_________________________________________________________________
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
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(Mark One)
_X__ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Quarterly period ended January 31, 1995
OR
____ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________ to ___________.
Commission File Number: 0-15188
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INTERSOLV, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
Delaware 52-0990382
(State or other jurisdiction of(I.R.S. Employer
incorporation or organization)Identification No.)
3200 Tower Oaks Boulevard
Rockville, Maryland 20852
(Address of principal executive offices)
(301) 230-3200
(Registrant's telephone number including area code)
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Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes___X___ No_______
As of February 28, 1995, there were 15,634,449 shares outstanding of the
Registrant's Common Stock, par value $.01 per share.
_________________________________________________________________
INTERSOLV, INC.
INDEX
Page
Number
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements 3
Condensed Consolidated Statements of Operations for the
three months ended January 31, 1995 and 1994 4
Condensed Consolidated Statements of Operations for the nine
months ended January 31, 1995 and 1994 5
Condensed Consolidated Balance Sheets as of
January 31, 1995 and April 30, 1994 6
Condensed Consolidated Statements of Cash Flows for the
nine months ended January 31, 1995 and 1994. 7
Notes to Condensed Consolidated Financial Statements 8
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 10
PART II. OTHER INFORMATION
Item 4. Results of Votes of Securities Holders 14
Item 5. Other Information 14
Item 6. Exhibits and Reports on Form 8-K 14
Signatures 15
PART I. FINANCIAL INFORMATION
Financial Statements.
The financial statements set forth below for the three-month and nine-
month periods ended January 31, 1995 and 1994 are unaudited, and have
been prepared pursuant to the rules and regulations of the Securities
and Exchange Commission. Certain information and note disclosures
normally included in annual financial statements prepared in accordance
with generally accepted accounting principles have been condensed or
omitted pursuant to those rules and regulations. INTERSOLV, Inc.
believes that the disclosures made are adequate to make the information
presented not misleading. The results for the three-month and nine
month periods ended January 31, 1995 are not necessarily indicative of
the results for the fiscal year.
In the opinion of management, the accompanying consolidated condensed
financial statements reflect all necessary adjustments (consisting only
of normal recurring adjustments) that are necessary for a fair
presentation of results for the periods presented. It is suggested that
these financial statements be read in conjunction with the latest
audited financial statements and the notes thereto (included in the
Annual Report on Form 10-K for the fiscal year ended April 30, 1994).
INTERSOLV, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
For the three months ended January 31
(dollars in thousands, except per share data)
(unaudited)
1995 1994
Revenues $30,084 $23,030
Costs and expenses:
Cost of sales 2,575 1,794
Sales and marketing 16,585 13,639
Research and development 3,137 2,141
General and administrative 2,227 1,920
Total costs and expenses 24,524 19,494
Operating income 5,560 3,536
Other income, net 169 115
Income before income taxes 5,729 3,651
Provision for income taxes 1,716 1,095
Net income $ 4,013 $ 2,556
Net income per share $ 0.25 $ 0.20
Shares used in computing net income per share 16,360 12,581
The accompanying notes are an integral part of these condensed
consolidated statements.
INTERSOLV, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
For the nine months ended January 31
(dollars in thousands, except per share data)
(unaudited)
1995 1994
Revenues $80,600 $60,088
Costs and expenses:
Cost of sales 7,254 5,134
Sales and marketing 46,724 36,694
Research and development 9,244 6,506
General and administrative 6,538 5,255
Total costs and expenses 69,760 53,589
Operating income 10,840 6,499
Other income, net 481 197
Income before income taxes 11,321 6,696
Provision for income taxes 3,395 2,009
Net income $ 7,926 $ 4,687
Net income per share $ 0.49 $ 0.38
Shares used in computing net income per share 16,020 12,425
The accompanying notes are an integral part of these condensed
consolidated statements.
INTERSOLV, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(amounts in thousands)
(unaudited)
January 31, April 30
1995 1994
ASSETS
Current assets:
Cash and cash equivalents $ 26,629 $ 22,366
Accounts receivable, net 28,471 25,791
Refundable income taxes 504 411
Prepaid expenses and other current assets 3,399 2,619
Total current assets 59,003 51,187
Software, net 19,744 18,998
Property and equipment, net 5,529 5,970
Notes receivable and other assets 1,020 1,446
Total assets $85,296 $77,601
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $24,953 $26,828
Deferred revenue 13,728 13,654
Total current liabilities 38,681 40,482
Long-term liabilities --- 1,196
Total liabilities 38,681 41,678
Stockholders' equity
Common stock 157 148
Paid-in capital 81,844 78,591
Treasury stock (768) ---
Deficit (33,563) (41,526)
Cumulative translation adjustment ( 1,055) ( 1,290)
Total stockholders' equity 46,615 35,923
Total liabilities and stockholders' equity $85,296 $77,601
The accompanying notes are an integral part of these condensed
consolidated statements.
INTERSOLV, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the nine months ended January 31
(amounts in thousands)
(unaudited)
1995 1994
CASH INFLOWS (OUTFLOWS)
Operating activities:
Net income $ 7,926 $ 4,687
Non-cash items:
Depreciation and amortization 7,206 5,789
Deferred taxes 3,394 1,833
Payment of restructuring / acquisition charges (4,073) ---
Change in assets and liabilities (3,488) (1,418)
Net cash provided by operating activities 10,965 10,891
Investing activities:
Additions to software (5,873) (4,215)
Additions to property and equipment (1,364) (2,378)
Sale/leaseback of equipment --- 1,252
Other 212 332
Net cash used in investing activities (7,025) (5,009)
Financing activities:
Purchase of common stock for treasury (2,674) ---
Payment of Q+E installment liability (1,107) ---
Proceeds from sale of common stock 3,907 2,584
Net cash provided by financing activities 126 2,584
Effect of exchange rate changes on cash 197 (149)
Net increase in cash and cash equivalents 4,263 8,317
Cash and cash equivalents, beginning of period 22,366 9,017
Cash and cash equivalents, end of period $26,629 $17,334
The accompanying notes are an integral part of these condensed
consolidated statements.
INTERSOLV, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Basis of Presentation
The accompanying condensed consolidated financial statements include the
accounts of INTERSOLV, Inc. and its wholly owned subsidiaries
(collectively, the "Company" or "INTERSOLV").
The accompanying unaudited financial statements reflect all the
adjustments that, in the opinion of management, are necessary for a fair
presentation of the results for the interim periods presented. The
results for the nine-month period ended January 31, 1995 may not
necessarily be indicative of the results for the entire year. The
results for the three months ended July 31, 1994 were restated to
include the results of operations of the Software Edge, as more fully
described on page 9 under Acquisitions.
These financial statements should be read in conjunction with the
Company's annual audited financial statements, as filed with the
Securities and Exchange Commission on Form 10-K, for the year ended
April 30, 1994.
Operations
The Company develops, markets and supports computer software used by
software developers to accelerate the development and maintenance
process, improve quality and reduce cost.
Contracting Costs (Discontinued Operations)
Prior to April 1986, certain revenues associated with discontinued
operations were generated under cost-plus-fee contracts with the U.S.
government and are subject to adjustments upon audit by the Defense
Contract Audit Agency (DCAA). Audits through July 31, 1986 have been
completed. On December 5, 1990, the Company received a notice from the
DCAA questioning certain charges aggregating approximately $2.4 million
incurred by the Company during fiscal 1985 and 1986. The Company filed
a response in April, 1991, which provided additional information
regarding the issues raised in the notice. Although the amount of the
liability, if any, cannot be ascertained, the Company currently does not
believe this claim will have a material impact on the Company's
financial statements taken as a whole.
Sales Tax
The Company sells its products in various states through different
distribution channels, including telesales, field sales and through
distributors. On certain sales, the Company must collect and remit
sales tax to the respective state. These sales taxes are subject to
adjustment upon audit by the respective state. Liabilities may result
from this process; however, management believes the reserves provided
for these liabilities are sufficient.
The Company's income tax returns are subject to audit by Federal, state
and foreign tax authorities. Adjustments to increase or decrease
taxable income or losses may result from these audits. Management
believes the impact of these adjustments, if any, would not have a
material impact on the Company's financial statements taken as a whole.
Capitalization of Computer Software Development Costs and Purchased
Software
In accordance with Statement of Financial Accounting Standards No. 86,
"Accounting for the Costs of Computer Software to be Sold, Leased, or
Otherwise Marketed,"("FAS 86") the Company capitalizes certain internal
software development costs subsequent to the establishment of
technological feasibility for the product as evidenced by a working
model. In addition, the Company supplements its internal development
effort by acquiring rights to selected software technologies ("purchased
software") from others. Capitalized software costs and purchased
software are amortized on a straight line basis over the estimated
economic lives of the products, which range from three to five years.
The Company continually compares the unamortized software development
costs and purchased software costs in light of the expected future
revenues for those products. If the unamortized costs exceed the
expected future net value from sales of the related product, then the
excess amount is written off.
Acquisitions
In April 1994, INTERSOLV acquired all of the outstanding common stock of
Q+E Software, Inc. ("Q+E") for approximately $37.4 million, consisting
of $5.3 million in cash and installment payments, 2,370,000 shares of
INTERSOLV common stock (valued at $28 million) and $4.1 million in
assumed and other liabilities. Q+E develops and markets software
products for end-users and software developers to access information
stored in databases resident on personal computers, mini computers and
mainframes. The acquisition has been accounted for using the "purchase"
method. Q+E's results are included in INTERSOLV's results of operations
starting on May 1, 1994.
In September 1994, INTERSOLV acquired all of the outstanding common
stock of The Software Edge, Inc. ("Software Edge") for approximately
$5.7 million, consisting of 471,819 shares of INTERSOLV common stock.
Software Edge develops and markets a software product which complements
the Company's PVCS line of software configuration management tools. The
acquisition was accounted for using the "pooling-of-interest" method.
Software Edge's results of operations beginning May 1, 1994 have been
included in the Company's results; accordingly the Company has restated
its previously issued results of operations for the three months ended
July 31, 1994. Results for previous years have not been restated
because the impact is not material.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Operating Results Overview
The following table sets forth, for the periods indicated, the
percentage which selected items in the Consolidated Statements of
Operations bear to total revenues:
Percentage of Total Revenue
Three Months Ended Nine Months Ended
January 31, January 31,
1995 1994 1995 1994
Revenues:
North America 73.1% 73.1% 71.7% 70.3%
International 26.9% 26.9% 28.3% 29.7%
100.0% 100.0% 100.0% 100.0%
Costs and expenses:
Cost of sales 8.6% 7.8% 9.0% 8.5%
Sales and marketing 55.1% 59.2% 58.0% 61.2%
Research and development 10.4% 9.3% 11.5% 10.8%
General and administrative 7.4% 8.3% 8.1% 8.7%
Total costs and expenses 81.5% 84.6% 86.6% 89.2%
Operating income 18.5% 15.4% 13.4% 10.8%
Other income, net 0.6% 0.5% 0.6% 0.3%
Income before taxes 19.1% 15.9% 14.0% 11.1%
Provision for income taxes 5.7% 4.8% 4.2% 3.3%
Net Income 13.4% 11.1% 9.8% 7.8%
License fees and maintenance fees were 76% and 24%, respectively, of
total revenues for the three months ended January 31, 1995. For the
three months ended January 31, 1994, license fees and maintenance fees
were 73% and 27%, respectively, of total revenues. License fees and
maintenance fees were 73% and 27%, respectively, of total revenues for
the nine months ended January 31, 1995. For the nine months ended
January 31, 1994, license fees and maintenance fees were 70% and 30%,
respectively, of total revenues.
Revenues
Revenues for the three months ended January 31, 1995 increased 31% from
$23 million for the same period last year to $30.1 million. Revenues
from North American and International operations grew 31%. Revenues for
the nine months ended January 31, 1995 increased 34% from $60.1 million
for the same period last year to $80.6 million. Revenues from North
American operations grew 37%, while International revenues increased
28%. Revenues for the three and nine months ended January 31, 1994 do
not include the results of Q+E Software, Inc. ("Q+E") which was
acquired in April 1994 in a transaction accounted for using the
"purchase" method, or The Software Edge ("Software Edge") which was
acquired in September 1994 in a transaction accounted for using the
"pooling-of-interests" method. The increase in both the three and nine
month periods ended January 31,1995 is due to the Q+E and Software Edge
acquisitions, coupled with revenue growth in the Company's client/server
products. The significant revenue growth in the client/server products
offset a revenue decline in the Company's products targeted at the
traditional software application development market. Approximately 35%-
40% of the Company's current revenue stream is from the more traditional
market and we expect demand in this market to remain flat or decline
over a number of years as software development shifts towards the
client/server market.
Cost of Sales
Cost of sales includes cost of software media, freight, royalties and
amortization of capitalized software development costs and purchased
technology costs. Cost of sales for the three months ended January 31,
1995 increased 43% from $1.8 million for the same period last year to
$2.6 million. Cost of sales for the nine months ended January 31, 1995
increased 41% from $5.1 million to $7.3 million. The increase is
primarily due to higher levels of software amortization, caused by
releases of new products since last year.
Sales and Marketing
Sales and marketing expenses for the three months ended January 31, 1995
increased 22% from $13.6 million for the same period last year to $16.6
million. Sales and marketing costs for the nine months ended January
31, 1995 increased 27% from $36.7 million for the same period last year
to $46.7 million. The acquisitions of Q+E and Software Edge, combined
with increased investment in telesales, third party distribution
channels and marketing programs were the primary reasons for the
increase in both the three and nine months ended January 31, 1995.
Research and Development
Research and Development ("R & D") expenses reflect gross expenditures
less amounts capitalized in accordance with FAS 86. Amortization of
capitalized software is included in cost of sales. R & D expenses were
$3.1 million in the third quarter of fiscal 1995, which represented a
46% increase when compared to $2.1 million in the same period last year.
R & D expenses for the nine months ended January 31, 1995 were $9.2
million, up 42% from $6.5 million for the same period last year. The
increase in both the three and nine month periods ending January 31,
1995 is due primarily to development costs associated with product lines
acquired in connection with Q+E and increased investment in the
Company's client/server products.
General and Administrative
General and administrative expenses were $2.2 million in the third
quarter of fiscal 1995 as compared to $1.9 million in the same period.
General and administrative expenses for the nine months ended January
31, 1995 increased 24% from $5.3 million for the same period last year
to $6.5 million. The increase in both the three and nine months periods
is due primarily to administrative costs associated with the
acquisitions of Q+E and The Software Edge.
Operating Income
Operating income was $5.6 million for the three months ended January 31,
1995 compared with a $3.5 million for the same quarter in fiscal 1994.
Operating income for the nine months ended January 31, 1995 was $10.8
million compared with $6.5 million in the same period last year. These
increases are due to overall revenue growth and economies of scale
achieved from the Q+E and Software Edge acquisitions.
Other Income, net
Other income increased due to higher levels of cash available for
investment, when compared to the same period last year.
Income Taxes
The effective tax rate for the current period is 30%, which is the same
as the comparable period last year. The Company expects that the tax
rate for the remainder of fiscal 1995 will be 30%. The difference from
the statutory rate is primarily because of the estimated tax benefit
resulting from the utilization of net operating losses and research and
development tax credit carry forwards.
Financial Condition - Liquidity and Capital Resources
During the nine months ended January 31, 1995, operations provided $11.0
million of cash, after making $4.1 million for acquisition related
payments. Additional cash of $3.9 million was generated through the
proceeds from the Company's stock option and stock purchase plans. Cash
was invested in capitalized software and fixed assets in the amount of
$5.9 million and $1.4 million, respectively, for the nine months ended
January 31, 1995. The Company also purchased $2.7 million in common
stock for treasury and disbursed $1.1 million to satisfy an installment
liability associated with the Q+E acquisition. Overall cash and cash
equivalents were $26.6 million at January 31, 1995, which is up $4.2
million from $22.4 million at the beginning of the fiscal year.
The Company has a bank line of credit arrangement which allows short-
term borrowings of up to $12 million. As of January 31, 1995 and for
the nine months then ended, there were no amounts outstanding under this
line of credit. Management believes that cash generated from
operations, cash on hand and available borrowings are sufficient to meet
the Company's capital requirements for the foreseeable future.
PART II. OTHER INFORMATION
Item 4. Results of Votes of Shareholders
None.
Item 5. Other
None.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
Number Exhibit Description
11.1 Computation of Net Income Per Share for
the three months
ended January 31, 1995 and 1994.
11.2 Computation of Net Income Per Share for
the nine monthsended January 31,
1995 and 1994.
(b) Reports on Form 8-K:
None.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
INTERSOLV, Inc.
Date: March 17, 1995 By:/s/Kevin J. Burns
Kevin J. Burns
President and Chief
Executive Officer
(Principal Executive Officer)
Date: March 17, 1995 By:/s/Kenneth A. Sexton
Kenneth A. Sexton
Vice President,
Finance and Administration,
Chief Financial Officer,
and Secretary
(Principal Financial and
Accounting Officer)
EXHIBIT INDEX
Exhibit
Number Description
11.1 Computation of Net Income Per Share for the
three months ended January 31, 1995 and 1994.
11.2 Computation of Net Income Per Share for the nine
months ended January 31, 1995 and 1994.
EXHIBIT 11.1
INTERSOLV, INC.
COMPUTATION OF NET INCOME PER SHARE
Three months ended January 31
(in thousands, except net income per share)
1995 1994
PRIMARY
Weighted average number of shares outstanding 15,429 12,166
Additional shares under stock option plan
assumed outstanding less shares
assumed repurchased under the treasury stock method 931 344
Primary Shares 16,360 12,510
Net Income $ 4,013 $ 2,556
Net Income Per Share $ 0.25 $ 0.20
FULLY DILUTED
Weighted average number of shares outstanding 15,429 12,166
Additional shares under stock option plan
assumed outstanding less shares assumed
repurchased under the treasury stock method 931 415
Fully Diluted Shares 16,360 12,581
Net Income $4,013 $ 2,556
Net Income Per Share $ 0.25 $ 0.20
EXHIBIT 11.2
INTERSOLV, INC.
COMPUTATION OF NET INCOME PER SHARE
Nine months ended January 31
(in thousands, except net income per share)
1995 1994
PRIMARY
Weighted average number of shares outstanding 15,312 12,046
Additional shares under stock option plan
assumed outstanding less shares assumed
repurchased under the treasury stock method 708 165
Primary Shares 16,020 12,211
Net Income $ 7,926 $ 4,687
Net Income Per Share $ 0.49 $ 0.38
FULLY DILUTED
Weighted average number of shares outstanding 15,312 12,046
Additional shares under stock option
plan assumed outstanding less shares assumed
repurchased under the treasury stock method 708 379
Fully Diluted Shares 16,020 12,425
Net Income $ 7,926 $ 4,687
Net Income Per Share $ 0.49 $ 0.38