1
_________________________________________________________
________
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION WASHINGTON,
D.C. 20549
FORM 10-Q
(Mark One)
_X__ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Quarterly period ended July 31, 1995
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: 0-15188
INTERSOLV, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
Delaware 52-
0990382
(State or other jurisdiction of
(I.R.S. Employer
incorporation or organization)
Identification No.)
9420 Key West Avenue
Rockville, Maryland 20850
(Address of principal executive offices)
(301) 838-5000
(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 August 31, 1995, there were 16,697,587 shares
outstanding of the Registrant's Common Stock, par value
$.01 per share.
_______________________________________________________
__ ________
INTERSOLV, INC.
INDEX
Page Number
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements 3
Condensed Consolidated Statements
of Operations for the three months
ended July 31, 1995 and 1994 4
Condensed Consolidated Balance Sheets as of July
31, 1995 and April 30, 1995 5
Condensed Consolidated Statements of Cash Flows
for the three months ended July 31, 1995 and
1994. 6
Notes to Condensed Consolidated Financial
Statements 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 9
PART II. OTHER INFORMATION
Item 4. Results of Votes of Securities Holders 12
Item 5. Other Information 12
Item 6. Exhibits and Reports on Form 8-K 12
Signatures 13
PART I. FINANCIAL INFORMATION
Financial Statements.
The financial statements set forth below for the
threemonth periods ended July 31, 1995 and
1994 are unaudited, and have been prepared pursuant
to the rules and regulations of the
Securities and Exchange
Commission. Certain information and note
disclosures normally included in annual
financial statements prepared in accordance
with generally accepted accounting principles
have been condensed or omitted pursuant to those
rules and regulations. INTERSOLV, Inc. believes that
the disclosures made are adequate to make the
information presented not misleading. The results
for the three-month period ended July 31, 1995
are not necessarily indicative of the results for
the fiscal year.
In the opinion of management, the
accompanying
consolidated condensed financial statements reflect
all necessary adjustments (consisting only
of normal
recurring adjustments) that are necessary for a
fair presentation of results for the periods
presented. It is suggested that these financial
statements be read in conjunction with the
latest audited financial
statements and the notes thereto (included in
the Annual Report on Form 10-K for the fiscal year
ended April 30, 1995).
INTERSOLV, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
For the three months ended July 31
(dollars in thousands, except per share data)
(unaudited)
1995 1994
Revenues:
License fees $16,009 $14,327
Service fees 12,849 9,743
Total revenues 28,858 24,070
Costs and expenses:
Cost of products 3,502 2,313
Cost of services 5,636 4,380
Sales and marketing 11,628 10,760
Research and development 3,182 2,896
General and administrative 2,493 2,084
Acquisition charges 2,000 ---
Total costs and expenses 28,441 22,433
Operating income 417 1,637
Other income, net 258 136
Income before income taxes 675 1,773
Provision for income taxes 202 519
Net income $ 473 $ 1,254
Shares used in computing net income per
share 17,572 16,409
Net income per share $ 0.03 $ 0.08
The accompanying notes are an integral part of
these condensed consolidated statements.
INTERSOLV, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(amounts in thousands)
(unaudited)
July 31, April 30,
1995 1995
ASSETS
Current assets:
Cash and cash equivalents $25,788 $24,613
Accounts receivable, net 33,751 38,148
Refundable income taxes 389 389
Prepaid expenses and other current
assets 4,110 4,087
Total current assets 64,038 67,237
Software, net 21,067 20,187
Property and equipment, net 6,648 6,356
Notes receivable and other assets 970 1,254
Total assets $92,723 $95,034
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $18,985 $23,990
Deferred revenue 14,708 14,498
Total current liabilities 33,693 38,488
Long-term liabilities 3,041 2,946
Total liabilities 36,734 41,434
Stockholders' equity
Common stock 213 157
Paid-in capital 85,533 83,711
Treasury stock (1,801) (1,815)
Accumulated deficit (27,147) (27,620)
Cumulative currency translation
adjustment (809) (833)
Total stockholders' equity 55,989 53,600
Total liabilities and stockholders'
equity $92,723 $95,034
The accompanying notes are an integral part of these
condensed consolidated statements.
INTERSOLV, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH
FLOWS
For the three months ended July 31
(amounts in thousands)
(unaudited)
1995 1994
CASH INFLOWS (OUTFLOWS)
Operating activities:
Net income $ 473 $1,254
Non-cash items:
Depreciation and amortization 3,138 2,283
Deferred taxes 95 486
Purchased research and development 680 -
Payment of restructuring / acquisition
charges (306) (2,032)
Change in assets and liabilities 955 (77)
Net cash provided by operating activities
5,035 1,914
Investing activities:
Additions to software (3,733) (1,872)
Additions to property and equipment (1,979) (375)
Sale/leaseback of equipment 776 ---
Other 280 30
Net cash used in investing activities (4,656) (2,217)
Financing activities:
Payment of acquisition installment
liability (1,107) ---
Proceeds from sale of common stock 1,892 426
Net cash provided by financing activities 785 426
Effect of exchange rate changes on cash 11 114
Net increase in cash and cash equivalents 1,175 237
Cash and cash equivalents, beginning of
period 24,613 22,435
Cash and cash equivalents, end of
period $25,788 $22,672
The accompanying notes are an integral part of these
condensed consolidated statements.
INTERSOLV, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Basis of Presentation
The accompanying condensed consolidated financial
statements include the accounts of INTERSOLV, Inc. and
its wholly owned subsidiaries (collectively, the
"Company" or "INTERSOLV").
The accompanying unaudited financial statements reflect
all the adjustments that, in the opinion of management,
are necessary for a fair presentation of the results
for the interim periods presented. The results for the
three-month period ended July 31, 1995 may not
necessarily be indicative of the results for the entire
year. The April 30, 1995 condensed consolidated
balance sheet data was derived from audited financial
statements as of the same date. The results for the
three months ended July 31, 1994 were restated to
include the results of operations of PC Strategies &
Solutions, Inc., as more fully described on page 8
under Acquisitions.
These financial statements should be read in
conjunction with the Company's annual audited financial
statements, as filed with the Securities and Exchange
Commission on Form 10-K, for the year ended April 30,
1995.
Operations
The Company develops, markets and supports computer
software used by software developers to accelerate the
development and maintenance process, improve quality
and reduce cost.
Contracting Costs (Discontinued Operations)
Prior to April 1986, certain revenues associated with
discontinued operations were generated under cost-plus
fee contracts with the U.S. government and are subject
to adjustments upon audit by the Defense Contract Audit
Agency (DCAA). Audits through July 31, 1986 have been
completed. On December 5, 1990, the Company received a
notice from the DCAA questioning certain charges
aggregating approximately $2.4 million incurred by the
Company during fiscal 1985 and 1986. The Company filed
a response in April, 1991, which provided additional
information regarding the issues raised in the notice.
The amount of the liability, if any, cannot be
ascertained.
Sales and Income Tax
The Company sells its products in various states
through different distribution channels, including
telesales, field sales and third party resellers. On
certain sales, the Company must collect and remit sales
tax to the respective state. These sales taxes are
subject to adjustment upon audit by the respective
state. Liabilities may result from this process;
however, management believes the reserves provided for
these liabilities are sufficient.
The Company's income tax returns are subject to audit
by Federal, state and foreign tax authorities.
Adjustments to increase or decrease taxable income or
losses may result from these audits. Management
believes the impact of these adjustments, if any, would
not have a material impact on the Company's financial
statements taken as a whole.
Capitalization of Computer Software Development Costs
and Purchased Software
In accordance with Statement of Financial Accounting
Standards No. 86, "Accounting for the Costs of Computer
Software to be Sold, Leased, or Otherwise
Marketed,"("FAS 86") the Company capitalizes certain
internal software development costs subsequent to the
establishment of technological feasibility for the
product as evidenced by a working model. In addition,
the Company supplements its internal development effort
by acquiring rights to selected software technologies
("purchased software") from others. Capitalized
software costs and purchased software are amortized on
a straight line basis over the estimated economic lives
of the products, which range from three to five years.
The Company continually compares the unamortized
software development costs and purchased software costs
in light of the expected future revenues for those
products. If the unamortized costs exceed the expected
future net value from sales of the related product,
then the excess amount is written off.
Acquisitions
Effective May 1, 1995, INTERSOLV acquired all of the
outstanding common stock of PC Strategies & Solutions,
Inc. ("PCS") for 675,000 shares of INTERSOLV common
stock (valued at $9.3 million). PCS provides
consulting and training services focusing on the
implementation of object-oriented client/server
technology. The transaction was accounted for using
the "pooling-ofinterests" method, accordingly the
historical financial statements have been restated to
include the financial position and results of
operations of PCS. INTERSOLV's previously reported
revenues for the quarter ended July 31, 1994 increased
by approximately $0.9 million, with no significant
change in net income or net income per share.
In May 1995, INTERSOLV acquired the C++/Views product
line from Liant Software for $1.2 million. The
transaction value was allocated to existing software
products that had reached technological feasibility
("capitalized software") and to in-process software
development ("purchased research and development")
based on their respective fair market values. This
resulted in $0.7 million of the transaction value being
allocated to purchased research and development, which
was charged to operations in the first quarter.
Acquisition Charges
In May 1995, the Company incurred $2 million of non
recurring charges related to the acquisition of the PC
Strategies business and the C++/Views product line.
Acquisition charges included a $0.7 million charge for
purchased research and development related to the
C++/Views transaction. The remaining $1.3 million
charge was for direct transaction expenses, severance
and costs
to consolidate operations. All personnel affected by
the acquisitions have been notified and most of the
severance and transaction expenses were disbursed by
July 31, 1995.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Operating Results Overview
The following table sets forth, for the
periods
indicated, the percentage which selected items in
the Consolidated Statements of Operations bear to
total revenues:
Percentage of Total Revenue
Three Months Ended
July 31,
1995 1994
Revenues:
License fees 55.5% 59.5%
Service fees 44.5% 40.5%
100.0% 100.0%
Costs and expenses:
Cost of products 12.2% 9.6%
Cost of services 20.2% 18.2%
Sales and marketing 39.6% 44.7%
Research and development 11.1% 12.1%
General and administrative 8.6% 8.6%
Acquisition charges 6.9% --
Total costs and expenses 98.6% 93.2%
Operating income 1.4% 6.8%
Other income, net 0.9% 0.6%
Income before taxes 2.3% 7.4%
Provision for income taxes 0.7% 2.2%
Net Income 1.6% 5.2%
Revenues from North America and International were 73%
and 27%, respectively, for the three months ended July
31, 1995. Revenues from North America and
International for the same period last year were 75%
and 25%, respectively.Revenues
Revenues for the three months ended July 31,
1995
increased 20% from $24.1 million for the same period
last year to $28.9 million. Revenues from the
Company's new client/server tools, focused in the
areas of Software Configuration Management, Data
Warehousing and Object Oriented Development, grew 38%
period on period. Growth in these areas resulted
from increased demand for
products and services in these solution areas
coupled with our expanded sales and marketing effort.
Revenue growth in these product groups more than
offset the 7% revenue decline from the
traditional COBOL oriented development tools.
Approximately 31% of the Company's revenues from the
quarter ended July 31, 1995 was from the traditional
development tools. This decline is consistent with
the shift in the market that the Company has
experienced in the past year, as companies move to
object-oriented development tools. The Company
expects the market for traditional development tools
to decline or remain flat over the next several
quarters.
Cost of Products
Cost of products includes cost of software
media, freight, royalties
and amortization of capitalized
software development costs and purchased
technology
costs. Cost of products for the three months ended
July 31, 1995 increased 52% from $2.3 million for
the same period last year to $3.5 million. The
increase is primarily due to higher levels of
software amortization, caused by releases of new
products since a year ago.
Cost of Services
Cost of services includes personnel and related
overhead costs incurred to
provide consulting and training
services, as well as telephone support to customers
under maintenance contracts. Cost of services
increased 29% from $4.4 million for the three months
ended July 31, 1994 to $5.6 million for the three
months ended July 31, 1995. The Company
has increased the number of personnel
in its consulting and training functions to support
the increased revenues, which led to the increased
costs.
Sales and Marketing
Sales and marketing expenses for the three months
ended July 31, 1995 increased 8% from $10.8 million
for the same period last year to $11.6 million. The
Company's increased investment in telesales,
third party
distribution channels and marketing programs were
the primary reasons for the increase during the three
months ended July 31, 1995.
Research and Development
Research and development ("R & D") expenses reflect
gross expenditures less amounts capitalized in
accordance with FAS 86. Amortization of capitalized
software is included in cost of products. R & D
expenses were $3.2 million in the first quarter of
fiscal 1996, which represented a 10% increase when
compared to $2.9 million in the same period last
year. The increase is the result of higher levels of
investment in the Company's Object Oriented
Development, Data Warehousing and Software
Configuration Management solution areas.
General and Administrative
General and administrative expenses were $2.5 million
in the first quarter of fiscal 1996 as compared to
$2.1 million in the same period. The increase in the
three month period is due to higher
administrative costs associated with supporting a
larger customer base.
Acquisition Charges
In May 1995, the Company incurred $2 million of
nonrecurring charges related to the acquisition of
the PC Strategies business and the C++/Views
product line. Acquisition charges included a $0.7
million charge for purchased R&D related to the
C++/Views transaction.
The
remaining $1.3 million charge was for direct
transaction expenses, severance and costs to
consolidate operations.
Operating Income
Operating income before acquisition costs was
$2.4 million for the three months ended July 31, 1995,
or up 48% from last year. Operating income after
acquisition costs was $.4 million for the three months
ended July 31, 1995 compared with $1.6 million for the
same quarter last year. Overall net revenue
growth, as previously discussed, led to the increase
in operating income before acquisition charges.
Other Income, net
Other income increased due to higher levels of
cash available for investment, when compared to
the same period last year.
Income Taxes
The effective tax rate for the current period is 30%,
as compared to 29% for the same period last year.
The
Company expects that the tax rate for the remainder
of fiscal 1996 will be 30%. The difference from
the statutory rate is primarily because of the
estimated tax benefit resulting from the utilization
of net operating losses and research and
development tax credit carryforwards.
Financial Condition - Liquidity and Capital Resources
During the three months ended July 31, 1995,
operations provided $5 million of cash. Financing
activities in the form of stock option exercises and
purchases under the employee purchase plan generated
$1.9 million and the Company made its final Q+E
Software installment payment of $1.1 million.
Investing activities used $4.7 million as the Company
invested $3.7 million in software and a net $1.2
million in fixed assets. Overall cash and cash
equivalents were $25.8 million at July 31, 1995, which
is up $1.2 million from $24.6 million at the
beginning of the fiscal year.
The Company has a bank line of credit arrangement
which allows short-term borrowings of up to $12
million. As of July 31, 1995 and for the three months
then ended, there were no amounts outstanding under
this line of credit. Management believes that cash
generated from operations, cash on hand and available
borrowings are sufficient to meet the Company's
capital requirements for
the
foreseeable future.
PART II. OTHER INFORMATION
Item 4. Results of Votes of Shareholders
None.
Item 5. Other
None.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
Number Exhibit
Description
11.1 Computation of Net
Income
Per Share for the three months
ended July 31, 1995 and
1994.
27 Financial Data Schedule
(as
part of electronic filing)
(b) Reports on Form 8-K:
None.
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.
INTERSOLV, Inc.
Date: September ___, 1995
By:
_________________
Kevin J. Burns
Chairman and
Chief Executive Officer
(Principal
Executive Officer)
Date: September ___,
1995
By:______________________________
Kenneth A. Sexton
Vice President,
Finance
and
Administration,
Chief
Financial Officer, and Secretary
(Principal
Financial and Accounting
Officer)
EXHIBIT INDEX
Exhibit
Number Description
11.1 Computation of Net Income Per
Share
for the three months ended July
31, 1995 and 1994.
EXHIBIT 11.1
INTERSOLV, INC
COMPUTATION OF NET INCOME PER SHARE
Three months ended July 31
(in thousands, except net income per share)
1995 1994
PRIMARY
Weighted average number of shares
outstanding 16,381 15,898
Additional shares under stock option
plan assumed outstanding less shares
assumed repurchased under the treasury
stock method 1,026 480
Primary Shares 17,407 16,378
Net Income $ 473 $1,254
Net Income Per Share $ 0.03 $ 0.08
FULLY DILUTED
Weighted average number of shares
outstanding 16,381 15,898
Additional shares under stock option plan
assumed outstanding less shares assumed
repurchased under the treasury stock
method 1,191 511
Fully Diluted Shares 17,572 16,409
Net Income $ 473 $1,254
Net Income Per Share $ 0.03 $ 0.08
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
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