14
_________________________________________________________
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(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, 1997
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
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.)
9420 Key West Avenue
Rockville, Maryland 20850
(Address of principal executive offices)
(301) 838-5000
(Registrant's telephone number including area code)
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, 1997, there were 20,555,475 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, 1997 and 1996 4
Condensed Consolidated Statements of
Operations for the nine months ended
January 31, 1997 and 1996 5
Condensed Consolidated Balance Sheets as of
January 31, 1997 and April 30, 1996 6
Condensed Consolidated Statements of Cash
Flows for the nine months ended January 31,
1997 and 1996 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 13
Item 5. Other 13
Item 6. Exhibits and Reports on Form 8-K 13
Signatures 14
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
The financial statements set forth below for the three
and nine month periods ended January 31, 1997 and 1996
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 and nine month periods ended
January 31, 1997 are not necessarily indicative of the
results for the fiscal year.
In the opinion of management, the accompanying
condensed consolidated 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 consolidated
financial statements and the notes thereto included in
the Annual Report on Form 10-K for the fiscal year
ended April 30, 1996.
INTERSOLV, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
For the three months ended January 31,
(amounts in thousands, except per share data)
(unaudited)
1997 1996
Revenues:
License fees $24,998 $24,990
Service fees 17,085 13,904
Total revenues $42,083 $38,894
Costs and expenses:
Cost of products 3,411 3,655
Cost of services 8,795 6,833
Sales and marketing 17,556 15,513
Research and development 3,828 3,638
General and administrative 3,472 2,893
Total costs and expenses 37,062 32,532
Operating income 5,021 6,362
Other income (expense), net (67) 283
Income before income taxes 4,954 6,645
Provision for income taxes 1,585 1,994
Net income $3,369 $4,651
Shares used in computing primary
net income per share 20,594 20,059
Primary net income per share $ 0.16 $ 0.23
Shares used in computing fully
diluted net income per share 20,913 21,080
Fully diluted net income per share $ 0.16 $ 0.22
The accompanying notes are an integral part of these
condensed consolidated financial statements.
INTERSOLV, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
For the nine months ended January 31,
(amounts in thousands, except per share data)
(unaudited)
1997 1996
Revenues:
License fees $65,009 $64,459
Service fees 47,486 40,813
Total revenues 112,495 105,272
Costs and expenses:
Cost of products 11,319 11,527
Cost of services 23,639 18,870
Sales and marketing 50,845 46,405
Research and development 10,545 11,070
General and administrative 9,159 9,393
Acquisition charges --- 13,600
Total costs and expenses 105,507 110,865
Operating income (loss) 6,988 (5,593)
Other income, net 72 763
Income (loss) before income taxes 7,060 (4,830)
Provision for income taxes 2,259 1,994
Net income (loss) $4,801 ($6,824)
Shares used in computing primary net
income per share 20,253 19,256
Primary net income (loss) per share $ 0.24 ($ 0.35)
Shares used in computing fully
diluted net income per share 20,897 19,256
Fully diluted net income (loss) per
share $ 0.23 ($ 0.35)
The accompanying notes are an integral part of these
condensed consolidated financial statements.
INTERSOLV, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(amounts in thousands)
(unaudited)
As of As of
January 31, April 30,
1997 1996
ASSETS
Current assets:
Cash and cash equivalents $12,826 $28,215
Accounts receivable, net 45,916 37,645
Prepaid expenses and other
current assets 7,111 7,237
Total current assets 65,853 73,097
Software, net 24,687 22,670
Property and equipment, net 11,133 7,835
Notes receivable and other assets 8,761 7,315
Total assets $110,434 $110,917
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and
accrued expenses 29,792 30,791
Deferred revenue 16,733 18,799
Total current liabilities 46,525 49,590
Long-term liabilities 9,000 7,817
Total liabilities 55,525 57,407
Subordinated convertible notes 120 3,676
Stockholders' equity
Common stock 208 198
Paid-in capital 96,267 92,967
Treasury stock (1,523) ---
Accumulated deficit (36,517) (41,318)
Cumulative currency translation
adjustment (3,646) (2,013)
Total stockholders' equity 54,789 49,834
Total liabilities and stockholders'
equity $110,434 $110,917
The accompanying notes are an integral part of these
condensed consolidated financial statements.
INTERSOLV, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the nine months ended January 31,
(amounts in thousands)
(unaudited)
1997 1996
CASH INFLOWS (OUTFLOWS)
Operating activities:
Net income (loss) $4,801 ($6,824)
Non-cash items:
Depreciation and amortization 12,244 10,692
Deferred income taxes 1,959 1,841
Capitalized software
writedowns --- 2,386
Payment of restructuring/
acquisition charges (2,782) (2,581)
Change in working capital (18,505) 3,608
Net cash (used by) provided by
operating activities (2,283) 9,122
Investing activities:
Additions to software (10,754) (8,891)
Acquisition of TechGnosis
International --- (4,800)
Additions to property and
equipment (6,039) (6,387)
Sale/leaseback of equipment --- 776
Changes in other assets (707) (330)
Net cash used in investing
activities (17,500) (19,632)
Financing activities:
Proceeds (payments) from debt,
net 6,325 (808)
Payment of acquisition
installment liability --- (1,107)
Proceeds from sale of common
stock 1,676 8,327
Purchase of common stock for
treasury (3,445) ---
Net cash provided by financing
activities 4,556 6,412
Effect of exchange rate changes
on cash (162) (249)
Net decrease in cash and cash
equivalents (15,389) (4,347)
Cash and cash equivalents,
beginning of period 28,215 26,661
Cash and cash equivalents,
end of period $12,826 $22,314
The accompanying notes are an integral part of these
condensed consolidated financial 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
three and nine month periods ended January 31, 1997 may
not necessarily be indicative of the results for the
entire year. The April 30, 1996 condensed consolidated
balance sheet data was derived from audited financial
statements as of the same date.
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,
1996.
Operations
The Company focuses on application enablement software
for client/server, Internet and intranet applications.
The Company's products and services support both the
development of client/server systems and the
maintenance of traditional systems.
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 January 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. The amount of the liability, if any,
cannot be ascertained.
Sales and Income Tax
The Company sells its products in various states
through different distribution channels, including
telesales, field sales and third party resellers. 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, generally three 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 realizable value from sales of the related
product, then the excess amount is written off.
Accounts Payable and Accrued Expenses
The Company has unsecured domestic and foreign bank line
of credit arrangements which provide for borrowings of up
to $15.8 million. As of January 31, 1997, there was $6.8
million outstanding. This amount is classified in
accounts payable and accrued expenses on the accompanying
condensed balance sheet.
Item 2.
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,
1997 1996 1997 1996
Revenues:
License fees 59.4% 64.3% 57.8% 61.2%
Service fees 40.6% 35.7% 42.2% 38.8%
100.0% 100.0% 100.0% 100.0%
Costs and expenses:
Cost of products 8.1% 9.4% 10.1% 10.9%
Cost of services 20.9% 17.6% 21.0% 17.9%
Sales and
marketing 41.7% 39.9% 45.2% 44.1%
Research and
development 9.1% 9.4% 9.4% 10.5%
General and
administrative 8.3% 7.4% 8.1% 8.9%
Acquisition
charges --- --- --- 12.9%
Total costs
and expenses 88.1% 83.7% 93.8% 105.2%
Operating income
(loss) 11.9% 16.3% 6.2% (5.2%)
Other income
(expense), net (0.1%) 0.7% 0.1% 0.7%
Income (loss) before
taxes 11.8% 17.0% 6.3% (4.5%)
Provision for income
taxes 3.8% 5.0% 2.0% 1.9%
Net income (loss) 8.0% 12.0% 4.3% (6.4%)
Revenues from North America and International were 69%
and 31%, respectively, for the three months ended January
31, 1997 as compared to 67% and 33%, respectively for the
same period last year. For the nine months ended January
31, 1997, revenues from North America and International
were 68% and 32% compared to 66% and 34% for the same
period last year.
Revenues
Revenues for the three months ended January 31, 1997 were
$42.1 million, which is 8% growth over the $38.9 million
for the same period last year. Revenues for the nine
months ended January 31, 1997 were $112.5 million, which
is 7% growth over the $105.3 million for the same period
last year. For the three months ended January 31, 1997,
revenue growth in PVCS (Software Configuration
Management) and DataDirect (Data Connectivity) product
lines was 34% and 7%, respectively, which was offset by a
22% decline in revenue from the AppMaster (Enterprise
Client/Server) product line. For the nine months ending
January 31, 1997, PVCS and DataDirect revenues grew 28%
and 17%, respectively, while revenues from the AppMaster
product line decreased 17%.
Growth in the PVCS and DataDirect product lines was due
to increases in new license sales and increased demand
for services, particularly consulting services. For the
nine months ended January 31, 1997, revenue for PVCS and
DataDirect represented 82% of the Company's revenue. The
decline in the AppMaster product line was due largely to
a decline in new license sales, reflecting a continuing
trend experienced by the Company as more companies shift
away from traditional COBOL oriented development to
client/server development. The decline in AppMaster new
license sales is partially offset by increased consulting
services as demand for the Company's Year 2000 solution
continues to build. The Company expects to derive
increased license fees from its new object-oriented
technology, Allegris, which was released for general
availability in January 1997.
On a geographical basis, the Company had revenue growth
in North America and Asia/Pacific (principally Japan),
for the three months ended January 31, 1997, while
revenues in Europe declined somewhat. The results for
the nine months ended January 31, 1997, showed growth in
North America and Asia/Pacific, while Europe was
essentially flat.
Cost of Products
Cost of products includes cost of software media,
freight, royalties and amortization of capitalized
software development costs and purchased technology
costs. Cost of products for the three months ended
January 31, 1997 decreased 7% from $3.7 million for the
same period last year to $3.4 million. Cost of products
for the nine months ended January 31, 1997 decreased to
$11.3 million, when compared to $11.5 million for the
same period last year. The decreases in the three and
nine months ended January 31, 1997 are primarily due to
lower levels of software amortization. Software
amortization should increase because the Allegris product
line was released for general availability in January
1997.
Cost of Services
Cost of services includes personnel and related indirect
costs incurred to provide consulting and training
services, as well as telephone support to customers under
maintenance contracts. Cost of services increased 29%
from $6.8 million for the three months ended January 31,
1996 to $8.8 million for the three months ended January
31, 1997. Cost of services increased 25% from $18.9
million for the nine months ended January 31, 1996 to
$23.6 million for the nine months ended January 31, 1997.
The Company has experienced strong growth in the demand
for consulting and training services, which is reflected
in the 23% and 16% growth in service revenue for the
three and nine month periods ended January 31, 1997,
respectively. The growth in consulting and training
services has led to an increase in personnel, thus
increasing the cost of services.
Sales and Marketing
Sales and marketing expenses for the three months ended
January 31, 1997 increased 13% from $15.5 million for the
same period last year to $17.6 million. Sales and
marketing expenses increased 10% from $46.4 million for
the nine months ended January 31, 1996 to $50.8 million.
The Company increased its investments in field sales,
telesales and third party selling channels, as well as
expanding its marketing capabilities during the three and
nine months ended January 31, 1997. This increase in
costs was partially offset by the decrease in sales and
marketing costs resulting from the elimination of
TechGnosis' redundant sales functions after the Company
acquired TechGnosis International, Inc. ("TechGnosis") in
October 1995, in a transaction accounted for using the
"pooling-of-interests" method.
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 products. R & D expenses were $3.8 million in
the third quarter ended January 31, 1997, which is 5%
higher than last year's level of $3.6 million. R&D
expenses for the nine months ended January 31, 1997 were
$10.5 million, which is 5% lower than the $11.1 million
for the same period last year. The decrease in R&D
expenses for the nine month period ended January 31, 1997
is the result of higher capitalization of software costs
related to the Allegris product line. The Allegris
product line was released for general availability in
January 1997.
General and Administrative
General and administrative expenses were $3.5 million in
the third quarter of fiscal 1997, which is a 20% increase
as compared to $2.9 million in the same period last year.
General and administrative expenses for the nine months
ended January 31, 1997 were $9.2 million which is 2%
lower than the $9.4 million for the same period last
year. The increase for the quarter ended January 31,
1997 is attributable to the implementation of new
information systems and supporting infrastructure.
Operating Income
The Company reported operating income of $5 million for
the three months ended January 31, 1997, as compared to
operating income of $6.4 million for the three months
ended January 31, 1996. Operating income for the nine
months ended January 31, 1997 was $7 million, as compared
to $8.0 million for the same period last year after
excluding acquisition charges.
Other Income, net
Other income, which is primarily net investment income,
decreased when compared to the same periods last year as
cash available to invest decreased .
Income Taxes
The Company's tax rate for the nine months ended January
31, 1997 was 32% based upon the Company's estimate of the
annual effective tax rate assuming the use of existing
tax credits and net operating loss carryforwards.
Financial Condition - Liquidity and Capital Resources
During the nine months ended January 31, 1997, operations
used $2.3 million of cash, after paying $2.8 million in
acquisition related restructuring charges. Financing
activities generated a net $4.6 million, as $1.7 million
was derived from the sale of stock through stock option
exercises and employee stock purchase programs and net
borrowings under lines of credit totaled $6.3 million.
The Company also spent $3.4 million to repurchase its
common stock. Investing activities used $17.5 million as
the Company invested $10.8 million in software and a net
$6 million in fixed assets. Overall cash and cash
equivalents were $12.8 million at January 31, 1997, which
is down $15.4 million from $28.2 million at the beginning
of the fiscal year.
The Company has domestic and foreign bank line of credit
arrangements which allow short-term borrowings of up to
$15.8 million, of which there was $6.8 million
outstanding as of January 31, 1997. 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, 1997 and
1996.
11.2 Computation of Net Income
Per Share for the nine
months ended January 31,
1997 and 1996
27 Financial Data Schedule (as
part of electronic filing)
(b) Reports on Form 8-K
There were no reports on Form 8-K filed during
the three months ended January 31, 1997.
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 13, 1997 By: /s/ Kenneth A. Sexton
Kenneth A. Sexton
Senior Vice President,
Finance & Administration
and Chief Financial Officer
(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,
1997 and 1996.
11.2 Computation of Net Income Per Share
for the nine months ended
January 31, 1997 and 1996
27 Financial Data Schedule (as part of
electronic filing)
EXHIBIT 11.1
INTERSOLV, INC
COMPUTATION OF NET INCOME PER SHARE
Three months ended January 31,
(in thousands, except net income per share)
1997 1996
PRIMARY
Weighted average number of shares
outstanding 20,272 19,515
Additional shares under stock
option plan assumed outstanding
less shares assumed repurchased
under the treasury stock method 322 544
Primary Shares 20,594 20,059
Net Income $3,369 $4,651
Net Income Per Share $ 0.16 $ 0.23
FULLY DILUTED
Weighted average number of shares
outstanding 20,272 19,515
Additional shares under stock
option plan assumed outstanding
less shares assumed repurchased
under the treasury stock method 397 544
Additional shares under the 8.4%
subordinated convertible notes
assumed outstanding 244 1,021
Fully Diluted Shares 20,913 21,080
Net Income before adjustments $3,369 $4,651
Elimination of interest expense,
net of related tax effect, related
to 8.4% subordinated convertible
notes 16 57
Net income used for fully diluted
net income per share $3,385 $4,708
Net Income per share $ 0.16 $ 0.22
EXHIBIT 11.2
INTERSOLV, INC
COMPUTATION OF NET INCOME PER SHARE
Nine months ended January 31
(in thousands, except net income per share)
1997 1996
PRIMARY
Weighted average number of shares
outstanding 19,977 19,256
Additional shares under stock
option plan assumed outstanding
less shares assumed repurchased
under the treasury stock method 276 ---
Primary Shares 20,253 19,256
Net Income (Loss) $ 4,801 ($6,824)
Net Income (Loss) Per Share $ 0.24 ($ 0.35)
FULLY DILUTED
Weighted average number of shares
outstanding 19,977 19,256
Additional shares under stock
option plan assumed outstanding
less shares assumed repurchased
under the treasury stock method 321 ---
Additional shares under the 8.4%
subordinated convertible notes
assumed outstanding 599 ---
Fully Diluted Shares 20,897 19,256
Net Income (Loss) before adjustments $4,801 ($6,824)
Elimination of interest expense,
net of related tax effect, related
to 8.4% subordinated convertible notes 99 ---
Net Income (Loss) used for fully
diluted net income (loss) per share $ 4,900 $ 6,824
Net Income (Loss) Per Share $ 0.23 ($ 0.35)