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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, 1998
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)
<TABLE>
<S> <C>
DELAWARE 52-0990382
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
</TABLE>
9420 KEY WEST AVE.
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, 1998, there were 22,852,529 shares outstanding of the
Registrant's Common Stock, par value $.01 per share.
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INTERSOLV, INC.
INDEX
<TABLE>
<CAPTION>
PAGE
NUMBER
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<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements............................... 3
Condensed Consolidated Statements of Income and
Comprehensive Income for the three months ended July
31, 1998 and 1997 (unaudited).......................... 4
Condensed Consolidated Balance Sheets as of July 31, 1998
(unaudited) and April 30, 1998......................... 5
Condensed Consolidated Statements of Cash Flows for the
three Months ended July 31, 1998 and 1997
(unaudited)............................................ 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.............................................. 12
Item 6. Exhibits and Reports on Form 8-K................... 12
SIGNATURES.................................................. 13
</TABLE>
2
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
The financial statements set forth below for the three month periods ended
July 31, 1998 and 1997 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, 1998 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, as
amended, for the fiscal year ended April 30, 1998).
3
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INTERSOLV, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
AND COMPREHENSIVE INCOME
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE THREE
MONTHS ENDED
JULY 31,
-----------------
1998 1997
------- -------
<S> <C> <C>
Revenues:
License fees........................................... $20,973 $18,273
Service fees........................................... 26,113 23,057
------- -------
Total revenues.................................... 47,086 41,330
------- -------
Costs and expenses:
Cost of products....................................... 1,461 1,297
Cost of services....................................... 14,869 12,461
Sales and marketing.................................... 17,839 17,112
Research and development............................... 6,500 6,631
General and administrative............................. 3,391 2,794
------- -------
Total costs and expenses.......................... 44,060 40,295
------- -------
Operating income............................................ 3,026 1,035
Other income (expense), net................................. 236 (105)
------- -------
Income before income taxes.................................. 3,262 930
Provision for income taxes.................................. 1,142 325
------- -------
Net income.................................................. 2,120 605
Other comprehensive income:
Foreign currency translation adjustments............... (448) 775
------- -------
Comprehensive income........................................ $ 1,672 $ 1,380
======= =======
Shares used in computing basic net income per share......... 22,722 20,705
------- -------
Basic net income per share.................................. $ 0.09 $ 0.03
======= =======
Shares used in computing diluted net income per share....... 24,014 21,065
======= =======
Diluted net income per share................................ $ 0.09 $ 0.03
======= =======
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
4
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INTERSOLV, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(AMOUNTS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
AS OF AS OF
JULY 31, APRIL 30,
1998 1998
-------- ---------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.............................. $ 33,576 $ 34,082
Accounts receivable, net............................... 58,555 62,962
Prepaid expenses and other current assets.............. 5,785 7,663
-------- --------
Total current assets.............................. 97,916 104,707
Software, net............................................... 3,646 4,184
Property and equipment, net................................. 11,362 11,988
Notes receivable and other assets........................... 13,499 11,987
-------- --------
Total assets...................................... $126,423 $132,866
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses.................. $ 33,065 $ 43,464
Deferred revenue....................................... 25,815 26,269
-------- --------
Total current liabilities......................... 58,880 69,733
Long-term liabilities....................................... 6,928 5,856
-------- --------
Total liabilities................................. 65,808 75,589
-------- --------
Subordinated convertible notes.............................. 38 38
-------- --------
Stockholders' equity
Common stock........................................... 228 226
Paid-in capital........................................ 122,010 120,346
Accumulated deficit.................................... (54,854) (56,969)
Accumulated other comprehensive income................. (6,807) (6,364)
-------- --------
Total stockholders' equity.................................. 60,577 57,239
-------- --------
Total liabilities and stockholders' equity........ $126,423 $132,866
======== ========
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
5
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INTERSOLV, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(AMOUNTS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE THREE
MONTHS ENDED
JULY 31,
------------------
1998 1997
------- --------
<S> <C> <C>
CASH INFLOWS (OUTFLOWS)
Operating activities:
Net income............................................. $ 2,120 $ 605
Non-cash items:
Depreciation and amortization..................... 2,025 1,603
Deferred income taxes............................. 1,068 267
Change in working capital.............................. (9,549) (12,459)
------- --------
Net cash used by operating activities....................... (4,336) (9,984)
------- --------
Investing activities:
Additions to software.................................. -- (105)
Additions to property and equipment.................... (567) (1,129)
Changes in other assets................................ -- 171
------- --------
Net cash used in investing activities....................... (567) (1,063)
------- --------
Financing activities:
Proceeds from debt, net................................ 2,891 3,743
Proceeds from sale of common stock..................... 1,666 1,771
------- --------
Net cash provided by financing activities................... 4,557 5,514
------- --------
Effect of exchange rate changes on cash..................... (160) (91)
------- --------
Net decrease in cash and cash equivalents................... (506) (5,624)
Cash and cash equivalents, beginning of period.............. 34,082 20,180
------- --------
Cash and cash equivalents, end of period.................... $33,576 $ 14,556
======= ========
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
6
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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, 1998 may not necessarily be indicative of the results for
the entire year. The April 30, 1998 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, as amended, for the year ended April 30, 1998.
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 enterprise application renewal.
NET INCOME PER SHARE
The Company has adopted Statement of Financial Accounting Standards (SFAS)
No. 128, "Earnings per Share". Basic earnings per common share have been
computed by dividing net income by the weighted-average number of common shares
outstanding during the period. Diluted earnings per common share have been
computed by dividing net income by the weighted-average number of common shares
outstanding plus an assumed increase in common shares outstanding for dilutive
securities. Earnings per share for all other periods presented herein have been
restated to conform to SFAS No. 128.
The following table reconciles the weighted average number of common shares
outstanding during each period for basic earnings per share with the comparable
amount for diluted earnings per share.
<TABLE>
<CAPTION>
QUARTER ENDED
JULY 31
---------------
1998 1997
------ ------
(AMOUNTS IN
THOUSANDS)
<S> <C> <C>
Weighted average shares outstanding -- basic................ 22,722 20,705
Stock Option equivalent shares.............................. 1,282 337
Subordinated Convertible Note equivalent shares............. 10 23
------ ------
Weighted average shares outstanding -- diluted.............. 24,014 21,065
====== ======
</TABLE>
ADOPTION OF ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standards Board has issued Statement of Financial
Accounting Standards No. 130, "Reporting Comprehensive Income" ("SFAS 130"),
which is effective for fiscal years beginning after December 15, 1997. SFAS 130
requires additional disclosures with respect to certain changes in assets and
liabilities that previously were not required to be reported as results of
operations for the period. Effective for the fiscal year ending April 30, 1999,
the Company has adopted SFAS 130.
7
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The American Institute of Certified Public Accountants has issued Statement
of Position ("SOP") 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. Effective for the fiscal year
ending April 30, 1999, the Company has adopted SOP 97-2.
RECENT ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standards Board has issued Statement of Financial
Accounting Standards No. 131, "Disclosures About Segment of an Enterprise and
Related Information" ("SFAS 131"), which is effective for the fiscal years
beginning after December 15, 1997. However, interim period adoption is not
required. SFAS 131 specifies revised guidelines for determining an entity's
operating segments and the type and level of financial information to be
disclosed.
The Company does not expect the adoption of this standard to have a
material impact on the Company's financial position or results of operations.
SUBSEQUENT EVENT
On June 17, 1998, the Company signed a definitive agreement to merge with
Micro Focus Group, Plc. Micro Focus is a UK company with principal offices in
Newbury, England, and Mountain View, California. Under the terms of the
agreement, each share of the Company's common stock will be exchanged for .55
shares of Micro Focus American Depositary Shares and each INTERSOLV option will
be exchanged for an equivalent Micro Focus option. Micro Focus shares are listed
both on the London Stock Exchange and on the Nasdaq National Market System. The
transaction has received regulatory approval in the US and the UK. Special
Meetings of Shareholders of both companies have been scheduled for September 23,
1998 to seek shareholder approval.
8
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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:
<TABLE>
<CAPTION>
PERCENTAGE OF
TOTAL REVENUE
---------------
THREE MONTHS
ENDED JULY 31,
---------------
1998 1997
------ ------
<S> <C> <C>
Revenues:
License fees........................................... 44.5% 44.2%
Service fees........................................... 55.5 55.8
----- -----
100.0 100.0
----- -----
Costs and expenses:
Cost of products....................................... 3.1 3.1
Cost of services....................................... 31.6 30.2
Sales and marketing.................................... 37.9 41.4
Research and development............................... 13.8 16.0
General and administrative............................. 7.2 6.8
----- -----
Total costs and expenses.......................... 93.6 97.5
----- -----
Operating income............................................ 6.4 2.5
Other income (expense), net................................. 0.5 (0.2)
----- -----
Income before taxes......................................... 6.9 2.3
Provision for income taxes.................................. 2.4 0.8
----- -----
Net income.................................................. 4.5% 1.5%
===== =====
</TABLE>
Revenues from North America and International were 71% and 29%,
respectively, for the three months ended July 31, 1998 as compared to 73% and
27%, respectively for the same period last year.
Revenues
The Company's product and service offerings are focused in three primary
solution areas: Automated Software Quality (or "ASQ"), which includes the PVCS
series, Data Connectivity, which includes the DataDirect series, and Enterprise
Application Renewal (or "EAR"), which includes Year 2000 and Euro currency
renewal services.
Total revenues for the three months ended July 31, 1998 increased 14% to
$47.1 million, compared to $41.3 million for the same period last year. Revenues
from the three primary solution areas totaled $45.0 million, which is a 23%
increase from the same period last year.
ASQ revenues grew 26%,while DataDirect revenues grew 24% for the three
months ended July 31, 1998. Revenue from EAR services grew 11% to $6.3 million.
Revenues for the other non-strategic products, which accounted for 5% of total
revenues for the quarter ended July 31, 1998, declined 19%. Growth in the ASQ
and DataDirect product lines was due to increases in new license sales and
increased demand for related services. Growth in the EAR area was due to
increased activity for such services in the most recent period.
On a geographical basis, the Company had revenue growth in both North
America and Europe of 12% and 34%, respectively, while Asia/Pacific experienced
a decline of 24%. Changes in foreign currency exchange rates between periods
caused total international revenues to decrease approximately $0.6 million
between periods.
9
<PAGE> 10
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, 1998 declined from 7.1% to 7.0% of license
fee revenue.
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 from 54.0% to
56.9% of service fee revenue for the three months ended July 31, 1997 and 1998,
respectively. Costs have increased to support the demand for EAR 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, 1998
increased 4% from $17.1 million for the same period last year to $17.8 million
on an absolute basis, but decreased from 41.4% to 37.9% as a percent of total
revenue. The Company continued to benefit from increased sales and marketing
focus on its three primary businesses.
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 $6.5 million in the first
quarter ended July 31, 1998, as compared to $6.6 million in the prior year.
Increased R&D in our key businesses was offset by reductions resulting from
exiting non-strategic areas, such as the Allegris product line.
General and Administrative
General and administrative expenses were $3.4 million in the first quarter
of fiscal 1999, which is a 21% increase as compared to $2.8 million in the same
period last year. The increase was primarily attributable to additional
amortization of intangible assets relating to the previously disclosed March,
1998, SQL acquisition.
Operating Income
The Company reported operating income of $3 million for the three months
ended July 31, 1998, as compared to an operating profit of $1 million for the
three months ended July 31, 1997.
Other Income, net
Other income, which is primarily net investment income, increased when
compared to the same period last year as cash available to invest increased.
Income Taxes
The Company's tax rate for the three months ended July 31, 1998 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, 1998, operations used $4.3 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 $4.6 million, with $1.7 million
derived from
10
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the sale of stock through stock option exercises and employee stock purchase
programs and $2.9 million of net borrowings from existing credit facilities.
Investing activities used $0.6 million as the Company invested in fixed assets.
No software capitalization occurred in the first quarter of fiscal 1999. Overall
cash and cash equivalents were $33.6 million at July 31, 1998, which is down
$0.5 million from $34.1 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, 1998, $6.0 million was
outstanding under this line of credit. Management believes that, independent of
the proposed merger with Micro Focus Group, Plc (see Subsequent Event), 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. Furthermore, any such forward looking
information and other statements made in this Form 10-Q are provided without
reference to the Company's proposed merger with Micro Focus Group, Plc (see
Subsequent Event).
11
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PART II. OTHER INFORMATION
ITEM 5. OTHER
On June 17, 1998, the Company signed a definitive agreement to merge with
Micro Focus Group, Plc. Micro Focus is a UK company with principal offices in
Newbury, England, and Mountain View, California. Under the terms of the
agreement, each share of the Company's common stock will be exchanged for .55
shares of Micro Focus American Depositary Shares and each INTERSOLV option will
be exchanged for an equivalent Micro Focus option. Micro Focus shares are listed
both on the London Stock Exchange and on the Nasdaq National Market System. The
transaction has received regulatory approval in the US and the UK. Special
Meetings of Shareholders of both companies have been scheduled for September 23,
1998 to seek shareholder approval.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) EXHIBITS
<TABLE>
<CAPTION>
NUMBER EXHIBIT DESCRIPTION
- ------ -------------------
<S> <C>
2 Agreement and Plan of Reorganization dated as of June 17,
1998, incorporated by reference to Appendix A to the
Company's definitive proxy statement dated August 24, 1998.
27 Financial Data Schedule (as part of electronic filing)
</TABLE>
(B) REPORTS ON FORM 8-K
There were no reports on Form 8-K filed during the three months ended July
31, 1998.
12
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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.
Date: September 10, 1998
INTERSOLV, INC.
By /s/ KENNETH A. SEXTON
------------------------------------
Kenneth A. Sexton
Senior Vice President, Finance &
Administration and Chief Financial
Officer
(Principal Financial and Accounting
Officer)
13
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EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<S> <C>
27 Financial Data Schedule (as part of electronic filing)
</TABLE>
14
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> APR-30-1998
<PERIOD-END> JUL-31-1998
<CASH> 33,576
<SECURITIES> 0
<RECEIVABLES> 60,697
<ALLOWANCES> (2,142)
<INVENTORY> 0
<CURRENT-ASSETS> 97,916
<PP&E> 28,462
<DEPRECIATION> (17,100)
<TOTAL-ASSETS> 126,423
<CURRENT-LIABILITIES> 58,880
<BONDS> 0
0
0
<COMMON> 228
<OTHER-SE> 60,349
<TOTAL-LIABILITY-AND-EQUITY> 126,423
<SALES> 47,086
<TOTAL-REVENUES> 47,086
<CGS> 16,330
<TOTAL-COSTS> 44,060
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 3,262
<INCOME-TAX> 1,142
<INCOME-CONTINUING> 2,120
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,120
<EPS-PRIMARY> 0.09
<EPS-DILUTED> 0.09
</TABLE>
