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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, 2000

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)

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 8, 2000, there were 13,811,210 shares of the registrant’s common stock, $.001 par value, outstanding.

PowerCerv Corporation
Form 10-Q

Index

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Part I. FINANCIAL INFORMATION

Item 1. Financial Statements

PowerCerv Corporation

Condensed Consolidated Balance Sheets
(In thousands)

See accompanying independent accountants’ review report and notes to condensed consolidated financial statements.

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PowerCerv Corporation

Condensed Consolidated Statements of Operations (Unaudited)
(In thousands, except per share amounts)

See accompanying independent accountants’ review report and notes to condensed consolidated financial statements.

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PowerCerv Corporation

Condensed Consolidated Statements of Cash Flows (Unaudited)
(In thousands)

See accompanying independent accountants’ review report and notes to condensed consolidated financial statements.

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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, 2000, and the condensed consolidated statements of operations for the three and nine months ended September 30, 2000 and 1999 and the condensed consolidated statements of cash flows for the nine months ended September 30, 2000 and 1999 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, 2000, and for all periods presented have been made. The condensed consolidated balance sheet at December 31, 1999, 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, 1999, included in the Company’s 1999 Annual Report on Form 10-K/A filed with the SEC on April 13, 2000 (“1999 Annual Report”).

      The results of operations for the three and nine months ended September 30, 2000, are not necessarily indicative of results that may be expected for any other interim period or for the full fiscal year.

      On December 3, 1999, the SEC issued Staff Accounting Bulletin (SAB) No. 101, Revenue Recognition in Financial Statements, which provides guidance on the recognition, presentation, and disclosure of revenue in financial statements. The SAB was effective for the first quarter of the fiscal year beginning after December 15, 1999, however, recently the SEC has extended the implementation date for companies whose fiscal year ends between December 16, 1999, and March 15, 2000, to the fourth quarter of fiscal year 2000. The Company has evaluated the impact of this SAB on its financial reporting of results of operations and does not believe that adoption of SAB 101 will have a material impact on revenues.

      In June 2000, the FASB issued SFAS No. 138, Accounting for Certain Derivative Instruments and Certain Hedging Activities, an amendment of FASB Statement No. 133, which is effective for fiscal years beginning after June 15, 2000. PowerCerv does not anticipate that the adoption of this Statement will have a significant effect on its results of operations or financial position.

B.  Revenue Recognition

      License fees represent revenue from the licensing of the Company’s Integrated Enterprise Response Solutions application products. License fees also include royalties earned on the Company’s Integrated Enterprise Response Solutions 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’ Statement of Position 97-2, Software Revenue Recognition (“SOP 97-2”), as amended by

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PowerCerv Corporation

Notes to Condensed Consolidated Financial Statements (Unaudited)

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. 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 (Loss) Per Share Data

      The following table sets forth the computation of basic and diluted earnings (loss) per share (“EPS”) for the periods indicated:

      Common stock equivalents in the three and nine month periods ended September 30, 2000 and the three month period ended September 30, 1999, were anti-dilutive due to the net loss sustained by the Company during those periods, thus the diluted net loss per share in those periods is the same as the basic net loss per share. During the quarter ended September 30, 2000, employees exercised no stock options.

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PowerCerv Corporation

Notes to Condensed Consolidated Financial Statements (Unaudited)

D.  Accrued Expenses

      Accrued expenses consist of the following:

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 1999 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 stay any discovery on this case until after the motions are ruled on by the Court. 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 Court ordered a second mediation conference for March 22, 2000, however, the parties were again unable to resolve this matter. On May 1, 2000, defendants filed supplemental authority in support of their motions to dismiss. The Court entertained oral argument on Defendants’ Motion to Dismiss on October 30, 2000. To date, however, the Court has not issued an Order on the Motion. 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.

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PowerCerv Corporation

Notes to Condensed Consolidated Financial Statements (Unaudited)

G.  Income Taxes

      During the first quarter of 2000, the Company recorded a charge related to estimated federal and state income tax and interest totaling $359 resulting from an Internal Revenue Service examination of the Company’s 1996 and 1995 federal income tax returns. The amounts allocated to tax expense and interest expense were $209 and $150, respectively. The Internal Revenue Service has rendered an unfavorable assessment resulting in the estimated exposure amount. The Company will continue to appeal this assessment.

      The Company also recorded $46 of income tax expense related to state and federal income taxes. The Company recorded a deferred income tax benefit applicable to the losses incurred during the period and correspondingly increased its deferred income tax valuation allowance for the same amount for the nine month period ended September 30, 2000. The decision to fully reserve the deferred income tax asset was primarily the result of the Company’s continued losses from operations.

      For the three and nine month periods ended September 30, 1999, the Company recorded no federal income tax expense since its net operating loss carryforwards offset any tax expense applicable to the net income for that period.

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 Integrated Enterprise Response Solutions application products.

      The following tables provide the various segment data (in thousands):

      There were no transactions between segments. The unallocated amounts are made up of the following items:

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PowerCerv Corporation

Notes to Condensed Consolidated Financial Statements (Unaudited)

      The Company does not use assets as a measure of the segment’s performance, thus no assets are disclosed by segment in the tables above.

I.   Work Force Reduction and Other

      During the second quarter of 2000, the Company initiated actions to reduce its work force and undertook additional cost cutting measures in line with its objective to return to profitability. The Company recorded a restructuring charge related to a work force reduction and other expenses totaling $711 in the second quarter of 2000. Additional restructuring charges of $162 were recorded in the third quarter of 2000 for a total restructuring charge of $873 in
2000. The total restructuring charge includes severance and related costs of $649 (4 senior-level staff and 35 non senior-level employees primarily in sales, services and research and development) and costs of $224 related to office closings. At September 30, 2000, the Company had approximately $566 in remaining restructuring related liabilities that are included in accrued expenses on the condensed consolidated balance sheet. As part of the restructuring plan, the Company’s Chairman has assumed the role of Chief Executive Officer, and the previous Chief Executive Officer is no longer with the Company. Substantially all of the obligations associated with the restructuring are expected to be completed within the next 12 months. The Company expects to realize gross annual savings of approximately $6,400 as a result of these actions. The restructuring is part of the Company’s strategic plan to reevaluate the Company’s direction, product positioning, marketing segments and distribution strategies. Management believes that it has properly resized the Company to minimize future losses, allow for sufficient time to implement its strategic plan and ultimately seek to return to profitability; however, there can be no assurance that the Company will return to profitability as a result of these actions.

      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. As of March 31, 2000, the Company had paid all of the $485 charged to expense.

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. A portion of the gain relates to a $827 note receivable maturing in 2004 and will be recognized upon collection of the note.

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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 Integrated Enterprise Response Solutions with innovative E-Commerce capabilities to mid-size U.S. 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 currently consist primarily of software license fees and fees for services, primarily relating to the Company’s applications, including consulting, education and maintenance and support.

      The Company was organized in April 1992, and through calendar year 1994 a substantial part of the Company’s revenue was derived from technology resales and consulting and education services. The Company began selling its own license product in the fourth quarter of 1993. Since then, the Company has brought several additional applications to the market. Service fees remain the Company’s largest single revenue source, although the Company’s strategy is to seek to increase revenue generated from licensing its application products. On 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. The results of operations for the first quarter of 1999 have been reclassified to conform with the current quarter’s presentations. It also finalized its 1998 strategy to discontinue technology resales of various third-party software products.

      License fees represent revenue from licensing the Company’s Integrated Enterprise Response Solutions application products and royalties earned on the Company’s Integrated Enterprise Response Solutions application products and related intellectual properties. Service fees represent revenue from implementing the Company’s Integrated Enterprise Response Solutions application products, consulting services, education services and maintenance and support services.

      Beginning January 1, 1998, the Company has recognized 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 (“SOP 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. 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. 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. Consulting and education

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PowerCerv Corporation

Item 2. Management’s Discussion and Analysis of
Financial Condition and Results of Operations
(dollars in thousands)

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. 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.

      In June, 1998, the Financial Accounting Standards Board (FASB) issued statement No. 133, Accounting for Derivative Instruments and Hedging Activities, as amended, which is required to be adopted in years beginning after June 15, 2000. Because of the Company’s minimal use of derivatives, management does not anticipate that the adoption of the new statement will have a significant effect on earnings or the financial position of the Company.

      On December 3, 1999, the Securities and Exchange Commission (SEC) issued Staff Accounting Bulletin (SAB) No. 101, Revenue Recognition in Financial Statements, which provides guidance on the recognition, presentation, and disclosure of revenue in financial statements. The SAB was effective for the first quarter of the fiscal year beginning after December 15, 1999, however, recently the SEC has extended the implementation date for companies whose fiscal year ends between December 16, 1999, and March 15, 2000, to the fourth quarter of fiscal year 2000. The Company has evaluated the impact of this SAB on its financial reporting of results of operations and does not believe that adoption of SAB 101 will have a material impact on revenues.

      In June, 2000, the FASB issued SFAS No. 138, Accounting for Certain Derivative Instruments and Certain Hedging Activities, an amendment of FASB Statement No. 133, which is effective for fiscal years beginning after June 15, 2000. PowerCerv does not anticipate that the adoption of this Statement will have a significant effect on its results of operations or financial position.

      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,” and/or 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. 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 1999 Annual Report on Form 10K/A filed with the SEC on April 13, 2000, 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;” “Impact of the Year 2000;” “—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® and others;” “—Dependence on Proprietary Technology; Risks of Third-Party Claims for Infringement;” “—Expansion of Indirect Channels; Potential for Channel

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PowerCerv Corporation

Item 2. Management’s Discussion and Analysis of
Financial Condition and Results of Operations
(dollars in thousands)

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 and service fees from continuing operations:

      License fees. The Company’s license fees are derived from licensing the Company’s application products. 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 decreased for the three and nine months ended September 30, 2000, compared to the same periods in 1999. Management believes the primary reason for the decrease in license revenue was due to overall depressed market conditions initially resulting from customers’ reluctance to make decisions early in the year after having addressed Y2K concerns in the previous year. Management believes that depressed market conditions continued in the second and third quarters of 2000 due to decreased demand for traditional enterprise software and a shift to integrated systems with E-Commerce. As a result, customers are taking longer to make decisions regarding these more advanced systems. Due to current market conditions, the Company initiated restructuring measures that included work force reduction plans and office closings beginning in the second quarter. Management believes that it has properly resized the Company to minimize further losses and seek to return to profitability once market conditions improve. Additionally, the Company has developed a strategic plan focusing on reevaluating the Company’s direction, product positioning, market segments and distribution strategies. The Company expects continued growth in its license revenue, but there can be no assurance that the Company’s license revenues will increase in accordance with management’s expectations.

      Services fees. The Company’s service fees consist of revenue from consulting, education and support and maintenance services for the Company’s application software licenses. 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 are based on a percentage of related license fees.

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PowerCerv Corporation

Item 2. Management’s Discussion and Analysis of
Financial Condition and Results of Operations
(dollars in thousands)

      Management believes that the decrease in service revenue was also impacted by the overall depressed market conditions resulting initially from Y2K concerns and then due to a shift in demand from traditional enterprise software to integrated systems with E-Commerce capabilities. Management believes that companies focused their efforts on getting new systems running before December 31, 1999, which resulted in substantially lower license purchases and a general decrease in consulting services and maintenance and support services in 2000. The Company believes that as revenue from licensing its application products increases, the demand for application consulting services (and related revenue) will likely increase. Service fees for maintenance and support will also likely increase; however, there can be no assurance that license revenue will increase or that if it does increase, revenue from service fees will increase correspondingly.

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 and services:

      Cost of licenses. The cost of licenses consists primarily of production costs, royalties associated with third-party products sold with the Company’s products, the cost associated with resales made by VARs, and the amortization of intangible assets. The cost of licenses for the three and nine months ended September 30, 2000, decreased 11% and 26%, respectively, compared to the same periods in 1999 primarily resulting from lower amortization expense and decreased royalties associated with third-party products sold with the Company’s products. Gross profit margin decreased for the three and nine months ended September 30, 2000, compared to the same periods in 1999 due to significantly lower license fee revenue and higher VAR fees.

      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 33% and 20%, respectively, for the three and nine months ended September 30, 2000, as compared to the same periods in 1999 primarily due to lower compensation expense for the periods. The decrease in gross profit percentage for the nine months ended September 30, 2000 is primarily due to lower use of consultants resulting from lower service fee activity in the period. The Company’s restructuring plan initiated in the second quarter of 2000 resulted in the elimination of eight services positions. The Company expects to realize gross annual savings of approximately $2,132. The Company believes that it has properly resized the consulting services component and expects that these reductions will result in lower expenses and increased utilization of remaining services personnel, however, there can be no assurance that the Company will return to profitability as a result of these actions.

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PowerCerv Corporation

Item 2. Management’s Discussion and Analysis of
Financial Condition and Results of Operations
(dollars in thousands)

The following table sets forth, for the periods indicated, certain financial data regarding the Company’s operating expenses:

      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 months ended September 30, 2000, compared to the same periods in 1999, is primarily due to lower compensation, communication and legal expenses in the current periods. The decrease for the nine month period is offset by higher bad debt expense in the earlier portion of the nine month period ended September 30, 2000. The G&A expense percentage of total revenue increased due to the fixed nature of G&A expenses and a reduction in total revenue for the periods. The Company’s restructuring plan initiated in the second quarter of 2000 resulted in the elimination of five G&A positions. The Company expects to realize gross annual savings of approximately $422. The Company believes that it has properly resized its cost structure and expects that these reductions will result in lower expenses, however, there can be no assurance that the Company will return to profitability as a result of these actions.

      Sales and marketing. Sales and marketing expenses primarily consist of compensation paid to sales and marketing personnel; costs of marketing, including direct mail and telemarketing activities; costs of public relations, including trade shows and conferences; and related communications costs. Sales and marketing costs decreased 45% and 26%, respectively, for the three and nine months ended September 30, 2000, as compared to the same periods in 1999. The decrease for the nine-month period is the result of lower sales commissions earned on license revenue in the current year, offset, to a certain extent, by increased advertising and tradeshow costs. The decrease in expenses for the three months ended September 30, 2000, compared to the same period in 1999 is primarily due to lower personnel costs. The sales and marketing expense as a percentage of total revenue increased for the nine-month period due to lower license and service revenue. However, in the current quarter, sales and marketing expenses declined as a percentage of total revenue due to the restructuring actions initiated by the Company in the second quarter. During the first half of 2000, the Company increased its investment 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. The Company’s restructuring and cost cutting plan initiated in the second quarter of 2000 involved a reduction in advertising costs for the remainder of the year by placing fewer trade media ads and included a resizing of the sales and marketing staff through the elimination of 14 positions. The Company expects to realize gross annual savings of approximately $2,810. There can be no assurance that the first and second quarter marketing investments

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PowerCerv Corporation

Item 2. Management’s Discussion and Analysis of
Financial Condition and Results of Operations
(dollars in thousands)

will result in higher revenues for the Company, or that the Company will return to profitability as a result of its cost cutting measures.

      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 26% and 5%, respectively, for the three and nine months ended September 30, 2000, as compared to the same periods in 1999, primarily due to decreased personnel costs realized in the third quarter of 2000 as a result of the Company’s restructuring. The R&D cost percentage of total revenue increased due to the fixed nature of R&D costs and decreased total revenue for the periods. The Company’s restructuring plan initiated in the second quarter involved the elimination of 15 R&D positions. The Company expects to realize gross annual savings of approximately $1,036; however, there can be no assurance that the Company will return to profitability as a result of these actions.

      Work force reduction and other. During the second quarter of 2000, the Company initiated actions to reduce its work force and undertook additional cost cutting measures in line with its objective to return to profitability. The Company recorded a restructuring charge related to a work force reduction and other expenses totaling $711 in the second quarter of 2000. Additional restructuring charges of $162 were recorded in the third quarter of 2000 for a total restructuring charge of $873 in 2000. The total restructuring charge includes severance and related costs of $649 (4 senior-level staff and 35 non senior-level employees primarily in sales, services and research and development) and costs of $224 related to office closings. At September 30, 2000, the Company had approximately $566 in remaining restructuring related liabilities that are included in accrued expenses on the condensed consolidated balance sheet. As part of the restructuring plan, the Company’s Chairman has assumed the role of Chief Executive Officer, and the previous Chief Executive Officer is no longer with the Company. Substantially all of the obligations associated with the restructuring are expected to be completed within the next 12 months. The Company expects to realize gross annual savings of approximately $6,400 as a result of these actions. The restructuring is part of the Company’s strategic plan to reevaluate the Company’s direction, product positioning, marketing segments and distribution strategies. Management believes that it has properly resized the Company to minimize future losses, allow for sufficient time to implement its strategic plan and ultimately seek to return to profitability; however, there can be no assurance that the Company will return to profitability as a result of these actions.

      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. As of March 31, 2000, the Company had paid all of the $485 charged to expense.

      Income taxes. During the first quarter of 2000, the Company recorded a charge related to estimated federal and state income tax and interest totaling $359 resulting from an Internal Revenue Service examination of the Company’s 1996 and 1995 federal income tax returns. The amounts allocated to tax expense and interest expense were $209 and $150, respectively. The Internal Revenue Service has rendered an unfavorable assessment resulting in the estimated exposure amount. The Company will continue to appeal this assessment.

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PowerCerv Corporation

Item 2. Management’s Discussion and Analysis of
Financial Condition and Results of Operations
(dollars in thousands)

      The Company also recorded $46 of income tax expense related to state and federal income taxes. The Company recorded a deferred income tax benefit applicable to the losses incurred during the period and correspondingly increased its deferred income tax valuation allowance for the same amount for the nine month period ended September 30, 2000. The decision to fully reserve the deferred income tax asset was primarily the result of the Company’s continued losses from operations.

      For the three and nine-month periods ended September 30, 1999, the Company recorded no federal income tax expense since its net operating loss carryforwards offset any tax expense applicable to the net income for that period.

Liquidity and Capital Resources

      The following tables set forth, for the periods indicated, certain financial data regarding the periods indicated, certain financial data regarding the Company’s working capital balances, cash and cash equivalents, cash used in operating activities, cash provided by investing activities and cash provided by financing activities:

      Working capital and cash and cash equivalents decreased as of September 30, 2000, compared to December 31, 1999, principally due to negative cash flow from operations.

      For the nine month period ended September 30, 2000, cash used by operating activities totaled $4,619, due principally to lower than anticipated license revenue for the year and consequently lower service fees for the nine month period.

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PowerCerv Corporation

Item 2. Management’s Discussion and Analysis of
Financial Condition and Results of Operations
(dollars in thousands)

      The Company’s cash provided by investing activities totaling $221 for the nine month period ended September 30, 2000, was principally due to the proceeds from a return of the Company’s investment in a third party ($500), offset by purchases of software and fixed assets ($279). The cash provided by investing activities of $6,623 for the nine month period ended September 30, 1999, was principally due to the sale of its general consulting business in March 1999 ($6,680) and the proceeds from a return of the Company’s investment in a third party ($250), offset by purchases of fixed assets ($307).

      At September 30, 2000, the Company’s primary source of liquidity consisted of its cash and cash equivalents balance of $2,697 and its short-term accounts receivable balance of $3,938. The Company’s 1999 Line of Credit expired on May 30, 2000. The Company is currently seeking other sources of debt or equity. There can be no assurances that such funds will be available to the Company or, if available, would be on terms satisfactory to the Company.

      In June of 2000, PowerCerv recognized that revenue for the Company was not going to rapidly return to the levels achieved in the third and fourth quarters of last year. The decision was made to downsize the Company in an effort to minimize future losses, allow for sufficient time to implement its strategic plan and ultimately seek to return to profitability. The cost of this restructuring is approximately $873 of which $711 was reported as part of the second quarter results and the balance of $162 was reported in the third quarter. This restructuring will save the Company approximately $1,600 in expenses per quarter; however, there can be no assurance that the Company will return to profitability as a result of these actions.

      If the Company’s existing cash reserves and restructuring decision prove insufficient to fund its future cash requirements and the Company is not able to obtain other sources of funds, the Company’s ability to pursue its business strategy beyond the year 2000 could be adversely affected. However, as a result of the Company’s restructuring decision, the amount of cash used in operations decreased substantially in the third quarter of 2000 as compared to the second quarter. See “Forward Looking Statements and Associated Considerations—Liquidity” as set forth in the Company’s 1999 Annual Report.

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Item 3. Quantitative and Qualitative Disclosure of Market Risk

      The Company had no holdings of derivative financial or commodity instruments at September 30, 2000. 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.

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INDEPENDENT CERTIFIED PUBLIC ACCOUNTANT’S
REVIEW REPORT

The Board of Directors
PowerCerv Corporation

We have reviewed the accompanying condensed consolidated balance sheet of PowerCerv Corporation as of September 30, 2000, and the related condensed consolidated statements of operations for the three-month and nine-month periods then ended and the condensed consolidated statement of cash flows for the nine-month period then ended. These financial statements are the responsibility of the Company’s management.

We conducted our review in accordance with standards established by the American Institute of Certified Public Accountants. A review of interim financial information consists principally of applying analytical procedures to financial data and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with auditing standards generally accepted in the United States of America, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.

Based on our review, we are not aware of any material modifications that should be made to the accompanying condensed consolidated financial statements referred to above for them to be in conformity with accounting principles generally accepted in the United States of America.

/s/ Grant Thornton LLP

Tampa, Florida
October 20, 2000

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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 stay any discovery on this case until after the motions are ruled on by the Court. 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 Court ordered a second mediation conference for March 22, 2000, however, the parties were again unable to resolve this matter. On May 1, 2000, defendants filed supplemental authority in support of their motions to dismiss. On October 30, 2000, the Court entertained oral argument on Defendants’ Motion to Dismiss. To date, the Court has not issued an Order on the Motion. The defendants continue to deny any wrongdoing and, should the Motion not be granted, 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		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).
		10.2		Executive Termination Agreement, dated July 27, 2000, between PowerCerv Corporation and Michael J. Simmons.

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Part II. Other Information

		15.1		Accountants’ Letter regarding Unaudited Interim Financial Information.
		27.1		Financial Data Schedule. (for SEC use only)
(b)		Reports on Form 8-K
		The Company filed a current report on 8-K on September 28, 2000, to report under Item 4, Change in Registrant’s Certifying Accountant, the Company’s appointment of Grant Thornton LLP as its independent accountant for the remainder of 2000. On September 25, 2000 the Company notified Ernst and Young LLP that the Company’s relationship with Ernst and Young LLP was terminated.

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Form 10-Q

(for the quarterly period ended September 30, 2000)

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.

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