<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-KSB
(Mark One)
Annual Report Pursuant to Section 13 or 15(d) of
X The Securities Exchange Act of 1934 [Fee Required]
FOR THE FISCAL YEAR ENDED JUNE 30, 1996
OR
Transition Report Pursuant to Section 13 or 15(d) of
___ The Securities Exchange Act of 1934 [No Fee Required]
For the transition period from _______________ to _______________
Commission File Number 0-13022
INTELLICORP, INC.
(Name of small business issuer in its charter)
DELAWARE 94-2756073
(State or other jurisdiction (I.R.S. Employer
of incorporation) Identification No.)
1975 EL CAMINO REAL WEST
MOUNTAIN VIEW, CALIFORNIA 94040-2216
(Address of principal executive offices) (Zip Code)
Telephone number: (415) 965-5500
Securities registered pursuant to
Section 12(b) of the Act: NONE
Securities registered pursuant to
Section 12(g) of the Act:
COMMON STOCK, $.001 PAR VALUE
(Title of class)
Check whether the registrant (1) filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act during the past 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 registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB.
___X__
Registrant's revenues for its most recent fiscal year:
$10,992,000.
The aggregate market value of the voting stock held by
nonaffiliates on September 5, 1996 computed by reference to the average bid and
ask price as of that date was $22,336,407.(1)
As of August 30, 1996, 12,396,512 shares of registrant's Common
Stock, par value $.001 per share, were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
<TABLE>
<CAPTION>
Incorporated
Document in Form 10-KSB
-------- --------------
<S> <C>
Definitive Proxy Statement to be filed with the Securities Part III
and Exchange Commission on or prior to October 28, 1996 and to be used in
connection with the Annual Meeting of Stockholders to be held December 6,
1996.
</TABLE>
- --------
(1) Excludes 2,469,220 shares held by directors, officers and 10% stockholders
of registrant.
<PAGE> 2
PART I
Item 1. Business.
General. The Company develops, markets and supports object-oriented
software environments that empower commercial customers to create live models of
their business operations and processes. IntelliCorp provides software tools and
services enabling organizations to create live models of their operations. These
powerful, interactive models:
-- enable improved understanding and accelerated implementation of
complex software systems;
-- provide the necessary foundation for building complex reasoning and
transformation systems; and
-- promote rapid re-use of software components and applications.
IntelliCorp principal products are offered under the family name
ModelWorks(TM). LiveModel(TM) is an object-oriented analysis and design
environment that includes the Company's new PC-based product for modeling the
SAP(TM) R/3(TM) system. PowerModel is an object-oriented development and
delivery environment for UNIX/X-Motif and MS-Windows client-server applications;
Kappa-PC(R) provides similar capabilities for PCs running DOS/MS-Windows. A
number of these products can be connected to databases and software applications
on mainframe, UNIX and PC platforms, and offer organizations the ability to
translate business model definitions and needs into cost-effective software
applications. In addition, PowerModel and LiveModel can be extended through
ModelBridge(TM) solutions which are provided to customers as a combination of
class libraries and support services.
For fiscal year 1996, product development efforts were focused on
new and enhanced versions of the LiveModel and PowerModel products. In April
1996, LiveModel 2.0 and PowerModel 3.2 were released for general availability.
In June 1996, LiveModel: SAP R/3 Edition was commercially released to address
the need for a modeling tool to assist companies which are implementing SAP's
R/3 system. The SAP R/3: Edition is a Windows 95 and Windows NT 4.0 product
that incorporates the R/3 Reference Model supplied by SAP.
IntelliCorp believes that increased acceptance of its software
products depends in large part on the successful development by its customers of
software applications which use the Company's products as a foundation, and
adoption by consulting firms who assist their customers in implementing complex
systems such as SAP's R/3 system. To stimulate and support the development of
such customer applications and adoption of these tools, IntelliCorp provides
training, support and consulting/application development services.
IntelliCorp markets its products directly and through independent
software vendors ("ISVs"), value-added resellers ("VARs"), representatives and
distributors. Its customers are mainly large corporations, consulting firms,
government agencies and universities.
In December 1994, GTE Telephone Operations licensed LiveModel/PowerModel
on a worldwide basis. Approximately 29% and 33% of the Company's fiscal 1996 and
fiscal 1995, respectively, revenues were attributable to this and other GTE
contracts. The Company's related development contract with GTE was canceled in
September 1995. Termination of the development effort resulted from business
reasons internal to GTE and unrelated to IntelliCorp's performance under the
development contract.
2
<PAGE> 3
In October 1995, IntelliCorp implemented a restructuring program which
included a reduction in work force of approximately 30%. In part as a result of
the cancellation of the GTE contract and the restructuring, fiscal 1996 revenues
decreased 37% and operating costs and expenses decreased 26% from those of
fiscal 1996.
Concurrent with these events, the Company refocused on the SAP market
and demonstrated the concept for LiveModel: SAP R/3 Edition at the SAPPHIRE User
Conference in Phoenix in September 1995. The Company has forged a new
relationship with SAP which included a Licensing and Distribution Agreement to
package the R/3 Reference Model with the Company's products and a Joint
Development Agreement for future technical investment by both parties.
The revenues from the SAP agreement as well as the revenues derived from
the license of the LiveModel: SAP R/3 Edition and related consulting and support
services are expected to provide an increasing portion of the Company's revenue
base. Revenues for LiveModel products comprised 28% of the revenues for fiscal
year 1996 as compared to 21% for fiscal year 1995.
Technology Base. IntelliCorp's products derive from several important
software technologies including: object-oriented programming, incremental
development tools, modeling and encapsulating technology and active and visible
graphical interfaces.
With IntelliCorp's object-oriented programming technologies, a
programmer can efficiently model real-world entities (such as a customer support
organization or an accounting department or a factory floor) that describe a
business and its processes, and the underlying rules and policies of the
business process being implemented. With their representation capabilities,
objects easily express the characteristics, attributes and behavior of these
entities and the relationships between them. Using objects, rather than
traditional programming, to express complex characteristics and relationships
can reduce the cost to business of managing, maintaining and extending software
applications over their lifetimes.
IntelliCorp's products provide a set of tools for creating high-impact
graphic user interfaces ("GUIs"). Customizable active graphic packages are
available to software developers and link directly to the underlying object
base. Sophisticated custom interface functionality can be easily assembled and,
at delivery to the end user, provides user-friendly dynamic GUIs for solution
presentation.
The models developed with these tools may be interfaced with other
programs and databases and are "live" and executable at every stage of the
development process, providing immediate feedback and new levels of flexibility
to analysts and programmers.
The LiveModel System. There are two versions of the LiveModel System.
The PC version, LiveModel: SAP R/3 Edition, is focused on assisting companies to
implement the SAP R/3 system. The UNIX version is a more general modeling tool
for software analysis and design.
LiveModel: SAP R/3 Edition is a highly modular scaleable modeling tool,
using OLE V2.0 (Microsoft's Object Linking and Embedding technology) as the
integration mechanism between modules. The LiveModel system's key components
include:
3
<PAGE> 4
-- ModelStore - an object-oriented repository for the models created
with LiveModel. It supports Reference Model licensed from SAP and
derivative user models created with LiveModel: SAP R/3 Edition.
-- ModelServer, which instantiates the SAP EPC methodology and is
extensible to handle other modeling methodologies (such as OOIE) in
the future.
-- ViewServers - graphical viewers or batch reporting tools that
access, manipulate, annotate and report on model data stored within
the ModelStore and as described by the ModelServer.
LiveModel's (UNIX) object-oriented tools let the developer use a variety
of modeling techniques to visualize aspects of an application. The Object
Diagrammer is used to model the objects in an application and express the
relationships between them. The Event Diagrammer models the business process and
information on the process flow in an application. The Business Rule Editor
allows the representation of business policies in the application and makes the
business rules used in an application explicit, visible and easy to modify and
validate. The Scenario Manager maintains test cases to execute and validate the
graphical business models created in LiveModel. The Report system automatically
provides reports on LiveModel applications. The newly introduced beta version of
the multideveloper support tool allows multiple developers to work on the same
models concurrently.
LiveModel, version 1.0, (UNIX) was commercially released in December
1993 and version 2.0 was released in April 1996. LiveModel: SAP R/3 Edition 1.0
(Microsoft Windows) was released in June 1996.
The PowerModel System. In April 1996, IntelliCorp commercially released
the PowerModel system, version 3.2, based on the C programming language, the
UNIX operating system and the X Windows interface. This product was initially
introduced in 1990. PowerModel is aimed at corporate and independent software
vendor developers. These individuals are generally trained as professional
programmers and are familiar with more complex technical issues. PowerModel 3.2
includes many features including: portability across UNIX and MS Windows
platforms, new interface building tools, and C++ interoperability.
PowerModel is comprised of two primary integrated components: a
graphical application development environment and a set of delivery components.
The application development environment offers programmers and designers
development and debugging tools that enhance productivity in building and
maintaining applications beyond that offered by traditional programming
languages, such as C, C++ and COBOL. With PowerModel 3.2, applications developed
in UNIX can be delivered on PCs in the Microsoft Windows environment as well as
under UNIX/X-Motif, both in stand-alone and client-server fashion.
Core technologies in PowerModel/LiveModel aid a programmer's effort to
translate business problems into software solutions. These are: object-oriented
programming, the ProTalk(TM) pattern matching and query language for objects, an
end-user interface toolkit for constructing graphic and form-based clients, the
ActiveRelations(TM) package to manage constraints and propagate values over
objects (i.e., a spreadsheet for objects), and links to other software
applications.
4
<PAGE> 5
ModelBridge Solutions. The Company's family of products interoperate
with certain middleware software products through ModelBridge solutions. These
solutions include class libraries that export from the LiveModel design tool to
the target development and delivery environment. Support services are packaged
with the class libraries to insure successful utilization of the ModelBridge
class libraries. Consulting services are available to customize the class
libraries to the customer's specific requirements and to assist in their
implementation on their application.
Kappa-PC System. Based on the C programming language, Kappa-PC features
object-oriented programming, active graphics, compact code size, and links to
other software applications, spreadsheets and databases. Kappa-PC can be used by
customers on industry-standard PCs, and is aimed at the PC developer building
single user departmental applications.
The KEE(R) System. IntelliCorp continues to market the Lisp-based KEE
(Knowledge Engineering Environment) system (originally introduced in August
1983) for complex AI and expert system applications. The KEE system, version
4.1, released in May 1993, is available on HP 9000 Series 700 and 800
workstations, the Sun SPARCstation and IBM RS6000 workstation. KEE 4.1 provides
support for the X Windows interface, a color capability and an enhanced
development environment. The KEE system is typically used for complex
applications, enabling users to develop their own knowledge-based systems for a
broad range of commercial and scientific applications.
Customer Service and Support. To stimulate and support customer
applications using the ModelWorks products, IntelliCorp provides support
packages to its customers, including program maintenance and updates,
documentation, training in the use of its software, on-site consultation and
applications support via telephone or electronic mail.
The Company offers apprenticeship programs, application development and
methodology workshops and other consulting programs for customers who desire
more than the standard support package. Under these programs, customer employees
work on their application programs for several weeks at the Company's offices
under the direction of an IntelliCorp engineer in an effort to produce a
prototype system and enhance the skills needed to develop high-quality
production applications.
Custom System Projects. The Company engages, on a contract basis, in the
development of applications for clients who desire direct involvement of
IntelliCorp's engineers during implementation of systems using IntelliCorp's
products. Services may include problem evaluation, system requirements
specification, prototype development, external system interface and integration,
and final system implementation.
Marketing and Sales. IntelliCorp's marketing strategy utilizes multiple
channels to reach the marketplace. These include telesales, direct licensing to
major accounts, both by corporate headquarters personnel and through regional
offices, as well as the development and support of ISVs, VARs, distributors and
representatives with whom the Company has cooperative marketing agreements. The
Company works closely with consulting firms and system integrators to provide
packaged solutions to it's customers. The Company has traditionally focused on
the telecommunications, manufacturing, financial, utilities, transportation and
government industries.
5
<PAGE> 6
In May 1996 Hewlett Packard announced that its SAP Americas Consulting
Practice would use LiveModel: SAP R/3 Edition in HP's newly introduced
accelerated SAP implementation approach. In June 1966 IntelliCorp entered into
an agreement with Deloitte & Touche Consulting Group/ICS (ICS) under which ICS
will load LiveModel: SAP R/3 Edition on every ICS consultant's laptop computer
to help customers make better engineering decisions and accelerate SAP
implementations.
Direct Licensing. IntelliCorp identifies customers who have needs for
its products and services and have the ability to develop applications for
internal use or relicensing. Applications developed by customers include
transaction-based systems. Specific examples include computer network
management, factory simulation and scheduling assistance, configuration of
complex products to customer specification, advice to design engineers to reduce
manufacturing faults, diagnosis of electronic and mechanical products,
assistance to customer service representatives, allocation of manufacturing
resources, passenger and cargo space management, scheduling preventative
maintenance for aircraft, optimizing the results of direct mail campaigns,
screening financial data for errors, experiment design, and materials planning.
IntelliCorp has sales offices in the Atlanta, Chicago, London, and
Washington D.C. areas. Its sales force uses direct mail, telephone and personal
contact marketing to identify potential customers, with an emphasis on major
corporate and government accounts. In addition, the Company's sales and
marketing efforts include a combination of exhibits and demonstrations at trade
shows and presentations at seminars.
Order backlog is not significant because IntelliCorp's practice is to
deliver its products promptly after the receipt of an order.
Distribution. IntelliCorp has entered into agreements pursuant to which
distributors in Brazil, Italy, Israel, Mexico, Portugal, South Korea, and Spain,
independent sales representatives in Japan and Netherlands, and dealers in Hong
Kong, Indonesia, Malaysia, Singapore, Taiwan, Thailand and Venezuela have been
granted rights to market and sublicense IntelliCorp's products in their
respective countries and certain other territories.
Competition. The Company believes that its ability to compete depends on
factors both within and outside its control, including the timing and success of
new products developed by the Company and its competitors, product performance
and price, distribution and customer support. There can be no assurance that the
Company will be able to compete successfully with respect to these factors.
The market for IntelliCorp's software products is intensely competitive
and is characterized by rapid change and frequent introduction of new products.
The important competitive factors in the industry are generation of and
integration with standard runtime environments, access to standard databases,
ability to support the client/server paradigm, support for popular
methodologies, product sophistication, features, reliability, price/performance
characteristics, ease of understanding and operating the software, integration
with conventional computing environments, availability and quality of support
and training services, and availability of the product on a variety of hardware
platforms. There can be no assurance that the Company will be successful in the
face of increasing competition from new products and enhancements introduced by
existing competitors and by new companies entering the market.
6
<PAGE> 7
The market for application development tools and languages for
client/server computing environments is intensely competitive and the Company
expects competition to continue to increase. The Company's competitors include a
broad range of companies that develop and market tools and languages for
software application development, including (i) providers of object-oriented
languages and tools, such as Smalltalk and products based upon Smalltalk, as
well as C++ and C; (ii) providers of object-based development tools; (iii)
providers of 4GL-based development tools; (iv) providers of CASE tools; and (v)
providers of modeling and/or diagramming tools, some of which operate, or may in
the future, operate in conjunction with SAP's R/3 System and who, for marketing
purposes, have formed or may, in the future, form strategic partnerships with
providers of commercially popular software systems, such as SAP. Vendors
marketing competing object-oriented languages and/or tools, include Brightware;
Centerline; Gensyn; Neuron Data; NeXT; ParcPlace; and Platinum Technologies.
Providers of 4GL application development tools include Borland; Informix;
Oracle; and Sybase. Providers of CASE tools include Cayenne; IDE; Rational;
Intersolv; Oracle; Texas Instruments; and Seer Technologies. Other companies
offering SAP R/3 modeling and implementation tools include: IDS Prof. Scheer,
Visio, Texas Instruments, Logic Works, and Micrographix. In addition, SAP offers
the Business Engineering Workbench with a subset of the capabilities of the
IntelliCorp products.
Many of the Company's current and prospective competitors have
significantly greater financial, technical, manufacturing and sales and
marketing resources than the Company. These companies as well as other hardware
and database software vendors can be expected to develop and market additional
competitive products in the future. In addition, a variety of established
companies are also building object-oriented products as extensions to their
existing product lines.
Product Research and Development. To date, substantially all of the
Company's research and development has been done in-house. IntelliCorp expects
that most of its software products will continue to be developed internally,
although it may on occasion outsource certain projects or acquire ownership of,
or rights to market, existing programs.
An agreement with Poet Software Corporation completed in December 1995
grants rights to IntelliCorp to license and deliver the Poet Object-Oriented
Database for use with LiveModel: SAP R/3 Edition. IntelliCorp resells the Poet
Database as part of its ModelStore offering in both single user (Client) and
multiuser (Server) configurations.
In April 1966, IntelliCorp announced the signing of two Agreements with
SAP AG --a licensing/distribution agreement to package the R/3 Reference Model
with the Company's products and a joint development agreement which includes a
formal commitment of resources on behalf of both parties to explore the utility
of IntelliCorp's technology within the content of the SAP R/S system.
A Joint Development Venture Agreement entered into in January 1992
between the Company, James Martin & Co., and James Martin provides for
technology exchange and joint product development of new CASE tools based on
IntelliCorp's object-oriented programming technologies and PowerModel product,
and implementing Dr. Martin's and James Odell's Object-oriented Information
Engineering methodology. The result of IntelliCorp's relationship with Dr.
Martin was the commercial release of LiveModel in December 1993.
7
<PAGE> 8
IntelliCorp owns all rights to LiveModel and any other products which
may be developed under the Agreement and pays royalties to Dr. Martin on
licenses of such products to customers.
The Company expensed $3,539,000, $4,210,000 and $2,766,000 on research
and development during the fiscal years ended June 30, 1996, 1995 and 1994,
respectively. In 1996 and 1994, respectively, an additional $295,000 and
$200,000 of product development costs were capitalized in accordance with
Statement of Financial Accounting Standards No. 86 (none in 1995), resulting in
total expenditures on product development for fiscal 1996 and 1994 of $3,834,000
and $2,966,000, respectively.
Product Protection. IntelliCorp regards its software as proprietary and
attempts to protect it by relying upon copyrights, trade secret and patent laws
and contractual nondisclosure safeguards as well as restrictions on
transferability that are incorporated into its software license agreements.
IntelliCorp licenses its software products (in object or binary form) to
customers rather than transferring title. In spite of these precautions, it may
be possible for competitors or users to copy aspects of IntelliCorp's products
or to obtain information which the Company regards as trade secrets without
authorization, or to develop similar technology independently. In addition,
effective copyright and trade secret protection may be unavailable or limited in
certain foreign countries. IntelliCorp has licensed a number of products,
including PowerModel, in source form (or human-readable form) to certain
customers and third parties, both in the United States and internationally, for
a variety of purposes, including porting to other platforms and globalization.
This practice increases the possibility of misappropriation or other misuse of
the Company's products. IntelliCorp has not required end-users of Kappa-PC and
LiveModel: SAP R/3 Edition to sign license agreements. Instead, the license
agreement for Kappa-PC and LiveModel: SAP R/3 Edition is included in the product
packaging, and the packaging explains that by opening the seal the user is
agreeing to the terms of the license agreement. It is uncertain whether
"shrink-wrap" license agreements of this type are legally enforceable.
IntelliCorp's first three patents, relating primarily to knowledge-based
technology, were issued between June 1987 and May 1990. IntelliCorp's fourth
patent with respect to certain technologies integrated in its PowerModel product
was issued in May 1994. The Company filed an additional patent application in
June 1994 relating to its LiveModel product. However, there can be no assurance
that any further patents will be issued with respect to the Company's products,
and existing patent and copyright laws afford only limited practical protection
to IntelliCorp. Although the Company believes that its products and technology
do not infringe on any existing proprietary rights of others, there exist
several patents with claims that might extend to IntelliCorp's products, which,
together with the growing use of patents to protect software, has increased the
risk that third parties may assert infringement claims against IntelliCorp in
the future.
In view of the rapid rate of technological change in the areas in which
it does business and the uncertainty of the scope of the protection afforded by
copyright and patent laws, IntelliCorp does not believe that copyrights or
patents will be of major competitive advantage to it. Rather, IntelliCorp
believes that it must rely primarily on the technical competence and creative
ability of its personnel to improve and update its software products and create
additional products in order to be successful.
8
<PAGE> 9
Employees. As of June 30, 1996, the Company employed 85 people, many of
whom hold advanced degrees. IntelliCorp's development engineers come from a
variety of commercial and research backgrounds. IntelliCorp believes that its
future success will depend, in large measure, on its ability to continue to
attract and retain qualified employees. None of IntelliCorp's employees is
covered by a collective bargaining agreement, and the Company believes that its
relations with its employees are good. The Company maintains competitive
compensation, benefits and equity participation programs. Competition for
qualified personnel is intense, and there can be no assurance that the Company
will be able to attract and retain qualified personnel in the future.
RISK FACTORS
In addition to the other risks described elsewhere in this Annual
Report, the Company's business is subject to the following risks:
Need for Acceptance of Modeling Technology and Company Products. The
market for the Company's products is new and evolving and its growth depends
upon broader market acceptance of modeling technology. Modeling technologies
represent fundamental shifts in analysis, design, and programming methodologies.
They require substantial investment in the retraining of programmers and
business analysts, which can be expensive and can reduce the productivity of
programmers and analysts during the training period. As a result, there can be
no assurance that organizations will choose to make the investment required to
use modeling techniques in planning their operations and for the enhancement of
their business or their clients' businesses.
Even if modeling technology gains broader market acceptance, there can
be no assurance that the Company's principal products will be accepted for
implementation of object-oriented and modeling technology. PowerModel and
LiveModel are both relatively new products with limited market acceptance. In
addition, even if PowerModel and LiveModel gain broader market acceptance, a
number of other vendors offer competing products. There are also a number of
other approaches to business and application modeling, including the use of
traditional CASE tools.
The Company has refocused its efforts on the SAP market and, in June
1996, LiveModel: SAP R/3 Edition was commercially released to address the need
for a modeling tool to assist companies who are implementing SAP's R/3 system.
As a result of refocusing the Company's business on the SAP market, increased
acceptance of the Company's software products will depend on continued market
acceptance of SAP's R/3 system. In addition, sales of the Company's SAP R/3
based products will depend on consulting firms and others who assist their
customers to implement the complex R/3 system. SAP has formed strategic
alliances with other companies to develop R/3 modeling/implementation software
packages and SAP itself offers products that include a subset of the
capabilities of IntelliCorp's products. While the Company believes that
LiveModel: SAP R/3 Edition offers advantages over competing products in this
market, there can be no assurance that the Company will be successful in
refocusing its business in the SAP R/3 market or that the Company's products
will successfully compete with others in this market.
In the fourth quarter of fiscal 1996, the Company introduced LiveModel:
SAP R/3 Edition. The Company's fiscal 1997 sales forecast anticipates a
significant portion of revenues to be derived from sales of and consulting
services related to LiveModel: SAP R/3 Edition. Factors which could impact the
level of revenues generated from LiveModel: SAP R/3 Edition include, but are not
limited to, the timing and level of market acceptance of the new product, the
timing of market introduction of competing products, and the success of sales
efforts with strategic partners. There can be no assurance, however, that the
actual sales will not differ materially from the sales forecast in the near
term.
9
<PAGE> 10
Rapid Technological Change; Product Development. The market for the
Company's products is characterized by ongoing technological developments,
evolving industry standards, rapid changes in customer requirements, and
increasing customer demands. As a result, the Company's success depends upon its
ability to continue to enhance its existing products, develop and introduce in a
timely manner new products that take advantage of technological advances, and
respond to new customer requirements and demands. Customer requirements include
portability across platforms, full "native" software, tools, systems, and
devices. To the extent one or more of the Company's competitors introduce
products that fully address these requirements, the Company's business could be
adversely affected. There can be no assurance that the Company will be
successful in developing and marketing enhancements to its existing products or
new products incorporating new technology on a timely basis or that its new
products will adequately address the changing needs of the marketplace. If the
Company is unable to develop and introduce new products or enhancements to
existing products in a timely manner in response to changing market conditions
or customer requirements or demands, the Company's business and results of
operations will be materially and adversely affected. Versions of LiveModel and
PowerModel are available for use on the UNIX operating system. UNIX enjoys
relatively limited market acceptance at present and there can be no assurance
that market acceptance for UNIX will expand or will not decrease.
The Company has also developed versions of LiveModel and PowerModel for
other operating systems, particularly Windows, and with the introduction of
LiveModel: SAP R/3 Edition, the Company has shifted its emphasis from UNIX
systems to Windows and other Microsoft operating systems. There can be no
assurance that this shift from UNIX to Windows will be successful or that the
Company will achieve significant sales of its Windows-based products.
In addition, the Company and SAP AG have a joint development agreement
under which the utility of the IntelliCorp technology within the content of the
SAP R/3 system is being explored. There is no assurance that SAP or IntelliCorp
will continue to find the mutual development of complimentary products to be in
their mutual best interests or that SAP will not terminate the partnership or
change their products or strategies in a way that is adverse to IntelliCorp.
Even though IntelliCorp may wish to further its relationship with SAP and its
development of products, there is no assurance that the Company will be
successful doing so.
Although the Company has a number of ongoing development projects, there
can be no assurance that the development of these products will be completed
successfully or on time, that the products will include the features required to
achieve market acceptance, or that enhancements to the products will keep pace
with broadening market requirements. There can be no assurance that the Company
will be successful in achieving and sustaining partnerships with third party
packaged systems vendors or with strategic consulting firms. From time to time
the Company or its competitors may announce new products, capabilities, or
technologies that have the potential to replace or shorten the life cycles of
the Company's existing products. There can be no assurance that announcements of
currently planned or other new products will not cause customers to defer
purchasing existing Company products. The Company has in the past experienced
delays in software development and there can be no assurance that the Company
will not experience further delays in connection with its current product
development or future development activities. Delays or difficulties associated
with new product introductions or product enhancements could have material
adverse effect on the Company's results of operations. Software products as
complex as those offered by the Company may contain undetected errors when first
introduced or as new versions are released. There can be no assurance that
errors will not be found in new products after commencement of commercial
shipments, resulting in loss of or delay in market acceptance. The Company
maintains no insurance for this risk.
10
<PAGE> 11
Dependence on Key Personnel. The Company is dependent upon a limited
number of key management, technical, and sales personnel, the loss of whom would
adversely affect the Company's business. In addition, the Company may, in the
future, need to augment or replace existing key management, technical, or sales
personnel in order to maintain or increase its business. Because of the
complexity and breadth of the Company's product line, in certain technical areas
the Company may have only a single employee with appropriate expertise. The loss
of any such employee can have the effect of slowing down or halting development
with respect to a product until the Company is able to locate and hire another
technical person with the requisite expertise. In addition, certain management,
technical, and support personnel are relatively new to the Company and the
Company's success in the future will depend in part on successful assimilation
of new personnel. The Company's future success will depend in part upon its
ability to attract and retain highly qualified personnel. The Company competes
for such personnel with other companies, academic institutions, government
entities, and other organizations. The ability to recruit, on a timely basis,
appropriate personnel to staff the various development efforts will be a key
factor in the success of those projects. If the Company cannot recruit the
appropriate personnel and must hire outside consultants to perform this work,
the contract margins may be adversely affected. There can be no assurance that
the Company will be successful in hiring or retaining qualified personnel. Loss
of key personnel or inability to hire and retain qualified personnel could have
a material adverse effect on the Company's business and results of operations.
Currently, the Company is seeking a Vice President of Sales. Recently, and from
time to time in the past, the Company has experienced significant turnover in
its sales force There can be no assurance that the Company will be able to
reduce this periodic turnover in its sales force or fill the position of Vice
President of Sales and the Company may lose sales opportunities.
Customers in the object-oriented technology market require tools that
can operate on many different hardware platforms and with many different
operating systems, tools, databases, systems, and devices. Because of the broad
range of features and functions required of the Company's products, their
development, maintenance, and use is extremely complex and requires the Company
to have technical personnel with a breadth of expertise. Highly qualified and
specialized personnel for sales, customer training, customer support, and
on-site consulting are required. These personnel requirements are very difficult
for the Company to manage and maintain because of its limited financial
resources. There can be no assurance that the Company will have the necessary
personnel to develop and commercialize its products successfully or to port
these products to the necessary hardware platforms and operating systems.
Dependence on Lower Margin Service Revenues. A significant amount of the
Company's revenues has been derived from contract and other services. The
operating margins from revenues for such services are substantially lower than
the operating margins from revenues for the Company's software products. This
disparity is principally due to the low cost of materials, royalties, and other
costs of the Company's software products, as compared to the relatively high
personnel costs incurred in providing consulting services. In addition, as the
proportion of contract and other service revenues increases, the overall margins
will decrease accordingly. As a result of the Company's reliance on contract and
other revenues, the Company's overall operating margins may be lower than those
for software companies that do not derive such a significant percentage of
revenues from contract and other services. In addition, the Company's operating
margins have in the past and may in the future vary significantly as a result of
changes in the proportion of revenues attributable to products and services.
11
<PAGE> 12
Lack of Profitability; Potential Future Losses. Over the last five
years, the Company has experienced aggregate consolidated net losses of
$24,139,000, including a net loss of $4,499,000 for the year ended June 30,
1996. In addition, the Company may incur a loss in fiscal 1997 and may also have
losses in future years. There can be no assurance that the Company will
eventually attain profitability or, if it attains profitability, that it will be
able to maintain profitability.
Working capital at June 30, 1996, was $2,850,000 as compared to
$2,272,000 at June 30, 1995. Management's financial plans for fiscal year 1997
anticipate sufficient revenues so as not to require additional capital
resources.
To remain listed for trading on the NASDAQ Stock Market, the Company is
required to maintain a minimum capital and surplus. In the past, the Company's
capital and surplus has fallen below the NASDAQ minimum, which required the
Company to exchange debt for preferred stock. Additional losses could adversely
affect the Company's ability to maintain the required minimum capital and
surplus in the future. However, the Company may, from time to time, need to
raise additional capital through debt or equity financing and there can be no
assurance that such financing will be available to the Company. If revenues for
fiscal year 1997 do not meet management's expectations and additional
financings are not available, management has the ability and intent to reduce
certain expenditures so as not to require additional capital resources.
Quarterly Results. The Company's quarterly revenues and operating
results have in the past, and may in the future, vary significantly due to such
factors as the timing of new product introductions, changes in pricing policies
by the Company and its competitors, market acceptance of new products, and
enhanced versions of existing products, the information systems department
budgets of its customers, and the length of sales cycles. Although a significant
portion of the Company's revenues in each quarter result from orders received in
that quarter, the majority of the Company's expense levels are fixed, based on
expectations of future revenues. In addition, a substantial amount of the
Company's quarterly revenues have typically been recorded in the third month of
the fiscal quarter with a concentration of such revenues in the last half of the
month. The timing of the closing of large license agreements increases the risk
of quarter to quarter fluctuations. As a result, if revenues are not realized as
expected, the Company's operating results will be materially adversely affected.
Accordingly, it is likely that the Company would experience disproportionate
declines in its operating results if revenues were to decline. In addition, it
is possible that in some future quarter the Company's operating results will be
below the expectations of public market analysts and investors. In such event,
the price of the Company's common stock would likely be adversely affected.
Customer Concentration. In the fiscal year ended June 30, 1996, revenues
from the sale of products and services to one commercial customer and one
related party accounted for 29% and 10%, respectively, of total revenue. The
Company does not currently have any long-term contracts with these customers and
the level of revenues received from these customers will not continue in future
periods. In addition, certain customers may account for a significant portion of
net revenues in a particular quarter, which may lead to significant variations
in quarterly results.
12
<PAGE> 13
Concentrated Product Line. The Company currently derives substantially
all of its revenue from LiveModel and PowerModel and related products and
services and expects this concentration to continue for the foreseeable future.
As a result, any factor adversely affecting the demand for, or pricing of,
LiveModel and PowerModel and related products and services would have a material
adverse effect on the Company's business and results of operations. The
Company's future financial performance will depend significantly on the
successful development and customer acceptance of new and enhanced versions of
LiveModel and PowerModel and other products.
Need for Channel Partners. In order for the Company to reach higher
levels of revenue and sustainable growth, the Company may require channel
partners for the sale and distribution of its products. Such partners may
include consulting firms, systems integrators, traditional software
distributors, or hardware or software companies with established distribution
channels. The Company has an arrangement with Hewlett-Packard and an agreement
with Deloitte & Touche Consulting Group/ICS to promote or to utilize the
Company's LiveModel: SAP R/3 Edition. These channel partners are instrumental in
gaining acceptance of IntelliCorp's modeling tools both for their consulting
methodology as well as by their customers for continuing operating requirements.
The Company anticipates that a significant portion of fiscal year 1997 revenues
will be generated through these arrangements and other similar arrangements or
agreements with consulting firms and hardware companies. There can be no
assurance that the Company will achieve significant sales through its
Hewlett-Packard and Deloitte & Touche ICS relationships or that the Company will
be successful in establishing additional channel partner arrangements or that if
such arrangements are established, they will prove to be commercially
successful.
Managing a Changing Business. Since its inception, the Company has
experienced changes in its operations which have placed significant demands on
the Company's administrative, operational, and financial resources. The
Company's future performance will depend in part on its ability to manage
change, both in its domestic and international operations, and to adapt its
operational and financial control systems as necessary to respond to changes in
its business. The failure of the Company's management to effectively respond to
and manage changing business conditions could have a material adverse effect on
the Company's business and results of operations.
International Operations. Approximately 31% of the Company's revenues
for the fiscal year ended June 30, 1996, were attributable to international
sales. Substantially all international revenues to date have been derived from
license revenues. The Company currently offers limited local language versions
of its products. Although it does intend to offer additional localized product
releases in the future, there can be no assurance that such releases will be
successfully developed or, if developed, that they will achieve market
acceptance. The Company faces certain risks as a result of international sales.
First, the results of the Company could be affected adversely by short-term
fluctuations in currency exchange rates. Additionally, the Company's
international operations may be affected by changes in demand resulting from
long-term changes in interest and currency exchange rates. The Company is also
subject to other risks associated with international operations, including
tariff regulations and requirements for export licenses, particularly with
respect to the export of certain technologies, which may on occasion be delayed
or difficult to obtain, unexpected changes in regulatory requirements, longer
accounts receivable payment cycles, difficulties in managing international
operations, potentially adverse tax consequences, economic and political
instability, restrictions on repatriation of earnings, and the burdens of
complying with a wide variety of foreign laws. In addition, the laws of certain
13
<PAGE> 14
countries do not protect the Company's products and intellectual property rights
to the same extent as do the laws of the United States. There can be no
assurance that such factors will not have an adverse effect on the Company
future international sales and, consequently, on the Company's business and
results of operations. With the exception of limited patent protection in
Canada, the Company has no patents protecting its products in foreign markets.
Volatility of Stock Price. The trading price of the Company's common
stock is subject to wide fluctuations in response to variations in the actual or
anticipated quarterly operating results of the Company, announcements of new
products or technological innovations by the Company or its competitors, and
general conditions in the industry. In addition, markets for securities of high
technology companies have experienced extreme price and volume trading
volatility in recent years. This volatility may have a substantial effect on the
market price of securities of many high technology companies for reasons
unrelated to the operating performance of the specific companies. These broad
market fluctuations may adversely affect the market price of the Company's
common stock.
In 1996, the Company had a convertible debt offering and issued
convertible preferred stock and warrants. The interest due on the notes and
dividends on preferred stock are payable in shares of common stock in lieu of
cash for two years. The notes and preferred stock are convertible into common
stock at the election of the holders. The Company is obligated to register for
resale the shares of common stock issuable with respect to the notes and
preferred stock. If all the shares reserved for these purposes were issued, it
would significantly increase the number of shares outstanding. Sales or issuance
of substantial amounts of Company common stock by the holders of the notes and
preferred stock or others in the future could adversely affect the market price
of the Company's common stock. Substantially all of the outstanding shares are
eligible for sale in the public market. In addition, the holders of stock
options could exercise their options and sell the vested shares in the public
market.
Item 2. Description of Property.
The Company's executive offices are located at 1975 El Camino Real West,
Mountain View, California. IntelliCorp leases approximately 34,000 square feet
of office and computer space at this facility pursuant to a lease which extends
through August 1998. This space is adequate to meet the Company's future needs.
IntelliCorp leases space for sales offices in the Chicago and Washington
D.C. areas and also leases its European sales office in London, England.
Item 3. Legal Proceedings.
Management is not aware of any material legal proceedings to which the
Company is a party or of which any of their properties are the subject.
Item 4. Submission of Matters to Vote of Security Holders.
Inapplicable.
PART II
Item 5. Market for Common Equity and Related Stockholder Matters.
IntelliCorp's common stock is traded on the over-the-counter market under the
NASDAQ symbol INAI. The following table sets forth the closing prices since July
1, 1994 for the common stock for the fiscal quarters indicated as reported by
NASDAQ. These over-the-counter market quotations reflect inter-dealer prices,
14
<PAGE> 15
without retail mark-up, mark-down, or commissions, and may not necessarily
represent actual transactions.
At June 30, 1996, there were approximately 614 registered stockholders
of the Company's common stock. IntelliCorp has not paid any cash dividends on
its common stock and does not plan to pay any dividends in the foreseeable
future. The Company's future dividend policy will be determined by its Board of
Directors on the basis of many factors, including results of operations, capital
requirements and general business conditions.
<TABLE>
<CAPTION>
Years ended June 30, 1996 1995
High Low High Low
<S> <C> <C> <C> <C>
1st Fiscal Quarter $3.25 $1.88 $2.94 $1.75
2nd Fiscal Quarter 2.44 1.06 3.00 1.88
3rd Fiscal Quarter 2.00 1.13 2.75 2.00
4th Fiscal Quarter 4.00 1.38 2.69 1.94
</TABLE>
Item 6. Management's Discussion and Analysis of Financial Condition and Results
of Operation.
RESULTS OF OPERATIONS
This annual report contains forward-looking statements that involve risks and
uncertainties. The Company's actual results may differ materially from the
results discussed in the forward-looking statements. Factors that might cause
such a difference include, but are not limited to, those discussed below and in
"Risk Factors"
The following table sets forth, for the periods indicated, certain
operational data as a percentage of total revenues and as a percentage change
from year to year (certain prior year revenue line items and associated cost of
revenue amounts have been reclassified to conform with the current year's
presentation):
<TABLE>
<CAPTION>
Percent increase
(decrease)
Percent of revenues 1996 1995
Years ended June 30, compared compared
1996 1995 1994 to 1995 to 1994
--------------------------------------------------------
<S> <C> <C> <C> <C> <C>
REVENUES:
Software 33% 58% 53% (64)% 57%
Contract services 44 29 29 (4) 46
Other services 23 13 18 13 1
- -----------------------------------------------------------------------------------------------------------------
Total revenues 100 100 100 (37) 44
COSTS AND EXPENSES:
Cost of software revenues 10 10 12 (35) 7
Cost of contract service revenues 24 21 16 (29) 93
Cost of other services revenues 5 6 7 (41) 13
Research and development 32 24 23 (16) 52
Marketing, general and administrative 55 51 71 (32) 4
Corporate restructure costs 4 - - N/M -
- -----------------------------------------------------------------------------------------------------------------
Total cost and expenses 130 112 129 (26) 25
- -----------------------------------------------------------------------------------------------------------------
Loss from operations (30) (12) (29) 62 (42)
Extraordinary item (11) - - N/M -
- -----------------------------------------------------------------------------------------------------------------
Net loss (41) (12) (31) 112 (43)
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
N/M - Not meaningful
15
<PAGE> 16
REVENUES. Total revenues were $10,992,000, $17,357,000 and $12,047,000 for
fiscal years 1996, 1995, and 1994, respectively. The Company's total revenue is
derived from three sources: software licenses, contract services and other
services including product support and training. The 37% decrease in fiscal 1996
total revenues as compared to fiscal 1995 revenues is largely due to the
termination of the GTE Telephone Operations ("GTE") development agreement in
September 1995, and the restructuring in October 1995. The GTE development
agreement represented 33% of the Company's total revenue in fiscal 1995 and has
not been replaced by similar size transactions in the current fiscal year. The
restructuring in October 1995 was undertaken to increase the Company's focus on
live business modeling tools for the Microsoft Windows platform and in support
of commercially popular purchased software systems.
Achievement of revenue goals is affected by numerous factors
beyond the Company's control, including competitors' product introductions,
market price, competition, and market acceptance of the Company's products.
Historical results of the Company may not be indicative of future operating
results.
Software revenues decreased 64% in fiscal 1996 from fiscal 1995.
This decrease is due primarily to the termination of the GTE development
agreement in September 1995. In fiscal 1995, software revenues of $4,887,000
from GTE were recognized while no software revenues from GTE were received in
fiscal 1996. The decline in revenues included a $5,431,000 decrease in sales of
PowerModel (formerly known as Kappa) and a $2,347,000 decrease in sales of
LiveModel (formerly known as Object Management Workbench). The revenue decline
in fiscal 1996 is attributed primarily to decreased unit sales rather than price
reductions. This decrease was offset by sales of $1,413,000 of the Company's
newest product, LiveModel: SAP R/3 Edition released in June 1996. LiveModel: SAP
R/3 Edition represented 39% of software revenues for fiscal 1996. PowerModel
revenues represented 26%, 63%, an 59% of total software revenues for the years
ended June 30, 1996, 1995 and 1994, respectively. Other LiveModel revenues
represented 20%, 30% and 22% of total software revenues for the years ended June
30, 1996, 1995 and 1994, respectively. The remainder of the Company's software
revenues is from the Kappa-PC and Lisp-based KEE(TM) products. Kappa-PC and KEE,
as a percentage of revenues, increased from 7% in fiscal 1995 to 15% in fiscal
1996; however, the decrease in absolute dollar amount of the sales of these
products will continue. The Company's ability to increase software revenues
depends upon, among other things, development of successful new and updated
products and upon these products meeting customer requirements. There can be no
assurance that the Company will successfully develop these products or that
these products will be successful in the marketplace.
Contract services revenues decreased 4% during fiscal 1996
compared to fiscal 1995. Although total revenue decreased, contract services
remained relatively unchanged due to continued consulting related to PowerModel.
The Company expects to perform additional contract services in the future.
However, because a majority of such services are performed on a short-term
basis, the ultimate trend for this type of revenue and the timing of the
services are difficult to predict.
Other services revenues, which consist primarily of training and
product support, increased 13% during fiscal 1996 compared to fiscal 1995. This
increase is primarily attributable to a one time payment received from GTE in
fiscal 1996 for product support.
The Company derived approximately 31%, 29% and 44% of its revenues
in fiscal years 1996, 1995 and 1994, respectively, from its international
operations. The Company expects that export sales will continue to provide a
significant portion of total revenues. However, changes in currency exchange
rates, strength of local economies and the inherent uncertainties in the
software market make these revenues difficult to predict.
COSTS AND EXPENSES. Cost of software revenues consists primarily of materials,
documentation, packaging, royalties and amortization of capitalized and
purchased software development costs. Cost of software revenues as a percentage
of software
16
<PAGE> 17
revenues decreased from 24% to 16% in fiscal years 1994 to 1995, respectively,
and increased to 29% in fiscal 1996. The fiscal 1995 decrease and fiscal 1996
increase in software cost, relative to software revenues, are partially
attributable to the significant portion of the expenses that are fixed in nature
such as salaries, amortization and depreciation expenses; therefore, revenue
fluctuations do not result in comparable changes in related costs.
Cost of contract services revenues consists primarily of
personnel, including outside consultants, and related costs. Cost of contract
services revenues as a percentage of the related revenues decreased to 56% in
fiscal 1996 compared to 75% in fiscal 1995, and 57% in fiscal 1994. As contract
services increase, the Company supplements its staff with outside consultants
until contract backlog supports the hiring of new staff and the additional
personnel can be hired and trained. When contract revenues increased
dramatically in 1995, the Company increased utilization of outside consultants,
which resulted in lower margins. In fiscal 1996, reliance on outside consultants
decreased.
Cost of other services revenues consists primarily of personnel
providing product support and training. Cost of other service revenues as a
percentage of the related revenues decreased to 20% in fiscal 1996 compared to
39% in fiscal 1995 and 35% in fiscal 1994. The decline in 1996 is due
principally to a reduction in training headcount.
The aggregate cost of revenues, as well as the resulting aggregate
gross margin, may fluctuate based on the mix of license, contract, or other
services performed in a particular period.
Research and development expense consists primarily of personnel
and related costs. The decrease of 16% in research and development expense in
fiscal 1996 compared to fiscal 1995 is mainly due to the reduction in force as a
result of the restructuring in the second quarter of fiscal 1996. Despite the
decrease in costs and lower revenues, research and development as a percentage
of revenues increased from 24% in fiscal 1995 to 32% in fiscal 1996 as the
Company focused on the completion of LiveModel products and new releases of
PowerModel. The Company anticipates that it will continue to commit substantial
resources to research and development in the future.
Marketing, general and administrative expense consists primarily
of personnel and related costs for marketing, selling, administration, finance,
information systems, human resources, and general management. The decrease of
32% in marketing, general and administrative expense in fiscal 1996 compared to
fiscal 1995 is also mainly due to the reduction in force as a result of the
restructuring in the second quarter of fiscal 1996.
In October 1995, the Company recorded a $414,000 pre-tax
restructuring charge which included the cost of providing severance pay and
benefits for the reduction of approximately 30 employees throughout the domestic
and international business, office closing costs for one international and two
domestic facilities and costs to revise the Company's annual report for the year
ended June 30, 1995, which was already in process at the time the decision was
made to restructure.
OTHER INCOME (EXPENSE). Interest income decreased from fiscal 1995 to fiscal
1996 due to lower average invested cash balances during the second and third
quarters of fiscal 1996.
Interest expense and other, net in fiscal 1996 consists primarily
of interest related to the convertible notes issued in April 1996. The Company
had not previously entered into any debt financing.
The provision for income taxes represents foreign withholding
taxes.
The Company incurred an extraordinary loss of $1,157,000 during
the fourth quarter of fiscal 1996 in connection with the exchange of convertible
notes for preferred stock and warrants. The loss reflects the excess of the
value of the preferred stock and warrants issuable to the noteholders over the
$1,800,000 of convertible debt obligations canceled as of June 1996.
17
<PAGE> 18
QUARTERLY RESULTS. The Company's quarterly revenues and operating results have
in the past, and may in the future, vary significantly due to such factors as
the timing of new product introductions, changes in pricing policies by the
Company and its competitors, market acceptance of new products and enhanced
versions of existing products, the research and development budgets of its
customers and lengthy sales cycles. Although a significant portion of the
Company's revenues in each quarter result from orders received in that quarter,
the majority of the Company's expense levels are fixed, based on expectations of
future revenues. In addition, a substantial amount of the Company's quarterly
revenues have typically been recorded in the third month of the fiscal quarter
with a concentration of such revenues in the last half of the month. The timing
of the closing of large license agreements increases the risk of quarter to
quarter fluctuations. As a result, if revenues are not realized as expected, the
Company's operating results will be materially adversely affected. Accordingly,
it is likely that the Company would experience disproportionate declines in its
operating income if revenues were to decline. In addition, it is possible that
in some future quarter the Company's operating results will be below the
expectations of public market analysts and investors. In such event, the price
of the Company's common stock would likely be adversely affected.
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash, cash equivalents and short-term investments were $4,124,000
at June 30, 1996 and $2,493,000 at June 30, 1995. The increase in fiscal 1996 is
primarily due to the issuance of convertible notes in April 1996 offset by the
cash used in operations. Spending for capital equipment was $277,000 in fiscal
1996, $569,000 in fiscal 1995 and $525,000 in fiscal 1994. As a result of the
reorganization in October 1995, capital spending was cut resulting in a decrease
between fiscal 1996 and fiscal 1995.
In April 1996, the Company issued $3,400,000 of seven-year senior
convertible notes which are due April 30, 2003. Interest only is payable
semi-annually in October and April at 10% per annum. Interest payments for the
first two years are payable, at the Company's option, in cash or in common stock
valued at 90% of the 20 day average bid price preceding the payment due date. In
June 1996, the Company agreed to issue 580,645 shares of preferred stock and
warrants to purchase 720,000 shares of common stock at $3.50 per share in
exchange for $1,800,000 of the convertible debt. The preferred stock is
convertible into common shares on a one-for-two basis, subject to adjustments
for dilutive events, and carries 10% cumulative dividends.
During March and April 1994, the Company sold 1,452,692 shares
(approximately 12% of the shares outstanding after the transaction) of the
Company's common stock to various investors at a price of $3.25 per share
resulting in net proceeds to the Company of $4,615,749.
The Company's capital resource commitments consist primarily of
operating lease obligations. For fiscal year 1996, the Company experienced a net
loss of $4,499,000. Working capital at June 30, 1996 was $2,850,000 as compared
to $2,272,000 at June 30, 1995. Management's financial plans for fiscal year
1997 anticipate sufficient revenues so as not to require additional capital
resources. However, the Company may, from time to time, raise additional capital
through debt or equity financing to take advantage of market opportunities.
There can be no assurance, however, that the Company will be able to raise
additional capital on favorable terms, if at all. If revenues for fiscal 1997 do
not meet management's expectations, and additional financings are not available,
management has the ability and may further reduce certain expenditures so as not
to require additional capital resources. As a result, the Company believes its
cash and cash equivalents at June 30, 1996 and cash collected from customers
will be adequate to fund its operations during fiscal 1997.
18
<PAGE> 19
ITEM 7. FINANCIAL STATEMENTS.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
Years ended June 30, 1996 and 1995
(In thousands, except share and per share amounts) 1996 1995
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 3,142 $ 2,493
Short-term investments 982 -
Accounts receivable (less allowance
for doubtful accounts: 1996, $322;
1995, $383) (Note 9) 2,217 4,414
Other current assets 214 153
- ---------------------------------------------------------------------------------------------------------------
Total current assets 6,555 7,060
Net property and equipment (at cost) 286 519
Capitalized software (less accumulated
amortization: 1996, $383; 1995, $1,523) 284 50
Other assets 276 471
- ---------------------------------------------------------------------------------------------------------------
$ 7,401 $ 8,100
- ---------------------------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 935 $ 1,010
Accrued compensation 570 858
Other current liabilities 1,453 1,588
Deferred revenues 746 1,332
- ---------------------------------------------------------------------------------------------------------------
Total current liabilities 3,704 4,788
CONVERTIBLE NOTES 1,600 -
COMMITMENTS
STOCKHOLDERS' EQUITY:
Preferred stock and warrants issuable 2,932 -
Preferred stock, $.001 par value -- 2,000,000
shares authorized, none outstanding - -
Common stock, $.001 par value -- 20,000,000
shares authorized; shares outstanding:
1996, 12,381,075; 1995, 12,087,162 12 12
Additional paid-in-capital 42,263 41,911
Accumulated deficit (43,110) (38,611)
- ---------------------------------------------------------------------------------------------------------------
Total stockholders' equity 2,097 3,312
- ---------------------------------------------------------------------------------------------------------------
$ 7,401 $ 8,100
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
19
<PAGE> 20
CONSOLIDATED STATEMENTS OF OPERATIONS
Years ended June 30, 1996, 1995 and 1994 (In thousands, except per share
amounts)
<TABLE>
<CAPTION>
1996 1995 1994
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
REVENUES:
Software $ 3,658 $ 10,098 $ 6,415
Contract services 4,851 5,071 3,463
Other services 2,483 2,188 2,169
- ------------------------------------------------------------------------------------------------------
Total revenues 10,992 17,357 12,047
- ------------------------------------------------------------------------------------------------------
COSTS AND EXPENSES:
Cost of revenues:
Software 1,045 1,620 1,508
Contract services 2,703 3,804 1,971
Other services 508 857 759
Research and development 3,539 4,210 2,766
Marketing, general and administrative 6,072 8,896 8,557
Corporate restructuring costs 414 - -
- ------------------------------------------------------------------------------------------------------
Total costs and expenses 14,281 19,387 15,561
Loss from operations (3,289) (2,030) (3,514)
- ------------------------------------------------------------------------------------------------------
OTHER INCOME (EXPENSE):
Interest income 120 135 131
Interest expense and other, net (60) - -
- ------------------------------------------------------------------------------------------------------
Total other income, net 60 135 131
- ------------------------------------------------------------------------------------------------------
Loss before income taxes (3,229) (1,895) (3,383)
Provision for income taxes (113) (232) (371)
- ------------------------------------------------------------------------------------------------------
Loss before extraordinary item (3,342) (2,127) (3,754)
Loss from extinguishment of debt (1,157) - -
- ------------------------------------------------------------------------------------------------------
Net loss $ (4,499) $ (2,127) $ (3,754)
- ------------------------------------------------------------------------------------------------------
Loss per common share:
Loss before extraordinary item $ (0.27) $ (0.18) $ (0.35)
Extraordinary item (0.10) - -
- ------------------------------------------------------------------------------------------------------
Net loss $ (0.37) $ (0.18) $ (0.35)
- ------------------------------------------------------------------------------------------------------
Shares used in computation of
loss per common share 12,209 12,040 10,586
- ------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
20
<PAGE> 21
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Preferred Notes
Stock receivable
Years ended June 30, and Additional from
1996, 1995, and 1994 Warrants Common Stock paid-in sale Accumulated
(In thousands) Issuable Shares Par value capital of stock deficit Total
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balances, June 30, 1993 $ - 9,877 $ 10 $ 36,137 $ (17) $(32,730) $ 3,400
Exercise of stock options - 668 1 616 - - 617
Sale of shares,
net of issue costs - 1,453 1 4,615 - - 4,616
Collection of notes
receivable - - - - 17 - 17
Issuance of warrants - - - 428 - - 428
Net loss - - - - - (3,754) (3,754)
- ----------------------------------------------------------------------------------------------------------------------------------
Balances, June 30, 1994 - 11,998 12 41,796 - (36,484) 5,324
Exercise of stock options - 59 - 96 - - 96
Exercise of warrants - 30 - 19 - - 19
Net loss - - - - - (2,127) (2,127)
- ----------------------------------------------------------------------------------------------------------------------------------
Balances, June 30, 1995 - 12,087 12 41,911 - (38,611) 3,312
Exercise of stock options - 294 - 352 - - 352
Preferred stock and warrants
issuable, net of issue
costs 2,932 - - - - - 2,932
Net loss - - - - - (4,499) (4,499)
- ----------------------------------------------------------------------------------------------------------------------------------
Balances, June 30, 1996 $ 2,932 12,381 $ 12 $ 42,263 $ - $(43,110) $ 2,097
==================================================================================================================================
</TABLE>
See accompanying notes to the consolidated financial statements.
21
<PAGE> 22
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For the years ended June 30, 1996, 1995 and 1994 Increase (decrease) in cash and
cash equivalents
(In thousands) 1996 1995 1994
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOW FROM OPERATING ACTIVITIES:
Cash collected from customers $ 12,558 $ 16,004 $ 11,085
Interest collected 108 147 122
Cash paid to employees and suppliers,
net of amounts capitalized (14,109) (18,547) (15,020)
Interest paid (69) - -
Income taxes paid (46) (118) (263)
Other, net 9 - -
- -----------------------------------------------------------------------------------------------------------------------
Net cash used in operating activities (1,549) (2,514) (4,076)
- -----------------------------------------------------------------------------------------------------------------------
CASH FLOW FROM INVESTING ACTIVITIES:
Property and equipment purchases (277) (569) (525)
Capitalization of software development (295) - (200)
Purchases of short-term investments (982) (505) (2,744)
Proceeds from sales of short-term investments - 1,757 1,826
- -----------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) investing activities (1,554) 683 (1,643)
- -----------------------------------------------------------------------------------------------------------------------
CASH FLOW FROM FINANCING ACTIVITIES:
Borrowings under convertible notes 3,400 - -
Issuance of common stock - net of issue costs 352 115 5,233
Collection of notes receivable from sale of stock - - 17
- -----------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 3,752 115 5,250
- -----------------------------------------------------------------------------------------------------------------------
Increase (decrease) in cash and cash equivalents 649 (1,716) (469)
Cash and cash equivalents, beginning of period 2,493 4,209 4,678
- -----------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of period $ 3,142 $ 2,493 $ 4,209
- -----------------------------------------------------------------------------------------------------------------------
RECONCILIATION OF NET LOSS TO NET CASH
USED IN OPERATING ACTIVITIES:
Net loss before extraordinary item $ (4,499) $ (2,127) $ (3,754)
Adjustments to reconcile net loss to
net cash used in operating activities:
Depreciation and amortization 656 790 661
Extinguishment of debt 1,157 - -
Issue costs for preferred stock and warrants (25) - -
Changes in assets and liabilities:
Accounts receivable 2,197 (1,073) (1,030)
Other current assets (61) 73 10
Other assets 110 210 (421)
Accounts payable (75) 7 122
Accrued compensation (288) 139 155
Other current liabilities (135) (253) 113
Deferred revenues (586) (280) 68
- -----------------------------------------------------------------------------------------------------------------------
Net cash used in operating activities $ (1,549) $ (2,514) $ (4,076)
- -----------------------------------------------------------------------------------------------------------------------
Noncash financing activities:
Exchange of convertible notes for preferred
stock and warrants issuable $ 1,800 - -
</TABLE>
See accompanying notes to consolidated financial statements.
22
<PAGE> 23
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION AND PRINCIPLES OF CONSOLIDATION. IntelliCorp is a United
States-based multinational corporation. The Company designs, develops, and
markets software development tools and provides related training, customer
support, and consulting services. The consolidated financial statements include
the accounts of the Company and its wholly-owned subsidiaries, IntelliCorp GmbH
(Germany), IntelliCorp Ltd. (United Kingdom), Nihon IntelliCorp K.K. (Japan),
and MegaKnowledge, Inc. All significant intercompany accounts and transactions
are eliminated. The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities,
disclosure of contingent assets and liabilities at the date of the financial
statements, and the reported amount of revenues and expenses during the
reporting period. Actual results could differ from those estimates. Certain
prior year revenue and associated cost of revenue amounts have been reclassified
to the current year's presentation.
BASIS OF PRESENTATION. The Company's consolidated financial statements have been
presented on a going concern basis, which contemplates the realization of assets
and the satisfaction of liabilities in the normal course of business. Over the
last five years, the Company has experienced aggregate consolidated net losses
of $24,139,000 including a net loss of $4,499,000 for the year ended June 30,
1996. Working capital at June 30, 1996 was $2,850,000 as compared to $2,272,000
at June 30, 1995. Management's financial plans for fiscal year 1997 anticipate
sufficient revenues so as not to require additional capital resources. However,
the Company may, from time to time, raise additional capital through debt or
equity financing to take advantage of market opportunities. There can be no
assurance, however, that such financing would be available when needed, if at
all, on favorable terms. If revenues for fiscal year 1997 do not meet
management's expectations and additional financings are not available,
management has the ability and intent to reduce certain expenditures so as not
to require additional capital resources.
CURRENT VULNERABILITY TO CERTAIN CONCENTRATIONS. In the fourth quarter of fiscal
1996, the Company introduced LiveModel: SAP R/3 Edition. The Company's fiscal
1997 sales forecast anticipates a significant portion of revenues to be derived
from sales of and consulting services related to LiveModel: SAP R/3 Edition.
Factors which could impact the level of revenues generated from LiveModel: SAP
R/3 Edition include, but are not limited to, the timing and level of market
acceptance of the new product, the timing of market introduction of competing
products, and the success of sales efforts with strategic partners. There can be
no assurance, however, that the actual sales will not differ materially from the
sales forecast in the near term.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization are computed using
the straight-line method over estimated useful lives of the assets ranging from
two to five years. Amortization of leasehold improvements is computed over the
shorter of the lease term or the useful life of the underlying assets.
Software development costs are capitalized once technological
feasibility has been established and are amortized on a straight-line basis over
the estimated useful life of the related product (which ranges from one to three
years) or on the ratio of current revenues to the total of current and
anticipated future revenues from the product, whichever is greater.
REVENUE RECOGNITION. Revenues from end user software license agreements are
recognized at the time of product shipment, provided there are no vendor
obligations remaining to be fulfilled and collectibility is probable. License
fees
23
<PAGE> 24
from resellers are also recognized as revenue when the software has been
shipped, provided that no significant vendor obligations remain to be fulfilled,
certain customer criteria established by the Company have been met, and the fees
are payable within twelve months.
Contract services revenues includes applications development and
research contracts and consulting services. Contract revenues and the related
cost of these revenues are recognized on a time and materials basis or on the
percentage of completion basis, for those fixed price contracts, which
involves the use of estimates. Actual results could differ from those
estimates and, as a result, future profitability on such contracts may be more
or less than planned.
Other services revenues consist of post-contract customer support and
training. Support revenues are recognized pro-rata over the term of the service
period and training or other revenues are recognized as provided. The
unrecognized portion of amounts paid in advance for such services is reported
as deferred revenues.
INCOME TAXES. Tax credits reduce the provision for income taxes when realizable.
NET LOSS PER COMMON SHARE. Net loss per common share is computed based on the
weighted average number of common shares outstanding and excludes common stock
equivalents as their effect would be antidilutive.
CASH, CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS. The Company considers all
highly liquid investments with a maturity from the date of purchase of ninety
days or less to be cash equivalents. At June 30, 1996 and 1995, the Company had
$1,108,000 and $1,215,000, respectively, in money market mutual funds which
invest in various US government securities including Treasury bills, notes,
bonds, US corporate paper, certificates of deposit, bank notes and corporate
notes. The funds seek to maintain a constant $1 net asset value per share. These
amounts are included in cash and cash equivalents. Also included in cash and
cash equivalents at June 30, 1996 is $494,000 consisting of investments in
commercial paper issued by US corporations.
Short-term investments consist of commercial paper issued by US
Corporations with maturities of more than ninety days and less than one year,
and are stated at cost, which approximates market value. The Company invests its
excess cash in accordance with a short-term investment policy set by the Board
of Directors. The policy authorizes investments in government securities, time
deposits and certificates of deposit in approved financial institutions,
commercial paper rated A-1/P-1, and other money market instruments of similar
liquidity and credit quality.
The Company considers its investments in such instruments as
available-for-sale and, in accordance with Financial Accounting Standard No.
115, "Accounting for Certain Investments in Debt and Equity Securities" (FAS
115), would record its investments at fair value. However, as the difference
between cost and fair value was immaterial, no adjustment was made to the
historical carrying value of the investments and no unrealized gains and losses
have been recorded as a separate component of stockholders' equity. Realized
gains or losses from available-for-sale investments have not been material.
FOREIGN CURRENCY TRANSLATION. The financial statements of foreign subsidiaries
are measured using the US dollar as the functional currency. Transaction gain or
losses have not been significant. The Company does not enter into foreign
currency forward exchange contracts.
CONCENTRATION OF CREDIT RISK. The Company designs, develops and markets software
development tools and provides related training, customer support and consulting
services to customers in diversified industries. The Company performs ongoing
credit evaluations of the financial condition of its customers, and generally
requires no collateral for customer orders and accounts receivable. To date,
write-offs of accounts receivable have been immaterial.
24
<PAGE> 25
FAIR VALUE OF FINANCIAL INSTRUMENTS. The following methods and assumptions were
used by the Company in estimating its fair value disclosures for financial
instruments:
Cash and equivalents: the carrying amount reported in the balance sheet for
cash and cash equivalents approximates fair value.
Investment securities: the fair values for marketable debt securities are
based on quoted market prices. However, the fair value of such securities
do not differ materially from their carrying value, which is at cost.
Convertible debt: the fair value of the convertible notes exceeds the
carrying amounts of the debt at June 30, 1996 as the current stock price is
greater than the conversion price. At June 30, 1996, the aggregate value of
the underlying stock into which the notes are convertible is $3,225,800.
ACCOUNTING PRONOUNCEMENTS. In March 1995, the Financial Accounting Standards
Board issued Statement of Financial Accounting Standards No. 121 (FAS 121),
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed of". The Company is required to adopt the Statement for the year
ending June 30, 1997. The Statement, if adopted, would not have a material
effect on the Company's financial position or results of operations for the year
ended June 30, 1996.
In October 1995, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 123 (FAS 123), "Accounting for
Stock-Based Compensation". The Standard establishes a fair value based method of
accounting for stock-based compensation plans, or permits an election to
continue to use the intrinsic value method prescribed by Accounting Principles
Board Opinion No. 25 with proforma impact disclosures of the fair value method
on net income and earnings per share. Upon adoption of FAS 123, the Company
intends to continue to account for stock-based compensation using the intrinsic
value method. The Company is required to adopt the Statement for the year ending
June 30, 1997 and the standard will not have a material effect on the Company's
financial position or results of operations.
2. REVENUES AND ACCOUNTS RECEIVABLE
Revenues from the sale of products and services to one commercial customer
accounted for 29% and 33% of total revenues in fiscal 1996 and fiscal 1995,
respectively. Revenues from the sale of products and services to one related
party accounted for 10% of total revenues in fiscal 1996 and fiscal 1995. Export
revenues were 31% of total revenues in fiscal 1996 (16% to Europe and 15% to the
Pacific Rim and Latin America), 29% of total revenues in fiscal 1995 (17% to
Europe and 12% to the Pacific Rim and Latin America) and 44% of total revenues
in fiscal 1994 (35% to Europe and 9% to the Pacific Rim and Latin America).
Accounts receivable include unbilled amounts with customers of
$349,000 and $296,000 at June 30, 1996 and 1995, respectively.
3. NET PROPERTY AND EQUIPMENT
Property and equipment at June 30 consist of:
<TABLE>
<CAPTION>
1996 1995
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Equipment $ 5,746,000 $ 9,768,000
Furniture and fixtures 1,638,000 1,637,000
Leasehold improvements 829,000 823,000
- -------------------------------------------------------------------------------------------------------------
Total property and equipment 8,213,000 12,228,000
Accumulated depreciation and amortization (7,927,000) (11,709,000)
- -------------------------------------------------------------------------------------------------------------
Net property and equipment $ 286,000 $ 519,000
- -------------------------------------------------------------------------------------------------------------
</TABLE>
25
<PAGE> 26
4. INCOME TAXES
The Company's provision for income taxes of $113,000 for the year ended June 30,
1996 and $232,000 for the year ended June 30, 1995 and $371,000 for the year
ended June 30, 1994 is attributable to withholding taxes of various foreign
countries.
Significant components of the Company's deferred tax assets for federal
and state income taxes as of June 30, 1996 and 1995 are as follows:
<TABLE>
<CAPTION>
Deferred tax assets: 1996 1995
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Net operating loss carryforwards $14,300,000 $ 12,569,000
General business credits (expire 2002-2009) 1,900,000 1,830,000
Reserves not deducted for tax purposes 200,000 553,000
Other 600,000 185,000
Total deferred tax assets 17,000,000 15,137,000
Valuation allowance for deferred tax assets (17,000,000) (15,137,000)
- -------------------------------------------------------------------------------------------------------------------
Net deferred tax assets $ - $ -
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
Due to the Company's lack of earnings history, the net deferred
tax asset has been fully offset by a valuation allowance. Approximately
$1,280,000 of the valuation allowance for deferred tax assets relates to
benefits of stock option deductions which, when recognized, will be allocated
directly to contributed capital.
At June 30, 1996, the Company had net operating loss carryforwards
of approximately $31,000,000 for federal income tax purposes, which will expire
in fiscal years 2002 through 2011. The Company also had net operating loss
carryforwards of approximately $12,500,000 for state income tax purposes and
$7,150,000 for foreign income tax purposes. The state net operating loss
carryforwards will expire in fiscal years 1998 through 2002. The foreign net
operating loss carryforwards have an indefinite carryforward period.
Utilization of the federal and state net operating losses and
credits maybe subject to a substantial annual limitation due to the "change in
ownership" provisions of the Internal Revenue Code of 1986 and similar state
provisions. The annual limitation may result in the expiration of net operating
losses and credits before utilization.
5. LEASE COMMITMENTS
The Company leases its present facilities under noncancelable operating lease
agreements through fiscal year 1999. The Company has commitments
under noncancelable operating leases as of June 30, 1996 as follows: $874,000 in
fiscal 1997, $805,000 in fiscal 1998, and $122,000 in fiscal 1999.
Rent expense was $788,000 in fiscal 1996, $967,000 in fiscal 1995
and $889,000 in fiscal 1994.
6. CORPORATE RESTRUCTURING COSTS
In the second quarter of fiscal 1996, the Company recorded a $414,000 pre-tax
restructuring charge. The restructuring program was undertaken to increase the
Company's focus on live business modeling tools for the Microsoft Windows
platform and in support of commercially popular purchased software systems. In
conjunction with the restructuring, the Company implemented a reduction-in-force
of approximately 30%. Implementation of the restructuring was completed in the
second quarter of fiscal 1996.
Of the $414,000 restructuring charge, the cost of providing
severance pay and benefits for the reduction of approximately 30 employees
throughout the domestic and international business was approximately $301,000.
Office closing costs for one international and two domestic facilities,
including lease abandonment were approximately $102,000. The remainder of the
charge, $11,000, represented cash costs to revise the Company's annual report
for the year
26
<PAGE> 27
ended June 30, 1995, which was already in process at the time the decision was
made to restructure.
7. CONVERTIBLE NOTES
In April 1996, the Company issued $3,400,000 of seven-year unsecured senior
convertible notes. Interest only is payable semi-annually in October and April
at 10% per annum. Interest payments for the first two years are payable, at the
Company's option, in cash or in common stock valued at 90% of the 20 day average
bid price preceding the payment due date. On June 27, 1996, the noteholders
agreed to exchange debt totaling $1,800,000 for preferred stock and warrants
(see Note 8).
The remaining $1,600,000 of debt is due and payable on April 30,
2003 and is convertible at any time, at the option of the noteholders, into the
Company's common stock at a conversion price of $1.55 per share. The Company has
reserved 1,032,258 shares of common stock for issuance upon conversion of these
notes. The Company has also reserved up to 240,000 shares of common stock for
issuance to noteholders in lieu of interest payments. The Company has the right
to prepay all or a portion of the principal amount outstanding at any time
following April 30, 1999. Offering costs of approximately $50,000 were recorded
in other assets and are being amortized on a straight-line basis as an
adjustment to interest expense over the term of the notes. The notes have been
issued in a private placement, although the Company intends to register the
shares underlying the notes as promptly as possible.
8. STOCKHOLDERS' EQUITY
PREFERRED STOCK AND WARRANTS ISSUABLE. On June 27, 1996, the Company agreed to
issue 580,645 shares of preferred stock and warrants to purchase 720,000 shares
of common stock at $3.50 per share in exchange for the conversion of $1,800,000
of the convertible debt. Such preferred shares and warrants were valued at
$2,932,000, net of issue costs. Consequently, in connection with the debt
exchange, the Company realized an extraordinary loss of $1,157,000. Each share
of the preferred stock is convertible into two common shares, subject to
adjustments for dilutive events, and carries 10% cumulative dividends. The
dividends for the first two years are payable, at the Company's option, in cash
or in common stock valued at 90% of the 20 day average bid price preceding the
payment due date. Preferred stockholders have no voting rights unless dividend
payments are more than two years in arrears, at which time the preferred
stockholders shall have the right to vote with common stockholders as one class
with the number of votes equal to the number of shares of common stock into
which the preferred stock is convertible.
The warrants are exercisable immediately, and expire in 2006. The
Company can redeem the warrants anytime after five years, if the common stock
trades at or above $6.00 per share, by paying a redemption price of $0.01 per
warrant share.
The preferred stock and warrants were issued in August 1996. The
Company has reserved 1,881,290 shares of common stock for issuance upon
conversion of preferred stock and exercise of these warrants and up to 270,000
shares of common stock for issuance in lieu of cash dividends. The common shares
issued in connection with the conversion of preferred stock, the exercise of
warrants or payment of dividends will be registered as promptly as possible. In
the event of any liquidation or winding up of the Company, the holders of
preferred stock will be entitled to receive in preference to the holders of
common stock an amount equal to $3.10 per share plus any accumulated and unpaid
dividends on the preferred stock. The liquidation preference would be $1,800,000
at June 30, 1996.
COMMON STOCK. In March and April 1994, the Company sold 1,452,692
shares of the Company's common stock in a private placement to various investors
("the Investors") at a price of $3.25 per share, pursuant to a Common Stock
Purchase Agreement between the Company and the Investors (the "Purchase
Agreement"). Net of the related issuance costs the proceeds to the Company were
$4,615,749. The Purchase Agreement provides, among other things, that each
27
<PAGE> 28
individual Investor will not (i) acquire more than a 15% interest in the
Company's voting securities; or (ii) except under limited circumstances,
transfer shares in a private transaction to an unaffiliated person. Pursuant to
the Purchase Agreement the Company has registered the shares sold to the
Investors with the Securities and Exchange Commission. As part of this offering,
Informix Corporation acquired 307,692 shares of the Company's common stock which
together with 1,428,571 shares purchased in 1993, maintained their ownership of
approximately 15% at the shares outstanding after the transaction. Additionally,
the Company issued warrants for assistance in finding purchasers for this
private placement.
WARRANTS. In connection with the acquisition of MegaKnowledge, Inc., the Company
issued warrants for 30,000 shares of common stock at $1.50 per share. These
warrants were exercised in fiscal year 1995.
In connection with renegotiation of certain royalty payments and
product training rights, the Company issued warrants to a stockholder to
purchase 350,000 shares of common stock at $2.035 per share. The royalties did
not have a material impact on the Company's operating results or liquidity
during the fiscal years ended June 30, 1996, 1995 or 1994. The exercise price of
the warrants represents a discount of approximately $250,000 over the fair
market value of the Company's common stock at the date of grant. These warrants
are exercisable and expire in June 1998. The warrants were valued at $428,000.
This amount is being amortized over 60 months (the exercise period of the
warrants) or the ratio of current royalty revenue to the total of current and
future royalty revenue, whichever is greater. At June 30, 1996, $171,400 and
$257,000 related to the warrants, is included in other assets and additional
paid-in-capital, respectively.
For assistance in finding purchasers for the private placement,
the Company issued warrants for 150,000 shares of common stock at $3.25 per
share to a financial advisor. These warrants are exercisable immediately and
expire in March 1997.
STOCK OPTION PLANS. The number of shares authorized under the Company's 1991
Stock Option Plan is 2,004,778. Incentive stock options may not be granted at
less than fair market value; non-qualified options may be granted at less than
fair market value. Both types of options are exercisable in full immediately
upon grant. The Company retains the right to repurchase shares issued upon
exercise of an option at the exercise price per share. Unless otherwise provided
by the 1991 Stock Option Plan, the repurchase rights typically expire over
periods of up to four years. Most options expire on approximately the tenth
anniversary of the date of grant. At June 30, 1996, options for 338,081 shares
were available for future grant, 1,167,787 options were exercisable, and no
shares outstanding from option exercises were subject to repurchase at the
issuance price. Options for 739,969 of shares granted under prior plans are
outstanding and exercisable as of June 30, 1996.
The number of shares authorized under the Company's 1991
Nonemployee Directors Stock Option Plan is 100,000. Options will be granted at
fair market value to nonemployee directors at set times as provided in the
Nonemployee Directors Plan, and should the Board elect to waive fees paid by the
Company to Nonemployee Directors, that amount of fees waived can be applied to
reduce the exercise price of options granted, pursuant to the terms of the Plan.
Options are exercisable in full six months after the date of grant. The Company
retains the right to repurchase shares issued upon exercise of an option at the
exercise price per share with the right to repurchase expiring over a two year
period. At June 30, 1996, options for 57,500 shares were available for future
grant, 25,326 options were exercisable and no shares outstanding from option
exercises were subject to repurchase at the issuance price. The Company has
reserved a sufficient number of shares of common stock to be issued upon
exercise of warrants and options outstanding and options to be granted.
28
<PAGE> 29
A summary of stock option activity under all plans follows:
<TABLE>
<CAPTION>
(Amounts in thousands Number of Shares
except per share data) Under Option Exercise Price Total
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Outstanding, June 30, 1993 2,413,923 $ .10 - $13.25 2,544,000
Granted 249,850 1.94 - 4.875 891,000
Exercised (670,046) .10 - 1.87 (538,000)
Canceled (139,938) .10 - 4.875 (201,000)
-----------------------------------------------------------------------------------------------------------------
Outstanding, June 30, 1994 1,853,789 .10 - 13.25 2,685,000
Granted 448,100 .75 - 2.75 1,081,000
Exercised (59,586) .625 - 1.75 (61,000)
Canceled (107,681) .625 - 4.375 (260,000)
-----------------------------------------------------------------------------------------------------------------
Outstanding, June 30, 1995 2,134,622 .10 - 13.25 3,445,000
Granted 623,800 1.00 - 3.00 1,119,000
Exercised (293,913) .10 - 2.125 (341,000)
Canceled (364,825) .625 - 4.875 (904,000)
-----------------------------------------------------------------------------------------------------------------
Outstanding, June 30, 1996 2,099,684 $ .10 - $13.25 $ 3,319,000
----------------------------------------------------------------------------------------------------------------
</TABLE>
9. RELATED PARTY TRANSACTIONS
During fiscal 1996, 1995 and 1994 the Company recognized $1,123,000, $1,684,000
and $1,242,000 of total revenues, respectively, from Informix Corporation
($280,000 and $354,000 is included in accounts receivable at June 30, 1996 and
June 30, 1995, respectively). During fiscal 1996, the Company purchased
approximately $2,000 of products and services from Informix Corporation (none in
fiscal 1995, $482,000 in fiscal 1994).
10. SUBSEQUENT EVENT (UNAUDITED)
On August 8, 1996, SAP AG purchased from Informix Corporation 1,736,263 shares
of common stock of the Company. This total represents all the Company shares
previously held by Informix Corporation and, following the purchase, SAP AG
holds approximately 14% of the outstanding common stock of the Company.
29
<PAGE> 30
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
THE BOARD OF DIRECTORS AND STOCKHOLDERS
INTELLICORP, INC.
We have audited the accompanying consolidated balance sheets of
IntelliCorp, Inc. as of June 30, 1996 and 1995, and the related consolidated
statements of operations, stockholders' equity and cash flows for each of the
three years in the period ended June 30, 1996. 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
from 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 consolidated financial position of
IntelliCorp, Inc. at June 30, 1996 and 1995, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
June 30, 1996 in conformity with generally accepted accounting principles.
/s/ Ernst & Young LLP
Palo Alto, California
August 2, 1996
Item 8. Changes In and Disagreements with Accountants on Accounting and
Financial Disclosure.
Inapplicable.
30
<PAGE> 31
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons; Compliance
With Section 16(a) of the Exchange Act.
The Company incorporates by reference the information set forth under the
caption "Nomination and Election of Directors" of the Company's Proxy Statement.
Executive Officers of the Registrant.
As of September 15, 1995, the executive officers and directors of
IntelliCorp are as follows:
Name Age Position
---- --- --------
Kenneth H. Haas 45 Director and President
Colin Bodell 34 Vice President, Product
Development and Engineering Services
Martin Hollander 43 Vice President, Marketing and Business
Development
David Loeb 35 Managing Director, Consulting
and Training Services
Daniel R. Menudier 36 Chief Accounting Officer and
Controller
Katharine C. Branscomb(1) 40 Director
Joseph A. Graziano(1)(2) 52 Director
John B. Landry(1)(2) 48 Director
Norman J. Wechsler(1)(2) 51 Director
- ------------------
(1) Audit Committee Member
(2) Compensation and Stock Option Committee Member
Mr. Haas has been a Director of the Company since 1993. Mr. Haas was
appointed President of IntelliCorp in October 1992. He joined the Company in
1983 as General Counsel, became Vice President and Secretary in March 1984 and
was appointed Vice President, Finance and Chief Financial Officer in January
1990. Mr. Haas received his B.A. from Harvard College in 1972, his J.D. from
Harvard Law School in 1976, and attended the Harvard Business School Advanced
Management Program in 1989.
Mr. Bodell joined IntelliCorp as Vice President, Product Development in
December 1995. Previously, Mr. Bodell served as Vice President, Client Server
Development at Micro Focus, Inc. Mr. Bodell received an Honours Degree in
Computer Science from Coventry University in England.
31
<PAGE> 32
Mr. Hollander rejoined IntelliCorp in July 1995 and was appointed Vice
President, Marketing and Business Development. Mr. Hollander has served in a
variety of senior marketing and executive roles in high technology companies
during the last 14 years. After receiving his MBA from Stanford in 1981, he
cofounded IntelliCorp and served as the head of marketing and sales for four
years. Senior marketing and sales positions include Vice President, Marketing
and Sales at Franz, Inc., Director of Marketing at Silicon Graphics and Vice
President of Marketing at Storm Software.
Mr. Loeb was appointed Managing Director, Consulting and Training Services
in July 1995. He joined IntelliCorp in 1994 as a Senior Field Consultant and was
promoted to Director, GTE Project. Prior to joining IntelliCorp, Mr. Loeb held
consulting, product development and management positions at IBM's Research
Center, AICorp and Enterprise Software. Mr. Loeb studied Computer Science at the
University of Illinois and is the author of two patents.
Mr. Menudier joined IntelliCorp in 1994 as Assistant Controller and was
promoted to Controller in 1995 and appointed Chief Accounting Officer in
September 1996. Prior to IntelliCorp, Mr. Menudier served as Assistant
Controller for Smurfit France, part of a multinational group. Mr. Menudier's
previous experience includes various positions within the audit department of
Ernst & Young, LLP, both in San Francisco and Paris, France.
Ms. Branscomb has been a Director of the Company since 1988. She is
currently a consultant and Senior Business Advisor to Interval Research in Palo
Alto, California and a director of Ariat Corporation. From October 1992 to
November 1995, she was Senior Vice President of Business Development for Lotus
Development Corporation and, in that capacity, served a principal role in the
sale of Lotus to IBM in June 1995. From November 1991 until joining Lotus, Ms.
Branscomb was the Chief Executive Officer of IntelliCorp, Inc. She had
previously held the position of Chief Operating Officer since late 1988. Prior
to joining IntelliCorp, Ms. Branscomb was Senior Vice President of Sales and
Marketing at Aion Corporation, founding principal and Vice President of Metaphor
Computer Systems and a consultant with the Boston Consulting Group, Inc.
Mr. Graziano has been a Director of the Company since April 1985. In 1981
Mr. Graziano joined Apple Computer, Inc. as Chief Financial Officer and served
in that position until 1985. After a two-year sabbatical, followed by two years
as CFO at Sun Microsystems, he rejoined Apple in 1989 as Senior Vice President
and Chief Financial Officer. Later, Mr. Graziano was appointed Executive Vice
President and was elected to Apple's Board of Directors in 1993. Mr. Graziano
resigned from Apple's Board in October 1995 and left Apple at the end of 1995.
Mr. Graziano was Treasurer at ROLM Corporation from 1976 until joining Apple in
1981, and held accounting positions with other technology companies in Silicon
Valley. Mr. Graziano is also a Director of Stratacom, Inc.
Mr. Landry has been a Director of the Company since August 1990. Mr. Landry
serves as strategic technology consultant to IBM and Lotus. Prior to assuming
his current role in November 1995, Mr. Landry was Senior Vice President of
Lotus' Communications Business Group and Chief Technology Officer. Mr. Landry
has more than 18 years of experience in the software industry, developing
financial systems, tools, and mail-enabled applications for all hardware
platforms. Prior to joining Lotus, Mr. Landry was Executive Vice President of
Software Development and Chief Technology Officer at Dun & Bradstreet (D&B)
Software. Mr. Landry serves on the Board of Directors of the Information
Technology Association of American (ITAA). He is also President of the American
Software Association and serves on the Board of Trustees of the Massachusetts
Computer Software Council. Mr. Landry was graduated from Babson College with a
bachelor's degree in finance.
32
<PAGE> 33
Mr. Wechsler has been a Director of the Company since September 3,
1996. Since 1963 he has been Chairman and President of Wechsler & Co., Inc., a
broker-dealer specializing in convertible and related securities. The firm is a
member of the NASD and SIPC.
Item 10. Executive Compensation.
The Company incorporates by reference the information set forth under
the caption "Executive Compensation" of the Proxy Statement.
Item 11. Security Ownership of Certain Beneficial Owners and Management.
The Company incorporates by reference the information set forth under
the caption "Beneficial Stock Ownership" of the Proxy Statement.
Item 12. Certain Relationships and Related Transactions.
The Company incorporates by reference the information set forth under
the caption "Executive Compensation" of the Proxy Statement.
Item 13. Exhibits, List and Reports on Form 8-K.
(a) 2. Exhibits
3-A Certificate of Incorporation (1)
3-B By-Laws (2)
10-AA Office Lease dated as of February 27, 1995 between
Registrant and El Camino Office Investments, as
amended (3)
10-FF Registrant's 1991 Stock Option Plan (2)
10-GG Registrant's 1991 Nonemployee Directors Stock Option
Plan (2).
10-JJ Employment Agreement dated October 30, 1991 between
Registrant and Kenneth H. Haas (2).
10-KK Employment Agreement dated October 30, 1992 between
Registrant and Gary Fine (5).
10-NN Modification No. 3 to Office Lease dated February
27, 1995 (5).
10-OO Seven-Year Senior Convertible Note Purchase Agreement
dated April 19, 1996 (6).
10-PP Form of Senior Convertible Note (6).
10-QQ Agreement to exchange convertible debt for preferred
stock and warrants.
20 Definitive form of Proxy Statement for the Annual
Meeting of Stockholders to be held December 6, 1996
(4).
21 Subsidiaries of Registrant (1).
23 Consent of Ernst & Young LLP, Independent Auditors.
25 Power of Attorney - See page 36 hereof.
27 Financial Data Schedule.
(b) Reports on Form 8-K
The Company filed a report on Form 8-K dated July 26, 1996 in
which the Company reported that the Company entered into an agreement to
exchange convertible notes for preferred stock and warrants.
---------------
33
<PAGE> 34
(1) Filed as an Exhibit to Registrant's Annual Report on Form 10-K for the
fiscal year ended June 30, 1990 and incorporated herein by reference.
(2) Filed as an Exhibit to Registrant's Annual Report on Form 10-K for the
fiscal year ended June 30, 1992 and incorporated herein by reference.
(3) Filed as an Exhibit to Registrant's Annual Report on Form 10-K for the
fiscal year ended June 30, 1993 and incorporated herein by reference.
(4) The Registrant's definitive Proxy Statement will be filed with the
Securities and Exchange Commission on or before October 28, 1996.
(5) Filed as an Exhibit to Registrant's Annual Report on Form 10-KSB for the
fiscal year ended June 30, 1995 and incorporated herein by reference.
(6) Filed as an Exhibit to Registrant's Quarterly Report on Form 10-QSB for the
quarter ended March 31, 1996 and incorporated herein by reference.
34
<PAGE> 35
SIGNATURES
In accordance with Section 13 or 15(d) of the Securities Exchange Act
of 1934, the Registrant caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
INTELLICORP, INC.
By: /s/ Kenneth H. Haas
---------------------
Kenneth H. Haas
Director and President
Date: September 30, 1996
35
<PAGE> 36
POWER OF ATTORNEY TO SIGN AMENDMENTS
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature
appears below does hereby constitute and appoint Kenneth H. Haas and Daniel R.
Menudier, and each of them, with full power of substitution and full power to
act without the other, his true and lawful attorney-in-fact and agent to act for
him in his name, place and stead, in any and all capacities, to sign any or all
amendments to this Annual Report on Form 10-KSB, and to file the same, with all
exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorneys-in-fact and
agents, and each of them, full power and authority to do and perform each and
every act and thing requisite and necessary to be done in and about the premises
in order to effectuate the same as fully, to all intents and purposes, as they
or he might or could do in person, hereby ratifying and confirming all that said
attorneys-in-fact and agents, or any of them, may lawfully do or cause to be
done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed by the following persons in the capacities and on
the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Kenneth H. Haas Director and President September 30, 1996
- ------------------- (Principal Executive Officer)
Kenneth H. Haas
/s/ Daniel R. Menudier Chief Accounting Officer September 30, 1996
- ---------------------- and Controller
Daniel R. Menudier
/s/ Katharine C. Branscomb Director September 30, 1996
- --------------------------
Katharine C. Branscomb
/s/ Joseph A. Graziano Director September 30, 1996
- ----------------------
Joseph A. Graziano
/s/ John B. Landry Director September 30, 1996
- ------------------
John B. Landry
/s/ Norman J. Wechsler Director September 30, 1996
- ----------------------
Norman J. Wechsler
</TABLE>
36
<PAGE> 37
EXHIBIT INDEX
INTELLICORP, INC.
FORM 10-KSB
<TABLE>
<CAPTION>
Sequentially
Index Numbered
No. Page
--- ------------
<S> <C> <C>
3-A Certificate of Incorporation (1).
3-B By-Laws (2).
10-AA Office Lease dated as of August 31, 1993 between Registrant and El
Camino Office Investments, as amended (3).
10-FF Registrant's 1991 Stock Option Plan. (2)
10-GG Registrant's 1991 Nonemployee Directors Stock Option Plan (2).
10-JJ Employment Agreement dated October 30, 1991 between the
Registrant and Kenneth H. Haas (2).
10-KK Employment Agreement dated October 30, 1992 between the
Registrant and Gary Fine (5).
10-NN Modification No. 3 to Office Lease dated February 27, 1995 (5).
10-OO Seven Year Senior Convertible Note Purchase Agreement dated
April 19, 1996 (6).
10-PP Form of Senior Convertible Note (6).
10-QQ Agreement to exchange convertible debt for preferred stock and
warrants. 40
20 Definitive form of Proxy Statement for the Annual Meeting of
Stockholders to be held December 6, 1996 (4).
21 Subsidiaries of Registrant (1).
23 Consent of Ernst & Young LLP, Independent Auditors. 38
25 Power of Attorney 36
27 Financial Data Schedule. 39
</TABLE>
- --------------------
(1) Filed as an Exhibit to Registrant's Annual Report on Form 10-K for the
fiscal year ended June 30, 1990 and incorporated herein by reference.
(2) Filed as an Exhibit to Registrant's Annual Report on Form 10-K for the
fiscal year ended June 30, 1992 and incorporated herein by reference.
(3) Filed as an Exhibit to Registrant's Annual Report on Form 10-K for the
fiscal year ended June 30, 1993 and incorporated herein by reference.
(4) The Registrant's definitive Proxy Statement will be filed with the
Securities and Exchange Commission on or before October 28, 1996.
(5) Filed as an Exhibit to Registrant's Annual Report on Form 10-KSB for the
fiscal year ended June 30, 1995 and incorporated herein by reference.
(6) Filed as an Exhibit to Registrant's Quarterly Report on Form 10-QSB for
the quarter ended March 31, 1996 and incorporated herein by reference.
37
<PAGE> 1
EXHIBIT 10-QQ
Mr. Kenneth H. Haas, President
INTELLICORP, INC.
1975 El Camino Real West
Mountain View, California 94040
Dear Ken:
As you know, solely with respect to the transaction described herein, I
represent the holders (the "Holders") of $3.4 million in face amount of
outstanding IntelliCorp, Inc. Senior Convertible Notes (the "Notes") issued
pursuant to a Seven-Year Senior Convertible Note Purchase Agreement dated April
19, 1996 (the "Note Agreement"). To permit Intellicorp, Inc. (the "Company") to
satisfy the capital and surplus requirements of, and thereby remain listed for
quotation on, the Nasdaq SmallCap Market, this letter will confirm our agreement
of June 27, 1996 to exchange, as of such date, $1.8 million in face amount of
outstanding Notes for Preferred Stock of Intellicorp. All Holders will exchange
50% of their Notes for Preferred Stock pro rata to the amount of their Notes and
I will exchange an additional $100,000 of Notes in excess of my pro rata
position. The terms of the Preferred Stock are set forth on the Outline of Terms
of Preferred Stock attached hereto.
If the foregoing accurately sets forth our agreement of June 27, 1996
regarding the exchange of the Notes for shares of Preferred Stock, please so
indicate by signing and returning a copy of this letter to me. Since, as we have
discussed, I represent the Holders of all of the Notes, solely with respect to
this transaction, I am signing this letter on behalf of all the Holders.
Sincerely,
/s/ Norman Wechsler
--------------------
Norman Wechsler
THE FOREGOING IS HEREBY ACCEPTED:
INTELLICORP, INC.
By: /s/ Kenneth H. Haas
--------------------------
Kenneth H. Haas, President
<PAGE> 2
Mr. Kenneth H. Haas
June 27, 1996 Page 2
OUTLINE OF TERMS OF PREFERRED STOCK
This outline summarizes the terms of the Preferred Stock (the
"Preferred") of Intellicorp, Inc. (the "Company") to be issued in exchange for
$1.8 million face amount of outstanding Senior Convertible Notes (the "Notes").
The original purchase price of the Preferred shall be $3.10 per share and
580,645 shares of Preferred Stock shall be issued to the holders of the Notes in
such exchange.
Rights, Preferences, (1) Dividend Provisions: The holders of the
Privileges and Restrictions Preferred will be entitled to receive
of Preferred Stock: dividends at the rate of ten percent
(10%) per annum, payable on January 31,
1997 (for the period commencing June
27, 1996 and ending October 31, 1996)
and on each April 30 and October 31
thereafter from any funds that are
legally available for payment, when and
as declared by the Board. Dividends on
the Preferred will be cumulative and
dividends on the Preferred (including
any accumulated and unpaid dividends)
will be in preference to any dividends
on the Common and no dividend shall be
paid on the Common while any dividends
on the Preferred remain unpaid. No
dividend shall be paid on the Common at
a rate greater than the rate at which
dividends are paid on Preferred (based
on the number of shares of Common into
which the Preferred is convertible on
the date the dividend is declared). For
all dividend payments through April 30,
1998, the Company, at its option, may
elect to pay the dividends in Common
Stock of the Company, priced at ninety
percent (90%) of the average closing
bid price of the Company's Common Stock
on the Nasdaq for the twenty (20)
trading days preceding the dividend
payment date (or, with respect to the
dividend payment due on January 31,
1997, for the twenty (20) trading days
preceding October 31, 1996) so long as
such Common Stock is, on the
<PAGE> 3
Mr. Kenneth H. Haas
June 27, 1996 Page 3
dividend payment date, registered with
the United States Securities and
Exchange Commission for resale by the
holder. If the Company elects to pay
the first dividend payment in Common
Stock, it shall notify the holders of
Preferred on or before October 31,
1996. If such Common Stock is not
registered with the Commission for
resale on or before January 31, 1997,
the holders of Preferred shall be
entitled to have such dividend paid in
cash or in Company Common, priced as
set forth above.
(2) Liquidation Preference: In the
event of any liquidation or winding up
of the Company, the holders of
Preferred will be entitled to receive
in preference to the holders of Common
an amount ("Liquidation Amount") equal
to $3.10 per share plus any accumulated
and unpaid dividends on the Preferred.
(3) Redemption: At any time on thirty
(30) days written notice given after
April 30, 1999, at its option, the
Company will have the right to redeem
the Preferred by paying in cash the
Liquidation Amount. The Preferred may
also be redeemed under the circumstance
described in "Change in Control" below.
(4) Conversion: A holder of Preferred
will have the right to convert
Preferred (and any accumulated and
unpaid dividends), at the option of the
holder, at any time prior to
redemption, into shares of Common. The
total number of shares of Common into
which Preferred may be converted
initially will be determined by
dividing the Original Purchase Price of
$3.10 by the conversion price. The
initial conversion price will be $1.55.
The conversion price will be the
subject of adjustment as provided in
<PAGE> 4
Mr. Kenneth H. Haas
June 27, 1996 Page 4
paragraph (5) below. The Company has
reserved for issuance the Common Stock
issuable on conversion of the Preferred
and on exercise of the Warrants
described below.
(5) Antidilution Provisions: The
conversion price of the Preferred and
the Warrant exercise price will be
subject to adjustment on the same basis
as provided in Section 3 of the Senior
Convertible Notes.
(6) Voting Rights: Except as provided
below, the Preferred will have no
voting rights. If the Company does not
declare and pay four semi-annual
dividend payments, then the holder of
Preferred shall have the right to vote
with the Common as one class on all
matters, with a number of votes equal
to the number of shares of Common
issuable upon conversion of the
Preferred. The right of the holders of
the Notes to designate a nominee for
election as director until 75% of the
initial principal amount of the Notes
has been repaid or Common Stock
received on conversion of the Notes has
been sold shall be deemed to relate to
75% of the aggregate of the outstanding
principal amount of the Notes following
the exchange plus the Preferred and 75%
of the Common Stock issuable on
conversion of the Notes and the
Preferred.
(7) Change in Control: If, prior to
conversion or redemption in full of the
Preferred, there is a change in control
of the Company (i.e., over 50% of the
Company's outstanding Common Stock is
acquired by merger, tender offer, sale
of stock by the Company or other
similar transaction), the conversion
price shall be the lower of the
conversion price in effect immediately
prior to the change in control event
(as adjusted pursuant to the
anti-dilution provisions) or
<PAGE> 5
Mr. Kenneth H. Haas
June 27, 1996 Page 5
the price per share of the change in
control event; provided, that if such
change of control event would reduce
the conversion price to the price per
share in the change of control event,
then the Company shall have the right
to redeem the Preferred by paying the
Liquidation Amount; provided, further
that if the price per share in the
change in control event is equal to two
(2) times the then conversion price,
the Company shall have the right, on
thirty (30) days prior notice during
which period the Preferred shall remain
convertible, to redeem the Preferred by
paying the Liquidation Amount.
Warrants: The Company will issue 720,000 ten-year
warrants pro rata to the holders of
Preferred, exercisable at a price of
$3.50 per share (the "Warrants"). The
Warrants shall be callable on twenty
(20) days notice by the Company at any
time after five years if the Common
Stock trades at $6.00 or higher for
twenty (20) consecutive business days
by paying a redemption price of $.01
per warrant share.
Registration Rights: The shares of Common Stock issuable on
conversion of the Preferred (and any
accumulated and unpaid dividends),
issuable as dividends on the Preferred
and issuable on exercise of the
Warrants, shall have the same
registration rights as are provided for
the Common Stock under Section 5 of the
Seven-Year Senior Convertible Note
Purchase Agreement dated April 19, 1996
pursuant to which the Notes were
issued. The reference therein to 75% of
the then principal amount of the Notes
shall refer to an aggregate of 75% of
the then principal amount of the Notes
plus the then outstanding Preferred.
Opinion of Counsel:
In connection with the exchange,
counsel to the Company will deliver
<PAGE> 6
Mr. Kenneth H. Haas
June 27, 1996 Page 6
an opinion that: (i) the shares of
Common Stock initially issuable on
conversion of the Preferred and on
exercise of the Warrants has been duly
reserved for issuance and, when issued,
will be validly issued, fully paid and
non-assessable; and (ii) the exchange
transaction qualifies as an "E"
reorganization.
<PAGE> 1
Exhibit 23
Consent of Ernst & Young LLP, Independent Auditors
We consent to the incorporation by reference in the Registration Statements
(Form S-8 No. 33-54854, 33-75102 and 33-89004) pertaining to the 1991 Stock
Option Plan, in the Registration Statement (Form S-8 No. 33-54856) pertaining to
the 1991 Nonemployee Directors Stock Option Plan, and in the Registration
Statements (Form S-8 No. 33-9466, 33-11244, 33-30345, 33-34598, 33-34599,
33-34600 and 33-40614; and Form S-3 No. 33-78718) pertaining to the Amended and
Restated 1982 Stock Option Plan, the 1986 Employee Stock Purchase Plan, and the
Common Stock Warrants of IntelliCorp, Inc., of our report dated August 2, 1996,
with respect to the consolidated financial statements of IntelliCorp, Inc.
included in this Annual Report (Form 10-KSB) for the year ended June 30, 1996.
/s/ Ernst & Young LLP
Palo Alto, CA
September 25, 1996
38
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-30-1996
<PERIOD-START> JUL-01-1995
<PERIOD-END> JUN-30-1996
<CASH> 3,142
<SECURITIES> 982
<RECEIVABLES> 2,217
<ALLOWANCES> 322
<INVENTORY> 0
<CURRENT-ASSETS> 6,555
<PP&E> 286
<DEPRECIATION> 7,927
<TOTAL-ASSETS> 7,401
<CURRENT-LIABILITIES> 3,704
<BONDS> 0
0
0
<COMMON> 12
<OTHER-SE> 2,085
<TOTAL-LIABILITY-AND-EQUITY> 7,401
<SALES> 3,658
<TOTAL-REVENUES> 10,992
<CGS> 1,045
<TOTAL-COSTS> 14,281
<OTHER-EXPENSES> 60
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 60
<INCOME-PRETAX> (3,229)
<INCOME-TAX> (113)
<INCOME-CONTINUING> (3,342)
<DISCONTINUED> 0
<EXTRAORDINARY> (1,157)
<CHANGES> 0
<NET-INCOME> (4,499)
<EPS-PRIMARY> (.37)
<EPS-DILUTED> (.37)
</TABLE>
