<PAGE> 1
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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 March 31, 1998
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 May 8, 1998, there were 13,801,392 shares of the registrant's common
stock, $.001 par value, outstanding.
================================================================================
<PAGE> 2
POWERCERV CORPORATION
FORM 10-Q
Index
<TABLE>
<CAPTION>
PAGE
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets as of March 31, 1998 (unaudited)
and December 31, 1997 ......................................................................... 2
Condensed Consolidated Statements of Operations for the
Three Months Ended March 31, 1998 and 1997 (unaudited) ........................................ 3
Condensed Consolidated Statements of Cash Flows for the Three Months Ended
March 31, 1998 and 1997 (unaudited) ........................................................... 4
Notes to Condensed Consolidated Financial Statements (unaudited).................................. 5
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations..................................................................... 8
Accountants' Review Report ....................................................................... 19
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.......................................................................... 20
Item 6. Exhibits and Reports on Form 8-K .......................................................... 20
Signatures ......................................................................................... 21
</TABLE>
ADAPTlications and INTERGY are registered trademarks of the registrant and the
PowerCerv logo, "ERP Plus" and design and "The Plus Your Enterprise Needs" 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>
MARCH 31, 1998 DECEMBER 31, 1997
---------------- -----------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 6,472 $ 6,360
Accounts receivable, net of allowance of $1,900 and
$2,000, respectively 6,473 7,480
Other current assets 304 329
---------------- -----------------
Total current assets 13,249 14,169
Property and equipment, net 2,553 2,527
Intangible assets, net 869 975
Investment in third party 1,500 1,500
Deposits and other assets 81 71
---------------- -----------------
Total assets $ 18,252 $ 19,242
================ =================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 852 $ 1,363
Accrued expenses 2,945 2,875
Deferred revenue 2,606 2,047
---------------- -----------------
Total current liabilities 6,403 6,285
Shareholders' equity 11,849 12,957
---------------- -----------------
Total liabilities and shareholders' equity $ 18,252 $ 19,242
================ =================
</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 MARCH 31,
-------------------------------------------------
1998 1997
---------------- -------------
<S> <C> <C>
Revenues:
License fees $ 1,362 $ 1,659
Technology resales 383 477
Service fees 5,542 6,620
---------------- -------------
Total revenues 7,287 8,756
---------------- -------------
Costs and expenses:
Cost of licenses 178 312
Cost of technology resales 271 352
Cost of services 4,505 5,080
General and administrative 1,128 1,547
Sales and marketing 1,440 2,537
Research and development 954 1,442
---------------- -------------
Total costs and expenses 8,476 11,270
---------------- -------------
Operating loss (1,189) (2,514)
Interest income, net 81 184
---------------- -------------
Loss before income taxes (1,108) (2,330)
Income tax benefit - (886)
---------------- -------------
Net loss and comprehensive loss $ (1,108) $ (1,444)
================ =============
Basic and diluted net loss per share $ (0.08) $ (0.10)
================ =============
Shares used in computing basic and
diluted net loss per share 13,797 13,842
================ =============
</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>
THREE MONTHS ENDED MARCH 31,
-----------------------------------------
1998 1997
------------------ -----------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (1,108) $ (1,444)
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities:
Depreciation and amortization 350 525
Deferred income taxes - (886)
Deferred revenue 559 206
Changes in assets and liabilities 581 (209)
----------------- -----------------
Net cash provided by (used in) operating activities 382 (1,808)
----------------- -----------------
Cash flows from investing activities:
Purchases of property and equipment, net (270) (253)
----------------- -----------------
Net cash used in investing activities (270) (253)
----------------- -----------------
Cash flows from financing activities:
Net proceeds from issuance of common stock - 47
----------------- -----------------
Net cash provided by financing activities - 47
----------------- -----------------
Net increase (decrease) in cash and cash equivalents 112 (2,014)
Cash and cash equivalents, beginning of period 6,360 14,637
----------------- -----------------
Cash and cash equivalents, end of period $ 6,472 $ 12,623
================= =================
</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 March 31, 1998 and the
condensed consolidated statements of operations for the three months ended March
31, 1998 and 1997 and the condensed consolidated statements of cash flows for
the three months ended March 31, 1998 and 1997 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 March 31, 1998 and
for all periods presented have been made. The condensed consolidated balance
sheet at December 31, 1997 has been derived from the Company's audited
consolidated financial statements at that date.
Certain information and footnote disclosures 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, 1997 included in the Company's 1997 Annual Report on Form 10-K filed with
the Securities and Exchange Commission on March 31, 1998.
The results of operations for the three months ended March 31, 1998
are not necessarily indicative of results that may be expected for any other
interim period or for the full fiscal year.
B. REVENUE RECOGNITION
License fees represent revenue from the licensing of the Company's
software application products and its development tools. License fees also
include royalties earned on the Company's application products and related
intellectual properties. Technology resales represent revenue from the
Company's resale of various third-party software products. Service fees
represent revenue from consulting services, education services and support and
maintenance services.
Beginning January 1, 1998, the Company has recognized revenue in
accordance with the American Institute of Certified Public Accounts' Statement
of Position 97-2, as amended, Software Revenue Recognition ("SOP 97-2").
Revenue is recognized from licenses of the Company's software products when the
contract has been executed, the product(s) has been shipped, collectibility is
probable and the software license fees are fixed or determinable. License
revenue from sales of the Company's development tools and revenue from
technology resales is recognized following the procedures above except generally
the Company ships its development tools and technology resale products under a
shrinkwrap license agreement upon the Company's receipt of a binding customer
order as opposed to executing a negotiated contract. The Company generally
accounts for consulting services separate from software license fees for those
arrangements where services are separately stated on a time and materials basis
and are not essential to the customer's functionality requirements. If any
portion of the software license fees is subject to forfeiture or refund, the
Company will postpone revenue recognition until the contingency has been
removed. The Company provides for potential product returns and allowances at
the time of shipment. Historically, product returns and allowances have been
immaterial. Consulting and education revenue is recognized as the services are
performed. Revenue from support and maintenance
5
<PAGE> 7
POWERCERV CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
activities is recognized ratably over the term of the maintenance period and the
unrecognized portion is recorded as deferred revenue. The Company's adoption of
SOP 97-2 did not have a material effect on the Company's financial statements
for the three month period ended March 31, 1998. Prior to January 1, 1998, the
Company recognized revenue in accordance with the American Institute of
Certified Public Accountants' Statement of Position 91-1, Software Revenue
Recognition.
C. NET LOSS PER SHARE
During the year ended December 31, 1997, the Company adopted Statement
of Financial Accounting Standards No. 128, Earnings Per Share, which sets forth
the requirements for the computation, presentation and disclosures regarding
earnings per share for entities with publicly held common stock.
The basic net loss per share is computed by dividing the net loss
available to common stockholders by the weighted-average number of common
shares outstanding. Common stock equivalents in each of the three month
periods ended March 31, 1998 and 1997 were anti-dilutive due to the net losses
sustained by the Company during each of those periods, thus the diluted net
loss per share in these periods is the same as the basic net loss per share.
D. COMPREHENSIVE INCOME
Beginning January 1, 1998, the Company adopted Statement of Financial
Accounting Standards No. 130, Reporting Comprehensive Income. Statement 130,
which defines comprehensive income as the change in equity of an enterprise
except for those changes resulting from shareholder transactions, establishes
standards for reporting comprehensive income. For the three months ended March
31, 1998 and 1997, the Company did not have any comprehensive income (loss)
except for the net loss reported on the Condensed Consolidated Statement of
Operations.
E. ACCRUED EXPENSES
Accrued expenses consist of the following:
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS)
MARCH 31, DECEMBER 31,
1998 1997
---------------- ------------------
<S> <C> <C>
Compensation $ 1,159 $ 1,370
Severance and related costs 238 411
Other 1,548 1,094
---------------- -----------------
$ 2,945 $ 2,875
=================== =================
</TABLE>
F. COMMITMENTS
The Company has entered into employment agreements with certain of its
executive officers. Information regarding these agreements is available in the
Company's 1997 Annual Report on Form 10-K filed with the Securities and
Exchange Commission on March 31, 1998.
6
<PAGE> 8
POWERCERV CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
G. CONTINGENCIES
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 SummitVentures 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 offering of its
common stock ("IPO")) 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 IPO 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. On March 19, 1998, the defendants
filed their motions to dismiss this complaint. An effect of this motion filing
is to postpone any discovery on this case until after the motions are ruled on
by the Court. No ruling has yet been handed down. On April 5, 1998, the Court
ordered the parties to attend a mediation conference to be conducted on or
before July 30, 1998. This conference is currently scheduled for July 30, 1998.
The defendants deny any wrongdoing and intend to contest the suit vigorously.
H. INCOME TAXES
The Company increased its deferred income tax asset valuation allowance
by approximately $421,000 for the three month period ended March 31, 1998 to
offset the tax benefit applicable to the loss incurred during the period. The
decision to fully reserve the deferred income tax asset was primarily the result
of the Company's continued losses from operations. For the three month period
ended March 31, 1997, the Company recorded an income tax benefit at an estimated
38% rate.
7
<PAGE> 9
POWERCERV CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(DOLLARS IN THOUSANDS)
OVERVIEW
The primary mission of PowerCerv Corporation and its wholly-owned
subsidiary, PowerCerv Technologies Corporation (collectively, the "Company" or
"PowerCerv") is to develop, market, license, implement and support open,
modifiable "ERP/back-office" and "front-office" enterprise application software
solutions for mid-size U.S. discrete manufacturing companies with annual
revenues between $25 million and $500 million. The Company's Enterprise
Resource Planning (ERP) application products (which also may be referred to as
"back office" products) facilitate the management of resources and information
to allow manufacturers to reduce order fulfillment times, improve operating
efficiencies and measure critical company performance against defined
objectives. The Company's front-office application products increase the
effectiveness of sales organizations and customer support centers by providing
opportunity management for maximum sales efficiency and problem tracking and
resolution management. The Company also provides a wide range of professional
technical and business consulting services, including application analysis,
design, development, modification and integration programming, training and
deployment for its application products. Separately, the Company provides a
wide range of consulting services to companies who use PowerBuilder(R), a
leading development tool of Sybase, Inc., for client/server systems
development. The Company also provides complementary development tool products
used to enhance or accelerate the implementation and ongoing maintenance of its
application products, and resells third party technology resale products to
complement the Company's products and services offering.
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 1997 Annual Report on Form 10-K filed with the
Securities and Exchange Commission on March 31, 1998. These risks include, but
are not limited to, matters related to the Company's ability to manage change,
liquidity, fluctuations in the Company's quarterly activities and results of
operations, the availability of qualified consulting personnel, dependence on
product development and its new products, competition, dependence on
client/server environment and dependence on key personnel. 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 third party software vendors
("technology resales") and fees for services, including consulting, education
and support and maintenance. For the quarter ended March 31, 1998, 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.
8
<PAGE> 10
POWERCERV CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
(DOLLARS IN THOUSANDS)
Beginning January 1, 1998, the Company has recognized revenue in
accordance with the American Institute of Certified Public Accounts' Statement
of Position 97-2, as amended, Software Revenue Recognition ("SOP 97-2").
Revenue is recognized from licenses of the Company's software products when the
contract has been executed, the product(s) has been shipped, collectibility is
probable and the software license fees are fixed or determinable. License
revenue from sales of the Company's development tools and revenue from
technology resales is recognized following the procedures above except generally
the Company ships its development tools and technology resale products under a
shrinkwrap license agreement upon the Company's receipt of a binding customer
order as opposed to executing a negotiated contract. The Company generally
accounts for consulting services separate from software license fees for those
arrangements where services are separately stated on a time and materials basis
and are not essential to the customer's functionality requirements. If any
portion of the software license fees is subject to forfeiture or refund, the
Company will postpone revenue recognition until the contingency has been
removed. The Company provides for potential product returns and allowances at
the time of shipment. Historically, product returns and allowances have been
immaterial. Consulting and education revenue is recognized as the services are
performed. Revenue from support and maintenance activities is recognized ratably
over the term of the maintenance period and the unrecognized portion is recorded
as deferred revenue. The Company's adoption of SOP 97-2 did not have a material
effect on the Company's financial statements for the three month period ended
March 31, 1998.
The Company's primary objective is to increase its license revenues and
market share in the middle market. The Company believes that its
ERP/back-office and front-office suite of application products effectively meet
the needs of mid-size manufacturing companies based on technology platforms,
functionality, agility and integration capabilities. The Company also believes
that the market for enterprise application vendors is growing rapidly based on,
among other factors, the continuing acceptance of client/server technology, the
migration from mainframe computers and year 2000 concerns. The Company is
focused on trying to successfully increase its license revenues while closely
managing its operating costs. If these objectives are achieved, this is
intended to result in improved earnings performance. To achieve the Company's
strategy to increase license revenue and market share, the Company will have to
continue to enhance its products, recruit and train additional consulting staff
and recruit and train sales and marketing professionals. There can be no
assurance that the Company will be able to achieve this strategy and to
successfully compete against current and future competitors.
The Company believes that it was the first enterprise software
application company to provide integrated client/server solutions for both
ERP/back-office and front-office systems from one vendor with a consistent
development methodology, under a common technical architecture and a common
look and feel. The Company's full suite of integrated ERP/back-office and
front-office enterprise application products is referred to as its Customer
Lifecycle Management (CLM) Solution. In early November 1997, the Company
released version 7.0 of its suite of application products. The Company
believes this release enhances its prior product offering. The Company
believes that its CLM Solution, including its 7.0 release, is a competitive
advantage. In late 1997 and early 1998 and pursuant to a marketing and sales
plan, the Company has focused its marketing and sales efforts, together with
other resources, on a much narrower target market than in 1997 and prior years.
As a result, the Company has reduced its focus on its development tools and
sale of third party resale products. Management believes the Company is
positioned to leverage the strength of its products and services for
mid-size U.S. discrete manufacturing
9
<PAGE> 11
POWERCERV CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT REFERENCES TO THE COMPANY'S TARGET MARKET)
companies with annual revenues between $25 million and $500 million. There can
be no assurance that the market will accept the Company's business strategy and
version 7.0 release of its suite of application products, or if it does, that
the Company will be able to successfully compete against other firms also
implementing this or a similar strategy.
In connection with the business strategy discussed above, the Company
also approved and implemented a financial operating plan associated with its
marketing and sales focus, hired a president/COO with relevant industry
experience to assist in connection with executing this plan, and promoted its
director of international sales to a new position of senior vice president of
worldwide sales. The plan also includes continued enhancement of the Company's
application products, recruiting and training additional marketing and sales
professionals and recruiting and training additional consulting personnel.
Management believes this new plan will assist the Company in attempting to
accomplish its strategic objective to increase license revenues from its
application products; however, there can be no assurance that the Company will
achieve this objective or that the Company's license revenues will increase in
accordance with its plans. 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.
The Company's financial operating plan is also designed to
significantly reduce the Company's operating expenses and minimize the usage of
cash. Based upon the financial operating plan, the Company initiated a
reduction in work force of approximately 50 persons from late 1997 through
January 1998. The Company's execution of this plan resulted in a work force
reduction and other charge of $1,010, which was recorded in the fourth quarter
of fiscal 1997. As a result of the Company's implementation of this financial
operating plan, the Company expects its general and administrative, sales and
marketing and research and development operating expenses to be lower during
1998 as compared to 1997.
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 and maintenance 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.
A substantial portion of the Company's operating expenses is related
to personnel, facilities, sales 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.
10
<PAGE> 12
POWERCERV CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
(DOLLARS IN THOUSANDS)
The Company's strategy for increasing its license revenues also
includes supplementing the marketing of its software products and services by
its direct sales force 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 international distributors. Selling through indirect channels
may limit the Company's contacts with its customers. As a result, the
Company's ability to accurately forecast sales, evaluate customer satisfaction
and recognize emerging customer requirements may be hindered. The Company's
strategy of marketing its products directly to end-users and indirectly through
VARs, OEMs, teaming partners and international 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 international distributors.
In addition, the Company's strategy is to provide its customers with a
wide range of professional technical and business consulting services
associated with implementing and customizing the Company's application
products. Separately, the Company provides a wide range of general consulting
services to companies who use PowerBuilder(R), a leading technology development
tool of Sybase, Inc. for client/server systems development. The Company
believes that if it is successful in increasing its application license
revenue, its consulting services revenues associated with the Company's
application products will increase. Conversely, lower application license
revenues will negatively impact its consulting services revenues. With respect
to its general consulting services, the Company plans to increase this portion
of its service revenue by focusing on medium scale client/server projects. The
market for these types of general consulting 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. The Company has
experienced higher than expected turnover among its consultants, and if this
continues, consulting services revenue and expenses will be negatively
impacted. 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
11
<PAGE> 13
POWERCERV CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
(DOLLARS IN THOUSANDS)
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.
The market for enterprise software application products and services
is intensely competitive, rapidly changing and significantly affected by new
product offerings and other market activities. A number of companies offer
products similar to the Company's products and services, which are targeted at
mid-size discrete manufacturers. In addition, the Company's market has no
proprietary barriers to entry, which would limit competitors from developing
similar products or selling competing products. Many of the Company's existing
competitors, as well as a number of potential competitors, have longer
operating history, more established marketing and sales organizations, greater
name recognition, larger research and development organizations, significantly
greater financial and technical resources and a larger installed base of
customers than the Company. As a result, these competitors may be able to
respond more quickly to new or emerging technologies and to changes in customer
requirements, or to devote greater resources to the development, promotion and
sale of their products, than can the Company. There can be no assurance that
the Company will be able to compete successfully with existing or new
competitors or that such competitors will not offer or develop products that
are superior to the Company's products or that achieve greater market
acceptance. In addition, increased competition is likely to result in price
reductions and related reductions in gross margins and market share, any one of
which could materially adversely affect the Company's business, results of
operations and financial condition.
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:
<TABLE>
<CAPTION>
REVENUES THREE MONTHS ENDED MARCH 31,
1998 CHANGE 1997
--------------------------------- -------------------------------------------
<S> <C> <C> <C>
License fees $1,362 (18%) $1,659
Percentage of total revenues 19% 19%
--------------------------------- -------------------------------------------
Technology resales 383 (20%) 477
Percentage of total revenues 5% 5%
--------------------------------- -------------------------------------------
Service fees 5,542 (16%) 6,620
Percentage of total revenues 76% 76%
--------------------------------- -------------------------------------------
</TABLE>
License fees. The Company's license fees are derived from licensing
the Company's application products and development tools. In addition, any
royalty fees earned are included in license fees. 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.
12
<PAGE> 14
POWERCERV CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT REFERENCES TO THE COMPANY'S TARGET MARKET)
License fees revenue decreased for the three month period ended March 31, 1998
compared to the same period in 1997 primarily due a lower average dollar amount
of the application transactions and slightly lower tools revenue. During late
December 1997 and early January 1998, the Company initiated a new plan and
strategy to increase license revenues from its applications products. Under
this plan, the Company has focused its sales and marketing efforts on licensing
its ERP/back-office and front-office application products to mid-size U.S.
discrete manufacturing companies with annual revenues between $25 million and
$500 million. The decision to implement this strategy is the result of the
Company's assessment of the market for enterprise application software
solutions, the Company's products and its strengths. Pursuant to this plan, the
Company approved and implemented a financial operating plan associated with its
marketing and sales focus, hired a president/COO with relevant industry
experience to assist in connection with executing this plan, and promoted its
director of international sales to a new position of senior vice president of
worldwide sales. This plan also includes continued enhancement of the Company's
application products, and recruiting and training additional marketing and sales
professionals. Management believes this new plan will assist the Company in
attempting to accomplish its strategic objective to increase license revenues
from its application products; however, there can be no assurance that the
company will achieve this objective or that the Company's license revenues will
increase in accordance with its expectations.
Sales of the Company's development tools will continue to decrease
during 1998 due to increased competition in the software development tools
market and the Company's decision to focus its sales, marketing and development
resources on its application products.
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 decreased 20% for the three month period ended March 31, 1998
compared to the three month period ended March 31, 1997 due to the Company's
increased focus on sales of its own application products and increased market
competition for technology resale products. The Company believes that the 1998
technology resales revenue, as a percentage of total revenue, will be less than
prior year periods.
Service fees. The Company's service fees consist of revenue from
consulting, education and support/maintenance services. Consulting services
are primarily provided on a time and materials basis, educational services are
generally priced on a per student basis and annual support/maintenance service
fees are based on a percentage of the related license fees. Service fees
revenue decreased 16% for the three month period ended March 31, 1998 compared
to the same period during 1997. This decrease was due mainly to a decrease in
the number of consultants as a result of closing certain unprofitable service
areas and the Company's December 1997 work force reduction. Also in
conjunction with the work force reduction, employees who were transitioned from
nonbillable to billable positions within the Company were not actually billable
at customer sites until later in the quarter following additional education
and training.
13
<PAGE> 15
POWERCERV CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
(DOLLARS IN THOUSANDS)
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 MARCH 31,
-------------------------------------------
1998 CHANGE 1997
--------------------------------- -------------------------------------------
<S> <C> <C> <C>
Cost of licenses $ 178 (43%) $ 312
Gross profit percentage 87% 81%
--------------------------------- -------------------------------------------
Cost of technology resales 271 (23%) 352
Gross profit percentage 29% 26%
--------------------------------- -------------------------------------------
Cost of services 4,505 (11%) 5,080
Gross profit percentage 19% 23%
--------------------------------- -------------------------------------------
</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. The cost of
licenses decreased 43% for the three month period ended March 31, 1998 as
compared to the same period in 1997 due to lower amortization of intangible
assets. Management expects the cost of licenses to continue to be lower during
1998 as compared to 1997 as a result of the Company recording a charge of
approximately $1.3 million during late 1997 to reduce the intangible assets
acquired in certain 1996 and 1995 acquisitions to their net realizable value.
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.
Technology resales cost decreased 23% in the three month period ended March 31,
1998 as compared to the same period in the prior year due to decreased
technology resales revenue. This decrease in technology resales revenue is due
to an increased focus on sales of the Company's own software products and
increased market competition for technology resale products.
Cost of services. The cost of services consists primarily of
compensation and travel costs associated with providing consulting, product
support and maintenance, technical services and education. The cost of services
decreased 11% for the first quarter in 1998 as compared to the same period in
1997 due to a decrease in the number of consultants as a result of closing
certain unprofitable service areas and the Company's December 1997 work force
reduction. The gross profit percentage decreased from 23% for the three month
period ended March 31, 1997 to 19% for the three month period ended March 31,
1998 as a result of several factors including the impact of those events
described above, transitioning some employees from nonbillable to billable
positions within the Company and training these individuals, higher than
expected consultant turnover, lower utilization of the application consultants
due to lower application license sales, and higher costs associated with
training the consulting staff.
14
<PAGE> 16
POWERCERV CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
(DOLLARS IN THOUSANDS)
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 MARCH 31,
-------------------------------------------
1998 CHANGE 1997
--------------------------------- -------------------------------------------
<S> <C> <C> <C>
General and administrative $1,128 (27%) $1,547
Percentage of total revenues 15% 18%
--------------------------------- -------------------------------------------
Sales and marketing 1,440 (43%) 2,537
Percentage and total revenues 20% 29%
--------------------------------- -------------------------------------------
Research and development 954 (34%) 1,442
Percentage of total revenues 13% 16%
--------------------------------- -------------------------------------------
</TABLE>
General and administrative ("G&A"). G&A expenses include compensation,
communications, accounting, human resources, legal and related facilities
expenses. The decrease in G&A expenses for the three month period ended March
31, 1998 compared to the three month period ended March 31, 1997 is primarily
due to the Company's implementation of the financial operating plan associated
with its marketing and sales focus which included a work force reduction. The
Company expects its G&A expenses to continue to be lower during 1998 as compared
to 1997 as a result of implementing and executing on its financial operating
plan.
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. Sales and marketing
costs decreased 43% for the three month period ended March 31, 1998 as compared
to the same period in 1997 as a result of the Company's implementation of the
financial operating plan associated with its marketing and sales focus and
continuing restructuring of its marketing and sales organizations. During the
remainder of 1998, the Company may invest additional resources, possibly in
excess of the amounts incurred during the first three months of 1998, on
rebuilding and strengthening the Company's marketing and sales organizations
and their respective programs and initiatives. Nevertheless, the Company
expects its sales and marketing expenses to continue to be lower during 1998 as
compared to 1997.
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 products. 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 34% for the three month period ended March
31, 1998 as compared to the same period in 1997 due to the Company's
implementation of the financial operating plan associated with its marketing and
sales focus. The Company expects its R&D expenses to continue to be lower
during 1998 as compared to 1997 as a result of implementing and executing on its
financial operating plan.
15
<PAGE> 17
POWERCERV CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
(DOLLARS IN THOUSANDS)
Income taxes. For the three month period ended March 31, 1998, the
Company increased its deferred income tax asset valuation allowance by
approximately $421 to offset the tax benefit applicable to the loss incurred
during the period. For the three months ended March 31, 1997, the Company
recorded an income tax benefit at an estimated 38% rate.
YEAR 2000 COMPLIANCE
The Company has reviewed its computer information systems to identify
any systems that could be affected by the "Year 2000" issue. Year 2000
problems typically arise from computer programs using two characters rather
than four to define the applicable year. This could result in system failure
or miscalculations. The Company presently believes that its software systems
which include its application products and other internally-developed software,
its relational data base management system, and its information systems
hardware used in connection with managing the Company's operations are Year
2000 compliant.
The Company has not assessed fully the impact of the Year 2000
compliance issue on the entities with whom the Company interacts, such as its
channel partners, resellers, distributors, suppliers, manufacturers and
customers. The Company has issued, however, a Year 2000 position statement for
those entities with which the Company does business. The Company also has not
verified that its non-information systems equipment is Year 2000 compliant.
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 and cash used in investing
activities.
<TABLE>
<CAPTION>
AS OF AND FOR THE
THREE MONTHS ENDED MARCH 31,
-------------------------------------------
1998 CHANGE 1997
------ -------- --------
<S> <C> <C> <C>
Working capital $6,846 (65%) $19,594
Cash and cash equivalents 6,472 (49%) 12,623
Cash provided by (used in)
operating activities 382 121% (1,808)
Cash used in investing activities (270) 7% (253)
</TABLE>
Working capital and cash and cash equivalents decreased as of March
31, 1998, compared to March 31, 1997, principally due to increased expenditures
in research and development associated with the October 1997 application
product release and increased infrastructure costs including its investment in
its direct and indirect sales and marketing organizations during the last nine
months of 1997.
16
<PAGE> 18
POWERCERV CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
(DOLLARS IN THOUSANDS)
For the three month period ended March 31, 1998, cash provided by
operating activities was $382 due to increased receivables collections,
decreased operating expenses as a result of implementing and executing on the
Company's financial operating plan, and certain one-time items including
settlements of outstanding receivables matters. During the three months ended
March 31, 1998, the Company paid approximately $350 in severance costs, office
closing costs and other charges related to its work force reduction and cost
cutting measures the Company began in late December 1997. For the three months
ended March 31, 1997, the cash used in operating activities was $1,808 and was
primarily due to increased investments in R&D, costs associated with being a
public company and increased infrastructure costs including investments in sales
and marketing organizations.
The Company's cash used in investing activities remained relatively
unchanged for the three month period ended March 31, 1998 as compared to March
31, 1997. For the three month period March 31, 1998, approximately $237 of the
cash used in investing activities was spent on the Company's relocation of its
product development group to a larger facility in Anderson, South Carolina. For
the three month period ended March 31, 1997, the cash used in investing
activities was spent primarily on computer equipment.
At March 31, 1998, the Company's primary source of liquidity consisted
of its cash and cash equivalents balance of $6,472 and its short-term accounts
receivable balance of $6,473. 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, which
has a February 15, 1999 maturity date, requires the Company to maintain certain
financial ratios. As of March 31, 1998, no balance was outstanding under the
line of credit. On January 26, 1998, the Company and its bank amended the
terms of this line of credit by providing for the application of a $300
sublimit for the purpose of supporting letters of credit.
During late 1997 and early 1998, the Company implemented a financial
operating plan associated with its marketing and sales focus which included a
work force reduction and cost cutting measures in line with its objective to
return to profitability. If the Company is not successful in achieving its
targeted license and service revenues and the projected reduction in costs, the
Company may be required to take further actions to align its operating expenses
with its revenues, such as further reductions in work force or other cost
cutting measures. The Company is dependent upon its ability to generate cash
flows from its license and service fees, as well as the collection of its
outstanding accounts receivable, to maintain its current liquidity levels.
The Company believes that, based upon its projected revenues and the
operating expense reductions associated with the recent work force reduction
and new financial plan, that funds generated from operations, existing cash and
cash equivalents and its short-term accounts receivable, 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.
17
<PAGE> 19
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 issued Statement
of Financial Accounting Standards No. 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 has identified its operating segments as its services
and license products. The Company will be required to adopt this standard for
financial statements for the fiscal year ended December 31, 1998; however,
Statement 131 need not be applied to interim financial statements in the
initial year of its application. As the standard addresses reporting and
disclosure issues only, there will be no impact on earnings from adoption of
this standard.
18
<PAGE> 20
ACCOUNTANTS' REPORT
The Board of Directors
PowerCerv Corporation
We have reviewed the condensed consolidated balance sheet of PowerCerv
Corporation and subsidiary as of March 31, 1998, and the related condensed
consolidated statements of operations and cash flows for the three months ended
March 31, 1998 and 1997, 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 accompanying 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, 1997, 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 26, 1998, except with
respect to notes 9 (c) and 10 (c), which are as of February 25, 1998, 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, 1997, as included in Part I/Item 1 of this quarterly
report on Form 10-Q, is fairly stated, in all material respects, in relation to
the consolidated balance sheet from which it has been derived.
/s/ KPMG Peat Marwick LLP
KPMG PEAT MARWICK LLP
Tampa, Florida
April 17, 1998
19
<PAGE> 21
POWERCERV CORPORATION
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
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 offering of
its common stock ("IPO")) 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 IPO 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. On March 19, 1998, the defendants
filed their motions to dismiss this complaint. An effect of this motion filing
is to postpone any discovery on this case until after the motions are ruled on
by the Court. No ruling has yet been handed down. On April 5, 1998, the Court
ordered the parties to attend a mediation conference to be conducted on or
before July 30, 1998. This conference is currently scheduled for July 30,
1998. The defendants deny any wrongdoing and intend to contest the suit
vigorously.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
15.1 Accountants' Letter regarding Unaudited Interim Financial
Information.
27.1 Financial Data Schedule.
(b) Reports on Form 8-K
The Company filed a current report on Form 8-K dated February 25,
1998, to report under Item 5, Other Events, the hiring of Michael J.
Simmons as President and Chief Operating Officer of the Company.
20
<PAGE> 22
POWERCERV CORPORATION
FORM 10-Q
(for the quarterly period ended March 31, 1998)
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.
PowerCerv Corporation
/s/ Marc J. Fratello
Date: May 15, 1998 ------------------------
Marc J. Fratello,
Chief Executive Officer
(Duly Authorized Officer)
/s/ Stephen M. Wagman
Date: May 15, 1998 ------------------------
Stephen M. Wagman,
Chief Financial Officer
(Principal Financial Officer)
/s/ Karen L. Surplus
Date: May 15, 1998 ------------------------
Karen L. Surplus,
Chief Accounting Officer
21
<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 April
17, 1998 related to our review of interim financial information, which report
is included in the quarterly report on Form 10-Q of PowerCerv Corporation for
the three months ended March 31, 1998.
Pursuant to Rule 436(c) under the Securities Act of 1933, such report is not
considered part of a registration statement prepared or certified by an
accountant or a report prepared or certified by an accountant within the
meaning of Sections 7 and 11 of the Act.
/s/ KPMG Peat Marwick LLP
KPMG PEAT MARWICK LLP
Tampa, Florida
April 17, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM UNAUDITED
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS AS OF AND FOR THE THREE MONTH PERIOD
ENDED MARCH 31, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH 10-Q
FILING.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 6,472
<SECURITIES> 0
<RECEIVABLES> 8,373
<ALLOWANCES> (1,900)
<INVENTORY> 0
<CURRENT-ASSETS> 304
<PP&E> 5,121
<DEPRECIATION> (2,568)
<TOTAL-ASSETS> 18,252
<CURRENT-LIABILITIES> 6,403
<BONDS> 0
0
0
<COMMON> 14
<OTHER-SE> 11,835
<TOTAL-LIABILITY-AND-EQUITY> 18,252
<SALES> 0
<TOTAL-REVENUES> 7,287
<CGS> 0
<TOTAL-COSTS> 8,401
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 75
<INTEREST-EXPENSE> (81)
<INCOME-PRETAX> (1,108)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,108)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,108)
<EPS-PRIMARY> (0.08)
<EPS-DILUTED> (0.08)
</TABLE>
