<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 September 30, 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 November 3, 1998, there were 13,831,958 shares of the registrant's common
stock, $.001 par value, outstanding.
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<PAGE> 2
POWERCERV CORPORATION
FORM 10-Q
INDEX
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION PAGE
Item 1. Financial Statements
<C> <C>
Condensed Consolidated Balance Sheets as of September 30, 1998 (unaudited)
and December 31, 1997................................................................................ 2
Condensed Consolidated Statements of Operations for the Three and Nine months Ended
September 30, 1998 and 1997 (unaudited)............................................................. 3
Condensed Consolidated Statements of Cash Flows for the Nine months Ended
September 30, 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
Independent 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>
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,
1998 1997
------------- -------------
(UNAUDITED)
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 7,017 $ 6,360
Accounts receivable, net of allowance of
$1,787 and $2,000, respectively 4,951 6,925
Other current assets 264 329
------- -------
Total current assets 12,232 13,614
Property and equipment, net 2,383 2,527
Intangible assets, net 659 975
Investment in third party 1,500 1,500
Deposits and other assets 88 71
------- -------
Total assets $16,862 $18,687
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 699 $ 1,363
Accrued expenses 2,489 2,875
Deferred revenue 2,435 1,492
------- -------
Total current liabilities 5,623 5,730
Shareholders' equity 11,239 12,957
------- -------
Total liabilities and shareholders' equity $16,862 $18,687
======= =======
</TABLE>
See accompanying 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,
------------------------------- ---------------------------------
1998 1997 1998 1997
---------------- ------------ ---------------- -------------
Revenues:
<S> <C> <C> <C> <C>
License fees $ 2,790 $ 2,027 $ 5,738 $ 5,693
Technology resales 98 563 854 1,535
Service fees 4,934 6,169 15,827 18,701
-------- -------- -------- --------
Total revenues 7,822 8,759 22,419 25,929
-------- -------- -------- --------
Costs and expenses:
Cost of licenses 142 402 441 1,186
Cost of technology resales 69 447 591 1,196
Cost of services 3,862 4,727 12,554 14,789
General and administrative 1,001 1,421 3,250 4,512
Sales and marketing 1,829 3,027 4,802 8,217
Research and development 989 1,423 2,846 4,485
-------- -------- -------- --------
Total costs and expenses 7,892 11,447 24,484 34,385
-------- -------- -------- --------
Operating loss (70) (2,688) (2,065) (8,456)
Interest income, net 82 127 232 465
-------- -------- -------- --------
Income (loss) before income taxes 12 (2,561) (1,833) (7,991)
Income tax provision - 2,577 - 1,691
-------- -------- -------- ---------
Net income (loss) and
comprehensive income (loss) $ 12 $ (5,138) $ (1,833) $ (9,682)
======== ======== ======== ========
Net income (loss) per share:
Basic and diluted $ 0.00 $ (0.37) $ (0.13) $ (0.70)
======== ======== ======== ========
Shares used in computing net income
(loss) per share:
Basic 13,831 13,847 13,811 13,845
======== ======== ======== ========
Diluted 14,680 13,847 13,811 13,845
======== ======== ======== ========
</TABLE>
See accompanying 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,
-------------------------------
1998 1997
---------- ----------
Cash flows from operating activities:
<S> <C> <C>
Net loss $ (1,833) $ (9,682)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation and amortization 1,076 1,567
Deferred income taxes - 1,658
Deferred revenue 943 (95)
Changes in assets and liabilities 970 1,776
-------- --------
Net cash provided by (used in) operating activities 1,156 (4,776)
-------- --------
Cash flows from investing activities:
Purchases of property and equipment, net (614) (600)
-------- --------
Net cash used in investing activities (614) (600)
-------- --------
Cash flows from financing activities:
Net proceeds from issuance of common stock 115 52
-------- --------
Net cash provided by financing activities 115 52
-------- --------
Net increase (decrease) in cash and cash equivalents 657 (5,324)
Cash and cash equivalents, beginning of period 6,360 14,637
-------- --------
Cash and cash equivalents, end of period $ 7,017 $ 9,313
======== ========
</TABLE>
See accompanying 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, 1998 and the
condensed consolidated statements of operations for the three and nine months
ended September 30, 1998 and 1997, and the condensed consolidated statements of
cash flows for the nine months ended September 30, 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
September 30, 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.
Certain 1997 balance sheet amounts have been reclassified to conform to
the 1998 financial statement presentation.
The results of operations for the three and nine months ended September
30, 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 Accountants'
Statement of Position 97-2, Software Revenue Recognition ("SOP 97-2"), as
amended by Statement of Position 98-4, Deferral of the Effective Date of a
Provision of 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 multi-element arrangements where services are a separate
element and are not essential to the customer's functionality requirements. If
any portion of the software
5
<PAGE> 7
POWERCERV CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
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 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 and nine-month period ended September 30,
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 INCOME (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 income (loss) per share is computed by dividing the net
income (loss) available to common stockholders by the weighted-average number of
common shares outstanding. The diluted net income (loss) per share is computed
by dividing the net income (loss) available to common stockholders by the
weighted average number of shares of common stock and common stock equivalents
outstanding. Common stock equivalents in the nine-month period ended September
30, 1998 and the three and nine-month periods ended September 30, 1997 were
anti-dilutive due to the net losses sustained by the Company during each of
those periods, thus the weighted average shares used in computing basic and
diluted net income (loss) per share are the same for those periods.
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 and nine-month
periods ended September 30, 1998 and 1997, the Company did not have any
comprehensive income (loss) except for the net income (loss) reported on the
Condensed Consolidated Statement of Operations.
E. ACCRUED EXPENSES
Accrued expenses consist of the following:
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS)
SEPTEMBER 30, DECEMBER 31,
1998 1997
------------- ------------
<S> <C> <C>
Compensation $1,386 $1,370
Severance and related costs 88 411
Other 1,015 1,094
------ ------
$2,489 $2,875
====== ======
</TABLE>
6
<PAGE> 8
POWERCERV CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
F. 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 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 by July 30, 1998. The
parties did not resolve this lawsuit in the mediation conference. The defendants
continue to deny any wrongdoing and intend to contest the suit vigorously.
The Company is also subject to miscellaneous legal proceedings in the
normal course of business. The Company is currently defending these proceedings
and claims and anticipates that it will be able to resolve these matters in a
manner that will not have a material adverse effect on the Company's
consolidated financial position.
G. INCOME TAXES
The Company decreased its deferred income tax asset valuation allowance
by approximately $5,000 for the three-month period ended September 30, 1998
which offsets the tax expense recorded during the period. For the nine-month
period ended September 30, 1998 and the three and nine-month periods ended
September 30, 1997, the Company increased its deferred income tax asset
valuation allowance by approximately $696,000, $3,500,000 and $4,700,000
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.
7
<PAGE> 9
POWERCERV CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT REFERENCES TO THE COMPANY'S TARGET MARKET)
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 has also provided 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 and
fees for services, including consulting, education and support and maintenance.
The Company also derives revenue from resales of software products developed by
third party software vendors ("technology resales"), though this revenue has
been significantly reduced in 1998 due to the Company's focused marketing and
sales strategy. For the quarter ended September 30, 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 Accountants'
Statement of Position 97-2, Software Revenue Recognition ("SOP 97-2"), as
amended by Statement of Position 98-4, Deferral of the Effective Date of a
Provision of 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 multi-element arrangements where services are a separate
element 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 and nine-month
periods ended September 30, 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 enterprise application software solutions effectively meet the
needs of mid-size manufacturing companies based on technology platforms,
functionality, agility and integration capabilities. The Company also believes
that this 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 sales professionals and
recruit and train additional application consultants. 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 software products is referred to as its
Customer Lifecycle Management (CLM) Solution. In early 1998, the Company began
referring to its CLM Solution as "ERP Plus", trademarked this reference, and has
focused its marketing and sales efforts on this new mark combined with "The Plus
Your Enterprise Needs". 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 ERP Plus product
offering, 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
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)
a result, the Company has reduced its focus on its development tools and sale of
third party resale products. On July 2, 1998, the Company announced that it will
discontinue sales of its development tools. In connection with this change and
for the same reason, the Company has also significantly reduced its focus on
generating revenue from technology resales. Management believes the Company is
positioned to leverage the strength of its ERP Plus application products and
related services for mid-size U.S. discrete manufacturing 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 and later
releases 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
approved and implemented a financial operating plan associated with its
marketing and sales focus and hired a president/COO in early March 1998 with
relevant industry experience to assist in connection with executing this plan.
The plan also includes continued enhancement of the Company's application
products, recruiting and training additional marketing and sales professionals,
centralizing the marketing organization in the Company's Tampa headquarters,
increasing the number of regional sales offices and U.S. regional sales vice
presidents, and recruiting and training additional consulting personnel. The new
president/COO has recruited additional management personnel to strengthen the
management team. This includes a senior vice president of marketing, senior vice
president of direct sales and a vice president of corporate services. 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 from their fiscal 1997
levels and to 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, marketing and sales, and research and development operating
expenses to be lower during the fourth quarter of 1998 as compared to the same
period in 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 execution of
the license agreement. 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.
10
<PAGE> 12
POWERCERV CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
(DOLLARS IN THOUSANDS)
A substantial portion of the Company's operating expenses is related to
personnel, facilities, marketing and sales programs. The level of spending for
such expenses cannot be adjusted quickly and is therefore fixed in the
short-term. The Company's expense levels for personnel, facilities and marketing
programs are based, in significant part, on the Company's expectations of future
revenue. If actual revenue levels on a quarterly basis are below management's
expectations, results of operations are likely to be adversely affected by a
similar amount because a relatively small amount of the Company's operating
expenses varies with its revenues in the short-term.
The 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
(application consultants). 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 (general consultants). 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
continues to focus 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 qualified 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, costs and the resulting profit margins 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;
11
<PAGE> 13
POWERCERV CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
(DOLLARS IN THOUSANDS)
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; 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.
The market for ERP software application products and services is
intensely competitive, rapidly changing and significantly affected by new
product offerings and other market activities. In addition, several major ERP
vendors have commented on the potential for slower than originally planned
revenue growth due to economic conditions overseas. These comments and general
market conditions have affected the stock prices of many ERP vendors. A number
of companies offer products similar to the Company's products and services,
which are targeted at mid-size discrete manufacturers principally located in the
United States. 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 SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30
---------------------------------- ------------------------------------
1998 CHANGE 1997 1998 CHANGE 1997
--------------------------------- ------------------------------------
<S> <C> <C> <C> <C> <C> <C>
- --------------------------------
License fees $ 2,790 38% $ 2,027 $ 5,738 1% $ 5,693
Percentage of total revenues 36% 23% 26% 22%
- -------------------------------- ------------------------------- --------------------------------------
Technology resales 98 (83%) 563 854 (44%) 1,535
Percentage of total revenues 1% 6% 4% 6%
- -------------------------------- ------------------------------- --------------------------------------
Service fees 4,934 (20%) 6,169 15,827 (15%) 18,701
Percentage of total revenues 63% 71% 70% 72%
- -------------------------------- ------------------------------- --------------------------------------
</TABLE>
12
<PAGE> 14
POWERCERV CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
(DOLLARS IN THOUSANDS)
License fees. The Company's license fees are derived primarily from
licensing the Company's application products, and to a lesser extent, from
licensing its 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 users and the number
of servers. Source code licenses are available at an additional cost.
License fees revenue increased for the three and nine-month periods
ended September 30, 1998 compared to the same periods in 1997 primarily due to
an increase in the number of license transactions primarily for the Company's
ERP Plus application software products. Management believes this is attributable
to the Company's successful execution of its focused marketing and sales
strategy during the quarter ended September 30, 1998. This increase in license
fees revenue was offset by lower revenue from the Company's development tools,
the sales efforts for which were discontinued in early July 1998. During late
December 1997 and early January 1998, the Company initiated a new plan to
increase license revenues from its applications products. Under this plan, the
Company focused its marketing and sales efforts on licensing its ERP Plus
solutions comprised of 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 was the result
of the Company's assessment of the market for enterprise application software
solutions, the Company's products and its strengths. Under this strategy, the
Company approved and implemented a financial operating plan associated with its
marketing and sales focus and hired a president/COO with relevant industry
experience to assist with the execution of this plan. During 1998, the Company
recruited a senior vice president of marketing and senior vice president of
direct sales, transitioned a sales executive into senior vice president of
channel sales, centralized its marketing organization in the Company's Tampa
headquarters, and increased the number of U.S. regional sales offices and
regional sales vice presidents from three to six. Management believes the
Company's implementation of 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 management's expectations.
The Company had been reducing its focus on its development tools due to
increased competition in the software development tools market and the Company's
decision to increase the focus on its ERP Plus enterprise application software
solutions. License fees revenue from development tools has continued to decrease
both in absolute dollars and as a percentage of total license fees. These and
other factors led the Company to announce on July 2, 1998 that it was
discontinuing sales of its development tools. The Company intends to continue to
provide support/maintenance on two of its development tools through June 30,
1999.
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. In connection with the
Company's decision to discontinue sales of its development tools, the Company
has also significantly reduced its focus on marketing and selling licenses for
technology resales. This action is consistent with the Company's 1998 strategy
focused on its ERP Plus application products. Technology resales revenue
decreased 83% and 44% for the three and nine-month periods ended September 30,
1998, respectively, compared to the comparable periods ended September 30, 1997
due to the Company's increased focus on the marketing and sales of its own ERP
Plus application products and the increased market competition for technology
resale products. The Company believes that the 1998 technology resales revenue,
as a percentage of total revenue and in absolute dollars, will continue to be
less than prior year periods.
13
<PAGE> 15
POWERCERV CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
(DOLLARS IN THOUSANDS)
Service fees. The Company's service fees consist of revenue from
consulting, education and support and 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 and maintenance
service fees are based on a percentage of the related license fees. Service fees
revenue decreased 20% and 15% for the three and nine-month periods ended
September 30, 1998, respectively, compared to the same period during 1997. This
decrease was due mainly to a decrease in the number of billable consultants as a
result of closing certain unprofitable service areas, the Company's December
1997 work force reduction and higher than expected consultant turnover. Also in
conjunction with the work force reduction, employees who were transitioned from
non-billable to billable positions within the Company were not billable at
customer sites until later during the March 31, 1998 quarter following
additional education and training. An additional factor impacting revenue from
service fees was the Company's ERP Plus internal application training program,
which was undertaken during the second and third quarters of 1998. The Company's
application consultants who participated in this training program were not
otherwise on billable assignments. The Company believes that as revenue from
licensing its application products increase, the demand for application
consulting services will correspondingly increase. Service fees for maintenance
and support will also increase. This would result in increased service fees
revenue. There can be no assurance that license revenue will continue to
increase or that if it were to increase, revenue from service fees would
correspondingly increase.
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 SEPTEMBER 30 NINE MONTHS ENDED SEPTEMBER 30,
--------------------------------- ----------------------------------
<S> <C> <C> <C> <C> <C> <C>
1998 CHANGE 1997 1998 CHANGE 1997
- ------------------------------ ---------------------------------------------------------------------------
Cost of licenses $ 142 (65%) $ 402 $ 441 (63%) $ 1,186
Gross profit percentage 95% 80% 92% 79%
- ------------------------------ --------------------------------------------------------------------------
Cost of technology resales 69 (85%) 447 591 (51%) 1,196
Gross profit percentage 30% 21% 31% 22%
- ------------------------------ --------------------------------------------------------------------------
Cost of services 3,862 (18%) 4,727 12,554 (15%) 14,789
Gross profit percentage 22% 23% 21% 21%
- ------------------------------ --------------------------------------------------------------------------
</TABLE>
Cost of licenses. The cost of licenses consists primarily of production
costs, royalties associated with a module of the Company's application products,
and the amortization of intangible assets. The cost of licenses decreased 65%
and 63% for the three and nine-month periods ended September 30, 1998,
respectively, as compared to comparable periods in 1997, due primarily to lower
amortization of intangible assets and lower royalties. 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. The Company also expects the royalty
payments to be lower during 1998 as compared to 1997 as certain contractual
royalty obligations have been satisfied.
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 85% and 51% in the three and nine-month periods ended
September 30, 1998, respectively, as compared to comparable periods in the prior
year due to decreased technology resales revenue. This decrease in technology
resales revenue is due to an increased focus on the marketing and sales of the
Company's ERP Plus application products and the increased market competition for
technology resale products.
14
<PAGE> 16
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 and maintenance, technical services and education. The cost of services
decreased 18% and 15% for the three and nine-month periods ended September 30,
1998, respectively as compared to the same periods 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 increased from 21% for the three-month period ended September 30,
1997 to 22% for the three-month period ended September 30, 1998 as a result of
several factors including higher utilization of application consultants and
higher average consultant billable rates.
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 SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
------------------------------------- ------------------------------------
1998 CHANGE 1997 1998 CHANGE 1997
- -------------------------------- ----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
General and administrative $1,001 (30%) $1,421 $3,250 (28%) $4,512
Percentage of total revenues 13% 16% 14% 17%
- -------------------------------- -----------------------------------------------------------------------------
Sales and marketing 1,829 (40%) 3,027 4,802 (42%) 8,217
Percentage of total revenues 23% 35% 21% 32%
- -------------------------------- ----------------------------------------------------------------------------
Research and development 989 (30%) 1,423 2,846 (37%) 4,485
Percentage of total revenues 13% 16% 13% 17%
- -------------------------------- ----------------------------------------------------------------------------
</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 and nine-month periods
ended September 30, 1998 compared to the same periods ended September 30, 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 programs,
and related communications costs. Sales and marketing costs decreased 40% and
42% for the three and nine-month periods ended September 30, 1998, respectively
as compared to the same periods in 1997 as a result of the Company's
implementation of the financial operating plan associated with its marketing and
sales focus and the Company's restructuring of its marketing and sales
organizations. During 1998, the Company recruited a senior vice president of
marketing and senior vice president of direct sales, transitioned a sales
executive into senior vice president of channel sales, centralized its marketing
organization in the Company's Tampa headquarters, and increased the number of
U.S. regional sales offices and regional sales vice presidents from three to
six. In the third quarter of 1998, the Company also changed its sales
organization commission plans which will likely result in higher sales
commission payments. During the remainder of 1998, the Company will invest
additional resources on 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 30% and 37% for the three and nine-month
periods ended September 30, 1998, respectively, as compared to the same periods
in 1997 due to the Company's implementation of the financial operating plan
associated with its marketing and sales
15
<PAGE> 17
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
(DOLLARS IN THOUSANDS)
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.
Income Taxes. The Company decreased its deferred income tax asset
valuation allowance by approximately $5 for the three-month period ended
September 30, 1998 which offset the tax expense recorded during the period. For
the nine-month period ended September 30, 1998 and the three and nine-month
periods ended September 30, 1997, the Company increased its deferred income tax
asset valuation allowance by approximately $696, $3,500 and $4,700 respectively,
to offset the tax benefits recorded in the respective periods and reduce the
deferred tax asset balance to zero at September 30, 1997.
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. The
expenses of the Company's efforts or the expenses or liabilities to which the
Company became subject as a result of Year 2000 problems are not expected to
have a material adverse effect on the Company's business, results of operations,
cash flows, or financial condition.
LIQUIDITY AND CAPITAL RESOURCES
The following tables set forth, for the periods indicated, certain
financial data regarding the Company's working capital balances, cash and cash
equivalents, cash provided by (used in) operating activities, cash used in
investing activities and cash provided by financing activities:
<TABLE>
<CAPTION>
AS OF
---------------------------------------------
SEPTEMBER 30, DECEMBER 31,
1998 CHANGE 1997
---------------------------------------------
<S> <C> <C> <C>
Working capital $6,609 (16%) $7,884
Cash and cash equivalents 7,017 10% 6,360
</TABLE>
<TABLE>
<CAPTION>
FOR THE
NINE MONTHS ENDED SEPTEMBER 30,
------------------------------------
1998 CHANGE 1997
------------------------------------
<S> <C> <C> <C>
Cash provided by (used in) operating activities $1,156 124% $(4,776)
Cash used in investing activities (614) 2% (600)
Cash provided by financing activities 115 121% 52
</TABLE>
Working capital decreased 16% as of September 30, 1998, compared to
December 31, 1997, principally due to the Company's net loss incurred during the
first nine months of 1998. The cash and cash equivalents increased from December
31, 1997 to September 30, 1998 primarily due to increased accounts receivable
collections during the first nine months of 1998.
For the nine-month period ended September 30, 1998, cash provided by
operating activities was $1,156 due to increased receivables collections,
decreased operating expenses as a result of implementing
16
<PAGE> 18
POWERCERV CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
(DOLLARS IN THOUSANDS)
and executing on the Company's financial operating plan and certain items
including settlements of outstanding receivables matters. During the nine
months ended September 30, 1998, the Company paid approximately $536 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 nine months ended September 30, 1997, the cash used in operating
activities was $4,776 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 nine-month period ended September 30, 1998 as compared to
September 30, 1997. For the nine-month period September 30, 1998, approximately
$306 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 nine-month period ended September 30, 1997, the cash
used in investing activities was spent primarily on purchases of computer
equipment.
At September 30, 1998, the Company's primary source of liquidity
consisted of its cash and cash equivalents balance of $7,017 and its short-term
accounts receivable balance of $4,951. 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
has a February 15, 1999 maturity date and requires the Company to maintain
certain financial ratios. As of September 30, 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 operating 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
INDEPENDENT ACCOUNTANTS' REVIEW REPORT
The Board of Directors
PowerCerv Corporation
We have reviewed the accompanying condensed consolidated balance sheet of
PowerCerv Corporation and subsidiary as of September 30, 1998, and the related
condensed consolidated statements of operations and cash flows for the
three-month and nine-month periods then ended. These financial statements are
the responsibility of the Company's management. The condensed consolidated
balance sheet of PowerCerv Corporation and subsidiary as of September 30, 1997,
and the related condensed consolidated statements of operations and cash flows
for the three-month and nine-month periods then ended and the condensed
consolidated statements of operations and cash flows for the three-month period
ended March 31, 1998, not separately presented herein, were reviewed by other
accountants whose reports (dated October 17, 1997 and April 17, 1998,
respectively) stated that they were not aware of any material modifications that
should be made to those statements for them to be in conformity with generally
accepted accounting principles.
We conducted our reviews 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, which will be performed
for the full year with the objective of expressing 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 financial statements at September 30, 1998, and for
the three-month and nine-month periods then ended for them to be in conformity
with generally accepted accounting principles.
/s/ Ernst & Young LLP
- ---------------------
Ernst & Young LLP
Tampa, Florida
October 14, 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 by July 30,
1998. The parties did not resolve this lawsuit in the mediation conference. The
defendants continue to 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 (for SEC use only).
(b) Reports on Form 8-K
None.
20
<PAGE> 22
POWERCERV CORPORATION
FORM 10-Q
(for the quarterly period ended September 30, 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
Date: November 16, 1998 /s/ Marc J. Fratello
------------------------------------
Marc J. Fratello
Chief Executive Officer
(Duly Authorized Officer)
Date: November 16, 1998 /s/ Stephen M. Wagman
------------------------------------
Stephen M. Wagman,
Chief Financial Officer
(Principal Financial Officer)
Date: November 16, 1998 /s/ Karen L. Surplus
------------------------------------
Karen L. Surplus,
Chief Accounting Officer
21
<PAGE> 1
Exhibit 15.1
The Board of Directors
PowerCerv Corporation
We are aware of the incorporation by reference in the Registration Statement
(Form S-8 No. 333-3960) of PowerCerv Corporation for the registration of
3,675,000 shares of its common stock of our report dated October 14, 1998
relating to the unaudited condensed consolidated interim financial statements of
PowerCerv Corporation that is included in its Form 10-Q for the quarter ended
September 30, 1998.
Pursuant to Rule 436(c) of the Securities Act of 1933, our reports are not a
part of the registration statement prepared or certified by accountants within
the meaning of Section 7 or 11 of the Securities Act of 1933.
/s/ Ernst & Young LLP
--------------------------
Ernst & Young LLP
Tampa, Florida
November 16, 1998
22
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM (A)
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS OF POWER CERV AS OF AND
FOR THE NINE MONTHS PERIOD ENDED SEPTEMBER 30, 1998 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH (B) 10-Q FILING.
</LEGEND>
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<EXCHANGE-RATE> 1
<CASH> 7,017
<SECURITIES> 0
<RECEIVABLES> 6,738
<ALLOWANCES> (1,787)
<INVENTORY> 0
<CURRENT-ASSETS> 264
<PP&E> 5,465
<DEPRECIATION> (3,082)
<TOTAL-ASSETS> 16,862
<CURRENT-LIABILITIES> 5,623
<BONDS> 0
0
0
<COMMON> 14
<OTHER-SE> 11,225
<TOTAL-LIABILITY-AND-EQUITY> 16,862
<SALES> 0
<TOTAL-REVENUES> 22,419
<CGS> 0
<TOTAL-COSTS> 24,347
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 137
<INTEREST-EXPENSE> (232)
<INCOME-PRETAX> (1,833)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,833)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,833)
<EPS-PRIMARY> (0.13)
<EPS-DILUTED> (0.13)
</TABLE>
