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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended June 30, 1997
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _______________to _________________
Commission file number 0-20740
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PLATINUM SOFTWARE CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 33-0277592
(State or other jurisdiction of (I.R.S 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: (714) 453-4000
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SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
TITLE OF CLASS
COMMON STOCK, PAR VALUE $.001 PER SHARE
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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 [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
The aggregate market value of the registrant's voting Common Stock held
by non-affiliates of the registrant was approximately $138,621,721 (computed
using the closing sales price of $11.0625 per share of Common Stock on September
2, 1997 as reported by the Nasdaq National Market). Shares of Common Stock held
by each officer and director and each person who owns 5% or more of the
outstanding Common Stock have been excluded in that such persons may be deemed
affiliates. The determination of affiliate status is not necessarily a
conclusive determination for other purposes.
There were 20,249,739 shares of the registrant's Common Stock, par
value $.001 per share, outstanding on September 2, 1997.
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Portions of the registrant's definitive Proxy Statement for the Annual
Meeting of Stockholders scheduled to be held on October 29, 1997, which Proxy
Statement will be filed no later than 120 days after the close of the
registrant's fiscal year ended June 30, 1997, are incorporated by reference in
Part III of this Annual Report on Form 10-K.
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PART I
ITEM 1. BUSINESS
Platinum Software Corporation ("Platinum" or the "Company") designs,
develops, markets and supports a broad range of integrated financial
applications software products targeted for use by businesses of all sizes
worldwide. The Company's software products have been designed and developed
primarily for use on client/server networked systems with a focus toward
financial applications software solutions. The Company has two primary software
product lines: Platinum(R) for Windows, a Windows-based powerful local area
network ("LAN")-based integrated financial and management information software
application and Platinum(R) SQL, a client/server financial accounting software
application optimized for use with Microsoft Windows NT and the Microsoft SQL
Server and Sybase SQL Server relational database management systems which are
targeted at medium-sized organizations. The Company also continues to market the
predecessor to the Platinum for Windows product line, the Platinum-DOS software
products. The Company's products not only perform sophisticated accounting and
financial functions, but can be fully integrated with an organization's
information system to provide comprehensive, on-line management information
system solutions. The Company's software products incorporate a significant
number of internationalized features to address global market opportunities for
financial and management information, including support for national languages,
multiple currencies and accounting for value-added taxation. The Company also
offers consulting, training and support services to supplement the use of its
software products by its customers.
On June 30, 1997 the Company acquired Clientele Software, Inc., a
privately held provider of help-desk automation software. As a result, effective
June 30, 1997, the Company began marketing and supporting the Clientele(R) line
of help desk software products.
The Company was incorporated in Delaware in November 1984 under the
name "Platinum Holdings Corporation." In September 1992, the Company changed its
name to Platinum Software Corporation. The Company has seven operating
subsidiaries: Platinum Software Canada, Ltd., Platinum Software (Aust.) Pty.
Limited, Platinum Software (N.Z.) Limited, Platinum Software (U.K.) Limited,
Platinum Software (Ireland) Limited, Platinum Software (North Asia) Limited and
Platinum Software Asia, Pte. Unless the context otherwise requires, references
to the "Company" herein includes Platinum Software Corporation and its operating
subsidiaries. The Company's headquarters and principal place of business are
located at 195 Technology Drive, Irvine, California 92618-2402, and its
telephone number is (714) 453-4000.
BACKGROUND
In recent years, organizations have increasingly focused on collecting,
analyzing and distributing mission-critical information as rapidly and
efficiently as possible to improve productivity and to secure a competitive
advantage. Historically, computing environments for large organizations were
dominated by mainframes and minicomputers, which were expensive to purchase,
install and maintain. Due to the centralized nature of these generally
proprietary systems, access to critical data was typically limited to an
organization's MIS department and was not readily available to other managers
and key employees.
In the 1980s, the advent of more powerful and less expensive personal
computers ("PCs"), coupled with improvements in networking technology, led to
the adoption of LANs in increasing numbers by businesses of all sizes. LANs
enabled organizations to have on-line access to real-time, mission-critical
data. Financial and management information software products were introduced
based on open database architectures. These systems were easier to implement and
modify and critical information could be accessed readily from a variety of
"off-the-shelf" general business productivity applications such as spreadsheet
and database programs.
The continuing advances in both microprocessor and network technology
resulted in corresponding increases in network performance, which caused LAN
systems to be adopted increasingly by many medium and small organizations and
departments of large organizations. For medium and small organizations,
LAN-based systems continue to be effective solutions. However, in heavy
processing environments with large numbers of users and tremendous amounts of
data being sent across the network, bottlenecks can result that significantly
reduce the performance of the LAN-based system. Consequently, the limited
client/server functionality of these LAN systems can create difficulties for
large organizations that combine heavy data flow requirements on an
enterprise-wide basis with a large number of users. Further, LAN-based systems
offer less control than centralized, host-based systems
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over the security and integrity of information, despite increasing access to
that information and, therefore, many MIS departments have been somewhat
reluctant to store sensitive, mission-critical data on LAN systems.
Many of the limitations of LAN technology have been overcome by the
development of client/server technology for storing, accessing and distributing
data. The client/server model consists of PC and workstation "clients" connected
on enterprise-wide networks to "servers," generally more powerful systems, such
as high-performance PCs or workstations, minicomputers, reduced instruction set
computer ("RISC")-based servers or mainframes. The client/server architecture is
designed to partition the processing of application software between the client
and the server to allow the clients to handle the user interface and local data
manipulation and to allow the server to perform computing-intensive functions.
This design minimizes network traffic and exploits the server's powerful
processing capability. Because of this partitioning, system throughput is
scaleable and can be increased by replacing the server computer with a more
powerful machine. Client/server systems also offer the degree of data integrity
and security that large MIS departments require, since all data access can be
controlled by server-based relational database management systems ("RDBMSs")
that couple the benefits of open database architectures with the benefits of
centralized control offered by host-based systems.
TECHNOLOGY STRATEGY
The Company's technology strategy is to develop leading line of
business software applications using industry standard tools where possible, and
to take advantage of leading third-party, industry-standard technologies for
database management systems, operating systems, user interfaces and networks.
The Company developed its own proprietary application development tools to
create its first generation of client/server products, but is increasingly
exploiting standard tools as they become available. The Company's core product
architecture incorporates many of the foundation technologies of client/server
computing. These elements include:
Open Relational Database Technology
The Company utilizes open relational database technology to provide
extremely flexible integrated financial and management information software.
This open database orientation is based on widely accepted database managers.
The Platinum for Windows product line, as well as the Platinum-DOS core set of
accounting and financial applications and Platinum Premier Financial
Applications, are optimized for the Pervasive, Inc. database (formerly named
Btrieve). The Company's Platinum SQL product line uses both the Microsoft and
Sybase SQL Server relational database management systems. The Company has
developed its Platinum SQL product line using industry standard SQL language as
the fundamental database access methodology.
Advanced Networking/Communications
The Company's products are designed to operate on both LANs and wide
area networks ("WANs"). The Company supports popular industry standard
networking protocols such as TCP/IP, Novell IPX/SPX and Microsoft NETBEUI/Named
Pipes. The Company's networking support offers advanced features such as: (i)
concurrent access to data and to critical functions for all network users; (ii)
a high degree of fault tolerance; (iii) high levels of security; (iv) a wide
range of options for configuring different users on the network; and (v) remote
access and processing.
Industry Standard User Interfaces
The Company has incorporated numerous features into its user interfaces
to simplify access to and operation of its products. The Company's products
generally conform to the Common User Access standard and include the ability to
mirror the form of printed output on the screen. The Company's Platinum SQL and
Platinum for Windows product lines incorporate the popular Microsoft Windows
graphical user interfaces ("GUIs"). The Company's GUI tools include industry
standard field controls, pull-down menus, tool bars and tab menus that
facilitate the use of the software. In addition, the Company's Platinum SQL and
Platinum for Windows products incorporate the latest and most advanced GUI
features such as process wizards, cue cards, advanced on-line help and on-line
documentation. These tools and the Windows multiple document interface ("MDI")
give the user interface a popular look and feel. The Company's Platinum for
Windows product was designed using the Windows 95 user interface standards,
incorporating document centric views, the use of the single document interface,
tab oriented forms and wizards for application set up and configuration.
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Powerful Application Development Tools
The Company provides comprehensive application development and
customization tools for its Platinum for Windows and Platinum SQL product lines.
Platinum for Windows was developed using industry standard development tools
such as Visual Basic and utilizes the industry standard Btrieve database engine.
As a result, a series of reusable objects have been created. By exposing certain
aspects of the objects, users have the ability to modify and extend the system
without losing a consistent user interface. Platinum for Windows also includes
template definition for easier document entry and wizards which make it easier
for a user to set up the software or define users or groups.
The Company also has developed an extensive tool kit for its Platinum
SQL product line. The core tools for the Platinum SQL product line deliver a
complete client/server development environment, enabling a user to make changes
ranging from a simple field name change to building an integrated custom
application. The intuitive visual interface of the forms designer provides a
powerful tool to modify and extend the functionality of standard applications.
In addition, industry-standard visual basic macro language and Object Linking
and Embedding ("OLE") version 2.0 with full ActiveX support enable all Platinum
SQL applications to exchange data and integrate with external OLE-enabled
Microsoft Windows applications. The Platinum SQL Customization Workbench is a
software developers kit for Platinum SQL which enables customers and authorized
resellers to build comprehensive software solutions that augment the standard
product. The Customization Workbench includes technical reference guides and
diagrams, an OLE integration kit and certain report script source code.
Client/Server Technology
In order to fully exploit the capabilities of the client/server model
of computing, the Company has optimized its Platinum SQL product line for both
the Microsoft SQL Server database and the Sybase SQL Server database. All major
data manipulation functions are implemented in the native language of both of
the database servers, Transact SQL, and thereby are executed as "stored
procedures" that are processed solely on the server. This implementation results
in a substantial reduction in network traffic as compared to other client/server
approaches, provides scaleable high performance, and provides inherent
portability of the RDBMS to a large number of server, hardware and operating
system platforms without code change or conversion.
PRODUCTS
The Company designs, develops, markets and supports a broad range of
integrated financial applications software products that provide organizations
with technically advanced business solutions. The Company's two primary software
product lines are Platinum for Windows and Platinum SQL. In addition, the
Company sells and supports its Platinum-DOS software products. The Company also
continues to provide support for the installed base of Platinum SQL Enterprise
(formerly SeQueL to Platinum(R)), a product which the Company discontinued
marketing in 1996.
On June 30, 1997, the Company acquired Clientele Software, Inc., a
privately held provider of help desk automation software, and as of this date
began marketing the Clientele(R) line of help desk software products. The
Company also develops and markets a variety of related applications software
products that enable users to customize the Company's software products and to
integrate these software products with general productivity applications
software.
Platinum for Windows and Platinum-DOS
Platinum for Windows is a Windows-based client/server financial
accounting software package for smaller businesses whose corporate computing
environment consists of LANs comprised of personal computers. Platinum for
Windows is the next generation of the Company's Platinum-DOS-based and Platinum
Premier Financial Applications accounting applications. First introduced in June
1995, Platinum for Windows includes a Windows-based client which was designed
around the interface standards of Microsoft Windows 95 to handle all user
interaction and data maintenance. The Windows-based client interacts with an
application server which runs postings, reports and utilities. Both the client
and the server communicate with the LAN-based Btrieve database. Since no
database conversions are required to upgrade from the Platinum-DOS-based product
to Platinum for Windows, this ensures a smooth upgrade path for DOS users.
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The following modules of Platinum for Windows are presently generally
available: Premier Ledger with FRx, Premier Consolidations, Premier Currency
Translation, Premier Inter-Company Processing, Premier Budgeting, Foreign
Currency Manager, System Manager, General Ledger, Bank Book, Accounts
Receivable, Accounts Payable, Purchase Order, Order Entry, Inventory, Advanced
Allocations, and Budget Manager.
In addition, the Company continues to sell and support its
Platinum-DOS-based integrated financial software applications. First introduced
in June 1985, the core Platinum-DOS-based accounting modules include General
Ledger, Accounts Receivable, Accounts Payable, Inventory, Order Entry and
Consolidations. In addition, the Company offers Platinum Premier Financial
Applications, which are extensions of the core Platinum-DOS-based modules and
are designed to meet the sophisticated financial reporting requirements of a
larger customer. The Platinum Premier Financial Applications modules operate in
conjunction with other Platinum-DOS and Windows-based modules and provide
downsizing and rightsizing opportunities to larger organizations whose previous
barriers were not the performance or capacity of LAN-based systems but lack of
advanced feature sets available from a LAN-based program.
Revenues attributable to licenses of the DOS-based Platinum
applications, including the Platinum Premier Financial Applications, were
$8,940,000, $3,780,000 and $2,243,000, exclusive of revenues attributable to the
Platinum Advanced Manufacturing System software application (which was sold
effective October 31, 1994) and license fee revenues that were deferred as part
of the fiscal 1994 restatement, or 15%, 9% and 4% of the Company's total
revenues in fiscal years 1995, 1996 and 1997, respectively. Revenue attributable
to licenses of Platinum for Windows (which first began shipping in June 1995)
were $203,000, $2,295,000 and $5,193,000, or 0%, 5% and 9% of the Company's
total revenues in fiscal years 1995, 1996 and 1997, respectively.
Platinum SQL
Platinum SQL, a client/server financial accounting software application
is targeted at medium-sized companies and subsidiaries or divisions of large
enterprises. These organizations require the power and sophistication of
high-end client/server applications but desire a rapid and unobtrusive product
implementation cycle for managing their critical business information. The
product is optimized for use with both the Microsoft SQL Server and the Sybase
SQL Server database. Platinum SQL minimizes the complexities of client/server
installation by providing the user with installation wizards which help
configure the Microsoft SQL Server database based upon information provided by
the installer. As previously indicated, Platinum SQL was designed for the
Microsoft Windows NT server platform and runs on Windows 3.x, Windows for
Workgroups, Windows NT and Windows 95 client platforms. Platinum SQL is
integrated with the Microsoft Office Professional suite of software products and
supports Microsoft OLE, version 2.0, which enables customers to integrate not
only other Microsoft products but any OLE 2.0-compliant application. In
addition, Platinum SQL is a 32-bit server application that takes full advantage
of the Microsoft SQL server for Windows NT.
The following modules of Platinum SQL are currently generally
available: General Ledger with FRx and System Manager, Multi-Currency Manager,
Accounts Receivable, Accounts Payable, Inventory Control, Cash Management, Order
Entry, Purchase Order, Asset Management, Advanced Allocations, Budget Manager,
FRx remote drill down viewer and Customization Workbench. Version 4.2 of
Platinum SQL is scheduled for general release in December 1997. See "Certain
Considerations - Forward Looking Statements." Version 4.2 will include enhanced
consolidation capabilities and new on-line planning wizards and troubleshooting
utilities as well as maintenance fixes. See "Certain Considerations - Forward
Looking Statements."
License fees for Platinum SQL vary depending upon the number of
concurrent users and platform. Revenues attributable to licenses of Platinum
SQL, which first began shipping in December 1994 were $3,202,000, $7,902,000,
and $17,931,000, or 5%, 18% and 31% of the Company's total revenues in fiscal
years 1995, 1996 and 1997, respectively.
Platinum SQL Enterprise
Platinum SQL Enterprise, formerly named SeQueL to Platinum, an
integrated financial and management information software application based on
the Microsoft and Sybase SQL Server databases for use on client/server systems,
was discontinued during fiscal 1996, although the Company continues to provide
maintenance and support for the installed base for this product.
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Clientele
On June 30, 1997, the Company acquired Clientele Software, Inc., a
privately held provider of help-desk automation software for the mid-market. See
"Recent Acquisition." The Clientele line of products includes applications used
for managing customer service and support ("CS&S") operations. The CS&S market
divides into two general arenas: internal help desk, used by internal
departments (in general the management information systems department)
supporting the organization's internal workforce; and external help desk for
supporting the customers, vendors, and suppliers that the Company conducts
business with. Clientele markets products for both applications, and has
different configuration options that allow the products to appeal to departments
of varying sizes. The base products are designed for small departments of less
than 25 support representatives, and a module that enables connectivity to a SQL
Server database allows the products to scale to organizations with hundreds of
support personnel. Another Clientele module provides for replication and
information synchronization among distributed CS&S organizations. Revenues
attributable to licenses from the Clientele products were $1,940,000, $3,139,000
and $3,906,000, or 3%, 7% and 7% of the Company's total revenues in the fiscal
years 1995, 1996 and 1997, respectively.
Other Products
The Company also offers a line of integration kits and database
products that support its Platinum for Windows and Platinum-DOS-based line of
software products and licenses these products to its Value Added Resellers
("VARs"), distributors, Authorized Consultants and end-users. The Company also
serves as an OEM vendor for certain third-party software applications and pays
royalties to various organizations in connection with the distribution of
third-party software and the sale of products that incorporate third-party
technologies.
PROFESSIONAL SERVICES
The Company's professional services division, formed in July 1992,
provides consulting services to customers in the design and implementation of
the Company's software products, as well as education, training and other
services. Prior to fiscal 1995, the division also provided custom modifications
and created applications which interfaced with the Company's software products.
In August 1994, the Company sold the assets related to its custom software
development operations. See "Restructurings." The professional services division
functions in domestic and international markets and primarily focuses on larger
corporate accounts. Professional services are generally provided on a time and
materials basis. Revenues from professional services were approximately
$11,265,000, $9,940,000, and $10,716,000, or 20%, 23% and 19% of total revenues,
in fiscal years 1995, 1996 and 1997, respectively.
During the first nine months of fiscal 1996, the professional services
division was very involved in the training of the Company's VARs and
distributors in selling and supporting the Platinum SQL product. Professional
services staff provided formal training to distributors and VARs and worked with
them on the job to transfer expertise gained in Platinum SQL Enterprise and
Platinum SQL NT implementations. During fiscal 1997, the professional services
division focused more of its efforts in providing consulting and implementation
services to customers. The Company believes that its provision of professional
services, in conjunction with its current and planned product offerings,
facilitates the licensing of technology to customers and stimulates demand for
the Company's products.
MARKETING, SALES AND DISTRIBUTION
The Company sells and markets its products and services directly and
through a network of VARs, distributors and software consultants who generally
market the Company's products on a nonexclusive basis. The Company's products
are sold to and used by a broad customer base, including businesses, government
bodies, educational institutions and other users. The Company sells its Platinum
for Windows, Platinum DOS, and Platinum SQL products through VARs or
distributors. In October 1995, the Company discontinued its direct sales force
for its Platinum SQL Enterprise product. Later in fiscal 1996, the Company hired
three new senior executives, and following an assessment of the Company's
business operations, the Company decided to start selling the Platinum SQL
product through a direct sales force as well as through a network of VARs. The
Company, in the fourth quarter of fiscal 1996, commenced development of this
direct sales force to supplement the efforts of the VARs and distributors. The
Company's field sales organization is divided into geographic regions: United
States, divided into Northeast, Southeast, Midwest, Southwest, and West, Canada,
United Kingdom/Europe/Middle East/Africa, Australia/New Zealand, Asia and other
international countries. The Company sells the Clientele products through an
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internal telesales organization and intends to begin selling the products
through its direct sales force beginning in late calendar 1997 or early calendar
1998. See "Certain Considerations - Forward Looking Statements."
The Company's network of VARs and Authorized Consultants are required
to undergo training and certification procedures provided by the Company on the
use, installation and implementation of the Company's products as a condition of
being authorized by the Company to sell its products. The Company's VARs include
consulting groups and resellers, the majority of whom provide computer
installations, systems integration and consulting services to organizations. The
Company's Authorized Consultants generally are not resellers of the Company's
products but professional firms who offer implementation services and product
support to end-users. The Company believes that its Authorized Consultants are
product influencers and are a valuable part of the Company's marketing, sales
and distribution efforts. The Company permits VARs and distributors to return
Platinum-DOS and Platinum for Windows products that were returned by the
end-user customers, within 30 days of purchase, upon payment of a restocking
fee, provided such products remain in their original packages, excluding product
upgrades and demonstration software.
To support the Company's network of VARs and Authorized Consultants,
the Company provides experienced personnel who are specifically tasked with
their growth and support. These individuals are responsible for educating and
training the distribution channel, disseminating information, implementing
marketing programs and developing regional markets.
In recognition of international opportunities for its software
products, the Company has committed resources to an international sales and
marketing effort. The Company has established subsidiaries in the United
Kingdom, Australia, New Zealand, Canada, Hong Kong and Singapore to further such
sales and marketing efforts. The Company sells its products in Europe, including
Russia, Latin and South America, Africa, Asia and the Middle East principally
through third-party distributors and dealers. The Company's international
revenues were approximately $17,857,000, $14,079,000 and $17,368,000, or 31%,
32% and 30% of total revenues, in fiscal years 1995, 1996 and 1997,
respectively. See "Note 9 of Notes to Consolidated Financial Statements."
The Company currently has sales offices located in the metropolitan
areas of Atlanta, Boston, Chicago, Dallas, Orange County, California, New York,
San Francisco, Washington, D.C., Toronto, Canada, Auckland, New Zealand, London,
England, Sydney and Melbourne, Australia, Hong Kong and Singapore.
Products are generally shipped as orders are received or within 30 days
thereof and, accordingly, the Company has historically operated with little or
no backlog. Because of the generally short cycle between order and shipment, the
Company does not believe that its backlog as of any particular date is
meaningful.
PRODUCT DEVELOPMENT AND QUALITY ASSURANCE
Since inception, the Company has made substantial investments in
product development, which is evidenced by the following product releases: the
1985 release of a LAN-based client/server accounting package that offered a high
degree of multi-user concurrency; the 1988 release of an accounting package
written for OS/2; the 1990 release of a LAN-based software package that provided
comprehensive support for international accounting requirements; the 1991
release of a Windows graphical accounting system that offered Windows MDI
support; the 1992 release of a graphical, SQL server-based integrated financial
and management information software product line; the 1994 release of a
client/server accounting application designed to run on Windows NT and the
Microsoft SQL server RDBMS; and the 1995 release of a Windows and LAN-based
accounting software package. During fiscal years 1995, 1996 and 1997, software
development expenses before capitalization were approximately $17,916,000,
$13,774,000, and $11,468,000, respectively.
The Company plans to continue to address the needs of users of
integrated financial and management information software by continuing to
develop high quality software products that feature advanced technologies. The
Company's technology strategy is to develop leading business application
software using its own technologies combined with leading third-party,
industry-standard technologies in database management systems, application
development tools, operating systems, user interfaces and networks. In
particular, the Company believes that it has been an industry leader in
designing and developing products for operation on LANs and has been a pioneer
in the use of GUIs with integrated financial and management information
software. Currently, the Company pursues object-oriented methodologies that
simplify the development, maintenance and third-party customization of its
products. Accordingly, the Company's tools offer a high degree of customization
for its products.
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The Company intends to continue to invest in product development. In
particular, the Company plans to continue to (i) develop enhancements, including
additional functions and features, for its Platinum for Windows and Platinum SQL
product lines, and (ii) develop and/or acquire new applications or modules that
build upon the company's business application strategy.
The Company intends to integrate the Clientele products with its
financial applications to address a growing market need for improved customer
information delivery and analysis. See "Certain Considerations, Forward Looking
Statements." The Clientele brand will be used to identify the range of modules
and applications that form the Company's customer information systems ("CIS")
strategy. The Company intends to extend the Clientele brand and product line
over the next year to include sales force automation ("SFA") modules for inside
sales organizations and outbound field sales organizations. See "Certain
Considerations - Forward Looking Statements." The range of integration options
then will include a customer management system ("CMS") module for the Platinum
SQL product that will unify all information interchange, and assure consistency
between all modules. A customer "life-cycle" view will be constructed, where
prospecting and selling activities represented in the SFA modules will be
unified with post-sale case details from the CS&S modules and transaction
details from the financial and accounting modules. This high value information,
with searching, advanced navigation features such as "drill-down" and
"drill-around," and analytical reporting capabilities will expand the
capabilities of Platinum's business applications solutions. See "Certain
Considerations - Forward Looking Statements."
The computer software industry is characterized by rapid technological
advances and changes in customer requirements. The Company's future success will
depend upon its ability to enhance its current products and develop and
introduce new products that keep pace with technological developments, respond
to evolving customer requirements and continue to achieve market acceptance. In
particular, the Company believes it must continue to respond quickly to users'
needs for broad functionality and multi-platform support and to advances in
hardware and operating systems. 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 not experience significant
delays in the introduction of new products or product enhancements in the
future, which could have a material adverse effect on the Company's results of
operations.
The Company's future business is dependent on the execution of the
strategy that is in place to target the financial and general business
applications needs of mid-sized businesses. Any significant delay in shipping
new modules or enhancements could have a material adverse effect on the
Company's results of operations. In addition, there can be no assurance that new
modules or product enhancements developed by the Company will adequately achieve
market acceptance.
TECHNICAL SUPPORT AND SOFTWARE MAINTENANCE
The Company is committed to providing timely, high-quality technical
support, which the Company believes is critical to maintaining customer
satisfaction. The Company provides technical support by offering telephone
support, e-mail support, facsimile support and communications through its World
Wide Web site, http://www.platsoft.com. Telephone support is available five days
a week during normal business hours on a nearly worldwide basis, collectively
from the Company's three support centers in Dublin, Ireland, Sydney, Australia
and Irvine, California. The Company also believes that customer satisfaction
should be maintained by ensuring that its VARs, Distributors and Authorized
Consultants are able to effectively provide front-line technical support and
assistance to end-users. The Company offers comprehensive training, telephone
consultation and product support for its VARs, Distributors and Authorized
Consultants. Training courses are held in major cities worldwide.
The Company offers its Platinum for Windows and Platinum-DOS customers
several software maintenance options, for varying annual fees. The Company's
software maintenance programs are the sole avenue for product updates and
technical support. The annual maintenance fee for the Platinum SQL product is
18% of the then current list price. Customers who subscribe for maintenance
receive telephone and technical support, timely information on product
enhancements and features and product updates and upgrades. Revenue from these
software maintenance agreements is recognized ratably over the maintenance
period.
The Company provides a three month performance warranty for its
Platinum SQL product. In addition, the Company provides a three month warranty
for the media on which its Platinum for Windows and Platinum-DOS are licensed.
Revenues from support services were approximately $8,985,000, $11,550,000, and
$15,861,000 or 15%, 26% and 27% of total revenues in fiscal years 1995, 1996 and
1997, respectively.
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COMPETITION
The financial accounting 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 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 results of operations.
The Company believes that it competes in two different market segments
in the client/server financial accounting software market. These two segments
are the middle market segment and the LAN-based segment. Although the Company
does not target customers in the enterprise market segment, which it defines as
large organizations desiring enterprise wide solutions, and is characterized by
high transaction volumes and software flexibility to customize applications, it
encounters competitors from this market segment.
In the middle market, which the Company defines as being comprised of
customers ranging in revenue size from $50 million to $750 million, customers
desire proven client/server software solutions that are easy to install, manage
and use, yet are flexible enough to address the challenges of a specific
organization. In addition, customers in this market segment require strong
price-performance metrics. This market segment is relatively new, and as a
result, the competitive landscape is still forming. The Company believes its
principal competitors include Lawson Corporation, JD Edwards, Great Plains
Software, Oracle Corporation, Solomon Software, SQL Financials, Peoplesoft,
Inc., Geac, Baan, SAP and Flexi International. Some of these companies are major
participants in the enterprise market segment who are presently selling an
existing enterprise segment product in the middle market segment, while others
are in the process of developing a client/server product to address the middle
market requirements. The Company has addressed the requirements of customers in
this market with its Platinum SQL product, a version of which has been optimized
for use for both the Microsoft SQL Server and Sybase SQL Server RDBMS. The
Company believes that this product competes favorably against its competitors
with respect to the foregoing competitive factors.
In the LAN-based market, the Company competes with State of the Art,
Inc., Macola, Inc., Great Plains Software, and Solomon Software in North
America, and Scala and Systems Union, Ltd. outside of North America. Products in
this market are principally sold through VARs and solution-oriented computer
retail stores with the purchasing decision often influenced by accounting
professionals providing consulting services. The Company believes that purchases
in this market are primarily influenced by functionality, performance,
availability of a Windows-based version, price and quality. The Company believes
it competes favorably with respect to all of these factors.
PRODUCTION
The principal materials and components used in the Company's software
products include computer media, including disks and CD-ROMs, and user manuals.
For each product, the Company prepares a master software disk or CD-ROM, user
manuals, which may be in printed form or distributed on a CD-ROM, and packaging.
Substantially all of the Company's disk and CD-ROM duplication is performed by
third-party vendors, using disks and blank CD-ROMs acquired from various
sources. Outside sources print the Company's packaging and related materials to
the Company's specifications. A portion of the completed packages are assembled
by third-party vendors. To date, the Company has not experienced any material
difficulties or delays in the manufacture and assembly of its products, or
material returns due to product defects.
INTELLECTUAL PROPERTY
The Company regards its software as proprietary, in that title to and
ownership of the software generally exclusively resides with the Company, and
the Company attempts to protect it with a combination of copyright, trademark
and trade secret laws, employee and third-party nondisclosure agreements and
other methods of protection. Despite these precautions, it may be possible for
unauthorized third-parties to copy certain portions of the Company's products or
reverse engineer or obtain and use information the Company regards as
proprietary. Like many software firms, the Company presently has no patents.
While the Company's competitive position may be
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affected by its ability to protect its proprietary information, the Company
believes that trademark and copyright protections are less significant to the
Company's success than other factors such as the knowledge, ability and
experience of the Company's personnel, name recognition and ongoing product
development and support.
The Company's software products are generally licensed to end-users on
a "right to use" basis pursuant to a perpetual, non-exclusive license that
generally restricts use of a software for the organization's internal business
purposes. The Company licenses its Platinum for Windows, Platinum-DOS, Clientele
and Platinum SQL (those sold through VARs and distributors) product lines
pursuant to "shrink wrap" licenses that are not signed by licensees and
therefore may be unenforceable under the laws of certain jurisdictions. In
addition, the laws of some foreign countries do not protect the Company's
proprietary rights to the same extent as do the laws of the United States.
Certain components of the Company's products are licensed from third-parties.
As the number of software products in the industry increases and the
functionality of these products further overlap, the Company believes that
software programs will increasingly become subject to infringement claims. There
can be no assurance that third-parties will not assert infringement claims
against the Company in the future with respect to current or future products or
that any such assertion may not require the Company to enter into royalty
arrangements or will result in costly litigation. The Company is not aware of
any material infringement actions or claims.
EMPLOYEES
As of June 30, 1997, the Company had 440 full-time employees, including
97 in product development, 67 in support services, 82 in professional services,
97 in sales, 33 in marketing and 64 in finance and administration. The Company
added 55 employees as a result of the acquisition of Clientele Software, Inc.
The Company's employees are not represented by any collective bargaining
organization, and the Company has never experienced a work stoppage. The Company
believes that its relations with its employees are good.
RECENT ACQUISITION
On June 30, 1997 the Company acquired Clientele Software, Inc. a
privately held provider of help desk automation software based in Portland,
Oregon. The acquisition was structured as a triangular merger whereby Clientele
Software, Inc. became a wholly-owned subsidiary of the Company. 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 potential indemnification claims in connection
with the transaction. The transaction was accounted for as a pooling of
interests.
As part of its business strategy, the Company intends to expand its
product offerings primarily through acquisitions to include application software
products that are complementary to financial accounting applications, such as
sales force automation, enterprise resource planning or human resources. See
"Certain Considerations - Horizontal Product Strategy and Forward Looking
Statements."
RESTRUCTURINGS
In May 1994, the Company announced a restructuring of its business
operations and a new organizational structure. Also in May 1994, the Company
announced a new strategy for distributing its products outside of North America
and the United Kingdom. Between May 1994 and April 1996, the Company divested
certain areas of its non-core financial software business. Effective June 30,
1994, the Company sold the assets relating to its Latin American operations to a
newly formed company in which Platinum retained a minority ownership interest.
As part of this transaction, Platinum entered into an exclusive distribution
agreement regarding the sale of its software products in Latin America by the
new company. In March 1997, the distribution agreement was terminated and the
Company commenced marketing and selling directly into Latin America. Also,
effective June 30, 1994, the Company sold its EDI product line and its SeQueL
Cost Management product, and the assets related to such products, to
third-parties. The Company retained the right to distribute such products to its
customers. In addition, the Company sold the assets related to its business
forms division, operated through the Company's subsidiary, Altec Products, Inc.,
to a third-party. The Company entered into a marketing agreement with the
purchaser of Altec
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Products, Inc. under which the purchaser was granted exclusive rights to
distribute business forms for use with the Company's software products. In July
1994, the Company transferred an interest in its FRx financial report writer
software product to a newly formed company, in which Platinum retained a
minority interest. The Company retained the right to market the FRx product as
part of its product line. Effective August 31, 1994, Platinum sold the assets
related to its custom software development business to Perot Systems Corporation
("Perot"). In this transaction, Platinum entered into a joint marketing and
distribution agreement with Perot in which Perot became the preferred provider
of custom development services for the Company's Platinum SQL Enterprise product
line in the United States, Canada and the United Kingdom. This arrangement with
Perot subsequently has been terminated. In November 1994, Platinum sold its
Platinum Advanced Manufacturing System software and related manufacturing
software applications to a third-party. Platinum retained limited distribution
rights to the Platinum Advanced Manufacturing System software. In March 1995,
Platinum sold its Access to Platinum product line to a third-party. Effective
September 30, 1995, the Company sold its treasury management software product to
a third party. In addition, effective February 29, 1996, the Company sold its
SeQueL distribution product to a third party.
In October 1994, the Company closed its operations related to its
client/server sales force and contact management software product. For
additional information see "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Fiscal 1994 Restructuring Charge."
During the second quarter of fiscal 1996, the Company restructured its
business operations with the intent to reduce operating expenses and minimize
the usage of cash. As part of the restructuring, the Company discontinued the
marketing of the version of its Platinum SQL Enterprise product line that runs
on the Sybase/UNIX server platform. Also, the Company discontinued its direct
sales force for its Platinum SQL Enterprise product line, which resulted in the
termination of approximately 50 employees. As a result of this action, the
Company shifted the focus of its product distribution to VARs and distributors.
In the fourth quarter of fiscal 1996, the Company commenced development of a
direct sales force for its Platinum SQL product and also commenced selling a
version of its Platinum SQL product that runs on the Sybase/UNIX platform. See
"Marketing, Sales and Distribution." The Company also expanded its field sales
and corporate marketing groups in an effort to support the distribution of its
products through its dealer channel. The Company terminated a total of
approximately 100 employees as part of the second quarter restructuring,
including approximately 50 employees in its international, administrative and
development operations. During the second quarter of fiscal 1996, the Company
recorded a $3.3 million charge for the restructuring. The restructuring charge
included expenses related to work force reductions, severance payments, asset
write downs, lease termination costs and other costs.
In February 1996, the Company underwent another reduction in force of
approximately 40 persons with the intent again to reduce operating expenses and
minimize the usage of cash. This reduction in force resulted in an additional
restructuring charge of $2.3 million, which was recorded in the third quarter of
fiscal 1996. The third quarter restructuring charge included expenses related to
work force reductions, severance payments, lease termination costs, property and
equipment write-downs and other costs.
In June 1997, the Company underwent another restructuring as a result
of the Clientele acquisition. The Company anticipates that Clientele will
continue to operate as an autonomous unit with integration activities focused on
the restructuring and consolidation of Clientele's administrative and support
functions with those of the Company. The Company expects to incur certain
expenses estimated at $1.6 million in connection with the restructuring and
consolidation, primarily the cost of reducing personnel, as well as excess
facility costs at Clientele. The Company estimates that expense savings from the
1997 restructuring to be nominal. See "Certain Considerations - Forward Looking
Statements."
CERTAIN CONSIDERATIONS
Forward Looking Statements. This annual 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.
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Liquidity. The Company's cash and cash equivalents increased from $5.4
million at June 30, 1996 to $6.3 million at June 30, 1997, principally due to
the exercise of stock options offset in part by capital expenditures and cash
used in operations. Although, the Company's fiscal 1994 restructuring is
substantially complete, there will be additional cash outlays in connection with
discontinued products and lease terminations, estimated to be approximately
$88,000. In addition, there will be further cash outlays estimated at
approximately $759,000 in connection with the second quarter fiscal 1996
restructuring, $162,000 in connection with the third quarter fiscal 1996
restructuring and $1.6 million in connection with the fiscal 1997 restructuring.
If the Company is not successful in achieving targeted revenues or positive cash
flow, 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.
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.
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 applications, such as
sales force automation, enterprise resource planning or human resources. This
strategy may involve acquisitions, investments in other businesses that offer
complementary products, joint development agreements or licensing of technology
agreements. 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 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.
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 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 middle market client server financial software
product, Platinum SQL. There can be no assurance that the direct sales force
will be successful in generating revenues or that it will not lead to conflicts
with the Company's VAR channel.
The Company's Platinum SQL product (formerly named Platinum SQL NT) 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-DOS and requires additional
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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, which are
discovered only after the product has been used with many different computer
systems and in varying applications. The Company has been informed by customers
of certain errors with respect to its Platinum SQL product which the Company is
addressing. The inability of the Company to correct the errors, or any
significant delay in correcting the errors in Platinum SQL, will 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. See "Product Development and Quality Assurance." The Company
has two principal product lines, Platinum for Windows (including Platinum-DOS)
and Platinum SQL. 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 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 December 1997. 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.
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 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.
Competition. The financial 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 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.
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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 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. In fiscal 1995, 1996 and
1997, international sales represented approximately 31%, 32% and 30%,
respectively, 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."
Shares Eligible for Future Sale. As of September 2, 1997, the Company
had 20,249,739 shares of common stock outstanding. There are presently 2,435,000
shares of Series B Preferred Stock and 213,803 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 2,435,000 and 2,138,030 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 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
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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.
ITEM 2. PROPERTIES
The Company leases approximately 95,000 square feet of office space in
Irvine, California. The leases for the space expire in April 1999. The Company
leases additional facilities and offices, including locations in Bellevue,
Washington; San Bruno, California; Oakbrook, Illinois; Newton, Massachusetts;
Portland, Oregon; Teaneck, New Jersey; Dallas, Texas; Atlanta, Georgia;
Melbourne and Sydney, Australia; Mississauga, Canada; Reading, England; Dublin,
Ireland; Auckland, New Zealand; Hong Kong and Singapore. The Company believes
that its present facilities are sufficient to accommodate its near-term
facilities requirements. The Company continues to evaluate new sales
opportunities on an ongoing basis which may result in the leasing of additional
facilities.
ITEM 3. LEGAL PROCEEDINGS
The Company is subject to miscellaneous legal proceedings in the normal
course of business and other legal proceedings related to or arising out of the
fiscal 1994 restructuring, reductions in force and the discontinuance of certain
client/server applications. 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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to a vote of security holders during the
fourth quarter of the year ended June 30, 1997.
PART II
ITEM 5. MARKET VALUE OF THE REGISTRANT'S COMMON STOCK
The Company's Common Stock is traded on the over-the-counter market
(The Nasdaq National Market System) under the symbol PSQL. The following table
sets forth, for the periods indicated, the range of high and low closing sale
prices for the Company's Common Stock.
Fiscal 1996: High Low
------------ ---- ---
1st Quarter $16.250 $11.125
2nd Quarter 11.250 4.813
3rd Quarter 7.125 3.500
4th Quarter 12.250 6.250
Fiscal 1997: High Low
------------ ---- ---
1st Quarter $11.125 $6.250
2nd Quarter 13.000 10.625
3rd Quarter 13.375 8.688
4th Quarter 11.000 7.000
There were approximately 1,736 security holders of record as of
September 2, 1997. The Company has not paid dividends to date and intends to
retain any earnings for use in the business for the foreseeable future.
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ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data should be read in
conjunction with the Consolidated Financial Statements and the Notes thereto
included elsewhere herein. The statement of operations data set forth below with
respect to the fiscal years ended June 30, 1995, 1996 and 1997 and the balance
sheet data at June 30, 1996 and 1997 are derived from, and should be read in
conjunction with, the audited Consolidated Financial Statements included
elsewhere herein. The statement of operations data set forth below with respect
to the fiscal years ended June 30, 1993 and 1994, and the balance sheet data at
June 30, 1993, 1994 and 1995 are derived from audited financial statements not
included in this Form 10-K.
In fiscal 1994, the Company restated previously issued financial
results, including the quarterly results throughout fiscal 1993, and the first
two quarters of fiscal 1994. The restated financial results primarily reflected
revisions in revenue recognition regarding software licenses, changes in the
accounting treatment for several acquisitions made during the fourth quarter of
fiscal 1993 and during the second quarter of fiscal 1994, and other adjustments
and accounting corrections.
Fiscal Years Ended June 30,
--------------------------------------------------------------------
1993 1994 1995 1996 1997
-------- -------- -------- -------- --------
(in thousands, except per share amounts)
STATEMENT OF OPERATIONS DATA:
Revenues:
License fees $ 18,054 $ 30,768 $ 37,664 $ 22,157 $ 30,320
Consulting and professional
services 2,436 11,034 11,265 9,940 10,716
Support services 2,634 5,820 8,985 11,550 15,861
Business forms sales 5,705 6,720 - - -
Royalty income - - 526 619 1,207
-------- -------- -------- -------- --------
Total revenues 28,829 54,342 58,440 44,266 58,104
Cost of revenues 9,621 25,506 20,169 20,848 21,389
-------- -------- -------- -------- --------
Gross profit 19,208 28,836 38,271 23,418 36,715
-------- -------- -------- -------- --------
Operating expenses:
Sales and marketing 14,715 25,869 20,890 21,114 25,443
General and administrative 2,586 10,258 5,396 15,996 5,415
Software development 7,389 22,017 17,826 14,293 10,011
Charge for restructuring - 6,741 - 5,568 1,600
Charge for purchased research
and development 11,987 3,570 - - -
-------- -------- -------- -------- --------
Total operating expenses 36,677 68,455 44,112 56,971 42,469
-------- -------- -------- -------- --------
Loss from operations (17,469) (39,619) (5,841) (33,553) (5,754)
Charge for settlement of class
action litigation and related
expenses - (20,000) - - -
Other income (expense), net 458(1) 341(1) 103(2) (132)(3) 873(1)
-------- -------- -------- -------- --------
Loss before provision
(benefit) for income taxes (17,011) (59,278) (5,738) (33,685) (4,881)
Provision (benefit) for income
taxes (9) 308 20 - -
-------- -------- -------- -------- --------
Net loss $(17,002) $(59,586) $ (5,758) $(33,685) $ (4,881)
======== ======== ======== ======== ========
Net loss per share $ (1.53) $ (4.48) $ (.42) $ (2.15) $ (0.25)
======== ======== ======== ======== ========
Weighted average shares 11,082 13,296 13,722 15,654 19,454
======== ======== ======== ======== ========
(1) Amount represents principally interest income.
(2) Amount represents principally interest income net of interest expense
associated with the Company's $15,000,000 debenture.
(3) Amount represents principally interest expense associated with the Company's
$15,000,000 debenture net of interest income.
16
17
June 30,
---------------------------------------------------
1993 1994 1995 1996 1997
---- ---- ---- ---- ----
BALANCE SHEET DATA:
Working capital (deficit) $ 42,412 $(10,096) $ 24,334 $ 2,763 $ 2,752
Total assets 80,871 48,339 66,534 40,912 41,778
Current portion of long-term
obligations - 6,000 - - -
Long-term obligations, less
current portion 116 10,158 16,035 288 277
Stockholders' equity 58,549 1,290 29,965 15,474 14,448
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
Fiscal 1994 Restructuring Charge
In May 1994, the Company announced a restructuring of its business
operations, including plans to sell certain operations and non-core software
products, with the intent to significantly reduce operating expenses and
minimize the usage of cash. Between May 1994 and March 1996, the Company reduced
its work force through a reduction in force, attrition, as well as the sale and
closure of certain of its operations and products. See "Part I, Item 1 --
Business - Restructurings."
As part of the divestitures and asset sales in the restructuring, the
Company is entitled to receive royalties on future sales of product from certain
of the purchasers, which are computed as a percentage of revenues. The Company
received $526,000 in royalty income from divested operations in fiscal 1995,
$619,000 in royalty income from divested operations in fiscal 1996, and
$1,207,000 in royalty income from divested operations in fiscal 1997.
In the fourth quarter of fiscal 1994, the Company recorded a
restructuring charge of $6.7 million. Such amount included approximately $2.4
million for severance and other extended benefit costs related to the reduction
in force, $2.3 million in lease termination and buyout costs related to the
closure of facilities, $2.1 million in asset write-downs and other costs. The
charge reflected the net effect of estimated proceeds of operations and products
to be divested. During fiscal 1995, the Company paid approximately $2.3 million
for severance, lease termination and other costs related to the restructuring.
Also during 1995, the Company wrote-down accounts receivable, property and
equipment, and other assets related to the restructuring aggregating $2.4
million. In addition, $1.8 million of excess proceeds from divestitures over the
net book value of assets sold were credited to the restructuring reserve. At
June 30, 1997, payments related to the fiscal 1994 restructuring were
substantially complete. At June 30, 1997, the Company had a $88,000 cash
obligation related to lease termination costs which will be funded from existing
cash resources and working capital.
Fiscal 1996 Restructuring Charges
During the second quarter of fiscal 1996, the Company restructured its
business operations. As part of the restructuring, the Company discontinued the
marketing of the version of its Platinum SQL Enterprise product line that runs
on the Sybase/UNIX server platform. Also, the Company discontinued its direct
sales force for its Platinum SQL Enterprise product line, which resulted in the
termination of approximately 50 employees. As a result of this action, the
Company at the time shifted the focus of its product distribution to VARs and
distributors. The Company also expanded its channel sales and corporate
marketing groups in an effort to support the distribution of its products
through its dealer channel. The Company terminated a total of approximately 100
employees as part of the second quarter restructuring, including approximately
50 employees in its international, administrative and development operations.
During the second quarter of fiscal 1996, the Company recorded a $3.3 million
charge for the restructuring. The restructuring charge 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 persons. This reduction in force resulted in an additional
restructuring charge of $2.3 million which was recorded in the third quarter of
fiscal 1996. The third quarter restructuring charge included approximately
$300,000 for severance and other extended
17
18
benefits 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. During fiscal 1997, the Company paid approximately
$912,000 for severance, lease termination and other costs relating to the fiscal
1994 and fiscal 1996 restructurings. At June 30, 1997, the Company had a
$921,000 cash obligation related to lease termination and other costs of the
fiscal 1996 restructurings which will be funded from existing cash resources and
working capital.
Fiscal 1997 Restructuring Charge and Clientele Acquisition
On June 30, 1997, the Company acquired Clientele Software, Inc., a
privately held provider of help desk automation software based in Portland,
Oregon. See "Part I, Business, Recent Acquisition." The acquisition was
accounted for as a pooling of interests and all financial results of the Company
for the fiscal years ended June 30, 1993, 1994, 1995, 1996 and 1997 include the
operations of Clientele.
The Company anticipates that Clientele will continue to operate as an
autonomous unit with integration activities focused on the restructuring and
consolidation of Clientele's administrative and support functions with those of
the Company. The Company expects to incur certain expenses estimated at
$1,600,000 in connection with the restructuring and consolidation, primarily the
cost of reducing personnel, as well as excess facility costs at Clientele. The
Company estimates that expense savings from the 1997 restructuring to be
nominal.
Fiscal 1994 Restatement
In fiscal 1994, the Company restated previously issued financial
results, including the quarter and fiscal year ended June 30, 1992, the
quarterly results throughout fiscal 1993, and the first two quarters of fiscal
1994. The restated financial results primarily reflected revisions in revenue
recognition regarding software licenses, changes in the accounting treatment for
several acquisitions made during the fourth quarter of fiscal 1993 and during
the second quarter of fiscal 1994, and other adjustments and accounting
corrections.
RESULTS OF OPERATIONS
The following table sets forth certain statement of operations data as
a percentage of total revenues for the periods indicated:
Fiscal Year Ended June 30,
----------------------------------------
1993 1994 1995 1996 1997
----- ---- ---- ---- ----
Revenues:
License fees 63% 57% 64% 50% 52%
Consulting and professional services 8 20 20 23 19
Support services 9 11 15 26 27
Business forms sales 20 12 - - -
Royalty income - - 1 1 2
---- ---- ---- ---- ----
Total revenues 100 100 100 100 100
Cost of revenues 33 47 35 47 37
---- ---- ---- ---- ----
Gross profit 67 53 65 53 63
---- ---- ---- ---- ----
Operating expenses:
Sales and marketing 51 48 35 48 44
General and administrative 9 19 9 36 9
Software development 26 41 31 32 17
Charge for restructuring - 12 - 13 3
Charge for purchased research and
development 42 6 - - -
---- ---- ---- ---- ----
Total operating expenses 128 126 75 129 73
---- ---- ---- ---- ----
Income (loss) from operations (61) (73) (10) (76) (10)
Charge for settlement of class action
litigation and related expenses - (37) - - -
Other income, net 2 - - - 2
---- ---- ---- ---- ----
Income (loss) before provision
(benefit) for income taxes (59) (110) (10) (76) (8)
Provision (benefit) for income taxes - - - - -
---- ---- ---- ---- ----
Net income (loss) (59)% (110)% (10)% (76)% (8)%
==== ==== ==== ==== ====
18
19
COMPARISON OF FISCAL YEAR 1996 TO FISCAL YEAR 1997
Revenues
Revenues were approximately $44,266,000 and $58,104,000 in fiscal years
1996 and 1997, respectively, representing an increase of approximately 31% in
fiscal 1997.
License fee revenues were $22,157,000 and $30,320,000 for the years
ended June 30, 1996 and 1997, respectively. License fee revenues for the
Company's Platinum SQL Enterprise product line approximated $2,903,000 for the
year ended June 30, 1996 as compared to $0 for the year ended June 30, 1997. In
October 1995, the Company discontinued the marketing of the version of its
Platinum SQL Enterprise product line that runs on the Sybase/UNIX server
platform because of lack of recent license revenue. The Company generated
license fee revenues of $7,902,000 for the year ended June 30, 1996 as compared
to $17,931,000 for the year ended June 30, 1997 from its Platinum SQL (formerly
named Platinum SQL NT) product line which was first released in the quarter
ended December 31, 1994. The increase in revenues is principally due to the
reinstatement of the direct sales force. Revenues for fiscal 1996 and 1997
included license fee revenues from the Platinum-DOS and Platinum for Windows
(first released in the quarter ended June 30, 1996) products of $6,075,000 and
$7,436,000, respectively. The increase in revenues was the result of the
availability of a complete Windows-based product suite for the entire fiscal
1997 period.
International license fee revenues increased from $7,100,000 in fiscal
year 1996 to $8,969,000 in fiscal year 1997. The increase was due to increases
in international license fee revenues for the Company's Platinum SQL and
Platinum for DOS and Platinum for Windows products.
Consulting and professional services revenues increased 8% from
$9,940,000 in fiscal year 1996 to $10,716,000 in fiscal year 1997. The increase
was primarily attributable to the involvement of the consulting and professional
services division in providing consulting and implementation services to
customers.
Support services revenue increased 37% from revenues of $11,550,000 in
fiscal year 1996 to $15,861,000 in fiscal year 1997. The increase was primarily
attributable to an overall rise in the installed base of end-users of Platinum
SQL and the increased effort to renew customers on maintenance contracts.
The number of days sales outstanding was 64 days at June 30, 1997 as
compared to 76 at June 30, 1996. The improvement in days sales outstanding was
primarily attributable to increased efforts in collecting accounts receivable as
well as payment terms on direct Platinum SQL licenses of 50% of net license fees
and maintenance due upon license execution and the remaining 50% of license fees
due in 30 days.
Gross Profit
Gross profit increased 57% from $23,418,000 in fiscal year 1996 to
$36,715,000 in fiscal year 1997 and increased as a percentage of revenues from
53% to 63%, respectively. The increases in gross profit and the gross profit
percentage were due to higher license revenues as a percentage of total
revenues, which have higher margins than consulting and professional services
and support services revenues.
Operating Expenses
Total operating expenses decreased from $51,403,000 for fiscal year
1996 to 40,869,000 for fiscal year 1997, excluding the one time charges for the
restructurings. The decrease was due to the provision of additional reserves for
the following items: accounts receivable arising from Platinum SQL sales to
VARs; relocation costs associated with the hiring of new senior management
executives; write-down of property and equipment; and notes receivable from
divestitures in fiscal 1996. Such decrease was also achieved by cost savings
from the termination of approximately 100 employees during the second quarter of
fiscal 1996 and 40 employees during the third quarter of fiscal 1996. Such
decrease was offset in part by the investment made in the Platinum SQL direct
sales force. Total operating expenses as a percentage of revenues were 116% and
70% for the years ended June 30, 1996 and 1997, respectively (excluding the one
time charges for the restructurings).
Sales and marketing expenses were approximately $21,114,000 and
$25,443,000 in fiscal years 1996 and 1997, respectively, or approximately 48%
and 44% of total revenues. The increase in the dollar amount of sales and
marketing expenses was primarily due to the re-establishment of a direct sales
force for the Platinum SQL product.
19
20
General and administrative expenses were approximately $15,996,000 and
$5,415,000 in fiscal years 1996 and 1997, respectively, or approximately 36% and
9% of total revenues. The decrease was primarily the result of the provision of
the following additional reserves: approximately $1,636,000 for accounts
receivable arising from Platinum SQL sales to VARs; approximately $1,292,000
relating to accounts receivable from Platinum SQL Enterprise customers;
relocation costs of approximately $1,590,000 associated with the hiring of new
senior management executives; write-down of approximately $500,000 of property
and equipment and approximately $2,941,000 provided for notes receivable from
divestitures in fiscal 1996.
Software development expenses were approximately $14,664,000 and
$11,468,000 in fiscal years 1996 and 1997, respectively, before capitalization
of software costs of approximately $371,000 and $1,457,000. The decrease in the
amount of software development expenses was due to personnel reductions as a
result of the restructurings. 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 increased from 3% in fiscal year 1996 to 13% in
fiscal year 1997 due principally to the capitalization of Platinum SQL
multi-currency development costs as well as certain Platinum for Windows
development costs.
Other Income (Expense)
Other income (expense) was approximately ($132,000) and $873,000 in
fiscal years 1996 and 1997, respectively. Other income (expense) primarily
represented interest earned on the Company's cash and cash equivalents and
short-term investments net of interest expense of $1,236,000 in fiscal 1996 and
$0 in fiscal 1997 on the Company's $15,000,000 debenture, which debenture was
repaid in June 1996, when it was converted into common stock by the Company.
Provision for Income Taxes
The provision for income taxes was approximately $0 and $0 in fiscal
years 1996 and 1997, respectively. The effective tax rate during these periods
was 0% for both years. The effective tax rates were lower than the statutory
federal income tax rate of 34%, primarily due to the inability to record
benefits from current net operating losses. As of June 30, 1997, the Company had
provided a valuation allowance of approximately $41,580,000 because realization
of the Company's net deferred tax asset is not assured due to the historical
losses incurred by the Company, and the uncertainty as to profits in the future.
Any realization of the Company's net deferred tax asset will reduce the
Company's effective tax rate in future periods.
COMPARISON OF FISCAL YEAR 1995 TO FISCAL YEAR 1996
Revenues
Revenues were approximately $58,440,000 and $44,266,000 in fiscal years
1995 and 1996, respectively, representing a decrease of approximately 24% in
fiscal 1996.
License fee revenues were $37,664,000 and $22,157,000 for the years
ended June 30, 1995 and 1996, respectively. Included in revenues for the years
ended June 30, 1995 and June 30, 1996, were $8,529,000 and $253,000,
respectively of license fee revenues that were previously deferred as part of
the fiscal 1994 restatement. See "Fiscal 1994 Restatement." Excluding license
fee revenues that were deferred as part of the restatement, license fee revenues
for the Company's Platinum SQL Enterprise product line approximated $11,116,000
for the year ended June 30, 1995 as compared to $2,650,000 for the year ended
June 30, 1996. In October 1995, the Company discontinued the marketing of the
version of its Platinum SQL Enterprise product line that runs on the Sybase/UNIX
server platform because of lack of recent license revenue. The Company generated
license fee revenues of $3,202,000 for the year ended June 30, 1995 as compared
to $7,902,000 for the year ended June 30, 1996 from its Platinum SQL (formerly
named Platinum SQL NT) product line which was first released in the quarter
ended December 31, 1994. Excluding license fee revenues that were deferred as
part of the restatement, revenues for fiscal 1995 and 1996 included license fee
revenues from the Platinum-DOS and Platinum for Windows (first released in the
quarter ended June 30, 1996) products of $9,143,000 and $6,075,000,
respectively. The decrease in revenues was the result of the unavailability of a
complete Windows-based product suite for the entire fiscal 1996 period.
20
21
International license fee revenues decreased from $10,984,000 in fiscal
year 1995 to $7,100,000 in fiscal year 1996. The decrease resulted principally
from the discontinuance of the marketing of the version of the Company's
Platinum SQL Enterprise product line, that runs on the Sybase/UNIX platform in
international markets and the elimination of the direct sales force for this
product, both of which occurred in October 1995.
Excluding the revenues from the custom software development division
which was divested in August 1994, consulting and professional services revenues
decreased 12% from $11,265,000 in fiscal year 1995 to $9,940,000 in fiscal year
1996. The decrease was primarily attributable to the involvement of the
consulting and professional services division in providing formal training to
distributors and dealers, and assisting them in transferring expertise gained in
the Platinum SQL Enterprise and Platinum SQL NT implementations over the last
three years.
Support services revenue increased 29% from revenues of $8,985,000 in
fiscal year 1995 to $11,550,000 in fiscal year 1996. The increase was primarily
attributable to an overall rise in the installed base of end-users of Platinum
SQL and the increased effort to renew customers on maintenance contracts.
The number of days sales outstanding was 76 days at June 30, 1996 as
compared to 84 at June 30, 1995. The improvement in days sales outstanding was
primarily attributable to the termination of 90 day credit terms given to VARs
and to additional receivable reserves provided.
Gross Profit
Gross profit decreased 39% from $38,271,000 in fiscal year 1995 to
$23,418,000 in fiscal year 1996 and decreased as a percentage of revenues from
65% to 53%, respectively. The decreases in gross profit and the gross profit
percentage were due to lower license revenues as a percentage of total revenues,
which have higher margins than consulting and professional services and support
services revenues.
Operating Expenses
Total operating expenses increased from $44,112,000 for fiscal year
1995 to $51,403,000 for fiscal year 1996, excluding the one time charges for the
restructurings. The increase was due to the provision of additional reserves for
accounts receivable arising from Platinum SQL sales to VARs, relocation costs
associated with the hiring of new senior management executives, write-down of
property and equipment and reserves provided for notes receivable from
divestitures. Such increases were offset in part by cost savings achieved from
the termination of approximately 100 employees during the second quarter of
fiscal 1996 and 40 employees during the third quarter of fiscal 1996. Total
operating expenses as a percentage of revenues were 75% and 116% for the years
ended June 30, 1995 and 1996, respectively (excluding the one time charges for
the restructurings).
Sales and marketing expenses were approximately $20,890,000 and
$21,114,000 in fiscal years 1995 and 1996, respectively, or approximately 36%
and 48% of total revenues. The increase in the dollar amount of sales and
marketing expenses increased as a result of increased Clientele marketing and
advertising expenses offset in part by cost savings achieved from the
termination of the direct sales force in October 1995. In the fourth quarter of
fiscal 1996, the Company re-established a smaller direct sales force for its
Platinum SQL product.
General and administrative expenses were approximately $5,396,000 and
$15,996,000 in fiscal years 1995 and 1996, respectively, or approximately 9% and
36% of total revenues. The increase was primarily the result of the provision of
additional reserves of approximately $1,636,000 for accounts receivable arising
from Platinum SQL sales to third party dealers, the provision of additional
reserves of approximately $1,292,000 relating to accounts receivable from
Platinum SQL Enterprise customers, relocation costs of approximately $1,590,000
associated with the hiring of new senior management executives, write-down of
approximately $500,000 of property and equipment and reserves of approximately
$2,941,000 provided for notes receivable from divestitures.
Software development expenses were approximately $18,434,000 and
$14,664,000 in fiscal years 1995 and 1996, respectively, before capitalization
of software costs of approximately $608,000 and $371,000. The decrease in the
amount of software development expenses was due to personnel reductions. 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
remained constant at 3% in fiscal years 1995 and 1996
21
22
because of a lower development level related to products that have reached
technological feasibility but have not been released for general availability.
Other Income (Expense)
Other income (expense) was approximately $103,000 and $(132,000) in
fiscal years 1995 and 1996, respectively. Other income (expense) primarily
represented interest earned on the Company's cash and cash equivalents and
short-term investments net of interest expense of $812,000 in fiscal 1995 and
$1,236,000 in fiscal 1996 on the Company's $15,000,000 debenture.
Provision for Income Taxes
The provision for income taxes was approximately $20,000 and $0 in
fiscal years 1995 and 1996, respectively. The effective tax rates during these
periods were 0% for each year. The effective tax rates were lower than the
statutory federal income tax rate of 34%, primarily due to the inability to
record benefits from current net operating losses. As of June 30, 1996, the
Company had provided a valuation allowance of approximately $38,895,000 because
realization of the Company's net deferred tax asset is not assured due to the
historical losses incurred by the Company, and the uncertainty as to profits in
the future. Any realization of the Company's net deferred tax asset will reduce
the Company's effective tax rate in future periods.
INFLATION AND FOREIGN CURRENCY EXCHANGE
Inflation has not had a significant impact on the Company's operating
results to date. The Company's foreign revenues are substantially all
denominated in the country's respective local currency. The Company's results of
operations of its international subsidiaries are impacted by foreign currency
fluctuations. Significant fluctuation in currency values could have an adverse
effect on the Company's consolidated net revenues, gross margin and
profitability.
LIQUIDITY AND CAPITAL RESOURCES
As of June 30, 1997, the Company's principal sources of liquidity
included cash and cash equivalents of approximately $6,290,000. Cash and cash
equivalents increased by approximately $850,000 over the June 30, 1996 balance
primarily due to exercise of stock options offset in part by capital
expenditures and cash used in operations. The Company had working capital of
$2,763,000 at June 30, 1996 versus working capital of $2,752,000 at June 30,
1997.
The Company's operations used approximately $657,000 of cash and cash
equivalents in the year ended June 30, 1997. Included in the use of cash and
cash equivalents from operations was the investment of approximately $11,468,000
in software development.
As part of the sale of certain Company product lines and divisions in
the fiscal 1994 restructuring, the Company received payments on notes receivable
from divestitures of approximately $1,207,000 during the year ended June 30,
1997. The Company also paid approximately $912,000 in severance, lease and other
costs related to the fiscal 1994 and fiscal 1996 restructurings during the year
ended June 30, 1997.
If the Company is not successful in achieving targeted revenues, the
Company may be required to take further actions to align its operating expenses
with its reduced revenues, such as reductions in work force or other cost
cutting measures.
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. However,
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.
22
23
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements and supplementary data of the Company required
by this Item are set forth at the pages indicated at Item 14(a)(1).
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
There were no changes or disagreements with respect to the Company's
independent accountants during fiscal 1997.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required hereunder is incorporated by reference from
the sections of the Company's Proxy Statement filed in connection with its
October 29, 1997 Annual Meeting of Stockholders entitled "Nominees", "Series B
Preferred Directors" and "Other Executive Officers."
ITEM 11. EXECUTIVE COMPENSATION
The information required hereunder is incorporated by reference from
the sections of the Company's Proxy Statement filed in connection with its
October 29, 1997 Annual Meeting of Stockholders entitled "Executive
Compensation."
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required hereunder is incorporated by reference from
the sections of the Company's Proxy Statement filed in connection with its
October 29, 1997, Annual Meeting of Stockholders entitled "Principal
Stockholders."
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required hereunder is incorporated by reference from
the sections of the Company's Proxy Statement filed in connection with its
October 29, 1997 Annual Meeting of Stockholders entitled "Executive
Compensation" and "Compensation Committee Interlocks and Insider Participation."
23
24
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) (1) Financial Statements
Index to Financial Statements
Page
----
Report of Independent Auditors...........................................30
Consolidated Balance Sheets as of June 30, 1996 and 1997.................31
Consolidated Statements of Operations for the years ended
June 30, 1995, 1996 and 1997................ ............................32
Consolidated Statements of Stockholders' Equity for the years ended
June 30, 1995, 1996 and 1997...... ......................................33
Consolidated Statements of Cash Flows for the years ended June 30,
1995, 1996 and 1997................ .....................................34
Notes to Consolidated Financial Statements...............................35
(2) Financial Statement Schedules
Index to Financial Statement Schedules
Report of Independent Auditors...........................................47
Schedule II - Valuation and Qualifying Accounts..........................48
All other schedules are omitted because they are not required or the
required information is included in the consolidated financial statements or
notes thereto.
24
25
(3) Exhibits
Index to Exhibits
Exhibit No. Description Location
----------- ----------- --------
2.1 Agreement and Plan of Reorganization and Merger
dated as of June 27, 1997 among the Company, CSI
Acquisition Corp., Clientele Software, Inc., Dale E.
Yocum, Pamela Yocum, William L. Mulert (Schedules
not included pursuant to Rule 601(b)(2) of Reg. S-K) (9)
3.1 Second Restated Certificate of Incorporation of the
Company. (1)
3.2 Certificate of Amendment to Second Restated
Certificate of Incorporation of the Company (10)
3.3 Amended and Restated Bylaws of the Company, as
currently in effect. (8)
3.6 Specimen Certificate of Common Stock. (2)
4.1 Certificate of Designation of Rights, Preferences
and Privileges of Series A Junior Participating
Preferred Stock (4)
4.2 Certificate of Designation of Preferences of Series
B Preferred Stock (5)
4.3 Certificate of Designation of Preferences of Series
C Preferred Stock (6)
4.4 Amended and Restated 8% Convertible, Exchangeable
Subordinated Security in the Principal Amount of
$15,000,000 dated May 8, 1996 (8)
10.1 Platinum Software Corporation Incentive Stock
Option, Nonqualified Stock Option and Restricted
Stock Purchase Plan - 1990 (the "1990 Plan"). (2)
10.2 Form of Incentive Option Agreement pertaining to the
1990 Plan. (2)
10.3 Form of Nonqualified Stock Option Agreement
pertaining to the 1990 Plan. (2)
10.4 Form of Restricted Share Agreement pertaining to the
Plan. (2)
10.5 Form of Indemnification Agreement for Officers and
Directors of the Company. (2)
10.6 Platinum Software Corporation Employee Stock
Purchase Plan, as amended. (2)
10.7 Employment Agreement, dated September 30, 1988,
between the Company and Timothy J. McMullen,
together with an amendment dated August 26, 1992
thereto. (2)
10.8 Employment Agreement, dated September 30, 1988,
between the Company and Kevin P. Riegelsberger,
together with an amendment dated August 26, 1992
thereto. (2)
10.10 1993 Nonqualified Stock Option Plan (3)
10.11 Form of Nonqualified Stock Option Agreement
pertaining to the 1993 Nonqualified Stock Option
Plan. (3)
10.12 1994 Incentive Stock Option, Non-qualified Stock
Option and Restricted Stock Purchase Plan. (5)
10.13 Form of Non-qualified Stock Option Agreement
pertaining to the 1994 Plan. (5)
10.15 Agreement of Purchase and Sale of Assets dated as of
June 30, 1994, between the Company and Altec Forms,
Inc. (excluding disclosure schedules) (5)
10.16 Agreement of Purchase and Sale of Assets dated as of
June 30, 1994, between the Company and MLDV
Acquisition Co. (excluding disclosure schedules) (5)
10.17 Agreement of Purchase and Sale of Assets dated as of
June 30, 1994, between the Company and FRC
Consulting, Inc. (excluding disclosure schedules) (5)
10.18 Agreement of Purchase and Sale of Assets dated as of
June 30, 1994, between the Company and Platinum
Latin America-Caribbean, Inc. (excluding disclosure
schedules) (5)
10.24 Agreement of Purchase and Sale of Assets dated
October 31, 1994 between the Company and Westwood &
Best Software Corporation (excluding disclosure
schedules) (6)
10.25 Agreement of Purchase and Sale of Assets dated
August 31, 1994 between the Company and Perot
Systems Corporation (excluding disclosure schedules) (6)
10.26 Agreement of Purchase and Sale of Assets dated March
22, 1995 between the Company and Baker Software
Products Corporation (excluding disclosure
schedules) (6)
10.27 Agreement for Transfer of Software and Mutual
Release dated July 22, 1994 between the Company,
Michael Rohan and Financial Reporting Technology,
Inc. (6)
10.28 Stock Purchase Agreement dated September 22, 1994
between the Company and the Series B Preferred Stock
Investors (6)
10.29 Registration Rights Agreement dated September 22,
1994 between the Company and the Series B Preferred
Stock Investors (6)
10.30 Amendment to Stock Purchase Agreement dated May 26,
1995 between the Company and the Series C Preferred
Stock Investors (6)
10.31 Amendment to Registration Rights Agreement dated May
26, 1995 between the Company and the Series C
Preferred Stock Investors (6)
25
26
10.32 Stipulation for Partial Settlement of In Re Platinum
Securities Litigation, dated July 14, 1994 (6)
10.33 Employment Offer letter with L. George Klaus dated
February 7, 1996. (7)
10.34 Restricted Stock Purchase Agreement between the
Company and L. George Klaus dated as of February 7,
1996. (7)
10.35 Employment Offer letter with William L. Pieser
dated February 7, 1996. (7)
10.36 Restricted Stock Purchase Agreement between the
Company and William L. Pieser dated as of February
7, 1996. (7)
10.37 Agreement between the Company and Michael J. Simmons
dated February 8, 1996. (7)
10.38 Agreement between the Company and Carmelo J. Santoro
dated February 8, 1996. (7)
10.39 Agreement between the Company and Bruce C. Edwards
dated February 8, 1996. (7)
10.40 Agreement of Purchase and Sale of Assets dated as of
February 29, 1996 between Strategic Advantage
Software Corporation, the Company, Cypher Business
Systems, Ltd., and Slatershelfco 173, Ltd.
(excluding disclosure schedules). (7)
10.41 Agreement of Purchase and Sale of Assets dated as of
September 30, 1995 between Platinum Treasury
Systems, plc and the Company (excluding disclosure
schedules). (7)
10.42 Employment Offer letter with Ken Lally dated as of
April 1, 1996. (7)
10.43 Restricted Stock Purchase Agreement between the
Company and Ken Lally dated as of April 10, 1996. (7)
10.44 1996 Nonqualified Stock Plan and Form of
Nonqualified Option Agreement.
10.45 Platinum Software Corporation Clientele Incentive
Stock Plan.
10.46 Consulting Agreement with Carmelo J. Santoro.
22.1 Subsidiaries of the Company.
23.1 Consent of Ernst & Young LLP.
24.1 Power of Attorney (included on the signature page of
this Annual Report on Form 10-K).
Executive Compensation Plans and Arrangements
Exhibit No. Description Location
----------- ----------- --------
10.1 1990 Plan (2)
10.2 Form of Incentive Option Agreement pertaining to the
1990 Plan. (2)
10.3 Form of Nonqualified Stock Option Agreement
pertaining to the 1990 Plan. (2)
10.4 Form of Restricted Share Agreement pertaining to the
1990 Plan. (2)
10.7 Employment Agreement dated September 30, 1988
between the Company and Timothy J. McMullen,
together with an amendment dated August 26, 1992
thereto. (2)
10.8 Employment Agreement dated September 30, 1988
between the Company and Kevin P. Riegelsberger,
together with an amendment dated August 26, 1992
thereto. (2)
10.10 1993 Nonqualified Stock Option Plan (3)
10.11 Form of Nonqualified Stock Option Agreement
pertaining to the 1993 Nonqualified Stock Option
Plan. (3)
10.12 1994 Incentive Stock Option, Non-qualified Stock
Option and Restricted Stock Purchase Plan. (5)
10.13 Form of Non-qualified Stock Option Agreement
pertaining to the 1994 Plan. (5)
10.33 Employment Offer letter with L. George Klaus dated
February 7, 1996. (7)
10.34 Restricted Stock Purchase Agreement between the
Company and L. George Klaus dated as of February 7,
1996. (7)
10.35 Employment Offer letter with William L. Pieser dated
February 7, 1996. (7)
10.36 Restricted Stock Purchase Agreement between the
Company and William L. Pieser dated as of February
7, 1996. (7)
10.37 Agreement between the Company and Michael J. Simmons
dated February 8, 1996. (7)
10.38 Agreement between the Company and Carmelo J. Santoro
dated February 8, 1996. (7)
10.39 Agreement between the Company and Bruce C. Edwards
dated February 8, 1996. (7)
10.42 Employment offer letter with Ken Lally dated as of
April 1, 1996 (7)
10.43 Restricted Stock Purchase Agreement between the
Company and Ken Lally dated as of April 10, 1996 (7)
10.44 1996 Nonqualified Stock Plan and Form of
Nonqualified Option Agreement.
10.45 Platinum Software Corporation Clientele Incentive
Stock Plan.
26
27
10.46 Consulting Agreement with Carmelo J. Santoro.
- --------
(1) Incorporated by reference to the referenced exhibit number
to the Company's Registration Statement on Form S-1, Reg.
No. 33-57294.
(2) Incorporated by reference to the referenced exhibit number
to the Company's Registration Statement on Form S-1, Reg.
No. 33-51566.
(3) Incorporated by reference to the referenced exhibit to the
Company's Annual Report on Form 10-K for the fiscal year
ended June 30, 1993.
(4) Incorporated by reference to the referenced exhibit to the
Company's Registration Statement on Form 8-A, dated April
14, 1994.
(5) Incorporated by reference to the referenced exhibit to the
Company's Annual Report on Form 10-K for the fiscal year
ended June 30, 1994.
(6) Incorporated by reference to the referenced exhibit to the
Company's Annual Report on Form 10-K for the fiscal year
ended June 30, 1995.
(7) Incorporated by reference to the referenced exhibit to the
Company's Quarterly Report on Form 10-Q for the quarter
ended March 31, 1996.
(8) Incorporated by reference to the referenced exhibit to the
Company's Annual Report on Form 10-K for the fiscal year
ended June 30, 1996.
(9) Incorporated by reference to the referenced exhibit to the
Company's Current Report on Form 8-K dated June 30, 1997.
(10) Incorporated by reference to the referenced exhibit to the
Company's Quarterly Report on Form 10-Q for the quarter
ending December 31, 1996.
(b) Reports on Form 8-K.
The Company filed a current report on Form 8-K dated April 22,
1997 to report under Item 5, Other Events, the Company's
results for the quarter ended March 31, 1997. In addition, the
Company filed a current report on Form 8-K, dated June 30,
1997, to report under Item 2, Acquisition or Disposition of
Assets, the acquisition of Clientele Software, Inc.
The following trademarks may be mentioned in the foregoing Annual Report on Form
10-K: Platinum, and SeQueL to Platinum. Platinum and SeQueL to Platinum are
registered trademarks of the Company. Clientele is a registered trademark of
Clientele Software, Inc. All other product names are trademarks or registered
trademarks of their respective companies.
27
28
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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, in the City of Irvine,
State of California, on September 26, 1997.
PLATINUM SOFTWARE CORPORATION
By: /s/ L. George Klaus
--------------------------------------
L. George Klaus
President, Chief Executive Officer and
Chairman of the Board
POWER OF ATTORNEY
We, the undersigned directors and officers of Platinum Software
Corporation, do hereby constitute and appoint L. George Klaus our true and
lawful attorney and agent, with full power of substitution to do any and all
acts and things in our name and behalf in our capacities as directors and
officers and to execute any and all instruments for us and in our names in the
capacities indicated below, which said attorney and agent may deem necessary or
advisable to enable said corporation to comply with the Securities Exchange Act
of 1934, as amended, and any rules, regulations and requirements of the
Securities and Exchange Commission, in connection with this Annual Report on
Form 10-K, including specifically but without limitation, power and authority to
sign for us or any of us in our names in the capacities indicated below, any and
all amendments (including post-effective amendments) hereto; and we do hereby
ratify and confirm all that said attorney and agent, shall do or cause to be
done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
--------- ----- ----
Chairman of the Board,
Chief Executive Officer
/s/ L. George Klaus and President
- ------------------------ (Principal Executive Officer) September 26, 1997
L. George Klaus
/s/ Michael J. Simmons
- ------------------------ Chief Financial Officer
Michael J. Simmons (Principal Financial Officer) September 26, 1997
/s/ Paul G. Mazzarella
- ------------------------ Vice President, Corporate Controller
Paul G. Mazzarella (Principal Accounting Officer) September 26, 1997
- ------------------------ Director ____________, 1997
Carmelo J. Santoro
/s/ W. Douglas Hajjar
- ------------------------ Director September 26, 1997
W. Douglas Hajjar
/s/ Richard J. Goeglein
- ------------------------ Director September 26, 1997
Richard J. Goeglein
28
29
SIGNATURE TITLE DATE
--------- ----- ----
/s/ L. John Doerr Director September 26, 1997
- --------------------------
L. John Doerr
/s/ Arthur J. Marks Director September 26, 1997
- --------------------------
Arthur J. Marks
/s/ Robert Finzi Director September 26, 1997
- --------------------------
Robert Finzi
/s/ Donald R. Dixon Director September 26, 1997
- --------------------------
Donald R. Dixon
29
30
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Platinum Software Corporation
We have audited the accompanying consolidated balance sheets of
Platinum Software Corporation as of June 30, 1996 and 1997, and the
related consolidated statements of operations, stockholders' equity
and cash flows for each of the three years in the period ended June
30, 1997. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on
these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation. We believe
that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the consolidated financial position
of Platinum Software Corporation as of June 30, 1996 and 1997, and the
consolidated results of its operations and its cash flows for each of
the three years in the period ended June 30, 1997, in conformity with
generally accepted accounting principles.
ERNST & YOUNG LLP
Orange County, California
July 29, 1997
30
31
PLATINUM SOFTWARE CORPORATION
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
June 30,
----------------------
1996 1997
--------- ---------
ASSETS
Current assets:
Cash and cash equivalents $ 5,440 $ 6,290
Short-term investments 10,098 9,542
Restricted cash 1,006 -
Accounts receivable, net of allowance for doubtful accounts
of $9,123 and $6,263 at June 30, 1996 and 1997, respectively 8,436 12,025
Notes receivable from divestitures, net 825 -
Inventories 460 481
Prepaid expenses and other 1,648 1,467
--------- ---------
Total current assets 27,913 29,805
Property and equipment, net 9,196 8,508
Software development costs, net of accumulated amortization
of $2,448 and $3,495 at June 30, 1996 and 1997, respectively 2,250 2,660
Acquired source code, net of accumulated amortization
of $3,116 and $4,200 at June 30, 1996 and 1997, respectively 1,088 278
Other assets 465 527
--------- ---------
$ 40,912 $ 41,778
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 4,057 $ 4,725
Other accrued expenses 5,664 6,387
Accrued restructuring costs 1,921 2,609
Accrued relocation costs 1,503 -
Accrued commissions 726 1,694
Deferred revenue 11,279 11,638
--------- ---------
Total current liabilities 25,150 27,053
--------- ---------
Long-term liabilities 288 277
--------- ---------
Commitments and Contingencies (Note 4)
Stockholders' equity:
Preferred stock, $.001 par value, 5,000,000 shares authorized:
Series A preferred stock, none issued and outstanding at
June 30, 1996 and 1997 - -
Series B preferred stock, 2,490,000 and 2,435,000 shares issued and
outstanding at June 30, 1996 and 1997, respectively 13,770 13,466
Series C preferred stock, 231,598 and 213,803 shares issued and
outstanding at June 30, 1996 and 1997, respectively 18,226 16,826
Common stock, $.001 par value: 60,000,000 shares authorized,
18,997,078 and 20,109,816 shares issued and outstanding
at June 30, 1996 and 1997, respectively 19 20
Additional paid-in capital 111,233 116,747
Less: Notes receivable from officers for issuance of restricted stock (11,563) (11,563)
Accumulated foreign currency translation adjustments 249 293
Accumulated deficit (116,460) (121,341)
--------- ---------
Total stockholders' equity 15,474 14,448
--------- ---------
$ 40,912 $ 41,778
========= =========
The accompanying notes are an integral part of
these consolidated balance sheets.
31
32
PLATINUM SOFTWARE CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Years Ended June 30,
--------------------------------
1995 1996 1997
-------- -------- --------
Revenues:
License fees $ 37,664 $ 22,157 $ 30,320
Consulting and professional services 11,265 9,940 10,716
Support services 8,985 11,550 15,861
Royalty income 526 619 1,207
-------- -------- --------
58,440 44,266 58,104
-------- -------- --------
Cost of revenues:
Cost of license fees 4,318 4,065 5,131
Cost of consulting and professional services 11,608 10,555 10,078
Cost of support services 4,243 6,228 6,180
-------- -------- --------
20,169 20,848 21,389
-------- -------- --------
Gross profit 38,271 23,418 36,715
-------- -------- --------
Operating expenses:
Sales and marketing 20,890 21,114 25,443
General and administrative 5,396 15,996 5,415
Software development 17,826 14,293 10,011
Charge for restructuring - 5,568 1,600
-------- -------- --------
44,112 56,971 42,469
-------- -------- --------
Loss from operations (5,841) (33,553) (5,754)
-------- -------- --------
Other income (expense):
Interest income 1,027 949 835
Interest expense (730) (1,344) (71)
Other income (expense), net (194) 263 109
-------- -------- --------
103 (132) 873
-------- -------- --------
Loss before provision for income taxes (5,738) (33,685) (4,881)
Provision for income taxes 20 - -
-------- -------- --------
Net loss $ (5,758) $(33,685) $ (4,881)
======== ======== ========
Net loss per share $ (0.42) $ (2.15) $ (0.25)
======== ======== ========
Shares used in computing net loss per share 13,722 15,654 19,454
======== ======== ========
The accompanying notes are an integral part of these consolidated statements.
32
33
PLATINUM SOFTWARE CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
Series A Series B Series C
Preferred Stock Preferred Stock Preferred Stock Common Stock
------------------ -------------------- ------------------- ------------------
Shares Amount Shares Amount Shares Amount Shares Amount
------- ------ ------ ------ ------ ------- ---------- ------
Balance, June 30, 1994 - - - $ - - $ - 13,371,887 $ 13
Net loss - - - - - - - -
Foreign currency translation
adjustments - - - - - - - -
Issuance of preferred stock - - 2,490,000 13,770 231,598 18,226 - -
Exercise of warrants - - - - - - 173,000 -
Employee stock purchases - - - - - - 62,774 -
Exercise of stock options - - - - - - 456,230 1
-- ----- --------- ------- ------- ------- ---------- ----
Balance, June 30, 1995 - - 2,490,000 13,770 231,598 18,226 14,063,891 14
Net loss - - - - - - - -
Foreign currency translation
adjustments - - - - - - - -
Issuance of restricted stock - - - - - - 2,950,000 3
Conversion of debenture - - - - - - 1,528,988 2
Exercise of warrants - - - - - - 60,750 -
Employee stock purchases - - - - - - 47,711 -
Exercise of stock options - - - - - - 345,738 -
-- ----- --------- ------- ------- ------- ---------- ----
Balance, June 30, 1996 - - 2,490,000 13,770 231,598 18,226 18,997,078 19
Net loss - - - - - - - -
Foreign currency translation
adjustments - - - - - - - -
Conversion of Series B
Preferred Stock - - (55,000) (304) - - 55,000 -
Conversion of Series C
Preferred Stock - - - - (17,795) (1,400) 177,950 -
Issuance of Common Stock - - - - - - 6,600 -
Exercise of warrants - - - - - - 55,000 -
Employee stock purchases - - - - - - 41,540 -
Exercise of stock options - - - - - - 776,648 1
-- ----- --------- ------- ------- ------- ---------- ----
Balance, June 30, 1997 - $ - 2,435,000 $13,466 213,803 $16,826 20,109,816 $ 20
== ===== ========= ======= ======= ======= ========== ====
Accumulated
Notes Foreign
Additional Receivable Currency Total
Paid-in from Translation Accumulated Stockholders'
Capital Officers Adjustments Deficit Equity (Deficit)
------------- ---------- ------------ ----------- ---------------
Balance, June 30, 1994 $ 77,941 $ - $353 $ (77,017) $ 1,290
Net loss - - - (5,758) (5,758)
Foreign currency translation
adjustments - - (49) - (49)
Issuance of preferred stock - - - - 31,996
Exercise of warrants 721 - - - 721
Employee stock purchases 316 - - - 316
Exercise of stock options 1,448 - - - 1,449
-------- -------- ---- --------- --------
Balance, June 30, 1995 80,426 - 304 (82,775) 29,965
Net loss - - - (33,685) (33,685)
Foreign currency translation
adjustments - - (55) - (55)
Issuance of restricted stock 11,560 (11,563) - - -
Conversion of debenture 17,046 - - - 17,048
Exercise of warrants 244 - - - 244
Employee stock purchases 269 - - - 269
Exercise of stock options 1,688 - - - 1,688
-------- -------- ---- --------- --------
Balance, June 30, 1996 111,233 (11,563) 249 (116,460) 15,474
Net loss - - - (4,881) (4,881)
Foreign currency translation
adjustments - - 44 - 44
Conversion of Series B
Preferred Stock 304 - - - -
Conversion of Series C
Preferred Stock 1,400 - - - -
Issuance of Common Stock - - - - -
Exercise of warrants 399 - - - 399
Employee stock purchases 237 - - - 237
Exercise of stock options 3,174 - - - 3,175
-------- -------- ---- --------- --------
Balance, June 30, 1997 $116,747 $(11,563) $293 $(121,341) $ 14,448
======== ======== ==== ========= ========
The accompanying notes are an integral part of these consolidated statements.
33
34
PLATINUM SOFTWARE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
Years Ended June 30,
--------------------------------
1995 1996 1997
-------- -------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (5,758) $(33,685) $ (4,881)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 5,510 6,338 5,812
Provision for doubtful accounts receivable 2,635 6,623 2,095
Provision for doubtful notes receivable from divestitures - 2,940 -
Interest income on notes receivable from divestitures (508) - -
Interest expense on debenture issued in connection with
class action settlement 812 1,236 -
Charge for restructuring - 5,568 1,600
Change in operating assets and liabilities:
(Increase) decrease in accounts receivable (6,988) (1,010) (5,684)
(Increase) decrease in inventories 314 212 (21)
(Increase) decrease in prepaid expenses and other (103) 111 181
(Increase) decrease in other assets (228) 91 (62)
Increase (decrease) in accounts payable 121 (73) 668
Increase (decrease) in other accrued expenses
and accrued commissions (3,369) 508 1,691
Increase (decrease) in accrued restructuring costs (2,330) (2,683) (912)
Increase (decrease) in accrued relocation costs - 1,503 (1,503)
Increase (decrease) in deferred revenue (4,382) 2,587 359
-------- -------- --------
Cash used in operating activities (14,274) (9,734) (657)
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (3,445) (2,760) (2,993)
Capitalized software development costs (608) (371) (1,457)
Purchase of source code - - (274)
Purchase of short-term investments (5,004) (13,192) (10,500)
Sale of short-term investments - 8,099 11,056
Payments received on notes receivable from divestitures 2,763 1,016 825
Increase (decrease) in long-term liabilities 106 66 (11)
Increase in notes receivable from divestitures - (209) -
-------- -------- --------
Cash used in investing activities (6,188) (7,351) (3,354)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuances of preferred stock 31,996 - -
Exercise of stock options 1,392 1,382 3,175
Exercise of warrants 721 186 399
Employee stock purchases 316 269 237
Payment on class action litigation (1,000) - -
(Increase) decrease in restricted cash (21) (530) 1,006
-------- -------- --------
Cash provided by financing activities 33,404 1,307 4,817
-------- -------- --------
EFFECT OF EXCHANGE RATES ON CASH (56) (55) 44
-------- -------- --------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 12,886 (15,833) 850
CASH AND CASH EQUIVALENTS, beginning of the year 8,387 21,273 5,440
-------- -------- --------
CASH AND CASH EQUIVALENTS, end of the year $ 21,273 $ 5,440 $ 6,290
======== ======== ========
The accompanying notes are an integral part of these consolidated statements.
34
35
PLATINUM SOFTWARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1995, 1996 AND 1997
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
a. Company Operations and Basis of Presentation
Platinum Software Corporation, a Delaware corporation, and its
subsidiaries design, develop, market and support a broad range of integrated
financial applications software products for use by businesses of all sizes
worldwide. The consolidated financial statements include the accounts of
Platinum Software Corporation and all of its subsidiaries. All significant
intercompany balances and transactions have been eliminated in consolidation.
The term "Company" used herein means Platinum Software Corporation and its
subsidiaries, unless otherwise indicated by the context.
b. Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual amounts could differ from these estimates.
c. Short-term Investments
The Company accounted for its investment securities under the
provisions of Statement of Financial Accounting Standards No. 115, "Accounting
for Certain Investments in Debt Securities, ("SFAS No. 115"). Under SFAS No.
115, management determines the appropriate classification of debt securities at
the time of purchase and reevaluates such designation as of each balance sheet
date. Debt securities that the Company has both the positive intent and ability
to hold to maturity are carried at amortized cost. Debt securities that the
Company does not have the positive intent and ability to hold to maturity are
classified as available-for-sale and carried at fair value. Realized and
unrealized holding gains and losses on securities classified as
available-for-sale are not material.
The Company classifies its short-term investments as available-for-sale
securities and carries them at their fair market value. In 1997, short-term
investments consisted of debt securities with interest rates ranging from 5.85%
to 7.87%. At June 30, 1996 and 1997, short-term investments are as follows:
Cost Gross Unrealized Losses Estimated Fair Value
---- ----------------------- --------------------
(in thousands)
June 30, 1996:
Corporate debt securities $10,175 $ 77 $10,098
======= ======= =======
June 30, 1997:
Corporate debt securities $ 9,664 $ 122 $ 9,542
======= ======= =======
d. 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,
35
36
however, when such services are provided for in the license agreement, an
appropriate portion of the license fee is deferred and recognized 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.
e. Product Returns
The Company permits VARs and other software distributors to return
certain products which were returned by the end-user customers and allows a
30-day return period for Clientele customers. The Company establishes reserves
for such estimated product returns. Such product return reserve is included
within the allowance for doubtful accounts and was $665,000 at June 30, 1996 and
$660,000 at June 30, 1997.
f. Inventories
The Company's inventories consist of software modules in diskette and
CD-ROM form ready for shipment, and manuals, and are stated at the lower of cost
(first-in, first-out) or market.
g. Property and Equipment
The following summarizes the components of property and equipment, at
cost, as of June 30, 1996 and 1997:
1996 1997
-------- --------
(in thousands)
Computer equipment $ 17,125 $ 18,950
Furniture and fixtures 3,279 3,605
Leasehold improvements 1,009 1,851
-------- --------
21,413 24,406
Accumulated depreciation and amortization (12,217) (15,898)
======== ========
$ 9,196 $ 8,508
======== ========
Depreciation is computed under the straight-line method over the
estimated useful lives of the assets ranging from three to five years.
Maintenance and repairs are charged to expense as incurred and the costs of
additions and betterments that increase the useful lives of the assets are
capitalized. Effective July 1, 1996, the Company adopted Statement of Financial
Accounting Standards No. 121 "Accounting for the Impairments of Long-Lived
Assets and for Long-Lived Assets to be Disposed of." The adoption of this
standard had no material impact on the Company's consolidated financial
statements.
h. Software Development Costs
Software development costs incurred subsequent to the determination of
technological feasibility and marketability of a software product are
capitalized. Amortization of capitalized software development costs commences
when the products are available for general release to customers over the
expected useful life of the respective products, which is generally five years.
Amortization of software development costs is included in cost of license fees
and totaled $820,000, $942,000 and $1,047,000 for the years ended June 30, 1995,
1996 and 1997, respectively.
i. Acquired Source Code
Acquired source code is amortized over the shorter of the estimated
economic life of the asset or five years. Amortization of acquired source code
is included in cost of license fees and totaled $855,000, $891,000 and
$1,084,000 for the years ended June 30, 1995, 1996 and 1997, respectively.
36
37
j. Advertising Costs
The Company expenses production costs of advertising upon the first
showing. Other advertising costs are expensed as incurred. Advertising expense
totaled $635,000, $857,000 and $1,463,000 for the years ended June 30, 1995,
1996 and 1997, respectively.
k. Income Taxes
The Company uses the liability method of accounting for income taxes as
set forth in Statement of Financial Accounting Standards No. 109. Under the
liability method, deferred taxes are determined based on the differences between
the financial statement and tax bases of assets and liabilities using enacted
tax rates.
l. Statements of Cash Flows
The Company considers investments with an initial maturity of three
months or less when purchased to be cash equivalents. The following summarizes
the supplemental disclosures related to the statements of cash flows:
1995 1996 1997
---- ---- ----
(in thousands)
CASH PAID DURING THE YEAR FOR:
Interest $20 $64 $56
=== === ===
Income taxes $23 $ - $ -
=== === ===
m. Foreign Currency Translation
The functional currency of the Company's foreign operations is the
respective local country's currency. Assets and liabilities of the foreign
operations are translated into U.S. dollars at the exchange rate at the balance
sheet date, whereas revenues and expenses are translated into U.S. dollars at
average exchange rates. Translation adjustments are shown as a separate
component of stockholders' equity.
n. Concentration of Credit Risks and Major Customer Data
The Company sells its products to VARs and other software distributors
generally under credit terms ranging from 30 to 90 days. Also, the Company
presently sells its products directly to end-users generally under credit terms
of 30 days. The Company believes no significant concentrations of credit risk
existed at June 30, 1997. The Company maintains adequate reserves for potential
credit losses and such losses have been within management's estimates.
Receivables from customers are generally unsecured.
o. Net Loss Per Share
Net loss per share is computed by dividing net loss by the weighted
average number of shares of common stock. The shares of common stock issuable in
connection with the July 26, 1995 election to redeem the debenture have been
treated as if they were outstanding from July 26, 1995 to September 30, 1995.
Due to the agreement to rescind the Company's July 26, 1995 election to repay
the debenture and the subsequent reinstatement of the debenture, the treatment
for net loss per share purposes of the shares of common stock issuable in
connection with the repayment of the debenture have been changed from being
outstanding to common stock equivalents from October 1, 1995 to June 30, 1996.
However, common stock equivalents were antidilutive for the years ended June 30,
1995 and 1996 and therefore are excluded from the calculation of net loss per
share for such periods.
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The following supplementary net loss per share for fiscal 1996 is
computed by dividing net loss, excluding interest expense related to the
redeemable convertible subordinated debenture (See Note 3) by the weighted
average number of shares of common stock outstanding during fiscal year 1996,
assuming the June 10, 1996 conversion of the debenture into common stock had
occurred on July 1, 1995.
Net loss excluding interest expense related to the redeemable
convertible subordinated debenture ($32,449,000)
============
Supplementary net loss per share ($1.90)
============
Shares used in computing supplementary net loss per share 17,098,841
============
In March 1997, the Financial Accounting Standards Board issued
Statement No. 128, "Earnings Per Share" ("SFAS No. 128"). SFAS No. 128 applies
to entities with publicly held common stock or potential common stock and is
effective for financial statements issued for periods ending after December 15,
1997. Under SFAS No. 128, the presentation of primary earnings (loss) per share
is replaced with a presentation of basic earnings (loss) per share. SFAS No. 128
requires dual presentation of basic and diluted earnings (loss) per share for
entities with complex capital structures. Basic earnings (loss) per share
includes no dilution and is computed by dividing net income (loss) available to
common stockholders by the weighted average number of common shares outstanding
for the period. Diluted earnings (loss) per share reflects the potential
dilution of securities that could share in the earnings of an entity, similar to
fully diluted earnings (loss) per share. Given the Company's fiscal 1995, 1996
and 1997 net loss position, management believes the adoption of SFAS No. 128
will not have a material effect on its primary earnings (loss) per share as
presented in the accompanying consolidated financial statement.
p. Reclassifications
Certain reclassifications have been made to fiscal 1995 and 1996
amounts to conform with the current year presentation.
2. ACQUISITION AND RESTRUCTURINGS
a. Acquisition
On June 30, 1997 the Company acquired Clientele Software, Inc. a
privately held provider of help desk automation software based in Portland,
Oregon. The acquisition was structured as a triangular merger whereby Clientele
Software, Inc. became a wholly-owned subsidiary of the Company. 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. The transaction was accounted for as a pooling of interests, and
accordingly, the accompanying consolidated financial statements have been
restated to incorporate the financial position and results of operations of
Clientele for all periods presented.
b. Restructurings
In May 1994, the Company announced a restructuring of its business
operations, including plans to sell certain operations and non-core software
products, with the intent to significantly reduce operating expenses. Between
May 1994 and April 1996, the Company reduced its workforce through a reduction
in force, attrition, as well as the sale and closure of certain of its
operations and products.
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In the fourth quarter of fiscal 1994, the Company recorded a
restructuring charge of $6,741,000. Such amount included approximately
$2,365,000 for severance and other extended benefit costs related to the
reduction in force, $2,312,000 in lease termination and buyout costs related to
the closure of facilities, $2,064,000 in asset write-downs and other costs. The
charge reflected the net effect of estimated proceeds of operations and products
to be divested. During fiscal 1995, the Company paid approximately $2,330,000
for severance, lease termination and other costs related to the restructuring.
Also during fiscal 1995, the Company wrote-down accounts receivable, property
and equipment, and other assets related to the restructuring aggregating
$2,384,000. In addition, $1,791,000 of excess proceeds from divestitures over
the net book value of assets sold were credited to the restructuring reserve. At
June 30, 1996, the restructuring was substantially complete. At June 30, 1997,
the Company had a $88,000 cash obligation, related to lease termination costs,
which will be funded from existing cash resources and working capital.
The Company is entitled to receive royalties on future sales of product
from certain of the purchasers, which are computed as a percentage of certain
revenues. The Company received $526,000 in royalty income from divested
operations in fiscal 1995, $619,000 in royalty income from divested operations
in fiscal 1996 and $1,207,000 in royalty income from divested operations in
fiscal 1997.
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 $3,271,000 which was recorded in the second quarter of
fiscal 1996. Such amount included approximately $1,160,000 for severance and
other extended benefit costs related to the reduction in force, $1,239,000 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 positions. This reduction in force resulted in an additional
restructuring charge of $2,297,000 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 $1,372,000
in asset write-downs and other costs. During fiscal 1996, the Company paid
approximately $2,683,000 for severance, lease termination and other costs
relating to the restructurings. At June 30, 1997, the Company had a $921,000
cash obligation related to lease termination and other costs of the fiscal 1996
restructurings which will be funded from existing cash reserves and working
capital.
In June 1997, the Company underwent another restructuring as a result
of the Clientele acquisition. The Company anticipates that Clientele will
continue to operate as an autonomous unit with integration activities focused on
the restructuring and consolidation of Clientele's administrative and support
functions with those of the Company. The Company expects to incur certain
expenses estimated at $1,600,000 in connection with the restructuring and
consolidation, primarily the cost of reducing personnel, as well as excess
facility costs at Clientele. The Company estimates that expense savings from the
1997 restructuring to be nominal.
3. SETTLEMENT OF CLASS ACTION LITIGATION
On January 19, 1994, a complaint was filed against the Company
and certain of its officers and directors requesting certification of
a class action, alleging various violations of the Federal Securities
Laws and claiming unspecified compensatory damages and related fees
and costs. A first amended class action complaint was filed on April
18, 1994. On April 18, 1994, a derivative complaint was filed against
the Company and certain of its officers and directors for violations
of the Federal Securities Laws and breach of fiduciary duties
requesting unspecified compensatory and punitive damages from the
individual defendants on behalf of the Company. The Company was named
as a nominal defendant in the derivative action. A second class action
suit was filed on April 21, 1994, against the Company and certain of
its officers. On May 23, 1994, the District Court consolidated the
class action complaints and the derivative complaint into one action
under the case name In Re Platinum Software Corporation Securities
Litigation, Case No. SACV-94-70-AHS, in the U.S. District Court for
the Central District of California. This consolidated action includes
three separate actions, Tauber v. Platinum Software Corporation, Wolf
v. Platinum Software Corporation, and Neomonitus v. Blackie, et al.
In June 1994, the Company settled the litigation for $17.0
million, $2.0 million in cash, of which $1.0 million was paid
immediately, $1.0 million was paid in December 1994, and $15.0 million
was paid by issuing a
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redeemable, convertible subordinated debenture in the principal amount of $15.0
million. The debenture bore interest at eight percent and was subject to
mandatory redemption over a period of twenty-seven months following final court
approval of the settlement as follows: $5.0 million after nine months, $5.0
million after eighteen months and $5.0 million after twenty-seven months. In
lieu of redeeming the debenture at a scheduled redemption date by making a cash
payment, the Company, at its option, could elect to repay the principal amount
of the debenture, plus interest accrued to date, by issuing common stock, or a
combination of stock and cash with the value of common stock determined at the
date of conversion. On September 26, 1994, the U.S. District Court approved the
settlement which became final thirty days thereafter.
On July 26, 1995, the Company elected to repay the first $5.0 million
principal installment, plus accrued interest thereon by issuing shares of common
stock and also elected to voluntarily repay the remaining $10.0 million
principal amount of the debenture and accrued interest thereon, by issuing
shares of common stock. The date fixed for the redemption was July 26, 1995.
Subsequent to July 26, 1995, the Company became engaged in discussions with the
attorneys for the plaintiff class regarding rescinding the July 26, 1995
election to repay the debenture and reinstating the debenture. Effective
February 28, 1996, the Company and Milberg, Weiss, Bershad, Hynes & Lerach, as
escrow agent ("the Escrow Agent") entered into an agreement in which the
election to repay the debenture by issuing shares of common stock was rescinded
and the debenture was reinstated. The terms of the debenture remained the same
except that the repayment terms were changed as follows: (i) the principal
amount of $7.5 million plus accrued interest is due on or before September 20,
1996 and (ii) the remaining principal amount of $7.5 million plus all accrued
interest is due on or before February 28, 1997.
On June 10, 1996, the Company elected to repay the first $7.5 million
principal installment, plus accrued interest thereon by issuing shares of common
stock and also elected to voluntarily repay the remaining $7.5 million principal
amount of the debenture and accrued interest thereon, by issuing shares of
common stock. The date fixed for the redemption was June 10, 1996. In
satisfaction of the above, the Company issued a total of 1,528,988 common shares
in repayment of the debenture. In determining the number of shares to be issued,
the Company's common stock was valued at its average closing price as quoted on
the Nasdaq National Market for ten of the twenty days preceding one day prior to
conversion, excluding the closing price on the five highest and five lowest
days.
4. COMMITMENTS AND CONTINGENCIES
The Company leases certain of its operating facilities and equipment
under operating leases with terms ranging up to five years. The following is a
schedule by years of future minimum lease payments under operating leases:
Year ending June 30 (in thousands):
1998 $ 2,588
1999 2,082
2000 1,098
2001 1,011
2002 334
Thereafter -
========
Total $ 7,113
========
Rental expense under operating leases, net of sublease income, for the
years ended June 30, 1995, 1996 and 1997, was $2,453,000, $2,137,000 and
$2,020,000, respectively. The total future minimum lease payments above includes
approximately $524,000 in sublease payments to be received.
The Company is party to an employment agreement with the President,
Chief Executive Officer and Chairman of the Board, which provides that the
Company shall be required to pay severance compensation to him equal to the
aggregate annual salary and bonus in the event his employment is terminated
without cause or in the event that he is constructively terminated. In the event
of termination without cause or constructive termination, the Company's
repurchase right lapses with respect to the restricted shares that would have
vested during the twelve month period following terminations. (See Note 7.)
Finally, the Company agreed to provide a relocation package to assist him in
relocating his principal residence from northern to southern California. Such
costs were paid in fiscal 1997.
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The Company is party to employment agreements with two of the Company's
senior vice presidents, which provides that the Company shall be required to pay
severance compensation equal to the aggregate six months salary and bonus in the
event their employment is terminated without cause or in the event that they are
constructively terminated. In the event of termination without cause or
constructive termination, the Company's repurchase right lapses with respect to
the shares that would have vested during the six month period following
termination. (See Note 7.) Finally, the Company agreed to provide a relocation
package to assist them in relocating their principal residences from northern to
southern California. Such costs were paid in fiscal 1997.
The Company is party to an agreement with another executive officer
which provides that in the event his employment is involuntarily terminated or
constructively terminated, all stock options held by this executive officer
shall vest and become immediately exercisable and the Company shall be required
to pay severance benefits equal to his total compensation for the prior twelve
months.
The Company is party to a consulting agreement with the former Chairman
of the Board of Directors, and current Board member, which provides that if he
is involuntarily removed from the Board of Directors, or not included in
Management's slate of directors at any annual meeting, then all options to
purchase common stock held by him shall accelerate and become exercisable.
The Company is subject to miscellaneous legal proceedings in the normal
course of business and other legal proceedings related to or arising out of the
fiscal 1994 restructuring, reductions in force and the discontinuance of certain
client/server applications. 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.
5. INCOME TAXES
The provision for income taxes for the years ended June 30, 1995, 1996
and 1997 is comprised of the following:
1995 1996 1997
---- ---- ----
Federal: (in thousands)
Current $ - $- $-
Deferred - - -
--- -- --
--- -- --
--- -- --
State:
Current 20 - -
Deferred - - -
--- -- --
20 - -
--- -- --
Foreign:
Current - - -
=== == ==
$20 $- $-
=== == ==
The reported provision (benefit) for income taxes for the years
ended June 30, 1995, 1996 and 1997 differ from the amount computed by
applying the statutory federal income tax rate of 34 percent to the
consolidated income before income taxes as follows:
1995 1996 1997
-------- -------- --------
(in thousands)
Benefit computed at statutory rates $ (1,934) $(11,201) $ (1,659)
Increase (reduction) resulting from: (414)
State taxes, net of federal benefit (180) (1,354)
Valuation allowance 2,051 12,795 2,685
Other 83 (240) (612)
-------- -------- --------
$ 20 $ - $ -
======== ======== ========
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The components of the Company's net deferred income tax asset
(liability) as of June 30, 1996 and 1997 are as follows:
1996 1997
-------- --------
(in thousands)
Net operating loss carryforwards $ 29,018 $ 33,250
Allowance for doubtful accounts 3,045 1,940
Acquisition costs, net 2,980 3,015
Research and development credits 2,543 2,010
Other 1,393 1,550
Accrued restructuring costs 770 1,210
Accrued relocation costs 600 -
Depreciation (554) (405)
Software capitalization, net (900) (990)
Valuation allowance (38,895) (41,580)
-------- --------
$ - $ -
======== ========
As of June 30, 1997, the Company had provided a valuation allowance of
approximately $41,580,000 because realization of the Company's net deferred tax
asset is not assured due to the historical losses incurred by the Company and
the uncertainty as to profits in the future. Any realization of the Company's
net deferred tax asset would reduce the Company's effective tax rate in future
periods.
The Company has federal, state and foreign net operating loss
carryforwards as of June 30, 1997 of approximately $84,000,000, $76,000,000 and
$24,000,000, respectively. The federal and state losses expire in the years 1998
through 2012. The foreign losses have no expiration date. In addition, the
Company has approximately $2,010,000 of federal research and development credit
carryforwards which expire in the years 2000 through 2011.
Utilization of the federal and state net operating loss and research
and development credit carryforwards could be limited in future years if the
Company were to experience a greater than 50% change in ownership within a 3
year period as defined in section 382 of the United States Internal Revenue Code
of 1986.
6. STOCK OPTION PLAN AND OTHER EMPLOYEE BENEFITS
The Company adopted a stock option plan effective May 31, 1990, whereby
incentive and nonqualified options and purchase rights may be granted to
officers and other key employees. The total number of shares which may be
granted under this plan is 1,650,000.
The Company adopted an additional nonqualified stock option plan
effective July 21, 1993, whereby nonqualified options may be granted to officers
and other key employees. The total number of shares which may be granted under
this plan is 1,275,000.
The Company adopted an additional stock option plan effective April 20,
1994, whereby incentive and nonqualified stock options, as well as purchase
rights, may be granted to officers, directors and other key employees. The total
number of shares which may be granted under this plan is 2,200,000.
The Company adopted a fourth stock option plan effective January 4,
1996, whereby nonqualified stock options may be granted to non-executive
officers and other key employees. The total number of shares which may be
granted under this plan is 500,000.
The Company adopted a fifth stock option plan effective July 29, 1997,
whereby non-qualified stock options may be granted to employees, consultants and
others with important business relationships with the Company. The total number
of shares which may be granted under this plan is 500,000.
On June 30, 1997, the Company acquired Clientele Software, Inc. (See
Note 2.) The Company assumed all of the outstanding employee stock options of
Clientele which translated into options to acquire 212,356 shares of common
stock of the Company.
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Effective July 1990, the Company adopted a profit sharing plan pursuant
to Section 401 of the Internal Revenue Code. The Company has not made any
contributions to the profit sharing plan as of June 30, 1997. In addition, the
Company adopted an Employee Stock Purchase Plan in August 1992 authorizing the
issuance of up to an aggregate of 450,000 shares of common stock to
participating employees which permits employees to purchase common stock at a
price equal to 85% of the fair market value at the beginning or end of a six
month plan period. As of June 30, 1997, 214,350 shares have been sold under this
plan.
The following is a summary of common stock option transactions as of
and for the years ended June 30, 1995, 1996 and 1997:
1995 1996 1997
------------------------- -------------------------- -------------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Options Price Options Price Options Price
------------ ----------- ------------ ---------- ----------- ---------
Outstanding, Beginning of year 3,288,257 $ 5.7191 3,593,798 $ 6.0563 3,657,243 $ 5.9200
Granted 1,597,042 8.3677 1,796,960 6.9006 3,653,087 5.5472
Exercised (456,230) 3.0486 (345,738) 3.9864 (776,648) 3.8445
Expired or Canceled (835,271) 10.6986 (1,387,777) 7.8937 (2,993,050) 6.4843
========= ======== ========= ======== ========= ========
Outstanding End of Year 3,593,798 $ 6.0563 3,657,243 $ 5.9200 3,540,632 $ 5.5058
========= ======== ========= ======== ========= ========
Options Exercisable 1,530,874 $ 4.6312 1,876,238 $ 4.8565 1,968,696 $ 4.1971
========= ======== ========= ======== ========= ========
The following table summarizes information about stock options
outstanding at June 30, 1997.
Options Outstanding Options Exercisable
------------------------------------------------- -------------------------------
Weighted
Average Weighted Weighted
Remaining Average Average
Number Contractual Exercise Number Exercise Price
Range of Exercise Prices Outstanding Life Price Exercisable
- --------------------------- --------------- ---------------- -------------- --------------- ---------------
$0.4200 - $1.4170 341,325 3.82 $ 0.7795 316,128 $ 0.7675
$3.5000 - $3.5000 1,494,787 7.64 $3.5000 902,167 $ 3.5000
$3.8750 - $7.0000 476,681 7.55 $ 5.0905 367,839 $ 4.5371
$7.0625 - $7.5000 517,954 8.34 $ 7.4287 234,000 $ 7.3670
$7.5910 - $8.7500 241,635 7.37 $ 8.0479 92,287 $ 8.0458
$9.2500 - $9.2500 200 7.57 $ 9.2500 200 $ 9.2500
$11.1250 - $11.1250 300 8.16 $ 11.1250 75 $11.1250
$12.1250 - $12.1250 343,750 9.32 $ 12.1250 4,000 $12.1250
$12.8750 - $12. 8750 64,000 9,54 $ 12.8750 0 $ 0.0000
$13.0000 - $13.0000 60,000 7.30 $ 13.0000 52,000 $13.0000
========= ===== ========= ========= ========
$0.4200 - $13.0000 3,540,632 7.53 $ 5.5058 1,968,696 $ 4.1971
========= ===== ========= ========= ========
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Effective July 1, 1996, the Company adopted the disclosure provisions
of Statement of Financial Accounting Standards No. 123 ("SFAS No. 123"),
"Accounting for Stock-Based Compensation." As permitted in SFAS No. 123, the
Company did not adopt the recognition provisions and has provided the pro forma
net loss and loss per share disclosures required by SFAS No. 123. The Company
will continue to follow Accounting Principles Board Opinion No. 25 "Accounting
for Stock Issued to Employees" in accounting for its plans. Accordingly, no
compensation expense has been recognized for its stock option plans and its
stock purchase plan. Had compensation costs for the Company's stock option plans
and stock purchase plan been determined based upon fair value at the grant date
under these plans consistent with the SFAS No. 123 methodology, the Company's
net loss and loss per share would have been increased to the pro forma amounts
shown below:
1996 1997
------------ --------------
Net loss as reported ($33,685,000) ($4,881,000)
============ ==============
Net loss - pro forma ($35,060,000) ($11,899,000)
============ ==============
Loss per share as reported ($2.15) ($0.25)
============ ==============
Loss per share - pro forma ($2.24) ($0.61)
============ ==============
Because SFAS No. 123 is only applicable to options granted subsequent
to July 1, 1995, its pro forma effect will not be fully reflected until fiscal
1998. The fair value of shares had been estimated using the Black-Scholes option
pricing model with the following weighted average assumptions:
Stock Option Plans Purchase Plan
------------------ --------------
Expected life (years) 4 .5
Risk-free interest rate 5.95% 5.95%
Volatility .7637 .7637
For options granted during fiscal years 1996 and 1997, the weighted
average fair value at date of grant was $4.3625 and $4.0667 per option,
respectively. The weighted average fair value at date of grant for stock
purchase shares during fiscal years 1996 and 1997 was $2.430 and $3.007 per
share, respectively. The discounted value of the stock purchase shares granted
in fiscal years 1996 and 1997 using the Black-Scholes Option pricing model was
$58,000 and $42,000 , respectively. As of June 30, 1997, the total number of
shares of common stock received for future issuance under existing stock option
plans, warrants and Series B and Series C Preferred Stock (See Note 8) is
approximately 8,410,000.
On March 9, 1994, the Board of Directors adopted a Shareholder Rights
Plan (the Plan) which is intended to protect stockholders from unfair takeover
practices. Under the Plan, each share of common stock carries a right to obtain
additional stock according to terms provided in the Plan. The rights will not be
exercisable or separable from the common stock until a third-party acquires at
least 20% of the Company's then outstanding common stock or commences a tender
offer for at least 20% of the Company's then outstanding common stock. In the
event the Company is acquired in a merger or other business combination
transaction which the Company is not the surviving corporation or 50% or more of
its consolidated assets or earning power are sold or transferred, each right
will entitle its holder to receive, at the then current exercise price, common
stock of the acquiring company, having a market value equal to two times the
exercise price of the right. If a person or entity were to acquire 20% or more
of the outstanding shares of the Company's common stock, or if the Company is
the surviving corporation in a merger and its common stock is not changed or
exchanged each right will entitle the holder to receive at the then current
exercise price common stock having a market value equal to two times the
exercise price of the right. Until a right is exercised, the holder of a right,
as such, will have no rights as a stockholder of the Company, including, without
limitation, the rights to vote as a stockholder or receive dividends. The
rights, which expire on March 9, 2004, may be redeemed by the Company at a price
of $0.01 per right.
In fiscal 1993 and 1994, in connection with three acquisitions, the
Company granted stock purchase warrants for 468,472 shares. During fiscal 1995,
1996 and 1997, 173,000, 40,750, and 5,000 stock purchase warrants were
exercised, respectively. During fiscal 1995, 1996 and 1997, 75,000, 0 and 0
stock purchase warrants were canceled, respectively. Such outstanding stock
purchase warrants expire in 2003.
In May 1995, the Company issued a former customer a warrant to purchase
50,000 shares of common stock at an exercise price of $7.5625 per share which
represented the fair market value of the common stock on the
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date an initial agreement to settle was reached. The warrant was issued as part
of the consideration paid to settle litigation relating to the Company's
client/server distributions software product. Such warrant was exercised in May
1997.
In May 1995, the Company agreed to issue to certain former officers and
directors or their designates stock purchase warrants to purchase an aggregate
of 50,000 shares of common stock, at an exercise price of $10.00 per share which
represented the fair market value of the common stock, in settlement of the
Company's obligations to indemnify and defend such individuals under
indemnification agreements regarding the facts giving rise to the class action
litigation brought against the Company in January 1994. Such warrants expired
without being exercised.
In January 1996, the Company issued a former customer a warrant to
purchase 20,000 shares of common stock at an exercise price of $4.75 per share,
which represented the fair market value of the common stock at the date of
settlement. The warrant was issued as part of the consideration paid to settle
litigation relating to the Company's client/server distribution product. Such
warrant was exercised in fiscal year 1996.
7. RESTRICTED STOCK
In February 1996, the President, Chief Executive Officer and Chairman
of the Board purchased 2,000,000 shares of restricted stock at a purchase price
of $3.50, the then fair market value of the Company's common stock. In payment
of one-half of the purchase price, the Company executed a secured five-year
promissory note in the principal amount of $3,500,000. The note bears simple
interest at 6% per annum and is a recourse promissory note. The Company retained
a repurchase right with respect to the restricted stock. The repurchase right
lapsed with respect to 350,000 shares on the date of the restricted stock grant,
and lapses with respect to 29,167 shares each month for 36 months so that after
three years the repurchase right shall not apply to 1,400,000 shares. The
repurchase right with respect to the remaining 600,000 shares lapses based on
fulfillment of certain performance criteria with respect to the Company's
operating revenues and profit after taxes for fiscal 1997, fiscal 1998 and
fiscal 1999 years, or in any event after ten years. The Company also has loaned
to the President, Chief Executive Officer and Chairman of the Board $3,500,000
pursuant to an unsecured five-year recourse promissory note, which bears
interest at the rate of 6% per annum. This loan was used to fund the restricted
stock purchase along with the secured note referenced above.
In February 1996, one of the Company's senior executive officers
purchased 500,000 shares of restricted stock at a purchase price of $3.50, the
then fair market value of the Company's common stock. In payment of one half of
the purchase price, the Company executed a secured five-year promissory note in
the principal amount of $875,000. The note bears simple interest at 6% per annum
and is a recourse promissory note. The Company retained a repurchase right with
respect to the restricted stock. The repurchase right lapsed with respect to
50,000 shares on the date of the restricted stock grant, and lapses with respect
to 8,334 shares each month for 36 months, so that after three years the
repurchase right shall not apply to 350,000 shares. The repurchase right with
respect to the remaining 150,000 shares lapses based on fulfillment of certain
performance criteria with respect to the Company's operating revenues and profit
after taxes for fiscal 1997, fiscal 1998 and fiscal 1999 years, or in any event
after ten years. The Company also has loaned to this senior executive officer
$875,000 pursuant to an unsecured five-year recourse promissory note, which
bears interest at the rate of 6% per annum. This loan was used to fund the
restricted stock purchase along with the secured note referenced above.
In April 1996, one of the Company's senior executive officers purchased
450,000 shares of restricted stock at a purchase price of $6.25, the then fair
market value of the Company's common stock. In payment of one half of the
purchase price, the Company executed a secured five-year promissory note in the
principal amount of $1,406,250. The note bears simple interest at 6% per annum
and is a recourse promissory note. The Company retained a purchase right with
respect to the restricted stock. The repurchase right lapsed with respect to
49,980 shares on the date of the restricted stock grant, and lapses with respect
to 6,945 shares each month thereafter for 36 months, so that after three years
the repurchase right shall not apply to 300,000 shares. The repurchase right
with respect to the remaining 150,000 shares lapses based on fulfillment of
certain performance criteria with respect to the Company's operating revenues
and profit after taxes for fiscal 1997, fiscal 1998 and fiscal 1999 years, or in
any event after ten years. The Company also has loaned to this senior executive
officer $1,406,250 pursuant to an unsecured five-year promissory note, which
bears interest at 6% per annum. This loan was used to fund the restricted stock
purchase along with the secured note referenced above.
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8. PREFERRED STOCK
On September 22, 1994, the Company completed a private placement. The
Company issued 2,490,000 shares of its newly created Series B Preferred Stock in
exchange for cash totaling $13,769,700 to a group of venture capital investors.
The preferred shares were issued at a price of $5.53 per share. The price per
share was determined on September 9, 1994, at the completion of a term sheet
satisfactory to the Company and the investors, and reflects a 20% discount from
the average trading price for the Company's common stock for twenty of the
thirty preceding days. Such preferred shares are convertible into common shares
of the Company on a one-for-one basis at any time at the option of the holders.
Such shares automatically convert into common stock of the Company ten days
after formal notification by the Company that the average consecutive 20-trading
day closing stock price of the common stock has exceeded $22.12 per share. The
holder of preferred stock shall be entitled to vote with the holders of common
stock on an as converted basis. The holders of a majority of the outstanding
Series B Preferred Stock, voting together as a class, have the right to
designate two members of the Board of Directors. In fiscal 1997, 55,000 shares
of Series B Preferred Stock were converted to common stock.
On May 26, 1995, the Company completed a second private placement. The
Company issued 231,598 shares of its newly created Series C Preferred Stock in
exchange for cash totaling $18,226,700 to a group of venture capital investors.
The preferred shares were issued at a price of $78.70 per share. The price per
share reflects a 20% discount from the average trading price for the Company's
common stock for twenty of the thirty preceding days. Such preferred shares are
convertible into common shares of the Company on a ten-for-one basis at any time
at the option of the holders. Such shares automatically convert into common
stock of the Company ten days after formal notification by the Company that the
average consecutive 20-trading day closing stock price of the common stock has
exceeded $25.00 per share. The holder of preferred stock shall be entitled to
vote with holders of common stock on an as converted basis. In fiscal 1997,
17,795 shares of Series C Preferred Stock were converted to common stock.
The holders of the Series B and Series C Preferred Stock have the right
to cause the Company to register the sale of shares of common stock issuable
upon conversion of the Series B and Series C Preferred Stock.
9. SEGMENT AND GEOGRAPHIC INFORMATION
The Company operates in one industry segment: the design, development,
marketing and support of financial applications software products.
A summary of the Company's operations by geographic area is as follows:
United Latin
States Australasia Europe Canada America Consolidated
-------- ----------- -------- --------- -------- ------------
(in thousands)
Year Ended June 30, 1995:
Net revenues $ 40,583 $ 8,813 $ 5,156 $ 3,418 $470 $ 58,440
======== ======== ======== ======== ==== ========
Operating income (loss) (1,429) (1,634) (3,162) (86) 470 (5,841)
======== ======== ======== ======== ==== ========
Identifiable assets 56,032 3,048 4,489 2,965 - 66,534
======== ======== ======== ======== ==== ========
Year Ended June 30, 1996:
Net revenues $ 30,187 $ 8,294 $ 2,134 $ 3,042 $609 $ 44,266
======== ======== ======== ======== ==== ========
Operating income (loss) (28,392) (1,823) (3,471) (476) 609 (33,553)
======== ======== ======== ======== ==== ========
Identifiable assets 32,642 3,164 2,857 2,249 - 40,912
======== ======== ======== ======== ==== ========
Year Ended June 30, 1997:
Net revenues $ 40,736 $ 7,993 $ 4,426 $ 3,957 $992 $ 58,104
======== ======== ======== ======== ==== ========
Operating income (loss) (5,895) 388 (1,429) 190 992 (5,754)
======== ======== ======== ======== ==== ========
Identifiable assets 33,444 3,565 2,488 2,281 - 41,778
======== ======== ======== ======== ==== ========
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REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Platinum Software Corporation
We have audited the consolidated financial statements of Platinum
Software Corporation as of June 30, 1996 and 1997, and for each of the
three years in the period ended June 30, 1997, and have issued our
report thereon dated July 29, 1997. Our audits also included the
financial statement schedule listed in Item 14 (a) of this Annual
Report on Form 10-K. This schedule is the responsibility of the
Company's management. Our responsibility is to express an opinion
based on our audits.
In our opinion, the financial statement schedule referred to above,
when considered in relation to the basic financial statements taken as
a whole, presents fairly in all material respects the information set
forth therein.
ERNST & YOUNG LLP
Orange County, California
July 29, 1997
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PLATINUM SOFTWARE CORPORATION
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
(in thousands)
Balance at
Beginning Provision for Amounts Balance at End
Description of Year Bad Debt Written Off Other of Year
- ----------------------------------- ----------- ------------- ----------- ----------- --------------
FOR THE YEAR ENDED JUNE 30, 1995:
Allowance for doubtful accounts $ 3,250 $ 2,635 $(2,476) $ 1,451(1) $ 4,860
======= ======= ======= =========== =======
FOR THE YEAR ENDED JUNE 30, 1996:
Allowance for doubtful accounts $ 4,860 $ 6,623 $(2,360) $ - $ 9,123
======= ======= ======= =========== =======
FOR THE YEAR ENDED JUNE 30, 1997:
Allowance for doubtful accounts $ 9,123 $ 2,095 $(4,955) $ - $ 6,263
======= ======= ======= =========== =======
(1) Amount represents a reclassification from accrued restructuring costs
48