
the Company will incur additional cash outlays of approximately $1.7 million.
See "Notes to Unaudited Condensed Consolidated Financial Statements - Fiscal
1996 and 1997 Restructurings." If the Company is not successful in achieving
targeted revenues or positive cash flow from operations, the Company may be
required to take actions to align its operating expenses with its reduced
revenues, such as reductions in work force, or other expense cutting measures or
seeking additional debt or equity financing. There can be no assurance that the
Company would be able to reduce expenses or secure additional financing on
reasonable terms or at all.
11
<PAGE> 12
The Company is dependent upon its ability to generate cash flow from license
fees and other operating revenues, as well as the collection of its outstanding
accounts receivable to maintain current liquidity levels. The Company believes
that its current cash reserves, together with existing sources of liquidity,
will satisfy the Company's projected short-term liquidity and other cash
requirements for the next 12 months.
CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS
Fluctuations in Quarterly Operating Results. The Company's operating
results can vary substantially from period to period. The Company's quarterly
operating results fluctuate in part due to the number and timing of new product
introductions and enhancements, discontinuance of product lines, the timing of
product orders and shipments, recognition of deferred revenue upon the Company's
completion of its contractual obligations, marketing and product development
expenditures and promotional programs. A significant portion of the Company's
quarterly revenues are recorded in the final month of the quarter, with a
concentration of such revenues in the final 10 business days of that month.
Also, the timing of the closing of direct sales in the latter part of each
quarter increases the risk of quarter-to-quarter fluctuations. Accordingly, the
Company believes that period to period comparisons of its results of operations
are not necessarily meaningful and should not be relied upon as an indication of
future performance. If revenues do not meet the Company's expectations in any
given quarter, operating results may be adversely affected. There can be no
assurance that the Company will be profitable in any quarter or at all.
Forward Looking Statements. This quarterly report contains certain
forward looking statements within the meaning of Section 27A of the Securities
and Exchange Act of 1933, as amended, and Section 21E of the Securities and
Exchange Act of 1934, as amended, that involve risks and uncertainties. In
addition, the Company may from time to time make oral forward looking
statements. Actual results are uncertain and may be impacted by the following
factors, among others, which may cause the actual results to differ materially
from those projected in the forward looking statement. Because of these and
other factors that may affect the Company's operating results, past performance
should not be considered an indicator of future performance and investors should
not use historical results to anticipate results or trends in future periods.
Liquidity. The Company's cash and cash equivalents increased from
$6.7 million at June 30, 1997 to $9.0 million at March 31, 1998, principally due
to cash generated from stock option exercises. There will be further cash
outlays estimated at approximately $1.7 million in connection with the several
restructurings. See "Notes to Unaudited Condensed Consolidated Financial
Statements - Fiscal 1996 and 1997 Restructurings." If the Company is not
successful in achieving targeted revenues or positive cash flow from operations,
the Company may be required to take actions to align its operating expenses with
its reduced revenues, such as reductions in work force or other expense cutting
measures, or seek additional debt or equity financing. There can be no assurance
that the Company would be able to reduce expenses or secure additional financing
on reasonable terms or at all.
Horizontal Product Strategy. As part of its business strategy, the
Company intends to expand its product offerings to include application software
products that are complementary to financial accounting, manufacturing and
distribution, sales force automation and help desk applications. This strategy
may involve acquisitions, investments in other businesses that offer
complementary products, joint development agreements or licensing of technology
agreements. See "Fiscal 1997 Acquisition" and "Fiscal 1998 Acquisition" in the
Notes to the Unaudited Condensed Consolidated Financial Statements. Such
acquisitions are, and any future acquisitions or investments would be
accompanied by the risks commonly encountered in the acquisitions of businesses.
Some of these risks include, among other things, the integration of previously
distinct businesses into one business unit, the substantial management time
devoted to such activities, the potential disruption of the Company's ongoing
business, undisclosed liabilities, the failure to realize anticipated benefits
(such as synergies and cost savings), and issues related to product integration
and transition (such as development, distribution and customer support). The
Company expects that the consideration paid in future acquisitions, if any,
would be in the form of stock, rights to purchase stock, cash or a combination
thereof. Dilution to existing stockholders and earnings per share may result to
the extent that shares of stock or other rights to purchase stock are issued in
connection with any such future acquisitions. Some of the risks associated with
joint development agreements or technology licenses include development delays,
product bugs or errors, issues related to the integration or transition of the
new products, such as providing adequate customer support, effectively selling
and marketing the new product and coordinating development efforts.
12
<PAGE> 13
Dependence on Distribution Channels. The Company distributes its
Platinum for DOS and Platinum for Windows products exclusively through
third-party distributors and Value Added Resellers ("VARs"), and distributes its
Platinum SQL software product through a direct sales force as well as through
VARs and distributors. The Company's distribution channel includes distributors,
VARs and Authorized Consultants, which consist primarily of professional firms.
Although no one of these distribution channel members is responsible for any
material amount of the Company's license fees, the Company's results of
operations could be adversely affected if significant numbers of its VARs or
Authorized Consultants were to cease distributing or recommending the Company's
products or were to choose to emphasize competing products. Generally, the
Company's agreements with its VARs and Authorized Consultants do not require
them to exclusively offer or recommend the Company's products and may be
terminated by either party with or without cause.
In the fourth quarter of fiscal 1996, the Company reestablished a
direct sales force for its client server financial software product, Platinum
SQL. There can be no assurance that the direct sales force will not cause
conflicts with the Company's VAR channel.
The Company's Platinum SQL product was first introduced on a limited
basis to the network of VARs during the quarter ended December 31, 1994.
Platinum SQL, a client/server financial software application designed to run on
Microsoft Windows NT, Microsoft SQL server and Sybase SQL server, is a more
technically complex product than Platinum for Windows and Platinum for DOS and
requires additional skill and training to successfully implement. The Company
presently has over 70 authorized VARs who have completed training from which
approximately 30 VARs generate greater than 90% of the indirect sales of
Platinum SQL and is actively seeking additional skilled VARs to sell Platinum
SQL. Delays in training VARs or recruiting additional skilled VARs could
adversely impact the Company's ability to generate license revenues from its
Platinum SQL product line.
Dependence on Platinum SQL Product Line. Platinum SQL, which is a
successor product to Platinum SQL Enterprise, which was first introduced in June
1992, and to Platinum SQL NT, which was first introduced in December 1994, is an
integrated financial and management information software product for use on
client/server computing systems. It is common for complex programs such as
Platinum SQL to contain undetected errors when first released or subsequently
enhanced, which are discovered only after the product has been used with many
different computer systems and in varying applications. The inability of the
Company to correct any serious errors, or any significant delay in correcting
any serious errors could have a material adverse effect on the Company's results
of operations. In addition, there can be no assurance that significant technical
problems will not be discovered, or if discovered, corrected in a timely manner.
Technical problems with the current release of the database platforms on which
Platinum SQL operate could impact sales of these Company products, and any
significant technical problems could have a material adverse effect on the
Company's results of operations.
New Product Introductions. The Company's future success will depend
upon its ability to develop and successfully introduce new products, enhance its
current products on a timely basis and increase customer acceptance of its
existing products. The Company has three principal product lines, Platinum for
Windows (including Platinum for DOS), Platinum SQL (including financial
accounting, distribution and manufacturing applications) and Clientele. The
Company continues to provide maintenance and support services for its Platinum
SQL Enterprise product for existing customers. Platinum SQL was released in the
quarter ended December 31, 1994 and some of the core accounting modules of
Platinum for Windows were released during the quarters ended December 31, 1996,
June 30, 1996 and December 31, 1995. Version 4.2 of Platinum SQL, which will
include enhanced consolidation capabilities and new on-line planning wizards and
troubleshooting utilities as well as maintenance fixes, is scheduled for release
in the fourth fiscal quarter of 1998. See "Forward Looking Statements." Version
4.6 of Platinum for DOS, which will make this product Year 2000 compliant is
scheduled for release in the first quarter of fiscal 1999. See "Forward Looking
Statements." In the past, the Company has occasionally experienced delays in the
introduction of new products and product enhancements. There can be no assurance
that the Company will be successful in developing and marketing these new
products or product enhancements on a timely basis or that the Company will not
experience significant delays in introducing new products in the future, which
could have a material adverse effect on the Company's results of operations. In
addition, there can be no assurance that new products or product enhancements
developed by the Company will achieve market acceptance.
Competition. The computer software industry is intensely competitive
and rapidly changing. A number of companies offer products similar to the
Company's products that target the same markets. Some of the Company's existing
competitors, as well as a number of new potential competitors, have larger
technical staffs, more
13
<PAGE> 14
established and larger marketing and sales organizations and significantly
greater financial resources than the Company. There can be no assurance that
competitors will not develop products that are superior to the Company's
products or that achieve greater market acceptance. The Company's future success
will depend significantly upon its ability to increase its share of its target
markets and to license additional products and product enhancements to existing
customers. There can be no assurance that the Company will be able to compete
successfully or that competition will not have a material adverse effect on the
Company's financial condition and results of operations.
Exposure to Rapid Technological Change. The market for the Company's
financial accounting and other line of business software products is
characterized by rapid technological advances, changes in end-user requirements,
frequent new product introductions and enhancements and evolving industry
standards. The introduction of products embodying new technologies and the
emergence of new industry standards could render the Company's existing products
and products under development obsolete and unmarketable. The Company's future
success will depend upon its ability to address the increasingly sophisticated
needs of its customers by enhancing its current products and by developing and
introducing on a timely basis new products that keep pace with technological
developments and emerging industry standards, respond to evolving end user
requirements and achieve market acceptance. Any failure by the Company to
anticipate or adequately respond to technological developments or end-user
requirements, or any significant delays in product development or introduction,
could result in a loss of competitiveness or reduced revenues. If the Company is
unable, for technological or any other reason, to develop, introduce and sell
its products in a timely manner, the Company's business, operating results and
financial condition would be materially adversely affected. From time to time,
the Company or its present or future competitors may announce new products,
capabilities or technologies that have the potential to replace or shorten the
life cycles of the Company's existing products. There can be no assurance that
announcements of currently planned or other new products will not cause
customers to delay or alter their purchasing decisions in anticipation of such
products, which could have a material adverse effect on the Company's business,
operating results and financial condition.
Dependence on Key Personnel. The Company's success depends on the
continued service of key management personnel, including L. George Klaus, Chief
Executive Officer, William Pieser, Senior Vice President, Marketing and Business
Development, and Ken Lally, Senior Vice President, Worldwide Field Operations.
None of the Company's key personnel is subject to an employment agreement for a
specified time duration with the Company. In addition, the competition to
attract, retain and motivate qualified technical, sales and operations personnel
is intense. The Company has at times experienced, and continues to experience,
difficulty in recruiting qualified personnel, particularly in software
development and customer support. There can be no assurance that the Company can
retain its key personnel or attract other qualified personnel in the future. The
failure to attract or retain such persons could have a material adverse effect
on the Company's business, operating results, cash flows and financial
condition.
Risks Associated with International Sales. For the nine months ended
March 31, 1998, international sales represented approximately 25% of the
Company's revenues, and the Company believes that its future growth is dependent
in part upon its ability to increase revenues in international markets. The
Company intends to attempt to continue to expand its operations outside of the
United States and enter additional international markets, which will require
significant management attention and financial resources. There can be no
assurance, however, that the Company will be able to successfully maintain or
expand its international sales. International sales are subject to inherent
risks, including changes in regulatory requirements, tariffs and other barriers,
fluctuating exchange rates, difficulties in staffing and managing foreign sales
and support operations and the possibility of greater difficulty in accounts
receivable collection. There can be no assurance that any of these factors will
not have a material adverse effect on the Company's future international sales
and, consequently, on the Company's business, operating results, cash flows and
financial condition. See "Management's Discussion and Analysis of Financial
Conditions and Results of Operations."
Dependence on Client/Server Environment. The Company's development
tools, application products and consulting and education services are intended
to help organizations build, customize or deploy solutions that operate in a
client/server computing environment. The client/server market is relatively new,
and there can be no assurance that organizations will continue to adopt
client/server environments or that customers of the Company that have begun the
migration to a client/server environment will broadly implement this model of
computing. The Company's future financial performance will depend in large part
on continued growth in the market for client/server software applications and
related services, which in turn will depend in part on the growth in the
14
<PAGE> 15
number of organizations implementing client/server computing environments and
the number of applications developed for use in those environments. There can be
no assurance that these markets will continue to grow or that the Company will
be able to respond effectively to the evolving requirements of these markets. If
the market for client/server application products and services does not grow in
the future, or grows more slowly than the Company anticipates, or if the Company
fails to respond effectively to evolving requirements of this market, the
Company's business, financial condition and results of operations would be
materially adversely affected.
Shares Eligible for Future Sale. As of May 5, 1998, the Company had
25,915,275 shares of common stock outstanding. There are presently 1,439,750
shares of Series B Preferred Stock and 162,973 shares of Series C Preferred
Stock outstanding. Each share of Series B Preferred Stock is convertible into
one share of common stock, as adjusted for stock dividends, combinations or
splits at the option of the holder. Each share of Series C Preferred Stock is
convertible into ten shares of common stock, as adjusted for stock dividends,
combinations or splits at the option of the holder. As a result, the Series B
and Series C Preferred Stock are convertible into 1,439,750 and 1,629,730 shares
of common stock, respectively. The holders of the Series B and Series C
Preferred Stock have the right to cause the Company to register the sale of the
shares of common stock issuable upon conversion of the Series B and Series C
Preferred Stock. Also, the Company has approximately 3,439,368 shares subject to
stock options which are issuable to employees under employee option plans. In
addition, the Company has registered for resale an aggregate of approximately
3,362,430 shares of common stock which were issued to former shareholders of
Clientele, Inc. and FocusSoft Inc. in the Clientele and FocusSoft acquisitions.
As a result, a substantial number of shares of common stock will be eligible for
sale in the public market at various times in the future. Sales of substantial
amounts of such shares could adversely affect the market price of the Company's
common stock.
Possible Volatility of Stock Prices. The market prices for
securities of technology companies, including the Company, have been volatile.
Quarter to quarter variations in operating results, changes in earnings
estimates by analysts, announcements of technological innovations or new
products by the Company or its competitors, announcements of major contract
awards and other events or factors may have a significant impact on the market
price of the Company's Common Stock. In addition, the securities of many
technology companies have experienced extreme price and volume fluctuations,
which have often been unrelated to the companies' operating performance. These
conditions may adversely affect the market price of the Company's Common Stock.
Because of these and other factors affecting the Company's operating
results, past financial performance should not be considered an indicator of
future performance, and investors should not use historical trends to anticipate
results or trends in future periods.
15
<PAGE> 16
PART II
OTHER INFORMATION
ITEM 1 - LEGAL PROCEEDINGS:
The Company is subject to miscellaneous legal proceedings in the normal course
of business and other legal proceedings. The Company is currently defending
these proceedings and claims, and anticipates that it will be able to resolve
these matters in a manner that will not have a material adverse effect on the
Company's financial position, results of operations or cash flows.
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K:
(a) Exhibits
27 Financial Data Schedule
(b) Reports on Form 8-K
The Company filed a Current Report on Form 8-K dated January
22, 1998 to report under Item 5 its results for the fiscal
quarter ended December 31, 1997.
16
<PAGE> 17
SIGNATURE
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 SOFTWARE CORPORATION
------------------------------------------
(Registrant)
Date: May 13, 1998 /s/ PAUL G. MAZZARELLA
---------------------------------------
Paul G. Mazzarella
Vice President and Corporate Controller
(Principal Financial and Accounting
Officer and Duly Authorized Officer)
17
<PAGE> 18
EXHIBIT INDEX
(a) Exhibits
27 Financial Data Schedule.
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-START> JUL-01-1997
<PERIOD-END> MAR-31-1998
<CASH> 9,047
<SECURITIES> 6,999
<RECEIVABLES> 26,193
<ALLOWANCES> 4,699
<INVENTORY> 712
<CURRENT-ASSETS> 41,645
<PP&E> 26,516
<DEPRECIATION> 18,974
<TOTAL-ASSETS> 52,416
<CURRENT-LIABILITIES> 26,649
<BONDS> 46
0
20,788
<COMMON> 23
<OTHER-SE> 4,910
<TOTAL-LIABILITY-AND-EQUITY> 52,416
<SALES> 37,157
<TOTAL-REVENUES> 66,288
<CGS> 3,958
<TOTAL-COSTS> 17,015
<OTHER-EXPENSES> 37,645
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 7,670
<INCOME-TAX> 0
<INCOME-CONTINUING> 7,670
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 7,670
<EPS-PRIMARY> 0.33
<EPS-DILUTED> 0.26
</TABLE>
