<PAGE> 1
================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-------------
FORM 10-Q
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
- ----- OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1996
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 0-27574
POWERCERV CORPORATION
(Exact name of registrant as specified in its charter)
FLORIDA 59-3350778
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
400 NORTH ASHLEY DRIVE, SUITE 2700, TAMPA, FLORIDA 33602
(Address of principal executive offices, including zip code)
(813) 226-2600
(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 August 6, 1996, there were 13,826,447 shares of the registrant's common
stock, $.001 par value, outstanding.
================================================================================
<PAGE> 2
POWERCERV CORPORATION
FORM 10-Q
Contents
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION PAGE
Item 1. Financial Statements
<S> <C>
Condensed Consolidated Balance Sheets as of June 30, 1996 (unaudited)
and December 31, 1995....................................................................................... 2
Condensed Consolidated Statements of Operations for the Three Months Ended
June 30, 1996 and 1995 (unaudited) and
Six Months Ended June 30, 1996 and 1995 (unaudited)........................................................ 3
Condensed Consolidated Statements of Cash Flows for the
Six Months Ended June 30, 1996 and 1995 (unaudited)........................................................ 4
Notes to Condensed Consolidated Financial Statements (unaudited)............................................. 5
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.......................................................................................... 7
Accountants' Report.............................................................................................. 14
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K......................................................................... 15
Signatures....................................................................................................... 16
</TABLE>
INTERGY is a registered trademark of the registrant and the PowerCerv logo,
ADAPTlications, EnPower Series, PowerPerformance Series, PowerTOOL, PADLock,
FLOWBuilder, BatchBuilder, PowerCOM, PowerMAN, Xceed, Response, GrowthPlan and
AppSync are trademarks of the registrant. All other trademarks and company
names mentioned are the property of their respective owners.
1
<PAGE> 3
POWERCERV CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
JUNE 30, DECEMBER 31,
1996 1995
---------------------------------------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 20,318 $ 1
Accounts receivable, net of allowance of $500 and
$425, respectively 11,732 7,950
Refundable income taxes 124 823
Inventories 210 43
Other current assets 543 30
------------------- ------------------------
Total current assets 32,927 8,847
Property and equipment, net 2,640 1,886
Intangible assets, net 3,617 3,193
Deferred tax asset 1,332 1,195
Other assets 74 171
------------------- ------------------------
Total assets $ 40,590 $ 15,292
=================== ========================
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Lines of credit $ - $ 3,417
Current portion of notes payable - 2,468
Accounts payable 2,041 1,720
Accrued expenses 1,168 1,114
Deferred revenue 1,391 1,425
Due to affiliate - 11
------------------- ------------------------
Total current liabilities 4,600 10,155
Notes payable, less current portion - 8,932
Noncurrent income taxes payable 1,625 1,195
Redeemable preferred stock - 5,500
Convertible preferred stock - 5,500
Shareholders' equity (deficit) 34,365 (15,990)
------------------- ------------------------
Total liabilities and shareholders' equity $ 40,590 $ 15,292
=================== ========================
See notes to condensed consolidated financial statements.
</TABLE>
2
<PAGE> 4
POWERCERV CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(IN THOUSANDS, EXCEPT INCOME PER SHARE)
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
------------------------------------------ -------------------------------------------
1996 1995 1996 1995
-------------------- -------------------- -------------------- ---------------------
<S> <C> <C> <C> <C>
Revenue:
License fees $ 3,883 $ 1,556 $ 6,936 $ 2,385
Technology resales 1,217 1,152 1,927 2,219
Service fees 5,652 4,339 11,686 8,045
-------------------- ------------------- -------------------- --------------------
Total revenue $ 10,752 $ 7,047 $ 20,549 $ 12,649
-------------------- ------------------- -------------------- ---------------------
Costs and expenses:
Cost of licenses $ 366 $ 7 $ 596 $ 7
Cost of technology resales 1,055 967 1,514 1,827
Cost of services 3,806 2,484 7,329 4,481
General and administrative 1,297 1,223 2,327 2,112
Research and development 1,858 652 3,213 1,178
Sales and marketing 2,490 1,232 4,900 2,183
In-process research &
development - - 100 -
-------------------- ------------------- -------------------- --------------------
Total costs and expenses $ 10,872 $ 6,565 $ 19,979 $ 11,788
-------------------- ------------------- -------------------- ---------------------
Operating income (loss) $ (120) $ 482 $ 570 $ 861
Interest income (expense) net 293 (45) 197 (44)
-------------------- ------------------- -------------------- --------------------
Income before income taxes $ 173 $ 437 $ 767 $ 817
Provision for income taxes $ 68 880 $ 293 $ 880
-------------------- ------------------- -------------------- --------------------
Net Income (loss) $ 105 $ (443) $ 474 $ (63)
==================== =================== ==================== ====================
Net income (loss) per share $ 0.01 $ (0.04) $ 0.04 $ (0.01)
==================== =================== ==================== ====================
Shares used in computing net
income (loss) per share 14,240 10,837 12,972 10,837
==================== =================== ==================== ====================
Pro forma net income data:
Income before income taxes $ 437 $ 817
Pro forma income taxes 166 310
------------------- --------------------
Pro forma net income 271 507
=================== ====================
Pro forma net income per share $ 0.03 $ 0.05
=================== ====================
Shares used in computing
pro forma net income per share 10,837 10,837
=================== ====================
</TABLE>
See notes to condensed consolidated financial statements.
3
<PAGE> 5
POWERCERV CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
-----------------------------
1996 1995
------------- -------------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 474 $ (63)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operations:
Depreciation and amortization 261 110
Deferred revenue (61) 182
Write-off of in-process research and development 100 -
Accretion of imputed interest 141 -
Amortization of intangibles 452 -
Changes in assets and liabilities (net of effect of acquisition) (2,956) (24)
------------ ------------
Net cash provided by (used in) operating activities (1,589) 205
------------ ------------
Cash flows from investing activities:
Purchases of property and equipment, net (860) (460)
Acquisition of net assets, net of cash received (21) -
------------ ------------
Net cash used in investing activities (881) (460)
------------ ------------
Cash flows from financing activities:
Net proceeds from issuance of preferred stock - 10,926
Net proceeds from issuance of common stock 43,446 -
Repayments on line of credit - (85)
Subchapter S distributions - (10,672)
Repayment of notes payable (11,541) -
Redemption of preferred stock (5,500) -
Repayment of lines of credit (3,618) -
------------ ------------
Net cash provided by financing activities 22,787 169
------------ ------------
Net increase (decrease) in cash and cash equivalents 20,317 (86)
Cash and cash equivalents, beginning of period 1 87
------------ ------------
Cash and cash equivalents, end of period $ 20,318 $ 1
============ ============
</TABLE>
See notes to condensed consolidated financial statements.
4
<PAGE> 6
POWERCERV CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
A. BASIS OF PRESENTATION
The condensed consolidated balance sheet of PowerCerv Corporation and its
subsidiary (collectively, the "Company") as of June 30, 1996 and the condensed
consolidated statements of operations for the three and six months ended June
30, 1996 and 1995 and cash flows for the six months ended June 30, 1996 and
1995 have been prepared by the Company, without audit. In the opinion of
management, all adjustments (which include only normal recurring adjustments)
necessary to present fairly the financial position, results of operations and
cash flows at June 30, 1996 and for all periods presented have been made. The
condensed consolidated balance sheet at December 31, 1995 has been derived from
the Company's audited consolidated financial statements at that date.
Certain information and footnote disclosure normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted pursuant to the Securities and Exchange
Commission rules and regulations. These condensed consolidated financial
statements should be read in conjunction with the audited consolidated
financial statements and notes thereto for the year ended December 31, 1995
included in the Company's Form S-1 Registration Statement as declared effective
on February 29, 1996.
The results of operations for the three and six months ended June 30, 1996
are not necessarily indicative of results that may be expected for any other
interim period or for the full fiscal year.
B. INITIAL PUBLIC OFFERING
On March 1, 1996, the Company completed its initial public offering
("IPO") and issued 2,900,000 shares of its common stock at a price of $14.00
per share. The Company received approximately $36.9 million of cash, net of
offering expenses and underwriting discounts and commissions. Simultaneously,
all outstanding shares of convertible preferred stock were automatically
converted into common stock on a one-for-one basis and all outstanding shares
of redeemable preferred stock were redeemed. On April 3, 1996, the Company
received approximately $6.4 million, net of underwriting discounts and
commissions, in connection with the issuance of an additional 495,000 shares of
its common stock pursuant to the underwriter's exercise of the over-allotment
option granted by the Company in connection with the IPO.
C. EARNINGS PER SHARE
Earnings per share is computed using the weighted average number of shares
of common stock outstanding and dilutive common equivalent shares. Pursuant to
the rules of the Securities and Exchange Commission, common and common
equivalent shares issued during the twelve month period prior to the Company's
IPO have been assumed to be outstanding for all periods presented.
5
<PAGE> 7
POWERCERV CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
D. ACCRUED EXPENSES
Accrued expenses consist of the following at June 30, 1996 and December
31, 1995:
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
1996 1995
----------- -----------
<S> <C> <C>
Compensation $ 707 $ 660
Sales tax 262 355
Other 199 99
----------- -----------
$ 1,168 $ 1,114
=========== ===========
</TABLE>
E. INCOME TAXES
Prior to May 15, 1995, the Company was treated as an S Corporation for
income tax purposes. Effective May 15, 1995, the Company converted to a C
Corporation and adopted Statement of Financial Accounting Standards No. 109,
Accounting for Income Taxes. The effect of the adoption of Statement 109 was
$850,000 and has been reported as a component of income taxes for the three and
six months ended June 30, 1995.
Pro forma net income data has been calculated to present the provision for
income taxes for the three and six months ended June 30, 1995 using the
statutory tax rate in effect during the applicable periods, as if the Company
were taxable as a C Corporation.
6
<PAGE> 8
POWERCERV CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(DOLLARS IN THOUSANDS)
OVERVIEW
PowerCerv Corporation and its wholly-owned subsidiary, PowerCerv
Technologies Corporation (collectively, the "Company") provide a broad range of
client/server software development tools, application products and services
enabling its customers to successfully implement client/server systems to
achieve their business goals. The Company's products and services provide its
customers with the ability to successfully design, develop, deploy and maintain
client/server solutions for their specific needs, whether those needs are best
met by buying pre-written applications, building custom applications from
scratch or combining elements of both approaches. The Company not only
provides software development tools to customers designing their own
applications, but also provides application products that can themselves be
adapted to the customer's specific requirements. In addition, the Company
provides consulting and education services to assist customers in designing and
deploying an optimal solution for their business problems. PowerCerv's
software development tools and application products are based on the technology
foundation of widely-used products provided by vendors such as Powersoft,
Sybase, Oracle and Microsoft, and utilize an open architecture enabling their
implementation with multiple databases, multiple operating systems, and
integration to other industry standard applications.
The discussion in this report contains forward-looking statements that
involve risks and uncertainties. The Company's future actual results may
differ materially from the results discussed herein and including those in the
forward-looking statements. Factors that could cause or contribute to such
differences include, but are not limited to, those discussed in this report,
and the risks discussed in the "Risk Factors" section (including, but not
limited to, the Company's ability to manage change, fluctuation in the
Company's quarterly activities and results of operations, the Company's
dependence on new products, the overall condition of the client/server market
and the Company's technology foundations, the availability of qualified
consulting personnel, the risks inherent in the Company's development of its
new products, and competition) in the Company's Registration Statement on Form
S-1 as declared effective by the Securities and Exchange Commission on February
29, 1996 (Reg. No. 333-00250). Due to all of these factors, it is possible
that in some future quarters the Company's results of operations may be below
the expectations of public market analysts and investors. In such event, the
price of the Company's common stock would likely be adversely affected.
RESULTS OF OPERATIONS
The Company's revenues consist primarily of software license fees, resales
of software products developed by other independent software vendors
("technology resales") and fees for services, including consulting, education
and maintenance. For the quarter ended June 30, 1996, service fees remain the
Company's largest single revenue source, although the Company's strategy is to
seek to increase revenue generated by licensing its application products and
software development tools as a percentage of total revenue.
7
<PAGE> 9
POWERCERV CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
(DOLLARS IN THOUSANDS)
The Company recognizes revenue in accordance with the American Institute
of Certified Public Accountants Statement of Position 91-1, Software Revenue
Recognition. Software license fees are recognized upon shipment to the
customer if collection is probable and the remaining Company obligations are
insignificant. The Company provides for potential product returns and
allowances at the time of shipment. Historically, product returns and
allowances have been immaterial. Revenues from consulting and education
services are recognized as those services are performed. Revenue for
maintenance services is recognized ratably over the term of the support period.
Unrecognized amounts are recorded as deferred revenue.
In general, revenues are difficult to forecast because the market for
client/server software is evolving rapidly and the Company's sales cycle, from
the customer's initial evaluation through purchase of licenses and the
related support services, varies substantially from customer to customer and
from product to product. License fee revenue from quarter to quarter is
difficult to forecast, as no significant order backlog exists at the end of any
quarter because the Company's products typically are shipped upon receipt of
customers' orders. The Company in the past has realized a substantial portion
of its revenue in the last month of a quarter, with this revenue concentrated
in the last weeks or days of a quarter.
The Company's strategy is to seek to expand its offering of higher margin
application products and software development tools and increase their sales as
a percentage of total revenue. Implementation of this strategy has in the
past, and may in the future, cause the Company's quarterly results to
fluctuate. In addition, the Company has built and intends to continue to build
an expense infrastructure that assumes this strategy will succeed. Therefore,
the failure of the Company to achieve this strategy could have a material
adverse effect on the Company's business, financial condition and results of
operations.
In addition, the Company's strategy is to supplement the marketing of its
software development tools, application products and services by its direct
sales force and telesales group with indirect marketing channels such as
value-added resellers ("VARs"), original equipment manufacturers ("OEMs") and
distributors. Selling through indirect channels may limit the Company's
contacts with its customers. As a result, the Company's ability to accurately
forecast sales, evaluate customer satisfaction and recognize emerging customer
requirements may be hindered. The Company's strategy of marketing its products
directly to end-users and indirectly through VARs, OEMs and distributors may
result in distribution channel conflicts. The Company's direct sales efforts
may compete with those of its indirect channels and, to the extent different
resellers target the same customers, resellers may also come into conflict with
each other. Although the Company has attempted to manage its distribution
channels in a manner to avoid potential conflicts, there can be no assurance
that channel conflicts will not materially adversely affect its relationships
with existing VARs, OEMs or distributors or adversely affect its ability to
attract new VARs, OEMs and distributors.
8
<PAGE> 10
POWERCERV CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
(DOLLARS IN THOUSANDS)
The Company's quarterly revenue and results of operations have fluctuated
significantly in the past and will likely fluctuate in the future. Causes of
such fluctuations have included and may include, among others, the demand for
the Company's products and services; the size and timing of orders; the number,
timing and significance of new product announcements by the Company and its
competitors; the ability of the Company to develop, introduce, market, sell and
ship existing, new and enhanced versions of the Company's products on a timely
basis; reassignments of consultants from providing billable services to
research and development; the level of product and price competition; changes
in operating expenses; changes in average selling prices and mix between the
Company's products, technology resale products and services; changes in the
Company's sales incentive strategy; the mix of direct and indirect sales
(including international sales); seasonal decline in product sales; changes in
customers' budget constraints and general economic factors. Any one or more of
these or other factors could have a material adverse effect on the Company's
business, financial condition and results of operations. The potential
occurrence of any one or more of these factors makes the prediction of revenue
and results of operations on a quarterly basis difficult and performance
forecasts derived from such predictions unreliable.
Since the market for software development tools, application products and
services in the client/server industry is intensely competitive and rapidly
changing, the Company's future success will depend upon its ability to enhance
its current products and to develop and introduce new products that keep pace
with technological developments, respond to evolving customer requirements,
compete effectively with other client/server product and services vendors and
achieve market acceptance. Any failure by the Company to anticipate or respond
adequately to technological developments and customer requirements, or any
significant delays in product development or introduction, could result in a
loss of competitiveness or revenue. In the recent past, the Company has
experienced unexpected delays in the introduction of certain of its products,
which has had an adverse impact on the Company's revenue.
<TABLE>
<CAPTION>
REVENUES THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
------------------------------- ------------------------------
1996 CHANGE 1995 1996 CHANGE 1995
---------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
License fees $3,883 150% $1,556 $ 6,936 191% $2,385
Percentage of total revenues 36% 22% 34% 19%
- ---------------------------- ---------------------------------------------------------------
Technology resales 1,217 6% 1,152 1,927 (13%) 2,219
Percentage of total revenues 11% 16% 9% 17%
- ---------------------------- ---------------------------------------------------------------
Service fees 5,652 30% 4,339 11,686 45% 8,045
Percentage of total revenues 53% 62% 57% 64%
- ---------------------------- ---------------------------------------------------------------
</TABLE>
Second quarter license fees revenue rose primarily as a result of the
completion of an OEM agreement for certain PowerCerv products producing $2,000
in license fees. Additionally, the Company is currently negotiating a $1,500
investment for a 5% interest in this OEM channel partner. There is no
assurance that a transaction will be consummated. The year-to-date increase in
license fees was also due to the increase in the number of licenses sold as
well as increased transaction size primarily due to increased market acceptance
of the Company's products and underlying client/server
9
<PAGE> 11
POWERCERV CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
(DOLLARS IN THOUSANDS)
technology, expansion of the Company's product offerings and growth in the
Company's sales, marketing and customer service organizations. Management
believes that the new release of Powersoft Corporation's PowerBuilder version
5.0 software has created a certain amount of client/server class library market
indecisiveness which has negatively impacted revenues associated with one of
the Company's software development tools and this negative impact is expected
to continue. Additionally, should the Company not introduce enhanced versions
of certain of its licensed products planned for third quarter release, its
third quarter license fee revenues may be adversely affected.
Technology resales revenue decreased year-to-date due to the Company's
increased focus on sales of its own software development tools and application
products and increased market competition for technology resale products.
Management believes that 1996 technology resales revenue will be less than such
revenue in the corresponding periods in 1995.
Service fees revenue grew because of the increase in the number of
consulting personnel, increase in the realized consulting hourly rates and the
additional maintenance revenue provided by the Company's product licensing
activities.
COSTS AND EXPENSES
<TABLE>
<CAPTION>
COST OF REVENUES: THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
-------------------------------- ---------------------------------
1996 CHANGE 1995 1996 CHANGE 1995
-------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Cost of licenses $ 366 * $ 7 $ 596 * $ 7
Gross profit percentage 91% 99% 91% 99%
- ----------------------- ------------------------------------------------------------------
Cost of technology resales $1,055 9% $ 967 $1,514 (17%) $1,827
Gross profit percentage 13% 16% 21% 18%
- ----------------------- ------------------------------------------------------------------
Cost of services $3,806 53% $2,484 $7,329 64% $4,481
Gross profit percentage 33% 43% 37% 44%
- ----------------------- ------------------------------------------------------------------
</TABLE>
(*) not meaningful
A substantial portion of the Company's operating expenses is related to
personnel, facilities and marketing programs. The level of spending for such
expenses cannot be adjusted quickly and is therefore fixed in the short term.
The Company's expense levels for personnel, facilities and marketing programs
are based, in significant part, on the Company's expectations of future revenue
on a quarterly basis. If actual revenue levels on a quarterly basis are below
management's expectations, results of operations are likely to be adversely
affected by a similar amount because a relatively small amount of the Company's
operating expenses varies with its revenues in the short term.
The cost of licenses consists primarily of production costs and the
amortization of intangible assets. The 1995 cost of licenses was immaterial as
a separate component of costs and expenses.
The increase in the year-to-date gross profit margin of technology resales
is due to new higher margin resales, primarily databases, and the recognition
of revenue of certain resale products on a commission basis versus recording
the transaction as gross sales revenue with the corresponding costs.
10
<PAGE> 12
POWERCERV CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
(DOLLARS IN THOUSANDS)
The decrease in the gross profit margin of service fees resulted primarily
from increased personnel costs. The Company anticipates that the gross profit
margin for 1996 quarterly services fees will continue to be less than such
margin for the corresponding periods in 1995, and the 1996 year-to-date gross
profit margin may not be sustainable.
<TABLE>
OPERATING EXPENSES: THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
------------------------------ -------------------------------
1996 CHANGE 1995 1996 CHANGE 1995
---------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
General and administrative $1,297 6% $1,223 $2,327 10% $2,112
Percentage of total revenues 12% 17% 11% 17%
- ---------------------------- --------------------------------------------------------------
Research and development $1,858 185% $ 652 $3,213 173% $1,178
Percentage of total revenues 17% 9% 16% 9%
- ---------------------------- --------------------------------------------------------------
Sales and marketing $2,490 102% $1,232 $4,900 124% $2,183
Percentage of total revenues 23% 17% 24% 17%
- ---------------------------- --------------------------------------------------------------
In-process research and
development $ - * $ - $ 100 * $ -
Percentage of total revenues - - 1% -
- ---------------------------- --------------------------------------------------------------
</TABLE>
(*) not meaningful
General and administrative ("G&A") expenses decreased as a percentage of
total revenues primarily due to certain corporate professional support
personnel being reclassified from G&A to sales and marketing and leverage being
obtained from the existing G&A infrastructure.
Research and development ("R&D") expenses increased year-to-date due
primarily to additional R&D personnel necessary to expand and enhance the
Company's product line. The second quarter R&D increase resulted from the
temporary reassignment of consulting personnel to R&D positions to facilitate
new version releases of its application products. This temporary transfer not
only increased R&D but also decreased service fees. This specific R&D
initiative is expected to continue through the third quarter and to a
lesser extent the fourth quarter and will adversely affect operating results.
The rise in sales and marketing expenses was attributable to the Company's
investment in its direct and indirect sales force, both domestically and
internationally, and increased marketing expenses for the Company's expanded
product line. The Company will continue to increase its direct and indirect
sales force and consequently its sales and marketing expenses may continue to
increase both in dollar amounts and percentage of total revenues in the future.
Effective January 1, 1996, the Company completed the strategic acquisition
of substantially all of the net assets of Visual Systems Development Group of
Michigan, Inc. The acquisition resulted in the issuance of 110,000 shares of
the Company's common stock and was accounted for as a purchase transaction.
The allocation of the purchase price of $935 included an allocation of $100 to
in-process R&D which is reflected as a one-time charge in the Company's first
quarter 1996 operating results.
11
<PAGE> 13
POWERCERV CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
(DOLLARS IN THOUSANDS)
PROVISION FOR INCOME TAXES
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
------------------------------- -------------------------------
ACTUAL PRO FORMA ACTUAL PRO FORMA
--------- --------- --------- ---------
1996 CHANGE 1995 1996 CHANGE 1995
----------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Provision for income taxes $68 (59%) $166 $293 (5%) $310
Percentage of revenue 1% 2% 1% 2%
- --------------------- ----------------------------------------------------------------
</TABLE>
Until May 1995, the Company was treated as an S Corporation for federal
and state income tax purposes. Accordingly, federal income taxes on any
earnings were payable by the Company's shareholders rather than the Company.
Pro forma net income data has been calculated to present the provision for
income taxes for the three and six months ended June 30, 1995 using the
statutory tax rate in effect during the applicable periods, as if the Company
were taxable as a C Corporation.
The Company's estimated tax rate for the six months ended June 30, 1996,
and the statutory tax rate in effect for the six months ended June 30, 1995,
was 38%.
LIQUIDITY AND CAPITAL RESOURCES
<TABLE>
<CAPTION>
AS OF AND FOR THE
SIX MONTHS ENDED JUNE 30,
---------------------------------
1996 CHANGE 1995
---------------------------------
<S> <C> <C> <C>
Working capital $28,327 * $1,172
Cash and cash equivalents 20,318 * 1
Cash provided by (used in) operating
activities (1,589) * 205
Cash used in investing activities 881 91% 460
Cash provided by financing activities 22,787 * 169
</TABLE>
(*) not meaningful
Working capital, cash and cash equivalents and cash provided by financing
activities increased in the six months ended June 30, 1996 due primarily to
the successful completion of the IPO on March 1, 1996 and the exercise of the
underwriter's over-allotment option on April 3, 1996.
Proceeds from the IPO were used to pay off all outstanding bank debt and
shareholder loans. Due to the Company's strong cash position and in light of
its current plans, the Company terminated its bank lines of credit in April
1996.
12
<PAGE> 14
POWERCERV CORPORATION
The Company believes that funds generated from its operations and existing
cash balances will be sufficient to finance the Company's operations for at
least the next twelve months.
REVIEW BY INDEPENDENT
CERTIFIED PUBLIC ACCOUNTANTS
The Company's independent certified public accountants have made a limited
review of the Condensed Consolidated Financial Statements (included in Part
I/Item 1 herein) in accordance with standards established by the American
Institute of Certified Public Accountants. The Accountants' Report is
presented on page 14 of this report.
13
<PAGE> 15
ACCOUNTANTS' REPORT
The Board of Directors
PowerCerv Corporation:
We have reviewed the condensed consolidated balance sheet of PowerCerv
Corporation and subsidiary as of June 30, 1996, and the related condensed
consolidated statements of operations and cash flows for both the three and six
months ended June 30, 1996 and 1995, as included in Part I/Item 1 of this
quarterly report on Form 10-Q. These condensed consolidated financial
statements are the responsibility of the Company's management.
We conducted our review in accordance with standards established by the American
Institute of Certified Public Accountants. A review of interim financial
information consists principally of applying analytical procedures to financial
data and making inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit conducted in
accordance with generally accepted auditing standards, the objective of which is
the expression of an opinion regarding the financial statements taken as a
whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to the aforementioned condensed consolidated financial statements for
them to be in conformity with generally accepted accounting principles.
We have previously audited, in accordance with generally accepted auditing
standards, the consolidated balance sheet of PowerCerv Corporation and
subsidiary as of December 31, 1995, and the related consolidated statements of
operations, shareholders' equity (deficit), and cash flows, for the year then
ended (not presented herein); and in our report dated January 27, 1996, we
expressed an unqualified opinion on those consolidated financial statements. In
our opinion, the information set forth in the condensed consolidated balance
sheet as of December 31, 1995, as included in Part I/Item 1 of this quarterly
report on Form 10-Q, is fairly stated, in all material respects, in relation to
the consolidated balance sheet from which it has been derived.
/s/ KPMG Peat Marwick LLP
KPMG Peat Marwick LLP
Tampa, Florida
July 18, 1996
14
<PAGE> 16
POWERCERV CORPORATION
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
15.1 Letter re unaudited interim financial information.
27.1 Financial Data Schedule (for SEC use only).
(b) Reports on Form 8-K
The Company did not file any report on Form 8-K during the quarter ended
June 30, 1996.
15
<PAGE> 17
POWERCERV CORPORATION
FORM 10-Q
(for the three-month period ended June 30, 1996)
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.
Dated: August 14, 1996
PowerCerv Corporation
/s/ Harold R. Ross
------------------------------------------
Harold R. Ross,
Chief Executive Officer
/s/ Gerald R. Wicker
------------------------------------------
Gerald R. Wicker,
Chief Financial Officer
(Principal Financial and Accounting Officer)
16
<PAGE> 1
EXHIBIT 15.1
PowerCerv Corporation
400 North Ashley Drive, Suite 2700
Tampa, Florida 33602
Gentlemen:
Re: Registration Statement on Form S-8 (No. 333-3960)
With respect to the above referenced registration statement, we acknowledge our
awareness of the incorporation by reference therein of our report dated July 18,
1996 related to our review of interim financial information, which report was
included in the Form 10-Q of PowerCerv Corporation for the three and six months
ended June 30, 1996.
Pursuant to Rule 436(c) under the Securities Act of 1933, such report is not
considered part of a registration statement prepared or certified by an
accountant or a report prepared or certified by an accountant within the
meaning of Sections 7 and 11 of the Act.
/s/ KPMG Peat Marwick LLP
KPMG Peat Marwick LLP
Tampa, Florida
July 18, 1996
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM UNAUDITED
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS AS OF AND FOR THE SIX MONTHS ENDED
JUNE 30, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH 10-Q
FILING.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> JUN-30-1996
<CASH> 20,318
<SECURITIES> 0
<RECEIVABLES> 12,232
<ALLOWANCES> 500
<INVENTORY> 210
<CURRENT-ASSETS> 32,927
<PP&E> 3,268
<DEPRECIATION> 628
<TOTAL-ASSETS> 40,590
<CURRENT-LIABILITIES> 4,600
<BONDS> 0
0
0
<COMMON> 14
<OTHER-SE> 34,351
<TOTAL-LIABILITY-AND-EQUITY> 40,590
<SALES> 0
<TOTAL-REVENUES> 20,549
<CGS> 0
<TOTAL-COSTS> 19,979
<OTHER-EXPENSES> 0
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<INCOME-PRETAX> 767
<INCOME-TAX> 293
<INCOME-CONTINUING> 474
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<CHANGES> 0
<NET-INCOME> 474
<EPS-PRIMARY> 0.04
<EPS-DILUTED> 0.04
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