U. S. Securities & Exchange Commission
Washington, D.C. 20549
FORM 10-KSB
[ X ] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES AND EXCHANGE ACT OF 1934
For the fiscal year ended September 30, 1996
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF
THE EXCHANGE ACT
For the transition period from _______ to _______
Commission file Number 0-11596
EXPERTELLIGENCE, INC.
(Exact name of small business issuer)
California 95-3506403
(State of incorporation) IRS Employer Identification number
203 Chapala Street, Suite B, Santa Barbara, CA 93101
(Address of principal executive offices)
(805) 962-2558
(Issuer's telephone number)
Securities registered under Section 12(b) of the Exchange Act:
Title of each class Name of each exchange on which registered
None None
Securities registered under Section 12(g) of the Exchange Act:
Preferred Stock, no par Common Stock, no par
(Title of class) (Title of class)
Check whether the issuer (1) 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
Check if there is no disclosure of delinquent filers in response to Item 405
of Regulation S-B contained in this form and no disclosure will be
contained, to the best of the registrant's knowledge, in definitive proxy
statements or information statements incorporated by reference in Part III
of this Form 10-KSB or in any amendment to this Form 10-KSB. [ X ]
Issuers revenues for the most recent fiscal year: $1,270,773
State the aggregate market value of the voting stock held by non-affiliates,
computed by reference to the per share closing bid price thereof on the
Over-the-Counter Exchange as of a specified date within the past 60 days:
Approximately $6.1 million based on a $6.00 per share closing bid price as
of November 27,1996.
State the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practical date.
Class Outstanding at September, 30 1996
Preferred stock, no par 159,244
Common stock, no par 1,331,321
Documents incorporated by reference: Issuers Proxy Statement for its
Annual Meeting on August 15, 1996 is incorporated by reference into Part
III.
<PAGE>
ExperTelligence, Inc.
Annual Report on Form 10-KSB
For the Fiscal Year Ended September 30, 1996
Table of Contents
Item number Page Number
Part I
1. Description of Business v
2. Description of Property vii
3. Legal Proceedings vii
4. Submission of Matters to a Vote of
Security Holders viii
Part II
5. Market for Common Equity and Related Stockholder
Matters viii
6. Management's Discussion and Analysis x
7. Financial Statements 1-13
8. Changes In and Disagreements With
Accountants on Accounting and Financial
Disclosure xii
Part III
9. Directors, Executive Officers, Promoters and Control
Persons; Compliance with Section 16(a) of the
Exchange Act xii
10. Executive Compensation xii
11. Security Ownership of Certain Beneficial Owners and
Management xiii
12. Certain Relationships and Related Transactions xiv
13. Exhibits and Reports on Form 8-K xiv
Part I
Item 1. Description of Business
The objective of ExperTelligence is to help companies make their
information needs or their information-driven products interactive on the
World Wide Web. It does this by providing them software tools and
applications based on advanced, object-oriented, Internet-aware software
technologies which are designed, developed, integrated, and sold by the
Company and its partners.
Last year the company successfully completed its transition to the Internet
market by successfully introducing its web data-base server, WebBase TM,
and its internet compatible mail merge tool,
E-Merge TM. The Company will devote considerable resources this next
year to further refining its existing internet products and developing and
introducing new ones. WebBase TM, is now being distributed through our
internet/telephone sales organization, as well as normal retail distribution
channels, a major accomplishment achieved this year.
We concluded our first major OEM WebBase TM license with GemStone,
Inc., to resell Gem Builder for the Web, to the Global 2000 business
objects market. In addition to opening up the UNIX market to WebBase,
it delivers the first web server based on persistent business objects. In
addition to cash advances the Company will realize royalties based on
product sales. GemStone expects to deliver this product in the first quarter
of 1997. In addition ExperTelligence will be able to resell WebBase
coupled with GemStone's object data base engine.
The Company has established a presence in the telecommunications
industry through sale of ANDE TM (Ameritech Network Design Expert).
ANDE has been licensed to Southwestern Bell and Bell Canada, and is
marketed to other telephone companies by our development partner,
Ameritech.
It is estimated that the internet is growing at over 100% a year, and that
the database market is growing at around 40% a year. ExperTelligence is
now well positioned to take advantage of both of these markets.
Next year will be devoted to further developing our distribution channels
and continuing our technical development efforts for WebBase TM. The
Company has signed a distribution agreement with Open Technologies of
Japan and expects to introduce a Japanese language version of WebBase
early in 1997. In addition we expect to introduce several new internet
software products here in the United States. We will pursue our OEM
strategy for our WebBase "engine."
ExperTelligence employs thirteen people full time and two people part
time. Additional contract workers are hired as necessary to complete
specific projects.
Business of Issuer
Software development remains the primary business of ExperTelligence.
The Company creates tools and applications both independently and under
contract for various customers.
WebBase provides users with easy access to database information over the
Internet. It includes full server capabilities and can interface with any
of 50 database formats including Microsoft Access, Excel and SQL Server,
Sybase SQL Server, Oracle, dBase, Paradox, and Btrieve. Full details
about WebBase TM may be found on our web site,
http://www.webbase.com/.
WebBase provides solutions ranging from simple access to a real estate
listing to complex enterprise-wide information system applications in
human resources, finance, and sales. It allows existing databases to be
enhanced through the addition of hypertext links into other Internet
publications.
Ameritech Network Design Expert (ANDE) is a fully integrated design
tool which allows users to analyze and determine workable ISDN solutions
by illustrating the equipment configurations required to run the
applications.
The ANDE co-marketing agreement signed in May of 1994 remains in
force. This agreement establishes Ameritech and ExperTelligence as co-
owners of ANDE with ExperTelligence entitled to a percentage of all gross
sales of the product.
Competitive Information
We were one of the first entrants in the web database server marketplace
and have delivered proven solutions to many Fortune 500 customers, but
the Internet market is highly dynamic and competitive. Many companies
are entering this market.
The rapidly changing nature of the software industry requires that a
significant effort be devoted to constantly developing new goods and
services.
Regulatory Information
Government approval is not required for the sale of any of the Company's
products.
There are no existing or probable government regulations which will have a
material effect on the Company, and there is no material cost of compliance
to environmental laws.
Item 2. Description of Property
The Company does not own any real property. The following is the
Company's principle place of business:
Location Size Lease Term
203 Chapala Street, Suite B 2,100 Sq. Ft. Two Years
Santa Barbara, CA 93101
Item 3. Legal Proceedings
The Company is not a party to any litigation.
Item 4. Submission of Matters to a Vote of Security Holders
An annual meeting was held on August 15, 1996. During that meeting the
items presented below were submitted to a vote of security holders through
solicitation of proxies.
For Against Withheld Abstained
a.) Election of the Board of Directors
Robert W. Reali 1,258,812 0 2,108 0
Denison W. Bollay 1,258,812 0 2,108 0
Karl A. Marlantes 1,258,812 0 2,108 0
George Mueller 1,258,812 0 2,108 0
Mario Perry 1,258,812 0 2,108 0
b.) Approval of 1996 Equity Participation Plan
1,006,835 10,091 0 3,204
c.) Approved Amendment of Articles of Incorporation to increase the
number of shares of common stock.
1,230,472 11,529 0 2,104
d.) Approved Amendment of Articles of Incorporation to limit director
liability.
1,242,199 11,529 0 2,104
e.) Approved indemnification agreements for officers, directors, and
agents of the company.
1,228,301 12,725 0 3,539
f.) Retention of McGowan Guntermann, Independent Certified Public
Accountants, as auditors for the company.
1,256,427 688 0 3,805
Part II
Item 5. Market for Common Equity and Related Stockholder Matters
The Company's common stock is traded on the Over-the-Counter
Exchange, under the symbol "EXGP". At September 30, 1996 there were
approximately 1,112 holders of record (1,110 holding common stock and 2
holding preferred stock).
As of September 30, 1996 the Company's assets and equity are still below
NASD's minimum requirements. As such, quotations of the Company's
security are not traded on NASDAQ.
The high and low bid price per share of the Company's common stock on
the Exchange for the last two fiscal years was as follows (as these shares
are traded on the OTC market, the prices indicated below are not
necessarily reflective of actual transactions):
<TABLE>
<CAPTION>
For the fiscal year ended September 30,
1996 1995
High Low High Low
<S> <C> <C> <C> <C>
First Quarter $ 1.00 $0.75 $0.10 $0.10
Second Quarter $14.00 $8.00 $0.10 $0.10
Third Quarter $13.00 $8.50 $0.40 $0.10
Fourth Quarter $ 5.00 $4.00 $6.00 $0.40
</TABLE>
There were no dividends declared during the past two fiscal years.
No dividends shall be paid or other distributions made (other than those
payable solely in Common Stock) with respect to the Common Stock
during any fiscal year of the Corporation until dividends in the total amount
of $.18 per share on the outstanding shares of Series A Preferred shall have
been paid. The Corporation shall not declare or pay any dividends on any
shares of Preferred Stock or any other class or series of stock of the
Corporation ranking as to dividends on a parity with the Preferred Stock
unless the Corporation shall pay a ratable dividend on the Preferred Stock
and such parity stock in proportion to the full dividend preference amounts
to which each is entitled. After the payment of the full dividend preference
amount on the Series A Preferred and on all other parity stock, and after
payment in any fiscal year of the Corporation of $.18 per share of Common
Stock (adjusted to reflect any subdivision or combination of the Common
Stock after the Original Issue Date of the Series A Preferred) outstanding
on such payment date, if any additional dividend is paid in such fiscal year
on the Common Stock, the holders of Series A Preferred shall be entitled
to receive, contemporaneously with such additional payment on the
Common Stock, an amount per share equal to (i) the amount of such
additional dividend paid on the Common Stock, multiplied by (ii) the
number of shares of Common Stock into which a share of Series A
Preferred is convertible on the date of the payment of the additional
dividend on the Common Stock.
Item 6. Management's Discussion and Analysis
General
The past year has been a period of considerable financial strengthening for
ExperTelligence. The Company has reduced debt to zero while
maintaining a commitment to investing in new products. We have cash in
the bank, sales have doubled, and we are profitable.
Having secured the Company's financial base, our attention is now focused
on growth. We have made a successful transition to the Internet market.
It is the Company's current goal to create and distribute additional Internet
products to meet the needs of this expanding market and grow with it.
Results of Operations
Comparison of Fiscal Year 1996 to Fiscal Year 1995
Sales roughly doubled, increasing 103%. Income from operations
increased 42%. Net income after taxes increased by 525% to $427,707
from $68,466. (See Note 6.) These results are consistent with the
Company's plan to grow with the internet market.
The increase in net income before taxes over the prior year is largely
attributable to the sales of WebBase and ANDE licenses. The change in
net income after taxes is attributable to a deferred income tax benefit of
$238,000 for 1996.
Liquidity and Capital Resources
Cash increased to $523,422 in 1996 from $37,716 in 1995. The difference
is caused by sale of stock of $300,000 and increased profits. Working
capital increased over the same period to $779,513 from $250,383 .
The net value of property and equipment increased to $59,769 in 1996
from $32,567 in 1995 due to the purchase of capital equipment for
development work.
The net value of Capitalized Product Development Costs decreased by
$22,125 due to pro-rata amortization of development associated with
ANDE. The Company believes product development costs will be
recovered in the future as development costs are matched to sales.
Long term debt has been eliminated.
Item 7. Financial Statements
The Financial Statements as of September 30, 1996 and 1995 are presented
on the pages that follow.
Item 8. Changes In and Disagreements With Accountants on
Accounting and Financial Disclosure
None.
<PAGE>
Part III
Item 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of the Exchange Act
Year first
Name Age Position elected Director
Denison Bollay 44 President, Chairman of the Board 1980
Robert Reali 35 Vice President, Director 1988
Karl Marlantes 51 Chief Operating Officer, Director 1996
Mr. Denison Bollay is the founder and has been the President of the
Company and Chairman of its Board of Directors since March 1980. He
received his Bachelor of Science Degree in Engineering in 1974 from
Harvey Mudd College.
Mr. Robert Reali was appointed to the board on August 1, 1988. He is
Vice President of Development. He has been with ExperTelligence, Inc.
since 1981. He majored in Computer Science Engineering at the
University of California, Santa Barbara.
Mr. Karl Marlantes was appointed to the board on August 15, 1996. He is
Chief Operating Officer and has been with ExperTelligence since August
15, 1996. He received his B.A. in Economics from Yale University in 1967
and a Master of Arts Degree in Politics, Philosophy, and Economics from
Oxford University in 1972.
Dr. Mueller and Mr. Perry have resigned as directors until the company
provides officers and directors liability insurance.
Item 10. Executive Compensation
The following table sets forth as required all compensation to officers for
services rendered in all capacities to the Company during or with respect to
the 1996 fiscal year.
Name & Position Year Salary Bonus Other Annual Compensation
Denison Bollay, CEO l996 $137,274.00 $3,000 0 $137,274.98
Karl Marlantes, COO 1996 $ 15,000.00 0 0 $ 15,000.00
Robert Reali,VP Dev 1996 $ 60,000.00 $3,000 0 $ 61,125.00
The table on the following page sets forth, as to individuals having received
greater than 5% of options granted and as to all executive officers and
directors as a group, the following information with respect to stock
options: (i) the aggregate number of shares of the Company's common
stock subject to options granted under the 1988 Incentive Stock Option
Plan and the 1996 Incentive Stock Option Plan through September 30,
1996, (ii) the number of options exercised prior to September 30, 1996, iii)
the number of options currently exercisable as of September 30, 1996, and
iv) the average per share option exercise price. As of September 30, 1996
195,000 options had been exercised.
<TABLE>
<CAPTION>
(i) (ii) (iii) (iv)
Options Options Options Average
Identity of group Granted exercised exercisable exercise price
<S> <C> <C> <C> <C>
Denison Bollay CEO,Dir 75,000 75,000 0 $0.11
Robert Reali VP,Dir 45,000 45,000 0 $0.10
Bernadette Bagley 35,000 35,000 0 $0.10
George Barilla 30,000 30,000 0 $0.10
Karl Marlantes COO,Dir 60,000 0 0 $4.00
Brian Colvin 20,000 0 0 $4.00
Officers and
Directors as a Group 180,000 120,000 0 $1.40
</TABLE>
Item 11. Security Ownership of Certain Beneficial Owners and
Management
On September 30, 1996, no person owned beneficially more than five
percent (5%) of the outstanding shares of the common and preferred
stock of the Company except as set out below. The Company has no
securities other than its preferred stock and common stock.
Number of Percent of
Name and Address of Beneficial Owner Shares Owned Class
Denison Bollay, CEO
P.O. Box 5117, Montecito, CA 93150 395,163 26.5%
BNP Venture Capital Corporation
c/o Bank of the West
50 W. San Fernando, 2nd Floor
San Jose, CA 95113 150,000 10.1%
George Mueller 74,622 5.0%
875 Park Lane
Montecito, CA 93108
Officers and Directors as a Group 470,163 31.5%
Item 12. Certain Relationships and Related Transactions
None.
Item 13. Exhibits and Reports on Form 8-K.
Resignations of Registrant's Directors
On September 3, 1996 the board accepted the resignations of Mario J.
Perry and Dr. George Mueller from the Board of Directors. These
individuals expressed their concern about the company not having officers
and directors insurance. The cost of officers and directors insurance is
prohibitive and both people stated their interest in serving on the board of
ExperTelligence once liability insurance is in place.
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.
ExperTelligence, Inc.
December 27, 1996 Denison Bollay,
President, Chief Financial Officer and
Chairman of the Board
December 27, 1996 Robert Reali, Director
December 27, 1996 Karl Marlantes, Director
<PAGE>
FINANCIAL STATEMENTS
September 30, 1996 and 1995
EXPERTELLIGENCE, INC.
<PAGE>
TABLE OF CONTENTS
Page
Independent Auditor's Report 1
Financial Statements:
Balance Sheets 2
Statements of Income 3
Statements of Shareholders' Equity 4
Statements of Cash Flows 5
Notes to Financial Statements 6 - 15
<PAGE>
INDEPENDENT AUDITOR'S REPORT
Board of Directors and Shareholders
ExperTelligence, Inc.
Santa Barbara, California
We have audited the accompanying balance sheets of
ExperTelligence, Inc., a California corporation, as of
September 30, 1996 and 1995, and the related statements of
income, shareholders' equity, and cash flows for the years
then ended. These financial statements are the responsibility
of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our
audits.
We conducted our audits in accordance with generally
accepted auditing standards. Those standards require that we
plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above
present fairly, in all material respects, the financial position of
ExperTelligence, Inc., at September 30, 1996 and 1995, and
the results of its operations and its cash flows for the years
then ended, in conformity with generally accepted accounting
principles.
December 4, 1996
-1-
<PAGE>
<TABLE>
<CAPTION>
EXPERTELLIGENCE, INC.
BALANCE SHEETS
September 30, 1996 and 1995
ASSETS
1996 1995
<S> <C> <C>
CURRENT ASSETS
Cash:
Non-interest bearing $ 56,653 $ 13,557
Interest bearing 466,768 24,159
Total Cash 523,422 37,716
Accounts receivable-related party
(Note 9) 7,167 -
Accounts receivable-net of allow
(Note 1E) 202,526 217,183
Inventory (Note 1C) 68,300 34,583
Prepaid expenses and other current
assets 17,280 4,362
Deferred tax assets 85,000 44,000
(Note 1J and 6)
Total Current Assets 903,695 337,844
PROPERTY AND EQUIPMENT, NET (Note 2) 59,769 32,567
OTHER ASSETS
Product development costs, net
(Note 1D) 530,258 552,383
Deferred tax assets 227,000 30,000
(Note 1J and 6)
Total Other Assets 757,258 582,383
TOTAL ASSETS $ 1,720,722 $ 952,794
LIABILITIES AND SHAREHOLDERS' EQUITY
1996 1995
CURRENT LIABILITIES
Accounts payable $ 57,932 $ 14,393
Accrued payroll taxes 178 5,398
Accrued vacation 40,072 29,377
Deferred revenue 26,000 -
Line of credit (Note 10) - 25,000
Notes payable (Note 9) - 13,293
Total Current Liabilities 124,182 87,461
SHAREHOLDERS' EQUITY
(Notes 3 and 4):
Preferred stock, no par value,
authorized 1,000,000 shares;
issued and outstanding 159,244
shares for 1996
and 348,248 shares for 1995
(liquidation preference is $3
per share, see Note 3) 318,487 696,488
Common stock, no par value,
authorized 2,000,000 shares;
issued and outstanding
1,331,321 shares for 1996 and
949,451 shares for 1995 3,189,727 2,808,226
Common stock subscribed (Note 5) 300,000 -
Accumulated deficit (2,211,674) (2,639,381)
Total Shareholders' Equity 1,596,540 865,333
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $1,720,722 $ 952,794
</TABLE>
SEE AUDITOR'S REPORT AND NOTES TO FINANCIAL
STATEMENTS
-2-
<PAGE>
<TABLE>
<CAPTION>
EXPERTELLIGENCE, INC.
STATEMENTS OF INCOME
For the Years Ended September 30, 1996 and 1995
1996 1995
<S> <C> <C>
INCOME (Note 7) $1,270,773 $ 626,437
OPERATING COSTS AND EXPENSES
Cost of sales 364,808 183,245
Selling and marketing 62,839 1,793
General and administration 564,887 280,164
Research and development 99,363 35,559
Total Operating Costs
and Expenses 1,091,897 500,761
INCOME FROM OPERATIONS 178,876 125,676
OTHER EXPENSES (INCOME)
Interest expense 931 3,424
Interest income (10,051) (2,014)
Miscellaneous income (2,511) -
Total Other Exp (Income) (11,631) 1,410
INCOME BEFORE INCOME TAXES 190,507 124,266
INCOME TAXES (Note 6) (237,200) 55,800
NET INCOME $ 427,707 $ 68,466
EARNINGS PER SHARE AND
COMMON STOCK
EQUIVALENTS (Note 1G):
INCOME BEFORE INCOME TAXES $ .1368 $ 0.0987
INCOME TAXES (.1703) 0.0443
NET INCOME $ .3071 $ 0.0544
EQUIVALENT NUMBER OF SHARES 1,392,621 1,258,859
</TABLE>
SEE AUDITOR'S REPORT AND NOTES TO FINANCIAL STATEMENTS
-3-
<PAGE>
<TABLE>
<CAPTION>
EXPERTELLIGENCE, INC.
STATEMENTS OF SHAREHOLDERS' EQUITY
For the Years Ended September 30, 1996 and 1995
Common Stock
Preferred Stock Common Stock Subscribed Net
Accumulated Shareholders
Shares Amount Shares Amount Shares Amount (Deficit) Equity
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, 9/30/94 34,824,381 $696,488 77,442,256 $2,790,726 - - $(2,707,847) $ 779,367
Stock issued - - 17,500,000 17,500 - - - 17,500
Rev. stock split (34,476,133) - (93,992,805) - - - - -
100:1 (Note 3)
Net income - - - - - - 68,466 68,466
Balance, 9/30/95 348,248 696,488 949,451 2,808,226 - - (2,639,381) 865,333
1988 ISOP shares - - 35,000 3,500 - - - 3,500
issued for cash
1988 ISOP shares - - 160,000 - - - - -
issued for stock
Stock redeemed - - (145,000) - - - - -
to issue stock
Stock reissued - - 142,866 - - - - -
Preferred shares
converted to
Common shares (189,004) (378,001) 189,004 378,001 - - - -
Common stock - - - - 100,000 300,000 - 300,000
subscribed (Note 5)
Net income - - - - - - 427,707 427,707
Balance, S9/30/96 159,244 $ 318,487 1,331,321 $ 3,189,727 100,000 $300,000 $(2,211,674) $1,596,540
</TABLE>
SEE AUDITOR'S REPORT AND NOTES TO FINANCIAL STATEMENTS
-4-
<PAGE>
<TABLE>
<CAPTION>
EXPERTELLIGENCE, INC.
STATEMENTS OF CASH FLOWS
For the Years Ended September 30, 1996 and 1995
1996 1995
CASH FLOWS FROM OPERATING ACTIVITIES
<S> <C> <C>
Net income $ 427,707 $ 68,466
Adjustments to reconcile net
income to net cash provided by
operating activities:
Depreciation and amortization 94,781 36,384
Common stock issued as a bonus - 17,500
Deferred tax expense (benefit) (238,000) 55,000
Decrease (increase) in:
Accounts receivable 7,490 (126,784)
Inventory (33,717) 6,796
Prepaid expenses and other
current assets (12,918) 898
Estimated earnings in excess of
billings on uncompleted contracts - 8,784
Increase (decrease) in:
Accounts payable and accrued
expenses 38,319 (12,075)
Income taxes payable - (800)
Accrued vacation 10,695 3,238
Deferred revenue 26,000 (32,167)
NET CASH PROVIDED BY OPERATING
ACTIVITIES 320,357 25,240
CASH FLOWS FROM INVESTING ACTIVITIES
Increase in product development
costs (60,160) (88,157)
Purchase of property and equipment (39,698) (25,966)
NET CASH USED BY INVEST. ACTIVITIES (99,858) (114,123)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds (repayments) on line of
credit (25,000) 25,000
Repayments of notes payable (13,293) (3,098)
Common stock subscribed 300,000 -
Common stock issued 3,500 -
Repayments of capital lease
obligations - (14,196)
NET CASH PROVIDED BY FINANCING
ACTIVITIES 265,207 7,706
NET INCREASE (DECREASE) IN CASH 485,706 (81,177)
CASH AND EQUIVALENTS -
BEGINNING OF YEAR 37,716 118,893
CASH AND EQUIVALENTS - END OF YEAR $ 523,422 $ 37,716
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
(Note 11)
Cash paid during the year for:
Interest $ 931 $ 3,402
Income taxes 800 800
</TABLE>
SEE AUDITOR'S REPORT AND NOTES TO FINANCIAL STATEMENTS
-5-
<PAGE>
EXPERTELLIGENCE, INC.
NOTES TO FINANCIAL STATEMENTS
September 30, 1996 and 1995
Note 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A. Business
ExperTelligence, Inc., (the Company) was incorporated in
California on March 31, 1980. The Company develops
custom software applications for telecommunication and
transportation companies and publishes general purpose
software products for the Internet.
B. Cash and Cash Equivalents
The Company considers all highly-liquid investments with a
maturity of three months or less at the time of purchase to be
cash equivalents.
C. Inventory
Inventory consists primarily of product manuals, CD ROMs,
and processing boards and is stated at the lower of average
cost (determined on the FIFO basis) or market. A reserve for
obsolescence of $242,883 and $242,883, has been provided
for 1996 and 1995, respectively.
D. Product Development Costs
Product development costs represent the costs of new
products and new application enhancements to existing
products incurred subsequent to establishing technological
feasibility of the product and prior to the date the product is
available for release to customers. Amortization is calculated
using the greater of the straight-line method over its economic
useful life, approximately five years, or on a product-by-
product basis in the ratio that current period sales bear to the
total of current and anticipated revenues. This policy was
adopted by the Company as of April 1, 1986, in accordance
with the provisions of Financial Accounting Standards Board
Statement No. 86, "Accounting for Software Development
Costs." Total costs capitalized during the fiscal years ended
September 30, 1996 and 1995, aggregated $60,160 and
$88,157, respectively. Related amortization, utilizing the
straight-line method, for the year ended September 30, 1996
and 1995, aggregated $82,285 and $15,824, respectively.
Accumulated amortization of product development costs
aggregated $231,143 and $148,858, at September 30, 1996
and 1995, respectively.
E. Allowance For Doubtful Accounts
The allowance for doubtful accounts at September 30, 1996
and 1995, is $18,000 and $0, respectively.
-6-
<PAGE>
EXPERTELLIGENCE, INC.
NOTES TO FINANCIAL STATEMENTS
September 30, 1996 and 1995
Note 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(Continued)
F. Revenue
Revenue from software sales is recognized on delivery of the
software when no further obligations remain under the sales or
licensing agreement. Revenue from software license
agreements that include significant product development is
recognized upon the percentage of completion method. As of
September 30, 1996 and 1995, there were no costs and
estimated earnings in excess of billings or billings in excess of
costs on uncompleted contracts. Product development
services include postcontract customer support and software
services. Revenue from postcontract customer support is
recognized ratably over the period of the postcontract support
arrangement. Revenue from software services is recognized
as the services are performed.
G. Earnings Per Share
Earnings per common share and common equivalent share is
computed by dividing net income by the weighted average
number of shares of common stock and common stock
equivalents outstanding during the year. Preferred shares are
considered in the computation of earnings per common and
common equivalent shares for the years ended September 30,
1996 and 1995. Stock options were not considered in the
computation of common equivalent shares for 1995, because
the stock options were considered antidilutive.
H. Research and Development
Research and development expenses, not subject to
capitalization, are charged to expense as incurred.
I. Property and Equipment
Property and equipment is recorded at cost. Depreciation
expense is provided over the useful lives of the assets, which
range from three to five years, using the straight-line method.
J. Income Taxes
The Company uses Statement of Financial Accounting
Standards No. 109, "Accounting for Income Taxes"(SFAS
No. 109) in reporting deferred income taxes. SFAS No. 109
requires a company to recognize deferred tax liabilities and
assets for the expected future income tax consequences of
events that have been recognized in the company's financial
statements. Under this method, deferred tax assets and
liabilities are determined based on temporary differences
between the financial carrying amounts and the tax basis of
assets and liabilities using enacted tax rates in effect in the
years in which the temporary differences are expected to
reverse.
-7-
<PAGE>
EXPERTELLIGENCE, INC.
NOTES TO FINANCIAL STATEMENTS
September 30, 1996 and 1995
Note 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(Continued)
K. Use of Estimates
The preparation of financial statements in conformity with
generally accepted accounting principles requires management
to make estimates and assumptions that affect certain
reported amounts and disclosures. Accordingly, actual results
could differ from those estimates.
Note 2 - PROPERTY AND EQUIPMENT
Depreciation expense at September 30, 1996 and 1995, is
$12,496 and $20,560, respectively. Property and equipment at
September 30, 1996 and 1995, is summarized as follows:
1996 1995
Furniture and fixtures $ 33,982 $ 33,730
Purchased software 3,467 3,467
Equipment 366,855 336,693
404,304 373,890
Less: Accumulated
depreciation 344,535 341,323
$ 59,769 $ 32,567
Note 3 - HAREHOLDERS' EQUITY
In September, 1995, the Company's Board of Directors
authorized a 100 to 1 reverse stock split of the Company's
common and preferred stock. As a result of the reverse stock
split, total common shares issued and outstanding were reduced
to 949,451, and total preferred shares issued and outstanding
were reduced to 348,248. All references in the accompanying
financial statements to the number of common and preferred
shares and per-share amounts for 1995 have been restated to
reflect the reverse stock split.
17,500,000 shares of common stock (prior to the reverse stock
split) in the amount of $17,500, were issued to the employees of
the Company as a bonus in the fiscal year ended September 30,
1995.
-8-
<PAGE>
EXPERTELLIGENCE, INC.
NOTES TO FINANCIAL STATEMENTS
September 30, 1996 and 1995
Note 3 - SHAREHOLDERS' EQUITY (continued)
During the year ended September 30, 1996, the majority of
employees under the 1988 Incentive Stock Option Plan (ISOP)
used their previously issued shares of the Company's common
stock to exercise their options and purchase the common shares
(Note 4). In total, 145,000 shares of common stock were
redeemed by employees at a price of $7.50 per share which was
the fair market value of the shares on June 27, 1996. These
shares were canceled and 2,134 shares were used to exercise
160,000 shares of common stock under the 1988 ISOP at a price
of $.10 per share. Subsequently, 142,866 shares (145,000 shares
- - 2,134 shares) of common stock were reissued to the same
employees at $7.50 per share. The remaining 35,000 shares under
the 1988 ISOP were exercised with cash.
The preferred stockholders have voting rights equal to that of
common stockholders. The preferred stock is convertible into
common stock on a one-for-one basis at any time. No shares of
preferred stock were issued during the year ended September 30,
1996 and 1995. During the year ended September 30, 1996,
189,004 shares of preferred stock were converted to 189,004
shares of common stock. The preferred stock is nonredeemable,
has a preference in liquidation equal to $3 per share plus any
declared but unpaid dividends and provides for dividends to be
declared at management's discretion. As of September 30, 1996
and 1995, no dividends have been declared.
Note 4 -STOCK OPTION PLANS
A. 1983 Incentive Stock Option Plan
In June 1983, the Company adopted an employee Incentive
Stock Option Plan (1983 ISOP) and a Nonqualified Stock
Option Plan (NSOP). Under the 1983 ISOP, the Company
reserved a maximum of 55,000 shares to be issued upon the
exercise of options. The number of shares that may be issued
pursuant to the NSOP is subject to determination of the
Board of Directors. Both plans are administered by the Board
of Directors. As of September 30, 1996 and 1995, the board
has not granted any options under the NSOP. As of
September 30, 1996 and 1995, there are no options
outstanding under the 1983 ISOP.
B. 1988 Incentive Stock Option Plan
In August 1988, the Board of Directors adopted a new ISOP
(1988 ISOP), whereby options may be granted to
management and key employees at exercise prices equal to or
greater than the fair market value of the Company's common
stock on the date of grant. The Company has reserved
200,000 shares of common stock for the exercise of options
under this plan. For the year ended September 30, 1995,
there were 195,000 options outstanding at exercise prices per
share of $.10 for options with a ten-year term and $.11 for
those options with five-year terms (the estimated fair market
value at the date of the grant). No options were exercised
during the years ended September 30, 1995.
-9-
<PAGE>
EXPERTELLIGENCE, INC.
NOTES TO FINANCIAL STATEMENTS
September 30, 1996 and 1995
During the year ended September 30, 1996, the remaining
stock options of 195,000 shares were exercised. 35,000
shares were issued for cash and 160,000 shares were issued in
exchange for stock of the Company.
At September 30, 1996 and 1995, options to purchase -0-
shares and 195,000 shares, respectively, of the Company's
common stock were exercisable under the 1988 ISOP.
C. 1996 Equity Participation Plan
On August 15, 1996, the Board of Directors adopted the
1996 Equity Participation Plan, whereby options may be
granted to employees, consultants, or independent directors.
For Incentive Stock Options the exercise price shall be equal
to or greater than the fair market value of the Company's
common stock on the date of the grant. For Nonqualified
Stock Options, the exercise price shall be not less than 85%
of the fair market value of a share of common stock on the
date the option is granted. The board of directors shall
determine whether options granted under this plan are to be
Incentive Stock Options or Nonqualified Stock Options. The
Company has reserved a total of 475,000 shares of common
stock for the exercise of options under this Plan. On August
23, 1996, 87,500 of options were granted under the Incentive
Stock Option Plan to purchase the Company's common stock
at $4 per share (the fair market value on the date of the
grant). As of September 30, 1996, options to purchase
87,500 of the Company's common stock were exercisable
under the 1996 Incentive Stock Option Plan. No options
were granted under the Nonqualified Stock Option Plan.
The Company has elected not to adopt early implementation
of Statement of Financial Accounting Standards No. 123
"Accounting For Stock-Based Compensation."
Note 5 - COMMON STOCK SUBSCRIBED
On February 26, 1996, the Company signed a stock subscription
agreement for 100,000 shares of common stock at a price of
$300,000. As of September 30, 1996, the Company received the
$300,000, but issued the common shares in October 1996.
Note 6 - INCOME TAXES
Temporary differences have resulted between financial statement
and income tax reporting including depreciation, capitalized
software costs, non-deductibility of accrued vacation wages not
paid within seventy-five days of year end, and net operating loss
carryforwards.
-10-
<PAGE>
EXPERTELLIGENCE, INC.
NOTES TO FINANCIAL STATEMENTS
September 30, 1996 and 1995
<TABLE>
<CAPTION>
Note 6 - INCOME TAXES (continued)
Income tax expense (benefit) for the years ended September 30,
1996 and 1995, are as follows:
1996 1995
<S> <C> <C>
Current $ 800 $ 800
Deferred (238,000) 55,000
Total $ (237,200) $ 55,800
Components of the deferred tax assets and (liabilities)
recognized in the balance sheet at September 30, 1996,
are as follows:
Current Non-current
Accrued vacation pay $ 17,000 $ -
Property and equipment - (20,000)
Software costs - (229,000)
Deferred state tax 5,000 1,000
Net operating losses 63,000 818,000
Deferred tax credits - 211,000
85,000 781,000
Deferred tax assets
valuation allowance - (554,000)
Deferred tax asset $ 85,000 $ 227,000
Reconciliation of the difference between income taxes computed
at Federal statutory tax rates and provision for income taxes,
for the year ended September 30, 1996, is as follows:
Income taxes computed at
Federal statutory tax rate $ 65,000
State tax provision 11,000
Graduated tax rates 8,000
Net operating loss and deferred credits 42,000
Valuation allowance (363,200)
Provision for income taxes $ (237,200)
</TABLE>
-11-
<PAGE>
EXPERTELLIGENCE, INC.
NOTES TO FINANCIAL STATEMENTS
September 30, 1996 and 1995
Note 6 - INCOME TAXES (continued)
As of September 30, 1996, the Company had the following
approximate net operating loss and tax credit carryforwards
available to reduce future federal and state income taxes:
<TABLE>
<CAPTION>
Federal Federal State State
Expiring NetOperating Tax NetOperating Tax
September30 Losses Credits Losses Credits
<S> <C> <C> <C> <C>
1997 - - 225,000 -
1998 - - 49,000 -
1999 42,000 56,000 - -
2000 487,000 29,000 - -
2001 390,000 - - -
2002 309,000 - - -
2003 125,000 - - -
2004 - 6,000 - -
2005 614,000 30,000 - -
2006 481,000 39,000 - 9,000
200 768,000 14,000 - 16,000
2008 - 10,000 - -
$2,516,000 $184,000 $274,000 $25,000
</TABLE>
Components of the deferred tax assets and (liabilities)
recognized in the balance sheet at September 30, 1995,
are as follows:
Current Non-current
Accrued vacation pay $ 13,000 $ -
Property and equipment - (11,000)
Software costs - (239,000)
Deferred state tax 4,000 (5,000)
Net operating losses 27,000 959,000
Deferred tax credits - 208,000
44,000 912,000
Deferred tax assets valuation
allowance - (882,000)
Deferred tax asset $ 44,000 $ 30,000
-12-
<PAGE>
EXPERTELLIGENCE, INC.
NOTES TO FINANCIAL STATEMENTS
September 30, 1996 and 1995
Note 6 - INCOME TAXES (continued)
Reconciliation of the difference between income taxes computed
at Federal statutory tax rates and provision for income taxes,
for the year ended September 30, 1995, is as follows:
Income taxes computed at Federal statutory
tax rate $ 43,000
State tax provision 11,000
Graduated tax rates 13,000
Net operating loss and deferred credits 22,000
Valuation allowance (33,200)
Provision for income taxes $ 55,800
Note 7 - SIGNIFICANT CUSTOMERS AND CREDIT RISK
For the year ended September 30, 1996, 71% of accounts
receivable was concentrated among two customers.
No one customer accounted for more than 17% of total revenue.
For the year ended September 30, 1995, 96% of accounts receivable
was concentrated with one customer and this same customer
individually accounted for approximately 86% of total revenue.
Note 8 - CASH AND CASH EQUIVALENTS - CONCENTRATION OF
CREDIT RISK
Uninsured cash balances were $379,309 at September 30, 1996,
and $-0- at September 30, 1995.
Note 9 - RELATED PARTY TRANSACTIONS
During the year ended September 30, 1995, computer equipment
totaling $7,570 was purchased from the president of the Company.
During the year ended September 30, 1995, the president and
shareholder of the Company loaned $14,000 to the Company.
The $14,000 was repaid without interest to the president during
the year ended September 30, 1995.
During the year ended September 30, 1996, the Company
performed work for another entity that is owned 50% by the
Company's president. Total revenue for this project is $294,792
and accounts receivable is $7,167 at September 30, 1996.
-13-
<PAGE>
EXPERTELLIGENCE, INC.
NOTES TO FINANCIAL STATEMENTS
September 30, 1996 and 1995
Note 9 - RELATED PARTY TRANSACTIONS (continued)
At September 30, 1995, the Company had a note payable due to
a related party (a significant shareholder) in the
amount of $13,293. The note was a demand note with monthly
payments of $909, with an annual interest rate of 10%.
Interest paid during the year totaled $528 and $1,721 for
996 and 1995, respectively. The note was paid off
during the year ended September 30, 1996.
Note 10 - LINE OF CREDIT
During 1995, the Company obtained a $40,000 collateralized
bank line of credit with Sanwa Bank bearing interest at the
current prime rate plus 2%, payable monthly, and was secured by
all assets of the Company. At September 30, 1995, the interest
rate was 10.75% and withdrawals against the line of credit were
$25,000, which was paid of subsequent to that. The line of
credit expired January 31, 1996.
Note 11 - NON-CASH TRANSACTIONS
During the year ended September 30, 1995, the Company issued
$17,500 of common stock to employees as a bonus (See note 3).
During the year ended September 30, 1996, the Company
exercised 1988 Stock Options for 160,000 shares of common
stock at $.10 per share option price by redeeming 2,134 shares
of previously issued common stock at $7.50 per share (Note 4).
Note 12 - SOFTWARE DEVELOPMENT, LICENSE, AND
DISTRIBUTION AGREEMENT
On September 30, 1996, the Company signed a contract with
another company (licensee) to develop and license the
Company's software to operate within the licensee's own
software (New Product). As part of this contract, the licensee
will additionally advance $250,000 as prepaid royalties. The
licensee will pay the Company royalties for sub-licensing the
New Product. For the later of 90 days following the licensee's
acceptance of the New Product or March 31, 1997, the licensee
may convert any then outstanding advance balance into an
equivalent number of shares of the Company's common stock.
The conversion price will be $5.25 per share.
-14-
<PAGE>
EXPERTELLIGENCE, INC.
NOTES TO FINANCIAL STATEMENTS
September 30, 1996 and 1995
Note 13 - FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company has various financial instruments, none of which
are held for trading purposes. The Company estimates
that the fair value of all financial instruments at September
30, 1996, does not differ materially from the carrying values
of its financial instruments recorded in the accompanying
balance sheet. Considerable judgement is necessarily required
in interpreting market data to develop the estimates of fair
value, and accordingly, the estimates are not necessarily
indicative of amounts the Company could realize in a
current market exchange.
-15-
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> SEP-30-1996
<PERIOD-END> SEP-30-1996
<CASH> 466,768
<SECURITIES> 0
<RECEIVABLES> 209,693
<ALLOWANCES> 18,000
<INVENTORY> 68,300
<CURRENT-ASSETS> 903,695
<PP&E> 404,304
<DEPRECIATION> 344,535
<TOTAL-ASSETS> 1,720,722
<CURRENT-LIABILITIES> 124,182
<BONDS> 0
<COMMON> 1,331,321
0
159,244
<OTHER-SE> 1,596,540
<TOTAL-LIABILITY-AND-EQUITY> 1,720,722
<SALES> 1,270,773
<TOTAL-REVENUES> 1,270,773
<CGS> 364,808
<TOTAL-COSTS> 1,091,897
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 931
<INCOME-PRETAX> 190,507
<INCOME-TAX> (237,200)
<INCOME-CONTINUING> 190,507
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 427,707
<EPS-PRIMARY> .31
<EPS-DILUTED> .31
