<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 September 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 November 7, 1996, there were 13,829,434 shares of the registrant's common
stock, $.001 par value, outstanding.
================================================================================
<PAGE> 2
POWERCERV CORPORATION
FORM 10-Q
Contents
<TABLE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
<CAPTION>
Page
<S> <C>
Condensed Consolidated Balance Sheets as of September 30, 1996 (unaudited)
and December 31, 1995............................................................................. 2
Condensed Consolidated Statements of Operations for the Three Months Ended
September 30, 1996 and 1995 (unaudited) and
Nine Months Ended September 30, 1996 and 1995 (unaudited)......................................... 3
Condensed Consolidated Statements of Cash Flows for the
Nine Months Ended September 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..................................................................................... 15
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K................................................................ 16
Signatures.............................................................................................. 17
</TABLE>
INTERGY is a registered trademark of the registrant and the PowerCerv logo,
ADAPTlications, PowerTOOL, PADLock, FLOWBuilder 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>
SEPTEMBER 30, DECEMBER 31,
1996 1995
------------------------------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 16,671 $ 1
Accounts receivable, net of allowance of $500 and
$425, respectively 11,679 7,950
Refundable income taxes 119 823
Inventories 259 43
Other current assets 327 30
------------- -------------
Total current assets 29,055 8,847
Property and equipment, net 2,966 1,886
Intangible assets, net 3,485 3,193
Deferred tax asset 1,377 1,195
Other assets 51 171
------------- -------------
Total assets $ 36,934 $ 15,292
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Lines of credit $ - $ 3,417
Current portion of notes payable - 2,468
Accounts payable 1,117 1,720
Accrued expenses 1,534 1,114
Deferred revenue 1,964 1,425
Due to affiliate - 11
------------- -------------
Total current liabilities 4,615 10,155
Notes payable, less current portion - 8,932
Noncurrent income taxes payable 260 1,195
Redeemable preferred stock - 5,500
Convertible preferred stock - 5,500
Shareholders' equity (deficit) 32,059 (15,990)
------------- -------------
Total liabilities and shareholders' equity $ 36,934 $ 15,292
============= ==============
See notes to condensed consolidated financial statements.
</TABLE>
2
<PAGE> 4
POWERCERV CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------------------------------------- ---------------------------------------------
1996 1995 1996 1995
-------------------- -------------------- -------------------- ---------------------
<S> <C> <C> <C> <C>
Revenue:
License fees $ 1,659 $ 2,363 $ 8,595 $ 4,748
Technology resales 491 519 2,418 2,738
Service fees 5,168 3,996 16,854 12,041
-------------------- ------------------- -------------------- --------------------
Total revenue $ 7,318 $ 6,878 $ 27,867 $ 19,527
-------------------- ------------------- -------------------- --------------------
Costs and expenses:
Cost of licenses $ 420 $ 88 $ 1,016 $ 95
Cost of technology resales 434 380 1,948 2,207
Cost of services 4,080 2,710 11,409 7,191
General and administrative 1,413 1,361 3,740 3,473
Research and development 2,045 729 5,258 1,907
Sales and marketing 2,909 1,174 7,809 3,357
In-process research &
development - - 100 -
-------------------- ------------------- -------------------- --------------------
Total costs and expenses $ 11,301 $ 6,442 $ 31,280 $ 18,230
-------------------- ------------------- -------------------- --------------------
Operating income (loss) $ (3,983) $ 436 $ (3,413) $ 1,297
Interest income (expense) net 262 (10) 459 (54)
-------------------- ------------------- -------------------- --------------------
Income (loss) before
income taxes $ (3,721) $ 426 $ (2,954) $ 1,243
Income tax expense (benefit) $ (1,411) $ 180 $ (1,118) $ 1,060
-------------------- ------------------- -------------------- --------------------
Net income (loss) $ (2,310) $ 246 $ (1,836) $ 183
==================== =================== ==================== ====================
Net income (loss) per share $ (0.17) $ 0.02 $ (0.15) $ 0.02
==================== =================== ==================== ====================
Shares used in computing net
income (loss) per share 13,827 10,837 12,652 10,837
==================== =================== ==================== ====================
Pro forma net income data:
Income before income taxes $ 1,243
Pro forma income taxes 490
--------------------
Pro forma net income 753
====================
Pro forma net income per share $ 0.07
====================
Shares used in computing
pro forma net income
per share 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>
NINE MONTHS ENDED SEPTEMBER 30,
----------------------------------------
1996 1995
---------------- ----------------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ (1,836) $ 183
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operations:
Depreciation and amortization 1,129 165
Deferred revenue 512 412
Write-off of in-process research and development 100 -
Accretion of imputed interest 141 -
Changes in assets and liabilities (net of effect of
acquisition) (4,679) (1,190)
--------------- ---------------
Net cash used in operating activities (4,633) (430)
--------------- ---------------
Cash flows from investing activities:
Purchases of property and equipment, net (1,363) (1,056)
Acquisition of net assets, net of cash received (126) -
--------------- ---------------
Net cash used in investing activities (1,489) (1,056)
--------------- ---------------
Cash flows from financing activities:
Net proceeds from issuance of preferred stock - 10,926
Net proceeds from issuance of common stock 43,451 200
Net borrowings (repayments) on line of credit (3,618) 1,157
Subchapter S distributions - (10,672)
Repayment of notes payable (11,541) -
Redemption of preferred stock (5,500) -
--------------- ---------------
Net cash provided by financing activities 22,792 1,611
--------------- ---------------
Net increase in cash and cash equivalents 16,670 125
Cash and cash equivalents, beginning of period 1 87
--------------- ---------------
Cash and cash equivalents, end of period $ 16,671 $ 212
=============== ===============
</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 September 30, 1996 and the
condensed consolidated statements of operations for the three and nine months
ended September 30, 1996 and 1995 and cash flows for the nine months ended
September 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 September 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 nine months ended September
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, from 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. During the
three and nine months ended September 30, 1996, all common stock equivalents
were anti-dilutive due to the net losses outstanding by the Company during the
period. 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 September 30, 1996 and
December 31, 1995:
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS)
1996 1995
----------- -----------
<S> <C> <C>
Compensation $ 850 $ 660
Sales tax 312 355
Other 372 99
----------- -----------
$ 1,534 $ 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
nine months ended September 30, 1995.
Pro forma net income data has been calculated to present the provision for
income taxes for the nine months ended September 30, 1995 using the statutory
tax rate in effect during the applicable period, 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 under "Risk Factors" 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) 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. Due to these factors, among others, 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 September 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 timely achieve this strategy could have a
material adverse effect on the Company's business, financial condition and
results of operations.
The Company's strategy for increasing its product sales also includes
supplementing the marketing of its software development tools, application
products and services by its direct sales force and telesales group with
indirect marketing channels. These indirect channels include value-added
resellers ("VARs"), original equipment manufacturers ("OEMs"), strategic
alliance partners assisting in generating product sales and providing consulting
services to end users ("teaming partners"), and distributors. During the
quarter ended September 30, 1996, the Company established a business development
group to implement this channels strategy and to leverage its strategic
alliances with software vendors, hardware vendors, consulting firms and major
systems integrators. 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, teaming partners 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
8
<PAGE> 10
POWERCERV CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
(DOLLARS IN THOUSANDS)
distribution channels to avoid potential conflicts, there can be no assurance
that channel conflicts will not materially adversely affect its relationships
with existing VARs, OEMs, teaming partners, or distributors or adversely affect
its ability to attract new VARs, OEMs, teaming partners and distributors.
In addition, the Company's strategy is to provide its customers with a
breadth of quality client/server and internet enablement services, including
architecture consulting, design, development, training and deployment services.
During the three months ended September 30, 1996, the Company created a
client/server migration group and an internet enablement group in expectation of
increasing sales of its services and development tools. The market for these
types of services is intensely competitive and the Company believes its ability
to compete successfully depends upon a number of factors both within and beyond
its control, including the quality of services, ability to recruit, hire, train
and retain technical consultant personnel, and industry and general economic
trends. Although services remain the largest single revenue source for the
Company, there can be no assurance that this strategy will succeed and that
service revenues and associated license fees from development tools will
increase.
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 and enhancements
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 and earnings. In the
recent past, the Company has experienced delays in the introduction of certain
of its products, which has had an adverse impact on the Company's revenue and
earnings.
9
<PAGE> 11
POWERCERV CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
REVENUES THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------- -------------------------------
1996 CHANGE 1995 1996 CHANGE 1995
- ---------------------------- ------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
License fees $1,659 (30%) $2,363 $ 8,595 81% $ 4,748
Percentage of total revenues 23% 34% 31% 24%
- ---------------------------- ------------------------------------------------------------------
Technology resales $ 491 (5%) $ 519 $ 2,418 (12%) $ 2,738
Percentage of total revenues 7% 8% 9% 14%
- ---------------------------- ------------------------------------------------------------------
Service fees $5,168 29% $3,996 $16,854 40% $12,041
Percentage of total revenues 70% 58% 60% 62%
- ---------------------------- ------------------------------------------------------------------
</TABLE>
Third quarter license fees revenue decreased primarily due to the
Company's release of enhancements for its application products later than
originally planned in the quarter. The year-to-date increase in license fees
was primarily the result of the increase in the number of licenses sold,
increased transaction size, expansion of the Company's product offerings, and
growth in the Company's sales, marketing and customer service organizations.
Management continues to believe that the second quarter 1996 release of
Powersoft Corporation's PowerBuilder version 5.0 software 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. Although the Company recently released the new version of
its class library development tool, management believes this negative impact is
expected to continue.
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>
COST OF REVENUES: THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------- -------------------------------
1996 CHANGE 1995 1996 CHANGE 1995
- ---------------------------- ------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Cost of licenses $ 420 * $ 88 $ 1,016 * $ 95
Gross profit percentage 75% 96% 88% 98%
- ---------------------------- --------------------------------------------------------------------
Cost of technology resales $ 434 14% $ 380 $ 1,948 (12%) $ 2,207
Gross profit percentage 12% 27% 19% 19%
- ---------------------------- --------------------------------------------------------------------
Cost of services $4,080 51% $2,710 $ 11,409 59% $ 7,191
Gross profit percentage 21% 32% 32% 40%
- ---------------------------- --------------------------------------------------------------------
(*) not meaningful
</TABLE>
10
<PAGE> 12
POWERCERV CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
(DOLLARS IN THOUSANDS)
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.
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, royalties
associated with a module of one of the Company's application products, and the
amortization of intangible assets. Cost of licenses increased during the three
months ended September 30, 1996 due to production expenses incurred for new
releases of the Company's products. The 1995 cost of licenses was immaterial
as a separate component of costs and expenses.
The decrease in the year to date cost of technology resales compared to the
prior year was due to decreased technology resales revenue. Third quarter gross
profit margin on technology resales decreased from the prior year due to
increased sales volume of lower margin technology resales.
The decrease in the gross profit margin of service fees resulted primarily
from increased personnel costs, costs associated with training, travel,
recruiting and higher than expected consultant turnover. 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
due to circumstances beyond the Company's control, including the fewer number
of actual billing days in the fourth quarter, the 1996 year-to-date gross
profit margin may not be sustainable.
<TABLE>
<CAPTION>
OPERATING EXPENSES: THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------- -------------------------------
1996 CHANGE 1995 1996 CHANGE 1995
- ---------------------------- ------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
General and administrative $ 1,413 4% $1,361 $3,740 8% $ 3,473
Percentage of total revenues 19% 20% 13% 18%
- ---------------------------- -----------------------------------------------------------------
Research and development $ 2,045 181% $ 729 $5,258 176% $ 1,907
Percentage of total revenues 28% 11% 19% 10%
- ---------------------------- -----------------------------------------------------------------
Sales and marketing $ 2,909 148% $1,174 $7,809 133% $ 3,357
Percentage of total revenues 40% 17% 28% 17%
- ---------------------------- -----------------------------------------------------------------
In-process research and
development $ - * $ - $ 100 * $ -
Percentage of total revenues - - - -
- ---------------------------- -----------------------------------------------------------------
(*) not meaningful
</TABLE>
11
<PAGE> 13
POWERCERV CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
(DOLLARS IN THOUSANDS)
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 application products and development tools. The third 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. Due
to the release of the Company's application products on September 30, 1996, the
reassignment of consultant personnel from R&D to the services organization and
the Company's consolidation of four separate application R&D centers into one
facility, the Company expects R&D expenses will be reduced during the fourth
quarter.
The rise in sales and marketing expenses was attributable to the Company's
investment in its direct and indirect sales force (including the establishment
of the Company's business development group and client/server migration group),
its opening of an international office in Amsterdam, and increased marketing
expenses for the Company's products and services. During the third quarter,
the Company restructured the sales management team from ten districts to three
sales regions to reduce the number of layers between the customer and sales
management as well as reduce the infrastructure costs. The Company will
continue to invest in its direct and indirect sales force and in implementing
its marketing and product strategies, 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.
INCOME TAX EXPENSE (BENEFIT)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------- -------------------------------
ACTUAL ACTUAL ACTUAL PRO
------ ------- ------
FORMA
---------
1996 CHANGE 1995 1996 CHANGE 1995
=========================== ===================================================================
<S> <C> <C> <C> <C> <C> <C>
Income tax expense (benefit) $(1,411) * $ 180 $(1,118) * $ 490
Percentage of revenue (19%) 3% (4%) 3%
=========================== ===================================================================
</TABLE>
(*) not meaningful
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.
12
<PAGE> 14
POWERCERV CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
(DOLLARS IN THOUSANDS)
Pro forma net income data has been calculated to present the provision for
income taxes for the nine months ended September 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 nine months ended September 30,
1996, and the statutory tax rate in effect during the nine months ended
September 30, 1995, was 38%.
LIQUIDITY AND CAPITAL RESOURCES
<TABLE>
<CAPTION>
AS OF AND FOR THE
NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------
1996 CHANGE 1995
--------------------------------------
<S> <C> <C> <C>
Working capital $24,440 * $ 992
Cash and cash equivalents 16,671 * 212
Cash used in operating activities 4,633 * 430
Cash used in investing activities 1,489 (41%) 1,056
Cash provided by financing activities 22,792 * 1,611
</TABLE>
(*) not meaningful
Working capital, cash and cash equivalents and cash provided by financing
activities increased in the nine months ended September 30, 1996 over the same
period from the prior year 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.
At September 30, 1996, the Company's primary source of liquidity consisted
of its cash and cash equivalents balance of $16.7 million. In addition, on
October 31, 1996, the Company obtained an unsecured $5 million line of credit
with a commercial bank for working capital and other purposes. The interest
rate on the line of credit is equal to LIBOR plus 150 or 200 basis points,
based on the Company's tangible net worth. The line of credit requires the
Company to maintain certain financial ratios. As of November 14, 1996, no
funds have been borrowed under the line of credit. The Company believes that
funds generated from its operations and existing cash and cash equivalents,
together with the availability of the line of credit, will be sufficient to
finance the Company's operations for at least the next twelve months.
13
<PAGE> 15
POWERCERV CORPORATION
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 15 of this report.
14
<PAGE> 16
ACCOUNTANTS' REPORT
The Board of Directors
PowerCerv Corporation:
We have reviewed the condensed consolidated balance sheet of PowerCerv
Corporation and subsidiary as of September 30, 1996, the related condensed
consolidated statements of operations for the three months and nine months ended
September 30, 1996 and 1995, and the related condensed consolidated statements
of cash flows for the nine months ended September 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 Accounts. 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 accompanying condensed consolidated financial statements for them
to be in conformity with generally accepted accounting principles.
We have previously audited, in accordance with generlly 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.
KPMG PEAT MARWICK LLP
Tampa, Florida
October 21, 1996
15
<PAGE> 17
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.
(b) Reports on Form 8-K
The Company did not file any report on Form 8-K during the quarter ended
September 30, 1996.
16
<PAGE> 18
POWERCERV CORPORATION
FORM 10-Q
(for the quarterly period ended September 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: November 14, 1996
PowerCerv Corporation
/s/ Harold R. Ross
------------------------------
Harold R. Ross,
Chief Executive Officer
/s/ Karen Jaderborg
------------------------------
Karen Jaderborg,
Chief Accounting Officer
17
<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 acknowlege our
awareness of the incorporation by reference therein of our report dated October
21, 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 nine
months ended September 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.
KPMG PEAT MARWICK LLP
Tampa, Florida
October 21, 1996
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM UNAUDITED
CONDENSED FINANCIAL STATEMENTS AS OF AND FOR THE NINE MONTHS ENDED SEPTEMBER 30,
1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH 10-Q FILING.
</LEGEND>
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> SEP-30-1996
<EXCHANGE-RATE> 1
<CASH> 16,671
<SECURITIES> 0
<RECEIVABLES> 12,179
<ALLOWANCES> (500)
<INVENTORY> 259
<CURRENT-ASSETS> 29,055
<PP&E> 3,783
<DEPRECIATION> (817)
<TOTAL-ASSETS> 36,934
<CURRENT-LIABILITIES> 4,615
<BONDS> 0
0
0
<COMMON> 14
<OTHER-SE> 32,045
<TOTAL-LIABILITY-AND-EQUITY> 36,934
<SALES> 0
<TOTAL-REVENUES> 27,867
<CGS> 0
<TOTAL-COSTS> 31,280
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (459)
<INCOME-PRETAX> (2,954)
<INCOME-TAX> (1,118)
<INCOME-CONTINUING> (1,836)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,836)
<EPS-PRIMARY> (0.15)
<EPS-DILUTED> (0.15)
</TABLE>
