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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 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)
Florida (State or other jurisdiction of incorporation or organization) |
59-3350778 (I.R.S. Employer Identification No.) |
400 North Ashley Drive, Suite 2700, Tampa, Florida 33602
(Address of principal executive offices, including zip code)
(813) 226-2600
(Registrants telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No___
As of May 8, 2000, there were 13,811,210 shares of the registrants common stock, $.001 par value, outstanding.
PowerCerv Corporation
Form 10-Q
Index
Part I. Financial Information | Page | ||||
Item 1. Financial Statements | |||||
Condensed Consolidated Balance Sheets as of March 31, 2000 (unaudited) and December 31, 1999 |
2 | ||||
Condensed Consolidated Statements of Operations for the Three Months Ended March 31, 2000 and 1999 (unaudited) |
3 | ||||
Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2000 and 1999 (unaudited) |
4 | ||||
Notes to Condensed Consolidated Financial Statements (unaudited) | 5 | ||||
Item 2. Managements Discussion and Analysis of Financial Condition | |||||
and Results of Operations | 10 | ||||
Item 3. Quantitative and Qualitative Disclosure of Market Risk | 17 | ||||
Independent Accountants Review Report | 18 | ||||
Part II. Other Information | |||||
Item 1. Legal Proceedings | 19 | ||||
Item 6. Exhibits and Reports on Form 8-K | 19 | ||||
Signatures | 20 |
1
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
PowerCerv Corporation
Condensed Consolidated Balance Sheets
(In thousands)
March 31, | December 31, | |||||||||
2000 | 1999 | |||||||||
(unaudited) | ||||||||||
Assets | ||||||||||
Current assets: | ||||||||||
Cash and cash equivalents | $ | 5,021 | $ | 6,224 | ||||||
Accounts receivable, net of allowance of $1,674 and | ||||||||||
$1,545, respectively | 4,857 | 6,952 | ||||||||
Other current assets | 258 | 193 | ||||||||
Total current assets | 10,136 | 13,369 | ||||||||
Property and equipment, net | 1,095 | 1,231 | ||||||||
Intangible assets, net | 419 | 321 | ||||||||
Investment in third party | 500 | 500 | ||||||||
Notes receivable, net | 1,130 | 1,037 | ||||||||
Deposits and other assets | 75 | 99 | ||||||||
Total assets | $ | 13,355 | $ | 16,557 | ||||||
Liabilities and Shareholders Equity | ||||||||||
Current liabilities: | ||||||||||
Accounts payable | $ | 580 | $ | 489 | ||||||
Accrued expenses | 2,046 | 2,087 | ||||||||
Deferred revenue | 1,779 | 2,001 | ||||||||
Total current liabilities | 4,405 | 4,577 | ||||||||
Deferred gain on sale of business | 827 | 827 | ||||||||
Shareholders equity | 8,123 | 11,153 | ||||||||
Total liabilities and shareholders equity | $ | 13,355 | $ | 16,557 | ||||||
See accompanying independent accountants review report and notes to condensed consolidated financial statements.
2
PowerCerv Corporation
Condensed Consolidated Statements of Operations (Unaudited)
(In thousands, except per share amounts)
Three months ended March 31, | ||||||||||||
2000 | 1999 | |||||||||||
Revenues: | ||||||||||||
License fees | $ | 319 | $ | 1,453 | ||||||||
Service fees | 2,187 | 2,727 | ||||||||||
Total revenues | 2,506 | 4,180 | ||||||||||
Costs and expenses: | ||||||||||||
Cost of licenses | 138 | 178 | ||||||||||
Cost of services | 1,694 | 1,990 | ||||||||||
General and administrative | 1,261 | 1,215 | ||||||||||
Sales and marketing | 1,755 | 2,166 | ||||||||||
Research and development | 1,220 | 1,158 | ||||||||||
Work force reduction and other | | 485 | ||||||||||
Total costs and expenses | 6,068 | 7,192 | ||||||||||
Operating loss | (3,562 | ) | (3,012 | ) | ||||||||
Interest income (expense), net | (91 | ) | 50 | |||||||||
Operations disposed of during 1999 | ||||||||||||
Revenue | | 2,464 | ||||||||||
Cost and expenses | | 2,240 | ||||||||||
| 224 | |||||||||||
Gain on sale of business | | 2,996 | ||||||||||
3,220 | ||||||||||||
Income (loss) before income taxes | (3,653 | ) | 258 | |||||||||
Income tax expense | 248 | | ||||||||||
Net income (loss) and comprehensive income (loss) |
$ | (3,901 | ) | $ | 258 | |||||||
Basic and diluted net income (loss) per share | $ | (0.29 | ) | $ | 0.02 | |||||||
Shares used in computing net income (loss) per share: | ||||||||||||
Basic | 13,649 | 13,827 | ||||||||||
Diluted | 13,649 | 14,148 | ||||||||||
See accompanying independent accountants review report and notes to condensed consolidated financial statements.
3
PowerCerv Corporation
Condensed Consolidated Statements of Cash Flows (Unaudited)
(In thousands)
Three months ended March 31, | |||||||||||
2000 | 1999 | ||||||||||
Cash flows from operating activities: | |||||||||||
Net income (loss) | $ | (3,901 | ) | $ | 258 | ||||||
Adjustments to reconcile net income (loss) | |||||||||||
to net cash used in operating activities: | |||||||||||
Depreciation and amortization | 197 | 390 | |||||||||
Gain on sale of business | | (2,996 | ) | ||||||||
Deferred revenue | (221 | ) | (603 | ) | |||||||
Changes in assets and liabilities | 2,010 | 695 | |||||||||
Net cash flows used in operating activities | (1,915 | ) | (2,256 | ) | |||||||
Cash flows from investing activities: | |||||||||||
Sale of business | | 2,455 | |||||||||
Return of investment in third party | | 250 | |||||||||
Purchase of intangible asset | (100 | ) | | ||||||||
Purchases of property and equipment, net | (59 | ) | (136 | ) | |||||||
Net cash flows (used in) provided by investing activities |
(159 | ) | 2,569 | ||||||||
Cash flows from financing activities: | |||||||||||
Net proceeds from issuance of common stock | 871 | 20 | |||||||||
Net cash flows provided by financing activities | 871 | 20 | |||||||||
Net increase (decrease) in cash and cash equivalents | (1,203 | ) | 333 | ||||||||
Cash and cash equivalents, beginning of period | 6,224 | 6,594 | |||||||||
Cash and cash equivalents, end of period | $ | 5,021 | $ | 6,927 | |||||||
See accompanying independent accountants review report and notes to condensed consolidated financial statements.
4
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, 2000, and the condensed consolidated statements of operations for the three months ended March 31, 2000 and 1999 and the condensed consolidated statements of cash flows for the three months ended March 31, 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 March 31, 2000, and for all periods presented have been made. The condensed consolidated balance sheet at December 31, 1999, has been derived from the Companys 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 Companys 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 months ended March 31, 2000, 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 Companys Enterprise Resource Planning (ERP) application products and, to a lesser extent, its development tools. License fees also include royalties earned on the Companys 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 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 Companys 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 customers 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.
5
PowerCerv Corporation
Notes to Condensed Consolidated Financial Statements (Unaudited)
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:
(dollars in thousands, except per share amounts) | |||||||||
Three Months Ended | |||||||||
March 31, | |||||||||
2000 | 1999 | ||||||||
Basic: | |||||||||
Net income (loss) | $ | (3,901 | ) | $ | 258 | ||||
Average shares outstanding | 13,649 | 13,827 | |||||||
Basic EPS | $ | (0.29 | ) | $ | 0.02 | ||||
Diluted: | |||||||||
Net income (loss) | $ | (3,901 | ) | $ | 258 | ||||
Average shares outstanding | 13,649 | 13,827 | |||||||
Net effect of dilutive stock options based on the treasury stock method |
| 321 | |||||||
Totals | 13,649 | 14,148 | |||||||
Diluted EPS | $ | (0.29 | ) | $ | 0.02 | ||||
Common stock equivalents in the three-month period ended March 31, 2000, 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, 2000, stock options and warrants were exercised to acquire 383,499 shares at an average exercise price of $2.29 per share.
D. Accrued Expenses
Accrued expenses consist of the following:
(dollars in thousands) | ||||||||
March 31, | December 31, | |||||||
2000 | 1999 | |||||||
Compensation | $ | 766 | $ | 1,139 | ||||
Severance and related costs | | 45 | ||||||
Other | 1,280 | 903 | ||||||
$ | 2,046 | $ | 2,087 | |||||
6
PowerCerv Corporation
Notes to Condensed Consolidated Financial Statements (Unaudited)
E. Commitments
The Company has entered into employment agreements with certain of its executive officers. Information regarding these agreements is available in the Companys 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 Companys common stock from March 1, 1996 (the date of the Companys 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 Companys 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. 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, in which the parties were again unable to resolve their lawsuit. To date, the Court has not issued a ruling on the Companys motion to dismiss. 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 Companys consolidated financial position.
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 Companys 1996 and 1995 federal income tax returns. The amount allocated to tax expense was $209, and $150 was allocated to interest expense. 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 $39 of income tax expense related to state income taxes and increased its deferred income tax asset valuation allowance for the three-month period ended March 31, 2000, to offset the tax benefit applicable to the loss incurred during the period. The decision to fully reserve the deferred income tax asset was primarily the result of the Companys continued losses from operations.
For the three-month period ended March 31, 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.
7
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.
The following tables provide the various segment data (dollars in thousands):
For the Three-month Period Ended March 31, 2000 | ||||||||||||||||
License | ||||||||||||||||
Product | Services | Unallocated | Total | |||||||||||||
Revenues from external Customers |
$ | 319 | $ | 2,187 | | $ | 2,506 | |||||||||
Segment profit (loss) | (2,794 | ) | 493 | (1,600 | ) | (3,901 | ) |
For the Three-month Period Ended March 31, 1999 | ||||||||||||||||
License | ||||||||||||||||
Product | Services | Unallocated | Total | |||||||||||||
Revenues from external Customers |
$ | 1,453 | $ | 2,727 | | $ | 4,180 | |||||||||
Segment profit (loss) | (2,049 | ) | 737 | 1,570 | 258 |
There were no transactions between segments. The unallocated amounts are made up of the following items:
For the Three-month Period | ||||||||
Ended March 31, | ||||||||
2000 | 1999 | |||||||
General and administrative costs | $ | (1,261 | ) | $ | (1,215 | ) | ||
Work force reduction | | (485 | ) | |||||
Interest income (expense), net | (91 | ) | 50 | |||||
Operations disposed of in 1999 | | 224 | ||||||
Gain on sale of business | | 2,996 | ||||||
Income tax expense | (248 | ) | | |||||
$ | (1,600 | ) | $ | 1,570 |
8
PowerCerv Corporation
Notes to Condensed Consolidated Financial Statements (Unaudited)
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. 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 Companys 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.
9
PowerCerv Corporation
Item 2. Managements 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. 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 Companys revenues currently consist primarily of software license fees and fees for services, primarily relating to the Companys 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 Companys 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 Companys largest single revenue source, although the Companys strategy is to seek to increase revenue generated from licensing its ERP Plus 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 quarters presentations. It also finalized its 1998 strategy to discontinue technology resales of various third-party software products.
License fees represent revenue from licensing the Companys ERP Plus application products and royalties earned on the Companys ERP application products and related intellectual properties. Service fees represent revenue from implementing the Companys ERP 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 Companys 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 customers 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.
10
PowerCerv Corporation
Item 2. Managements Discussion and Analysis of
Financial Condition and Results of Operations
(dollars in thousands)
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. 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 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 Companys 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.
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 Companys industry, managements beliefs and certain assumptions made by the Companys 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. Forward-looking statements include, without limitation, statements regarding the extent and timing of future revenues and expenses and customer demand for the Companys products and services as described in the Companys 1999 Annual Report on Form 10K/A filed with the SEC on April 13, 2000, under Managements 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 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 Companys 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 Companys revenues derived from license fees and service fees:
11
PowerCerv Corporation
Item 2. Managements Discussion and Analysis of
Financial Condition and Results of Operations
(dollars in thousands)
Revenues | Three months ended March 31, | ||||||||||||
2000 | Change | 1999 | |||||||||||
License fees | $ | 319 | (78 | %) | $ | 1,453 | |||||||
Percentage of total revenues | 13 | % | 35 | % | |||||||||
Service fees | $ | 2,187 | (20 | %) | $ | 2,727 | |||||||
Percentage of total revenues | 87 | % | 65 | % | |||||||||
License fees. The Companys license fees are derived from licensing the Companys 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 decreased for the three-month period ended March 31, 2000, compared to the same period in 1999. Management believes the primary reason for the decrease in license revenue was decreased activity by the Companys potential customers as they return to normal buying cycles after addressing their Y2K concerns. Interest in our products and sales leads were strong, but our potential customers were not compelled to make decisions in the first quarter. The difference between quarters also reflects the fact that in the first quarter of 1999 there was $473 from an internal use license and OEM agreement with the purchaser of the Companys general consulting and education business. The Company expects the first quarter will be the low point in the year for license fee revenues as customers return to normal review and buying cycles, but there can be no assurance that the Companys license revenues will increase in accordance with managements expectations.
Services fees. The Companys service fees consist of revenue from consulting, education and support and maintenance services for the Companys 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. Management believes that the decrease in service revenue was also impacted by Y2K concerns. 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 the first quarter of 2000. The Company believes that as revenue from licensing its application products increases, the demand for application consulting services (and related revenue) will increase correspondingly, 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 increase correspondingly.
12
PowerCerv Corporation
Item 2. Managements Discussion and Analysis of
Financial Condition and Results of Operations
(dollars in thousands)
Costs and expenses
The following table sets forth, for the periods indicated, certain financial data regarding the Companys costs associated with its license fees and services:
Cost of revenues | Three months ended March 31, | ||||||||||||
2000 | Change | 1999 | |||||||||||
Cost of license fees | $ | 138 | (22 | %) | $ | 178 | |||||||
Gross profit percentage | 57 | % | 88 | % | |||||||||
Cost of service | $ | 1,694 | (15 | %) | $ | 1,990 | |||||||
Percentage of total revenues | 23 | % | 27 | % | |||||||||
Cost of licenses. The cost of licenses consists primarily of production costs, royalties associated with third-party products sold with the Companys products, the cost associated with resales made by VARs, and the amortization of intangible assets. The cost of licenses for the first quarter of 2000 decreased 22% compared to 1999 primarily resulting from lower amortization expense and increased royalties associated with third-party products sold with the Companys products. The decrease in gross profit percentage is due to significantly lower license fee revenue and increased royalties for the current period.
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 15% in the first quarter of 2000 compared to 1999 primarily due to a lower compensation expense for the period. The decrease in gross profit percentage is primarily due to lower use of consultants resulting from lower service activity in the current period.
The following table sets forth, for the periods indicated, certain financial data regarding the Companys operating expenses:
Operating expenses: | Three months ended March 31, | ||||||||||||
2000 | Change | 1999 | |||||||||||
General and administrative | $ | 1,261 | 3% | $ | 1,215 | ||||||||
Percentage of total revenues | 50 | % | 29 | % | |||||||||
Sales and marketing | 1,755 | (18%) | 2,166 | ||||||||||
Percentage of total revenues | 70 | % | 52 | % | |||||||||
Research and development | 1,220 | 5% | 1,158 | ||||||||||
Percentage of total revenues | 49 | % | 28 | % | |||||||||
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, 2000, compared to the three-month period ended March 31, 1999, is primarily due to higher bad debt expense, which was offset to a certain extent by lower compensation expense. 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 period.
13
PowerCerv Corporation
Item 2. Managements Discussion and Analysis of
Financial Condition and Results of Operations
(dollars in thousands)
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 18% for the three-month period ended March 31, 2000, as compared to the same period in 1999 as a result of lower sales commissions earned on license revenue in the current period, which was offset to a certain extent by increased advertising and tradeshow costs. The sales and marketing expense as a percentage of total revenue increased due to lower license and service revenue for the period. During the first quarter of 2000, the Company increased its investment in marketing programs focused on increasing awareness of the Company and its products and expansions of the Companys marketing and telemarketing organizations in Tampa. There can be no assurance that these investments will result in higher revenues for the Company.
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 Companys 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 5% for the three-month period ended March 31, 2000, as compared to the same period in 1999, primarily due to increased personnel costs. The R&D cost percentage of total revenue increased due to the fixed nature of R&D costs and decreased total revenue for the period.
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. As of March 31, 2000, the Company had paid all of the total $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 Companys 1996 and 1995 federal income tax returns. The amount allocated to tax expense was $209, and $150 was allocated to interest expense. 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 $39 of income tax expense related to state income taxes and increased its deferred income tax asset valuation allowance for the three-month period ended March 31, 2000, to offset the tax benefit applicable to the loss incurred during the period. The decision to fully reserve the deferred income tax asset was primarily the result of the Companys continued losses from operations.
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PowerCerv Corporation
Item 2. Managements Discussion and Analysis of
Financial Condition and Results of Operations
(dollars in thousands)
For the three-month period ended March 31, 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 sets forth, for the periods indicated, certain financial data regarding the Companys working capital balances, cash and cash equivalents, cash used in operating activities and cash used in investing activities:
As of | |||||||||||||
March 31, | December 31, | ||||||||||||
2000 | Change | 1999 | |||||||||||
Working capital | $ | 5,731 | (35 | %) | $ | 8,792 | |||||||
Cash and cash equivalents | $ | 5,021 | (19 | %) | $ | 6,224 |
Working capital and cash and cash equivalents decreased as of March 31, 2000, compared to December 31, 1999, due to significantly reduced revenues resulting in lower accounts receivable and operating losses for the quarter.
For the | ||||||||||||
Three months ended March 31, | ||||||||||||
2000 | Change | 1999 | ||||||||||
Cash flows used in operating activities | (1,915 | ) | 15 | % | (2,256 | ) | ||||||
Cash flows (used in) provided by investing activities | (159 | ) | >100 | % | 2,569 | |||||||
Cash flows provided by financing activities | 871 | >100 | % | 20 |
For the three-month period ended March 31, 2000, cash used by operating activities totaled $1,915, due principally to lower than anticipated license revenues and subsequent operating losses for the quarter.
The Companys cash used in investing activities totaled $159 for the three-month period ended March 31, 2000, as a result of investments in software and fixed assets. The Companys cash in 1999 was principally provided by proceeds from the sale of the Companys general consulting and general education business ($2,455 in the first quarter of 1999) and proceeds from a return of the Companys investment in a third party ($250), offset by purchases of property and equipment ($136).
At March 31, 2000, the Companys primary source of liquidity consisted of its cash and cash equivalents balance of $5,021 and its short-term accounts receivable balance of $4,857. The Company has an agreement with its bank for a credit facility of $10 million (1999 Line of Credit). As of March 31, 2000, there was no outstanding balance against this facility.
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PowerCerv Corporation
Item 2. Managements Discussion and Analysis of
Financial Condition and Results of Operations
(dollars in thousands)
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 credit 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 Companys tangible net worth. Draws from $2 million to $5 million will be conditioned upon the Companys compliance with an additional financial ratio, or alternatively, may be secured by the Companys accounts receivable and inventory. Draws in excess of $5 million will be subject to terms agreed to at the time of the draw. The 1999 Line of Credit expires on May 30, 2000. The Company is currently seeking a renewal of at least a portion of the 1999 Line of Credit.
If the Companys existing cash reserves prove insufficient to fund its future cash requirements, and the Company is not able to renew its Line of Credit upon expiration or is unable to borrow against its 1999 Line of Credit if renewed, the Company may be required to seek alternative capital funding sources. 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. If the Company fails to maintain sufficient liquidity to fund its future cash requirements, the Companys ability to pursue its business strategy during the year 2000 and thereafter would be adversely affected. See Forward Looking Statements and Associated ConsiderationsLiquidity as set forth in the Companys 1999 Annual Report.
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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, 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 Companys net income. Generally, all of the Companys 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 ACCOUNTANTS REVIEW REPORT
The Board of Directors
PowerCerv Corporation
We have reviewed the accompanying condensed consolidated balance sheet of PowerCerv Corporation as of March 31, 2000, and the related condensed consolidated statements of operations for the three-month periods ended March 31, 2000 and 1999 and the condensed statements of cash flows for the three-month periods ended March 31, 2000 and 1999. These financial statements are the responsibility of the Companys management.
We conducted our reviews in accordance with standards established by the American Institute of Certified Public Accountants. A review of interim financial information consists principally of applying analytical procedures to financial data, and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with auditing standards generally accepted in the United States, 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 reviews, 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.
We have previously audited, in accordance with auditing standards generally accepted in the United States, the consolidated balance sheet of PowerCerv Corporation as of December 31, 1999, and the related consolidated statements of operations, shareholders equity, and cash flows for the year then ended not presented herein and in our report dated January 20, 2000, we expressed an unqualified opinion on those consolidated financial statement. In our opinion, the information set forth in the accompanying condensed consolidated balance sheet as of December 31, 1999, is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.
/s/ Ernst & Young LLP |
Tampa, Florida
April 13, 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 Companys common stock from March 1, 1996 (the date of the Companys 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 Companys 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. 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, in which the parties were again unable to resolve their lawsuit. To date, the Court has not issued a ruling on the Companys motion to dismiss. 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 Companys 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 Companys $10,000,000 credit facility (incorporated herein by reference from Exhibit Number 10.4 to the Companys 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 Companys 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 | ||
None |
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PowerCerv Corporation
Form 10-Q
(for the quarterly period ended March 31, 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.
POWERCERV CORPORATION | |||
Date: May 12, 2000 | /s/ Marc J. Fratello | ||
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Marc J. Fratello, Chairman of the Board (Duly Authorized Officer) |
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Date: May 12, 2000 | /s/ Michael J. Simmons | ||
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Michael J. Simmons, President, Chief Executive Officer and Director (Duly Authorized Officer) |
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Date: May 12, 2000 | /s/ Lawrence J. Alves | ||
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Lawrence J. Alves, Chief Financial Officer (Principal Financial Officer) |
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