23
_________________________________________________________
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 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 January 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)
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 March 13, 1998, there were 22,590,454 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 January 31, 1998
and 1997 4
Condensed Consolidated Statements of Operations
for the nine months ended January 31, 1998
and 1997 5
Condensed Consolidated Balance Sheets as of
January 31, 1998 and April 30, 1997 6
Condensed Consolidated Statements of Cash Flows
for the nine months ended January 31, 1998
and 1997 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 5. Other 14
Item 6. Exhibits and Reports on Form 8-K 14
Signatures 15
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
The financial statements set forth below for the three
and nine month periods ended January 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 and nine month periods ended
January 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 recommended 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 January 31,
(amounts in thousands, except per share data)
(unaudited)
1998 1997
Revenues:
License fees $21,764 $24,998
Service fees 27,250 17,085
Total revenues 49,014 42,083
Costs and expenses:
Cost of products 1,242 3,411
Cost of services 14,361 8,795
Sales and marketing 16,661 17,556
Research and development 5,724 3,828
General and administrative 3,020 3,472
Total costs and expenses 41,008 37,062
Operating income 8,006 5,021
Other income (expense), net (96) (67)
Income before income taxes 7,910 4,954
Provision for income taxes 2,490 1,585
Net income $ 5,420 $ 3,369
Shares used in computing basic net
income per share 21,271 20,272
Basic net income per share $ 0.25 $ 0.17
Shares used in computing diluted net
income per share 22,642 20,860
Diluted net income per share $ 0.24 $ 0.16
The accompanying notes are an integral part of these
condensed consolidated financial statements.
INTERSOLV, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
For the nine months ended January 31,
(amounts in thousands, except per share data)
(unaudited)
1998 1997
Revenues:
License fees $ 63,036 $ 65,009
Service fees 75,075 47,486
Total revenues 138,111 112,495
Costs and expenses:
Cost of products 3,891 11,319
Cost of services 41,076 23,639
Sales and marketing 51,537 50,845
Research and development 18,058 10,545
General and administrative 9,031 9,159
Non-recurring expense 176 ---
Total costs and expenses 123,769 105,507
Operating income 14,342 6,988
Other income (expense), net (367) 72
Income before income taxes 13,975 7,060
Provision for income taxes 4,612 2,259
Net income $ 9,363 $ 4,801
Shares used in computing basic net
income per share 21,014 19,977
Basic net income per share $ 0.45 $ 0.24
Shares used in computing diluted net
income per share 22,040 20,855
Diluted net income per share $ 0.42 $ 0.23
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
January 31, April 30,
1998 1997
ASSETS
Current assets:
Cash and cash equivalents $ 20,662 $20,180
Accounts receivable, net 54,743 50,338
Prepaid expenses and other current
assets 8,611 6,156
Total current assets 84,016 76,674
Software, net 3,164 4,278
Property and equipment, net 12,072 11,566
Notes receivable and other assets 10,950 3,499
Total assets $110,202 $96,017
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 33,618 $38,156
Deferred revenue 20,562 20,471
Total current liabilities 54,180 58,627
Long-term liabilities 10,563 6,554
Total liabilities 64,743 65,181
Subordinated convertible notes 72 87
Stockholders' equity
Common stock 213 208
Paid-in capital 103,886 99,179
Treasury stock --- (1,523)
Accumulated deficit (53,121) (62,484)
Cumulative currency translation
adjustment (5,591) (4,631)
Total stockholders' equity 45,387 30,749
Total liabilities and stockholders'
equity $110,202 $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 nine months ended January 31,
(amounts in thousands)
(unaudited)
1998 1997
CASH INFLOWS (OUTFLOWS)
Operating activities:
Net income $ 9,363 $ 4,801
Non-cash items:
Depreciation and amortization 4,950 12,244
Deferred income taxes 4,426 1,959
Installment sale of assets (1,784) ---
Payment of restructuring/acquisition charges --- (2,782)
Change in working capital (22,298) (19,212)
Net cash used by operating activities (5,343) (2,990)
Investing activities:
Additions to software (483) (10,754)
Additions to property and equipment (3,757) (6,039)
Net cash used in investing activities (4,240) (16,793)
Financing activities:
Proceeds from debt, net 4,027 6,325
Proceeds from sale of common stock 6,235 1,676
Purchase of common stock for treasury --- (3,445)
Net cash provided by financing activities 10,262 4,556
Effect of exchange rate changes on cash (197) (162)
Net increase (decrease) in cash and cash
equivalents 482 (15,389)
Cash and cash equivalents, beginning of period 20,180 28,215
Cash and cash equivalents, end of period $ 20,662 $ 12,826
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 nine month periods ended January 31, 1998 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, but does not include
all disclosures required by generally accepted
accounting principles.
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.
Earnings 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 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.
Quarter Ended Nine Months Ended
January 31 January 31
(amounts in thousands) 1998 1997 1998 1997
Weighted average shares
outstanding-basic 21,271 20,272 21,014 19,977
Stock Option equivalent shares 1,350 344 1,004 279
Subordinated Convertible Note
equivalent shares 21 244 22 599
Weighted average shares
outstanding-diluted 22,642 20,860 22,040 20,855
Recent Accounting Pronouncements
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.
Subsequent Event
On March 2, 1998, the Company acquired SQL Software,
Ltd., a U.K. company engaged in the software life cycle
management business, for 1,251,450 shares of the
Company's common stock. The transaction, valued at
approximately $19 million, was accounted for using the
purchase method. A substantial portion of the acquisition
cost will be allocated to purchased research and development
and expensed in the quarter ending April 30, 1998. In
the April quarter, the Company expects to incur one-time
charges of $18 million to $22 million related to the
acquisition, including the non-cash provision for
purchased research and development.
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 Nine Months Ended
January 31, January 31,
1998 1997 1998 1997
Revenues:
License fees 44.4% 59.4% 45.6% 57.8%
Service fees 55.6% 40.6% 54.4% 42.2%
100.0% 100.0% 100.0% 100.0%
Costs and expenses:
Cost of products 2.5% 8.1% 2.8% 10.1%
Cost of services 29.3% 20.9% 29.8% 21.0%
Sales and marketing 34.0% 41.7% 37.3% 45.2%
Research and development 11.7% 9.1% 13.1% 9.4%
General and administrative 6.2% 8.3% 6.5% 8.1%
Non-recurring expense ---% ---% 0.1% ---%
Total costs and expenses 83.7% 88.1% 89.6% 93.8%
Operating income 16.3% 11.9% 10.4% 6.2%
Other income (expense), net (0.2)% (0.1)% (0.3)% 0.1%
Income before taxes 16.1% 11.8% 10.1% 6.3%
Provision for income taxes 5.1% 3.8% 3.3% 2.0%
Net income 11.0% 8.0% 6.8% 4.3%
Revenues from North America and International were 77%
and 23%, respectively, for the three months ended January
31, 1998 as compared to 69% and 31%, respectively, for
the same period last year. For the nine months ended
January 31, 1998, revenues from North America and
International were 74% and 26%, respectively, compared to
68% and 32%, respectively, for the same period last year.
Revenues
The Company's product and service offerings are focused
in three key information technology solution areas:
Automated Software Quality (which includes the PVCS
products for Software Configuration Management and
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 January 31, 1998 increased 16% to
$49.0 million, compared to $42.1 million for the same
period last year. Revenues from the three key solution
areas totaled $44.8 million, which is a 27% increase from
the same period last year. Revenues for non-key
businesses declined 38% to $4.2 million for the three
month period; the decline was primarily attributable to
the disposal of certain product lines. On a
nine month year to date basis, total revenues grew 23% to
$138.1 million while key area revenues grew 37% to $124.7
million. Non-key revenues declined 38% to $13.3 million
on a year to date basis for the reasons cited above.
ASQ revenues grew 25% and 33% in the respective three and
nine month periods due primarily to the continued growth
of the PVCS line and secondarily because of the
introduction of testing products. DataDirect revenues
fell 18% and 5%, in the third quarter and nine months,
respectively, primarily due to declines of sales in
Japan. Revenue from Year 2000 renewal services, which
was negligible in the prior year, grew to $7.1 million.
Other revenues, which consist of non-strategic and
discontinued product lines, comprised 9% of total revenue
but declined 38% from the prior year's quarter. Growth
in the ASQ product line 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.
During the quarter, on a geographical basis, the Company
had revenue growth of 30% and 19% in North America and
Europe, respectively, while Asia/Pacific experienced a
decline of $1.1 million or 65% from the prior year.
Changes in foreign currency exchange rates between
periods resulted in a net decrease in revenue of $0.9
million and $2.1 million in the three and nine 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 as the largest
component. Cost of products for the three and nine
months ended January 31, 1998 decreased 64% and 66% to
$1.2 million and $3.9 million, respectively. In the
fourth quarter of fiscal 1997, the Company expensed
approximately $19.1 million of capitalized and purchased
software. As a result, the level of software
amortization dropped significantly in the three and nine
month periods ended January 31, 1998, 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 by 63%
and 74% for the three and nine months ended January 31,
1998 to $14.4 million and $41.1 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
January 31, 1998 decreased by 5% to $16.7 million. The
Company was able to reallocate sales and marketing
expenses formerly expended on discontinued product lines
and thereby increase its investments in field sales,
telesales and third party selling channels in continuing
product lines. These expenses grew 1% to $51.5 million
for the year to date period.
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 third quarter ended January 31,
1998, which is 50% more than last year's level of $3.8
million. R&D expenses grew 71% to $18.0 million for the
nine 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 $3.0 million and
$9.0 million in the third quarter and first nine months
of fiscal 1998, respectively. G&A expenses decreased 13%
and 1% in the three and nine month periods, respectively,
when compared to the prior year period.
Non-recurring Charges
In 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 gains realized on the sale of other discontinued
products.
Operating Income
The Company reported operating income of $8.0 million and
$14.3 million for the three and nine months ended January
31, 1998, as compared to an operating income of $5.0
million and $7.0 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 nine months
ended January 31, 1998 was 31.5% and 33%, respectively,
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 nine months ended January 31, 1998, operations
used $4.0 million of cash, due primarily to an increase
in accounts receivable and decrease in accounts payable.
Financing activities provided a net $10.3 million, with
$6.2 million derived from the sale of stock through stock
option exercises and employee stock purchase programs and
$4.0 million of net borrowings from existing credit
facilities. Investing activities used $5.6 million as
the Company invested a net $3.7 million in fixed assets;
the Company also accepted a long term receivable in
connection with the sale of a non-strategic product line
in the amount of $1.5 million. Overall cash and cash
equivalents were $20.7 million at January 31, 1998, which
is up $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
January 31, 1998, $10.5 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.
PART II. OTHER INFORMATION
Item 5. Other
None.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
Number Exhibit Description
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 January 31, 1998.
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: March 17, 1998 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
27 Financial Data Schedule (as part of
electronic filing)
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