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, 1998
[ ] 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 ]
Issuer's revenues for the most recent fiscal year: $897,226
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 $9,199,506 million based on a $6.25 per share
closing bid price as of December 28,1998.
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 1998
Preferred stock, no par 159,244
Common stock, no par 1,471,921
<PAGE>
ExperTelligence, Inc.
Annual Report on Form 10-KSB
For the Fiscal Year Ended September 30, 1998
Table of Contents
Item number Page Number
Part I
1. Description of Business iv
2. Description of Property v
3. Legal Proceedings v
4. Submission of Matters to a Vote of Security Holders v
Part II
5. Market for Common Equity and Related Stockholder Matters vii
6. Management's Discussion and Analysis vii
7. Financial Statements 1-15
8. Changes In and Disagreements With Accountants on
Accounting and Financial Disclosure ix
Part III
9. Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of the Exchange Act x
10. Executive Compensation x
11. Security Ownership of Certain Beneficial Owners and
Management xi
12. Certain Relationships and Related Transactions xi
13. Exhibits and Reports on Form 8-K xi
<PAGE>
Part I
Item 1. Description of Business
The objective of ExperTelligence ( The Company) is to support its
clients in making their information needs or their information-driven
products interactive on the World Wide Web. The Company designs,
develops, markets and implements software products for business
applications based on advanced, object-oriented, Internet-aware
technologies which are designed, developed, integrated, and sold by the
Company and its partners. The Company now specializes in the development
and hosting of Web/Database and Electronic Commerce application
solutions using WebBaseTM and ExperForms. The Company's extensive
experience with eCommerce and database systems, combined with their web
service WebdataR and the WebData Network, have given the Company the
necessary experience to develop significant cutting edge Web software
tools and high profile services. The Company is uniquely qualified to
develop and host complex "intelligent" web sites that take full
advantage of databases and their potential for sophisticated, cost
effective applications.
The Company has established a presence in the telecommunications
industry through the 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.
In 1997 the Company acquired, Cerebral Systems Development, a Canadian
corporation that produces software. As a result of this acquisition
the Company introduced two new software products, WebberActive and
Webber 32. In May 1998 ExperTelligence, Inc. moved support of these
products to Santa Barbara.
ExperTelligence employs eleven people full time. Additional contract
workers are hired as necessary to complete specific projects.
Business of Issuer
WebDataR, a comprehensive database - only portal for the Internet was
announced by the company December 1, 1998. Webdata.com is built on
proprietary intelligent agent and HTML parsing technology that collects,
organizes and builds relationships between searchable databases. This
allows
the user who needs concrete data to locate the appropriate database
immediately. Webdata.com catalogues only databases and used patent-pending
user interface to provide access to them.
WebData Network is a link exchange service featuring the industries only
query-based banner ad exchange. WebData Network is ideally suited to
database sites because banner queries instantly send users to the related
database and display the results. The banner ads are not just a static
image, but an interactive tool to draw users to our client's sites.
This year the Company established Experdata.com, a database web-hosting
site. This site is uniquely focused on hosting eCommerce, business to
business, dynamic, database-enabled Web sites for real world applications.
The Company is fully equipped to deliver high bandwidth connections, fast
file servers, tip quality support services, site development and database
expertise.
WebBaseTM still continues to be the Company's premier product. It is the
basis for most of the consulting revenue and software sales. WebBaseTM
provides users the tools to develop 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. WebBaseTM
provides for solutions ranging from simple access, to 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.
Full details about WebBaseTM may be found on our web site,
http://www.expertelligence.com.
The Company's consulting group specializes in integrating networks and Web
and Internet technology to produce powerful application solutions for
forward thinking business organizations. The Company has spent the last
ten years combining Internet programming experience with real world
business process understanding to produce well-engineered Internet,
Intranet and Extranet applications.
ExperForms, based on WebBase TM, is revolutionary new software that
converts scanned forms into complete web sites. It creates database and
all the web forms necessary to add, update, search and view any web
browser on the Intra or Internet. It is also resold through one of the
Company's strategic partners, CAERE Corporation. The Company has
participated with CAERE in major trade shows and other joint marketing
activities this year allowing the Company to receive industry wide
exposure.
E-Merge, a WebBase TM add-on allows users to conveniently send mail
directly from their WebBase TM web server. E-Merge dynamically creates
emails from databases.
WebberActive is a dynamic HTML editor and channel creation tool targeted
directly at Microsoft and Netscape software standards.
Webber32 is a free HTML editor and validation tool the Company distributes
internationally to introduce potential customers to the Company. It is
downloaded free at over 20 popular Internet sites.
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
The Company is a pioneer in web database server technology. The company has
delivered proven solutions to many Fortune 500 customers. The rapidly
changing nature of the software industry and the fact that the Internet
market is highly dynamic and competitive, requires that a significant
effort be devoted to constantly developing new goods, services and
partnerships. The Company continues to seek every opportunity to solidify
its marketbase.
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
<PAGE>
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, 1998 there were approximately
1,051 holders of record (1,049 holding common stock and 2 holding preferred
stock).
As of September 30, 1998 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,
1998 1997
<S> <C> <C> <C> <C>
High Low High Low
First Quarter $1.12 $1.62 $4.25 $3.25
Second Quarter $2.12 $2.68 $5.00 $4.00
Third Quarter $3.44 $3.44 $3.25 $2.75
Fourth Quarter $2.13 $2.63 $2.50 $2.50
</TABLE>
There were no dividends declared during the past fiscal year.
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
Results of Operations
The Company plans to expand its scope of business activities including the
introduction of WebData(TM), a portal to web databases, and other Web
Services. The Company entered into a strategic marketing alliance with
Saatchi & Saatchi, PLC ("Saatchi") in August 1998 which includes Saatchi's
provision of strategic planning and marketing services related to WebData
and the Web Services.
Comparison of Fiscal Year 1998 to Fiscal Year 1997
Sales decreased 6% from $955,246 to $897,226. The Company often
sells its software's together with its consulting services to clients
ranging from award winning HarrisInfoOnline, one of the largest
international information brokers to Bagdasarian Productions, the creators
of the Chipmunks to numerous municipalities, court and school systems.
The Company's expansion into its new portal to web databases,
"WebData.com" will generate revenue from advertising in the upcoming
year.
Cost of Sales increased by 66% due to development salaries working more on
contract services and less on development of software. Selling and
marketing expense decreased 281%. The Company's decision to market its
products with the assistance of outside services resulted in the release of
the Vice-President of Sales and the Vice-President of Marketing. This year
the Company entered into a strategic marketing alliance with Saatchi &
Saatchi, PLC ("Saatchi"), which includes Saatchi's provision of strategic
planning and marketing services related to WebData and the Web Services.
The Company limited it trades show participation to joint efforts with
strategic partners, suchas CAERE Corporation. General and Administrative
expenses were down 150% due to the Company's decision to review and analyze
each expense category for optimum benefit and reduced cost. Significant
reduction in expenses was seen in communication costs, health benefits,
travel and supplies. General and Administrative costs in Canada were
significantly lower due to the closure of this office in May 1998.
Research and Development increased by 30% due to the development of WebData
and its patent pending processes. Income from
operations after taxes decreased its loss from $(281,162) to a current loss
of $(103,139). This loss includes a $50,000 non-cash non-recurring item.
The decrease in net loss before taxes over the prior year is attributable
to consistent revenue from contract services and decreases in operating
expenses. The change in net income after taxes is due to a deferred income
tax benefit of $39,200 for 1998.
Liquidity and Capital Resources
Cash increased from $27,465 in 1997 to $130,149 in 1998. The increase is
due to collection of most of the Company's receivable. Working capital
decreased over the same period from $411,450 to $289,359. Included in
Accounts Payable is a $50,000 non-recurring non-cash item. In addition a
current receivable was reclassified to long term due to an agreement
between the Company and its customer.
The net value of Capitalized Product Development Costs increased by
$18,989. The Company spent the year concentrating on consulting. The next
year will see the development of WebData and its development costs. 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, 1997 and 1998 are presented on
the pages that follow.
<PAGE>
EXPERTELLIGENCE, INC. AND SUBSIDIARY
SANTA BARBARA, CALIFORNIA
CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1998 and 1997
TABLE OF CONTENTS
Page
Independent Auditor's Report 1
Consolidated Financial Statements:
Consolidated Balance Sheets 2
Consolidated Statements of Income 3
Consolidated Statements of Shareholders' Equity 4
Consolidated Statements of Cash Flows 5
Notes to Consolidated Financial Statements 6 - 18
<PAGE>
INDEPENDENT AUDITOR'S REPORT
Board of Directors and Shareholders
ExperTelligence, Inc.
Santa Barbara, California
We have audited the accompanying consolidated balance sheets of
ExperTelligence, Inc., a California corporation, and subsidiary as of
September 30, 1998 and 1997, and the related consolidated statements of
income, shareholders' equity, and cash flows for the years then ended.
These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated 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 consolidated financial
statements are free of material misstatement. An audit includes examining,
on a test basis, evidence supporting the amounts and disclosures in the
consolidated 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 consolidated financial statements referred to above
present fairly, in all material respects, the financial position of
ExperTelligence, Inc., and subsidiary at September 30, 1998 and 1997, and
the results of their operations and their cash flows for the years then
ended, in conformity with generally accepted accounting principles.
McGowan Guntermann
Santa Barbara, California
November 16, 1998
-1-
<PAGE>
<TABLE>
<CAPTION>
EXPERTELLIGENCE, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
September 30, 1998 and 1997
ASSETS
1998 1997
<S> <C> <C>
CURRENT ASSETS
Cash:
Non-interest bearing $ 5,659 $ 16,355
Interest bearing 124,490 11,110
Total Cash 130,149 27,465
Accounts receivable - net of allowance
(Note 1E) 102,409 271,312
Inventory (Note 1C) 66,723 65,178
Prepaid expenses and other current assets 16,570 28,083
Deferred tax assets (Note 1J and 6) 125,000 110,000
Total Current Assets 440,851 502,038
PROPERTY AND EQUIPMENT - Net
(Note 1I and 2) 52,732 53,947
OTHER ASSETS
Long-term accounts receivable (Note 14) 51,585 -
Product development costs, net (Note 1D) 801,144 820,133
Deferred tax assets (Note 1J and 6) 353,000 328,000
Total Other Assets 1,205,729 1,148,133
TOTAL ASSETS $1,699,312 $ 1,704,118
</TABLE>
<TABLE>
<CAPTION>
LIABILITIES AND SHAREHOLDERS' EQUITY
1998 1997
<S> <C> <C>
CURRENT LIABILITIES
Accounts payable $ 87,498 $ 33,174
Accrued vacation 63,994 57,413
Total Current Liabilities 151,492 90,587
SHAREHOLDERS' EQUITY (Notes 3, 4 and 5):
Preferred stock, no par value, authorized
1,000,000 shares;issued and outstanding
159,244 shares for 1998 and 1997 (liquidation
preference is $3 per share, see
Note 3) 318,487 318,487
Common stock, no par value, authorized
2,000,000 shares;issued and outstanding
1,471,921 shares for 1998 and1,472,621
shares for 1997 3,651,890 3,653,627
Accumulated deficit (2,422,557) (2,358,583)
Total Shareholders' Equity 1,547,820 1,613,531
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $ 1,699,312 $1,704,118
</TABLE>
SEE AUDITOR'S REPORT AND NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-2-
<PAGE>
EXPERTELLIGENCE, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
For the Years Ended September 30, 1998 and 1997
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
INCOME (Note 7) $ 897,226 $ 955,246
OPERATING COSTS AND EXPENSES
Cost of sales 327,881 215,997
Selling and marketing 81,514 229,231
General and administration 470,352 706,649
Research and development 120,618 84,531
Total Operating Costs and Expenses 1,000,365 1,236,408
LOSS FROM OPERATIONS (103,139) (281,162)
OTHER EXPENSES (INCOME)
Interest expense 2,879 738
Interest income (2,807) (10,916)
Loss on foreign currency exchange - 1,125
Total Other Expenses (Income) 72 (9,053)
LOSS BEFORE INCOME TAXES (103,211) (272,109)
INCOME TAXES (Note 6) (39,200) (125,200)
NET LOSS $ (64,011) $ (146,909)
EARNINGS PER SHARE AND COMMON STOCK
EQUIVALENTS (Note 1G)
LOSS BEFORE INCOME TAXES $ (.0633) $ (.1721)
INCOME TAXES (.0240) (.0792)
NET LOSS $ (.0393) $ (.0929)
EQUIVALENT NUMBER OF SHARES 1,631,753 1,580,379
</TABLE>
SEE AUDITOR'S REPORT AND NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-3-
<PAGE>
EXPERTELLIGENCE, INC. AND SUBSIDIARY
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
For the Years Ended September 30, 1998 and 1997
Common Stock
Preferred Stock Common Stock Subscribed
Shares Amount Shares Amount Shares Amount
<S> <C> <C> <C> <C> <C> <C>
Balance,
September 30,
1996 159,244 $ 318,487 1,331,321 $ 3,189,727 100,000 $300,000
Stock issued - - 41,300 163,900 - -
Common stock
subscribed - - 100,000 300,000 (100,000) (300,000)
Net loss - - - - - -
Balance, September
30, 1997 159,244 318,487 1,472,621 3,653,627 - -
Common stock
redeemed - - (700) (1,737) - -
Net loss - - - - - -
Balance, September
30, 1998 159,244 $ 318,487 1,471,921 $ 3,651,890 - $ -
</TABLE>
<TABLE>
<CAPTION>
Net
Accum. Shareholders
(Deficit) Equity
<S> <C> <C>
Balance, September 30, 1996 $ 2,211,674) $ 1,596,540
Stock issued - 163,900
Common stock subscribed - -
Net loss (146,909) (146,909)
Balance, September 30, 1997 (2,358,583) 1,613,531
Common stock redeemed 37 (1,700)
Net loss (64,011) (64,011)
Balance, September 30, 1998 $ (2,422,557) $ 1,547,820
</TABLE>
SEE AUDITOR'S REPORT AND NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-4-
<PAGE>
EXPERTELLIGENCE, INC. AND SUBSIDIARY
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended September 30, 1998 and 1997
CASH FLOWS FROM OPERATING ACTIVITIES 1998 1997
<S> <C> <C>
Collections from customers $ 1,014,544 $ 893,627
Interest collected 2,807 10,916
Interest paid (2,879) (738)
Taxes paid (800) (800)
Cash paid to suppliers and employees (814,240) (1,210,077)
NET CASH PROVIDED (USED) BY OPERATING
ACTIVITIES 199,432 (307,072)
CASH FLOWS FROM INVESTING ACTIVITIES
Increase in product development costs (75,710) (176,791)
Purchase of property and equipment (19,338) (12,094)
NET CASH USED BY INVESTING ACTIVITIES (95,048) (188,885)
CASH FLOWS FROM FINANCING ACTIVITIES
Common stock redeemed (1,700) -
NET CASH USED BY FINANCING ACTIVITIES (1,700) -
NET INCREASE (DECREASE) IN CASH 102,684 (495,957)
CASH AND EQUIVALENTS - BEGINNING OF YEAR 27,465 523,422
CASH AND EQUIVALENTS - END OF YEAR $ 130,149 $ 27,465
RECONCILIATION OF NET LOSS TO NET CASH PROVIDED (USED) BY OPERATING
ACTIVITIES:
Net loss $ (64,011) $ (146,909)
Adjustments to reconcile net loss
to net cash provided (used) by operating activities:
Loss on disposition of fixed asset 425 -
Depreciation and amortization 114,827 64,832
Deferred tax expense (benefit) (40,000) (126,000)
Decrease (increase) in:
Accounts receivable 117,318 (61,619)
Inventory (1,545) 3,122
Prepaid expenses and other current assets 11,513 (10,803)
Increase (decrease) in:
Accounts payable and accrued expenses 54,324 (21,036)
Accrued vacation 6,581 17,341
Deferred revenue - (26,000)
NET CASH PROVIDED (USED) BY OPERATING
ACTIVITIES $ 199,432 $ (307,072)
</TABLE>
SEE AUDITOR'S REPORT AND NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-5-
<PAGE>
EXPERTELLIGENCE, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1998 and 1997
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, publishes general purpose
software products for the Internet, and sets up and maintains web sites for
business and other entities.
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 $230,874 has been provided
for both 1998 and 1997.
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 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, 1998 and 1997,
aggregated $75,710 and $336,791, respectively. Related amortization,
utilizing the straight-line method, for the year ended September 30, 1998
and 1997, aggregated $94,699 and $46,916, respectively. Accumulated
amortization of product development costs aggregated $372,758 and $278,059,
at September 30, 1998 and 1997, respectively.
E. Allowance For Doubtful Accounts
The allowance for doubtful accounts at September 30, 1998 and 1997, is $0
for both years.
-6-
<PAGE>
EXPERTELLIGENCE, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1998 and 1997
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, 1998 and 1997, there were nocosts 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, 1998 and 1997. Stock
options were not considered in the computation of common equivalent shares
for 1998 and 1997, 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. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1998 and 1997
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.
L. Principles of Consolidation
The 1998 and 1997 consolidated financial statements include the accounts of
ExperTelligence, Inc. and its wholly-owned subsidiary, ExperTelligence
Canada, Inc. All inter-company accounts and transactions have been
eliminated in consolidation.
M. Stock-Based Compensation
The Company accounts for compensation costs related to employee stock
options and other forms of employee stock-based compensation plans in
accordance with the requirements of Accounting Principles Board Opinion 25
("APB 25"). APB 25 requires compensation costs for stock-based
compensation plans to be recognized based on the difference, if any,
between the fair market value of the stock on the date of the grant and the
option exercise price. In October 1995, the Financial Accounting Standards
Board issued Statement of Financial Accounting Standards 123, Accounting
for Stock-Based Compensation ("SFAS 123"). SFAS 123 established a fair
value-based method of accounting for compensation costs related to stock
options and other forms of stock-based compensation plans. However, SFAS
123 allows an entity to continue to measure compensation costs using the
principles of APB 25 if certain pro forma disclosures are made. SFAS 123
is effective for fiscal years beginning after December 15, 1995. The
Company adopted the provisions of pro forma disclosure requirements of SFAS
123 in fiscal year 1997.
Options granted to non-employees are recognized at their estimated fair
value at the date of grant.
-8-
<PAGE>
EXPERTELLIGENCE, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1998 and 1997
Note 2 - PROPERTY AND EQUIPMENT
Depreciation expense for the years ended September 30, 1998 and 1997, is
$20,128 and $17,916, respectively. Property and equipment at September 30,
1998 and 1997, is summarized as
follows:
1998 1997
Furniture and fixtures $ 33,983 $ 33,983
Purchased software 9,662 8,929
Equipment 391,667 373,486
435,312 416,398
Less: Accumulated depreciation 382,580 362,451
$ 52,732 $ 53,947
Note 3 - SHAREHOLDERS' EQUITY
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, 1998 and 1997. 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, 1998 and 1997, 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, 1997, the board has not granted any options under the NSOP.
As of September 30, 1997, there are no options outstanding under the 1983
ISOP. This plan was terminated as of September 30, 1997.
-9-
<PAGE>
EXPERTELLIGENCE, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1998 and 1997
Note 4 - STOCK OPTION PLANS (continued)
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 had reserved 200,000 shares
of common stock for the exercise of options under this plan. 195,000
options were granted 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).
The plan was terminated as of September 30, 1997.
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. Options expire ten years after the date of grant unless an
earlier expiration date is set at the time of grant. The Company has
reserved a total of 475,000 shares of common stock for the exercise of
options under this Plan. No options have been granted under the
Nonqualified Stock Options plan.
-10-
<PAGE>
EXPERTELLIGENCE, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1998 and 1997
Note 4 - STOCK OPTION PLANS (continued)
C. 1996 Equity Participation Plan
Stock option activity is shown below:
<TABLE>
<CAPTION>
Weighted Average
Grant Date Fair
Value of Options
Number of Weighted Average Granted During
Shares Exercise Price Year
<S> <C> <C> <C>
1997
Outstanding at
beginning of year 87,500 $ 4.00
Granted 191,000 4.10 $ 4.78
Exercised - -
Cancelled 80,000 4.00
Outstanding at end
of year 198,500 4.10
Exercisable at end of
year 7,500 4.00
1998
Outstanding at
beginning of year 198,500 $4.10
Granted 60,000 1.435 $ 1.75
Exercised - -
Cancelled 80,000 4.25
Outstanding at end
of year 178,500 3.14
Exercisable at end
of year 29,700 4.00
</TABLE>
Statement of Financial Accounting Standards 123, "Accounting for Stock-
Based Compensation", encourages but does not require companies to record
compensation cost for stock-based employee compensation plans at fair
value. The Company has chosen to continue to account for stock-based
compensation using the intrinsic value method prescribed in Accounting
Principles Board Opinion 25, "Accounting for Stock Issued to Employees",
and related interpretations. Accordingly, compensation cost for stock
options is measured as the excess, if any, of the quoted market price of
the Company's stock at the date of grant over the amount an employee must
pay to acquire the stock.
- -11-
<PAGE>
EXPERTELLIGENCE, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1998 and 1997
Note 4 - STOCK OPTION PLANS (continued)
C. 1996 Equity Participation Plan (continued)
Had compensation costs for the plan been determined based on the fair value
of the options at the grant dates consistent with the method of SFAS 123,
the Company's net income and earnings per share would have been:
1998 1997
Net loss
As reported $ (64,011) $ (146,909)
Pro forma (242,516) (231,904)
Primary earnings per share
As reported (.0393) (.0929)
Pro forma (.1486) (.1467)
These pro forma amounts may not be representative of future disclosures
because they do not take into effect pro forma compensation expense related
to grants made before 1996. In addition, potential deferred tax expense
and benefits of approximately $71,100 and $34,100, respectively, has not
been reflected in the pro forma amounts. The fair value of these options
was estimated at the date of the grant using the
Black-Scholes option-pricing model with the following weighted average
assumptions for 1998 and 1997:
1998 1997
Expected life (years) 10 10
Risk-free interest rate 6% 6%
Volatility 160% 25%
Expected dividends None None
Note 5 - COMMON STOCK
During the year ended September 30, 1998, the Company redeemed 700 of its
own shares. To properly record the redemption, common shares issued and
outstanding was reduced by 700 shares, the dollar amount of common stock
was reduced by $1,737 and retained earnings was increased by $37.
- -12-
<PAGE>
EXPERTELLIGENCE, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1998 and 1997
Note 6 - INCOME TAXES (continued)
Income tax expense (benefit) for the years ended September 30, 1998 and
1997, are as follows:
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
Current $ 800 $ 800
Deferred (40,000) (126,000)
Total $ (39,200) $ (125,200)
</TABLE>
Components of the deferred tax assets and (liabilities) recognized in the
balance sheet at September 30, 1998, are as follows:
<TABLE>
<CAPTION>
Current Non-current
<S> <C> <C>
Accrued vacation pay $ 26,000 $ -
Property and equipment - (6,000)
Software costs - (265,000)
Investment in subsidiary - (78,000)
Deferred state tax 9,000 (2,000)
Net operating losses 90,000 921,000
Deferred tax credits - 226,000
125,000 796,000
Deferred tax assets valuation allowance - (443,000)
Deferred tax asset $ 125,000 $ 353,000
</TABLE>
Reconciliation of the difference between income taxes computed at Federal
statutory tax rates and provision for income taxes, for the year ended
September 30, 1998, is as follows:
Income taxes computed at Federal statutory tax rate $ (24,000)
State tax provision 3,000
Graduated tax rates (7,000)
Net operating loss and deferred credits 69,000
Valuation allowance (80,200)
Provision for income taxes $ (39,200)
-13-
<PAGE>
EXPERTELLIGENCE, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1998 and 1997
Note 6 - INCOME TAXES (continued)
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.
As of September 30, 1998, 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 Net Operating Tax Net Operating Tax
September 30 Losses Credits Losses Credits
<S> <C> <C> <C> <C>
1999 $ 28,000 $ 56,000 $ - $ -
2000 487,000 30,000 - -
2001 390,000 - - -
2002 309,000 - 171,000 -
2003 125,000 - 38,000 -
2004 - 6,000 - -
2005 614,000 30,000 - -
2006 481,000 39,000 - 9,000
2007 68,000 14,000 - 16,000
2008 - 10,000 - -
2009 - - - -
2010 - 1,000 - -
2011 - 4,000 - 8,000
2012 342,000 2,000 - 1,000
2013 76,000 - - -
$ 2,920,000 $ 192,000 $ 209,000 $ 34,000
</TABLE>
-14-
EXPERTELLIGENCE, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1998 and 1997
Note 6 - INCOME TAXES (continued)
Components of the deferred tax assets (liabilities) recognized in the
balance sheet at September 30, 1997, are as follows:
<TABLE>
<CAPTION>
Current Non-current
<S> <C> <C>
Accrued vacation pay $ 24,000 $ -
Property and equipment - (8,000)
Software costs - (264,000)
Investment in subsidiary - (91,000)
Deferred state tax 8,000 2,000
Net operating losses 78,000 992,000
Deferred tax credits - 223,000
110,000 854,000
Deferred tax assets valuation allowance - (526,000)
Deferred tax asset $ 110,000 $ 328,000
</TABLE>
Reconciliation of the difference between income taxes computed at Federal
statutory tax rates and provision for income taxes, for the year ended
September 30, 1997, is as follows:
Income taxes computed at Federal statutory tax rate $ (93,000)
State tax provision 10,000
Graduated tax rates (16,000)
Net operating loss and deferred credits 1,000
Valuation allowance (27,200)
Provision for income taxes $ (125,200)
Note 7 - SIGNIFICANT CUSTOMERS AND CREDIT RISK
For the year ended September 30, 1998, 68% of accounts receivable was
concentrated between two customers. Three customers accounted for
approximately 71% of total revenue.
For the year ended September 30, 1997, 69% of accounts receivable was
concentrated among three customers. These same three customers accounted
for approximately 54% of total revenue.
-15-
<PAGE>
EXPERTELLIGENCE, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1998 and 1997
Note 8 - CASH AND CASH EQUIVALENTS - CONCENTRATION OF CREDIT RISK
Uninsured cash balances were $31,985 at September 30, 1998, and $0 at
September 30, 1997.
Note 9 - LINE OF CREDIT
On October 14, 1997, the Company reactivated a line of credit that had
expired January 31, 1996. The limit on this line of credit is $30,000. The
balance on this line of credit at September 30, 1998, was 0.
On February 25, 1998, the Company opened a second line of credit that
expires February 1, 1999. The limit on this line of credit is $100,000. It
is secured by inventory, receivables, contract rights and furniture and
fixtures. The balance on this line of credit at September 30, 1998, was 0.
Note 10 - NON-CASH TRANSACTIONS
During the year ended September 30, 1997, the Company issued 40,000 shares
of common stock at $4.00 per share to acquire a wholly owned subsidiary
(see Note 12).
During the year ended September 30, 1997, the Company issued 1,300 shares
of common stock at $3.00 per share to pay for legal expenses.
Note 11 - 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, 1998 and 1997, 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.
- -16-
<PAGE>
EXPERTELLIGENCE, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1998 and 1997
Note 12 - BUSINESS ACQUISITION
On March 12, 1997, the Company acquired Cerebral Systems Development
Corporation (formerly CSD, now ExperTelligence Canada, Inc.) for an
aggregate purchase price of $188,052 (excluding acquisition costs of
$44,473), consisting of $28,052 cash and the issuance of 40,000 shares of
common stock of the Company at $4.00 per share. ExperTelligence Canada,
Inc. (ET Canada) is a Canadian company that develops software, which is
sold worldwide, mainly over the Internet.
The acquisition was accounted for as a purchase and, accordingly, the
acquired assets and liabilities were recorded at their estimated fair
market values at the date of acquisition. The purchase price plus costs
directly attributable to the completion of the acquisition have been
allocated to the assets and liabilities acquired. Approximately $210,000
of acquisition costs represents product development costs that have reached
the technological feasibility stage. There is no goodwill deemed to be a
part of the aggregate purchase price. The Company's consolidated results of
operations include the operating results of ET Canada from the acquisition
date.
The following unaudited pro forma condensed combining statements of
operations of the Company and ET Canada for the year ended September 30,
1997 has been prepared to illustrate the effect of the acquisition which is
being accounted for as a purchase, as if the acquisition had occurred on
October 1, 1996. Adjustments have been made including the issuance of
common stock as part of the acquisition. The pro forma information is
presented for illustrative purposes only, and is not necessarily indicative
of what actual results of operations would have been during such periods.
Year Ended
September 30, 1997
Income Statement
Net sales $ 993,204
Net loss (131,570)
Net loss per share (.0833)
-17-
<PAGE>
EXPERTELLIGENCE, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1998 and 1997
Note 13 - COMMITMENTS AND CONTINGENCIES
Leases
Starting on January 1, 1997, the Company leased its office space under a
non-cancelable operating lease through December 31, 1998 for monthly rental
payments of $2,350. The monthly rental rate will be adjusted on January
1st of each subsequent year to reflect the year-to-year percentage change
in the Los Angeles Consumer Price Index for September. Total office rent
expense for the years ended September 30, 1998 and 1997 is $28,494 and
$28,200 ($21,150 under the non-cancelable lease), respectively. It is the
Company's intent to extend the lease for two years, to December 31, 2000.
Future minimum lease payments for the year ending September 30, are as
follows:
1999 $ 28,704
2000 28,704
2001 7,176
Total $ 64,584
Note 14 - SUBSEQUENT EVENTS
On October 7, 1998, the Company issued 16,667, shares of common stock,
valued at $50,000, in exchange for marketing and consulting services. The
$50,000 was included in accounts payable and expense as of September 30,
1998.
The Company is in the process of converting an account receivable balance
of $51,585 into a long-term note receivable. This amount has been
reclassified on the September 30, 1998, balance sheet to a long-term
accounts receivable.
- -18-
<PAGE>
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 46 President, Chairman of the Board 1980
Robert Reali 37 Vice President, Director 1988
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. David Swan resigned in January 1998
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 1997 fiscal year.
Name & Position Year Salary Bonus Other Annual
Compensation
Denison Bollay, CEO 1997 $151,200 $0 $151,200
Robert Reali, VP Dev 1997 $ 64,500 $0 $ 66,000
David Swan, VP Sales 1997 $ 80,462 $0 $ 6,415
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,
1997, (ii) the number of options exercised prior to September 30, 1997,
iii) the number of options currently exercisable as of September 30, 1997,
and iv) the average per share option exercise price. As of September 30,
1998 198,500 options had not 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 95,000 0 0 $2.72
Robert Reali 25,000 0 0 $2.72
Ofelia Garcia 5,000 0 0 $4.00
George Barilla 18,000 0 0 $2.72
Beverly Pierson 25,500 0 0 $2.84
Brad Bradbury 5,000 0 0 $1.44
Sahap Yuzer 5,000 0 0 $1.44
</TABLE>
<PAGE>
Item 11. Security Ownership of Certain Beneficial Owners and
Management
On September 30, 1998, no person owned beneficially more than five percent
(5%) of the outstanding shares of the common 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
203 Chapala Street
Santa Barbara, CA 93101 395,463 24.2%
BNP Venture Capital Corporation
c/o Bank of the West
50 W. San Fernando, 2nd Floor
San Jose, CA 95113 150,000 9.2%
Officers and Directors as a Group 440,463 28.3%
Item 12. Certain Relationships and Related Transactions
None.
Item 13. Exhibits and Reports on Form 8-K.
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.
Denison Bollay, President, Chief
Financial Officer and Chairman of the Board
December 29,1998
Robert Reali, Director
December 29, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-END> SEP-30-1998
<CASH> 130,149
<SECURITIES> 0
<RECEIVABLES> 102,409
<ALLOWANCES> 0
<INVENTORY> 66,723
<CURRENT-ASSETS> 440,851
<PP&E> 435,312
<DEPRECIATION> 382,580
<TOTAL-ASSETS> 1,699,312
<CURRENT-LIABILITIES> 151,492
<BONDS> 0
<COMMON> 1,471,921
0
159,244
<OTHER-SE> 1,547,820
<TOTAL-LIABILITY-AND-EQUITY> 1,699,312
<SALES> 897,226
<TOTAL-REVENUES> 897,226
<CGS> 327,881
<TOTAL-COSTS> 1,000,365
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,879
<INCOME-PRETAX> (103,211)
<INCOME-TAX> (39,200)
<INCOME-CONTINUING> (103,211)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (64,011)
<EPS-PRIMARY> (.04)
<EPS-DILUTED> (.04)
