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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 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 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
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Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
--- ---
As of November 2, 1998, there were 28,379,289 shares of common stock
outstanding.
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PLATINUM SOFTWARE CORPORATION
INDEX
Page
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PART I - FINANCIAL INFORMATION...........................................................3
Item I - Financial Statements........................................................3
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.......................................................9
PART II - OTHER INFORMATION.............................................................16
Item 1 - Legal Proceedings........................................................16
Item 6 - Exhibits and Reports on Form 8-K.........................................16
SIGNATURE ...........................................................................17
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PART I
FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS:
PLATINUM SOFTWARE CORPORATION
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
September 30, June 30,
1998 1998
------------- ---------
ASSETS
Current assets:
Cash and cash equivalents $ 6,640 $ 11,251
Short-term investments 12,553 11,528
Accounts receivable, net 27,702 28,929
Inventories 694 803
Prepaid expenses and other 6,148 2,851
--------- ---------
Total current assets 53,737 55,362
Property and equipment, net 9,335 8,688
Software development costs, net 3,753 2,851
Acquired source code, net 192 206
Other assets 1,473 881
--------- ---------
$ 68,490 $ 67,988
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 3,862 $ 3,571
Accrued expenses 7,046 12,166
Accrued restructuring costs 1,139 1,280
Deferred revenue 15,474 16,026
--------- ---------
Total current liabilities 27,521 33,043
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Long-term liabilities 26 35
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Stockholders' equity:
Preferred stock 7,501 20,713
Common stock 28 26
Additional paid-in capital 148,631 134,550
Less: notes receivable from officers for issuance
of restricted stock (11,563) (11,563)
Accumulated foreign currency translation adjustments (625) (1,092)
Accumulated deficit (103,029) (107,724)
--------- ---------
Total stockholders' equity 40,943 34,910
--------- ---------
$ 68,490 $ 67,988
========= =========
The accompanying notes are an integral part of these unaudited
condensed consolidated financial statements.
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PLATINUM SOFTWARE CORPORATION
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Three Months Ended
September 30,
--------------------
1998 1997
------- -------
Revenues:
License fees $16,177 $10,087
Services 14,039 8,079
Royalty income 113 99
------- -------
Total revenue 30,329 18,265
Cost of revenues 10,066 6,069
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Gross profit 20,263 12,196
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Operating expenses:
Sales and marketing 10,953 7,152
Software development 2,797 3,050
General and administrative 1,936 1,263
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Total operating expenses 15,686 11,465
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Income from operations 4,577 731
Other income, net 298 574
------- -------
Income before provision for income taxes 4,875 1,305
Provision for income taxes 180 --
------- -------
Net income $ 4,695 $ 1,305
======= =======
Basic net income per share $ 0.17 $ 0.06
======= =======
Shares used in computing basic
net income per share 28,330 22,683
======= =======
Diluted net income per share $ 0.16 $ 0.05
======= =======
Shares used in computing diluted
net income per share 30,009 28,919
======= =======
The accompanying notes are an integral part of these unaudited
condensed Consolidated financial statements.
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PLATINUM SOFTWARE CORPORATION
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
Three Months Ended
September 30,
--------------------
1998 1997
-------- --------
Cash flows from operating activities:
Net income $ 4,695 $ 1,305
Adjustments to reconcile net income to net
cash used in operating activities
Depreciation and amortization 2,007 1,287
Change in operating assets and liabilities:
(Increase) decrease in accounts receivable, net 1,227 (502)
(Increase) decrease in inventories 109 6
(Increase) decrease in prepaid expenses and other (3,297) (16)
(Increase) decrease in other assets (592) (891)
Increase (decrease) in accounts payable 291 (1,852)
Increase (decrease) in accrued expenses (5,120) (1,797)
Increase (decrease) in accrued restructuring costs (141) (246)
Increase (decrease) in deferred revenue (552) (389)
-------- --------
Cash used in operating activities (1,373) (3,095)
-------- --------
Cash flows from investing activities:
Capital expenditures, net (2,404) (521)
Capitalized software development costs (1,138) (121)
Purchase of short-term investments (1,025) (1,000)
Sale of short-term investments -- 1,009
Payments of long-term liabilities (9) (202)
-------- --------
Cash used in investing activities (4,576) (835)
-------- --------
Cash flows from financing activities:
Exercise of common stock options 381 281
Issuance of common stock under the Employee
Stock Purchase Plan 490 231
-------- --------
Cash provided by financing activities 871 512
-------- --------
Effect of exchange rates on cash 467 282
-------- --------
Net decrease in cash and cash equivalents (4,611) (3,136)
Cash and cash equivalents, beginning of period 11,251 6,724
-------- --------
Cash and cash equivalents, end of period $ 6,640 $ 3,588
======== ========
The accompanying notes are an integral part of these unaudited
condensed consolidated financial statements.
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PLATINUM SOFTWARE CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1998
BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements present
the financial position of Platinum Software Corporation (the "Company") as of
September 30, 1998 and June 30, 1998, the results of its operations and its cash
flows for the three months ended September 30, 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, 1998.
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 three months ended September 30, 1998, are not
necessarily indicative of the results of operations to be expected for the
entire fiscal year ending June 30, 1999.
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 has adopted SOP 97-2
for software transactions entered into after July 1, 1998. The adoption of SOP
97-2 did not have a material impact on the Company's results of operations.
BASIC AND DILUTED NET INCOME 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 per share is computed by dividing
net income by the weighted average number of shares of common stock outstanding
during the period. Diluted income per share is computed by dividing net income
by the weighted average number of shares of common stock and common stock
equivalents outstanding during the period. All earnings per share amounts for
all periods have been presented and, where necessary, restated to conform with
the provisions of Statement 128.
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The following table sets forth the computation of basic and diluted net income
per share:
Three Months Ended
September 30,
--------------------
1998 1997
------- -------
(in thousands, except
per share amounts)
Numerator:
Net income - Numerator for basic $ 4,695 $ 1,305
and diluted net income per share
Denominator:
Denominator for basic net income 28,330 22,683
per share - weighted average shares
Effect of dilutive securities:
Employee stock options 726 1,663
Preferred stock 953 4,573
------- -------
Dilutive potential common shares 1,679 6,236
Denominator for diluted net income per share 30,009 28,919
======= =======
Basic net income per share $ 0.17 $ 0.06
======= =======
Diluted net income per share $ 0.16 $ 0.05
======= =======
In July 1998, the remaining outstanding Series B Preferred Stock automatically
converted to common stock.
PENDING FISCAL 1999 ACQUISITION
On October 13, 1998, the Company entered into a definitive merger agreement with
DataWorks Corporation ("DataWorks"). Following the merger, DataWorks will become
a wholly owned subsidiary of the Company. The merger is subject to customary
conditions and will require regulatory approvals and stockholder approval by
each company. Under the terms of the merger agreement, shares of the Company's
Common Stock will be exchanged for all outstanding shares and options of
DataWorks on the basis of .794 shares of the Company for each share of
DataWorks. The merger is expected to close by the end of calendar year 1998. If
the merger closes, the Company's revenue and expenses subsequent to the close
are expected to be significantly greater.
DataWorks and certain of its officers, directors and former officers have been
named as defendants in a lawsuit alleging violations of the federal securities
laws. The complaint, which was filed on November 3, 1998 in the United States
District Court for the Southern District of California, purports to be brought
on behalf of a class of stockholders, and alleges that between January 28, 1998
and July 16, 1998, the defendants issued misleading statements concerning
DataWorks' acquisition of Interactive Group, Inc. and sales of certain products.
The complaint does not specify the dollar amount of damages alleged or relief
requested. The Company is also named in the lawsuit as a defendant as a
successor of DataWorks.
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. 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 247,479 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 unaudited condensed
consolidated financial statements have been restated to incorporate the
financial position, results of operations and cash flows of FocusSoft for all
periods presented.
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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 three months ended September 30, 1998, the Company paid approximately
$141,000 for severance, lease termination and other costs relating to the 1996
and 1997 restructurings.
STOCK OPTION REPRICING
In July 1998, the Company amended its 1998 Nonqualified Stock Option Plan to
increase the number of shares available for option grants to 3,000,000 shares.
Also, in July 1998, the Company granted options to purchase an aggregate of
1,975,450 shares of common stock of the Company to employees, including
executive officers. The options had an exercise price of $23.375 per share. In
October 1998, the Company's Board of Directors repriced the above referenced
options, as well as other outstanding options with an exercise price in excess
of $11.50, to $11.50 per share, the closing price of the Company's common stock
on November 9, 1998.
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.
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ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS:
RESULTS OF OPERATIONS
Net income for the first quarter of fiscal 1999 was $4.7 million, or $0.16 per
share, as compared to a net income of $1.3 million, or $0.06 per share, for the
comparable quarter of fiscal 1998. The following summarizes the significant
aspects related to the Company's results of operations.
Revenues
Revenues were approximately $30.3 million and $18.3 million for the three months
ended September 30, 1998 and 1997, respectively, representing an increase of
66%. The increase for the three months ended September 30, 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 $16.2 million and $10.1 million
for the three months ended September 30, 1998 and 1997, respectively,
representing an increase of 60%.
License fee revenues for the Company's Platinum SQL product (including
Clientele) were approximately $14.0 million and $8.1 million for the three
months ended September 30, 1998 and 1997, respectively, representing an increase
of 72%. The increase in revenues primarily was attributable to an overall
increase in personnel in the direct sales force, the Company's broader product
offering following the FocusSoft acquisition, the release of the Clientele 3.0
product, which included sales force automation functionality, the release of
FocusSoft's version 5.0 product (now named Platinum SQL Advanced Distribution
and Manufacturing) with enhanced distribution and manufacturing functionality,
additional lead generation, telesales and marketing 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 $2.2 million and $1.9 million for the three months ended
September 30, 1998 and 1997, respectively, representing an increase of 12%. The
increase resulted primarily from increased domestic demand for Platinum for
Windows during the three months ended September 30, 1998.
International license fee revenues were approximately $5.0 million and $2.7
million for the three months ended September 30, 1998 and 1997, respectively,
representing an increase of 85%. The increase was 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 was approximately $14.0 million and $8.1 million for the three
months ended September 30, 1998 and 1997, respectively, representing an increase
of 74%. The increase in the three months ended September 30, 1998 primarily was
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 as a percentage of revenues was 67% for the three months ended
September 30, 1998 and 1997.
Operating Expenses
Total operating expenses increased from $11.5 million for the three months ended
September 30, 1997 to $15.7 million for the three months ended September 30,
1998. The increase was primarily attributable to an overall increase in direct
sales personnel. Total operating expenses as a percentage of revenues were 52%
and 63% for the three months ended September 30, 1998 and 1997, respectively
Sales and marketing expenses were approximately $11.0 million and $7.2 million
for the three months ended September 30, 1998 and 1997, respectively, or
approximately 36% and 39% respectively, of total revenues. The dollar amount
increase resulted from the growth of the direct sales force for the Company's
Platinum SQL product (including the advanced distribution and manufacturing
applications and Clientele products.)
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Software development expenditures were approximately $3.9 million and $3.2
million for the three months ended September 30, 1998 and 1997, respectively,
before capitalization of software costs of approximately $1.1 and $121,000,
respectively, or approximately 13% and 17% 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 29% for the
three months ended September 30, 1998 and 4% for the three months ended
September 30, 1997. During the three months ended September 30, 1998, costs were
capitalized for the creation of foreign country translations and localizations
for the Platinum SQL product; the serial lot tracking feature for Platinum for
Windows; the 4.6 release for Platinum for DOS; certain applications of the
Platinum SQL 7.0 release and Clientele's 3.0 connector functionality. During the
three months ended September 30, 1997, costs were capitalized for the creation
of foreign country localizations for the Platinum SQL and Platinum for Windows
products.
General and administrative expenses were approximately $1.9 million and $1.2
million for the three months ended September 30, 1998 and 1997, respectively, or
approximately 6% and 7%, respectively, of total revenues. The increase in the
amount was primarily due to the increase in certain tax and accounts receivable
reserves.
Other Income
Other income for the three months ended September 30, 1998 and 1997, was
approximately $298,000 and $574,000, respectively. The decrease primarily
resulted from a one time increase of $298,000 in the fair value of an investment
for the three months ended September 30, 1997.
Provision for Income Taxes
The Company has provided a provision for income taxes of approximately $180,000
for the three months ended September 30, 1998 for expected federal alternative
minimum taxes payable and expected certain foreign taxes payable.
Liquidity and Capital Resources
As of September 30, 1998, the Company's principal sources of liquidity included
cash and cash equivalents and short-term investments of approximately $19.2
million. These resources decreased by approximately $3.6 million over the June
30, 1998 balance primarily due to the reduction of accrued expenses relating to
the payment of fiscal 1998 bonuses, profit sharing and sales commissions and
capital expenditures, offset in part by the collection of accounts receivable.
The Company had working capital of $22.3 million at June 30, 1998 as compared to
working capital of $26.2 million at September 30, 1998. The increase was
primarily attributable to the reduction of accrued expenses described above.
The Company paid approximately $141,000 in severance, lease and other costs
related to the fiscal 1996 and 1997 restructurings during the three months ended
September 30, 1998. At September 30, 1998, the Company had a $1.1 million cash
obligation related to lease termination and other costs of the fiscal 1996 and
1997 restructurings. The Company believes that these obligations will be funded
from existing cash reserves, working capital and operations.
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.
Year 2000 Issues
OVERVIEW. The Year 2000 Problem generally involves whether a computer system,
software product or business system, when working alone or in conjunction with
other software or hardware systems, accepts input of, stores, manipulates and
outputs dates in the Year 2000 or thereafter without error or interruption (the
"Year 2000 Problem"). The Year 2000 Problem potentially impacts the Company in
the following principal areas: (i) The Company's software products, including
products manufactured by third parties that are resold by the Company; (ii) the
Company's internal technology systems; (iii) the Company's non-internal
technology systems which contain embedded computer devices; and (iv) the
business systems of the Company's distributors, resellers and customers.
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COMPANY PRODUCTS. As a leading supplier of client/server enterprise resource
planning software for the middle market, the Company is aware of the Year 2000
Problem and committed to offering software products that are Year 2000
compliant. The Company presently believes that the current releases of its
Platinum SQL and Platinum for Windows software products are Year 2000 compliant.
The Company's Platinum for DOS product, which was initially released in the
mid-1980s was not Year 2000 compliant until the recent release of version 4.6 in
August 1998. The version 4.6 release is being offered for free to all existing
Platinum for DOS users on maintenance.
As part of its Platinum SQL and Platinum for Windows product lines the Company
resells certain products that are manufactured by third parties, both on an OEM
and reseller basis. Based upon informal discussions with the third parties, the
Company does not believe there will be material Year 2000 Problems with the
third party products. The Company is in the process of formally querying the
manufacturers of these products as to their progress in identifying and
addressing Year 2000 Problems. It is possible that such formal inquiries will
uncover unanticipated issues, although the Company does not presently believe
that any issues uncovered would be of a material nature.
INTERNAL TECHNOLOGY SYSTEMS. The Company's internal technology systems include
telecommunications (phones, voicemail and network connections), computer
hardware (personal computers and network servers) and software. The Company has
assessed the Year 2000 Problem with respect to telecommunications with the
exception of its Louisville, Kentucky and Portland, Oregon offices. The
assessment with respect to these offices is scheduled to be completed prior to
December 31, 1998. The Company has identified fixes that need to be made to its
telecommunications systems to make them Year 2000 compliant. These fixes relate
primarily to upgrades to voice mail and phone systems at some of the Company's
international offices and sales offices. It is anticipated that these fixes will
be implemented by January 1, 1999 and fully tested by June 30, 1999. The
estimated cost of these fixes is $225,000. To date, the Company has incurred
approximately $100,000 in year 2000 remediation costs, which was funded from
working capital. In addition, the Company has assessed approximately 75 percent
of its hardware used for Year 2000 compliance and has not uncovered any material
non compliance. The assessment of the remaining 25 percent is scheduled to be
completed by December 31, 1998. The Company's principal software systems include
accounting, customer support, order entry and desktop email/word processing. The
Company uses Microsoft Corporation products for email/word processing which have
been certified by Microsoft as Year 2000 compliant. The Company uses its
Platinum SQL and Clientele products for its accounting, order entry and customer
support software needs. The Company is in the process of completing a
contingency plan for its internal technology systems in connection with the
completion of the assessment of its internal technology systems.
NONINTERNAL TECHNOLOGY SYSTEMS. Noninternal technology systems include security
systems, elevators and other systems which contain an embedded computer or
computer like device which is used to control the operation of plant, machinery
and equipment. The Company has not assessed whether there are any Year 2000
Problems with its noninternal technology systems and anticipates that the
assessment will be completed by December 31, 1998. The Company is in the process
of completing a contingency plan for its non-internal technology systems in
connection with the completion of the assessment of its noninternal technology
systems.
THIRD PARTY DISTRIBUTORS, RESELLERS AND CUSTOMERS. The Company has over 350
resellers of its software products, including distributors and Vars. No one of
the resellers is responsible for a material amount of the Company's license
fees. The Company, from time to time, queries its resellers as to their progress
in identifying and addressing Year 2000 Problems.
CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS
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. These statements
are generally identified by the words "estimates," "expects," "anticipates,"
"plans," "believes," and similar expressions. 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.
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FLUCTUATIONS IN QUARTERLY OPERATING RESULTS. The Company's quarterly operating
results have fluctuated in the past. The Company's operating results may
fluctuate in the future as a result of many factors that may include:
o The demand for the Company's products;
o The size and timing of orders for the Company's products;
o The number, timing and significance of new product announcements by the
Company and its competitors;
o The Company's ability to introduce and market new and enhanced versions
of its products on a timely basis;
o The level of product and price competition; Changes in operating expenses
of the Company; and Changes in average selling prices.
In addition, the Company will most likely record a significant portion of its
revenues in the final month of a quarter with a concentration of such revenues
recorded in the final 10 business days of that month.
Due to the above factors, among others, the Company's revenues will be difficult
to forecast. The Company, however, will base its expense levels, in significant
part, on its expectations of future revenue. As a result, the Company expects
its expense levels to be relatively fixed in the short run. The Company's
failure to meet revenue expectations could adversely affect operating results.
Further, an unanticipated decline in revenue for a particular quarter may
disproportionately affect the Company's net income because a relatively small
amount of the Company's expenses will vary with its revenues in the short run.
As a result, the Company believes that period-to-period comparisons of the
Company's results of operations are not and will not necessarily be meaningful,
and you should not rely upon them as an indication of future performance. Due to
the foregoing factors, it is likely that in some future quarter the Company's
operating results will be below the expectations of public market analysts and
investors. Such an event would likely have a material adverse effect upon the
price of the Company's Common Stock.
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 its existing client/server enterprise resource
planning applications, such as human resources and payroll products. This
strategy may involve acquisitions, investments in other businesses that offer
complementary products, joint development agreements or licensing of technology
agreements. The risks commonly encountered in the acquisitions of businesses
would accompany any future acquisitions or investments by the Company. Such
risks may include, the following:
o The difficulty of integrating previously distinct businesses into one
business unit;
o The substantial management time devoted to such activities;
o The potential disruption of the Company's ongoing business;
o Undisclosed liabilities;
o Failure to realize unanticipated benefits (such as synergies and
cost savings); and
o Issues related to product transition (such as development, distribution
and customer support).
The Company expects that the consideration it would pay in such future
acquisitions would consist of stock, rights to purchase stock, cash or some
combination. If the Company issues stock or rights to purchase stock in
connection with these future acquisitions, earnings per share and then-existing
holders of the Company's Common Stock may experience dilution.
DEPENDENCE ON DISTRIBUTION CHANNELS. The Company distributes its Platinum for
DOS and Platinum for Windows products exclusively through third-party
distributors and VARs, and distributes its Platinum SQL product, including
Clientele, 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. The
Company's agreements with its VARs and authorized consultants do not require
such VARs and consultants to offer exclusively or recommend the Company's
products, and either party can terminate such agreements with or without cause.
If the Company's VARs or authorized consultants cease distributing or
recommending the Company's products or emphasize competing products, the
Company's results of operations could be materially and adversely affected. In
addition, Platinum SQL, a client/server enterprise resource planning
application, requires additional skill and training for successful
implementation. Although the Company is actively seeking additional VARs to sell
Platinum SQL, delays in training or recruiting VARs could adversely impact the
Company's ability to generate license revenue from its Platinum SQL line of
products.
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In the fourth quarter of fiscal 1996, the Company reestablished a direct sales
force for Platinum SQL. There can be no assurance that the direct sales force
will not lead to conflicts with the Company's VAR channel.
RISKS OF PRODUCT DEFECTS. Software products as complex as those offered by the
Company may contain undetected errors or failures when first introduced or as
new versions are released. Despite testing by the Company, and by current and
potential customers, any of the Company's products may contain errors after
their commercial shipment. Such errors may cause loss of or delay in market
acceptance of the Company's products. The inability of the Company to correct
such errors in a timely manner could have a material adverse effect on the
Company's results of operations. In addition, technical problems with the
current release of the database platforms on which the Company's products
operate could impact sales of these products, which could have a material
adverse effect on the Company's results of operations.
RELIANCE ON THIRD-PARTY SUPPLIERS. The Company's products incorporate and use
software products developed by other entities. The Company cannot assure you
that such third parties will:
o Remain in business;
o Support the Company's product line;
o Maintain viable product lines; and
o Make their product lines available to the Company on commercially
acceptable terms.
Any significant interruption in the supply of such third-party technology could
have a material adverse effect on the Company's business, results of operation
and financial condition.
RISKS ASSOCIATED WITH RAPID TECHNOLOGICAL CHANGE AND PRODUCT DEVELOPMENT. The
market for the Company's software products is subject to ongoing technological
developments, evolving industry standards and rapid changes in customer
requirements. As companies introduce products that embody new technologies or as
new industry standards emerge, existing products may become obsolete and
unmarketable. The Company's future business, operating results and financial
condition will depend on its ability to:
o Enhance its existing products;
o Develop new products that address the increasingly sophisticated needs
of its customers; and
o Develop products for additional platforms.
Further, if the Company fails to respond to technological advances, emerging
industry standards and end-user requirements, or experiences any significant
delays in product development or introduction, the Company's competitive
position and revenues could be adversely affect. The Company's success will
depend on its ability to develop and successfully introduce new products and
services. The Company cannot assure you that it will successfully develop and
market new products on a timely basis, if at all. Any such delay or failure
could have a material adverse effect on the Company's business, results of
operations and financial condition. From time to time, the Company or its
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. The Company cannot assure you that such announcements will not cause
customers to delay or alter their purchasing decisions, which could have a
material adverse effect on the Company's business, operating results and
financial condition.
DEPENDENCE ON CLIENT/SERVER ENVIRONMENT. The Company's development tools,
application products and consulting and education services help organizations
build, customize or deploy solutions that operate in a client/server computing
environment. The Company cannot assure you 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 will be materially and adversely affected.
HIGHLY COMPETITIVE INDUSTRY. The business information systems industry in
general and the client/server enterprise resource planning computer software
industry in particular are very competitive and subject to rapid technological
change. Many of the Company's current and potential competitors have (1) longer
operating histories, (2) significantly greater financial, technical and
marketing resources, (3) greater name recognition, (4) larger technical staffs,
and (5) a larger installed customer base than the Company has. A number of
companies offer products that
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are similar to the Company's products and that target the same markets. In
addition, any of these competitors may be able to respond more quickly to new or
emerging technologies and changes in customer requirements, and to devote
greater resources to the development, promotion and sale of their products than
the Company. Furthermore, because there are relatively low barriers to entry in
the software industry, the Company expects to experience additional competition
from other established and emerging companies. Such competitors may develop
products and services that compete with those offered by the Company or may
acquire companies, businesses and product lines that compete with the Company.
It also is possible that competitors may create alliances and rapidly acquire
significant market share. Accordingly, the Company cannot assure you that the
Company's current or potential competitors will not develop or acquire products
or services comparable or superior to those that the Company develops, combine
or merge to form significant competitors, or adapt more quickly than will the
Company to new technologies, evolving industry trends and changing customer
requirements. Competition could cause price reductions, reduced margins or loss
of market share for the Company's products and services, any of which could
materially and adversely affect the Company's business, operating results and
financial condition. The Company cannot assure you that the Company will be able
to compete successfully against current and future competitors or that the
competitive pressures that the Company may face will not materially adversely
affect its 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, Chairman,
President and Chief Executive Officer, William Pieser, Executive Vice President,
Product Operations and Marketing, and Ken Lally, Executive Vice President, Field
and Customer Operations. None of the Company's 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 is 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. The following table compares
international sales of the Company to the total revenues of the Company for the
periods indicated.
International Sales as a Percentage of Total Revenues
-----------------------------------------------------
Fiscal Year ended June 30, 1998 28%
Fiscal Year ended June 30, 1997 29%
Fiscal Year ended June 30, 1996 31%
The Company believes that any future growth of the Company will be dependent in
part upon its ability to increase revenues in international markets. The Company
will continue to expand its operations outside of the United States. The
expansion will require significant management attention and financial resources
and could adversely affect the Company's margins. To increase international
sales in subsequent periods, the Company must establish additional foreign
operations, hire additional personnel and recruit international resellers. The
Company cannot assure you that the Company will maintain or expand its
international sales. If the revenues that the Company generates from foreign
activities are inadequate to offset the expense of maintaining foreign offices
and activities, the Company's business, financial condition and results of
operations could be materially and adversely affected. International sales are
subject to inherent risks, including:
o Unexpected changes in regulatory requirements;
o Tariffs and other barriers;
o Unfavorable intellectual property laws;
o Fluctuating exchange rates;
o Difficulties in staffing and managing foreign sales and support
operations;
o Longer accounts receivable payment cycles;
o Difficulties in collecting payment;
o Potentially adverse tax consequences, including repatriation of earnings;
o Lack of acceptance of localized products in foreign countries;
o Burdens of complying with a wide variety of foreign laws; and
o Effects of high local wage scales and other expenses.
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Any one of these factors could materially and adversely affect the Company's
future international sales and, consequently, the Company's business, operating
results, cash flows and financial condition. In the recent past, the financial
markets in Asia, Latin America and other world regions have experienced
significant turmoil. Such turmoil in the Asian financial markets, in particular,
may negatively affect the Company's sales to that region. A portion of the
Company's revenues from sales to foreign entities, including foreign
governments, has been in the form of foreign currencies. The Company does not
have any hedging or similar foreign currency contracts. Fluctuations in the
value of foreign currencies could adversely impact the profitability of the
Company's foreign operations.
RISKS ASSOCIATED WITH INTELLECTUAL PROPERTY AND PROPRIETARY RIGHTS PROTECTION.
The Company relies on a combination of copyright, trademark and trade secret
laws, employee and third-party nondisclosure agreements and other industry
standard methods for protecting ownership of its proprietary software. However,
the Company cannot assure you that in spite of these precautions, an
unauthorized third party will not copy or reverse-engineer certain portions of
the Company's products or obtain and use information that the companies regard
as proprietary. The Company cannot assure you that the mechanisms that the
Company uses to protect its intellectual property will be adequate or that the
Company's competitors will not independently develop products that are
substantially equivalent or superior to the Company's products.
The Company may from time to time receive notices from third parties claiming
that its products infringe upon third-party intellectual property rights. The
Company expects that as the number of software products in the country increases
and the functionality of these products further overlaps, the number of these
types of claims will increase. Any such claim, with or without merit, could
result in costly litigation and require the Company to enter into royalty or
licensing arrangements. The terms of such royalty or license arrangements, if
required, may not be acceptable to the Company.
SHARES ELIGIBLE FOR FUTURE SALE. As of November 2, 1998, the Company had
28,379,289 shares of common stock outstanding. There are presently 95,305 shares
of Series C Preferred Stock outstanding. 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 C
Preferred Stock is convertible into 953,050 shares of common stock. The holders
of the 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 C
Preferred Stock. Also, the Company has a substantial number of options or shares
issuable to employees under employee option or stock grant plans. 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.
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PART II
OTHER INFORMATION
ITEM 1 - LEGAL PROCEEDINGS:
On October 13, 1998, the Company entered into a definitive merger
agreement with DataWorks Corporation. Following the merger DataWorks will become
a wholly-owned subsidiary of the Company. The merger is subject to customary
conditions and requires regulatory approvals and shareholder approval by each
company. DataWorks and certain of its officers, directors and former officers
have been named as defendants in a lawsuit alleging violations of the federal
securities laws. The complaint, which was filed on November 3, 1998 in the
United States District Court for the Southern District of California, purports
to be brought on behalf of a class of stockholders, and alleges that between
January 28, 1998 and July 16, 1998, the defendants issued misleading statements
concerning DataWorks' acquisition of Interactive Group, Inc. and sales of
certain products. The complaint does not specify the dollar amount of damages
alleged or relief requested. The Company is also named in the lawsuit as a
defendant as a successor of DataWorks.
The Company is subject to miscellaneous legal proceedings in the normal
course of business. 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 July 29, 1998 to
report under Item 5, Other Events, the Company's results for the quarter and
year ending June 30, 1998.
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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: November 13, 1998 /s/ PAUL G. MAZZARELLA
---------------------------------
Paul G. Mazzarella
Principal Financial and
Accounting Officer
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EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
27 Financial Data Schedule