<PAGE> 1
================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-----------
FORM 10-Q
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
----- OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1999
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 11, 1999, there were 13,147,408 shares of the registrant's common
stock, $.001 par value, outstanding.
================================================================================
<PAGE> 2
POWERCERV CORPORATION
FORM 10-Q
INDEX
PART I. FINANCIAL INFORMATION
<TABLE>
<CAPTION>
PAGE
<S> <C>
Item 1. Financial Statements
Condensed Consolidated Balance Sheets as of March 31, 1999 (unaudited)
and December 31, 1998.................................................................................2
Condensed Consolidated Statements of Operations for the Three Months Ended
March 31, 1999 and 1998 (unaudited)..................................................................3
Condensed Consolidated Statements of Cash Flows for the Three Months Ended
March 31, 1999 and 1998 (unaudited)..................................................................4
Notes to Condensed Consolidated Financial Statements (unaudited)........................................5
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations............................................................................10
Item 3. Quantitative and Qualitative Disclosure of Market Risks............................................18
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>
MARCH 31, DECEMBER 31,
1999 1998
--------- ------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 6,927 $ 6,594
Accounts receivable, net of allowance of
$1,460 and $1,480, respectively 3,274 5,007
Notes receivable 4,347 --
Other current assets 279 240
------- -------
Total current assets 14,827 11,841
Property and equipment, net 1,600 2,239
Intangible assets, net 199 556
Investment in third party 750 1,000
Note receivable 850 --
Deposits and other assets 168 94
------- -------
Total assets $18,394 $15,730
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 786 $ 637
Accrued expenses 2,398 1,954
Deferred gain on sale of business 2,850 --
Deferred revenue 1,668 1,864
------- -------
Total current liabilities 7,702 4,455
Deferred gain on sale of business 850 --
Shareholders' equity 9,842 11,275
------- -------
Total liabilities and shareholders' equity $18,394 $15,730
======= =======
</TABLE>
See accompanying independent accountants' review report 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,
----------------------------
1999 1998
-------- --------
<S> <C> <C>
Revenues:
License fees $ 1,453 $ 1,362
Technology resales -- 383
Service fees 5,191 5,542
-------- --------
Total revenues 6,644 7,287
-------- --------
Costs and expenses:
Cost of licenses 178 178
Cost of technology resales -- 271
Cost of services 4,127 4,505
General and administrative 1,215 1,128
Sales and marketing 2,269 1,440
Research and development 1,158 954
Work force reduction and other 485 --
-------- --------
Total costs and expenses 9,432 8,476
-------- --------
Operating loss (2,788) (1,189)
Interest income, net 50 81
Gain on sale of business 2,996 --
-------- --------
Income (loss) before income taxes 258 (1,108)
Income tax benefit -- --
-------- --------
Net income (loss) and comprehensive
income (loss) $ 258 $ (1,108)
======== ========
Basic and diluted net income (loss) per share $ 0.02 $ (0.08)
======== ========
Shares used in computing net income (loss) per share:
Basic 13,827 13,797
======== ========
Diluted 14,148 13,797
======== ========
</TABLE>
See accompanying independent accountants' review report 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,
----------------------------
1999 1998
------- -------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 258 $(1,108)
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities:
Depreciation and amortization 390 350
Gain on sale of business (2,996) --
Deferred revenue (603) 559
Changes in assets and liabilities 695 581
------- -------
Net cash flows from operating activities (2,256) 382
------- -------
Cash flows from investing activities:
Sale of business 2,455 --
Return of investment in third party 250 --
Purchases of property and equipment, net (136) (270)
------- -------
Net cash flows from investing activities 2,569 (270)
------- -------
Cash flows from financing activities:
Net proceeds from issuance of common stock 20 --
------- -------
Net cash flows from financing activities 20 --
------- -------
Net increase in cash and cash equivalents 333 112
Cash and cash equivalents, beginning of period 6,594 6,360
------- -------
Cash and cash equivalents, end of period $ 6,927 $ 6,472
======= =======
</TABLE>
See accompanying independent accountants' review report 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, 1999, and the
condensed consolidated statements of operations for the three months ended March
31, 1999 and 1998 and the condensed consolidated statements of cash flows for
the three months ended March 31, 1999 and 1998 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, 1999, and
for all periods presented have been made. The condensed consolidated balance
sheet at December 31, 1998, 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 ("SEC") rules and regulations. These condensed consolidated
financial statements should be read in conjunction with the audited consolidated
financial statements and notes thereto for the year ended December 31, 1998,
included in the Company's 1998 Annual Report on Form 10-K filed with the SEC on
April 14, 1999 ("1998 Annual Report").
The results of operations for the three months ended March 31, 1999,
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
Enterprise Resource Planning ("ERP") application products and, to a lesser
extent, its development tools. License fees also include royalties earned on the
Company's ERP application products and related intellectual properties. Service
fees represent revenue from consulting services, education services and support
and maintenance services.
The Company recognizes revenue in accordance with the American
Institute of Certified Public Accountants' ("AICPA") 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 ("SOP 98-4") and
Statement of Position 98-9, Modification of SOP 97-2, Software Revenue
Recognition, With Respect to Certain Transactions ("SOP 98-9"). 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. In the event that the
contract provides for multiple elements (e.g., software products, post-contract
customer support, consulting services), the total fee is allocated to these
elements based on "vendor-specific objective evidence" of fair value. If any
portion of the license fees is subject to forfeiture, refund or other
contractual contingencies, the Company will postpone revenue recognition until
these contingencies have been removed. Historically, product returns and
allowances have been immaterial. For those periods in which the Company marketed
its development tools and third party technology resales, license revenue was
recognized following the
5
<PAGE> 7
POWERCERV CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
procedures above except that these products are generally licensed via
shrinkwrap license agreements. The Company generally accounts for consulting and
education 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 and there is "vendor-specific objective
evidence" of fair value for these services. 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.
C. EARNINGS PER SHARE DATA
The following table sets forth the computation of basic and diluted
earnings (loss) per share ("EPS") for the periods indicated:
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
THREE MONTHS ENDED
MARCH 31,
-------------------------
1999 1998
-------- --------
<S> <C> <C>
Basic:
Net income (loss) $ 258 $ (1,108)
======== ========
Average shares outstanding 13,827 13,797
======== ========
Basic EPS $ 0.02 $ (0.08)
======== ========
Diluted:
Net income $ 258 $ (1,108)
======== ========
Average shares outstanding 13,827 13,797
Net effect of dilutive stock options--
based on the treasury stock method 321 --
-------- --------
Totals 14,148 13,797
======== ========
Diluted EPS $ 0.02 $ (0.08)
======== ========
</TABLE>
Common stock equivalents in the three month period ended March 31,
1998, were anti-dilutive due to the net loss sustained by the Company during
this period, thus the diluted net loss per share in this period is the same as
the basic net loss per share. During the quarter ended March 31, 1999, employees
exercised stock options to acquire 10,450 shares at an average exercise price of
$1.92 per share.
6
<PAGE> 8
POWERCERV CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
D. ACCRUED EXPENSES
Accrued expenses consist of the following:
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS)
MARCH 31, DECEMBER 31,
1999 1998
--------- ------------
<S> <C> <C>
Compensation $1,094 $1,055
Severance and related costs 257 57
Other 1,047 842
------ ------
$2,398 $1,954
====== ======
</TABLE>
E. COMMITMENTS
The Company has entered into employment agreements with certain of its
executive officers. Information regarding these agreements is available in the
Company's 1998 Annual Report.
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
For the three month period ended March 31, 1999, the Company recorded
no income tax expense since its net operating loss carryforwards should
substantially offset any tax expense applicable to the net income for the
period.
7
<PAGE> 9
POWERCERV CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
H. SEGMENT REPORTING
The Company has identified its operating segments as its services and
license product segments. In 1998, the Company adopted Statement of Financial
Accounting Standards No. 131, Disclosures about Segments of an Enterprise and
Related Information. The services segment provides consulting, education,
support and maintenance services and the license product segment provides ERP
application products, development tools and third-party technology resale
products.
The following tables provide the various segment data (dollars in
thousands):
<TABLE>
<CAPTION>
FOR THE THREE MONTH PERIOD ENDED MARCH 31, 1999
-----------------------------------------------
LICENSE
SERVICES PRODUCT UNALLOCATED TOTAL
-------- ------- ----------- -----
<S> <C> <C> <C> <C>
Revenues from external
customers 5,191 1,453 -- 6,644
Segment profit (loss) 961 (2,049) 1,346 258
</TABLE>
<TABLE>
<CAPTION>
FOR THE THREE MONTH PERIOD ENDED MARCH 31, 1998
-----------------------------------------------
LICENSE
SERVICES PRODUCT UNALLOCATED TOTAL
-------- ------- ----------- -----
<S> <C> <C> <C> <C>
Revenues from external
customers 5,542 1,745 -- 7,287
Segment profit (loss) 969 (1,030) (1,047) (1,108)
</TABLE>
There were no transactions between segments. The unallocated amounts
include general and administrative costs, other expense and income items, and
in 1999, a $2,996 gain on sale of business and $485 of work force reduction and
other costs. The Company does not use assets as a measure of the segment's
performance, thus no assets are disclosed by segment in the table above.
I. WORK FORCE REDUCTION AND OTHER
During the first quarter of 1999, the Company recorded a charge
related to a work force reduction and other related expenses totaling $485.
This amount included severance and related costs of $391 (11 employees,
primarily management level) and costs of $94 related to office downsizings or
closings. The Company expects to realize gross annual savings of approximately
$1,200 as a result of these actions. As of March 31, 1999, the Company had paid
approximately $284 of the total $485 charged to expense and expects to pay the
remaining amounts within the next nine months.
J. SALE OF BUSINESS
Effective March 31, 1999, the Company sold its general consulting and
general education business (consulting and education services other than its
application-related services) to a third party. Consideration totaled
approximately $10 million and consisted of a combination of cash, the Company's
common stock, and promissory notes.
The unaudited pro forma condensed consolidated statement of operations
for the three-month period ended March 31, 1999, includes the historical effects
of the sale of the general consulting business as if the sale had occurred at
the beginning of the period. The pro forma information is based on the
historical financial statements of the Company and the assumptions and
adjustments described in the accompanying Notes to Unaudited Pro Forma Condensed
Consolidated Statement of Operations. The pro forma information does not purport
to be indicative of the actual results that would have been achieved had the
sale actually been completed as of the date indicated.
8
<PAGE> 10
POWERCERV CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
Three Month Period Ended March 31, 1999
(In Thousands, except per share amounts)
<TABLE>
<CAPTION>
Pro Forma
---------
Historical (a) Adjustments Pro Forma
-------------- ----------- ---------
<S> <C> <C> <C>
Revenue:
License fees $ 1,453 $ -- $ 1,453
Technology resales -- -- --
Service fees 5,191 (2,461)(b) 2,730
-------- -------- --------
Total revenue 6,644 (2,461) 4,183
-------- -------- --------
Costs and expenses:
Cost of licenses 178 (18)(c) 160
Cost of technology resales -- -- --
Cost of services 4,127 (2,137)(c) 1,990
General and administrative 1,215 -- 1,215
Sales and marketing 2,269 (103)(c) 2,166
Research and development 1,158 -- 1,158
Work force reduction and other 485 -- 485
-------- -------- --------
Total costs and expenses 9,432 (2,258) 7,174
-------- -------- --------
Operating loss (2,788) (203) (2,991)
Other income (expense):
Interest and other income (net) 29 39 (d) 68
Gain on sale of business 3,017 -- 3,017
-------- -------- --------
Total other income (expense) 3,046 39 3,085
-------- -------- --------
Income (loss) before income taxes 258 (164) 94
Income tax expense (benefit) -- -- --
-------- -------- --------
Net income (loss) $ 258 $ (164) $ 94
======== ======== ========
Basic and diluted earnings per share $ 0.02 $ 0.01
======== ========
Shares used in computing earnings per share:
Basic 13,827 (700)(e) 13,127
======== ======== ========
Diluted 14,148 (700)(e) 13,448
======== ======== ========
</TABLE>
Notes to Unaudited Pro Forma Condensed Consolidated Statement of Operations
(a) Historical information is based on the unaudited condensed
consolidated statement of operations of the Company for the three-month
period ended March 31, 1999.
(b) To eliminate revenues from general consulting and education business.
(c) To eliminate costs and expenses associated with general consulting and
education business.
(d) To reflect interest income on cash and notes receivable received as
consideration.
(e) To reflect shares of stock received as consideration from buyer.
9
<PAGE> 11
POWERCERV CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(DOLLARS IN THOUSANDS)
OVERVIEW
The Company is focused on delivering open, modifiable ERP and
front-office enterprise application software solutions to mid-size U.S. discrete
manufacturing companies with annual revenues between $25 million and $750
million. The Company has focused its resources, including product development,
marketing and sales efforts, on the needs and requirements of companies in this
market. The Company's revenues consist primarily of software license fees and
fees for services, including consulting, education, and support and maintenance.
License fees represent revenue from the licensing of the Company's ERP
application products and, to a lesser extent, its development tools. License
fees also include royalties earned on the Company's ERP application products and
related intellectual properties. Service fees represent revenue from consulting
services, education services and support and maintenance services.
The Company recognizes revenue in accordance with the AICPA's SOP
97-2, as amended by SOP 98-4 and SOP 98-9. 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. In the event that the contract provides
for multiple elements (e.g., software products, post-contract customer support,
consulting services), the total fee is allocated to these elements based on
"vendor-specific objective evidence" of fair value. If any portion of the
license fees is subject to forfeiture, refund or other contractual
contingencies, the Company will postpone revenue recognition until these
contingencies have been removed. Historically, product returns and allowances
have been immaterial. For those periods in which the Company marketed its
development tools and third party technology resales, license revenue was
recognized following the procedures above except that these products are
generally licensed via shrinkwrap license agreements. The Company generally
accounts for consulting and education 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 and there is
"vendor-specific objective evidence" of fair value for these services.
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.
This Quarterly Report on Form 10-Q and any documents incorporated
herein by reference contain forward-looking statements that have been made
pursuant to the provisions of the Private Securities Litigation Reform Act of
1995. Such forward-looking statements are based on current expectations,
estimates and projections about the Company's industry, management's beliefs and
certain assumptions made by the Company's management. Words such as
"anticipates," "expects," "intends," "plans," "believes," "seeks," "estimates,"
variations of such words and similar expressions are intended to identify such
forward-looking statements. These statements are not guarantees of future
performance and are subject to certain risks, uncertainties and assumptions that
are difficult to predict; therefore, actual results may differ materially from
those expressed or forecasted in any such forward-looking statements.
10
<PAGE> 12
\
POWERCERV CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(DOLLARS IN THOUSANDS)
Forward-looking statements include, without limitation, statements regarding
the extent and timing of future revenues and expenses and customer demand for
the Company's products and services as described in the Company's 1998 Annual
Report under "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Forward-Looking Statements and Associated
Considerations;" "--Fluctuations in Quarterly Activity and Results of
Operations;" "--Competition;" "--Economic and Market Condition Risks;" "Year
2000 Readiness;" "--Lengthy Sales Cycle;" "Ability to Manage Change;"
"--Liquidity;" "--Availability of Consulting Personnel," "--Dependence on
Product Development; and Associated Risks," "--Dependence on New Products;"
"--Dependence on PowerBuilder(R) and Other Third Party Products;" "--Dependence
on Proprietary Technology; Risks of Third-Party Claims for Infringement;"
"--Expansion of Indirect Channels; and Potential for Channel Conflict;"
"--Voting Control by Management;" "--Dependence on Key Personnel;" and
"--Possible Volatility of Stock Price." The Company assumes no obligation to
update any such forward-looking statement. It is important to note that the
Company's actual results could differ materially from those in such
forward-looking statements.
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,
----------------------------
1999 CHANGE 1998
-------------------------------- ------------------------------------------------
<S> <C> <C> <C>
License fees $ 1,453 7% $ 1,362
Percentage of total revenues 22% 19%
-------------------------------- ------------------------------------------------
Technology resales -- (100)% 383
Percentage of total revenues -- 5%
-------------------------------- ------------------------------------------------
Service fees 5,191 (6)% 5,542
Percentage of total revenues 78% 76%
-------------------------------- ------------------------------------------------
</TABLE>
License fees. The Company's license fees are derived from licensing the
Company's application products and, to a lesser extent, 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 servers and users. Source code licenses are available at an
additional cost.
License fees revenue increased for the three-month period ended March
31, 1999, compared to the same period in 1998. The Company's first quarter
revenues included $473 from an internal use license and OEM agreement with the
purchaser of the Company's general consulting and education business. During
the three-month period ended March 31, 1999, the Company invested in additional
resources to strengthen the Company's marketing and sales organizations and
their respective programs and initiatives, and management expects application
license revenue to continue to grow as these initiatives produce results. The
Company has become aware, however, that there is significant uncertainty in the
ERP software industry concerning the potential effects associated with Year
2000 readiness. Management believes that customers and potential customers
purchasing patterns may be affected in a number of ways. Many companies are
expending significant resources to upgrade their systems. These expenditures
may result in reduced funds available to purchase software products such as
those the
11
<PAGE> 13
POWERCERV CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(DOLLARS IN THOUSANDS)
Company offers. Additionally, it is possible that certain of the Company's
customers are purchasing support contracts only to ensure that they are Year
2000 ready and then will cancel such contracts. Many potential customers may
defer purchasing Year 2000 ready products as long as possible, accelerate
purchasing such products, switch to other systems or suppliers, or purchase the
Company's products only as an interim solution. Accordingly, there can be no
assurance that the Company's license revenues will increase in accordance with
management's expectations.
Technology resales. Technology resales are derived from licensing
complementary client/server and Internet development tools developed by other
independent software vendors. The market for technology resales and related
services is very competitive and is more price-sensitive than are the Company's
application product license fees and related services markets. Due to the
Company's increased focus on the marketing and sale of its own ERP application
products and increased market competition for technology resale products, in
1999 the Company has discontinued its marketing and sales efforts for technology
resale products.
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, education 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. During the
first quarter of 1999, service fees declined 6% over 1998, due primarily to the
Company's having fewer billable consulting personnel in 1999 compared to 1998.
The Company believes that as revenue from licensing its application products
increases, the demand for application consulting services (and related revenue)
will correspondingly increase, as will service fees for maintenance and support;
however, there can be no assurance that license revenue will increase or that if
it does increase, revenue from service fees will correspondingly increase.
On March 31, 1999, the Company sold its general consulting and general
education business to a third party. Consideration totaled approximately $10
million and consisted of a combination of cash, the Company's common stock and
promissory notes. This portion of PowerCerv's services business provided
approximately $2,461 in revenue and approximately $203 in net margin during the
quarter ended March 31, 1999.
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,
----------------------------
1999 CHANGE 1998
----------------------------- -----------------------------------------
<S> <C> <C> <C>
Cost of licenses $ 178 0% $ 178
Gross profit percentage 88% 87%
----------------------------- -----------------------------------------
Cost of technology resales -- (100)% 271
Gross profit percentage -- 29%
----------------------------- -----------------------------------------
Cost of services 4,127 (8)% 4,505
Gross profit percentage 20% 19%
----------------------------- -----------------------------------------
</TABLE>
12
<PAGE> 14
POWERCERV CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(DOLLARS IN THOUSANDS)
Cost of licenses. The cost of licenses consists primarily of production
costs, royalties associated with third-party products sold with the Company's
products, and the amortization of intangible assets. The cost of licenses for
the first quarter of 1999, both in dollars and as a percentage of revenue, was
consistent with the prior year.
Cost of Technology Resales. In 1998, the cost of technology resales
consisted primarily of costs associated with resales of complementary
client/server and internet development tools developed by independent software
vendors. In 1999, the Company has discontinued its marketing and sales efforts
for technology resale products; accordingly, there was no cost of technology
resales during the first quarter of 1999.
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 8% in the first quarter of 1999 compared to 1998 primarily due to a
decrease in the number of billable consultants, compensation and related
expenses.
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,
----------------------------
1999 CHANGE 1998
------------------------------- -----------------------------------------
<S> <C> <C> <C>
General and administrative $1,215 8% $1,128
Percentage of total revenues 18% 15%
------------------------------- -----------------------------------------
Sales and marketing 2,269 58% 1,440
Percentage of total revenues 34% 20%
------------------------------- -----------------------------------------
Research and development 1,158 21% 954
Percentage of total revenues 17% 13%
------------------------------- -----------------------------------------
</TABLE>
General and administrative ("G&A"). G&A expenses include compensation,
communications, accounting, human resources, legal and related facilities
expenses. The increase in G&A expenses for the three month period ended March
31, 1999, compared to the three month period ended March 31, 1998, is primarily
due to increased compensation and related expenses.
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
increased 58% for the three month period ended March 31, 1999, as compared to
the same period in 1998 as a result of the Company's acceleration of its
investments in its marketing and sales organizations. These investments
included hiring additional personnel in the direct sales organization,
including regional vice presidents, field sales representatives, and pre-sales
specialists; a change in the Company's commission structure designed to drive
growth in the Company's ERP Plus application product sales; broad investments
in marketing programs focused on increasing awareness of the Company and its
products; and expansions of the Company's marketing and telemarketing
organizations in Tampa. There can be no assurance that these investments will
result in higher revenues for the Company.
13
<PAGE> 15
POWERCERV CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(DOLLARS IN THOUSANDS)
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 increased 21% for the three month period ended March
31, 1999, as compared to the same period in 1998, primarily due to increased
personnel costs.
Work Force Reduction and Other. During the first quarter of 1999, the
Company recorded a charge related to a work force reduction and other related
expenses totaling $485. This amount included severance and related costs of
$391 (11 employees, primarily management level) and costs of $94 related to
office downsizings or closings. The Company expects to realize gross annual
savings of approximately $1,200 as a result of these actions. As of March 31,
1999, the Company had paid approximately $284 of the total $485 charged to
expense and expects to pay the remaining amounts within the next nine months.
Income taxes. For the three month period ended March 31, 1999, the
Company recorded no income tax expense, since its net operating loss
carryforwards should substantially offset any taxable income realized during the
quarter.
IMPACT OF THE YEAR 2000 ISSUE
The Year 2000 issue is the result of computer programs being written
using two digits rather than four to define the applicable year. Affected
computer programs or hardware that have date-sensitive software or embedded
chips may recognize a date using "00" as the year 1900 rather than the year
2000. Potential implications include system failures or miscalculations that
could impair a company's ability to conduct normal business operations and
process transactions. This Year 2000 issue affects the Company in two general
areas: (i) its software products sold to customers, and (ii) its internal
information systems.
Based on its assessments, management believes that the current versions
of the Company's ERP application products generally are Year 2000 ready.
However, these products are developed and produced using third-party development
tools that, themselves, may be subject to Year 2000 issues. The Company has
tested its products in an attempt to identify any such issues, but there is no
assurance that all such issues have been identified and corrected. The Company
has a published Year 2000 Readiness Disclosure statement that provides guidance
to its customers and prospects on the status of the Year 2000 issue with respect
to its products. From time to time, customers require this statement to be
included as a warranty in their license agreements, which the Company will do.
This could result in additional exposure for the Company to Year 2000-related
litigation. Furthermore, it has been widely reported that a significant amount
of litigation surrounding business interruptions will arise out of Year 2000
issues. It is uncertain whether, or to what extent, the Company may be affected
by such litigation. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Forward Looking Statements and Associated
Considerations--Year 2000 Readiness" in the Company's 1998 Annual Report.
The Company's efforts to resolve the Year 2000 issue with respect to
its internal information systems involve the following four phases: assessment,
remediation or replacement, testing and contingency planning. The Company has
completed the assessment process for its information technology and
non-information technology exposures. The Company presently believes that its
internal software
14
<PAGE> 16
POWERCERV CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(DOLLARS IN THOUSANDS)
systems, which include its application products and other internally developed
software and its relational data base management system, are Year 2000 ready.
The Company has determined that it will be required to modify or
replace certain hardware and upgrade certain operating system software so that
those systems will properly utilize dates beyond December 31, 1999. The Company
presently believes that with modifications or replacements of certain hardware
and upgrades to operating systems software, the Year 2000 issue can be
mitigated. However, if such modifications, replacements, and upgrades are not
made, or are not completed timely, the Year 2000 issue could have a material
impact on the operations of the Company. The Company expects remediation and
replacement of affected hardware and operating systems software to be completed
by June 30, 1999, and to have completed substantially all the phases of its
efforts by September 30, 1999.
The Company has queried its significant suppliers and subcontractors
that do not share information systems with the Company (external agents). To
date, the Company is not aware of any external agent with a Year 2000 issue that
would materially impact the Company's results of operations, liquidity or
capital resources. However, the Company has no means of ensuring that external
agents will be Year 2000 ready. The inability of external agents to complete
their Year 2000 resolution process in a timely fashion could materially impact
the Company. The effect of non-compliance by external agents is not
determinable.
The Company is utilizing internal resources to address Year 2000
issues. The total cost of its Year 2000 effort is estimated to be approximately
$0.4 million and is being funded through operating cash flows. To date, the
Company has incurred approximately $0.2 million related to all phases of its
Year 2000 efforts. The remaining project costs primarily relate to modifications
to hardware and operating system software and will be expensed as incurred.
Management believes it has an effective program in place to resolve
the Year 2000 issue in a timely manner. As noted above, the Company has not yet
completed all of its Year 2000 efforts. In the event that the Company does not
complete its efforts, the Company could experience Year 2000-related
disruptions that might affect its ability to serve its customers and process
transactions. In addition, disruptions in the economy generally resulting from
Year 2000 issues could also materially adversely affect the Company. The
Company also could be subject to Year 2000-related litigation. The amount of
potential liability or potential lost revenue cannot be reasonably estimated at
this time.
The Company currently has no contingency plans in place in the event it
does not complete all phases of the Year 2000 efforts. The Company plans to
evaluate the status of completion in July 1999 and determine whether such plans
are necessary.
In addition to the concerns discussed above on the Year 2000 issue and
how it affects the Company's products and its internal information systems,
significant uncertainty exists in the ERP software industry concerning the
potential effects associated with Year 2000 readiness. As noted previously,
management believes that customers and potential customers purchasing patterns
may be affected in a number of ways. Many companies are expending significant
resources to upgrade their systems. These expenditures may result in reduced
funds available to purchase software products such as those the Company offers.
Additionally, it is possible that certain of the Company's customers are
15
<PAGE> 17
POWERCERV CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(DOLLARS IN THOUSANDS)
purchasing support contracts only to ensure that they are Year 2000 ready and
then will cancel such contracts. Many potential customers may defer purchasing
Year 2000 ready products as long as possible, accelerate purchasing such
products, switch to other systems or suppliers, or purchase the Company's
products only as an interim solution. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations--Forward Looking Statements and
Associated Considerations--Year 2000 Readiness" in the Company's 1998 Annual
Report.
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,
----------------------------
1999 CHANGE 1998
----------------------------------
<S> <C> <C> <C>
Working capital $ 7,125 4% $ 6,846
Cash and cash equivalents 6,927 7% 6,472
Cash flows from operating activities (2,256) >100% 382
Cash flows from investing activities 2,569 >100% (270)
</TABLE>
Working capital and cash and cash equivalents increased as of March 31,
1999, compared to March 31, 1998, principally due to proceeds from the March 31,
1999, sale of the Company's general consulting and general education business to
a third party, offset by negative cash flow from operations.
For the three month period ended March 31, 1999, cash used by operating
activities totaled $2,256, due principally to lower than anticipated license
revenues and increased operating expenses as a result of the Company's
investments in its sales and marketing organizations.
The Company's cash provided by investing activities totaled $2,569 for
the three month period ended March 31, 1999, principally due to the proceeds
from the sale of the Company's general consulting and general education
business ($2,455 in the first quarter of 1999) and proceeds from a return of
the Company's investment in a third party ($250), offset by purchases of
property and equipment ($136).
At March 31, 1999, the Company's primary source of liquidity consisted
of its cash and cash equivalents balance of $6,927 and its short-term accounts
receivable balance of $3,274. On March 29, 1999, the Company entered into an
agreement with its bank for a $10 million credit facility ("1999 Line of
Credit"). The 1999 Line of Credit consists of a commitment for a revolving line
of credit totaling $5 million, with an additional $5 million of uncommitted
funding. The agreement requires the Company to maintain certain financial
ratios. The first $2 million of the 1999 Line of Credit is unsecured, with an
interest rate equal to the 90-day floating LIBOR rate plus 150 or 200 basis
points, based on the Company's tangible net worth. Draws from $2 million to $5
million will be conditioned upon the Company's compliance with an additional
financial ratio, or alternatively, may be secured by the Company's accounts
receivable and inventory. Draws in excess of $5 million will be subject to
terms agreed to at the time of the draw.
16
<PAGE> 18
POWERCERV CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(DOLLARS IN THOUSANDS)
As noted previously, effective March 31, 1999, the Company sold the
net assets of its general consulting and general education business to a third
party. Under the terms of the agreement, on or about June 30, 1999, management
expects to receive approximately $4.4 million. This amount is evidenced by
secured promissory notes from the purchaser which become due on June 30, 1999.
In addition, there are penalties associated with late payment on these notes.
There can be no assurance that these notes will be paid by the purchaser in
accordance with their terms. In the event the notes are not paid per their
terms, the Company's existing cash reserves prove insufficient to fund its
operating needs, and the Company is not able to borrow against its 1999 Line of
Credit in accordance with its terms, management may be required to seek
alternative capital funding sources. Further, there can be no assurances that
such funds would be available to the Company, or if available, would be on terms
satisfactory to the Company.
The Company believes that, based upon its projected revenues and
operating expense levels and funds received and to be received by the Company
in connection with the sale of its general consulting and general education
business, that funds generated from operations, existing cash and cash
equivalents and its short-term accounts receivable, together with the
availability of the 1999 Line of Credit, will be sufficient to finance the
Company's operations for at least the next twelve months. See "Forward Looking
Statements and Associated Considerations -- Liquidity" as set forth in the
Company's 1998 Annual Report.
17
<PAGE> 19
POWERCERV CORPORATION
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE OF MARKET RISK
The Company had no holdings of derivative financial or commodity
instruments at March 31, 1999. The Company has no significant exposure to
interest rate or foreign currency exchange rate risks. An increase in interest
rates of 100 basis points would not significantly impact the Company's net
income. Generally, all of the Company's business is transacted in U.S. dollars.
Accordingly, foreign exchange rate fluctuations should not have a significant
impact on the Company.
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 March 31, 1999, and the related
condensed consolidated statement of operations and cash flows for the
three-month period 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 March 31, 1998, and the related
condensed consolidated statements of operations and cash flows for the
three-month period then ended, were reviewed by other accountants whose report
(dated April 17, 1998) 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 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, 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 March 31, 1999, and for the
three-month period then ended for them to be in conformity with generally
accepted accounting principles.
/s/ Ernst & Young LLP
Ernst & Young LLP
Tampa, Florida
April 16, 1999
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.
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.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10.1 Loan Agreement and related promissory note, dated March 29,
1999, among NationsBank, N.A. and the Company, related to the
Company's $10,000,000 credit facility (incorporated herein by
reference from Exhibit Number 10.4 to the Company's 1998
Annual Report).
10.2 Asset Purchase Agreement, dated March 30, 1999, by and between
the Company and R.O.I Consulting, Inc. (incorporated herein by
reference from Exhibit Number 2 to the Company's Current
Report on Form 8-K filed with the SEC on April 13, 1999).
15.1 Accountants' Letter regarding Unaudited Interim Financial
Information.
27.1 Financial Data Schedule.
(b) Reports on Form 8-K
The Company did not file any reports on Form 8-K during the three
months ended March 31, 1999.
20
<PAGE> 22
POWERCERV CORPORATION
FORM 10-Q
(for the quarterly period ended March 31, 1999)
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: May 17, 1999 /s/ Marc J. Fratello
----------------------------------------
Marc J. Fratello
Chairman and Chief Executive Officer
(Duly Authorized Officer)
Date: May 17, 1999 /s/ Stephen M. Wagman
----------------------------------------
Stephen M. Wagman,
Chief Financial Officer
(Principal Financial Officer)
Date: May 17, 1999 /s/ Spencer D. Lloyd
----------------------------------------
Spencer D. Lloyd,
Vice President, Accounting and Treasurer
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 April 16, 1999,
relating to the unaudited condensed consolidated interim financial statements of
PowerCerv Corporation that is included in its Form 10-Q for the quarter ended
March 31, 1999.
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
April 16, 1999
22
<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, 1999 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-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 6,927
<SECURITIES> 0
<RECEIVABLES> 9,081
<ALLOWANCES> 1,460
<INVENTORY> 0
<CURRENT-ASSETS> 14,827
<PP&E> 5,106
<DEPRECIATION> 3,506
<TOTAL-ASSETS> 18,394
<CURRENT-LIABILITIES> 7,702
<BONDS> 0
0
0
<COMMON> 13
<OTHER-SE> 9,829
<TOTAL-LIABILITY-AND-EQUITY> 18,394
<SALES> 0
<TOTAL-REVENUES> 6,644
<CGS> 0
<TOTAL-COSTS> 9,432
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 258
<INCOME-TAX> 0
<INCOME-CONTINUING> 258
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 258
<EPS-PRIMARY> 0.02
<EPS-DILUTED> 0.02
</TABLE>
