_________________________________________________________
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 October 31, 1996
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 November 30, 1996, there were 19,976,411 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
October 31, 1996 and 1995 4
Condensed Consolidated Statements of Operations
for the six months ended October 31, 1996
and 1995 5
Condensed Consolidated Balance Sheets as of
October 31, 1996 and April 30, 1996 6
Condensed Consolidated Statements of Cash
Flows for the six months ended October 31,
1996 and 1995 7
Notes to Condensed Consolidated Financial
Statements 8
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of
Operations 10
PART II. OTHER INFORMATION
Item 4. Results of Votes of Securities Holders 13
Item 5. Other 13
Item 6. Exhibits and Reports on Form 8-K 13
Signatures 14
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
The financial statements set forth below for the three
and six month periods ended October 31, 1996 and 1995 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 and six month periods ended October 31, 1996
are not necessarily indicative of the results for the
fiscal year.
In the opinion of management, the accompanying condensed
consolidated 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 consolidated financial statements
and the notes thereto (included in the Annual Report on
Form 10-K for the fiscal year ended April 30, 1996).
INTERSOLV, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
For the three months ended October 31,
(amounts in thousands, except per share data)
(unaudited)
1996 1995
Revenues:
License fees $21,371 $20,379
Service fees 16,294 13,335
Total revenues 37,665 33,714
Costs and expenses:
Cost of products 3,652 4,002
Cost of services 7,713 6,119
Sales and marketing 17,686 15,681
Research and development 3,593 3,526
General and administrative 2,971 3,161
Acquisition charges --- 11,600
Total costs and expenses 35,615 44,089
Operating income (loss) 2,050 (10,375)
Other income, net 3 275
Income (loss) before income taxes 2,053 (10,100)
Provision for income taxes 657 (194)
Net income (loss) $ 1,396 ($9,906)
Shares used in computing
primary net income per share 20,016 19,303
Primary net income (loss) per
share $ 0.07 $(0.51)
Shares used in computing
fully diluted net income
per share 20,724 19,303
Fully diluted net income
(loss) per share $ 0.07 $(0.51)
The accompanying notes are an integral part of these
condensed consolidated financial statements.
INTERSOLV, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
For the six months ended October 31,
(amounts in thousands, except per share data)
(unaudited)
1996 1995
Revenues:
License fees $40,011 $39,469
Service fees 30,401 26,909
Total revenues 70,412 66,378
Costs and expenses:
Cost of products 7,908 7,872
Cost of services 14,844 12,037
Sales and marketing 33,289 30,892
Research and development 6,717 7,432
General and administrative 5,687 6,500
Acquisition charges --- 13,600
Total costs and expenses 68,445 78,333
Operating income (loss) 1,967 (11,955)
Other income, net 139 480
Income (loss) before income taxes 2,106 (11,475)
Provision for income taxes 674 ---
Net income (loss) $ 1,432 ($11,475)
Shares used in computing
primary net income per share 20,078 19,105
Primary net income (loss) per
share $ 0.07 $(0.60)
Shares used in computing fully
diluted net income per share 20,855 19,105
Fully diluted net income (loss)
per share $ 0.07 $(0.60)
The accompanying notes are an integral part of these
condensed consolidated financial statements.
INTERSOLV, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(amounts in thousands)
(unaudited)
As of As of
October 31, April 30,
1996 1996
ASSETS
Current assets:
Cash and cash equivalents $13,764 $28,215
Accounts receivable, net 40,026 37,645
Prepaid expenses and other
urrent assets 7,925 7,937
Total current assets 61,715 73,797
Software, net 23,526 21,970
Property and equipment, net 9,681 7,835
Notes receivable and other
assets 7,769 7,315
Total assets $102,691 $110,917
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and
accrued expenses $24,763 $26,838
Accrued acquisition charges 1,572 3,953
Deferred revenue 17,366 18,799
Total current liabilities 43,701 49,590
Long-term liabilities 7,949 7,817
Total liabilities 51,650 57,407
Subordinated convertible notes 1,885 3,676
Stockholders' equity
Common stock 203 198
Paid-in capital 94,656 92,967
Treasury stock (2,553) ---
Accumulated deficit (39,886) (41,318)
Cumulative currency
translation adjustment (3,264) (2,013)
Total stockholders' equity 49,156 49,834
Total liabilities and
stockholders' equity $102,691 $110,917
The accompanying notes are an integral part of these
condensed consolidated financial statements.
INTERSOLV, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the six months ended October 31,
(amounts in thousands)
(unaudited)
1996 1995
CASH INFLOWS (OUTFLOWS)
Operating activities:
Net income (loss) $1,432 $(11,475)
Non-cash items:
Depreciation and amortization 8,449 7,174
Deferred income taxes 452 (100)
Capitalized software writedowns --- 2,386
Payment of restructuring / acquisition
charges (2,381) (684)
Accrued acquisition charges --- 8,528
Change in working capital (8,494) 3,711
Net cash (used by) provided by
operating activities (542) 9,540
Investing activities:
Additions to software (7,733) (6,924)
Additions to property and equipment (3,651) (3,979)
Sale/leaseback of equipment --- 776
Changes in other assets 28 324
Net cash used in investing activities (11,356) (9,803)
Financing activities:
Proceeds (payments) from debt, net (51) 232
Payment of acquisition installment
liability --- (1,107)
Proceeds from sale of common stock 796 7,430
Purchase of common stock for
treasury (3,446) ---
Net cash (used by) provided by
financing activities (2,701) 6,555
Effect of exchange rate changes on
cash 148 (48)
Net (decrease) increase in cash and
cash equivalents (14,451) 6,244
Cash and cash equivalents, beginning
of period 28,215 26,661
Cash and cash equivalents, end
of period $13,764 $32,905
The accompanying notes are an integral part of these
condensed consolidated financial 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
and six month periods ended October 31, 1996 may not
necessarily be indicative of the results for the entire
year. The April 30, 1996 condensed consolidated balance
sheet data was derived from audited financial statements
as of the same date.
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, 1996.
Operations
The Company focuses on application enablement software
for client/server, Internet and intranet applications.
The Company's products and services support both the
development of client/server systems and the maintenance
of traditional systems.
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 January 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, generally three
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
realizable value from sales of the related product, then
the excess amount is written off.
Item 2.
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 Six Months Ended
October 31, October 31,
1996 1995 1996 1995
Revenues:
License fees 56.7% 60.4% 56.9% 59.5%
Service fees 43.3% 39.6% 43.1% 40.5%
100.0% 100.0% 100.0% 100.0%
Costs and expenses:
Cost of products 9.7% 11.9% 11.2% 11.9%
Cost of services 20.5% 18.1% 21.1% 18.1%
Sales and marketing 46.9% 46.5% 47.3% 46.5%
Research and development 9.5% 10.5% 9.5% 11.2%
General and administrative 7.9% 9.4% 8.1% 9.8%
Acquisition charges --- 34.4% --- 20.5%
Total costs & expenses 94.5% 130.8% 97.2% 118.0%
Operating income (loss) 5.5% (30.8%) 2.8% (18.0%)
Other income, net --- 0.8% 0.2% 0.7%
Income (loss) before taxes 5.5% (30.0%) 3.0% (17.3%)
Provision (benefit) for
income taxes 1.7% (0.6%) 1.0% ---
Net income (loss) 3.8% (29.4%) 2.0% (17.3%)
Revenues from North America and International were 67%
and 33%, respectively, for the three months ended October
31, 1996 as compared to 66% and 34%, respectively for the
same period last year. For the six months ended October
31, 1996, revenues from North America and International
were 67% and 33% compared to 68% and 32% for the same
period last year.
Revenues
Revenues for the three months ended October 31, 1996 were
$37.7 million, which is 12% growth over the $33.7 million
for the same period last year. Revenues for the six
months ended October 31, 1996 were $70.4 million, which
is 6% growth over the $66.4 million for the same period
last year. For the three months ended October 31, 1996,
revenue growth in PVCS (Software Configuration
Management) and DataDirect (Data Connectivity) product
lines was 21% and 27%, respectively, which was offset by
a 1% decline in revenue from the AppMaster (Enterprise
Client/Server) product line. For the six months ending
October 31, 1996, PVCS and DataDirect revenues grew 22%
and 23%, respectively, while revenues from the AppMaster
product line decreased 15%.
Growth in the PVCS and DataDirect product lines was due
to increases in new license sales and increased demand
for services, particularly consulting services. The
decline in the AppMaster product line was due largely to
a decline in new license sales, reflecting a continuing
trend experienced by the Company as more companies shift
away from traditional COBOL oriented development to
client/server development. The decline in AppMaster for
this last quarter slowed as demand for the Company's Year
2000 solution begins to build.
On a geographical basis, the Company had revenue growth
in North America and Asia/Pacific (principally Japan),
for the three months ended October 31, 1996, while Europe
was essentially flat. The results for the six months
ended October 31, 1996, showed growth in North America
and Europe, while Asia/Pacific had a slight decline.
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
October 31, 1996 decreased 9% from $4 million for the
same period last year to $3.7 million. Cost of products
for the six months ended October 31, 1996 was flat at
$7.9 million, when compared to the same period last year.
The decrease in the three months ended October 31, 1996
is primarily due to lower levels of software
amortization. This is expected to increase once the
Allegris product line is released for general
availability later in the fiscal year.
Cost of Services
Cost of services includes personnel and related indirect
costs incurred to provide consulting and training
services, as well as telephone support to customers under
maintenance contracts. Cost of services increased 26%
from $6.1 million for the three months ended October 31,
1995 to $7.7 million for the three months ended October
31, 1996. Cost of services increased 23% from $12
million for the six months ended October 31, 1995 to
$14.8 million for the six months ended October 31, 1996.
The Company has experienced strong growth in the demand
for consulting and implementation support services, which
is reflected in the 22% and 13% growth in service revenue
for the three and six month periods ended October 31,
1996, respectively. The growth in consulting revenues
has led to an increase in personnel, thus increasing the
cost of services.
Sales and Marketing
Sales and marketing expenses for the three months ended
October 31, 1996 increased 13% from $15.7 million for the
same period last year to $17.7 million. Sales and
marketing expenses increased 8% from $30.9 million for
the six months ended October 31, 1996 to $33.3 million.
The Company increased its investments in field sales,
telesales and third party selling channels, as well as
expanding its marketing capabilities during the three and
six months ended October 31, 1996. This increase in
costs was partially offset by the decrease in sales and
marketing costs resulting from the elimination of
TechGnosis' redundant sales functions after the Company
acquired TechGnosis International, Inc. ("TechGnosis") in
October 1995, in a transaction accounted for using the
"pooling-of-interests" method.
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 $3.6 million in
the second quarter ended October 31, 1996, which is 2%
higher than last year's level of $3.5 million. R&D
expenses for the six months ended October 31, 1996 were
$6.7 million, which is 10% lower than the $7.4 million
for the same period last year. The decrease in R&D
expenses for the six month period ended October 31, 1996
is the result of higher capitalization of software costs
related to the Company's new object-oriented technology,
or Allegris. The Allegris product line is currently
being used by several hundred "beta" customers and is
expected to be released for general availability in the
next several months.
General and Administrative
General and administrative expenses were $3 million in
the second quarter of fiscal 1997, which is a 6% decrease
as compared to $3.2 million in the same period last year.
General and administrative expenses for the six months
ended October 31, 1996 were $5.7 million which is 13%
lower than the $6.5 million for the same period last
year. The decrease is due largely to the elimination of
TechGnosis's redundant administrative functions after the
Company acquired TechGnosis.
Operating Income
The Company reported an operating income of $2 million
for the three months ended October 31, 1996, as compared
to operating income excluding acquisition charges of $1.2
million for the three months ended October 31, 1995.
Operating income for the six months ended October 31,
1996 was $2 million, as compared to $1.6 million for the
same period last year, after excluding acquisition
charges.
Other Income, net
Other income, which is primarily net investment income,
decreased when compared to the same periods last year as
cash available to invest decreased .
Income Taxes
The Company's tax rate for the six months ended October
31, 1996 was 32% based upon the Company's estimate of
what the annual effective tax rate will be assuming the
use of existing tax credits and net operating loss
carryforwards.
Financial Condition - Liquidity and Capital Resources
During the six months ended October 31, 1996, operations
used $.5 million of cash, after paying $2.4 million in
acquisition related restructuring charges. Financing
activities used a net $2.7 million, as the Company spent
$3.4 million to repurchase its common stock. These
outflows were offset by $0.8 million derived from the
sale of stock through stock option exercises and employee
stock purchase programs. Investing activities used $11.4
million as the Company invested $7.7 million in software
and a net $3.7 million in fixed assets. Overall cash and
cash equivalents were $13.8 million at October 31, 1996,
which is down $14.4 million from $28.2 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 $15 million. As of
October 31, 1996, 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
The Annual Meeting of Stockholders was held at the
Company's offices at 9420 Key West Avenue, Rockville, MD
20850 on September 25, 1996.
The stockholders voted to approve the following matters
as set forth in the proxy statement.
Number of Votes Cast
Description of Matter For Against Abstain
1. The following Class A
Directors were elected:
Kevin J. Burns 15,430,809 1,141,011 ---
Richard A. Carpenter 16,140,032 431,788 ---
Frank A. Sola 16,136,120 435,700 ---
2. The addition of 300,000
shares of common stock
to the Company's 1992
Employee Stock Purchase
plan was approved 14,287,185 2,142,738 141,897
3. The selection of
Coopers & Lybrand
L.L.P. as the Company's
independent auditors
for fiscal 1997 was
ratified. 16,319,613 242,568 9,639
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 October 31, 1996 and 1995.
11.2 Computation of Net Income Per Share
for the six months ended
October 31, 1996 and 1995
27 Financial Data Schedule (as
part of electronic filing)
(b) Reports on Form 8-K
There were no reports on Form 8-K filed during
the three months ended October 31, 1996.
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: December 12, 1996 By: /s/ Kenneth A. Sexton
Kenneth A. Sexton
Senior Vice President,
Finance & Administration
and Chief Financial
Officer
(Principal Financial
and Accounting
Officer)
EXHIBIT INDEX
Exhibit
Number Description
11.1 Computation of Net Income Per Share
for the three months ended October 31,
1996 and 1995.
11.2 Computation of Net Income Per Share
for the six months ended
October 31, 1996 and 1995
27 Financial Data Schedule (as part of
electronic filing)
EXHIBIT 11.1
INTERSOLV, INC
COMPUTATION OF NET INCOME PER SHARE
Three months ended October 31,
(in thousands, except net income per share)
1996 1995
PRIMARY
Weighted average number of
shares outstanding 19,804 19,303
Additional shares under stock
option plan assumed outstanding
less shares assumed repurchased
under the treasury stock method 212 ---
Primary Shares 20,016 19,303
Net Income (loss) $1,396 $(9,906)
Net Income (loss) Per Share $0.07 $(0.51)
FULLY DILUTED
Weighted average number of shares
outstanding 19,804 19,303
Additional shares under stock
option plan assumed outstanding
less shares assumed repurchased
under the treasury stock method 212 ---
Additional shares under the
subordinated convertible notes
assumed outstanding 708 ---
Fully Diluted Shares 20,724 19,303
Net Income (loss) before adjustments $1,396 $(9,906)
Elimination of interest expense,
net of related tax effect,
related to 8.4% subordinated
convertible notes 35 ---
Net income (loss) used for fully
diluted net income per share $1,431 $(9,906)
Net Income (loss) per share $0.07 $(0.51)
EXHIBIT 11.2
INTERSOLV, INC
COMPUTATION OF NET INCOME PER SHARE
Six months ended October 31
(in thousands, except net income per share)
1996 1995
PRIMARY
Weighted average number
of shares outstanding 19,829 19,105
Additional shares under stock
option plan assumed outstanding
less shares assumed repurchased
under the treasury stock method 249 ---
Primary Shares 20,078 19,105
Net Income (Loss) $1,432 $(11,475)
Net Income (Loss) Per Share $0.07 $(0.60)
FULLY DILUTED
Weighted average number of
shares outstanding 19,829 19,105
Additional shares under stock
option plan assumed outstanding
less shares assumed repurchased
under the treasury stock method 249 ---
Additional shares under the
subordinated convertible
notes assumed outstanding 777 ---
Fully Diluted Shares 20,855 19,105
Net Income (Loss) before
adjustments $1,432 $(11,475)
Elimination of interest expense,
net of related tax effect,
related to 8.4% subordinated
convertible notes 83 ---
Net Income (Loss) used for
fully diluted net income
(loss) per share $1,515 $(11,475)
Net Income (Loss) Per Share $0.07 ($0.60)
17
30
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