4
_________________________________________________
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, 1997
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 28, 1997, there were 21,215,933 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, 1997 and 1996 4
Condensed Consolidated Statements of Operations for
the six months ended October 31, 1997 and 1996 5
Condensed Consolidated Balance Sheets as of
October 31, 1997 and April 30, 1997 6
Condensed Consolidated Statements of Cash Flows for
the six months ended October 31, 1997 and 1996 7
Notes to Condensed Consolidated Financial Statements 8
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 13
Item 5. Other 13
Item 6. Exhibits and Reports on Form 8-K 13
Signatures 15
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
The financial statements set forth below for the three
and six month periods ended October 31, 1997 and 1996
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, 1997 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 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, 1997).
INTERSOLV, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
For the three months ended October 31,
(amounts in thousands, except per share data)
(unaudited)
1997 1996
Revenues:
License fees $22,999 $21,371
Service fees 24,768 16,294
Total revenues 47,767 37,665
Costs and expenses:
Cost of products 1,352 3,652
Cost of services 14,254 7,713
Sales and marketing 17,764 17,686
Research and development 5,703 3,593
General and administrative 3,217 2,971
Non-recurring expense 176 ---
Total costs and expenses 42,466 35,615
Operating income 5,301 2,050
Other income (expense), net (166) 3
Income before income taxes 5,135 2,053
Provision for income taxes 1,797 657
Net income $ 3,338 $ 1,396
Shares used in computing primary net
income per share 22,352 20,016
Primary net income per share $ 0.15 $ 0.07
Shares used in computing fully diluted net
income per share 22,376 20,724
Fully diluted net income per share $ 0.15 $ 0.07
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)
1997 1996
Revenues:
License fees $41,272 $40,011
Service fees 47,825 30,401
Total revenues 89,097 70,412
Costs and expenses:
Cost of products 2,649 7,908
Cost of services 26,715 14,844
Sales and marketing 34,876 33,289
Research and development 12,334 6,717
General and administrative 6,011 5,687
Non-recurring expense 176 ---
Total costs and expenses 82,761 68,445
Operating income 6,336 1,967
Other income (expense), net (271) 139
Income before income taxes 6,065 2,106
Provision for income taxes 2,122 674
Net income $3,943 $ 1,432
Shares used in computing primary net
income per share 21,383 20,078
Primary net income per share $ 0.18 $ 0.07
Shares used in computing fully diluted net
income per share 21,470 20,855
Fully diluted net income per share $ 0.18 $ 0.07
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 31,1997 April 30, 1997
ASSETS
Current assets:
Cash and cash equivalents $19,650 $20,180
Accounts receivable, net 50,319 50,338
Prepaid expenses and other current
assets 6,709 6,156
Total current assets 76,678 76,674
Software, net 3,484 4,278
Property and equipment, net 12,315 11,566
Notes receivable and other assets 9,965 3,499
Total assets $102,442 $96,017
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued
expenses $36,121 $38,156
Deferred revenue 18,479 20,471
Total current liabilities 54,600 58,627
Long-term liabilities 8,436 6,554
Total liabilities 63,036 65,181
Subordinated convertible notes 87 87
Stockholders' equity
Common stock 212 208
Paid-in capital 102,773 99,179
Treasury stock (148) (1,523)
Accumulated deficit (58,541) (62,484)
Cumulative currency translation
adjustment (4,977) (4,631)
Total stockholders' equity 39,319 30,749
Total liabilities and stockholders'
equity $102,442 $96,017
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)
1997 1996
CASH INFLOWS (OUTFLOWS)
Operating activities:
Net income $3,943 $1,432
Non-cash items:
Depreciation and amortization 3,330 8,449
Deferred income taxes 1,985 452
Installment sale of assets (1,532) ---
Change in working capital (16,267) (10,847)
Net cash used by operating activities (8,541) (514)
Investing activities:
Additions to software (262) (7,733)
Additions to property and equipment (2,955) (3,651)
Net cash used in investing activities (3,217) (11,384)
Financing activities:
Proceeds (payments) from debt, net 6,129 (51)
Proceeds from sale of common stock 4,973 796
Purchase of common stock for treasury --- (3,446)
Net cash provided by (used by) financing
activities 11,102 (2,701)
Effect of exchange rate changes on cash 126 148
Net decrease in cash and cash equivalents (530) (14,451)
Cash and cash equivalents, beginning of
period 20,180 28,215
Cash and cash equivalents, end of period $19,650 $13,764
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, 1997 are
not necessarily indicative of the results for the
entire year. The April 30, 1997 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,
1997.
Operations
The Company is engaged in the development, marketing
and support of computer software products and services
in three major solution areas: automated software
quality, data connectivity and Year 2000 renewal.
Recent Accounting Pronouncements
The Financial Accounting Standards Board (FASB) has
issued Statement of Financial Accounting Standards
(SFAS) No. 128, "Earnings per Share", which is required
to be adopted for financial statements issued after
December 15, 1997. In June 1997, the FASB issued SFAS
No. 130, "Reporting Comprehensive Income" and SFAS No.
131, "Disclosures About Segments of an Enterprise and
Related Information", Both SFAS No. 130 and SFAS No.
131 are required to be adopted for fiscal years
beginning after December 15, 1997. Upon the effective
date of each of the new statements, the Company will
make the necessary changes to comply with the
provisions of each statement and restate all prior
periods presented. The Company does not expect the
adoption of these statements to have a material impact
on the Company's financial condition or results of
operations.
The American Institute of Certified Public Accountants
has issued Statement of Position 97-2, "Software
Revenue Recognition". SOP 97-2 is effective for
transactions entered into in fiscal years beginning
after December 15, 1997 and provides guidance on
applying generally accepted accounting principles in
recognizing revenue on software transactions. The
Company does not expect the application of the SOP to
have a material impact on the Company's financial
condition or results of operations.
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,
1997 1996 1997 1996
Revenues:
License fees 48.1% 56.7% 46.3% 56.9%
Service fees 51.9% 43.3% 53.7% 43.1%
100.0% 100.0% 100.0% 100.0%
Costs and expenses:
Cost of products 2.8% 9.7% 3.0% 11.2%
Cost of services 29.9% 20.5% 30.0% 21.1%
Sales and marketing 37.2% 47.0% 39.2% 47.3%
Research and development 11.9% 9.5% 13.8% 9.5%
General and administrative 6.7% 7.9% 6.7% 8.1%
Non-recurring expense 0.4% --- 0.2% ---
Total costs and expenses 88.9% 94.6% 92.9% 97.2%
Operating income 11.1% 5.4% 7.1% 2.8%
Other income, net -0.3% --- -0.3% 0.2%
Income before taxes 10.8% 5.4% 6.8% 3.0%
Provision for income taxes 3.8% 1.7% 2.4% 1.0%
Net income 7.0% 3.7% 4.4% 2.0%
Revenues from North America and International were 72%
and 28%, respectively, for the three months ended October
31, 1997 as compared to 67% and 33%, respectively for the
same period last year. For the six months ended October
31, 1997, revenues from North America and International
were 73% and 27% compared to 67% and 33% for the same
period last year.
Revenues
The Company's product and service offerings are focused
in three key solution areas: Automated Software Quality
(or "ASQ", which includes the PVCS products for
Software Configuration Management and QualityWorks
products for Automated Software Testing), Data
Connectivity (which includes DataDirect products for
data middleware) and Year 2000 Renewal. Total revenues
for the three months ended October 31, 1997 increased
27% to $47.8 million, compared to $37.7 million for the
same period last year. Revenues from the three key
solution areas totaled $43.5 million, which is a 43%
increase from the same period last year. On a year to
date basis, total revenues grew 27% to $89.1 million while
key area revenues grew 43% to $88.3 million.
ASQ revenues grew 39% and 35% in the respective three and
six month periods due to the continued growth of the
PVCS line and to the introduction of the new
QualityWorks line. DataDirect revenues grew 2% and 3%,
in the second quarter and first half, respectively,
primarily due to increases in North America which were
partially offset by declines of sales in Japan. Revenue
from Year 2000 Renewal services, which was negligible in
the prior year, grew to $5.9 million and $11.7 million
for the three and six months ended October 31, 1997,
respectively. Other revenues, which consist of
non-strategic and discontinued businesses, comprised
9% of total revenue but declined 38% from the prior
year's quarter. Growth in the ASQ and DataDirect product
lines was due to increases in new license sales and
increased demand for services. Growth in the Year 2000
Renewal area was due to increased demand for such services.
On a geographical basis, the Company had revenue growth
in both North America and Europe, while Asia/Pacific
experienced a decline. Changes in foreign currency
exchange rates between periods resulted in a net decrease
in revenue of $0.8 million and $1.2 million in the three
and six month periods respectively.
Cost of Products
Cost of products includes cost of software media,
freight, royalties and amortization of capitalized
software development costs and purchased technology
costs, with amortization expense being the largest
component. Cost of products for the three and six months
ended October 31, 1997 decreased 63% and 67% to $1.4
million and $2.6 million, respectively. In the fourth
quarter of fiscal 1997, the Company wrote down
approximately $19.1 million of capitalized and purchased
software. As a result, the level of software
amortization dropped significantly in the three and six
month periods ended October 31, 1997, when compared to
the prior 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 to 85%
and 80% for the three and six months ended October 31,
1997 to $14.3 million and $26.7 million, respectively.
Costs have increased to support the demand for Year 2000
renewal services as well as consulting services for the
other products. The cost increases relate primarily to
personnel growth needed to perform the services.
Sales and Marketing
Sales and marketing expenses for the three months ended
October 31, 1997 were unchanged at a level of $17.8
million. These expenses grew 5% to $26.7 million for the
year to date period. The Company was able to increase
its investments in field sales, telesales and third party
selling channels, as well as expanding its marketing
capabilities during the six months ended October 31, 1997.
Much of this increase was offset by reductions of sales
and marketing expenses formerly expended on discontinued
products.
Research and Development
Research and development ("R&D") expenses include
personnel and related overhead costs incurred to develop
the Company's products, less amounts capitalized in
accordance with FAS 86. Amortization of capitalized
software is included in cost of products. R&D expenses
were $5.7 million in the second quarter ended October 31,
1997, which is 59% more than last year's level of $3.6
million. R&D expenses grew 84% to $12.3 million for the
six month period. The increase in R&D expenses is the
result of lower capitalization of software costs, as
fewer products met the Company's capitalization policy.
General and Administrative
General and administrative expenses were $3.2 million and
$6.0 million in the second quarter and first half of
fiscal 1998, respectively. G&A expenses grew 8% and 6%
in the three and six month periods, respectively, when
compared to the prior year period.
Non-recurring Charges
During the quarter ended October 31, 1997, the company
incurred a $176,000 charge related to discontinued
products. This non-recurring item included a $1.5
million charge to close the Allegris component-based
product development area. This loss was offset somewhat
by the gain realized on the sale of other discontinued
products.
Operating Income
The Company reported operating income of $5.3 million and
$6.3 million for the three and six months ended October
31, 1997, as compared to an operating profit of $2.1
million and $2.0 million for the respective prior year
periods.
Other Income (Expense), net
Other income (expense), which is primarily investment
income net of interest expense, decreased when compared
to the same period last year as the Company utilized its
working capital facility.
Income Taxes
The Company's tax rate for the three and six months ended
October 31, 1997 was 35%, based upon the Company's
assessment of the realizability of existing deferred tax
assets, which include tax credits and net operating loss
carryforwards.
Financial Condition - Liquidity and Capital Resources
During the six months ended October 31, 1997, operations
used $6.6 million of cash, due primarily to an increase
in accounts receivable. Financing activities provided a
net $11.1 million, with $5.0 million derived from the
sale of stock through stock option exercises and employee
stock purchase programs and $6.1 million of net
borrowings from existing credit facilities. Investing
activities used $5.2 million as the Company invested a
net $3.2 million in fixed assets; the Company also
accepted a long term receivable in connection with the
sale of a non-strategic business in the amount of $2.0
million. Overall cash and cash equivalents were $19.7
million at October 31, 1997, which is down $0.5 million
from $20.2 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, 1997, $12.0 million was 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.
Forward Looking Information
This quarterly report on Form 10-Q may contain forward-
looking information within the meaning of Section 27A of
the Securities Act of 1933 and Section 21E of the
Securities and Exchange Act of 1934, and is subject to
the safe harbor created by those sections. The Company
assumes no obligation to update the information contained
in this Form 10-Q.
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 24, 1997.
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 B Directors
were elected:
Michel Berty 17,986,228 388,199 ---
Russell E. Planitzer 17,854,170 520,257 ---
R. Craig Roos 17,981,228 393,199 ---
2. The following Class C Director
was elected:
C. Thomas Faulders, III 17,933,402 441,025 ---
3. The addition of 1,000,000 shares
of common stock subject to the
Company's 1992 Stock Option Plan
was approved 15,695,120 2,641,203 38,104
4. The adoption of amendments to the
Company's 1992 Stock Option Plan
regarding the granting of options
to non-employee directors was
approved 17,809,199 525,995 39,233
5. An increase in the common stock
subject to the Company's 1992
Employee Stock Purchase Plan from
640,000 to 1,200,000 shares was
approved 16,786,435 1,554,182 33,810
6. The selection of Coopers & Lybrand
L.L.P. as the Company's independent
auditors for fiscal 1998 was
ratified 18,312,341 41,480 20,606
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, 1997
and 1996.
11.2 Computation of Net Income Per Share for
the six months ended October 31, 1997
and 1996
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, 1997.
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 15, 1997 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, 1997 and 1996.
11.2 Computation of Net Income Per Share for the six
months ended October 31, 1997 and 1996
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)
1997 1996
PRIMARY
Weighted average number of shares outstanding 21,067 19,804
Additional shares under stock option plan assumed
outstanding less shares assumed repurchased under
the treasury stock method 1,285 212
Primary Shares 22,352 20,016
Net Income $3,338 $1,396
Net Income Per Share
$ 0.15 $0.07
FULLY DILUTED
Weighted average number of shares outstanding 21,067 19,804
Additional shares under stock option plan assumed
outstanding less shares assumed repurchased under
the treasury stock method 1,286 212
Additional shares under the subordinated
convertible notes assumed outstanding 23 708
Fully Diluted Shares 22,376 20,724
Net Income before adjustments $3,338 $1,396
Elimination of interest expense, net of
related tax effect, related to 8.4%
subordinated convertible notes 1 35
Net income used for fully diluted net income
per share $3,339 $1,431
Net Income per share $ 0.15 $ 0.07
EXHIBIT 11.2
INTERSOLV, INC
COMPUTATION OF NET INCOME PER SHARE
Six months ended October 31,
(in thousands, except net income per share)
1997 1996
PRIMARY
Weighted average number of shares outstanding 20,886 19,829
Additional shares under stock option plan
assumed outstanding less shares assumed
repurchased under the treasury stock method 497 249
Primary Shares 21,383 20,078
Net Income $3,943 $1,432
Net Income Per Share $ 0.18 $ 0.07
FULLY DILUTED
Weighted average number of shares outstanding 20,886 19,829
Additional shares under stock option plan
assumed outstanding less shares assumed
repurchased under the treasury stock method 561 249
Additional shares under the subordinated
convertible notes assumed outstanding 23 777
Fully Diluted Shares 21,470 20,855
Net Income before adjustments $3,943 $1,432
Elimination of interest expense, net of related
tax effect, related to 8.4% subordinated convertible
notes 2 83
Net Income used for fully diluted net income
per share $3,945 $1,515
Net Income Per Share $ 0.18 $ 0.07
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