18
_________________________________________________________
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, 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 August 31, 1997, there were 20,978,868 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, 1997 and 1996 4
Condensed Consolidated Balance Sheets as of
July 31, 1997 and April 30, 1997 5
Condensed Consolidated Statements of Cash
Flows for the three Months ended July 31, 1997
and 1996 6
Notes to Condensed Consolidated Financial
Statements 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of
Operations 8
PART II. OTHER INFORMATION
Item 4. Results of Votes of Securities Holders 11
Item 5. Other 11
Item 6. Exhibits and Reports on Form 8-K 11
Signatures 12
Page 2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
The financial statements set forth below for the three
month periods ended July 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 month period ended July 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 (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, 1997).
Page 3
INTERSOLV, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
For the three months ended July 31,
(amounts in thousands, except per share data)
(unaudited)
1997 1996
Revenues:
License fees $18,273 $18,640
Service fees 23,057 14,107
Total revenues 41,330 32,747
Costs and expenses:
Cost of products 1,297 4,256
Cost of services 12,461 7,131
Sales and marketing 17,112 15,603
Research and development 6,631 3,124
General and administrative 2,794 2,716
Total costs and expenses 40,295 32,830
Operating income (loss) 1,035 (83)
Other income (expense), net (105) 136
Income before income taxes 930 53
Provision for income taxes 325 17
Net income $605 $ 36
Shares used in computing primary net
income per share 21,020 20,122
Primary net income per share $0.03 $0.00
Shares used in computing fully diluted
net income per share 21,206 20,970
Fully diluted net income per share $ 0.03 $0.00
The accompanying notes are an integral part of these
condensed consolidated financial statements.
Page 4
INTERSOLV, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(amounts in thousands)
(unaudited)
(Unaudited)
As of As of
July 31, April 30,
1997 1997
ASSETS
Current assets:
Cash and cash equivalents $14,556 $20,180
Accounts receivable, net 48,495 50,338
Prepaid expenses and other current assets 7,134 6,156
Total current assets 70,185 76,674
Software, net 3,864 4,278
Property and equipment, net 11,645 11,566
Notes receivable and other assets 6,315 3,499
Total assets $92,009 $96,017
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $33,396 $38,156
Deferred revenue 17,859 20,471
Total current liabilities 51,255 58,627
Long-term liabilities 6,767 6,554
Total liabilities 58,022 65,181
Subordinated convertible notes 87 87
Stockholders' equity
Common stock 209 208
Paid-in capital 99,574 99,179
Treasury stock (148) (1,523)
Accumulated deficit (61,879) (62,484)
Cumulative currency translation
adjustment (3,856) (4,631)
Total stockholders' equity 33,900 30,749
Total liabilities and stockholders' equity $92,009 $96,017
The accompanying notes are an integral part of these condensed
consolidated financial statements.
Page 5
INTERSOLV, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the three months ended July 31,
(amounts in thousands)
(unaudited)
1997 1996
CASH INFLOWS (OUTFLOWS)
Operating activities:
Net income $605 $36
Non-cash items:
Depreciation and amortization 1,603 4,734
Deferred income taxes 267 (146)
Change in working capital (12,459) (4,654)
Net cash used by operating activities (9,984) (30)
Investing activities:
Additions to software (105) (4,158)
Additions to property and equipment (1,129) (2,088)
Changes in other assets 171 (57)
Net cash used in investing activities (1,063) (6,303)
Financing activities:
Proceeds (payments) from debt, net 3,743 (349)
Proceeds from sale of common stock 1,771 782
Purchase of common stock for treasury --- (2,805)
Net cash provided by (used in) financing
activities 5,514 (2,372)
Effect of exchange rate changes on cash (91) 175
Net decrease in cash and cash equivalents (5,624) (8,530)
Cash and cash equivalents, beginning of period 20,180 28,215
Cash and cash equivalents, end of period $14,556 $19,685
The accompanying notes are an integral part of these condensed
consolidated financial statements.
Page 6
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, 1997 may not
necessarily be 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.
Net Income(Loss) Per Share
During 1997, the Financial Accounting Standards
Board issued Statement of Financial Accounting
Standards No. 128 - "Earnings per Share" ("FAS 128").
FAS 128 is effective for periods ending after December
15, 1997. The Company will implement this in fiscal
1998, starting with the quarter ended January 31, 1998.
The impact is not expected to be material.
Item 2.
Page 7
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,
1997 1996
Revenues:
License fees 44.2% 56.9%
Service fees 55.8% 43.1%
100.0% 100.0%
Costs and expenses:
Cost of products 3.1% 13.0%
Cost of services 30.2% 21.8%
Sales and marketing 41.4% 47.6%
Research and development 16.0% 9.5%
General and administrative 6.8% 8.3%
Total costs and expenses 97.5% 100.2%
Operating income (loss) 2.5% (0.2%)
Other income (expense), net (0.2%) 0.4%
Income before taxes 2.3% 0.2%
Provision for income taxes 0.8% 0.1%
Net income 1.5% 0.1%
Revenues from North America and International were 73%
and 27%, respectively, for the three months ended July
31, 1997 as compared to 67% and 33%, respectively for the
same period last year.
Page 8
Revenues
The Company's product and service offerings are focused
in three primary solution areas: Automated Software
Quality (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 July 31, 1997 increased 26% to $41.3 million,
compared to $32.7 million for the same period last year.
Revenues from the three core solution areas totaled $36.4
million, which is a 43% increase from the same period
last year.
PVCS revenues grew 30%,while DataDirect revenues grew 5%
for the three months ended July 31, 1997. Revenue from
Year 2000 renewal services, which was negligible for the
first quarter last year, grew to $5.7 million. Revenues
for the other non-strategic products, which accounted for
12% of total revenues for the quarter ended July 31,
1997, declined 35%. Growth in the PVCS 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 in the most recent period.
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 caused total international
revenues to decrease approximately $0.7 million between
periods, with a significant portion of this decrease
attributable to Japan.
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 months ended
July 31, 1997 decreased 69% from $4.3 million for the
same period last year to $1.3 million. 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 this quarter ended
July 31, 1997, when compared to the same period last
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 75%
from $7.1 million for the three months ended July 31,
1996 to $12.5 million for the three months ended July 31,
1997. 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 growth in personnel needed to perform the
services.
Sales and Marketing
Sales and marketing expenses for the three months ended
July 31, 1997 increased 10% from $15.6 million for the
same period last year to $17.1 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 months ended July
31, 1997.
Research and Development
Research and development ("R & D") expenses includes
personnel and related overhead costs incurred to develop
the Company's products, less amounts capitalized in
accordance with FASB 86. Amortization of capitalized
software is included in cost of products. R & D expenses
were $6.6 million in the first quarter ended July 31,
1997, which is more than double last year's level of $3.1
million. The increase in R&D expenses is the result of
lower capitalization of software costs, as fewer products
met the Company's capitalization policy in the quarter
ended July 31, 1997.
Page 9
General and Administrative
General and administrative expenses were $2.8 million in
the first quarter of fiscal 1998, which is a 3% increase
as compared to $2.7 million in the same period last year.
Operating Income
The Company reported operating income of $1 million for
the three months ended July 31, 1997, as compared to an
operating loss of $83 thousand for the three months ended
July 31, 1996.
Other Income, net
Other income, which is primarily net investment income,
decreased when compared to the same period last year as
cash available to invest decreased .
Income Taxes
The Company's tax rate for the three months ended July
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 three months ended July 31, 1997, operations
used $10 million of cash, primarily to paydown various
current liabilities, which normally increase at the end
of a fiscal year due to the Company's commission and
bonus plans. Financing activities provided a net $5.5
million, with $1.8 million derived from the sale of stock
through stock option exercises and employee stock
purchase programs and $3.7 million of net borrowings from
existing credit facilities. Investing activities used
$1.1 million as the Company invested a net $1.1 million
in fixed assets. Overall cash and cash equivalents were
$14.6 million at July 31, 1997, which is down $5.6
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
July 31, 1997, $9.5 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.
Page 10
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, 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 July 31, 1997.
Page 11
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 9, 1997 By: /s/ Kenneth A. Sexton
Kenneth A. Sexton
Senior Vice President,
Finance & Administration and
Chief Financial Officer
(Principal Financial and Accounting
Officer)
Page 12
EXHIBIT INDEX
Exhibit
Number Description
11.1 Computation of Net Income per share for the three months
ended July 31, 1997 and 1996.
27 Financial Data Schedule (as part of electronic filing)
Page 13
EXHIBIT 11.1
INTERSOLV, INC
COMPUTATION OF NET INCOME PER SHARE
Three months ended July 31,
(in thousands, except net income per share)
1997 1996
PRIMARY
Weighted average number of shares outstanding 20,705 19,852
Additional shares under stock option plan assumed
outstanding less shares assumed repurchased under
the treasury stock method 315 270
Primary Shares 21,020 20,122
Net Income $ 605 $ 36
Net Income Per Share $0.03 $ 0.00
FULLY DILUTED
Weighted average number of shares outstanding 20,705 19,852
Additional shares under stock option plan assumed
outstanding less shares assumed repurchased under
the treasury stock method 478 271
Additional shares under the subordinated
convertible notes assumed outstanding 23 847
Fully Diluted Shares 21,206 20,970
Net Income before adjustments $605 $36
Elimination of interest expense, net of related
tax effect, related to 8.4% subordinated
convertible notes 5 48
Net income used for fully diluted net income per
share $610 $ 84
Net Income per share $0.03 $ 0.00
Page 14
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