<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, 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 0-27574
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 3, 1997, there were 13,796,767 shares of the registrant's common
stock, $.001 par value, outstanding.
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<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 September 30, 1997 (unaudited)
and December 31, 1996 .......................................... 2
Condensed Consolidated Statements of
Operations for the Three Months Ended
September 30, 1997 and 1996 (unaudited)
and Nine Months Ended September 30, 1997
and 1996 (unaudited) ........................................... 3
Condensed Consolidated Statements of Cash
Flows for the Nine Months Ended
September 30, 1997 and 1996 (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' Review Report ........................................ 18
PART II. OTHER INFORMATION
Item 1. Legal Proceedings ......................................... 19
Item 6. Exhibits and Reports on Form 8-K .......................... 21
Signatures ........................................................ 22
</TABLE>
ADAPTlications and INTERGY are registered trademarks of the registrant and the
PowerCerv logo, PowerTOOL, PADLock, FLOWBuilder, AppSync and PFCtool are
trademarks of the registrant. All other trademarks and company names mentioned
are the property of their respective owners.
1
<PAGE> 3
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
POWERCERV CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1997 1996
----------- -----------
<S> <C> <C>
(UNAUDITED)
ASSETS
Current assets:
cash and cash equivalents $ 9,313 $14,637
Accounts receivable, net of allowance of $730 and
$550, respectively 10,339 11,475
Other current assets 661 666
------- -------
Total current assets 20,313 26,778
Property and equipment, net 2,863 3,111
Intangible assets, net 2,540 3,243
Investment in third party 1,500 1,500
Deferred tax asset - 1,658
Deposits and other assets 72 61
------- -------
Total assets $27,288 $36,351
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,311 $ 1,071
Accrued expenses 2,176 1,755
Deferred revenue 2,238 2,333
------- -------
Total current liabilities 5,725 5,159
Common stock with redemption rights 200 200
Shareholders' equity 21,363 30,992
------- -------
Total liabilities and shareholders' equity $27,288 $36,351
======= =======
</TABLE>
See accompanying review report of KPMG Peat Marwick LLP and notes to condensed
consolidated financial statements.
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,
----------------------- -----------------------
1997 1996 1997 1996
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenues:
License fees $ 2,027 $ 1,659 $ 5,693 $ 8,595
Technology resales 563 491 1,535 2,418
Service fees 6,169 5,168 18,701 16,854
-------- -------- -------- --------
Total revenues 8,759 7,318 25,929 27,867
-------- -------- -------- --------
Costs and expenses:
Cost of licenses 402 420 1,186 1,016
Cost of technology resales 447 434 1,196 1,948
Cost of services 4,727 4,080 14,789 11,409
General and administrative 1,421 1,413 4,512 3,740
Sales and marketing 3,027 2,909 8,217 7,809
Research and development 1,423 2,045 4,485 5,258
In-process research & development -- -- -- 100
-------- -------- -------- --------
Total costs and expenses 11,447 11,301 34,385 31,280
-------- -------- -------- --------
Operating loss (2,688) (3,983) (8,456) (3,413)
Interest income, net 127 262 465 459
-------- -------- -------- --------
Loss before income taxes (2,561) (3,721) (7,991) (2,954)
Income tax expense (benefit) 2,577 (1,411) 1,691 (1,118)
-------- -------- -------- --------
Net loss $ (5,138) $ (2,310) $ (9,682) $ (1,836)
======== ======== ======== ========
Loss per share $ (0.37) $ (0.17) $ (0.70) $ (0.15)
======== ======== ======== ========
Shares used in computing net
loss per share 13,847 13,827 13,845 12,652
======== ======== ======== ========
</TABLE>
See accompanying review report of KPMG Peat Marwick LLP and 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,
-----------------------
1997 1996
---------- ---------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (9,682) $ (1,836)
Adjustments to reconcile net loss to net cash
used in operations:
Depreciation and amortization 1,567 1,129
Deferred income taxes 1,658 (182)
Deferred revenue (95) 512
Changes in assets and liabilities
(net of effect of
acquisition during 1996) 1,776 (4,256)
-------- --------
Net cash used in operating activities (4,776) (4,633)
-------- --------
Cash flows from investing activities:
Purchases of property and equipment, net (600) (1,363)
Acquisition of net assets, net of cash received -- (126)
-------- --------
Net cash used in investing activities (600) (1,489)
-------- --------
Cash flows from financing activities:
Net proceeds from issuance of common stock 52 43,451
Net repayments on lines of credit -- (3,618)
Repayments of notes payable -- (11,541)
Redemption of preferred stock -- (5,500)
-------- --------
Net cash provided by financing activities 52 22,792
-------- --------
Net increase (decrease) in cash and cash equivalents (5,324) 16,670
Cash and cash equivalents, beginning of period 14,637 1
-------- --------
Cash and cash equivalents, end of period $ 9,313 $ 16,671
======== ========
</TABLE>
See accompanying review report of KPMG Peat Marwick LLP and 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, 1997 and the
condensed consolidated statements of operations for the three and nine months
ended September 30, 1997 and 1996 and cash flows for the nine months ended
September 30, 1997 and 1996 have been prepared by the Company, without audit.
In the opinion of management, all adjustments (which include normal recurring
adjustments and a non-recurring adjustment to increase the deferred income
tax asset valuation allowance as discussed in Note E) necessary to present
fairly the financial position, results of operations and cash flows at
September 30, 1997 and for all periods presented have been made. The
condensed consolidated balance sheet at December 31, 1996 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 (the "SEC") 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, 1996 included in the Company's 1996 Annual Report on Form 10-K filed with
the SEC on March 28, 1997.
The results of operations for the three and nine months ended September
30, 1997 are not necessarily indicative of results that may be expected for any
other interim period or for the full fiscal year.
B. LOSS PER SHARE
Loss per share is computed using the weighted average number of shares of
common stock outstanding and dilutive common stock equivalent shares. During
the three and nine months ended September 30, 1997, all common stock
equivalents were anti-dilutive due to the net losses sustained by the Company
during those periods. Pursuant to the rules of the SEC, common stock and
common stock equivalent shares issued during the twelve-month period prior to
the Company's initial public offering on March 1, 1996 have been assumed to be
outstanding for the period January 1, 1996 to March 31, 1996 that is included
in the nine month period ended September 30, 1996.
In February 1997, the Financial Accounting Standards Board ("FASB") issued
FASB Statement of Financial Accounting Standard No. 128 Earnings Per Share.
The matter is discussed in "Recently Issued Accounting Pronouncements"
elsewhere in this Report on Form 10-Q.
C. ACCRUED EXPENSES
Accrued expenses consist of the following:
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS)
SEPTEMBER 30, DECEMBER 31,
1997 1996
------------ ------------
<S> <C> <C>
Compensation $1,182 $1,268
Sales tax 187 182
Royalty 236 46
Other 571 259
------ ------
$2,176 $1,755
====== ======
</TABLE>
5
<PAGE> 7
POWERCERV CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
D. CONTINGENCIES
Since 1995, the Company has provided computer software and a significant
amount of consulting services to Crown Paper Co. ("Crown"). Crown paid the
Company for the software and had been paying for the services rendered. In
April of this year, Crown disputed the remaining money owed the Company.
Discussions between the Company and Crown on resolving this matter were not
productive. Crown filed a complaint against the Company on June 24, 1997 in
the United States District Court for the Northern District of California (the
"California Action"). The complaint alleges breach of contract and certain
warranties and covenants, as well as claims for fraud and deceit, negligent
misrepresentation and unfair competition under a California statute. Certain
computer software and consulting services provided by the Company to the
plaintiff are the subject matter of the California Action. Crown seeks
approximately $4.3 million in compensatory damages, punitive damages of an
unspecified amount and other relief. On June 25, 1997, the Company filed a
complaint against Crown in the Thirteenth Judicial Circuit, Hillsborough
County, Florida, Civil Division (the "Florida Action"), relating to the failure
of Crown to pay the Company approximately $1.1 million that is owed for part of
the services that are the subject of the California Action. Crown removed the
Florida Action to the United States District Court for the Middle District of
Florida. Crown filed a response to this complaint, as well as a motion to
transfer the Florida Action to federal court in California. The Company filed
a motion in the California Action to transfer the action to the United States
District Court for the Middle District of Florida. The Company also filed a
motion to dismiss certain claims in the California Action and strike certain
allegations contained in the California Action. On August 29, 1997, Crown
filed an amended complaint in the California Action. In response, the Company
filed a motion to dismiss certain claims and strike certain allegations in the
California Action. The parties have agreed to mediate the California Action
and the Florida Action. If the mediation does not resolve these actions, the
Company intends to vigorously defend the California Action, and to aggressively
prosecute the Florida Action.
A complaint was filed on July 24, 1997 in the United States District Court
for the Middle District of Florida, captioned J. Conrad Lifsey vs. Harold R.
Ross, Gerald R. Wicker, Marc J. Fratello, Roy E. Crippen, III, Donald B. Hebb,
Jr., Thomas S. Roberts, PowerCerv Corporation, Alex Brown & Sons, Inc.,
Robertson, Stephens & Company, ABS Capital Partners, L.P., Summit Investors II,
L.P., and Summit Ventures III, L.P. The complaint purports to be a class
action on behalf of those persons who purchased shares of the Company's common
stock from March 1, 1996 (the date of the Company's initial public stock
offering) through July 24, 1996. The complaint alleges, among other things,
that the defendants violated the Securities Act of 1933 and the Securities
Exchange Act of 1934 in connection with the Company's initial public offering
of stock and in its subsequent securities filings, press releases and other
public statements. The plaintiff seeks damages of an unspecified amount,
rescission of certain securities sales and certain other remedies. The
defendants deny any wrongdoing and intend to contest the suit vigorously.
A complaint was filed on August 29, 1997 in the United States District
Court for the Northern District of Ohio, captioned Automated Packaging Systems,
Inc. vs. PowerCerv Corporation. The plaintiff is seeking a declaratory
judgment with respect to its rights under two contracts between it and the
Company. The complaint also alleges breach of contract, breach of certain
warranties, and fraudulent inducement. The plaintiff seeks compensatory damages
in excess of $75,000 related to the approximate $760,000 previously paid to the
Company for licenses and services, punitive damages in excess of $1 million, and
other relief. The Company has claims against the plaintiff including its failure
to pay outstanding invoices of approximately $420,000. The Company denies the
allegations of the complaint and intends to vigorously defend this action, and
raise appropriate counterclaims against the plaintiff.
E. INCOME TAXES
The Company increased its deferred income tax asset valuation allowance
by approximately $3,500 and $4,700 for the three and nine months ended
September 30, 1997, respectively, to offset the tax benefits recorded in the
respective periods and reduce the deferred tax asset balance to zero at
September 30, 1997. The decision to fully reserve the deferred income tax
asset was primarily the result of the Company's continued losses from
operations.
6
<PAGE> 8
POWERCERV CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(DOLLARS IN THOUSANDS)
OVERVIEW
PowerCerv Corporation's mission is to build and deliver open, adaptable
client/server solutions that provide mid-tier organizations a sustainable
competitive advantage. The products and services of PowerCerv Corporation and
its wholly-owned subsidiary, PowerCerv Technologies Corporation (collectively,
the "Company" or "PowerCerv") assist the Company's customers in successfully
designing, developing, deploying and maintaining adaptable 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 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. The Company also provides third party technology resale products to
complement the Company's products and services offerings. PowerCerv's software
development tools and application products are based on the technology
foundation of widely-used products provided by vendors such as Microsoft
Corporation, Powersoft Corporation, Sybase, Inc., and Oracle Corporation, and
utilize an open architecture enabling their implementation with multiple
databases, multiple operating systems, and integration with 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 "Management's Discussion and Analysis of Financial
Condition and Results of Operations - Forward-Looking Statements and Associated
Considerations" in the Company's 1996 Annual Report on Form 10-K filed with the
Securities and Exchange Commission in March 1997. These risks include but are
not limited to, matters related 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 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.
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, 1997, 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 products 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 (SOP 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. Technology resales are recognized at the time of product shipments.
Consulting and education services fees 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.
On October 27, 1997, the American Institute of Certified Public
Accountants issued AICPA Statement of Position 97-2 Software Revenue
Recognition ("SOP 97-2") which supercedes SOP 91-1. SOP 97-2 is effective for
transactions entered into in fiscal years beginning after December 15, 1997.
During the fourth quarter of 1997, the Company will be reviewing the SOP 97-2 to
determine what impact, if any, it will have on the Company's revenue
recognition policies.
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 license sales and increase license sales as a percentage of total
revenue. To assist in achieving this strategy, the Company continues to focus
on increasing the number and caliber of the professionals of its direct sales
force. Given that the typical application sales cycle is at least four to nine
months long, there is a corresponding lag before the Company will see what
effect, if any, of the increased sales force on its license sales. However,
there can be no assurance that the Company can achieve such increase in sales.
Implementation of the Company's strategy to expand the license sales 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 application products, development tools and
services by its direct sales force and telesales group with indirect marketing
channels. During the past year, the Company has expanded its Business
Development Group for generating indirect sales channels of the Company's
products in the United States. 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.
Selling through indirect channels may limit the Company's
8
<PAGE> 10
POWERCERV CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
(DOLLARS IN THOUSANDS)
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
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.
The Company has a Technology Deployment Group seeking to accelerate the
Company's service revenue growth in the United States by focusing on medium
scale client/server and/or internet service projects. This group is also focused
on the sale of the Company's development tools and third party development tools
to be licensed in connection with these service revenue projects. 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 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 continue to 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 and/or product release
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 non-billable roles; the timing of hiring
personnel; 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.
One of the Company's objectives, as identified in the Company's 1996
Annual Report on Form 10-K filed with the Securities and Exchange Commission on
March 28, 1997, relates to its seeking to offer to the mid-tier market
(companies having annual revenue between $50 million and $750 million) a full
suite of integrated, adaptable client/server applications, which the Company
refers to as its Customer Lifecycle Management (CLM) Solution. This full suite
of products includes Sales Force Automation, Customer
9
<PAGE> 11
POWERCERV CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
(DOLLARS IN THOUSANDS)
Support, Financials, Distribution and Manufacturing. In early November 1997, the
Company released version 7.0 of its CLM Solution. Management of the Company
believes this release enhances its prior product offering. The Company believes
that its CLM Solution, including this recent version 7.0 release, is a
competitive advantage. In its Form 10-K, the Company indicated that it knew of
no other application software provider that offered a full CLM Solution from a
single source. In recent months, however, at least three other software firms
have announced their acquisition or partnership with other software application
vendors to achieve this business strategy. Similarly, other firms have
announced their intentions to focus on the mid-tier market. There can be no
assurance that the market will accept the Company's business strategy and its
new version 7.0 release, or if it does, that the Company will be able to
successfully compete against other firms also implementing this strategy,
and/or focusing on the mid-tier market, many of which have longer operating
histories and greater financial, technical, sales, marketing and other
resources, as well as greater name recognition, larger installed customer bases,
and greater market acceptance of their products and technologies than the
Company.
Since the market for application products, software development tools, 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.
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.
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, certain
financial data regarding the Company's revenues derived from license fees,
technology resales and service fees:
10
<PAGE> 12
POWERCERV CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
REVENUES THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------------- ---------------------------
1997 CHANGE 1996 1997 CHANGE 1996
-------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
- -------------------------------------------------------------------------------------
License fees $2,027 22% $1,659 $ 5,693 (34%) $ 8,595
Percentage of total revenues 23% 23% 22% 31%
- ---------------------------- -------------------------------------------------------
Technology resales 563 15% 491 1,535 (37%) 2,418
Percentage of total revenues 6% 7% 6% 9%
- ---------------------------- -------------------------------------------------------
Service fees 6,169 19% 5,168 18,701 11% 16,854
Percentage of total revenues 71% 70% 72% 60%
- ---------------------------- -------------------------------------------------------
</TABLE>
License fees. The Company's license fees are derived from licensing the
Company's application products and development tools. The Company establishes
its licensing fees using a tiered pricing approach based on the number of
concurrent servers and users. Source code licenses are available at an
additional cost. License fees revenue increased for the three month period ended
September 30, 1997 compared to the same period in 1996 due to an increased
number of license transactions. License fees revenue decreased for the nine
month period ended September 30, 1997 compared to the same period in 1996 due to
lower product application and development tools sales. Lower sales in part were
a result of the first quarter of 1997 restructuring of the Company's direct
sales force and sales management, and the Company's continuing efforts to
increase the number and caliber of its direct sales force. Given that the
typical application sales cycle is at least four to nine months long, there is
a corresponding lag before the Company will see what effect, if any, of the
increased sales force on its license sales. However, there can be no assurance
that the Company can achieve such increase in sales or that the restructuring,
changes and increases in the Company's direct sales force will result in
increased license revenue. In addition, second quarter of 1996 license
revenue included a single $2,000 OEM license fee, which was substantially
larger than the Company's typical license transaction size. Sales of the
Company's development tools decreased $155 and $1,081 in the three month
and nine month periods of 1997, respectively, compared to the same period in
1996 due to increased competition in the software development tools market.
Additionally, the Company has decreased the amount of emphasis on marketing and
selling its development tools on a stand-alone basis as compared to marketing
and selling its application products. Also, during the first nine months of
1997, the Company has experienced the continued effects of the second quarter
1996 release of Powersoft Corporation's PowerBuilder version 5.0 software which
negatively impacted revenues associated with one of the Company's software
development tools. Although the Company released the new version of its class
library development tool in the first quarter of 1997, the Company believes
this negative impact is expected to continue on its tools sales.
Technology resales. Technology resales are derived from licensing
complementary client/server and internet development tools developed by other
independent software vendors. Technology resales and related services are more
susceptible to change based on the price for such products and services than the
Company's application license fees and related services. Technology resales
revenue increased for the three month period ended September 30, 1997 compared
to the three month period ended September 30, 1996 primarily due to additional
technology resale products included in the Company's offering and greater
technology resale contributions from the Company's corporate sales organization.
Technology resales revenue decreased for the
11
<PAGE> 13
POWERCERV CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
(DOLLARS IN THOUSANDS)
nine month period ended September 30, 1997 compared to the same period in 1996
due to the Company's increased focus on sales of its own application products
and development tools and increased market competition for technology resale
products.
Service fees. The Company's service fees consist of revenue from
consulting, education and maintenance services. Consulting services are
primarily provided on a time and materials basis; education services are
generally priced on a per student basis; and annual maintenance fees are based
on a percentage of the related license fees. Service fees revenue increased 19%
and 11% for the three and nine month periods ended September 30, 1997,
respectively, compared to the same periods in 1996 because of the increase in
the realized consulting hourly rates, increase in education revenue and the
additional maintenance revenue provided by the Company's product licensing
activities.
COSTS AND EXPENSES
The following table sets forth, for the periods indicated, certain
financial data regarding the Company's costs associated with its license fees,
technology resales and services:
<TABLE>
<CAPTION>
COST OF REVENUES: THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------ -------------------------
1997 CHANGE 1996 1997 CHANGE 1996
- -------------------------- ---------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Cost of licenses $ 402 (4%) $ 420 $ 1,186 17% $ 1,016
Gross profit percentage 80% 75% 79% 88%
- -------------------------- ---------------------------------------------------
Cost of technology resales 447 3% 434 1,196 (39%) 1,948
Gross profit percentage 21% 12% 22% 19%
- -------------------------- ---------------------------------------------------
Cost of services 4,727 16% 4,080 14,789 30% 11,409
Gross profit percentage 23% 21% 21% 32%
- -------------------------- ---------------------------------------------------
</TABLE>
Cost of licenses. 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 decreased
4% for the three month period ended September 30, 1997 compared to the same
period in 1996 due to higher production expenses incurred with respect to a
September 1996 release of the Company's products. Cost of licenses increased 17%
for the nine month period ended September 30, 1997 compared to the corresponding
period in 1996 due to increased royalties and overall higher production
expenses during the nine month period ended September 30, 1997 compared to the
same period in 1996.
Cost of technology resales. The cost of technology resales consists
primarily of costs associated with resales of complementary client/server and
internet development tools developed by independent software vendors. The
decrease in the nine month period ended September 30, 1997 cost of technology
resales compared to the same period in the prior year was due to decreased
technology resales revenue. The three and nine month periods ended September 30,
1997 gross profit margin on technology resales increased from the comparable
periods in the prior year due to increased sales volume of higher margin
technology resale products.
12
<PAGE> 14
POWERCERV CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
(DOLLARS IN THOUSANDS)
Cost of services. The cost of services consists primarily of compensation
and travel costs associated with providing consulting, product support,
technical services and education. The cost of services increased 16% for the
three month period ended September 30, 1997 compared to the same period in 1996,
and 30% for the nine month period ended September 30, 1997 compared to the same
period in 1996, primarily due to increased number of personnel, compensation and
related expenses, as further identified in this paragraph below. The increase in
the gross profit margin of service fees for the three month period ended
September 30, 1997 as compared to the same period in 1996 resulted from an
increase in the realized consulting hourly rates, education revenue and
maintenance revenue. These increases in revenue were partially mitigated by
increased services expenses. The decrease in the gross profit margin of service
fees for the nine month period ended September 30, 1997 compared to the same
period in 1996 resulted from higher costs associated with recruiting and
training a more experienced, and thus more expensive consulting staff. Other
factors that contributed to higher costs of services included higher than
expected consultant turnover, lower utilization of the application consultants
due to lower application license sales, slower redeployment of consultants from
large projects that were completed. The Company anticipates that the gross
profit margin for 1997 quarterly services fees will continue to be less than
such margin for the corresponding periods in 1996 and due to circumstances
beyond the Company's control, including fewer number of actual billing days in
the fourth quarter, the 1997 year-to-date gross profit margin may not be
sustainable.
The following table sets forth, for the periods indicated, certain
financial data regarding the Company's operating expenses:
<TABLE>
<CAPTION>
OPERATING EXPENSES: THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------------------- --------------------------
1997 CHANGE 1996 1997 CHANGE 1996
- ---------------------------- -------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
General and administrative $1,421 1% $1,413 $4,512 21% $3,740
Percentage of total revenues 16% 19% 17% 13%
- ---------------------------- -------------------------------------------------------
Sales and marketing 3,027 4% 2,909 8,217 5% 7,809
Percentage of total revenues 35% 40% 32% 28%
- ---------------------------- -------------------------------------------------------
Research and development 1,423 (30%) 2,045 4,485 (15%) 5,258
Percentage of total revenues 16% 28% 17% 19%
- ---------------------------- -------------------------------------------------------
</TABLE>
General and administrative ("G&A"). G&A expenses include compensation,
communications, accounting, human resources, legal and related facilities
expenses. The increase in the G&A expenses for the nine month period ended
September 30, 1997 as compared to the same period in the prior year was due to
expansion of the Company's administrative staff to support its operations,
increased provision for bad debts and increased accounting and legal expenses
associated with being a public company and certain other matters. These
increased costs as well as lower revenues for the nine month period ended
September 30, 1997 compared to the same period in 1996 caused G&A expenses as a
percentage of total revenue to increase for the nine month period ended
September 30, 1997 compared to the corresponding period in 1996. G&A as a
percentage of total revenues decreased for the three month period ended
September 30, 1997 compared to the same period in 1996 as a result of higher
revenue for the three month period ended September 30, 1997 compared to the same
period in 1996.
13
<PAGE> 15
POWERCERV CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
(DOLLARS IN THOUSANDS)
Sales and marketing. Sales and marketing expenses primarily consist of
compensation paid to sales and marketing personnel, costs of marketing, direct
mail and telemarketing activities, costs of public relations, trade shows and
conferences, and related communications costs. The increase in sales and
marketing expenses for the three and nine month periods ended September 30, 1997
compared to the same periods in 1996 was attributable to the Company's
investment in its direct sales force (including the establishment of the
Company's Business Development Group and Technology Deployment Group), its
opening of an international office in Amsterdam, increased marketing
expenses for the Company's products and services, and increased costs from
expected sales force turnover. During the third quarter of 1997, the Company
continued to increase the size of its direct sales force personnel. During the
fourth quarter of 1997, the Company will continue to focus upon its distribution
channel by increasing its direct sales force. The Company will also continue to
invest in implementing its marketing and product strategies. The Company
expects its sales and marketing expenses may continue to increase both in
dollar amounts and percentage of total revenues in the future due to these
increased investments.
Research and development ("R&D"). R&D costs consist primarily of
compensation and related facilities and equipment costs associated with
developing, maintaining and enhancing the Company's application products and
development tools. Since inception, the Company has not capitalized any
internal R&D costs as the costs incurred during the period between the point in
time that technological feasibility is established and that a product is
released to the market have been insignificant. R&D costs decreased during the
three and nine month periods ended September 30, 1997 compared to the same
periods in 1996 primarily due to the temporary assignment of consulting
personnel to R&D positions to facilitate new version releases of its
application products during the second and third fiscal quarters in 1996. The
Company plans to continue to make significant investments in R&D and during the
first quarter of 1997 hired an experienced industry executive to manage the R&D
organization. R&D costs have decreased as a percentage of total revenue for the
nine month period ended September 30, 1997 compared to the same period in 1996
as a result of lower R&D expenses for the nine month period ending September
30, 1997 compared to the same period in the prior year even though total
revenue for the period in 1997 is less than that in 1996. Lower R&D expenses as
well as increased revenues for the three month period ended September 30, 1997
compared to the same period in 1996 caused R&D as a percentage of total
revenues to decrease for the three month period ended September 30, 1997
compared to the same period in 1996.
In-process R&D. 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 taxes. The Company recorded income tax benefit at an estimated 38%
rate for the three and nine months ended September 30, 1996. For the three and
nine month periods ended September 30, 1997, the Company increased the tax
asset valuation allowance by approximately $3,500 and $4,700, respectively,
which reduced the deferred tax asset balance to zero and offset any tax benefit
recorded during the respective periods.
14
<PAGE> 16
POWERCERV CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
(DOLLARS IN THOUSANDS)
LIQUIDITY AND CAPITAL RESOURCES
The following table sets forth, for the periods indicated, certain
financial data regarding the Company's working capital balances, cash and cash
equivalents, cash used in operating activities, cash used in investing
activities, and cash provided by financing activities:
<TABLE>
<CAPTION>
AS OF AND FOR THE
NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------------
1997 CHANGE 1996
----------- ----------- -----------
<S> <C> <C> <C>
Working capital $14,588 (40%) $24,440
Cash and cash equivalents 9,313 (44%) 16,671
Cash used in operating activities (4,776) (3%) (4,633)
Cash used in investing activities (600) 60% (1,489)
Cash provided by financing activities 52 * 22,792
</TABLE>
(*) Not meaningful
Working capital and cash and cash equivalents decreased, and cash used in
operating activities increased, as of September 30, 1997 compared to September
30, 1996 due to increased operating costs and decreased revenues as previously
discussed.
The Company's cash provided by financing activities was lower for the nine
months ended September 30, 1997 compared to 1996 due to the Company's completion
of its initial public offering of its common stock on March 1, 1996.
At September 30, 1997, the Company's primary source of liquidity consisted
of its cash and cash equivalents balance of $9,313 and its short-term accounts
receivable balance of $10,339. In addition, the Company has an unsecured $5,000
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 September 30, 1997, no
balance was outstanding under the line of credit. On October 22, 1997, the
commercial bank extended the maturity date of the Company's line of credit to
February 15, 1999.
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.
15
<PAGE> 17
POWERCERV CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
(DOLLARS IN THOUSANDS)
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
During 1997, the Financial Accounting Standards Board ("FASB") has issued
certain Statements of Financial Accounting Standards ("Statements") which are
pending implementation by the Company. They are as follows:
Statement 128 - Earnings Per Share. Statement 128 supersedes APB Opinion
No. 15, Earnings Per Share and specifies the computation, presentation, and
disclosure requirements for earnings per share ("EPS") for entities with
publicly-held common stock. Statement 128 is effective for financial statements
for both interim and annual periods ending after December 15, 1997. Earlier
application is not permitted. After adoption, all prior-period EPS data
presented shall be restated to conform with Statement 128. As the Statement
addresses the computation of EPS only, there will be no impact on earnings from
its adoption.
Statement 130 - Reporting Comprehensive Income. Statement 130 establishes
standards for reporting comprehensive income. The Statement defines
comprehensive income as the change in equity of an enterprise except those
resulting from shareholder transactions. All components of comprehensive income
are required to be reported in a new financial statement that is displayed
with equal prominence as existing financial statements. The Company will be
required to adopt this Statement January 1, 1998. As the Statement addresses
reporting and presentation issues only, there will be no impact on earnings
from its adoption.
Statement 131 - Disclosures about Segments of an Enterprise and Related
Information. Statement 131 establishes standards for related disclosures about
products and services, geographic areas, and major customers. The Company will
be required to adopt this Statement for financial statements for the fiscal year
ended December 31, 1998. As the Statement addresses reporting and disclosure
issues only, there will be no impact on earnings from its adoption of this
Standard.
On October 27, 1997, the American Institute of Certified Public
Accountants issued AICPA Statement of Position 97-2 Software Revenue
Recognition ("SOP 97-2") which supercedes SOP 91-1. SOP 97-2 is effective for
transactions entered into in fiscal years beginning after December 15, 1997.
During the fourth quarter of 1997, the Company will be reviewing the SOP 97-2
to determine what impact, if any, it will have on the Company's revenue
recognition policies.
16
<PAGE> 18
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' Review Report is
presented on page 18 of this report.
17
<PAGE> 19
ACCOUNTANTS' REVIEW REPORT
The Board of Directors
PowerCerv Corporation
We have reviewed the condensed consolidated balance sheet of PowerCerv
Corporation and subsidiary as of September 30, 1997, and the related condensed
consolidated statements of operations for the three and nine months ended
September 30, 1997 and 1996 and the related condensed consolidated statements
of cash flows for the nine months ended September 30, 1997 and 1996, 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, 1996, and the related consolidated statements of
operations, shareholders' equity, and cash flows, for the year then ended (not
presented herein); and in our report dated January 30, 1997, 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, 1996, 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
Tampa, Florida
October 17, 1997
18
<PAGE> 20
POWERCERV CORPORATION
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Since 1995, the Company has provided computer software and a significant
amount of consulting services to Crown Paper Co. ("Crown"). Crown paid the
Company for the software and had been paying for the services rendered. In April
of this year, Crown disputed the remaining money owed the Company. Discussions
between the Company and Crown on resolving this matter were not productive.
Crown filed a complaint against the Company on June 24, 1997 in the United
States District Court for the Northern District of California (the "California
Action"). The complaint alleges breach of contract and certain warranties and
covenants, as well as claims for fraud and deceit, negligent misrepresentation
and unfair competition under a California statute. Certain computer software and
consulting services provided by the Company to the plaintiff are the subject
matter of the California Action. Crown seeks approximately $4.3 million in
compensatory damages, punitive damages of an unspecified amount and other
relief. On June 25, 1997, the Company filed a complaint against Crown in the
Thirteenth Judicial Circuit, Hillsborough County, Florida, Civil Division (the
"Florida Action"), relating to the failure of Crown to pay the Company
approximately $1.1 million that is owed for part of the services that are the
subject of the California Action. Crown removed the Florida Action to the United
States District Court for the Middle District of Florida. Crown filed a response
to this complaint, as well as a motion to transfer the Florida Action to federal
court in California. The Company filed a motion in the California Action to
transfer the action to the United States District Court for the Middle District
of Florida. The Company also filed a motion to dismiss certain claims in the
California Action and strike certain allegations contained in the California
Action. On August 29, 1997, Crown filed an amended complaint in the California
Action. In response, the Company filed a motion to dismiss certain claims and
strike certain allegations in the California action. The parties have agreed to
mediate the California Action and the Florida Action. If the mediation does not
resolve these actions, the Company intends to vigorously defend the California
Action, and to aggressively prosecute the Florida Action.
A complaint was filed on July 24, 1997 in the United States District Court
for the Middle District of Florida, captioned J. Conrad Lifsey vs. Harold R.
Ross, Gerald R. Wicker, Marc J. Fratello, Roy E. Crippen, III, Donald B. Hebb,
Jr., Thomas S. Roberts, PowerCerv Corporation, Alex Brown & Sons, Inc.,
Robertson, Stephens & Company, ABS Capital Partners, L.P., Summit Investors II,
L.P., and Summit Ventures III, L.P. The complaint purports to be a class action
on behalf of those persons who purchased shares of the Company's common stock
from March 1, 1996 (the date of the Company's initial public stock offering)
through July 24, 1996. The complaint alleges, among other things, that the
defendants violated the Securities Act of 1933 and the Securities Exchange Act
of 1934 in connection with the Company's initial public offering of stock and in
its subsequent securities filings, press releases and other public statements.
The plaintiff seeks damages of an unspecified amount, rescission of certain
securities sales and certain other remedies. The defendants deny any wrongdoing
and intend to contest the suit vigorously.
19
<PAGE> 21
A complaint was filed on August 29, 1997 in the United States District
Court for the Northern District of Ohio, captioned Automated Packaging Systems,
Inc. vs. PowerCerv Corporation. The plaintiff is seeking a declaratory judgment
with respect to its rights under two contracts between it and the Company. The
complaint also alleges breach of contract, breach of certain warranties, and
fraudulent inducement. The plaintiff seeks compensatory damages in excess of
$75,000 related to the approximate $760,000 previously paid to the Company for
licenses and services, punitive damages in excess of $1 million, and other
relief. The Company has claims against the plaintiff including its failure to
pay outstanding invoices of approximately $420,000. The Company denies the
allegations of the complaint and intends to vigorously defend this action, and
raise appropriate counterclaims against the plaintiff.
20
<PAGE> 22
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
<TABLE>
<S> <C>
(a) Exhibits
15.1 Accountants' letter regarding unaudited interim financial
Information.
27.1 Financial Data Schedule.
(b) Reports on Form 8-K
None.
</TABLE>
21
<PAGE> 23
POWERCERV CORPORATION
FORM 10-Q
(for the quarterly period ended September 30, 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.
Dated: November 14, 1997
PowerCerv Corporation
/s/ Harold R. Ross
------------------------------
Harold R. Ross,
Chief Executive Officer
/s/ Karen Jaderborg
------------------------------
Karen Jaderborg,
Chief Accounting Officer
22
<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 October
17, 1997, related to our review of interim financial information, which report
was included in the quarterly report on Form 10-Q of PowerCerv Corporation for
the quarterly period ended September 30, 1997.
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
Tampa, Florida
October 17, 1997
23
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM UNAUDITED
CONDENSED FINANCIAL STATEMENTS AS OF AND FOR THE NINE MONTH PERIOD ENDED
SEPTEMBER 30, 1997 10-Q FILING, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<EXCHANGE-RATE> 1
<CASH> 9,313
<SECURITIES> 0
<RECEIVABLES> 11,069
<ALLOWANCES> (730)
<INVENTORY> 168
<CURRENT-ASSETS> 20,313
<PP&E> 4,721
<DEPRECIATION> (1,858)
<TOTAL-ASSETS> 27,288
<CURRENT-LIABILITIES> 5,725
<BONDS> 0
0
0
<COMMON> 14
<OTHER-SE> 21,549
<TOTAL-LIABILITY-AND-EQUITY> 27,288
<SALES> 0
<TOTAL-REVENUES> 25,929
<CGS> 0
<TOTAL-COSTS> 34,385
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (465)
<INCOME-PRETAX> (7,991)
<INCOME-TAX> 1,691
<INCOME-CONTINUING> (9,682)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (9,682)
<EPS-PRIMARY> (0.70)
<EPS-DILUTED> (0.70)
</TABLE>
