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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, 1998
[ ] 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: (949) 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
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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 $269,741,181 (computed
using the closing sales price of $13.25 per share of Common Stock on September
3, 1998 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 28,369,525 shares of the registrant's Common Stock, par
value $.001 per share, outstanding on September 3, 1998.
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Portions of the registrant's definitive Proxy Statement for the Annual
Meeting of Stockholders scheduled to be held on October 28, 1998, which Proxy
Statement will be filed no later than 120 days after the close of the
registrant's fiscal year ended June 30, 1998, 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 an integrated suite of client/server enterprise
resource planning ("ERP") applications targeted for use by midmarket companies
and divisions/subsidiaries of large corporations worldwide. The Company has two
primary software product lines: Platinum(R) SQL, which includes client/server
financial accounting, budgeting, manufacturing, distribution, sales force
automation and customer service and support software applications optimized for
use with Microsoft Windows NT and the Microsoft SQL Server relational database
management system which are targeted at medium-sized organizations; and
Platinum(R) for Windows, an integrated, powerful, Windows-based financial
accounting software application designed for local area networks ("LANs"). In
addition, the Company continues to market the predecessor to the Platinum for
Windows product line, Platinum(R) for DOS. 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.
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 (949) 453-4000.
BACKGROUND
In recent years, organizations have increasingly focused on collecting,
analyzing and distributing mission-critical enterprise 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 management information services ("MIS") department and was not
readily available to key decision makers.
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 some medium and most 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 significantly reduce the
performance of the LAN-based system. Consequently, the limited client/server
functionality of these LAN systems can create difficulties for larger
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 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 advanced 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
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the client and the server to allow the clients to handle the user interface and
local data manipulation while allowing 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.
With the dramatic scalability and performance improvements made
possible with client/server technology, many organizations looked to leverage
this technology to implement enterprise business applications. Enterprise
business applications began as an extension of the corporate reengineering
efforts of the early 1990s. As Fortune 1,000 companies aggressively invested in
information technology to help them streamline and integrate disparate business
processes, they created a tremendous demand for enterprise wide software
applications. At first, only these large organizations had the technological
expertise, budget and ability to support lengthy implementations typified by
early solutions.
This demand helped make the enterprise applications market one of the
largest and fastest growing segments of the software industry. In fact, AMR
Research, Inc., an industry analyst, projects that the enterprise applications
market will grow 37 percent annually for the next several years, reaching more
than $52 billion by 2002, up from just $14.8 billion in 1997.
While smaller companies understood the business value of enterprise
applications, they lacked the extensive resources required to implement and
support such first-generation solutions. Collectively known as the "midmarket,"
these small and mid-sized organizations number in the hundreds of thousands
worldwide. In their own quest to boost productivity, profits and gain a
competitive advantage, midmarket companies increasingly turned to integrated
application software to automate and link business processes. Due to the
midmarket's unique business limitations, "best-of-breed" solutions and
after-market application integration were far too cumbersome and costly to be an
effective enterprise solution. The midmarket required a software application
that leveraged the advances in client/server software technology to deliver a
truly integrated and enterprise wide solution.
Enterprise applications employed by midmarket companies are required to
satisfy business and technology requirements that are significantly different
from those found in Fortune 1,000 organizations. As a group, midmarket companies
face tremendous global competitive pressures because they compete for business
against larger corporations, other midmarket competitors and smaller start-ups.
They understand the need to remain close to their customers and to make the most
effective use of their relatively limited resources. Midmarket companies demand
a quick return on technology investments and require that solutions be
affordable not only to acquire, but also throughout its entire operational
lifecycle.
With respect to technology, midmarket companies are practical
consumers. Midmarket companies generally do not take risks on cutting-edge
technology, but instead typically select affordable, proven solutions. The
decade's dramatic decrease in information technology costs, coupled with a
simultaneous increase in computing power, have made key new technologies
accessible to this cost-conscious market. Microsoft Corporation took advantage
of increased computing capabilities to develop Microsoft BackOffice(R), a robust
network operating system and scaleable relational database that provides smaller
businesses with a sophisticated technology infrastructure previously accessible
only to Fortune 1,000 corporations. Microsoft Windows NT(R) and SQL Server
quickly became the fastest growing technology platforms, attracting midmarket
companies with its features, familiarity and ease-of-use.
The development of cost-effective infrastructures has increased the
midmarket's investment in enterprise applications. Spurred by outside issues,
such as Year 2000 readiness and pending Euro currency mandates, midmarket
companies realized they could finally afford--or, rather not afford to be
without--enterprise business solutions. The Company's product offerings and
product development efforts are focused on meeting the enterprise business
application needs of growing midmarket businesses.
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TECHNOLOGY STRATEGY
The Company's technology strategy is to develop a leading line of
enterprise 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 connectivity (including Internet, Intranet and Extranet access). The Company
developed its own proprietary application development tools to create its first
generation of client/server products, as well as acquired several proprietary
application development tools through recent acquisitions. These technologies
and tools were developed to meet the unique needs of the current marketplace.
However, as industry-standard tools mature, the Company intends to increasingly
exploit these leading tools as they become generally available. The Company's
core product architecture incorporates many of the foundation technologies of
client/server computing, including:
Open Relational Database Technology
The Company utilizes open relational database technology to provide
extremely flexible, integrated financial, operational, customer service and
management information software applications. This open database orientation is
based on widely accepted database managers. The Company's Platinum SQL product
line uses both the Microsoft and Sybase SQL Server relational database
management systems. The Company has based its Platinum SQL product line using
the industry-standard SQL language as the fundamental database access
methodology. The Platinum for Windows product line, as well as the Platinum for
DOS core set of accounting and financial applications, are optimized for the
Pervasive, Inc. database, Pervasive.SQL.
Advanced Networking/Connectivity
The Company's products are designed to operate on LANs, wide area
networks ("WANs"), the Internet, Intranets, Extranets, mobile and dial-up
connections. The Company supports popular industry-standard networking protocols
such as TCP/IP, Novell IPX/SPX and Microsoft NETBEUI/Named Pipes. The Company's
connectivity and networking support offers advanced features such as: (i)
concurrent access to data and 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; (v) remote access and
data processing; and (vi) mobile computing.
Industry Standard User Interfaces
The Company has incorporated numerous features into its user interfaces
to simplify the operation of and access to 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
(including the Financial, Distribution, Manufacturing and Clientele solution
suites) 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, ground-up application development
and customization capabilities for its Platinum SQL and Platinum for Windows
product lines. To accomplish this, the Company provides extensive, integrated
application development environments for both product lines. The core tools for
the Platinum SQL financial suite delivers 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 Windows
interface of the Visual Forms Designer provides a powerful tool to modify and
extend the functionality of standard applications. In addition,
industry-standard Visual Basic macro language and ActiveX Automation support
enable all Platinum SQL applications to exchange data and integrate with
external COM-enabled Microsoft Windows applications.
The Platinum SQL Customization Workbench is a software development 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. The Company has recently
licensed Visual Basic for Applications and intends to incorporate it into the
next release of Platinum SQL.
The Platinum SQL distribution and manufacturing suites employs
PowerBuilder from Sybase, Inc. to provide its user interface. Due to the
complexity and wide variations of the changes needed for many end users of the
manufacturing and distribution products, the Company offers complete
customization services through its professional services group. In addition to
its Windows-based client, the Company provides a Java-based user interface and
middle-tier application server to provide electronic commerce functionality on
top of the same database platform. Users are provided with complete capabilities
to change the user interface, validation rules and business processing of
business-to-business transactions using a complete application extension
environment.
The Platinum SQL Clientele front office suite uses a proprietary forms
package to build and modify the user interface. The suite also includes
Clientele Basic to enable users and consultants to tailor the look and feel,
behavior and processing of the Clientele application suite to meet their
specific business needs. Clientele Conductor provides workflow routing and rules
capabilities that allow any user, no matter where they are, to receive messages
and tasks from the system. ClienteleNet enables internal users and remote users
and customers to interact with the system via a browser over the Internet.
Platinum for Windows was developed using industry standard development
tools such as Visual Basic and utilizes the industry standard Pervasive.SQL
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.
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 the
Microsoft SQL Server database and also supports 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" and/or "triggers" 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, client/server enterprise resource planning software applications
that provide organizations with technically advanced business solutions. The
Company's two primary software product lines are Platinum SQL and Platinum for
Windows. The Platinum SQL product suite includes financial accounting,
budgeting, manufacturing, distribution, sales force automation and customer
service and support functionality. In addition, the Company sells and supports
its Platinum for DOS financial accounting software products. The Company also
continues to provide support for the installed base of Platinum(R) SQL
Enterprise (formerly SeQueL to Platinum(R)), a product which the Company
discontinued marketing in 1996.
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Platinum SQL
Platinum SQL, an integrated suite of client/server enterprise resource
planning software applications, is designed to meet the unique business needs of
midmarket companies and subsidiaries or divisions of larger corporations. 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 Platinum SQL suite of products
includes financial accounting, budgeting, manufacturing, distribution, sales
force automation and customer service and support. The product is optimized for
use with the Microsoft Windows NT operating systems and the Microsoft SQL Server
relational 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 NT and Windows 95/98
client platforms. Platinum SQL is integrated with other Microsoft software
products and supports Active X which enables customers to integrate not only
other Microsoft products but any Active X-compliant application. In addition,
Platinum SQL is a 32-bit client and 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; Customization Workbench; Platinum SQL Internet
Object Server; Platinum Explorer; Manufacturing; Advanced Distribution; Advanced
Purchasing; Platinum SQL Net Order; Clientele for Customer Support; Clientele
for Sales and Marketing; Clientele for Help Desks; Conductor and ClienteleNet.
Version 7.0 of Platinum SQL is scheduled for general release in November 1998.
See "Certain Considerations - Forward Looking Statements." Platinum SQL 7.0 will
include an increased level of integration between the financial, distribution
and manufacturing applications so that each such application will share the same
customer and vendor data. The 7.0 release of Platinum SQL will also support
Microsoft SQL Server 7.0 and will include enhanced functionality in the
distribution application as well as contain the Platinum Explorer application,
which will allow a user to inquire and drill into data in other integrated
applications throughout the entire Platinum SQL suite. See "Certain
Considerations Forward Looking Statements."
Clientele Version 3.0, introduced in March 1998, is a front office
application (including customer service and sales force automation
functionality) which enables small to mid-sized businesses to organize, maintain
and share customer information to improve customer service and improve support
and sales personnel productivity. The Clientele line of products includes
applications used for managing customer service and support operations including
internal help desk, (in general, the MIS department) supporting the
organization's internal workforce; and external help desk for supporting the
customers, vendors, and suppliers that the Company conducts business with. The
Clientele products also include a sales and marketing automation application
which, when combined with the customer service and support application, enables
organizations to share customer information from the initial contact throughout
the duration of the customer lifecycle. The sales and marketing application
includes contact management, opportunity management, account management,
territory management, a marketing encyclopedia, scheduling and calendaring.
The Company's distribution and manufacturing product suites are
comprehensive, client/server applications designed to improve the efficiency and
responsiveness of manufacturing and distribution operations. The manufacturing
and distribution modules are integrated with the Platinum SQL financial
application suite to ensure that repetitive, make-to-order, configure-to-order,
job shop or hybrid manufacturing operations are always in sync with sales,
distribution, purchasing and financial departments. The customer-centric focus
of Platinum SQL manufacturing and distribution suites enables companies to
respond quickly to customer demands and improve customer service. The suites
also offer advanced functionality, such as an Advanced Planning and Scheduling
engine, product customization and job shop.
License fees for Platinum SQL vary depending upon the number of
concurrent users and platform. Revenues attributable to licenses of Platinum SQL
(including Clientele) were $17,159,000, $24,687,000, and $48,825,000 or 38%, 41%
and 50% of the Company's total revenues in fiscal years 1996, 1997 and 1998,
respectively.
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Platinum for Windows and Platinum for 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 for DOS and Platinum
Premier financial 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 Pervasive.SQL database. No database
conversions are required to upgrade from the Platinum for DOS product to
Platinum for Windows, ensuring a smooth upgrade path for Platinum for DOS users.
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, Sales Order, Inventory, Project
Costing, Bank Book, Advanced Allocations, and Budget Manager.
In addition, the Company continues to sell and support its Platinum for
DOS integrated financial software applications. First introduced in June 1985,
the core Platinum for DOS accounting modules include General Ledger, Accounts
Receivable, Accounts Payable, Inventory, Order Entry, System Manager, Purchase
Order, Job Costing, Bank Book and Consolidations. In addition, the Company
offers Platinum Premier financial applications, which are extensions of the core
Platinum for DOS 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 for 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. The next release of Platinum for Windows, version 4.7, is
scheduled for release during the fourth quarter of calendar year 1998. Planned
enhancements to this product include the addition of serial/lot tracking and
drop shipment functionality and enhanced Internet access. See "Certain
Considerations-Forward Looking Statements."
Revenues attributable to licenses of the Platinum for Windows and
Platinum for DOS applications were $6,075,000, $7,436,000 and $8,752,000, or
13%, 12% and 9% of the Company's total revenues in fiscal years 1996, 1997 and
1998, 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.
Other Products
The Company also offers a line of integration kits and database
products that support its Platinum for Windows and Platinum for DOS lines 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, TECHNICAL SUPPORT AND SOFTWARE MAINTENANCE
The Company's professional services division provides consulting
services to customers in the design and implementation of the Company's software
products, as well as custom software development, education, training and other
services. 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. 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, stimulates demand for the Company's products and
provides a key market differentiator over its competition.
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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 regularly in major cities worldwide.
The Company offers its Platinum for Windows and Platinum for 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 modules. In addition, the Company provides a three-month warranty
for the media on which its Platinum for Windows and Platinum for DOS products
are licensed.
Services revenues, which include consulting, education, training and
maintenance and support services, were approximately $21,817,000, $27,420,000
and $40,406,000, respectively in fiscal years 1996, 1997 and 1998, or 48%, 45%
and 41% respectively, of total revenues in fiscal 1996, 1997 and 1998.
MARKETING, SALES AND DISTRIBUTION
The Company sells and markets its products and services worldwide,
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 and Platinum for DOS products exclusively
through VARs or distributors. The Company sells its Platinum SQL product through
a hybrid channel that includes a direct sales force as well as 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, Northcentral,
Southcentral, Northwest, and Southwest; Canada; United Kingdom/Europe/Middle
East/Africa; Australia/New Zealand; Asia and other international countries. The
Company sells its Clientele modules through an internal telesales organization
and through a direct sales force.
The Company's network of VARs and Authorized Consultants are required
to undergo extensive 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.
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
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East principally through third-party distributors and dealers. The Company's
international revenues were approximately $14,079,000, $17,368,000 and
$27,480,000, or 31%, 29% and 28% of total revenues, in fiscal years 1996, 1997
and 1998, 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, Detroit, Houston, Louisville, Irvine,
New York, Portland, San Francisco, St. Louis, Seattle, Tampa, Washington, D.C.,
Calgary, Canada, 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; the 1995 release of a Windows and LAN-based
accounting software package; the 1997 release of an international,
multi-currency client/server accounting application; the 1998 release of an
integrated ERP suite of products including manufacturing, distribution, sales
and marketing, customer support and financials. During fiscal years 1996, 1997
and 1998, software development expenses before capitalization were approximately
$14,861,000, $11,855,000, and $12,971,000, respectively.
The Company plans to continue to address the needs of midmarket users
of client/server enterprise resource planning 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. The Company plans to use
technologies from Microsoft Corporation whenever possible and plans to build
technologies based on Microsoft Corporation's recommended technical
architecture. In particular, the Company believes that it has been an industry
leader in designing and developing products for operation on LANs/WANs and
Microsoft's SQL Server database. The Company has also been a pioneer in the use
of GUIs with integrated business application software. Currently, the Company
pursues object-oriented methodologies that simplify the development, maintenance
and customization of its products. Accordingly, the Company's tools offer a high
degree of customization for its products.
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.
In fiscal 1997 and fiscal 1998, the company acquired two business
application software developers, FocusSoft Inc. and Clientele Inc. See "Recent
Acquisition" and "Management's Discussion of Analysis of Financial Condition and
Results of Operations, Fiscal 1997 and Fiscal 1998 Acquisition." The Company has
integrated to a certain level the products acquired in these acquisitions with
the Company's Platinum SQL core financial application. The Company intends to
further integrate the acquired applications to share common master files (e.g.
customers, vendors, and inventory items) and to process transactions
consistently across all applications. All of the Platinum SQL product line is
built on the Microsoft SQL Server database, supports extensive customization,
and provides a graphical user interface. The Company also is investing to make
the technical architecture more consistent across all of the applications
especially in the area of user interface, object oriented development and
reporting.
The Company is also making investments to improve the marketability of
its products outside of the United States and Canada. The Company has opened a
European localization center ("ELC") based in Dublin, Ireland.
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The ELC will develop the necessary changes to translate and localize the
products for sale in Europe. In addition, the Company has contracted with a
third party to develop the necessary changes to translate and localize the
products for sale in Latin and South America.
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 client/server ERP software 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.
COMPETITION
The client/server enterprise business applications 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. In addition, a
number of companies offer a product similar or competitive to one product in the
Company's enterprise business application suite. 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 principally in two distinct
software application markets: midmarket enterprise business applications and
LAN-based financial accounting applications. Although the Company does not
target larger, Fortune 1,000 corporations with its enterprise business
applications, it encounters competitors from this market segment who are selling
their products in the midmarket space.
The Company defines the midmarket as being comprised of businesses
ranging in revenue size from $50 million to $750 million and divisions or
subsidiaries of large corporations in the same revenue range. Customers in this
market segment 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 it is
the only vendor in this marketspace dedicated to providing midmarket companies
with comprehensive, integrated enterprise business applications on the Microsoft
Windows NT and SQL Server platform. However, there are competitors from both the
high-end and low-end who are attracted to the business opportunity represented
by midmarket companies and are beginning to offer complete or partial enterprise
business applications for this market.
The Company believes its principal enterprise business application
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 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 with the Microsoft SQL Server RDBMS. The Company believes that this
product competes favorably against its competitors with respect to the foregoing
competitive factors.
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On occasion, the Company competes with other vendors that sell only one
enterprise business application of the total enterprise business application
solution. This occurs principally with the Company's manufacturing,
distribution, sales force automation and customer service and support
applications. The primary competitors for manufacturing and distribution include
Symix System, Inc., Dataworks Corporation and Fourth Shift. The primary
competitors for sales force automation and customer service and support are
Onyx, Pivotal and Sales Logix. While these competitors offer dedicated
applications, the Company's believes its broader product offerings and level of
product integration provide a significant competitive advantage.
In the LAN-based market, the Company competes with Sage (formerly 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 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 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.
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EMPLOYEES
As of June 30, 1998, the Company had 624 full-time employees, including
111 in product development, 78 in support services, 144 in professional
services, 163 in sales, 39 in marketing and 89 in finance and administration.
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 November 14, 1997, the Company acquired FocusSoft, Inc., a privately
held provider of manufacturing and distribution software. As consideration for
the acquisition, the Company issued 2,474,794 shares of common stock in exchange
for all of the outstanding shares of common stock of FocusSoft. The exchange
ratio used with respect to the conversion of the FocusSoft shares was 24.747937.
In addition, each outstanding employee stock option of FocusSoft was assumed by
the Company and has been converted to a right to acquire an aggregate of 225,206
shares of common stock of the Company with appropriate adjustments made to the
exercise price based on the exchange ratio. Ten percent of the shares issued in
the merger, or 247,479 shares were placed into an escrow to cover
indemnification claims in connection with the transaction. The transaction was
accounted for as a pooling of interests.
RESTRUCTURINGS
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. 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. In June 1997,
the Company underwent another restructuring as a result of the Clientele
acquisition. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations, Fiscal 1996 and 1997 Restructurings."
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. These statements
are generally identified by the words "estimates," "expects," "anticipates,"
"plans," "believes," and similar expressions. In addition, the Company may from
time to time make oral forward looking statements. Actual results are uncertain
and may be impacted by the following factors, among others, which may cause the
actual results to differ materially from those projected in the forward looking
statement. Because of these and other factors that may affect the Company's
operating results, past performance should not be considered an indicator of
future performance and investors should not use historical results to anticipate
results or trends in future periods.
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 its existing client/server enterprise
resource planning applications, such as human resources and payroll. This
strategy may involve acquisitions,
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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.
Liquidity. The Company's cash, cash equivalents and short-term
investments increased from $16,266,000 at June 30, 1997 to $22,779,000 at June
30, 1998, principally due to cash generated by operations and the exercise of
stock options offset in part by capital expenditures. There will be further cash
outlays estimated at approximately $478,000 in connection with the second
quarter fiscal 1996 restructuring and $798,000 in connection with the fiscal
1997 restructuring. The Company intends to fund these requirements from cash
generated from operations. If the Company is not successful in achieving
targeted revenues, the Company may be required to take cost cutting measures to
align its operating expenses with its reduced revenues.
Dependence on Distribution Channels. The Company distributes its
Platinum for DOS and Platinum for Windows products exclusively through
third-party distributors and VARs, and distributes its Platinum SQL product,
including Clientele, through a direct sales force as well as through VARs and
distributors. The Company's distribution channel includes distributors, VARs and
Authorized Consultants, which consist primarily of professional firms. 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 enterprise resource
planning application, Platinum SQL. There can be no assurance that the direct
sales force will not lead to conflicts with the Company's VAR channel.
Platinum SQL, a client/server enterprise resource planning application
designed to run on Microsoft Windows NT and Microsoft SQL server, is a more
technically complex product than Platinum for Windows and Platinum for DOS and
requires additional skill and training to successfully implement. The Company 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, is an enterprise
resource planning suite of applications comprised of financial accounting,
budgeting, manufacturing, distribution and customer service and support software
applications. Some of the applications were developed internally by the Company,
while others were acquired through acquisitions or OEM arrangements. 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. From time to
time the Company is informed by customers of certain errors with respect to its
Platinum SQL product which the Company addresses. 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.
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Reliance on Third-Party Suppliers. The Company's products utilize
certain software licensed to it by third-party software developers. Although the
Company believes that there are alternatives for these products, any significant
interruption in the supply of such third-party software could have a material
adverse impact on the Company's sales unless and until the Company can replace
the functionality provided by these products. In addition, the Company is to a
certain extent dependent upon such third parties' abilities to enhance their
current products, to develop new products on a timely and cost-effective basis
and to respond to emerging industry standards and other technological changes.
New Product Introductions and Integration. 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, integrate applications in the
Platinum SQL suite 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 for DOS) and Platinum
SQL. The Company continues to provide maintenance and support services for its
Platinum SQL Enterprise product for existing customers. Version 7.0 of Platinum
SQL, which will include an increased level of integration between the financial,
distribution and manufacturing applications so that each application will share
the same customer and vendor data is scheduled for release in November 1998. 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
or product enhancements 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 client/server enterprise resource planning 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.
Exposure to Rapid Technological Change. The market for the Company's
enterprise resource planning 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, as well as 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, introduction or
product integration, could result in
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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,
Chairman, President and Chief Executive Officer, William Pieser, Executive Vice
President, Product Operations and Marketing, and Ken Lally, Executive Vice
President, Field and Customer Operations. None of the Company's personnel is
subject to an employment agreement for a specified time duration with the
Company. In addition, the competition to attract, retain and motivate qualified
technical, sales and operations personnel is intense. The Company has at times
experienced, and continues to experience, difficulty in recruiting qualified
personnel, particularly in software development and customer support. There 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 1996, 1997 and
1998, international sales represented approximately 31%, 29% and 28%,
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. If revenues generated
by foreign activities are not adequate to offset the expense of maintaining
foreign offices and activities, the Company's business, financial condition and
results of operations could be materially adversely affected. International
sales are subject to inherent risks, including changes in regulatory
requirements, tariffs and other barriers, less favorable intellectual property
laws, 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. In the recent past, the financial
markets in Asia have experienced significant turmoil. There can be no assurance
that such turmoil in the Asian financial markets will not negatively affect the
sales by the Company to that region. A portion of the Company's revenues from
sales to foreign entities, including foreign governments, is in the form of
foreign currencies. The Company has no hedging or similar foreign currency
contracts and fluctuations in the value of foreign currencies could adversely
impact the profitability of the Company's foreign operations.
Shares Eligible for Future Sale. As of September 3, 1998, the Company
had 28,369,525 shares of common stock outstanding. There are presently 95,305
shares of Series C Preferred Stock outstanding. Each share of Series C Preferred
Stock is convertible into ten shares of common stock, as adjusted for stock
dividends, combinations or splits at the option of the holder. As a result, the
Series C Preferred Stock is convertible into 953,050 shares of common stock. The
holders of the Series C Preferred Stock have the right to cause the Company to
register the sale of the shares of common stock issuable upon conversion of the
Series C Preferred Stock. Also, the Company has a substantial number of options
or shares issuable to employees under employee option or stock grant plans. As a
result, a substantial number of shares of common stock will be eligible for sale
in the public market at various times in the future. Sales of substantial
amounts of such shares could adversely affect the market price of the Company's
common stock.
Possible Volatility of Stock Prices. The market prices for securities
of technology companies, including the Company, have been volatile. Quarter to
quarter variations in operating results, changes in earnings estimates by
analysts, announcements of technological innovations or new products by the
Company or its competitors, announcements of major contract awards and other
events or factors may have a significant impact on the market price of the
Company's Common Stock. In addition, the securities of many technology companies
have experienced extreme price and volume fluctuations, which have often been
unrelated to the companies' operating performance. These conditions may
adversely affect the market price of the Company's Common Stock.
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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 122,000 square feet of office space in
Irvine, California. The leases for the space expire in April 2004. The Company
leases additional facilities and offices, including locations in Louisville,
Kentucky; Foster City, California; Oakbrook, Illinois; East Berlin, Connecticut;
Portland, Oregon; Hasbrouck Heights, New Jersey; Dallas, Texas; Houston, Texas;
Atlanta, Georgia; Plymouth, Michigan; Tampa, Florida; St. Louis, Missouri;
Melbourne and Sydney, Australia; Mississauga, Canada; London, 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. 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, 1998.
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 1997: High Low
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1st Quarter $11.125 $ 6.250
2nd Quarter 13.000 10.625
3rd Quarter 13.375 8.688
4th Quarter 11.000 7.000
Fiscal 1998: High Low
------------ -------- --------
1st Quarter $12.9375 $10.3750
2nd Quarter 11.750 7.7500
3rd Quarter 24.0000 10.2500
4th Quarter 24.3750 17.5000
There were approximately 1,518 security holders of record as of
September 3, 1998. 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, 1996, 1997 and 1998 and the balance
sheet data at June 30, 1997 and 1998 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, 1994 and 1995, and the balance sheet data at
June 30, 1994, 1995, and 1996 are derived from audited financial statements not
included in this Form 10-K.
Fiscal Year Ended June 30
----------------------------------------------------------------------------
1994 1995 1996 1997 1998
-------- -------- -------- -------- --------
(in thousands, except per share amounts)
STATEMENT OF OPERATIONS DATA:
Revenues:
License fees $ 31,136 $ 37,925 $ 23,234 $ 32,123 $ 57,577
Services 16,854 20,250 21,817 27,420 40,406
Business forms sales 6,720 -- -- -- --
Royalty income -- 692 619 1,208 505
-------- -------- -------- -------- --------
Total revenues 54,710 58,867 45,670 60,751 98,488
Cost of revenues 25,635 20,205 21,083 21,980 29,961
-------- -------- -------- -------- --------
Gross profit 29,075 38,662 24,587 38,771 68,527
-------- -------- -------- -------- --------
Operating expenses:
Sales and marketing 25,961 21,007 21,334 26,024 38,177
Software development 22,059 17,914 14,490 10,398 11,724
General and administrative 10,350 5,569 16,270 6,030 7,145
Charge for restructuring 6,741 -- 5,568 1,600 --
Charge for purchased research
and development 3,570 -- -- -- --
-------- -------- -------- -------- --------
Total operating expenses 68,681 44,490 57,662 44,052 57,046
-------- -------- -------- -------- --------
Income (loss) from
operations (39,606) (5,828) (33,075) (5,281) 11,481
Charge for settlement of
class action litigation and
related expenses (20,000) -- -- -- --
Other income (expense), net 341(1) 103(2) (132)(3) 873(1) 1,866(1)
-------- -------- -------- -------- --------
Income (loss) before
provision for income
taxes (59,265) (5,725) (33,207) (4,408) 13,347
Provision for income taxes 308 20 -- -- --
-------- -------- -------- -------- --------
Net income (loss) $(59,573) $ (5,745) $(33,207) $ (4,408) $ 13,347
======== ======== ======== ======== ========
Diluted net income (loss)
per share $ (3.78) $ (0.35) $ (1.83) $ (0.20) $ 0.45
======== ======== ======== ======== ========
Weighted average shares 15,770 16,196 18,128 21,758 29,716
======== ======== ======== ======== ========
- --------------
(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.
1994 1995 1996 1997 1998
-------- -------- -------- -------- --------
BALANCE SHEET DATA:
Working capital (deficit) $ (9,996) $ 24,443 $ 3,438 $ 3,808 $ 22,319
Total assets 48,479 66,691 41,640 43,156 67,988
Current portion of
long-term obligations 6,000 -- -- -- --
Long-term obligations,
less current portion 10,158 16,035 288 277 35
Stockholders' equity 1,299 30,212 16,199 15,587 34,910
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
Fiscal 1997 Acquisition
On June 30, 1997, the Company acquired Clientele Software, Inc.
(Clientele), a privately held provider of help desk automation software based in
Portland, Oregon. As consideration for the acquisition, the Company issued
887,636 shares of common stock in exchange for all of the outstanding shares of
common stock of Clientele. The exchange ratio used with respect to the
conversion of the Clientele shares was 0.19761 (i.e., each share of Clientele
common stock converted into 0.19761 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, results of operations and cash flows of Clientele for all
periods presented.
Fiscal 1998 Acquisition
On November 14, 1997, the Company acquired FocusSoft, Inc. (FocusSoft),
a privately held provider of enterprise resource planning and distribution
software based in Louisville, Kentucky. As consideration for the acquisition,
the Company issued 2,474,794 shares of common stock in exchange for all of the
outstanding shares of common stock of FocusSoft. The exchange ratio used with
respect to the conversion of the FocusSoft shares was 24.747937 (i.e., each
share of FocusSoft common stock converted into 24.747937 shares of the Company's
common stock.) In addition, the Company assumed all of the employee stock
options of FocusSoft, which translated into stock options to acquire 225,206
shares of common stock of the Company. Ten percent of the shares issued in the
merger, or 247,479 shares, were placed into an escrow for a period of one year
to cover indemnification claims in connection with the transaction. The
transaction was accounted for as a pooling of interests, and accordingly, the
accompanying consolidated financial statements have been restated to incorporate
the financial position, results of operations and cash flows of FocusSoft for
all periods presented.
Fiscal 1996 and 1997 Restructurings
During the second quarter of fiscal 1996, the Company restructured its
business operations. The restructuring included the cessation of the marketing
of the version of the Company's Platinum SQL Enterprise product that runs on the
Sybase/UNIX server platform as well as the elimination of the Company's direct
sales force for its Platinum SQL Enterprise product line. The restructuring
resulted in a charge of $3,300,000. Such amount included approximately
$1,200,000 for severance and other extended benefit costs related to the
reduction in force, $1,200,000 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 people. This reduction in force resulted in an additional
restructuring charge of $2,300,000 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 $1,400,000
in asset write-downs and other costs.
In June 1997, the Company underwent another restructuring as a result
of the Clientele acquisition. This resulted in an additional restructuring
charge of $1,600,000 which was recorded in the fourth quarter of fiscal 1997.
Such amount included approximately $1,100,000 for excess facility costs, as well
as approximately $500,000 for severance and other extended benefit costs.
During the year ended June 30, 1998, the Company paid approximately
$1,329,000 for severance, lease termination and other costs relating to the 1996
and 1997 restructurings. At June 30, 1998, the Company has a $1,280,000 cash
obligation related to lease terminations and other costs of the fiscal 1996 and
1997 restructurings which will be funded from existing cash reserves and working
capital.
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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
--------------------------------------------
1994 1995 1996 1997 1998
---- ---- ---- ---- ----
(in percents)
Revenues:
License fees 57 64 51 53 58
Services 31 35 48 45 41
Business forms sales 12 -- -- -- --
Royalty income -- 1 1 2 1
---- ---- ---- ---- ----
Total revenues 100 100 100 100 100
Cost of revenues 47 34 46 36 30
---- ---- ---- ---- ----
Gross profit 53 66 54 64 70
---- ---- ---- ---- ----
Operating expenses:
Sales and marketing 47 36 47 43 39
Software development 40 31 32 17 12
General and administrative 19 9 36 10 7
Charge for restructuring 12 -- 12 3 --
Charge for purchased research
and development 7 -- -- -- --
---- ---- ---- ---- ----
Total operating expenses 125 76 127 73 58
---- ---- ---- ---- ----
Income (loss) from operations (72) (10) (73) (9) 12
Charge for settlement of class
action litigation and related
expenses (37) -- -- -- --
Other income (expense), net -- -- -- 2 2
---- ---- ---- ---- ----
Income (loss) before provision
for income taxes (109) (10) (73) (7) 14
Provision for income taxes -- -- -- -- --
---- ---- ---- ---- ----
Net income (loss) (109) (10) (73) (7) 14
==== ==== ==== ==== ====
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20
COMPARISON OF FISCAL YEAR 1997 TO FISCAL YEAR 1998
Revenues
Revenues were approximately $60,751,000 and $98,488,000 in fiscal years
1997 and 1998, respectively, representing an increase of approximately 62
percent in fiscal 1998.
License fee revenues were approximately $32,123,000 and $57,577,000 for
the years ended June 30, 1997 and 1998, respectively, representing an increase
of 79 percent in fiscal 1998. License fee revenues for the Company's Platinum
SQL product (including Clientele) were approximately $24,687,000 and $48,825,000
for the years ended June 30, 1997 and 1998, respectively, representing an
increase of 98 percent in fiscal 1998. The increase in revenues was primarily
attributable to an overall increase in personnel in the direct sales force for
the Platinum SQL product; the Company's broader product offering following the
FocusSoft acquisition; the release of the Clientele 3.0 product in February
1998, which included sales force functionality; the release of FocusSoft's
version 5.0 product (now named Platinum SQL Advanced Distribution and
Manufacturing) with enhanced distribution and manufacturing functionality;
additional lead generation, telesales and marketing efforts and an increased
effort to sell Platinum SQL internationally. License fee revenues for the
Company's Platinum for Windows and Platinum for DOS products were approximately
$7,436,000 and $8,752,000 for the years ended June 30, 1997 and 1998,
respectively, representing an increase of 18 percent in fiscal 1998. The
increase in revenues was primarily due to increased domestic demand created by
the commercial availability of a complete suite of the Platinum for Windows
modules. International license fee revenues increased from $8,969,000 in fiscal
1997 to $18,713,000 in fiscal 1998. The increase was due to an increased effort
to sell Platinum SQL internationally.
Services revenues, which include consulting, education, training, and
maintenance and support services, increased 47 percent from $27,420,000 in
fiscal year 1997 to $40,406,000 in fiscal year 1998. The increase was primarily
attributable to the increase in installations. Also, the increase was
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 62 days at June 30, 1997 as
compared to 76 at June 30, 1998. The increase in days sales outstanding was
primarily attributable to increased international revenues, which generally have
longer payment terms than domestic revenues.
Gross Profit
Gross profit increased 77 percent from $38,771,000 in fiscal year 1997
to $68,527,000 in fiscal year 1998 and increased as a percentage of revenues
from 64 percent to 70 percent, 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 services revenues.
Operating Expenses
Total operating expenses increased from $42,452,000 for fiscal year
1997 to $57,046,000 for fiscal year 1998, excluding the one time charge for the
fiscal 1997 restructuring. Total operating expenses as a percentage of revenues
were 70 percent and 58 percent for the years ended June 30, 1997 and 1998,
respectively, excluding the one time charge for the fiscal 1997 restructuring.
Included in operating expenses for the fiscal year ended June 30, 1998 were
approximately $800,000 in one time charges for the FocusSoft acquisition. The
increase in dollar amount was primarily attributable to an overall increase in
direct sales personnel as well as additional commissions for the sales personnel
as their quota was exceeded. The Company expects the dollar amount of total
operating expenses to increase in fiscal 1999 but to decrease as a percentage of
total revenues. See "Certain Considerations, Forward Looking Statements."
Sales and marketing costs were approximately $26,024,000 and
$38,177,000 in fiscal years 1997 and 1998, respectively, or approximately 43
percent and 39 percent of total revenues. The increase in the dollar amount of
sales and marketing expenses was primarily due to the increase in the direct
sales force for the Platinum SQL product.
Software development costs were approximately $11,855,000 and
$12,971,000 in fiscal years 1997 and 1998, respectively, or approximately 20
percent and 13 percent of total revenues, before capitalization of software
costs of approximately $1,457,000 and $1,247,000. Upon the release for general
availability of the Company's
20
21
software products, the Company amortizes capitalized software development costs
over a 5-year period. Such amortization is included in cost of revenues. The
percentage of capitalized software development costs to total software
development costs decreased from 12 percent in fiscal year 1997 to 10 percent in
fiscal year 1998. During fiscal year 1997, costs were capitalized for Platinum
SQL multi-currency functionality, as well as certain Platinum for Windows
development costs for the Inventory and Order Entry modules and development of
Platinum SQL Customization Workbench. During fiscal year 1998, costs were
capitalized for the creation of translations into different languages and
localizations for the Platinum SQL product, the Job Cost module for the Platinum
for Windows product, Year 2000 enhancements for the Platinum for DOS product,
Job Shop and Engineer to Order for the Platinum SQL Advanced Distribution and
Manufacturing applications, Clientele 3.0 sales force automation functionality
and certain applications of the Platinum SQL 4.2 release.
General and administrative expenses were approximately $6,030,000 and
$7,145,000 in fiscal years 1997 and 1998, respectively, or approximately 10
percent and 7 percent of total revenues. The increase was primarily attributable
to management bonuses and employee profit sharing earned in fiscal 1998 due to
the Company's improved operating results.
Other Income
Other income was approximately $873,000 and $1,866,000 in fiscal years
1997 and 1998, respectively. Other income primarily represented interest earned
on the Company's cash and cash equivalents and short-term investments as well as
foreign currency gains realized in fiscal 1998.
Provision for Income Taxes
The Company recorded no provision for income taxes in fiscal years 1997
and 1998. The effective tax rate during these periods was 0 percent for both
years. During 1997 the effective tax rate was lower than the statutory federal
income tax rate of 34 percent, primarily due to the inability to record benefits
from current net operating losses. During 1998, the Company's tax expense was
offset by the reduction of valuation allowances recorded in prior years as a
result of the Company's profitability in the current year. As of June 30, 1998,
the Company had provided a valuation allowance of approximately $46,495,000
because realization of the Company's net deferred tax asset is not more likely
than not due to the historical losses incurred by the Company prior to fiscal
1998, 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 1996 TO FISCAL YEAR 1997
Revenues
Revenues were approximately $45,670,000 and $60,751,000 in fiscal years
1996 and 1997, respectively, representing an increase of approximately 33
percent in fiscal 1997.
License fee revenues were $23,234,000 and $32,123,000 for the years
ended June 30, 1996 and 1997, respectively, representing an increase of
approximately 38 percent in fiscal 1997. License fee revenues for the Company's
Platinum SQL product (including Clientele) were approximately $17,159,000 and
$24,687,000 for the years ended June 30, 1996 and 1997, respectively
representing an increase of 44 percent in fiscal 1997. The increase in revenues
is principally due to the reinstatement of the direct sales force. License fee
revenues for the Company's Platinum for Windows and Platinum for DOS products
were approximately $6,075,000 and $7,436,000 for the years ended June 30, 1996
and 1997, respectively, representing an increase of 22 percent in fiscal 1997.
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 1996 to $8,969,000 in
fiscal 1997. The increase was due to increases in international license fee
revenues for the Company's Platinum SQL and Platinum for Windows and Platinum
for DOS products.
21
22
Services revenues increased 26 percent from $21,817,000 in fiscal 1996
to $27,420,000 in fiscal 1997. The increase was primarily attributable to the
involvement of the consulting and professional services division in providing
consulting and implementation services to customers. Also, the increase was
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 94 days at June 30, 1996 as
compared to 62 at June 30, 1997. 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 fee
and maintenance due upon license execution and the remaining 50% of license fees
generally due in 30 days.
Gross Profit
Gross profit increased 58 percent from $24,587,000 in fiscal year 1996
to $38,771,000 in fiscal year 1997 and increased as a percentage of revenues
from 54 percent to 64 percent, 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 services revenues.
Operating Expenses
Total operating expenses, excluding restructuring charges, decreased
from $52,094,000 for fiscal year 1996 to $42,452,000 for fiscal year 1997. The
decrease was due to the provision of additional reserves in fiscal 1996 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-downs of property and equipment and notes receivable from divestitures.
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, excluding restructuring charges,
were 115 percent and 70 percent for the years ended June 30, 1996 and 1997,
respectively.
Sales and marketing expenses were approximately $21,334,000 and
$26,024,000 in fiscal years 1996 and 1997, respectively, or approximately 47
percent and 43 percent 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.
Software development costs were approximately $14,861,000 and
$11,855,000 in fiscal years 1996 and 1997, respectively, or approximately 33
percent and 20 percent of total revenues, 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 5-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 percent in fiscal year 1996 to 12 percent 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 for the Inventory and Order Entry modules.
General and administrative expenses were approximately $16,270,000 and
$6,030,000 in fiscal years 1996 and 1997, respectively, or approximately 36
percent and 10 percent 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.
22
23
Other Income (Expense)
Other income (expense) was approximately ($132,000) and $873,000 in
fiscal years 1996 and 1997. 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 of the Company.
Provision for Income Taxes
The Company recorded no provision for income taxes in fiscal years 1996
and 1997. The effective tax rate during these periods was 0 percent for both
years. The effective tax rates were lower than the statutory federal income tax
rate of 34 percent, 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 more likely than not 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, 1998, the Company's principal sources of liquidity
included cash, cash equivalents and short-term investments of approximately
$22,779,000. These resources increased by approximately $6,513,000 over the June
30, 1997 balance primarily due to cash generated by operations and exercise of
stock options offset in part by capital expenditures. The Company had working
capital of $22,319,000 at June 30, 1998.
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.
Year 2000 Issues
Overview. The Year 2000 Problem generally involves whether a computer
system, software product or business system, when working alone or in
conjunction with other software or hardware systems, accepts input of, stores,
manipulates and outputs dates in the Year 2000 or thereafter without error or
interruption (the "Year 2000 Problem"). The Year 2000 Problem potentially
impacts the Company in the following principal areas: (i) The Company's software
products, including products manufactured by third parties that are resold by
the Company; (ii) the Company's internal technology systems; (iii) the Company's
non-internal technology systems which contain embedded computer devices; and
(iv) the business systems of the Company's distributors, resellers and
customers.
Company Products. As a leading supplier of client/server enterprise
resource planning software for the middle market, the Company is aware of the
Year 2000 Problem and committed to offering software products that are Year 2000
compliant. The Company presently believes that the current releases of its
Platinum SQL and Platinum for Windows software products are Year 2000 compliant.
The Company's Platinum for DOS product, which was initially released in the
mid-1980s was not Year 2000 compliant until the recent release of version 4.6 in
August 1998. The version 4.6 release is being offered for free to all existing
Platinum for DOS users on maintenance.
As part of its Platinum SQL and Platinum for Windows product lines the
Company resells certain products that are manufactured by third parties, both on
an OEM and reseller basis. Based upon informal discussions with
23
24
the third parties, the Company does not believe there will be material Year 2000
Problems with the third party products. The Company is in the process of
formally querying the manufacturers of these products as to their progress in
identifying and addressing Year 2000 Problems. It is possible that such formal
inquiries will uncover unanticipated issues, although the Company does not
presently believe that any issues uncovered would be of a material nature.
Internal Technology Systems. The Company's internal technology systems
include telecommunications (phones, voicemail and network connections), computer
hardware (personal computers and network servers) and software. The Company has
assessed the Year 2000 Problem with respect to telecommunications with the
exception of its Louisville, Kentucky and Portland, Oregon offices. The
assessment with respect to these offices is scheduled to be completed prior to
December 31, 1998. The Company has identified fixes that need to be made to its
telecommunications systems to make them Year 2000 compliant. These fixes relate
primarily to upgrades to voice mail and phone systems at some of the Company's
international offices and sales offices. It is anticipated that these fixes will
be implemented by January 1, 1999 and fully tested by June 30, 1999. The
estimated cost of these fixes is $225,000. To date, the Company has incurred
approximately $100,000 in year 2000 remediation costs, which was funded from
working capital. In addition, the Company has assessed approximately 75 percent
of its hardware used for Year 2000 compliance and has not uncovered any material
non compliance. The assessment of the remaining 25 percent is scheduled to be
completed by December 31, 1998. The Company's principal software systems include
accounting, customer support, order entry and desktop email/word processing. The
Company uses Microsoft Corporation products for email/word processing which have
been certified by Microsoft as Year 2000 compliant. The Company uses its
Platinum SQL and Clientele products for its accounting, order entry and customer
support software needs. The Company is in the process of completing a
contingency plan for its internal technology systems in connection with the
completion of the assessment of its internal technology systems.
Noninternal Technology Systems. Noninternal technology systems include
security systems, elevators and other systems which contain an embedded computer
or computer like device which is used to control the operation of plant,
machinery and equipment. The Company has not assessed whether there are any Year
2000 Problems with its noninternal technology systems and anticipates that the
assessment will be completed by December 31, 1998. The Company is in the process
of completing a contingency plan for its non-internal technology systems in
connection with the completion of the assessment of its noninternal technology
systems.
Third Party Distributors, Resellers and Customers. The Company has over
350 resellers of its software products, including distributors and Vars. No one
of the resellers is responsible for a material amount of the Company's license
fees. The Company, from time to time, queries its resellers as to their progress
in identifying and addressing Year 2000 Problems.
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 1998.
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25
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 28, 1998 Annual Meeting of Stockholders entitled "Nominees" 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 28, 1998 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 28, 1998, 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 28, 1998 Annual Meeting of Stockholders entitled "Executive
Compensation" and "Compensation Committee Interlocks and Insider Participation."
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26
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
Page
----
(a)(1) Financial Statements
Index to Financial Statements
-----------------------------
Report of Independent Auditors......................................... 31
Consolidated Balance Sheets as of June 30, 1997 and 1998............... 32
Consolidated Statements of Operations for the years ended
June 30, 1996, 1997 and 1998......................................... 33
Consolidated Statements of Stockholders' Equity for the years
ended June 30, 1996, 1997 and 1998................................... 34
Consolidated Statements of Cash Flows for the years
ended June 30, 1996, 1997 and 1998................................... 35
Notes to Consolidated Financial Statements............................. 36
(2) Financial Statement Schedules
Index to Financial Statement Schedules
--------------------------------------
Report of Independent Auditors......................................... 48
Schedule II - Valuation and Qualifying Accounts........................ 49
All other schedules are omitted because they are not required or the
required information is included in the consolidated financial statements or
notes thereto.
26
27
(3) Exhibits
Index to Exhibits
Exhibit No. Description Location
----------- ----------- --------
2.1 Agreement and Plan of Reorganization and Merger dated as of June 27, 1997 (9)
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)
2.2 Agreement and Plan of Reorganization dated as of November 4, 1997 by and (11)
among the Company, FS Acquisition Corp., FocusSoft, Inc., John Lococo,
Michael Zimmerman and Joseph Brumleve (Schedules not included pursuant to
Rule 601(b)(2) of Reg. S-K)
3.1 Second Restated Certificate of Incorporation of the Company. (1)
3.2 Certificate of Amendment to Second Restated Certificate of Incorporation (10)
of the Company
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 (4)
Series A Junior Participating Preferred Stock
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)
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 1990 Plan. (2)
10.5 Form of Indemnification Agreement for Officers and Directors of the (2)
Company.
10.6 Platinum Software Corporation Employee Stock Purchase Plan, as amended. (2)
10.10 1993 Nonqualified Stock Option Plan (3)
10.11 Form of Nonqualified Stock Option Agreement pertaining to the 1993 (3)
Nonqualified Stock Option Plan.
10.12 1994 Incentive Stock Option, Non-qualified Stock Option and Restricted (5)
Stock Purchase Plan.
10.13 Form of Non-qualified Stock Option Agreement pertaining to the 1994 Plan. (5)
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)
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)
10.42 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. (12)
10.45 Platinum Software Corporation Clientele Incentive Stock Plan. (12)
10.47 1997 Nonqualified Stock Option Plan (13)
10.48 Amended and Restated 1998 Nonqualified Stock Option Plan.
10.49 Software Distribution License Agreement with FRx Software Corporation, as
amended to date.
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).
27.1 Financial Data Schedule.
27
28
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)
10.10 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)
10.42 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 (7)
dated as of April 10, 1996
10.44 1996 Nonqualified Stock Plan and Form of Nonqualified Option Agreement. (12)
10.45 Platinum Software Corporation Clientele Incentive Stock Plan. (12)
10.47 1997 Nonqualified Stock Option Plan. (13)
10.48 Amended and Restated 1998 Nonqualified Stock Option Plan.
- -------------------
(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.
(11) Incorporated by reference to the referenced exhibit to the Company's
Current Report on Form 8-K dated November 14, 1997.
(12) Incorporated by reference to the referenced exhibit to the Company's Annual
Report on Form 10-K for the fiscal year ended June 30, 1997.
(13) Incorporated by reference to Exhibit 4.1 to the Company's Registration
Statement on Form S-8, Reg. No. 333-41321.
28
29
(b) Reports on Form 8-K.
The Company filed a current report on Form 8-K dated July 29, 1997
to report under Item 5, Other Events, the Company's results for the
quarter and year ending June 30, 1997. In addition, the Company
filed a current report on Form 8-K, dated October 29, 1997, to
report under Item 5, Other Events, the Company's results for the
quarter ending September 30, 1997. The Company also filed a Current
Report on Form 8-K dated November 25, 1997, to report under Item 2
"Acquisition or Disposition of Assets", the acquisition of
FocusSoft, Inc. The Company also filed a Current Report on Form 8-K
dated January 22, 1998, to report under Item 5 "Other Events" the
Company's results for the quarter ending December 31, 1997.
The following trademarks may be mentioned in the foregoing Annual Report on Form
10-K: Platinum, Clientele, and SeQueL to Platinum. Platinum, Clientele and
SeQueL to Platinum are registered trademarks of the Company. All other product
names are trademarks or registered trademarks of their respective companies.
29
30
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 25, 1998.
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
--------- ----- ----
/s/ L. George Klaus Chairman of the Board, September 25, 1998
- ---------------------------- Chief Executive Officer
L. George Klaus and President
(Principal Executive Officer)
/s/ Paul G. Mazzarella Vice President, Corporate September 25, 1998
- ---------------------------- Controller
Paul G. Mazzarella (Principal Financial and
Accounting Officer)
/s/ W. Douglas Hajjar Director September 25, 1998
- ----------------------------
W. Douglas Hajjar
/s/ L. John Doerr Director September 25, 1998
- ----------------------------
L. John Doerr
/s/ Arthur J. Marks Director September 25, 1998
- ----------------------------
Arthur J. Marks
Director September __, 1998
- ----------------------------
Donald R. Dixon
30
31
EXHIBIT INDEX
Exhibit No. Description Location
----------- ----------- --------
2.1 Agreement and Plan of Reorganization and Merger dated as of June 27, 1997 (9)
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)
2.2 Agreement and Plan of Reorganization dated as of November 4, 1997 by and (11)
among the Company, FS Acquisition Corp., FocusSoft, Inc., John Lococo,
Michael Zimmerman and Joseph Brumleve (Schedules not included pursuant to
Rule 601(b)(2) of Reg. S-K)
3.1 Second Restated Certificate of Incorporation of the Company. (1)
3.2 Certificate of Amendment to Second Restated Certificate of Incorporation (10)
of the Company
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 (4)
Series A Junior Participating Preferred Stock
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)
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 1990 Plan. (2)
10.5 Form of Indemnification Agreement for Officers and Directors of the (2)
Company.
10.6 Platinum Software Corporation Employee Stock Purchase Plan, as amended. (2)
10.10 1993 Nonqualified Stock Option Plan (3)
10.11 Form of Nonqualified Stock Option Agreement pertaining to the 1993 (3)
Nonqualified Stock Option Plan.
10.12 1994 Incentive Stock Option, Non-qualified Stock Option and Restricted (5)
Stock Purchase Plan.
10.13 Form of Non-qualified Stock Option Agreement pertaining to the 1994 Plan. (5)
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)
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)
10.42 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. (12)
10.45 Platinum Software Corporation Clientele Incentive Stock Plan. (12)
10.47 1997 Nonqualified Stock Option Plan (13)
10.48 Amended and Restated 1998 Nonqualified Stock Option Plan.
10.49 Software Distribution License Agreement with FRx Software Corporation, as
amended to date.
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).
27.1 Financial Data Schedule.
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)
10.10 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)
10.42 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 (7)
dated as of April 10, 1996
10.44 1996 Nonqualified Stock Plan and Form of Nonqualified Option Agreement. (12)
10.45 Platinum Software Corporation Clientele Incentive Stock Plan. (12)
10.47 1997 Nonqualified Stock Option Plan. (13)
10.48 Amended and Restated 1998 Nonqualified Stock Option Plan.
32
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, 1997 and 1998, and the related consolidated
statements of operations, stockholders' equity and cash flows for each of the
three years in the period ended June 30, 1998. 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, 1997 and 1998, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
June 30, 1998, in conformity with generally accepted accounting principles.
ERNST & YOUNG LLP
Orange County, California
July 29, 1998
31
33
PLATINUM SOFTWARE CORPORATION
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
June 30
---------------------------
1997 1998
--------- ---------
ASSETS
Current assets:
Cash and cash equivalents $ 6,724 $ 11,251
Short-term investments 9,542 11,528
Accounts receivable, net of allowance for doubtful accounts
of $6,263 and $5,159 at June 30, 1997 and 1998, respectively 11,976 28,929
Inventories 481 803
Prepaid expenses and other 2,377 2,851
--------- ---------
Total current assets 31,100 55,362
Property and equipment, net 8,587 8,688
Software development costs, net of accumulated amortization
of $3,495 and $4,551 at June 30, 1997 and 1998, respectively 2,660 2,851
Acquired source code, net of accumulated amortization
of $4,200 and $4,272 at June 30, 1997 and 1998, 278 206
respectively
Other assets 531 881
--------- ---------
$ 43,156 $ 67,988
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 4,752 $ 3,571
Accrued restructuring costs 2,609 1,280
Accrued bonuses and profit sharing 238 2,397
Accrued commissions 1,694 3,408
Accrued royalties 527 1,670
Other accrued expenses 5,834 4,691
Deferred revenue 11,638 16,026
--------- ---------
Total current liabilities 27,292 33,043
--------- ---------
Long-term liabilities 277 35
--------- ---------
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, 1997 and 1998 -- --
Series B preferred stock, 2,435,000 and 1,439,750
shares issued and outstanding at June 30, 1997
and 1998, respectively 13,466 7,962
Series C preferred stock, 213,803 and 162,020 shares
issued and outstanding at June 30, 1997 and 1998,
respectively 16,826 12,751
Common stock, $.001 par value: 60,000,000 shares authorized,
22,584,610 and 26,142,715 shares issued and outstanding
at June 30, 1997 and 1998, respectively 22 26
Additional paid-in capital 116,745 134,550
Less: Notes receivable from officers for issuance of
restricted stock (11,563) (11,563)
Accumulated foreign currency translation adjustments 393 (1,092)
Accumulated deficit (120,302) (107,724)
--------- ---------
Total stockholders' equity 15,587 34,910
--------- ---------
$ 43,156 $ 67,988
========= =========
The accompanying notes are an integral part of these consolidated financial
statements.
32
34
PLATINUM SOFTWARE CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Year Ended June 30
------------------------------------
1996 1997 1998
-------- -------- --------
Revenues:
License fees $ 23,234 $ 32,123 $ 57,577
Services 21,817 27,420 40,406
Royalty income 619 1,208 505
-------- -------- --------
Total revenues 45,670 60,751 98,488
-------- -------- --------
Cost of revenues:
Cost of license fees 4,117 5,159 5,990
Cost of services 16,966 16,821 23,971
-------- -------- --------
Total cost of revenues 21,083 21,980 29,961
-------- -------- --------
Gross profit 24,587 38,771 68,527
-------- -------- --------
Operating expenses:
Sales and marketing 21,334 26,024 38,177
Software development 14,490 10,398 11,724
General and administrative 16,270 6,030 7,145
Charge for restructuring 5,568 1,600 --
-------- -------- --------
Total operating expenses 57,662 44,052 57,046
-------- -------- --------
Income (loss) from operations (33,075) (5,281) 11,481
-------- -------- --------
Other income (expense):
Interest income 949 835 940
Interest expense (1,344) (71) (39)
Other 263 109 965
-------- -------- --------
Total other income (expense) (132) 873 1,866
-------- -------- --------
Income (loss) before provision for
income taxes (33,207) (4,408) 13,347
Provision for income taxes -- -- --
-------- -------- --------
Net income (loss) $(33,207) $ (4,408) $ 13,347
======== ======== ========
Basic net income (loss) per share $ (1.83) $ (0.20) $ 0.56
======== ======== ========
Shares used in computing basic net income
(loss) per share 18,128 21,758 23,956
======== ======== ========
Diluted net income (loss) per share $ (1.83) $ (0.20) $ 0.45
======== ======== ========
Shares used in computing diluted net
income (loss) per share 18,128 21,758 29,716
======== ======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
33
35
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, 1995 - $ - 2,490,000 $ 13,770 231,598 $ 18,226 16,538,685 $ 16
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 21,471,872 21
Net loss - - - - - - - -
Foreign currency
translation adjustments - - - - - - - -
Subchapter S distributions
to FocusSoft shareholders - - - - - - - -
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 22,584,610 22
Net income - - - - - - - -
Foreign currency
translation adjustments - - - - - - - -
Subchapter S distributions
to FocusSoft shareholders - - - - - - - -
Conversion of Series B
Preferred Stock - - (995,250) (5,504) - - 995,250 1
Conversion of Series C
Preferred Stock - - - - (51,783) (4,075) 517,830 1
Employee stock purchases - - - - - - 45,968 -
Exercise of stock options - - - - - - 1,999,057 2
----- ------ ---------- ------- -------- ------- ----------- ---
Balance, June 30, 1998 - $ - 1,439,750 $ 7,962 162,020 $12,751 26,142,715 $ 26
===== ====== ========== ======= ======== ======= =========== ====
Accumulated
Notes Foreign
Additional Receivable Currency Total
Paid-In from Translation Accumulated Stockholders'
Capital Officers Adjustments Deficit Equity
---------- ---------- ------------ ------------ ------------
Balance, June 30, 1995 $ 80,424 $ - $ 404 $ (82,628) $ 30,212
Net loss - - - (33,207) (33,207)
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 111,231 (11,563) 349 (115,835) 16,199
Net loss - - - (4,408) (4,408)
Foreign currency
translation adjustments - - 44 - 44
Subchapter S distributions
to FocusSoft shareholders - - - (59) (59)
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 116,745 (11,563) 393 (120,302) 15,587
Net income - - - 13,347 13,347
Foreign currency
translation adjustments - - (1,485) - (1,485)
Subchapter S distributions
to FocusSoft shareholders - - - (769) (769)
Conversion of Series B
Preferred Stock 5,503 - - - -
Conversion of Series C
Preferred Stock 4,074 - - - -
Employee stock purchases 435 - - - 435
Exercise of stock options 7,793 - - - 7,795
-------- -------- ------- --------- --------
Balance, June 30, 1998 $134,500 $(11,563) $(1,092) $(107,724) $ 34,910
======== ======== ======= ========= ========
34
36
PLATINUM SOFTWARE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
Year Ended June 30
----------------------------------
1996 1997 1998
--------- -------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $(33,207) $ (4,408) $ 13,347
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization 6,431 5,822 5,126
Provision for doubtful accounts receivable 6,623 2,095 1,561
Provision for doubtful notes receivable from 2,940 -- --
divestitures
Interest expense on debenture issued in connection
with class action settlement 1,236 -- --
Charge for restructuring 5,568 1,600 --
Change in operating assets and liabilities:
(Increase) decrease in accounts receivable (1,322) (6,197) (18,514)
(Increase) decrease in inventories 212 (21) (322)
(Increase) decrease in prepaid expenses and other 111 176 (474)
(Increase) decrease in other assets 91 (62) (350)
Increase (decrease) in accounts payable (58) 693 (1,181)
Increase (decrease) in accrued restructuring costs (2,683) (912) (1,329)
Increase (decrease) in other accrued expenses 1,998 400 3,873
Increase (decrease) in deferred revenue 2,587 359 4,388
-------- -------- --------
Cash provided by (used in) operating
activities (9,473) (455) 6,125
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (2,795) (3,035) (4,099)
Capitalized software development costs (371) (1,457) (1,247)
Purchase of source code -- (274) --
Purchase of short-term investments (13,192) (10,500) (13,500)
Sale of short-term investments 8,099 11,056 11,514
Payments received on notes receivable from divestitures 1,016 825 --
Increase (decrease) in long-term liabilities 66 (11) (242)
Increase in notes receivable from divestitures (209) -- --
-------- -------- --------
Cash used in investing activities (7,386) (3,396) (7,574)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Subchapter S distributions to FocusSoft shareholders -- (59) (769)
Exercise of stock options 1,382 3,175 7,795
Exercise of warrants 186 399 --
Employee stock purchases 269 237 435
(Increase) decrease in restricted cash (530) 1,006 --
-------- -------- --------
Cash provided by financing activities 1,307 4,758 7,461
-------- -------- --------
EFFECT OF EXCHANGE RATES ON CASH (55) 44 (1,485)
-------- -------- --------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (15,607) 951 4,527
CASH AND CASH EQUIVALENTS, beginning of the year 21,380 5,773 6,724
-------- -------- --------
CASH AND CASH EQUIVALENTS, end of the year $ 5,773 $ 6,724 $ 11,251
======== ======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
35
37
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1996, 1997 AND 1998
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 client/server
enterprise resource planning software 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 accounts for its investment securities under the provisions
of Statement of Financial Accounting Standards No. 115, "Accounting for Certain
Investments in Debt and Equity 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 are 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. At June 30, 1998,
short-term investments consisted of debt securities with interest rates ranging
from 5.63 percent to 7.38 percent.
At June 30, 1997 and 1998, short-term investments are as follows:
Gross
Unrealized Estimated
Cost Losses Fair Value
------- ----------- ----------
(in thousands)
June 30, 1997:
Corporate debt securities $ 9,664 $122 $ 9,542
======= ==== =======
June 30, 1998:
Corporate debt securites $11,538 $ 10 $11,528
======= ==== =======
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, however, when such services are
36
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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.
In October 1997, the AICPA issued Statement of Position (SOP) 97-2,
"Software Revenue Recognition," which supersedes SOP 91-1. The Company has
adopted SOP 97-2 for software transactions entered into after July 1, 1998. The
Company's management anticipates that the adoption of SOP 97-2 will not have a
material impact on the Company's results of operations.
e. Product Returns
The Company permits VARs and other software distributors to return
certain products that were returned by the end-user customers and allows a
30-day return period for certain 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 $660,000 at June 30,
1997 and $190,000 at June 30, 1998.
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, 1997 and 1998:
1997 1998
------- -------
(in thousands)
Computer equipment $ 19,039 $ 22,222
Furniture and fixtures 3,605 3,653
Leasehold improvements 1,851 2,719
-------- -------
24,495 28,594
Accumulated depreciation and amortization (15,908) (19,906)
--------- --------
$ 8,587 $ 8,688
======== ========
Depreciation is computed under the straight-line method over the
estimated useful lives of the assets ranging from 3 to 5 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 5 years.
Amortization of software development costs is included in cost of license fees
and totaled $942,000, $1,047,000 and $1,056,000 for the years ended June 30,
1996, 1997 and 1998, respectively.
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i. Acquired Source Code
Acquired source code is amortized over the shorter of the estimated
economic life of the asset or 5 years. Amortization of acquired source code is
included in cost of license fees and totaled $891,000, $1,084,000 and $72,000
for the years ended June 30, 1996, 1997 and 1998, respectively.
j. Advertising Costs
The Company expenses production costs of advertising upon the first
showing. Other advertising costs are expensed as incurred. Advertising expense
totaled $867,000, $1,490,000 and $1,034,000 for the years ended June 30, 1996,
1997 and 1998, 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 3 months
or less when purchased to be cash equivalents. The following summarizes the
supplemental disclosures related to the statements of cash flows:
1996 1997 1998
---- ---- ----
(in thousands)
CASH PAID DURING THE YEAR FOR:
Interest $ 64 $ 56 $ --
==== ==== ====
Income taxes $ -- $ -- $ --
==== ==== ====
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 to 60 days. The Company believes no significant concentrations of credit
risk existed at June 30, 1998. 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 Income (Loss) per Share
In 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128, "Earnings Per Share" (SFAS 128). SFAS
128 replaced the previously reported primary and fully diluted earnings per
share with basic and diluted earnings per share. Basic net income (loss) per
share is computed by dividing net income (loss) by the weighted average number
of shares of common stock outstanding during the period. Diluted income (loss)
per share is computed by dividing net income (loss) by the weighted average
number of shares of common stock and common stock equivalents outstanding during
the period. Common stock equivalents were antidilutive for the years ended June
30, 1996 and 1997, and, therefore, were excluded from the calculation of diluted
net loss per share for such periods. All earnings per share amounts for all
periods have been presented and, where necessary, restated to conform with the
provisions of SFAS 128.
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The following table sets forth the computation of basic and diluted net income
(loss) per share:
Year Ended June 30
--------------------------------------
1996 1997 1998
-------- -------- --------
(in thousands, except per share amounts)
Numerator:
Net income (loss) - Numerator for basic
and diluted net income (loss) per share $(33,207) $(4,408) $13,347
Denominator:
Denominator for basic net income (loss)
per share - weighted average shares 18,128 21,758 23,956
Effect of dilutive securities:
Employee stock options -- -- 1,942
Preferred stock -- -- 3,818
-------- ------- -------
Dilutive potential common shares -- -- 5,760
Denominator for diluted net income (loss)
per share - adjusted weighted average
shares and assumed conversions 18,128 21,758 29,716
======== ======= =======
Basic net income (loss) per share $ (1.83) $ (0.20) $ 0.56
======== ======= =======
Diluted net income (loss) per share $ (1.83) $ (0.20) $ 0.45
======== ======= =======
p. Recently Issued Accounting Pronouncements
In June 1997, the Financial Accounting Standard Board issued Statement
of Financial Accounting Standards No. 130, "Reporting Comprehensive Income"
(SFAS 130), which establishes standards for the reporting and display of
comprehensive income and its components in financial statements. Comprehensive
income generally represents all changes in stockholders' equity except those
resulting from investments by and/or distributions to stockholders. SFAS No. 130
is effective for fiscal years beginning after December 15, 1997 and requires
restatement of earlier periods presented. The Company plans to adopt SFAS No.
130 in fiscal 1999, and does not expect adoption to have a material impact on
the Company's financial position, results of operations or cash flows.
Also, in June 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 131, "Disclosure about Segments
of an Enterprise and Related Information" (SFAS 131), which requires
publicly-held companies to report financial and descriptive information about
its operating segments in financial statements issued to stockholders for
interim and annual periods. The statement also requires additional disclosures
with respect to products and services, geographical areas of operations, and
major customers. SFAS No. 131 is effective for fiscal years beginning after
December 15, 1997 and requires restatement of earlier periods presented. The
Company plans to adopt SFAS No. 131 in fiscal 1999 and does not expect adoption
to significantly change its reportable segments.
q. Reclassifications
Certain reclassifications have been made to fiscal 1996 and 1997 amounts
to conform with the current year presentation.
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2. ACQUISITIONS AND RESTRUCTURINGS
a. Acquisitions
On June 30, 1997, the Company acquired Clientele Software, Inc.
(Clientele), a privately held provider of help desk automation software based in
Portland, Oregon. As consideration for the acquisition, the Company issued
887,636 shares of common stock in exchange for all of the outstanding shares of
common stock of Clientele. The exchange ratio used with respect to the
conversion of the Clientele shares was 0.19761 (i.e., each share of Clientele
common stock converted into 0.19761 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, results of operations and cash flows of Clientele for all
periods presented.
On November 14, 1997, the Company acquired FocusSoft, Inc. (FocusSoft),
a privately held provider of enterprise resource planning and distribution
software based in Louisville, Kentucky. As consideration for the acquisition,
the Company issued 2,474,794 shares of common stock in exchange for all of the
outstanding shares of common stock of FocusSoft. The exchange ratio used with
respect to the conversion of the FocusSoft shares was 24.747937 (i.e., each
share of FocusSoft common stock converted into 24.747937 shares of the Company's
common stock.) In addition, the Company assumed all of the employee stock
options of FocusSoft, which translated into stock options to acquire 225,206
shares of common stock of the Company. Ten percent of the shares issued in the
merger, or 247,479 shares, were placed into an escrow for a period of one year
to cover indemnification claims in connection with the transaction. The
transaction was accounted for as a pooling of interests, and accordingly, the
accompanying consolidated financial statements have been restated to incorporate
the financial position, results of operations and cash flows of FocusSoft for
all periods presented.
b. Restructurings
During the second quarter of fiscal 1996, the Company restructured its
business operations. The restructuring included the cessation of the marketing
of the version of the Company's Platinum SQL Enterprise product that runs on the
Sybase/UNIX server platform as well as the elimination of the Company's direct
sales force for its Platinum SQL Enterprise product line. The restructuring
resulted in a charge of $3,300,000. Such amount included approximately
$1,200,000 for severance and other extended benefit costs related to the
reduction in force, $1,200,000 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 people. This reduction in force resulted in an additional
restructuring charge of $2,300,000 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 $1,400,000
in asset write-downs and other costs.
In June 1997, the Company underwent another restructuring as a result of
the Clientele acquisition. This resulted in an additional restructuring charge
of $1,600,000 which was recorded in the fourth quarter of fiscal 1997. Such
amount included approximately $1,100,000 for excess facility costs, as well as
approximately $500,000 for severance and other extended benefit costs.
During the year ended June 30, 1998, the Company paid approximately
$1,329,000 for severance, lease termination and other costs relating to the 1996
and 1997 restructurings. At June 30, 1998, the Company has a $1,280,000 cash
obligation related to lease terminations and other costs of the fiscal 1996 and
1997 restructurings, which will be funded from existing cash reserves and
working capital.
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
40
42
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 $17,000,000, $2,000,000 in cash, of which
$1,000,000 was paid immediately, $1,000,000 was paid in December 1994, and
$15,000,000 was paid by issuing a redeemable, convertible subordinated debenture
in the principal amount of $15,000,000. On June 10, 1996, the Company elected to
repay the principal amount of the debenture, plus accrued interest thereon by
issuing shares of common stock and subsequently issued a total of 1,528,988
common shares in repayment of the debenture.
4. COMMITMENTS AND CONTINGENCIES
The Company leases certain of its operating facilities and equipment
under operating leases with terms ranging up to 5 years. The following is a
schedule by years of future minimum lease payments under operating leases:
Amount
-------
Year ending June 30 (in thousands)
1999 $ 3,299
2000 3,211
2001 2,563
2002 2,298
2003 1,898
Thereafter 6,402
-------
Total $19,671
=======
Rental expense under operating leases, net of sublease income, for the
years ended June 30, 1996, 1997 and 1998, was $2,154,000, $2,067,000 and
$2,432,000, respectively.
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 12-month period following termination. (See Note 7.) Finally,
the Company agreed to provide a relocation package to assist him in relocating
his principal residence. Such costs were paid in fiscal 1997.
The Company is party to employment agreements with two of the Company's
executive 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 restricted shares that would have vested during the 6-month period following
termination. (See Note 7.) Finally, the Company agreed to provide a relocation
package to assist them in relocating their principal residences. Such costs were
paid in fiscal 1997.
The Company is subject to miscellaneous legal proceedings in the normal
course of business and other legal proceedings. The Company is currently
defending these proceedings and claims, and anticipates that it will be able to
resolve these matters in a manner that will not have a material adverse effect
on the Company's financial position, results of operations or cash flows.
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5. INCOME TAXES
The provision for income taxes for the years ended June 30, 1996, 1997
and 1998 is comprised of the following:
1996 1997 1998
----- ------ -----
(in thousands)
Federal:
Current $ -- $ -- $ --
Deferred -- -- --
----- ------ -----
-- -- --
----- ------ -----
State:
Current -- -- --
Deferred -- -- --
----- ------ -----
-- -- --
----- ------ -----
Foreign:
Current -- -- --
Deferred -- -- --
----- ------ -----
$ -- $ -- $ --
===== ====== =====
The income (loss) before income taxes between Federal and foreign
jurisdictions for the years ended June 30, 1996, 1997 and 1998 are as follows:
1996 1997 1998
--------- -------- -------
(in thousands)
Federal $ (28,061) $(4,375) $10,676
Foreign (5,146) (33) 2,671
--------- ------- -------
Total $ (33,207) $(4,408) $13,347
========= ======= =======
The reported provision (benefit) for income taxes for the years ended June
30, 1996, 1997 and 1998 differ from the amount computed by applying the
statutory federal income tax rate of 35 percent to the consolidated income
(loss) before income taxes as follows:
1996 1997 1998
---------- -------- -------
(in thousands)
Provision (benefit) computed at
statutory rates $(11,201) $(1,659) $ 4,708
Increase (reduction) resulting from:
State taxes, net of federal benefit (1,354) (414) 574
Valuation allowance 12,795 2,685 (5,372)
Other (240) (612) 90
-------- ------- -------
$ -- $ -- $ --
======== ======= =======
The components of the Company's net deferred income tax asset
(liability) as of June 30, 1997 and 1998 are as follows:
1997 1998
-------- --------
(in thousands)
Net operating loss carryforwards $ 33,250 $ 37,750
Allowance for doubtful accounts 1,940 1,330
Acquisition costs, net 3,015 3,380
Research and development credits 2,010 2,720
Other 1,550 1,820
Accrued restructuring costs 1,210 685
Depreciation (405) (410)
Software capitalization, net (990) (780)
Valuation allowance (41,580) (46,495)
--------- --------
$ -- $ --
========= ========
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As of June 30, 1998, the Company had provided a valuation allowance of
approximately $46,495,000 because realization of the Company's net deferred tax
asset is not more likely than not due to the historical losses incurred by the
Company prior to fiscal 1998, 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, 1998 of approximately $98,700,000, $69,700,000 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 $2,720,000 of federal research and development credit
carryforwards that expire in the years 2000 through 2011.
Included in the Company's net operating loss carryforwards are tax
deductions relating to the exercise of non-qualified stock options totaling
approximately $44,100,000. These losses are fully offset by a valuation
allowance. Upon future realization of net operating losses, no income tax
benefit will be permitted to the extent the utilized losses reflect a deduction
for the exercise of nonqualified stock options which will be charged to
stockholders' equity.
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 percent 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 that 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 that 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 nonexecutive officers
and other key employees. The total number of shares that may be granted under
this plan is 500,000.
The Company adopted a fifth stock option plan effective July 29, 1997,
whereby nonqualified stock options may be granted to employees, consultants and
others with important business relationships with the Company. The total number
of shares that may be granted under this plan is 500,000.
The Company adopted a sixth stock option plan effective April 22, 1998,
whereby nonqualified stock options may be granted to officers, directors,
employees and others with important business relationships with the Company. The
total shares that may be granted under this plan is 3,000,000. The shares that
may be granted were increased from 1,000,000 to 3,000,000 effective July 28,
1998.
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.
On November 14, 1997, the Company acquired FocusSoft, Inc. (See Note 2).
The Company assumed all of the outstanding employee stock options of FocusSoft,
which translated into options to acquire 225,206 shares of common stock of the
Company.
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, 1998. In addition, the
Company adopted an Employee Stock Purchase Plan in August 1992 authorizing the
issuance of up to an aggregate
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of 450,000 shares of common stock to participating employees which permits
employees to purchase common stock at a price equal to 85 percent of the fair
market value at the beginning or end of a 6-month plan period. As of June 30,
1998, 260,318 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, 1996, 1997 and 1998:
1996 1997 1998
-------------------- -------------------- --------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Options Price Options Price Options Price
---------- --------- ---------- -------- --------- ---------
Outstanding, Beginning
of Year 3,593,798 $ 6.0563 3,763,658 $5.8039 3,765,837 $ 5.2839
Granted 1,903,375 6.5210 3,771,877 5.4211 1,767,354 13.3240
Exercised (345,738) 3.9864 (776,648) 3.8445 (1,999,057) 3.9693
Expired or Canceled (1,387,777) 7.8937 (2,993,050) 6.4843 (420,596) 9.4058
---------- -------- ---------- ------- ---------- --------
Outstanding, End of
Year 3,763,658 $ 5,8039 3,765,837 $5.2839 3,113,538 $ 9.3080
========== ======== ========== ======= ========== ========
Options Exercisable 1,876,238 $ 4.8565 2,008,293 $4.1165 718,858 $ 5.7045
========== ======== ========== ======= ========== ========
The following table summarizes information about stock options
outstanding at June 30, 1998.
Options Outstanding Options Exercisable
-------------------------------------- ------------------------
Weighted
Average Weighted Weighted
Remaining Average Average
Number Contractual Exercise Number Exercise
Range of Exercise Prices Outstanding Life Price Exercisable Price
- ------------------------ ----------- ----------- ---------- ----------- --------
$0.1107-$1.2650 184,604 3.07 $0.3549 75,328 $0.6356
$3.5000-$3.5000 471,490 6.82 $3.5000 302,659 $3.5000
$5.0000-$7.5000 338,042 8.38 $7.2265 111,049 $6.9340
$7.5910-$8.3125 512,248 8.62 $8.1663 70,015 $7.7492
$8.6030-$9.7500 325,655 8.59 $9.4002 93,142 $9.3198
$9.9375-$10.7500 327,273 9.27 $10.0907 0 $0.0000
$10.8125-$12.1250 384,859 8.72 $11.6968 59,215 $12.1250
$12.3750-$14.9375 324,850 9.12 $12.8554 7,450 $12.7408
$18.8750-$22.1875 50,000 9.71 $20.5313 0 $0.0000
$23.5000-$23.5000 194,517 9.81 $23.5000 0 $0.0000
- -------------------- --------- ------ -------- ------- --------
$0.1107-$23.5000 3,113,538 8.21 $9.3080 718,858 $5.7045
==================== ========= ====== ======== ======= ========
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 income
(loss) and income (loss) per share disclosures required by SFAS No. 123. The
Company continues 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 income (loss) and income (loss) per share would
have been the pro forma amounts shown below:
1996 1997 1998
------------ ------------- -----------
Net income (loss) as reported $(33,207,000) $ (4,408,000) $13,347,000
============ ============= ===========
Net income (loss) -- pro forma $(34,582,000) $(11,426,000) $ 6,753,000
============ ============= ===========
Income (loss) per share as
reported $(1.83) $(0.20) $0.45
============ ============= ===========
Income (loss) per share --
pro forma $(1.91) $(0.53) $0.23
============ ============= ===========
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46
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 5.9375% 5.57%
Volatility 1.4962 1.4962
Dividend rate 0% 0%
For options granted during fiscal years 1996, 1997 and 1998, the
weighted average fair value at date of grant was $4.3625, $4.0667 and $10.5921
per option, respectively. The weighted average fair value at date of grant for
stock purchase shares during fiscal years 1996, 1997 and 1998 was $2.430, $3.007
and $5.798 per share, respectively. The discounted value of the stock purchase
shares granted in fiscal years 1996, 1997 and 1998 using the Black-Scholes
Option pricing model was $58,000, $42,000 and $158,000 respectively. As of June
30, 1998, the total number of shares of common stock reserved for future
issuance under existing stock option plans and Series B and Series C Preferred
Stock (See Note 8) is approximately 6,173,000.
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 percent of the Company's then outstanding common stock or commences a
tender offer for at least 20 percent 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
percent 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 percent 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.
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 percent 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 3 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 10 years. The Company also has loaned
to the President, Chief Executive Officer and Chairman of the Board $3,500,000
pursuant to an unsecured 5-year recourse promissory note, which bears interest
at the rate of 6 percent 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 5-year promissory note in the
principal amount of $875,000. The note bears simple interest at 6 percent 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 3 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 10 years. The Company also has loaned to this senior executive officer
$875,000 pursuant to an unsecured 5-year recourse promissory note, which bears
interest at the rate of 6 percent per annum. This loan was used to fund the
restricted stock purchase along with the secured note referenced above.
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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 5-year promissory note in the
principal amount of $1,406,250. The note bears simple interest at 6 percent 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 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 3
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, or in any
event after 10 years. The Company also has loaned to this senior executive
officer $1,406,250 pursuant to an unsecured 5-year promissory note, which bears
interest at 6 percent per annum. This loan was used to fund the restricted stock
purchase along with the secured note referenced above.
In April 1998, the Board of Directors forgave any and all interest on
such notes.
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 percent
discount from the average trading price for the Company's common stock for 20 of
the 30 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 10 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 1998, 995,250 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 percent discount from the average trading price for the
Company's common stock for 20 of the 30 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 10 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 1998,
51,783 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.
Subsequent to June 30, 1998, the remaining outstanding Series B
Preferred Stock automatically converted to common stock.
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9. SEGMENT AND GEOGRAPHIC INFORMATION
The Company operates in one industry segment: the design, development,
marketing and support of client/server enterprise resource planning 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, 1996:
Net revenues $ 31,591 $ 8,294 $ 2,134 $ 3,042 $ 609 $ 45,670
======== ======== ======== ======== ====== ========
Operating income (loss) (27,914) (1,823) (3,471) (476) 609 (33,075)
======== ======== ======== ======== ====== ========
Identifiable assets 33,370 3,164 2,857 2,249 -- 41,640
======== ======== ======== ======== ====== ========
Year Ended June 30, 1997:
Net revenues $ 43,383 $ 7,993 $ 4,426 $ 3,957 $ 992 $ 60,751
======== ======== ======== ======== ====== ========
Operating income (loss) (5,422) 388 (1,429) 190 992 (5,281)
======== ======== ======== ======== ====== ========
Identifiable assets 34,822 3,565 2,488 2,281 -- 43,156
======== ======== ======== ======== ====== ========
Year Ended June 30, 1998:
Net revenues $ 71,008 $ 9,560 $ 8,169 $ 7,232 $2,519 $ 98,488
======== ======== ======== ======== ====== ========
Operating income (loss) 9,721 (1,818) 1,109 (50) 2,519 11,481
======== ======== ======== ======== ====== ========
Identifiable assets 51,956 5,809 4,974 5,249 -- 67,988
======== ======== ======== ======== ====== ========
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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 1997 and 1998, and for each of the three years in the
period ended June 30, 1998, and have issued our report thereon dated July 29,
1998. 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, 1998
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PLATINUM SOFTWARE CORPORATION
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
(in thousands)
Balance at Provision Balance
Beginning for Amounts at End
Description of Year Bad Debt Written Off of Year
- ----------------------------------- ----------- --------- ----------- -------
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
======== ======= ======= ======
FOR THE YEAR ENDED JUNE 30, 1998:
Allowance for doubtful accounts $ 6,263 $ 1,561 $(2,665) $5,159
======== ======= ======= ======
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