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U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
Annual Report
Pursuant to Section 13 or 15(d) of
The Securities Exchange Act of 1934 [Fee Required]
For the Fiscal Year Ended June 30, 1998
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 Identification No.)
of incorporation)
1975 EL CAMINO REAL WEST, MOUNTAIN VIEW, CALIFORNIA 94040-2216
(Address of principal executive offices and zip code)
(650) 965-5500
(Telephone Number)
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. [ ]
Registrant's revenues for its most recent fiscal year: $24,445,000.
The aggregate market value of the voting stock held by nonaffiliates on
September 21, 1998 computed by reference to the closing price as of that date
was $22,144,633(1).
As of September 21, 1998, 15,211,307 shares of registrant's Common Stock, par
value $.001 per share, were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
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Document Incorporated in Form 10-KSB
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Definitive Proxy Statement to be filed with the Securities and Exchange Part III
Commission on or prior to October 28, 1998 and to be used in connection with the
Annual Meeting of Stockholders to be held December 8, 1998.
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(1) Excludes 3,400,836 shares held by directors, officers and 10% stockholders
of registrant.
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PART I
ITEM 1. BUSINESS.
- - GENERAL The Company develops, markets and supports live business modeling
products for implementing, configuring and integrating packaged applications,
and for continuously engineering the enterprise. IntelliCorp has used its
expertise in business process modeling, object technology and knowledge-based
systems to create products and services for organizations to gain greater
benefit from their purchased packaged applications.
IntelliCorp has developed its initial business in the packaged applications
market by targeting the SAP(TM) R/3(TM) market segment. The strategy is to build
a strong development partnership with SAP AG (SAP), a leading supplier of
enterprise business software, so that the products created by IntelliCorp are
best able to deliver the necessary functionality to SAP's customers. Since the
SAP R/3 system is installed by consultants, called Implementation Partners, who
also have requirements for business process software tools, IntelliCorp has also
focused on working with these Implementation Partners to satisfy their tools
requirements and gain their support for including the IntelliCorp products into
their implementation methodology.
Using the ModelWorks(TM) product family -- LiveModel(TM), LiveInterface(TM),
LiveAnalyst(TM), and TestDirector, as well as expert LiveDesign(TM) and
ModelCapture(TM) consulting services, and the GoLive(TM) support program,
IntelliCorp delivers solutions for enterprise framework management. LiveModel is
a business process-modeling tool based upon the Microsoft Windows(TM) platform
and focused on the SAP R/3 system. LiveInterface is a software solution for
developing and managing data interfaces into R/3; not only does it quickly
generate the interfaces with a minimum of specialized programming expertise
required, it also provides the management infrastructure to ensure reliable data
transfer. LiveInterface was first sold in January 1998 after IntelliCorp
purchased the technology, formerly known as UPI, from Deloitte & Touche.
LiveAnalyst is a business process optimization tool that is tightly coupled with
LiveModel, and enables SAP R/3 implementation teams to model the complete
environment for specific business operations and to simulate these operations to
identify opportunities for improvement and organizational change. TestDirector
is an integrated management tool for organizing and deployment of
business-critical SAP R/3 applications by enabling testing to begin earlier in
the deployment process. TestDirector is being integrated with LiveModel to
enable users to create test plans directly from business process models,
ensuring the application meets end-user needs.
IntelliCorp believes that increased acceptance of its software products depends
in large part on the adoption of these products by consulting firms who assist
their customers in implementing complex systems such as SAP's R/3 system, and
the successful use of LiveModel, LiveInterface and LiveAnalyst in actual SAP R/3
implementations. To stimulate and support the development of such customer
applications and adoption of these tools, IntelliCorp provides training, support
and consulting services through, for example, the LiveDesign and GoLive
programs.
IntelliCorp markets its products directly in the United States, and both
directly as well as through independent software vendors ("ISVs"), value-added
resellers ("VARs"), representatives and distributors in other regions around the
world. Its customers are mostly large end-user corporations.
For the last year, the Company focused on the SAP market and promoted LiveModel:
SAP R/3 Edition at three SAPPHIRE(R) User Conferences, one each in Europe, Japan
and the United States. The Company has continued to grow its relationship with
SAP which has 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. Most recently, the Company
entered into a License and Development Agreement with SAP AG, in August 1997.
Under this agreement, SAP has licensed viewing, configuration and model
authoring technology being developed under the agreement for SAP by IntelliCorp.
As a result of this agreement, the Company developed the Business Navigator Web
which is now shipped by SAP as part of R/3 4.0. LiveModel: SAP R/3 Edition will
also continue to be marketed and sold by IntelliCorp through its direct
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sales force and distribution channels. See Dependence on SAP under the Risk
Factors section of this report for additional information and risks related to
the SAP agreement.
The revenues from product sales and related consulting and support services to
customers of SAP software are expected to provide an increasing portion of the
Company's revenue base. For example, revenues for LiveModel products and related
services in the SAP market comprised 76% of the revenues for fiscal year 1998 as
compared to 75% for fiscal year 1997. This revenue includes sales of a
specialized edition of LiveModel, LiveModel: Industry Prints Edition(TM) which
is a repository for Deloitte & Touche's Industry Print models. In fiscal 1998,
the Company also built a substantial SAP services capability.
IntelliCorp's software development tools, which represent a decreasing
percentage of the Company's business, include PowerModel(R), Kappa-PC(R) and
KEE(R). PowerModel is an object-oriented development and delivery environment
for UNIX/X-Motif and MS-Windows client-server applications; Kappa-PC 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.
TECHNOLOGY BASE IntelliCorp's products derive from several important software
technologies including object-oriented programming, client/server architecture,
and modeling and encapsulating technology.
The current approach used in SAP R/3 implementations relies on substantial
knowledge and experience of the implementation team. Based on the R/3 Reference
Model (a business blueprint of the R/3 software) those business processes that
are not relevant in a specific implementation context need to be identified and
pruned, remaining processes adapted where necessary and new processes added also
as appropriate. The result is an implementation specific model that defines the
scope for the customization activities necessary to configure the R/3 software
to implement those business processes. LiveModel: SAP R/3 Edition is a business
process modeling tool, tailored to support the SAP R/3 implementation process
using the SAP R/3 Reference Model and the other elements of SAP's Business
Engineer. It provides a mechanism for SAP R/3 implementation team members to
review the SAP Reference Model, revise the model, and validate changes prior to
actual R/3 code configuration. It accelerates R/3 implementations by enabling
users to better understand the R/3 system and to better articulate their
business requirements. In version 2.0 released in fiscal year 1998, IntelliCorp
extended the tool that allows a company to model their business practices -- how
the company does business -- to describe their behavior and predict change. This
is done through model animation, recording of design decisions and links to live
R/3 transactions, features that provide the benefits required by companies
undergoing enterprise resource planning and change.
LiveModel version 2.0 was used by SAP to create the new R/3 version 4.0
Reference Model. This version of LiveModel, released for general availability in
September 1997, contains all of the functionality of version 1.2 plus the
additional features needed to reduce the risk of implementation cost and
schedule overruns. These features include redlining, viewing filters and the
ability to create and modify R/3 variants.
LiveInterface is both a developer's workbench and interface management
framework. After mapping the data that must be transferred between SAP R/3 and
one or more external computer systems, LiveInterface automatically generates the
code (in ABAP/4) for the required interface. The management framework not only
provides the necessary capabilities for defining how and when the interfaces
should run but also a view on how they are executing and capabilities for
recovery in case of failure.
IntelliCorp has entered into an agreement with Mercury Interactive to integrate
LiveModel with Mercury's TestDirector product. This integration, helps an
implementation team focus their testing activities, based on their system design
in LiveModel, providing a business process-oriented view of the entire design,
implement, and test cycle.
LiveAnalyst, IntelliCorp's general purpose business process modeling and
simulation tool, supports organizational and knowledge integration features
essential when mapping strategic business objectives to SAP design requirements.
The ability to drag and drop EPC objects from LiveModel into LiveAnalyst and the
interface to HR, make it easy to test and optimize configuration variants, to
show the impact of new workflows and to optimally configure resources.
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In April 1996, IntelliCorp commercially released the PowerModel system, version
3.2, one of the Company's key software development tools 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 has many features including: portability across UNIX and
MS Windows platforms, new interface building tools, and C++ interoperability.
The Kappa-PC product is 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.
Finally, 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 help customers become more productive using the
ModelWorks family of tools, IntelliCorp offers a support package to its
customers that includes program maintenance and updates (including new SAP R/3
Reference Models), documentation, training in the use of its software, on-site
consultation and application support via telephone, fax, email or world wide
web. IntelliCorp offers extensive support materials on its world wide web site
located at http://www.intellicorp.com.
CONSULTING AND TRAINING SERVICES The Company also offers various consulting and
training services to its customers on a contract basis. For its SAP customers,
IntelliCorp offers programs such as ModelCapture(TM) and LiveDesign services, as
well as training and consulting services to customers who have purchased the
LiveInterface tool. These programs enhance the benefit customers derive from the
use of the Company's modeling and applications integration tools.
IntelliCorp also provides consulting services to SAP for the development and
roll-out of SAP's Sales Configuration Engine (SCE) and the development of SAP's
Sales Pricing Engine (SPE). IntelliCorp consulting staff have been involved in a
number of implementations of the SCE as part of SAP's SCE beta program.
In addition, IntelliCorp offers knowledge-based systems consulting to customers
of its software development tools. Finally, the Company offers custom
development services to its key business partners.
MARKETING AND SALES IntelliCorp's marketing strategy utilizes multiple channels
to reach the marketplace. These include 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
outside the United States with whom the Company has cooperative marketing
agreements. The Company works closely with consulting firms and system
integrators to provide packaged solutions to its customers. The Company has
traditionally focused on the telecommunications, manufacturing, financial,
utilities, transportation and government industries, and is expanding into those
industries implementing SAP software.
In June 1996, IntelliCorp entered into an agreement with Deloitte & Touche
Consulting Group/ICS (ICS) under which ICS will use LiveModel: Industry Print
Edition to help their customers make better business engineering decisions and
accelerate SAP implementations. Since that time, five of the original Big Six
accounting firms have adopted IntelliCorp's products, as have IBM and other
major SAP Implementation Partners.
IntelliCorp has sales offices in Mountain View and in multiple cities around the
United States, as well as in London, Paris and Munich. Its sales force uses
direct mail, telephone and personal contact marketing to
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identify potential customers, with an emphasis on major corporate accounts. The
Company also relies on customer referrals from SAP Implementation Partners. 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 and resellers in certain European countries, South Africa, and in
the Asia Pacific region have been granted non-exclusive 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.
One factor in the success of LiveModel: SAP R/3 Edition is the Company's
relationship with SAP. Continued growth of this relationship would help ensure
the Company's success in the SAP R/3 market. It is SAP's policy to provide
application programming interfaces (API) to its technology that allows existing
and potential competitors to access the models and other parts of the R/3
system, thereby ensuring that there is competition.
Competitors in the SAP business modeling marketplace include IDS Scheer with the
ARIS product line, Visio with the Visio Business Modeler and Micrografx Inc.
with the Enterprise Charter. Other competitors are expected to enter this
business modeling marketplace. In addition, SAP offers the Business Engineer
with a subset of the capabilities of the IntelliCorp products for version 3.1
and earlier of the R/3 system. SAP provides the ASAP Implementation Assistant at
no-charge to licensees of R/3 for use in implementing the system.
With respect to LiveInterface, formerly known as UPI, the primary competition
comes from four companies: TSI, ETI, Neon and IBI. The continued sustainability
of our competitive position in the application integration market is dependent
on the successful development of future follow-on technology (refer to Item 6,
Management's Discussion and Analysis of Financial Condition and Results of
Operations).
See the Risk Factors section of this report for additional information related
to competition.
PRODUCT RESEARCH AND DEVELOPMENT To date, most 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 technology.
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 and derivative products. IntelliCorp
resells the Poet Database as part of its ModelStore(TM) product in both single
user (Client) and multi-user (Server) configurations.
In April 1996, IntelliCorp announced the signing of two agreements with SAP - 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/3 system. In August
1997, the Company announced the signing of another License and Development
agreement with SAP. This agreement was further extended by SAP and IntelliCorp
at the end of its initial term. See Dependence on SAP under the Risk Factors
section of this report for additional information on this agreement.
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An agreement with ProUBIS, completed in April 1997 grants rights to IntelliCorp
to license and deliver the Bonapart Business Process Re-engineering tool as
IntelliCorp's LiveAnalyst product.
In January 1998 IntelliCorp acquired UPI technology from ICS Deloitte Management
LLC. UPI is sold by IntelliCorp as LiveInterface. At the time of acquisition,
IntelliCorp hired a number of key development and support staff who had worked
on the UPI technology at ICS Deloitte and Touche Consulting/ICS.
IntelliCorp will continue to provide paid-for support for the following
products: LiveModel: SAP R/3 Edition (and derivative editions), LiveAnalyst,
LiveInterface, KEE, Kappa-PC, and PowerModel (Kappa).
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 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 not
required end-users of LiveModel: SAP R/3 Edition and derivative products,
LiveInterface, LiveAnalyst and Kappa-PC to sign license agreements. Instead, the
license agreement for these products is included in the product packaging, and
the packaging explains that by installing and executing the product 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 currently has four patents on its technology. See Proprietary
Information under the Risk Factors section of this report for additional
information related to patents.
In view of the rapid rate of technological change in the areas in which the
Company 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.
EMPLOYEES As of June 30, 1998, the Company employed 138 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
The information about the Company included or incorporated by reference herein
contains forward-looking statements that involve risks and uncertainties,
including the risks detailed below.
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, including object-oriented technology.
Modeling technologies represent fundamental shifts in analysis, design and
programming methodologies. They require substantial investment in the retraining
of programmers and business analysis, 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 businesses or their clients' businesses.
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Even if modeling technology gains broader market acceptance, there can be no
assurance that the Company's ModelWorks family and software development tools
will be accepted for implementation of object-oriented and modeling technology.
The ModelWorks products, in particular, are relatively new products with limited
market acceptance. In the case of the product market for LiveModel: SAP R/3
Edition, it is unclear if this product's modeling approach will be accepted as a
solution to customers' SAP implementation problems, or if the product will be
used by customers who have previously installed SAP's R/3 software. In addition,
even if these products 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. See Competition below.
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 a substantial portion of 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 the acceptance and use by
consulting firms and others who assist their customers to implement the complex
R/3 system. There can be no assurance that the Company will be successful in
achieving and sustaining partnerships with third party packaged system vendors
or with strategic consulting firms. 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 its products offer
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.
The Company's fiscal 1999 sales forecast anticipates a predominant portion of
revenues to be derived from sales of and consulting and support services related
to LiveModel: SAP R/3 Edition, and LiveInterface. Factors which could impact the
level of revenues generated from these products include, but are not limited to,
the timing and level of market acceptance of these products, the timing of
market introduction of competing products, the timely and successful
introduction of new technology enhancements and follow-on products, the success
of providing consulting services 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.
The Company has attempted to refocus its PowerModel business on various markets.
However, there can be no assurance that customers will accept the Company's
product solutions, that the Company will have the necessary expertise for this
market, or that the Company will obtain the right business partnerships. In
fact, the revenue related to the PowerModel business has declined in fiscal 1998
compared to the prior year.
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. To the extent one or more of the
Company's competitors introduce products that fully address customer
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.
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 continue to
be successful.
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LiveInterface is written in the SAP ABAP programming language. These can be no
assurance that SAP will not discontinue or dramatically change the
specifications to this language. The competition for expert Windows and ABAP
programmers is highly competitive. In addition, customer requirements and
technology for the applications integration market is evolving very rapidly.
New, follow-on technology and products will be necessary to remain competitive.
The Company also relies on licenses from third parties, such as POET, SAP and
ProUBIS for some of its technology and product functionality. There can be no
assurance that these licensed technologies will be maintained and/or enhanced by
their owners such that they can continue to provide the necessary functionality
for IntelliCorp's products.
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 projects will include the features required to
achieve market acceptance, or that enhancements to the product will keep pace
with broadening market requirements. 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 by the Company or its
competitors 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 a
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.
IntelliCorp may consider, from time to time, purchasing technology from third
parties. However, there is no assurance that the Company can do this
successfully or that, if the Company does acquire new technology, there is no
assurance that it will not have an adverse impact on the operating results of
the Company as a result of the acquisition of this technology.
DEPENDENCE UPON SAP IntelliCorp entered into a software license and development
agreement with SAP in August 1997. Under this agreement, which includes an
extension of the previous development agreement between the companies, SAP has
contracted for IntelliCorp to develop viewing and configuration technology to
embed into SAP's software. This new agreement also provides a license to SAP for
this viewing and configuration technology. SAP has released the viewing
technology to its users, and is using LiveModel: SAP R/3 Edition as the
authoring environment for the R/3 Reference Model and Industry-Solution (IS)
specific models. In addition, while LiveModel: SAP R/3 Edition will continue to
be sold by IntelliCorp through its direct sales and distribution channels, at
some point, SAP will begin selling some level of functionality of the Company's
LiveModel: SAP R/3 Edition from their price list through the SAP sales force,
for which sales SAP will pay IntelliCorp a royalty. There can be no assurance
that these actions will not affect IntelliCorp's own product sales and have a
negative effect on the Company's future revenue stream. Finally, the agreement
gives SAP certain future options to license components in addition to the
viewing and configuration technology from IntelliCorp for a price to be
negotiated. Again, there can be no assurance that, if SAP elected the option,
that there would not be an additional unfavorable impact on the Company's own
future product sales, or that IntelliCorp will be able to develop and market
alternative products successfully in time to replace any potential lost
revenues.
In addition, some of the revenues from this license and development agreement
with SAP will be one-time in nature, including a site license by SAP of the
Company's LiveModel product and the licensing of the viewing and configuration
technology. There is no guarantee that IntelliCorp will be able to replace this
revenue with other customer revenues after these revenues from the agreement
with SAP are recognized. In addition, there can be no assurance that SAP will
continue their relationship with IntelliCorp. Termination of the SAP arrangement
could have a material adverse effect on the Company's financial results.
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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 has been intensely competitive
and characterized by rapid change and frequent introduction of new products. The
important competitive factors in the industry are acceptance of its products by
the SAP implementation partners, continued close relationship with SAP itself,
product sophistication, features, reliability, price/performance
characteristics, ease of understanding and operating the software, integration
with conventional computing environments and the internet. 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.
The Company's advantage continues to be its close relationship with the SAP
development organization, and continued growth of this relationship is necessary
to insure the Company's success in the SAP R/3 market. This relationship is
always at risk based upon the ability of the Company to perform the development
work desired by SAP and the alternatives available to SAP.
The Company is at risk for encroachment into the value provided by LiveModel:
SAP R/3 Edition by SAP's continued improvement to the ASAP Implementation
Assistant. As new facilities are added to this freely provided component of the
SAP R/3 implementation toolset, there is no guarantee that the value of the
facilities in LiveModel will not be jeopardized. The Company must continue to
enhance the facilities in LiveModel and/or introduce new products that build
upon the ASAP Implementation Assistant to retain and grow its revenues.
SAP also provides an environment that fosters competition to LiveModel through a
published API to the models in their repository. Existing competitors such as
IDS Scheer, Visio and Micrografx already have access to these APIs, and other
modeling tool companies may be interested in entering this market by using API's
and their existing or planned products to offer valuable business process
modeling capabilities to their customers.
The major competitors in the SAP business modeling marketplace are IDS Scheer
with the ARIS product line which offers broad BPR capabilities, and Visio with
the Visio Business Modeler which offers very low cost viewing and editing
capabilities. Other competitors are expected to enter this business modeling
marketplace. In addition, SAP offers the ASAP Implementation Assistant with a
subset of the capabilities of the IntelliCorp products for version 3.1 and
earlier of the R/3 system.
LiveInterface competitors include data transformation and middleware vendors who
have invested in technologies to access data within SAP R/3. IntelliCorp's
strategy is to partner with these vendors and to develop follow-on product
offerings that result in a more complete solution for the customer. Refer to
Item 6 "Management's Discussion and Analysis of Financial Condition and Results
of Operations", for additional information on the risks related to
LiveInterface.
TestDirectors' primary competitors are Autotester Inc. and SAP. Both companies
have test automation tools and test management tool for use in R/3. Both have a
close focus on SAP implementations. In additional, SAP's Computer Aided testing
Tool (CATT) is delivered free with the R/3 Developers Workbench. IntelliCorp
intends to compete with these tools in several ways, first, the integration with
LiveModel is a key differentiator as it supports process-based testing. Second,
IntelliCorp emphasizes the ability of TestDirector to address all of a
customer's enterprise systems, not just SAP.
The PowerModel business continues to decline primarily due to the declining
market for internal application development and the focus for new application
development is on Windows and Java applications. Since neither of these
application delivery platforms is the primary development environment for
PowerModel,
9
<PAGE> 10
PowerModel is susceptible to competition from many sources. The major market has
been the existing customer base where the value of PowerModel facilities are
appreciated, and the applications built with PowerModel continue to need
support.
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.
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, in the future, the Company may 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 the 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. It is
particularly difficult to hire personnel with SAP expertise. 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.
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 and, as a result, the Company
may lose sales opportunities, market share or customers.
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 (including the higher cost of using outside consultants)
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.
LACK OF PROFITABILITY, POTENTIAL FUTURE LOSSES Over the last five years, the
Company has experienced aggregate consolidated net losses of over $12,962,000,
including a net loss of $698,000 for the year ended June 30, 1998 (including a
one-time charge of $2,700,000 related to the purchase of in-process research and
development related to the UPI technology acquisition) and a net loss of
$1,884,000 for the year ended June 30, 1997. The Company may also have losses in
future years. There can be no assurance that the Company will attain and
maintain profitability.
Working capital at June 30, 1998 was $6,973,000 as compared to $6,838,000 at
June 30, 1997. Management's financial plans for fiscal year 1999 anticipate
sufficient net cash flows so as not to require additional capital resources.
However, the Company may, from time to time, need to raise additional capital
10
<PAGE> 11
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 1999 do
not meet management's expectations, and additional financing is not available,
management has the ability and intent to reduce certain expenditures to lower
the Company's cost base, if required. As a result of these factors, the Company
believes its cash, cash equivalents and short-term investments at June 30, 1998
and expected cash generated from operations will be sufficient to fund
operations during fiscal 1999.
To allow its Common Stock to remain listed for trading on The Nasdaq SmallCap
Market tier of The Nasdaq Stock Market (Nasdaq), the Company is required to
maintain a minimum capital and surplus. In the past, the Company's capital and
surplus have fallen below the Nasdaq minimum. This failure to maintain the
minimum capital and surplus required the Company to exchange debt for preferred
stock and to issue additional equity securities in fiscal 1997 and fiscal 1996.
Significant additional losses could adversely affect the Company's ability to
maintain the required minimum capital and surplus in the future. Should the
Company's Common Stock be delisted from the Nasdaq Stock Market, the trading
market for the Common Stock would likely be adversely affected.
POTENTIAL FLUCTUATIONS IN QUARTERLY OPERATING 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.
CONCENTRATED PRODUCT LINE The Company currently derives substantially all of its
revenue from LiveModel: SAP R/3 Edition and LiveInterface, 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 LiveInterface 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
its products.
CUSTOMER CONCENTRATION For fiscal 1998, revenues from the sale of products and
services to one related party accounted for 19% of total revenues. The level of
revenues received from this customer may 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.
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, distribution and co-marketing of its products. Such partners may include
SAP, consulting firms, systems integrators, traditional software distributors or
hardware or software companies with established distribution channels. The
Company has an agreement with some global SAP Implementation Partners to promote
or 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 1999 revenues will be generated through these arrangements and other
similar arrangements or agreements with consulting firms and hardware
11
<PAGE> 12
companies. IntelliCorp also plans to sell its LiveModel: SAP R/3 Edition through
the SAP sales force. There can be no assurance that the Company will be able to
achieve significant sales through its global implementation partner
relationships or SAP or that the Company will be successful in establishing
additional channel partner arrangements or that, if such relationships are
established, they will prove to be commercially successful. In addition, there
can be no assurance that the Company's partners will not utilize their relative
size or financial strength to the disadvantage of the Company.
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 28% of the Company's net revenues for the
fiscal year ended June 30, 1998 and 36% of the Company's net revenues for the
fiscal year ended June 30, 1997 were attributable to international sales. Most
international revenues to date have been derived from license revenues. The
Company currently offers 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. 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,
the burdens of complying with a wide variety of foreign laws, and patterns of
customers' staff vacations, especially in Europe, that may reduce earnings in
Company's fiscal first quarter. In addition, the laws of certain 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's 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.
PROPRIETARY INFORMATION 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 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 licenses LiveInterface in a machine-independent form for users to
install into their SAP R/3 systems. This practice increases the possibility of
misappropriation or other misuse of the Company's products. IntelliCorp has not
required end-users of Kappa-PC (a PowerModel product), LiveModel: SAP R/3
Edition (and derivative editions), LiveAnalyst and LiveInterface to sign license
agreements. Instead, the license agreement for these products 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
12
<PAGE> 13
1994 relating to its Object Management Workbench 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. Any such claims, with or
without merit, could result in costly litigation or might require the Company to
enter into royalty or licensing agreements. Such royalty or license agreements,
if required, may not be available on terms acceptable to the Company or at all.
The Company does not have insurance to cover the risk of infringement claims.
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.
PUBLIC TRADING MARKET; POSSIBLE 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,
stock 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 prices 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 March 1997, the Company had a preferred stock offering for shares of its
Series B Preferred Stock (the "Series B Preferred Stock"). The Series B
Preferred Stock may, at the option of the Company, be exchanged for convertible
promissory notes of the Company issued with the same terms as the Series B
Preferred Stock (the Notes). The dividends on Series B Preferred Stock, or the
interest on the Notes in the event of an exchange, may be payable in shares of
Common Stock in lieu of cash for one year. The Series B Preferred Stock or the
Notes, if issued, are convertible into Common Stock at the election of the
holders. The Company has registered for resale the shares of Common Stock
issuable with respect to the Series B Preferred Stock or the Notes, as well as
the Common Stock expected to be issued in payment of dividends or interest with
respect to the Series B Preferred Stock or Notes, as applicable. 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
the Company's Common Stock by the holders of the Series B Preferred Stock or
others in the future could adversely affect the market price of the Company's
Common Stock. Most of the outstanding shares of the Company's Common Stock are
eligible for sale in the public market. One exception is the 1,000,000 shares of
common stock issued to Deloitte & Touche Consulting/ICS for the purchase of the
UPI technology. These shares are restricted from sale for one year after the
acquisition date of January 23, 1998. 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 2003. This space is adequate to meet the Company's needs in the
foreseeable future.
IntelliCorp leases space for offices in the Chicago area and Chadds Ford,
Pennsylvania, and also leases its European sales offices in London, Paris and
Munich.
13
<PAGE> 14
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 A VOTE OF SECURITY HOLDERS.
Not applicable.
14
<PAGE> 15
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The Company's common stock trades on The Nasdaq SmallCap Market tier of The
Nasdaq Stock Market under the symbol: INAI. The following table sets forth the
closing prices since July 1, 1996 for the common stock for the fiscal quarters
indicated as reported by Nasdaq. These over-the-counter market quotations
reflect inter-dealer prices, without retail mark-up, markdown, or commissions,
and may not necessarily represent actual transactions.
At June 30, 1998, there were approximately 524 registered stockholders of the
Company's common stock. The Company 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>
YEAR ENDED JUNE 30,
-------------------------------------------------------------------------------------
1998 1997
-------------------------------------------------------------------------------------
High Low High Low
-------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1st Fiscal Quarter $6.25 $2.88 $3.63 $1.75
-------------------------------------------------------------------------------------
2nd Fiscal Quarter 5.19 3.13 2.38 1.50
-------------------------------------------------------------------------------------
3rd Fiscal Quarter 5.00 2.88 2.78 1.69
-------------------------------------------------------------------------------------
4th Fiscal Quarter 4.50 3.44 3.13 1.88
-------------------------------------------------------------------------------------
</TABLE>
Recent Sales of Unregistered Securities
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% 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 Series A 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. Such preferred stock and warrants were
issued in August 1996. 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.
On March 19, 1997, the Company issued 5,000 shares of 8% convertible Series B
Preferred Stock at $1,000 per share in a private placement to three investors.
Each share is convertible into 500 shares of common stock, subject to
adjustments, at $2.00 per share and carries 8% mandatory cumulative dividends.
The dividends for the first year are payable at the Company's option in cash or
common stock valued at 90% of the 20 day average bid price preceding the
distribution due date.
In the event of any liquidation, dissolution or winding up of the Company, the
holders of Series B Preferred Stock will be entitled to receive, junior to the
rights of the holders of Series A Preferred Stock, in preference to the holders
of common stock, an amount equal to $1,000 per share plus all accumulated and
unpaid dividends on the Series B Preferred Stock. The total liquidation
preference for Series B Preferred Stock would be approximately $5,067,000 at
June 30, 1998. The Company has reserved 2,500,000 shares of common stock for
issuance upon conversion of the Series B Preferred Stock. These shares were
registered on July 30, 1997.
On December 30, 1996 the Company issued 307,692 shares of common stock to an
existing stockholder at $1.625 per share in a private placement.
15
<PAGE> 16
SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30, 1998 1997 1996 1995 1994
(In thousands, except per share amounts)
<S> <C> <C> <C> <C> <C>
- --------------------------------------------------------------------------------------------------------------------
STATEMENT OF OPERATIONS DATA
Net revenues $ 24,445 $ 12,686 $ 10,992 $ 17,357 $ 12,047
- --------------------------------------------------------------------------------------------------------------------
Loss from operations (625) (1,753) (3,269) (2,098) (3,490)
Interest expense (177) (153) (69) -- --
Interest income and other, net 310 161 109 203 107
- --------------------------------------------------------------------------------------------------------------------
Loss before income taxes $ (492) $ (1,745) $ (3,229) $ (1,895) $ (3,383)
Provision for income taxes 206 139 113 232 371
Loss before extraordinary item $ (698) $ (1,884) $ (3,342) $ (2,127) $ (3,754)
Extraordinary item -- -- (1,157) -- --
- --------------------------------------------------------------------------------------------------------------------
Net loss $ (698) $ (1,884) $ (4,499) $ (2,127) $ (3,754)
Preferred stock dividend requirements:
Series A and B (623) (311) -- -- --
Embedded Dividend (1) -- (1,720) -- -- --
- --------------------------------------------------------------------------------------------------------------------
Net loss applicable to common stockholders $ (1,321) $ (3,915) $ (4,499) $ (2,127) $ (3,754)
- --------------------------------------------------------------------------------------------------------------------
Net loss before
extraordinary item per common share $ (0.10) $ (0.31)(1) $ (0.27) $ (0.18) $ (0.35)
Basic and diluted net loss per common share $ (0.10) $ (0.31)(1) $ (0.37) $ (0.18) $ (0.35)
Shares used in computation of basic and
diluted net loss per common share 13,871 12,634 12,209 12,040 10,586
- --------------------------------------------------------------------------------------------------------------------
BALANCE SHEET DATA
Cash, cash equivalents
and short-term investments $ 6,186 $ 6,392 $ 4,124 $ 2,493 $ 5,461
Working capital 6,973 6,838 2,851 2,272 3,853
Total assets 16,680 12,064 7,401 8,100 10,499
Convertible notes 1,600 1,600 1,600 -- --
Stockholders' equity 8,383 5,948 2,097 3,312 5,324
</TABLE>
No cash dividends were declared or paid to the common stockholders during the
periods set forth above.
(1) Net loss per common share for the year ended June 30, 1997, gives
effect to the accounting treatment relative to the Company's Series B
convertible preferred stock having beneficial conversion features. The
net loss per common share reflects a $1,720,000 preferred dividend as a
result of this treatment.
16
<PAGE> 17
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS.
UPI ASSET PURCHASE
On January 23, 1998, the Company entered into an asset purchase agreement with
ICS Deloitte Management LLC, an affiliate of Deloitte & Touche, ("D&T") to
purchase the rights to the Universal Portable Interface ("UPI") technology. This
technology consisted of the intellectual and proprietary property comprised of
UPI and included all related copyrights, processes, designs, formulas,
inventions, trade secrets, know-how, technology, methodologies, principles of
operations flow charts, schematics, codes and databases. UPI is presently a
stand-alone software product for automatically building and managing data
interfaces for SAP R/3. It is used to help facilitate the data transfer between
the new SAP R/3 software and preexisting or legacy systems. UPI's value is
currently limited to a small segment of the applications integration market. The
Company also purchased, and assigned value to, in-process research and
development. The Company is using the acquired in-process research and
development to create a new applications integration solution for SAP enterprise
software customers. The target completion date for this project is the second
half of fiscal 1999. The nature of the efforts required to develop the purchased
in-process technology into a viable product principally relate to the completion
of all product specifications, design, coding, and testing and the capability of
integrating with the appropriate complementary applications integration
technology.
In consideration for these assets, the Company paid D&T approximately $2.6
million in cash and 1,000,000 shares of the Company's common stock (with a fair
market value of $3.56 per share) and assumed certain liabilities totaling
$453,000. The acquisition was accounted for using the purchase method of
accounting. For financial reporting purposes, values were assigned to acquired
in-process research and development, developed technology, customer base and the
assembled workforce.
The write-off of in-process research and development related to the asset
acquisition described above totaled $2.7 million all of which was recorded in
the quarter ended March 31, 1998. The value was computed using discounted cash
flow analysis on the anticipated income stream of the related product sales. The
discounted cash flow analysis was based on forecasts of future revenues and
expenses that management believes are likely to occur. This analysis resulted in
amounts assigned to in-process research and development for the project which
has not yet reached technological feasibility (as defined and utilized by the
Company in assessing software capitalization) and does not have alternative
future uses.
Revenues for the in-process technology were estimated for a portion of fiscal
1999 through fiscal 2004. Upon introduction of the new product, these revenue
projections assume near term growth rates resulting from the expansion of
existing sales channels and growth in the overall applications integration
market and then declines as that product life cycle phases down. The Company's
estimates of cost of goods sold, research and development, and selling, general
and administrative expense are based on historical averages recently experienced
by the Company. The cost to complete the in-process technology was based on
management's estimate of the effort necessary to complete the project and all
associated costs. Income tax expense was assumed at the statutory rate.
The Company discounted the net cash flows of the in-process technology to their
present value using a discount rate of 30%. This rate was derived based on the
Company's estimated weighted average cost of capital plus a risk premium to
account for the inherent uncertainty surrounding the successful completion of
the project from its current stage of development and achieving the estimated
cash flows.
Revenues for developed and core technology were estimated for the remainder of
fiscal 1998 through fiscal 2004. The Company anticipates sales of the acquired
developed product will decline significantly during fiscal 1999 when and as the
revenues are anticipated to shift to the new product solution which is expected
to be introduced into the market in the second half of fiscal year 1999. It
should be noted that while revenues allocated to the developed and in-process
technologies are expected to individually phase down over time (consistent with
normal software product life cycles), the composite revenue attributed to all
applications integration products and technologies (including future follow-on
technologies) is planned to continue growing in the foreseeable future.
The Company discounted the net cash flows of the developed technology to their
present value using a discount rate of 25%. This rate was derived based on the
Company's estimated average cost of capital plus a risk premium associated with
the uncertainty of achieving the estimated cash flows.
17
<PAGE> 18
At the time of acquisition, the Company estimated that an aggregate of
approximately $2.0 million of research and development spending is anticipated
over an approximately one year development period from the acquisition date in
order to develop the acquired in-process research and development into a viable
product offering. Accordingly, the Company expects future research and
development expenses to increase. If a viable new product is successfully
developed, it will replace the acquired product. However, there is significant
uncertainty as to whether this new product can be successfully developed and
therefore, there can be no assurance that the Company will be successful in
completing the development of such in-process research and development or that
development efforts will result in a viable and competitive future product
offering.
RESULTS OF OPERATIONS
Other than statements of historical fact, the statements made in this annual
report are hereby identified as, 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 risks associated with,
competitors' product introductions, market price competition and market
acceptance of the Company's products, as well as, those discussed below and in
"Risk Factors."
In particular, it is important to note that achievement of revenue goals is
affected by numerous factors beyond the Company's control. Historical results of
the Company may not be indicative of future operating results.
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:
<TABLE>
<CAPTION>
Percent increase
(decrease)
Percent of revenues 1998 1997
Year ended June 30, compared compared
1998 1997 1996 to 1997 to 1996
----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
REVENUES:
Software 57% 52% 33% 109% 82%
Contract services 29 35 44 62 (8)
Other services 14 13 23 112 (36)
-----------------------------------------------------------------------------------------------------------------------
Total revenues 100 100 100 93 15
COSTS AND EXPENSES:
Cost of software revenues 5 8 10 (12) 2
Cost of contract service revenues 17 19 24 71 (11)
Cost of other services revenues 5 4 5 136 2
Research and development 24 30 32 54 7
Marketing, general and administrative 41 53 55 49 10
Corporate restructure costs -- -- 4 -- N/A
In-process R&D charge 11 -- -- N/A --
-----------------------------------------------------------------------------------------------------------------------
Total cost and expenses 103 114 130 86 1
-----------------------------------------------------------------------------------------------------------------------
Loss from operations (3) (14) (30) 37 (46)
Extraordinary item -- -- (11) -- N/A
-----------------------------------------------------------------------------------------------------------------------
Net loss (3) (15) (41) 31 (58)
-----------------------------------------------------------------------------------------------------------------------
</TABLE>
N/A -- Not applicable
REVENUES The Company's total revenue is derived from three sources: software
licenses, contract services and other services including product support and
training. Total revenues were $24,445,000, $12,686,000 and $10,992,000 for
fiscal years 1998, 1997, and 1996, respectively. This represents a 93% increase
in fiscal 1998 total revenues as compared to fiscal 1997. The increase is due to
increased sales of software licenses and services associated with LiveModel: SAP
R/3 Edition, revenue recognized in connection with the license and development
agreement with SAP AG, and initial sales of software licenses and services
associated with the
18
<PAGE> 19
Company's newly acquired LiveInterface product line. The 15% increase in fiscal
1997 total revenues as compared to fiscal 1996 is largely due to increased sales
of software licenses and services associated with LiveModel: SAP R/3 Edition.
Software revenues increased 109% in fiscal 1998 from fiscal 1997. This increase
is attributable primarily to increased sales of LiveModel: SAP R/3 Edition and
initial sales of LiveInterface, an application integration tool introduced in
January 1998. Sales of the Company's older products, including PowerModel,
Kappa-PC, and Kee, declined from 10% of license revenue, in fiscal 1997 to 3% of
license revenue in fiscal 1998. The Company's ability to increase software
revenues depends upon, among other things, development of successful new and
updated products, especially LiveModel: SAP R/3 Edition and LiveInterface, 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 increased 62% during fiscal 1998 compared to fiscal
1997. The increase is due to consulting revenue related to LiveModel SAP R/3
Edition, LiveInterface, the license and development agreement with SAP AG, and
the configure-to-order consulting business. 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 112% during fiscal 1998 compared to fiscal 1997. This
increase is primarily attributable to product training and support revenues
related to the LiveModel SAP R/3 product and the LiveInterface product.
The Company derived approximately 28%, 36% and 31% of its revenues in fiscal
years 1998, 1997 and 1996, respectively, from international sales. 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.
The geographic breakdown of revenues is as follows:
(In thousands)
<TABLE>
<CAPTION>
Percent increase
(decrease)
1998 1997
Year ended June 30, compared compared
1998 1997 1996 to 1997 to 1996
---------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
REVENUES:
North America $17,595 $ 8,154 $ 7,631 116% 7%
Europe 5,581 3,100 1,783 80 74
Pacific Rim/Latin America 1,269 1,432 1,578 (11) (9)
----------------------------------------------------------------------------------------------------------
Total revenues $24,445 $12,686 $10,992 93% 15%
</TABLE>
The geographic revenue as a percentage of revenue is as follows:
<TABLE>
<CAPTION>
Year ended June 30,
1998 1997 1996
---------------------------------------
<S> <C> <C> <C>
REVENUES:
North America 72% 64% 69%
Europe 23 24 16
Pacific Rim/Latin America 5 12 15
----------------------------------------------------------------------------
Total revenues 100% 100% 100%
</TABLE>
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
19
<PAGE> 20
as a percentage of software revenues decreased from 29% in fiscal 1996 to 16% in
fiscal year 1997 and to 9% in fiscal year 1998. The fiscal 1998 decrease in
software cost, relative to software revenues, is attributable to lower
capitalized software amortization in 1998 and to the significant portion of the
expenses that are fixed such as salaries 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 remained relatively flat at 57%, 54%, and
56%, respectively, for fiscal years 1998, 1997, and 1996. As contract services
increase, the Company supplements its staff with outside consultants.
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 increased to 36% in fiscal 1998 compared to 32% in fiscal
1997 and 20% in fiscal 1996. The increase in the cost of other services revenue
as a percentage of other services revenue in fiscal year 1998 is primarily due
to increased costs resulting from the purchase of the UPI technology and related
assets from D&T. The increase from fiscal year 1996 to fiscal year 1997 is a
result of start-up costs associated with the establishment of a customer
satisfaction team during fiscal year 1997.
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 increase of 54% in research and development expense in fiscal 1998
compared to fiscal 1997 is mainly due to increased headcount and the associated
costs and increased labor costs. Research and development costs as a percentage
of revenues decreased from 30% in fiscal 1997 to 24% in fiscal 1998, as revenues
grew faster than research and development spending. Research and development
costs increases by 7% from fiscal 1996 to fiscal 1997 due to increased headcount
and associated costs. The Company anticipates that it will continue to invest
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 increase of 49% in
marketing, general and administrative expense in fiscal 1998 compared to fiscal
1997 is mainly due to higher sales and marketing costs associated increased
sales volume, including increased marketing activities, increased marketing and
selling headcount, and the opening of a French sales office. The increase of 10%
in marketing, general and administrative expense in fiscal 1997 compared to
fiscal 1996 is also mainly due to higher sales costs associated with increased
sales volume in fiscal 1997 compared to fiscal 1996.
The in-process research and development charge of $2,700,000 is related to the
acquisition of the UPI technology from D&T on January 23, 1998. The financial
impact of this purchase is discussed in detail above.
OTHER INCOME (EXPENSE) Interest income and other, net in fiscal 1998 consists
primarily of interest income from cash, cash equivalents and short-term
investments. The increase in the cash balance as a result of the issuance of the
Series B Preferred Stock in March 1997 resulted in higher interest income in
fiscal 1998 as compared to fiscal 1997. Interest income and other, net also
increased from fiscal 1996 to fiscal 1997 as a result of the issuance of the
Series B Preferred Stock in fiscal 1997, and the issuance of the Convertible
Notes and Series A Preferred Stock in fiscal 1996.
Interest expense consists of interest related to the convertible notes issued in
April 1996.
The provision for income taxes primarily represents foreign withholding taxes
and income taxes (Alternative Minimum Tax).
20
<PAGE> 21
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.
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 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 $6,186,000 at June 30, 1998 and $6,392,000 at June
30, 1997. The slight decrease in fiscal 1998 is due to the expenditure of
$2,572,000 for the acquisition of the UPI business from Deloitte & Touche ICS
offset by cash generated from operations. Spending for capital equipment was
$1,158,000 in fiscal 1998, $337,000 in fiscal 1997 and $277,000 in fiscal 1996.
In March 1997, the Company issued 5,000 shares of 8% convertible Series B
Preferred Stock at $1,000 per share. Each share is convertible into 500 shares
of common stock, subject to adjustments, at $2.00 per share. The dividends for
the first year are payable at the Company's option in cash or common stock
valued at 90% of the 20 day average bid price preceding the distribution due
date.
In December 1996, the Company issued 307,692 shares of common stock to an
existing stockholder at $1.625 per share.
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. Such preferred stock and warrants were
issued in August 1996. 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.
The Company's capital resource commitments consist primarily of operating lease
obligations. For fiscal year 1998, the Company experienced a net loss of
$698,000. Working capital at June 30, 1998 was $6,973,000 as compared to
$6,838,000 at June 30, 1997. While, 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 that the Company will be able to raise
additional capital on favorable terms, if at all. However, the Company believes
its cash, cash equivalents and short-term investments at June 30, 1998 and
expected cash flow from future operations will be adequate to fund its
operations for fiscal 1999.
21
<PAGE> 22
YEAR 2000 ISSUE
The Company has conducted a comprehensive review of its information technology
and non-information technology systems to identify the systems that could be
affected by the year 2000 Issue. The year 2000 issue is the result of computer
programs being written using two digits rather than four to define applicable
year. Any of the Company's programs that have time-sensitive software or micro
controllers may recognize a date using "00" as the year 1900 rather than the
year 2000. This could result in a major system failure or miscalculations. The
Company believes any modifications deemed necessary will be made on a timely
basis and does not believe that the cost of such modifications will have a
material effect on the Company's operating results. Additionally, the Company is
in the process of evaluating the need for contingency plans with respect to year
2000 requirements. The necessity of any contingency plan must be evaluated on a
case by case basis and will vary considerably in nature depending on the year
2000 issue it may need to address. The Company's expectations as to the extent
and timeliness of modifications required in order to achieve Year 2000
compliance is a forward-looking statement subject to risks and uncertainties.
Actual results may vary materially as a result of a number of factors,
including, among others, those described in this paragraph and the paragraph
below. There can be no assurance however, that the Company will be able to
successfully modify on a timely basis such products, services and systems to
comply with year 2000 requirements, which failure could have a material adverse
effect on the Company's operating results.
Based on the Company's assessment to date, all newly introduced products and
services of the Company are year 2000 compliant, however, some of the Company's
customers are running product versions that are not year 2000 compliant. The
Company has been encouraging such customers to migrate to current product
version. In addition, the Company faces risks to the extent that suppliers of
products, services and systems purchased by the Company and others with whom the
Company transacts business on a worldwide basis do not have business systems or
products that comply with the year 2000 requirements. To the extent that
IntelliCorp is not able to test technology provided by third party hardware or
software vendors, IntelliCorp is in the process of obtaining assurances from
such vendors that their systems are year 2000 compliant. In the event any such
third parties cannot in a timely manner provide the Company with products,
services or systems that meet the year 2000 requirements, the Company's
operating results could be materially adversely affected. Although the Company
believes that the cost of year 2000 modifications for both internal use software
and systems or the Company's products are not material, there can be no
assurance that various factors relating to the year 2000 compliance issues,
including litigation, will not have a material adverse effect on the Company's
business, operating results or financial position.
RECENT PRONOUNCEMENTS
The Statement of Position ("SOP 97-2"), "Software Revenue Recognition" was
issued in October 1997 and addresses software revenue recognition matters
primarily from a conceptual level and does not include specific interpretive and
implementation guidance. Statement of Position 98-4 was issued in March 1998
which delays for one year the implementation of a narrow provision of SOP 97-2.
SOP 97-2 supersedes SOP 91-1 and is effective for transactions entered into for
fiscal years commencing after December 15, 1997. Detailed interpretive and
implementation guidelines for this standard have not yet been issued. Once
available, such detailed interpretive and implementation guidance could lead to
unanticipated changes in IntelliCorp's current revenue accounting practices, and
such changes could be material to IntelliCorp's revenues and earnings.
In 1997, Statement of Financial Accounting Standards No. 130 ("SFAS 130"),
"Reporting Comprehensive Income," was issued and is effective for years
commencing after December 15, 1997. IntelliCorp will comply with the
requirements of SFAS 130 in fiscal year 1999.
In 1997, Statement of Financial Accounting Standards No. 131 ("SFAS 131"),
"Disclosures about Segments of an Enterprise and Related Information," was
issued and is effective for years commencing after December 15, 1997.
IntelliCorp will comply with the requirements of SFAS 131 in fiscal year 1999.
22
<PAGE> 23
ITEM 7. FINANCIAL STATEMENTS.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
June 30,
(In thousands, except share and per share amounts) 1998 1997
- ----------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 4,714 $ 4,363
Short-term investments 1,472 2,029
Accounts receivable (less allowance for
doubtful accounts: 1998, $591; 1997, $345) 7,157 4,830
Other current assets 327 132
- ----------------------------------------------------------------------------------------------
Total current assets 13,670 11,354
Net property and equipment (at cost) 1,101 334
Purchased intangibles (less accumulated amortization of
$496 at June 30, 1998) 3,431 --
Capitalized software (less accumulated
amortization: 1998, $708; 1997, $570) 49 188
Other assets 203 188
- ----------------------------------------------------------------------------------------------
$ 18,454 $ 12,064
- ----------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 1,410 $ 650
Accrued compensation 1,321 771
Accrued royalties 545 304
Other current liabilities 1,044 942
Deferred revenues 2,377 1,849
- ----------------------------------------------------------------------------------------------
Total current liabilities 6,697 4,516
CONVERTIBLE NOTES 1,600 1,600
COMMITMENTS
STOCKHOLDERS' EQUITY:
Preferred stock, $.001 par value - 2,000,000
shares authorized; shares outstanding:
Series A: 483,871 and 580,645 at June 30, 1998
and 1997, respectively; aggregate liquidation
preference of $1,525,000 at June 30, 1998 1 1
Series B: 5,000 at June 30, 1998 and 1997;
aggregate liquidation preference of
$5,067,000 at June 30, 1998 -- --
Common stock, $.001 par value - 50,000,000
shares authorized; shares outstanding:
1998, 15,110,358; 1997, 12,939,884 15 13
Additional paid-in capital 58,487 52,959
Accumulated deficit (48,346) (47,025)
- ----------------------------------------------------------------------------------------------
Total stockholders' equity 10,157 5,948
- ----------------------------------------------------------------------------------------------
$ 18,454 $ 12,064
- ----------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
23
<PAGE> 24
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Year ended June 30, 1998, 1997 and 1996
(In thousands, except per share amounts) 1998 1997 1996
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
REVENUES:
Software $ 13,861 $ 6,646 $ 3,658
Contract services 7,202 4,444 4,851
Other services 3,382 1,596 2,483
- ------------------------------------------------------------------------------------------------------
Total revenues 24,445 12,686 10,992
- ------------------------------------------------------------------------------------------------------
COSTS AND EXPENSES:
Cost of revenues:
Software 1,266 1,065 1,045
Contract services 4,129 2,410 2,703
Other services 1,225 518 508
Research and development 5,818 3,771 3,539
Marketing, general and administrative 9,932 6,675 6,052
Corporate restructuring costs -- -- 414
Purchase of in-process research and development 2,700 -- --
- ------------------------------------------------------------------------------------------------------
Total costs and expenses 25,070 14,439 14,261
- ------------------------------------------------------------------------------------------------------
Loss from operations (625) (1,753) (3,269)
- ------------------------------------------------------------------------------------------------------
OTHER INCOME (EXPENSE):
Interest expense (177) (153) (69)
Interest income and other, net 310 161 109
- ------------------------------------------------------------------------------------------------------
Total other income 133 8 40
- ------------------------------------------------------------------------------------------------------
Loss before income taxes (492) (1,745) (3,229)
Provision for income taxes 206 139 113
- ------------------------------------------------------------------------------------------------------
Loss before extraordinary item (698) (1,884) (3,342)
Loss from extinguishment of debt -- -- (1,157)
- ------------------------------------------------------------------------------------------------------
Net loss (698) (1,884) (4,499)
Preferred stock dividend requirements:
Series A and Series B (623) (311) --
Embedded dividend (see note 8) -- (1,720) --
- ------------------------------------------------------------------------------------------------------
Net loss applicable to common stockholders $ (1,321) $ (3,915) $ (4,499)
- ------------------------------------------------------------------------------------------------------
Basic and diluted net loss per common share:
Net loss before extraordinary item $ (0.10) $ (0.31) $ (0.27)
Extraordinary item -- -- (0.10)
- ------------------------------------------------------------------------------------------------------
Net loss per common share $ (0.10) $ (0.31) $ (0.37)
- ------------------------------------------------------------------------------------------------------
Shares used in computation of net
loss per common share 13,871 12,634 12,209
- ------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
24
<PAGE> 25
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Preferred
Stock
Years ended June 30, and Preferred Common Additional
1998, 1997, and 1996 Warrants Stock Stock paid-in Accumulated
(In thousands) Issuable Shares Par value Shares Par value capital deficit Total
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
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
Exercise of stock options -- -- -- 65 -- 75 -- 75
Sale of shares -- -- -- 308 1 499 -- 500
Issuance of Series A Preferred
Stock and warrants (2,932) 581 1 -- -- 2,931 -- --
Issuance of Series B Preferred
Stock, net of issue costs -- 5 -- -- -- 4,961 -- 4,961
Issuance of common stock
in lieu of payment of interest -- -- -- 106 -- 199 -- 199
Dividends on preferred stock -- -- -- 80 -- 168 (168) --
Dividends on preferred stock
to be distributed -- -- -- -- -- 143 (143) --
Dividends on Series B Preferred
Stock issuance related to
beneficial conversion
feature -- -- -- -- -- 1,720 (1,720) --
Net loss -- -- -- -- -- -- (1,884) (1,884)
- ----------------------------------------------------------------------------------------------------------------------------
Balances June 30, 1997 -- 586 1 12,940 13 52,959 (47,025) 5,948
Exercise of stock options -- -- -- 403 1 455 -- 456
Exercise of warrants -- -- -- 350 712 -- 712
Issuance of common stock
in lieu of payment of interest -- -- -- 41 -- 177 -- 177
Dividends on preferred stock -- -- -- 183 -- 531 (531) --
Dividends on preferred stock
to be distributed -- -- -- -- -- 92 (92) --
Issuance of common stock in
connection with UPI asset
purchase -- -- -- 1,000 1 3,561 -- 3,562
Conversion of series A Preferred
Stock to common stock -- (97) -- 194 -- -- -- --
Net loss -- -- -- -- -- -- (698) (698)
- ----------------------------------------------------------------------------------------------------------------------------
Balances June 30, 1998 $ -- 489 $ 1 15,111 $ 15 $ 58,487 $(48,346) $ 10,157
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
25
<PAGE> 26
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For the years ended June 30, 1998, 1997 and 1996
Increase (decrease) in cash and cash equivalents
(In thousands) 1998 1997 1996
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOW FROM OPERATING ACTIVITIES:
Net loss $ (698) $(1,884) $(4,499)
Adjustments to reconcile net loss to
net cash used in operating activities:
Purchase of in-process research and development 2,700 -- --
Depreciation and amortization 1,037 560 656
Extinguishment of debt -- -- 1,157
Issuance costs for preferred stock and warrants -- -- (25)
Issuance of common stock in lieu of
interest payments 177 199 --
Changes in assets and liabilities:
Accounts receivable (2,327) (2,613) 2,197
Other current assets (195) 82 (61)
Other assets (15) 4 110
Accounts payable 760 (285) (75)
Accrued compensation 525 201 (288)
Other current liabilities (136) (207) (135)
Deferred revenues 528 1,103 (586)
- ---------------------------------------------------------------------------------------------
Net cash provide by (used in) operating activities 2,356 (2,840) (1,549)
- ---------------------------------------------------------------------------------------------
CASH FLOW FROM INVESTING ACTIVITIES:
Property and equipment purchases (1,158) (337) (277)
Capitalization of software development -- (91) (295)
Purchase of intangible assets (2,572) -- --
Purchases of short-term investments (5,092) (2,029) (982)
Proceeds from sales of short-term investments 5,649 982 --
- ---------------------------------------------------------------------------------------------
Net cash used in investing activities (3,173) (1,475) (1,554)
- ---------------------------------------------------------------------------------------------
CASH FLOW FROM FINANCING ACTIVITIES:
Borrowings under convertible notes -- -- 3,400
Cash received from exercise of warrants 712 -- --
Issuance of preferred stock -- 4,961 --
Issuance of common stock 456 575 352
- ---------------------------------------------------------------------------------------------
Net cash provided by financing activities 1,168 5,536 3,752
- ---------------------------------------------------------------------------------------------
Increase (decrease) in cash and cash equivalents 351 1,221 649
Cash and cash equivalents, beginning of period 4,363 3,142 2,493
- ---------------------------------------------------------------------------------------------
Cash and cash equivalents, end of period $ 4,714 $ 4,363 $ 3,142
- ---------------------------------------------------------------------------------------------
Supplemental disclosure of cash flow information:
Income taxes paid $ 206 $ 139 $ 113
Noncash financing activities:
Exchange of convertible notes for preferred
stock and warrants issuable -- -- 1,800
Exchange of common stock for assets 3,562 -- --
</TABLE>
See accompanying notes to consolidated financial statements.
26
<PAGE> 27
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION AND PRINCIPLES OF CONSOLIDATION. IntelliCorp is a United
States-based corporation. The Company designs, develops, and markets business
process modeling and integration 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.
BASIS OF PRESENTATION AND ACCOUNTING PRINCIPLES. On January 23, 1998, the
Company entered into an asset purchase agreement with ICS Deloitte Management
LLC, an affiliate of Deloitte & Touche, ("D&T") to purchase the Universal
Portable Interface ("UPI") technology. This technology consisted of the
intellectual and proprietary property comprised of UPI and included all related
copyrights, processes, designs, formulas, inventions, trade secrets, know-how,
technology, methodologies, principles of operations, flow charts, schematics,
codes and databases, and related in-process technology. In consideration for
this asset purchase, the Company paid D&T approximately $2.6 million in cash and
1,000,000 shares of the Company's common stock (with a fair market value of
$3.56 per share) and assumed certain liabilities totaling $453,000. IntelliCorp
intends to significantly change the nature of the revenue producing activity by
selling the current UPI product through its direct sales force and indirect
sales partners and by incurring significant future research and development
expenses to further develop the UPI technology. Therefore, historical financial
results of the acquired product's operations are not meaningful for an
understanding of the future operations of the Company, and, therefore, pro forma
information has not been presented.
USE OF ESTIMATES. The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the amounts reported in the consolidated financial
statements and accompanying notes. Actual results could differ from those
estimates.
CURRENT VULNERABILITY TO CERTAIN CONCENTRATIONS. The Company currently derives
most of its revenues from sales of and consulting services related to LiveModel:
SAP R/3 Edition. This product and related services are expected to account for
the majority of the Company's revenue for the foreseeable future. Factors which
could impact the level of revenues generated from LiveModel: SAP R/3 Edition
include, but are not limited to, the level of market acceptance of the product,
the timing of market introduction of competing products, and the success of
sales efforts and relationships with strategic partners. Consequently, a decline
in sales of this product and related services, will adversely affect operating
results.
PURCHASED INTANGIBLE ASSETS. Purchased intangible assets primarily consist of
developed and in-process technology and other intangibles related to the
acquisition of assets from D&T accounted for by the purchase method. See Note 3.
Amortization of these purchased intangibles is provided on the straight-line
basis over the respective useful lives of the assets. The purchased intangible
assets are amortized over a period of 78 months or less. Acquired in-process
research and development without alternative future use was expensed when
acquired.
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. Amortization of capitalized
software development costs charged to software cost of revenues was
approximately $138,000, $187,000 and $62,000 in fiscal 1998, 1997 and 1996,
respectively.
27
<PAGE> 28
REVENUE RECOGNITION. Revenues from end user software license agreements are
recognized at the time of product shipment, provided the license fee is fixed
and determinable, there are no significant vendor obligations remaining to be
fulfilled, and collectibility is probable. License fees from resellers are also
recognized as revenue when the software has been shipped, provided that the
license fee is fixed and determinable, no significant vendor obligations remain
to be fulfilled and certain customer criteria established by the Company have
been met (ie, either the payment for the license has been received or the end
user has been identified).
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
related to such services is recorded as deferred revenues.
INCOME TAXES. Tax credits reduce the provision for income taxes when realizable.
NET LOSS PER COMMON SHARE. In December 1997, the Company adopted the provisions
of Financial Accounting Standard Board Statement No. 128, "Earnings Per Share".
The adoption had no impact on the net loss per share computation. Basic net loss
per share is computed using the weighted average number of common shares
outstanding during the period. Dilutive potential common shares have been
excluded from the net loss per share computation in fiscal years 1998, 1997 and
1996 as their effect is antidilutive.
Stock options to purchase 3,027,000, 2,737,000, and 2,100,000 at an average
price of $2.29, $1.73 and $1.58 per share were outstanding during fiscal 1998,
1997 and 1996, respectively, but were not included in the computation of diluted
net loss per share for those years. Also excluded from net loss per share were
489,000 and 586,000 convertible preferred shares during fiscal 1998 and 1997,
respectively, and warrants to purchase 720,000 and 1,070,000 shares, at an
average exercise price of $3.50 and $3.02 during fiscal years 1998 and 1997
respectively. These dilutive potential common shares have been excluded because
the Company reported net losses for each of those potential shares would have
had an antidilutive effect on net loss per common share.
For the fiscal years ended June 30, 1998 and 1997, preferred stock dividends,
including the assumed dividend recorded in 1997 as a result of the "beneficial
conversion feature" embedded in the Series B preferred stock, have been included
in the net loss per common share computation. The assumed dividend in 1997
represents the difference between the fair market value of the Company's common
stock and the conversion price of Series B preferred stock on the date of the
Series B issuance. The Series A and B preferred stock dividends has been
deducted from net loss to arrive at net loss applicable to common stockholders.
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, 1998 and 1997, the Company had
$1,844,000 and $1,301,000, respectively, in money market mutual funds which
invest in various U.S. government securities including Treasury bills, notes and
bonds, and U.S. corporate paper, certificates of deposit, and bank notes. These
amounts are included in cash and cash equivalents. Also included in cash and
cash equivalents at June 30, 1997 is $1,480,000 consisting of investments in
commercial paper issued by U.S. corporations with a maturity of 90 days or less
from the date of purchase.
Short-term investments consist of commercial paper issued by U.S. corporations
with maturities from the date of purchase of ninety days or more 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.
28
<PAGE> 29
The Company classifies its investments in debt and equity securities as
available-for-sale and, in accordance with Financial Accounting Standards Board
Statement No. 115, "Accounting for Certain Investments in Debt and Equity
Securities" (SFAS 115), records its investments at fair value. However, as the
difference between amortized cost and fair value was immaterial as of June 30,
1998 and 1997, 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 been insignificant.
FOREIGN CURRENCY TRANSLATION. The financial statements of foreign subsidiaries
are measured using the U.S. dollar as the functional currency. Transaction and
translation gains or losses have not been significant. The Company does not
enter into foreign currency forward exchange contracts.
CONCENTRATION OF CREDIT RISK AND SIGNIFICANT CUSTOMERS. The Company designs,
develops and markets software 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.
Revenues from one related party accounted for 19% of total revenues during
fiscal 1998 and 1997 and revenues from another related party accounted for 10%
of total revenues in fiscal 1996. No other customer accounted for more than 10%
during fiscal 1998 or 1997 while one commercial customer accounted for 29% of
revenues during fiscal 1996.
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 equivalents: the carrying amount reported in the balance sheet
for cash equivalents approximates fair value.
Investment securities: the fair values for marketable debt securities
are based on quoted market prices. However, the fair values of such
securities do not differ materially from their carrying value, which is
at amortized cost.
Convertible debt: the fair value of the convertible notes exceeds the
carrying amounts of the debt at June 30, 1998 as the current stock
price is greater than the conversion price. At June 30, 1998, the
aggregate value of the underlying stock into which the notes are
convertible is $4,129,000.
STOCK-BASED COMPENSATION. As permitted under Statement No. 123 (SFAS 123),
Accounting for Stock-Based Compensation, the Company has elected to follow
Accounting Principles Board Opinion No. 25 (APB 25), Accounting for Stock Issued
to Employees in accounting for stock-based awards to employees.
ACCOUNTING PRONOUNCEMENTS. Statement of Position ("SOP 97-2"), "Software Revenue
Recognition" was issued in October 1997 and addresses software revenue
recognition matters primarily from a conceptual level and does not include
specific interpretive and implementation guidance. Statement of Position 98-4
was issued in March 1998 which delays for one year the implementation of a
narrow provision of SOP 97-2. SOP 97-2 supersedes SOP 91-1 and is effective for
transactions entered into for fiscal years commencing after December 15, 1997.
Detailed interpretive and implementation guidelines for this standard have not
been issued. Once available, such detailed interpretive and implementation
guidance could lead to unanticipated changes in IntelliCorp's current revenue
accounting practices, and such changes could be material to IntelliCorp's
revenues and earnings.
In 1997, Statement of Financial Accounting Standards No. 130 ("SFAS 130"),
"Reporting Comprehensive Income," was issued and is effective for years
commencing after December 15, 1997. IntelliCorp will comply with the
requirements of SFAS 130 in fiscal year 1999.
29
<PAGE> 30
In 1997, Statement of Financial Accounting Standards No. 131 ("SFAS 131"),
"Disclosures about segments of Enterprise and Related Information" was issued
and is effective for years commencing after December 15, 1997.
IntelliCorp will comply with the requirements of SFAS 131 in fiscal year 1999.
2. NET PROPERTY AND EQUIPMENT
Property and equipment are stated at cost and at June 30 consist of:
<TABLE>
<CAPTION>
1998 1997
--------------------------------------------------------------------------------
<S> <C> <C>
Equipment $ 6,796,000 $ 5,952,000
Furniture and fixtures 1,764,000 1,612,000
Leasehold improvements 958,000 786,000
--------------------------------------------------------------------------------
Total property and equipment 9,518,000 8,350,000
Accumulated depreciation and amortization (8,417,000) (8,016,000)
--------------------------------------------------------------------------------
Net property and equipment $ 1,101,000 $ 334,000
--------------------------------------------------------------------------------
</TABLE>
3. ASSET PURCHASE AGREEMENT WITH D&T.
As described in Note 1, the Company acquired assets related to the UPI
technology. The acquisition was accounted for using the purchase method of
accounting. For financial reporting purposes, the Company is required to
determine the fair value of all identified intangible assets and expense the
fair value associated with in-process research and development for which there
is no alternative future use. The Company believes such fair value cannot exceed
an amount a third party would pay for it. The Company's total purchase price,
including liabilities assumed is $6,638,000 of which $2,700,000 was allocated to
purchased in-process research and development and $3,938,000 was allocated to
purchased intangible assets which primarily consist of developed technology.
IN-PROCESS RESEARCH AND DEVELOPMENT
To determine the value of the in-process research and development, the expected
future cash flows of the in-process technology were based on forecasts of future
results that management believes are likely to occur. The future cash flows were
discounted taking into account, the state of development of the in-process
"project", the cost to complete that project, the expected income stream, the
life cycle of the product ultimately developed, and the associated risks. Such
risks include, but are not limited to, the inherent difficulties and
uncertainties in completing the project and, thereby achieving technological
feasibility and risks related to the viability of and potential changes to
future target markets. This analysis resulted in amounts assigned to in-process
research and development projects which have not yet reached technological
feasibility (as defined and utilized by the Company in assessing software
capitalization) and do not have alternative future uses.
DEVELOPED TECHNOLOGY
To determine the value of the developed technology, the expected future cash
flows of the existing developed technology were discounted taking into account
the characteristics and applications of the product, existing and future
markets, the aggregate size and growth rate of the existing and future markets,
and assessments of the product sales cycle.
30
<PAGE> 31
4. INCOME TAXES
The Company's provision for income taxes consists of the following:
<TABLE>
<CAPTION>
Year ended June 30,
1998 1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
CURRENT:
Federal $ 89,000 $ -- $ --
State 29,000 -- --
Foreign 88,000 139,000 113,000
- --------------------------------------------------------------------------------
206,000 139,000 113,000
- --------------------------------------------------------------------------------
DEFERRED:
Federal -- -- --
State -- -- --
- --------------------------------------------------------------------------------
Provision for income taxes $206,000 $139,000 $113,000
</TABLE>
The Company's provision for income taxes differs from the amount computed by
applying the federal statutory rate to income taxes as follows:
<TABLE>
<CAPTION>
Year ended June 30,
- ------------------------------------------------------------------------------------------------------
1998 1997 1996
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Expected income tax provision/(benefit)
at U.S. federal statutory rate (34%) (34.0%) (34.0%) (34.0%)
State taxes, net of federal benefit 11.5 -- --
Net operating losses and credits not currently benefited (3.2) 30.7 47.8
Foreign losses not currently benefited/(utilized) 29.8 5.2 (10.8)
Federal alternative minimum tax 53.7 -- --
Foreign withholding taxes 53.0 8.0 3.5
Other individual immaterial items 13.3 (1.9) (3.0)
- ------------------------------------------------------------------------------------------------------
124.1% 8.0% 3.5%
- ------------------------------------------------------------------------------------------------------
</TABLE>
Significant components of the Company's deferred tax assets for federal, state
and foreign income taxes as of June 30, 1998 and 1997 are as follows:
<TABLE>
<CAPTION>
Deferred tax assets: 1998 1997
------------------------------------------------------------------------------------
<S> <C> <C>
Net operating loss carryforwards $ 14,100,000 $ 15,500,000
General business credits (expire 2002-2013) 2,800,000 2,100,000
In process research and development 1,100,000 --
Other 1,100,000 700,000
------------------------------------------------------------------------------------
Total deferred tax assets 19,100,000 18,300,000
Valuation allowance for deferred tax assets (19,100,000) (18,300,000)
------------------------------------------------------------------------------------
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 $400,000 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.
31
<PAGE> 32
At June 30, 1998, the Company had net operating loss carryforwards of
approximately $29,800,000 for federal income tax purposes, which will expire in
fiscal years 2002 through 2013. The Company also had net operating loss
carryforwards of approximately $9,800,000 for state income tax purposes and
$7,430,000 for foreign income tax purposes. The state net operating loss
carryforwards will expire in fiscal years 1998 through 2003. The foreign net
operating loss carryforwards have an indefinite carryforward period.
Utilization of the federal and state net operating losses and credits may be
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 2003. The Company has commitments under
noncancelable operating leases as of June 30, 1998 as follows: $1,537,000 in
fiscal 1999, $1,621,000 in fiscal 2000, $1,621,000 in fiscal 2001, $1,621,000 in
fiscal 2002, and $451,000 thereafter.
Rent expense was $915,000 in fiscal 1998, $793,000 in fiscal 1997 and $788,000
in fiscal 1996.
6. CORPORATE RESTRUCTURING COSTS
During 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. Other costs were $11,000.
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 were 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 the right to prepay all or a portion of the principal amount
outstanding at any time following April 30, 1999. The notes have been issued in
a private placement, and the Company registered the common stock that is
issuable upon conversion of the notes.
8. STOCKHOLDERS' EQUITY
SERIES A PREFERRED STOCK AND WARRANTS. On June 27, 1996, the Company agreed to
issue 580,645 shares of Series A 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
32
<PAGE> 33
valued at $2,932,000, net of issue costs. Each share of the preferred stock is
convertible into two common shares, subject to adjustments for dilutive events,
and carries 10% mandatory cumulative dividends payable semi-annually in April
and October. The dividends for the first two years were 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 at any time 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 Series A Preferred Stock and warrants issuable in fiscal 1996 (discussed
above) were issued in August 1996. In January and April 1998 one Series A
Preferred stockholder converted 96,774 shares of Series A Preferred Stock into
193,548 shares of Common Stock. The Company has reserved 1,687,742 shares of
common stock for issuance upon conversion of the remaining preferred stock and
exercise of these warrants. The common shares issuable in connection with the
conversion of Series A Preferred Stock or exercise of warrants were registered
on December 23, 1996. In the event of any liquidation or winding up of the
Company, the holders of Series A 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 total
liquidation preference for Series A Preferred Stock would be approximately
$1,525,000 at June 30, 1998.
SERIES B PREFERRED STOCK. On March 19, 1997, the Company issued 5,000 shares of
8% convertible Series B Preferred Stock at $1,000 per share. Each share is
convertible into 500 shares of common stock, subject to adjustments, at $2.00
per share and carries 8% mandatory cumulative dividends. The dividends for the
first year were payable at the Company's option in cash or common stock valued
at 90% of the 20 day average bid price preceding the distribution due date.
In the event of any liquidation, dissolution or winding up of the Company, the
holders of Series B Preferred Stock will be entitled to receive, junior to the
rights of the holders of Series A Preferred Stock, in preference to the holders
of common stock, an amount equal to $1,000 per share plus all accumulated and
unpaid dividends on the Series B Preferred Stock. The total liquidation
preference for Series B Preferred Stock would be approximately $5,067,000 at
June 30, 1998. The Company has reserved 2,500,000 shares of common stock for
issuance upon conversion of the Series B Preferred. These common shares were
registered on July 30, 1997.
When preferred stock is convertible to common stock at a conversion rate that is
a discount from the market rate at the date of issuance, the discounted amount
is an assured incremental yield, the "beneficial conversion feature," to the
preferred stockholders and should be accounted for as an embedded dividend to
preferred stockholders. As such, this dividend was recognized in the earnings
per share calculation at June 30, 1997. Based on the conversion terms of the
Series Preferred Stock, an embedded dividend of $1,720,000 or $0.14 per share,
was added to net loss in the calculation of basic and diluted net loss per
common share.
COMMON STOCK. On December 30, 1996 the Company issued 307,692 shares of
unregistered common stock to an existing stockholder at $1.625 per share.
STOCK OPTION PLANS. In December 1996, the stockholders authorized an additional
1,000,000 shares for a total of 3,004,778 shares authorized under the Company's
1991 Stock Option Plan. Incentive stock options may not be granted with exercise
prices at less than fair market value; non-qualified options may be granted with
exercise prices at less than fair market value. Both types of options are
exercisable in full immediately upon grant. However, the Company retains the
right to repurchase unvested 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
33
<PAGE> 34
tenth anniversary of the date of grant. At June 30, 1998, options for 157,529
shares were available for future grant, 1,437,348 options were vested, and no
shares outstanding from option exercises were subject to repurchase. Options for
449,175 of shares granted under prior plans are outstanding and exercisable as
of June 30, 1998.
In December 1997, the stockholders authorized an additional 150,000 shares for a
total of 250,000 shares authorized under the Company's 1991 Nonemployee
Director's Stock Option Plan. Options may 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 unvested 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, 1998, options for 172,500 shares were available for future
grant, 28,125 options were exercisable and no shares outstanding from option
exercises were subject to repurchase. The Company has reserved a sufficient
number of shares of common stock to be issued upon exercise of warrants and
options outstanding and to be granted.
In January 1998, The Board of Directors authorized 267,000 shares to be granted
to employees in connection with the purchase of UPI technology (refer to Note
3). The options may be granted at the fair market value on the date of grant
with a term of 10 years and vesting over four years. 50% of the fourth year
vesting for certain employees may be accelerated based on the achievement of
certain milestones. The options are exercisable when vested. At June 30, 1998,
options for 43,500 shares were available for future grant and zero options were
vested.
A summary of stock option activity under all plans follows:
<TABLE>
<CAPTION>
1998 1997 1996
- ---------------------------------------------------------------------------------------------------------------------------------
Weighted Weighted Weighted
Average Average Average
(Shares in thousands) Options Exercise Price Options Exercise Price Options Exercise Price
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Options:
Outstanding at beginning of year 2,737 $ 1.73 2,100 1.58 2,135 1.61
Granted 818 3.47 866 2.16 624 1.79
Exercised (403) 1.06 (65) 2.48 (294) 1.16
Canceled (125) 1.68 (164) 2.28 (365) 2.48
- ---------------------------------------------------------------------------------------------------------------------------------
Outstanding at end of year 3,027 $ 2.29 2,737 $ 1.73 2,100 $ 1.58
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The exercise price of options exercised during fiscal 1998 ranged from $0.10 to
$3.00. The Company granted 15,000 options at less than fair market value in
1998. Options to purchase 2,803,445 shares were exercisable at June 30, 1998.
The following table summarizes information about options outstanding at June 30,
1998:
OPTIONS OUTSTANDING
<TABLE>
<CAPTION>
Weighted Weighted
Range of Number Average Remaining Average
Exercise Prices Outstanding Contractual Life Exercise Price
- ----------------------------------------------------------------------------
<S> <C> <C> <C>
$0.6250 -- $1.6875 639,394 5.31 years $1.0021
1.7500 -- 2.0000 706,001 5.70 1.8835
2.0313 -- 2.7500 794,000 7.63 2.3839
2.8438 -- 3.5000 609,000 9.05 3.1408
3.5625 -- 5.1875 278,550 9.42 4.1215
- ----------------------------------------------------------------------------
$0.6250 -- $5.1875 3,026,945 7.14 years $2.2875
</TABLE>
34
<PAGE> 35
The Company has elected to continue to follow APB 25 for accounting for its
employee stock options because, as discussed below, the alternative fair value
method of accounting prescribed by SFAS 123 requires the use of option valuation
models that were not developed for use in valuing employee stock options. Under
APB 25, no compensation expense is recognized because the exercise price of the
Company's employee stock options equals the market price of the underlying stock
on the date of grant.
Pro forma information regarding net loss and loss per share in fiscal 1998,
fiscal 1997 and fiscal 1996 has been determined as if the Company had accounted
for its employee stock options granted subsequent to June 30, 1995 under the
fair value method prescribed by SFAS 123. The resulting effect on pro forma net
loss and loss per share disclosed for fiscal 1998, fiscal 1997 and fiscal 1996
is not likely to be representative of the effects on net income and earnings per
share on a pro forma basis in future years, because fiscal 1998, 1997 and 1996
pro forma results include the impact of only three years, two years and one
year, respectively, of grants and related vesting, while subsequent years will
include additional years of grants and vesting. The fair value of options was
estimated at the date of grant using a Black-Scholes option valuation model with
the following assumptions for fiscal 1998, 1997 and 1996: weighted average
risk-free interest rates of 5.7%, 6.3% and 5.8%, respectively; dividend yields
of 0% for all three years: volatility factors of the expected market price of
the Company's common stock of 68%, 66% and 66%, respectively; and a
weighted-average expected life of one year beyond vesting for all these years.
The weighted average fair value of options granted during fiscal 1998, 1997 and
1996 was $1.80, $1.10 and $0.92, respectively.
The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options which have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions including the expected stock price volatility. Because
the Company's employee stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in management's
opinion the existing models do not necessarily provide a reliable single measure
of the fair value of its employee stock options.
For purposes of pro forma disclosures, the estimated fair value of options is
amortized to pro forma expense over the options' vesting period. Pro forma
information for the years ending June 30 follows:
(in thousands, except per share amounts):
<TABLE>
<CAPTION>
Year ended June 30,
1998 1997 1996
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net loss applicable to common shareholders-pro forma $ 1,514 $ 2,303 $ 4,666
Net loss per common share-pro forma (including preferred stock dividends) $ 0.15 $ 0.34 $ 0.38
</TABLE>
9. SEGMENT AND GEOGRAPHIC INFORMATION
The Company conducts its business within one industry segment. The breakdown of
export revenues is as follows:
<TABLE>
<CAPTION>
(in thousands): Year ended June 30,
1998 1997 1996
----------------------------------
<S> <C> <C> <C>
EXPORT REVENUES
Europe $5,581 $3,100 $1,783
Pacific Rim/Latin America 1,269 1,432 1,578
- --------------------------------------------------------------------------------
Total export revenues $6,850 $4,532 $3,361
</TABLE>
Revenues and operating income recorded by the foreign subsidiaries of the
Company and their corresponding identifiable assets were not material in fiscal
1998, 1997 or 1996.
35
<PAGE> 36
10. RELATED PARTY TRANSACTIONS
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. As of June 30, 1998, SAP AG holds
approximately 11% of the outstanding stock of the Company. The Company
recognized $4,685,000 and $2,468,000 of total revenues from SAP AG during fiscal
1998 and 1997, respectively and had $153,000 and $645,000 included in accounts
receivable at June 30, 1998 and 1997, respectively, from SAP AG.
36
<PAGE> 37
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, 1998 and 1997, and the related consolidated statements of
operations, stockholders' equity and cash flows for each of the three years in
the period ended June 30, 1998. 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, 1998 and 1997, and the consolidated results of its operations and
its cash flows for each of the three years in the period ended June 30, 1998 in
conformity with generally accepted accounting principles.
/s/ ERNST & YOUNG LLP
Palo Alto, California
July 31, 1998
37
<PAGE> 38
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Not applicable.
38
<PAGE> 39
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 5, 1998, the executive officers and directors of IntelliCorp are
as follows:
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<S> <C> <C>
Kenneth H. Haas 47 Director and President
Colin Bodell 36 Chief Operating Officer
Development and Engineering Services
Tanya Candia 49 Vice President, Marketing
Mark Bickerstaffe 40 Vice President, North American Sales
David Loeb 37 Vice President, and Managing Director, Consulting
and Training
Adrian G. Rayner 46 Vice President and Managing Director, Europe
Peter L. Christiansen 40 Vice President, Software Development
Maryanne R. Stone 33 Vice President, and Managing Director, SAP
Consulting and Training
Kenneth A. Czaja 49 Vice President Finance, Secretary and
Chief Financial Officer
Katharine C. Branscomb(2) 42 Director
Joseph A. Graziano(1), (2) 54 Director
Norman J. Wechsler(1), (2) 53 Director
Arthur W. Berry(1) 57 Director
</TABLE>
(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, and was appointed Chief Operating Officer in August, 1998. Previously, Mr.
Bodell served as Vice President, Client Server
39
<PAGE> 40
Development at Micro Focus, Inc. Mr. Bodell received an Honors Degree in
Computer Science from Coventry University in England.
Ms. Candia joined IntelliCorp in August 1998 as Vice President, Worldwide
Marketing. She has served in a variety of senior marketing and executive roles
in technology companies during the last 16 years, including Unison Software,
OpenVision, Amdahl Corporation and Teradyne. She received holds an MA degree in
Intercultural Communication from the Monterey Institute of International
Studies, and an MS in Systems Management from the University of Southern
California.
Mr. Bickerstaffe was appointed Vice President, North American Sales in August
1998. He joined IntelliCorp in 1993 as Sales Manager for the European
Distribution Channels. Mr. Bickerstaffe moved to the United States in 1996 to
take responsibility for IntelliCorp's relationships with SAP's Implementation
Partners. Prior to joining IntelliCorp he worked in the United Kingdom as a
Sales Manager at Boole and Babbage.
Mr. Loeb was appointed Managing Director, Consulting and Training Services in
July 1995, and was appointed a Vice President in August 1998. 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. Rayner was appointed Vice President and Managing Director, Europe in August
1997. He joined IntelliCorp in November 1993 as European General Manager. From
1991 to 1993, Mr. Rayner was the United Kingdom Sales Director for Boole &
Babbage and from 1987 to 1991, he served as the National Sales Manager at
Phillips Business Systems. Mr. Rayner holds an Electrical Engineering degree
from the University of London.
Mr. Christiansen was appointed Vice President, Software Development in August
1997. He joined IntelliCorp in September 1993 as a Senior Software Engineer and
was promoted to Director of Product Development in November 1995. Prior to
joining IntelliCorp, Mr. Christiansen served in various capacities within PRO
UBIS, a German consulting and software company. Most recently he held the
position of Project Manager.
Ms. Stone joined IntelliCorp as Managing Director, SAP Consulting and Training
in August 1997, and was appointed a Vice President in August 1998. Prior to
joining IntelliCorp, she worked for Deloitte & Touche Consulting Group/ICS where
she served as Manager of Client Services. Ms. Stone has been involved with SAP
implementations for the last nine years and is a previous employee of SAP AG,
Switzerland. She received her Bacheloris of Commerce degree from the University
of Cape Town and completed the Management Advancement Program in Business
Administration at the University of Witwatersrand, South Africa.
Mr. Czaja joined IntelliCorp as Vice President, Finance, Secretary and Chief
Financial Officer in October 1996. Prior to joining IntelliCorp, he served as
Vice President, Finance at Wyse Technology, Inc. where he began as Controller in
1991. From 1989 to 1991, he was Corporate Controller of Silicon Compiler Systems
and a Group Controller at Mentor Graphics (which acquired Silicon Compiler
Systems). From 1973 to 1989, Mr. Czaja held various financial management
positions at Xerox Corporation.
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,
40
<PAGE> 41
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 Pixar Animation
Studios and CIDCO, Inc.
Mr. Wechsler has been a Director of the Company since September 1996. He is
Chairman and President of Wechsler & Co., Inc., a broker-dealer and investment
company, which he joined in 1963. The firm is a member of the NASD and SIPC.
Mr. Berry became a Director of the Company in August 1997. Since 1990, he has
been Chairman of Pecks Management Partners Ltd. in New York, a specialized,
institutional investment manager focusing on public and privately placed
convertible securities. From 1985 to 1990, Mr. Berry was President of the
Alliance Capital Management, L.P. Convertible Fund. Prior to joining Alliance,
he was with the Harris Bank in Chicago, first as Senior Portfolio Manager in the
bank's individual investment group, then as Vice President and Head of the
Special Funds section and Manager of the Harris Convertible Fund. Mr. Berry, a
Chartered Financial Analyst, is a graduate of Monmouth College and holds an MBA
degree from Washington University. He is a director of Hybridon, Inc.
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.
41
<PAGE> 42
ITEM 13. EXHIBITS, LIST AND REPORTS ON FORM 8-K.
(a) 2. Exhibits
<TABLE>
<S> <C>
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-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(5).
10-RR Series B Preferred Stock Purchase Agreement dated
March 19, 1997(7).
10-SS Office Lease dated March 17, 1998.
20 Definitive form of Proxy Statement for the Annual Meeting
of Stockholders to be held December 8, 1998(4).
21 Subsidiaries of Registrant(1).
23 Consent of Ernst & Young LLP, Independent Auditors.
25 Power of Attorney - See page 37 hereof.
27 Financial Data Schedule.
</TABLE>
(b) Reports on Form 8-K
Incorporated by reference to the Company's report on Form 8-K
related to UPI asset Purchase filed on February 9, 1998.
- ----------
(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, 1997.
(5) Filed as an Exhibit to Registrant's Annual Report on Form 10-KSB for the
fiscal year ended June 30, 1998. 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.
42
<PAGE> 43
(7) Filed as an Exhibit to Registrant's Quarterly Report on Form 10-QSB for
the quarter ended March 31, 1997 and incorporated herein by reference.
43
<PAGE> 44
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:
Kenneth H. Haas
Director and President
Date: October 6, 1998
44
<PAGE> 45
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 Kenneth A. Czaja, 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 October 6, 1998
------------------- (Principal Executive Officer)
Kenneth H. Haas
/s/ Kenneth A. Czaja Chief Financial Officer October 6, 1998
-------------------- and Secretary
Kenneth A. Czaja
/s/ Katharine C. Branscomb Director October 6, 1998
--------------------------
Katharine C. Branscomb
/s/ Joseph A. Graziano Director October 6, 1998
----------------------
Joseph A. Graziano
/s/ Norman J. Wechsler Director October 6, 1998
----------------------
Norman J. Wechsler
/s/ Arthur W. Berry Director October 6, 1998
-------------------
Arthur W. Berry
</TABLE>
45
<PAGE> 46
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 Registrantis 1991 Stock Option Plan(2).
10-GG Registrantis 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-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(5).
10-RR Series B Preferred Stock Purchase Agreement dated March 19, 1997.
10-SS Office Lease dated March 17, 1998.
20 Definitive form of Proxy Statement for the Annual Meeting of
Stockholders to be held December 8, 1998(4).
21 Subsidiaries of Registrant(1).
23 Consent of Ernst & Young LLP, Independent Auditors. 40
25 Power of Attorney. 37
27 Financial Data Schedule.
</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, 1997.
(5) Filed as an Exhibit to Registrant's Annual Report on Form 10-KSB for the
fiscal year ended June 30, 1998 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.
46
<PAGE> 1
EXHIBIT 10-SS
LEASE AGREEMENT
between
EL CAMINO OFFICE INVESTMENTS
and
Intellicorp
for
1975 El Camino Real West, Suite 101
Mountain View, Ca 94040
Dated: March 17, 1998
1
<PAGE> 2
1. PARTIES. This Lease dated March 17, 1998 for reference purposes only, by and
between EL CAMINO OFFICE INVESTMENTS, ("Landlord") and INTELLICORP INC., who
agree as follows:
2. PREMISES. Landlord leases to Tenant, and Tenant leases from Landlord the
office space located in Mountain View, California, 94040, described as 1975 El
Camino Real, outlined in Exhibit "A" ("Premises"). Premises have an agreed area
of approximately 34,291 rentable square feet.
3. TERM. The term of this Lease shall be for Five (5) Years, commencing on
September 1, 1998 and ending on August 31, 2003.
4. RENT.
4.1. Tenant shall pay to Landlord as rent for the
Premises, without demand, deduction, or off-set, the sum of One Hundred Two
Thousand Eight Hundred Seventy Three Dollars and no/100 ($102,873.00) on or
before the first day of each and every month of the term of this Lease, the
first monthly payment to be made concurrently with the execution hereof. If the
commencement date is not the first day of a month or if the Lease termination
date is not the last day of a month, the rent payable hereunder shall be
prorated, based upon a thirty day month, at the current rate for the fractional
month during which this Lease commences and/or terminates. Any rent payable for
a partial month directly following the commencement date shall be payable on the
first day of the first full calendar month of the term. Rent shall be paid to
Landmark Investments, Limited, at 2093 Landings Drive, Mountain View, CA 94043.
4.2. The base rent provided for in 4.1. above shall increase three percent (3%)
each year on the anniversary date of the commencement of the term of the Lease
stated in 3. above.
4.3. Late Charges. Tenant hereby acknowledges that late
payment by Tenant to Landlord of rent or other sums due
2
<PAGE> 3
hereunder will cause Landlord to incur costs not contemplated by this Lease, the
exact amount of which will be extremely difficult to ascertain. Such costs
include, but are not limited to, processing and accounting charges, and late
charges which may be imposed upon Landlord by terms of any mortgage or trust
deed covering the Premises. Accordingly, if any installment of rent or of a sum
due from Tenant shall not be received by Landlord or Landlord's designees by
12:00 noon on the fifth (5th) day of each month of the term hereof, then Tenant
shall pay to Landlord a late charge equal to five percent (5%) of such overdue
amount. The parties hereby agree that such late charges represent a fair and
reasonable estimate of the cost that Landlord will incur by reason of the late
payment by Tenant. Acceptance of such late charges by the Landlord shall in no
event constitute a waiver of Tenant's default with respect to such overdue
amount, nor prevent Landlord from exercising any of the other rights and
remedies granted hereunder.
5. SECURITY DEPOSIT. On execution of this Lease, Tenant
shall deposit with Landlord an additional $49,873.00 for a total security
deposit of $102,873.00 for the performance by Tenant of the provisions of this
Lease. If Tenant is in default, Landlord can use the security deposit, or any
portion of it, to cure the default or to compensate Landlord for all damage
sustained by Landlord resulting from Tenant's default. Tenant shall immediately
on demand pay to Landlord a sum equal to the portion of the security deposit
expended or applied by Landlord as provided in this paragraph so as to maintain
the security deposit in the sum initially deposited with Landlord. If Tenant is
not in default at the expiration or termination of this Lease, Landlord shall,
no later than fourteen (14) days after lease expiration or termination, return
to Tenant (or at Landlord's option, to the last assignee of Tenant's interest
hereunder), the balance of the security deposit. Landlord shall not be required
to keep this security deposit separate from its general funds, and Tenant shall
not be entitled to interest on such deposit.
6. POSSESSION.
6.1. If Landlord, for any reason cannot deliver possession of the Premises to
Tenant at the commencement of the term hereof, this Lease shall not be void or
voidable nor shall Landlord be liable to Tenant for any loss or damage
3
<PAGE> 4
resulting therefrom, nor shall the expiration date of the above term be
extended, but, in that event, all rent shall be abated during the period between
the commencement of said term and the time when Landlord delivers possession.
6.2. In the event that Landlord shall permit Tenant to occupy the Premises prior
to the commencement date of the term, such occupancy shall be subject to all of
the provisions of this Lease and said early possession shall not advance the
termination date hereinabove provided. Rent shall be prorated and prepaid for
early occupancy at the current rate.
7. USE.
7.1 Use. The Premises shall be used and occupied by Tenant for general office
purposes and for no other purpose without the prior written consent of the
Landlord.
7.2 Uses Prohibited.
a. Tenant shall not do or permit anything to be done in or about the Premises
nor bring or keep anything therein which will increase the existing rate or
affect any fire or other insurance upon the building or any of its contents, or
cause a cancellation of any insurance policy covering said building or any part
thereof or any of its contents, nor shall Tenant sell or permit to be kept used
or sold in or about said Premises any articles or substances, inflammable or
otherwise, which may be prohibited by a standard form policy of fire insurance.
b. Tenant shall not do or permit anything to be done in or about the Premises
which will in any way obstruct or interfere with the rights of other tenants of
the building or injure or annoy them or use or allow the Premises to be used for
any unlawful or objectionable purpose.
c. Tenant shall not use the Premises or permit anything to be done in or about
the Premises which will in any way conflict with any law now in force or which
may hereafter be enacted. Tenant shall at its cost promptly comply with all laws
now in force or which may hereafter be in force and with the requirements of any
board of fire underwriters or other similar body relating to Tenant's
improvements or acts.
4
<PAGE> 5
8. ALTERATIONS AND ADDITIONS. Landlord and its agents, contractors and employees
shall make all alterations and additions to the Premises. Tenant shall not make
or allow any alterations, additions or improvements of or to the Premises. Any
such alterations, additions or improvements, including, but not limited to,
wallcovering, paneling and built-in cabinet work, but excepting movable
furniture and trade fixtures, shall become a part of the realty, shall belong to
the Landlord and shall be surrendered with the Premises at expiration or
termination of the Lease. If Landlord consents to construct any alterations,
additions or improvements requested by Tenant, they shall be made at Tenant's
cost. Upon termination Tenant shall, upon written demand by Landlord promptly
pay Landlord to remove any alterations, additions or improvements requested by
Tenant. Such removal and repair of any damage to the premises caused by such
removal shall be at Tenant's cost. Tenant shall approve in writing the fixed
cost of any Tenant requested work prior to Landlord commencing work.
9. LIENS. Tenant shall keep the Premises and the property in which the Premises
are situated free from any liens arising out of any work performed, materials
furnished or obligations incurred by Tenant. Landlord may require Tenant to
provide Landlord, at Tenant's cost, a lien and completion
bond in an amount equal to one and one-half (1-1/2) times the estimated cost of
any improvements, additions, or alterations by Tenant, to insure Landlord
against liability for mechanic's and materialmen's liens and to insure
completion for the work.
10. REPAIRS AND MAINTENANCE. By taking possession of the Premises, Tenant shall
be deemed to have accepted the Premises as being in good sanitary order,
condition and repair. Tenant shall at Tenant's cost, keep the premises and every
part thereof in good condition and repair except for damages from causes beyond
the control of Tenant and ordinary wear and tear. Tenant shall upon the
expiration or sooner termination of this Lease surrender the Premises to the
Landlord in good condition, ordinary wear and tear and damage from causes beyond
the reasonable control of the Tenant excepted. Unless specifically provided in
an addendum to this Lease, Landlord shall have no obligation to alter, remodel,
improve, repair, decorate or paint the Premises or any part thereof and the
parties hereto affirm
5
<PAGE> 6
that Landlord has made no representations to Tenant respecting the condition of
the premises or the building except as specifically herein set forth.
Notwithstanding the above provisions, Landlord shall repair and maintain the
structural portions of the building, including the exterior walls and roof of
the building, the standard plumbing, air conditioning, heating and electrical
systems furnished by Landlord, unless such maintenance and repairs are caused in
part or in whole by the act, neglect, fault or mission of any duty by the
Tenant, its agents, employees or invitees, in which case Tenant shall pay to
Landlord the reasonable cost of such maintenance and repairs. Tenant shall give
Landlord written notice of any required repairs or maintenance. Landlord shall
not be liable for any failure to repair or to perform any maintenance unless
such failure shall persist for an unreasonable time after written notice. Any
repairs or maintenance to supplemental cooling equipment required for Tenant's
special needs are the responsibility of Tenant. Except as specifically herein
set forth, there shall be no abatement of rent and no liability of Landlord by
reason of any injury to or interference with Tenant's business arising from the
making of any repairs, alterations or improvements to any portion of the
building or the Premises or to fixtures, appurtenances and equipment therein.
Tenant waives the right to make repairs at Landlord's expense under any law,
statute or ordinance now or hereafter in effect.
11. ASSIGNMENTS AND SUBLETTING. Tenant shall not, voluntarily or by operation of
law, assign, transfer, or encumber its interest under this Lease or in the
Premises nor sublease all or any part of the premises or allow any other person
or entity (except Tenant's employees, agents and invitees) to occupy or use all
or any part of the premises without the prior written consent of Landlord. If
the assignment or subletting is at a higher rent than Tenant is paying Landlord
for the assigned or sublet portion of the Premises then the Tenant shall pay
Landlord seventy-five (75%) of the difference as received. All costs of
assigning or subletting shall be borne by Tenant. Any consent by Landlord shall
not release Tenant from liability hereunder, and a consent to one assignment,
subletting, occupation or use shall not be deemed a consent to any subsequent
assignment, subletting, occupation or use. Any such purported assignment,
subletting, or permission to occupy or use without such consent from Landlord
shall be void and shall, at the option of Landlord, constitute a
6
<PAGE> 7
default under this Lease. Tenant immediately and irrevocably assigns to
Landlord, as security for Tenant's obligations under this Lease, all rent from
any subletting of all or a part of the Premises as permitted by this Lease, and
Landlord, as assignee and as attorney-in-fact for Tenant, or a receiver for
Tenant appointed on Landlord's application, may collect such rent and apply it
toward Tenant's obligations under this Lease; except that, until the occurrence
of an act of default by Tenant, Tenant shall have the right to collect such
rent.
12. HOLD HARMLESS. Except as to claims based on the sole gross negligence or
willful misconduct of Landlord, its agents or employees, Tenant shall hold
Landlord harmless from any claims arising from Tenant's use of the premises or
from any activity permitted by Tenant in or about the Premises, and any claims
arising from any breach or default in Tenant's performance of any obligation
under the terms of this Lease. If any action or proceeding is brought by reason
of any such claim in which Landlord is named as a party, Tenant shall defend
Landlord therein at Tenant's expense by counsel reasonably satisfactory to
Landlord. Landlord and its agents shall not be liable for any damage to property
entrusted to employees of the building, nor for loss or damage to any property
by theft or otherwise, nor from any injury to or damage to persons or property
resulting from any cause whatsoever, unless caused by or due to the sole gross
negligence or willful misconduct of Landlord, its agents, or employees. Landlord
shall not be liable for any latent defect in the Premises or in the building of
which they are a part. Tenant shall give prompt notice to Landlord in case of
fire or accidents in the Premises or in the building or of alleged defects in
the building, fixtures or equipment.
13. INSURANCE.
13.1 Coverage. Tenant shall assume the risk of damage to any fixtures, goods,
inventory, merchandise, equipment, furniture and leasehold improvements, and
Landlord shall not be liable for injury to Tenant's business or any loss of
income therefrom relative to such damage. Tenant shall, at all times during the
term of this Lease, and at its own cost, procure and continue in force the
following insurance coverage.
a. Commercial general liability insurance, insuring
7
<PAGE> 8
Landlord and Tenant against any liability arising out of the ownership, use,
occupancy or maintenance of the Premises and all areas appurtenant thereto.
13.2. Insurance Policies. The limits of said insurance policies shall not,
however, limit the liability of the Tenant hereunder. Tenant may carry said
insurance under a blanket policy, providing, however, said insurance by Tenant
shall name Landlord as an additional insured. If Tenant shall fail to procure
and maintain said insurance, Landlord may, but shall not be required to, procure
and maintain same, but at the expense of Tenant. Insurance required hereunder
shall be in companies that rate B+ or better in "Best's Insurance Guide". Tenant
shall deliver to Landlord prior to occupancy of the premises copies of policies
of
insurance required herein or certificates evidencing the existence and amounts
of such insurance with loss payable clauses, satisfactory to Landlord. No policy
shall be cancellable or subject to reduction of coverage except after fifteen
(15) days prior written notice to Landlord. The minimum acceptable amount of
comprehensive liability insurance is $1,000,000 against claims in any
occurrence, and property damage insurance in an amount of not less than $100,000
per occurrence, or combined single limit of $1,000,000 commercial liability and
property damage insurance.
13.3. Waiver of Subrogation. As long as their respective insurers so permit,
Landlord and Tenant each hereby waive any and all rights of recovery against the
other for any loss or damage occasioned to such waiving party or its property of
others under its control to the extent that such loss or damage is insured
against under any fire or extended coverage insurance policy which either may
have in force at the time of such loss or damage. Each party shall obtain any
special endorsement, if required by their insurer, to evidence compliance with
the aforementioned waiver.
14. SERVICE AND UTILITIES.
14.1 Landlord's Obligations. Landlord agrees to furnish to the Premises
electricity for normal lighting and fractional horsepower office machines, and
elevator service. Landlord agrees to furnish to the Premises during reasonable
hours of generally recognized business days to be determined by Landlord, and
subject to the Rules and Regulations of the building, heat and air conditioning
required in Landlord's judgement for the comfortable use and occupancy of the
Premises, janitorial, and window washing Landlord
8
<PAGE> 9
shall also maintain and keep lighted the common stairs, gallerias, entries and
toilet rooms in the building. Landlord shall not be liable for and Tenant shall
not be entitled to any reduction of rental by reason of Landlord's failure to
furnish any of the foregoing when such failure is caused by accident, breakage,
repairs, strikes, lockouts or other labor disturbances or labor disputes of any
character, or by any other cause, similar or dissimilar, beyond the reasonable
control of Landlord.
14.2 Tenant's Obligation. Tenant shall pay for, prior to delinquency, all
telephone and all other materials and services, not expressly required to be
paid by Landlord, which may be furnished to or used in, on or about the Premises
during the term of this Lease. Tenant will not, without the prior written
consent of Landlord and subject to any conditions which Landlord may impose, use
any apparatus or device in the Premises which will in any way increase the
amount of electricity or water usually furnished for use of the Premises as
general office space. If Tenant shall require water or electric current in
excess of that usually furnished or supplied for use of the Premises as general
office space, Tenant shall first procure the consent of Landlord. Wherever heat
generating machines or equipment are used in the Premises which affect the
temperature otherwise maintained by the air conditioning system, Landlord
reserves the right to install supplementary air conditioning units in the
Premises and the cost thereof, including the cost of installation, operation and
maintenance thereof, shall be paid by Tenant to Landlord upon demand by
Landlord. Landlord shall not be liable for Landlord's failure to furnish any of
the foregoing when such failure is caused by any cause beyond the reasonable
control of Landlord. Landlord shall not be liable under any circumstances for
loss of or injury to property, however occurring, in connection with failure to
furnish any of the foregoing.
15. PROPERTY TAXES. Tenant shall pay before delinquency, all personal property
or similar taxes levied or assessed and which become payable during the term
hereof upon all Tenant's equipment, furniture, fixtures and personal property
located in the Premises. Landlord shall pay all property taxes on the land and
building, except should the California Constitution be changed in a way that
results in a higher or lower tax on the Premises than the annual increases now a
matter of law, any such increase or decrease shall be passed through to tenant
on a prorated basis as an item separate from any CPI adjustments. Tenant shall
pay to Landlord its share of such taxes, if any, within thirty days after
delivery
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to Tenant by Landlord of a statement in writing setting forth the amount of such
taxes.
16. RULES AND REGULATIONS. Tenant shall faithfully observe and comply with the
rules and regulations attached as Exhibit "B" to this Lease, as well as such
rules and regulations that Landlord shall from time to time promulgate. Landlord
reserves the right from time to time to make all reasonable modifications to
those rules which shall be binding to Tenant upon delivery of a copy of them to
Tenant. Landlord shall not be responsible to Tenant for the nonperformance of
any of said rules by any other tenant.
17. HOLDING OVER. If Tenant remains in possession without Landlord's consent,
after termination of the Lease, by lapse of time or otherwise, Tenant shall pay
Landlord for each day of such retention one-fifteenth (1/15th) of the amount of
the monthly rental for the last month prior to such termination and Tenant shall
also pay all costs, expenses and damages sustained by Landlord by reason of such
retention, including, without limitation, claims made by a succeeding tenant
resulting from Tenant's failure to surrender the Premises.
18. ENTRY BY LANDLORD. Landlord reserves the right to enter the premises at any
time to inspect the Premises, to provide any service for which Landlord is
obligated hereunder, to submit the Premises to prospective purchasers or
tenants, to post notices of nonresponsibility, and to alter, improve, maintain
or repair the Premises or any portion of the building of which the Premises are
a part that Landlord deems necessary or desirable, all without abatement of
rent. Landlord may erect scaffolding and other necessary structures where
reasonably required by the character of the work to be performed, but shall not
block entrance to the Premises and not interfere with Tenant's business, except
as reasonably required for the particular activity by Landlord. Landlord shall
not be liable in any manner for any inconvenience, disturbance, loss of
business, nuisance, interference with quiet enjoyment, or other damage arising
out of Landlord's entry on the Premises as provided in this paragraph, except
damage, if any, resulting from the negligence or willful misconduct of Landlord
or its authorized representative. Landlord shall retain a key with which to
unlock all doors into, within and about the Premises, excluding Tenant's vaults,
safes and files. In an emergency, Landlord shall have the right to use any means
which Landlord deems reasonably necessary to obtain entry to the Premises,
without liability to Tenant, except for any failure to exercise
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due care for Tenant's property. Any such entry to the Premises by Landlord shall
not be construed or deemed to be forcible or unlawful entry into or a detainer
of the Premises or an eviction of Tenant from the Premises or any portion
thereof.
19. RECONSTRUCTION. If the Premises or the building of which the Premises are a
part are damaged by fire or other peril covered by extended coverage insurance,
Landlord agrees to make repairs and restorations to the extent and in the manner
possible at a cost not exceeding the proceeds of the insurance received by
Landlord. If the cost of repair and restoration exceeds the amount of proceeds
received from insurance, Landlord may elect to terminate this Lease by giving
notice to Tenant within twenty (20) days after determining that the cost will
exceed such proceeds.
If Landlord proceeds with repair and restoration, this
Lease shall remain in full force and effect, except that Tenant shall be
entitled to a proportionate reduction of rent while such repairs are being made.
The rent reduction shall be based upon the extent to which repair and
restoration activity materially interferes with Tenant's business at the
Premises, provided, however, that if the damage was occasioned by the fault or
neglect of Tenant, its agents or employees, there shall not be an abatement of
rent.
20. DEFAULT; REMEDIES.
20.1 Default. The occurrence of any of the following shall constitute a default
by Tenant:
a. Failure by Tenant to pay the rent or other monies when due, where such
failure continues for three (3) business days after written notice by Landlord
to Tenant.
b. Abandonment of the Premises by Tenant.
c. Failure by Tenant to perform any other provision of this Lease where such
failure to perform is not cured within thirty (30) days after notice has been
given to Tenant; provided, however, that if the nature of the default is such
that the same cannot reasonably be cured within said thirty (30) day period,
Tenant shall not be deemed to be in default if Tenant shall within such period
commence such cure and thereafter diligently prosecute the same to completion.
d. The making by Tenant of any general assignment or general
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arrangement for the benefit of creditors; the filing by or against Tenant of a
petition to have Tenant adjudged a bankrupt or of a petition for reorganization
or arrangement under any law relating to bankruptcy (unless, in the case of a
petition filed against Tenant, same is dismissed within sixty (60) days; the
appointment of a trustee or receiver to take possession of substantially all of
Tenant's assets located at the Premises or of Tenant's interest in this Lease,
where possession is not restored to Tenant within thirty (30) days; or the
attachment, execution or other judicial seizure of substantially all of Tenant's
assets located at the Premises or of Tenant's interest in this Lease, where such
seizure is not discharged within thirty (30) days.
20.2 Remedies. In the event of any such default Landlord may:
a. Maintain this Lease in full force and effect and recover the rent and other
monetary charges as they become due, without terminating Tenant's right to
possession irrespective of whether Tenant shall have abandoned the Premises. In
the event Landlord elects not to terminate the Lease, Landlord shall have the
right to attempt to re-let the Premises at such rent and upon such conditions
and for such a term, and to do all acts necessary to maintain or preserve the
Premises as Landlord deems reasonable and necessary without being deemed to have
elected to terminate the Lease, including removal of all persons and property
from the Premises. Such property may be removed and stored in a public warehouse
or elsewhere at the cost of and for the account of Tenant. In the event any such
reletting occurs, this Lease shall terminate automatically upon the new tenant
taking possession of the Premises. Notwithstanding that Landlord fails to elect
to terminate the Lease initially, Landlord at any time during the term of this
Lease may elect to terminate this Lease by virtue of such previous default of
Tenant.
b. Terminate Tenant's right to possession by any lawful means, in which case
this Lease shall terminate and Tenant shall immediately surrender possession of
the Premises to Landlord. In such event Landlord shall be entitled to recover
from Tenant all damages incurred by Landlord by reason of Tenant's default,
including without limitation thereto, the following: (1) the worth at the time
of award of any unpaid rent which would have been earned at the time of such
termination; plus (2) the worth at the time of award of the amount by which the
unpaid rent which would have been earned after termination until the time the
award exceeds the amount of such rental loss that is proved could have been
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reasonably avoided; plus (3) the worth at the time of award of the amount by
which unpaid rent for the balance of the term after the time of award exceeds
the amount of such rental loss that is proved could be reasonably avoided; plus
(4) any other amount necessary to compensate Landlord for all the detriment
proximately caused by Tenant's failure to perform his obligations under this
Lease or which in the ordinary course of events would be likely to result
therefrom; plus (5) at Landlord's election, such other amounts in addition to or
in lieu of the foregoing as may be permitted from time to time by applicable
law. Upon any such re-entry Landlord shall have the right to make any reasonable
repairs, alterations or modifications to the Premises, which Landlord in its
sole discretion deems reasonable and necessary. As used in (1) above, the "worth
at the time of award" is computed by allowing interest at the rate of ten
percent (10%) per annum from the date of default. As used in (2) and (3) above,
the "worth at the time of award" is computed by discounting such amount at the
discount rate of the U.S.
Federal Reserve Bank at the time of award plus one percent (1%).
Remedies of Landlord contained in this Lease shall be construed and held to be
cumulative, and Landlord shall have the right to pursue any one or all of such
remedies or any other remedy or relief which may be provided by law. No waiver
of any default of Tenant hereunder shall be implied from any acceptance by
Landlord of any rent or other payments due hereunder or any omission by Landlord
to take any action on account of such default if such default persists or is
repeated, and no express waiver shall affect defaults other than as specified in
said waiver. The consent or approval of Landlord to or of any act by Tenant
requiring Landlord's consent or approval shall not be deemed to waive or render
unnecessary Landlord's consent or approval to or of any subsequent similar acts
by Tenant.
21. EMINENT DOMAIN. If more than twenty-five percent (25%) of the Premises is
taken or appropriated by any public or quasi-public authority under powers of
eminent domain, either party hereto shall have the right at its option, to
terminate this Lease. If less than twenty-five percent (25%) of the Premises is
taken (or neither party elects to terminate as above, provided if more than
twenty-five percent (25%) is taken), the Lease shall continue, but the rental
thereafter to be paid shall be equitably reduced. If any part of the building of
which the Premises are a part is so taken or appropriated, whether or not any
part of the Premises is involved, Landlord shall be entitled to the entire
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award and compensation for the taking which is paid or made by the public or
quasi-public agency, and Tenant shall have no claim against said award.
22. STATEMENT TO LENDER. Tenant shall at any time and from time to time, upon
not less than ten (10) days prior written notice from Landlord, execute,
acknowledge, and deliver to Landlord a statement in writing, (a) certifying that
this Lease is unmodified and in full force and effect (or, if modified, stating
the nature of such modifications and certifying that this Lease as so modified,
is in full force and effect), and the date to which the rental and other charges
are paid in advance, if any, and (b) acknowledging that there are not, to
Tenant's knowledge, any uncured defaults on the part of the Landlord hereunder,
or specifying such defaults if any are claimed and (c) certifying such other
matters as may be reasonably required by Landlord. Any such statement may be
relied upon by any prospective purchaser or encumbrancer of all or any portion
of the real property of which the Premises are a part.
23. PARKING. Tenant shall have the right to use, in common with the other
tenants, occupants or vistors of the building, parking facilities, provided by
Landlord for tenants of The Atrium Business Center, subject to the rules and
regulations established from time to time by Landlord. Said parking shall be at
no expense to the Tenant unless a tax, fee or levy is imposed directly or
indirectly by a Federal, State or local agency or jurisdiction for parking. If
such a tax, fee or levy is imposed tenant agrees to pay its portion of said fee
as reasonably determined by the Landlord.
24. AUTHORITY OF PARTIES.
24.1 Corporate Authority. If Tenant is a corporation, each individual executing
this Lease on behalf of said corporation represents and warrants that he is duly
authorized to execute and deliver this Lease on behalf of said corporation, in
accordance with a duly adopted resolution of the Board of Directors of said
corporation or in accordance with the by- laws of said corporation, and that
this Lease is binding upon said corporation in accordance with its terms.
24.2 Limited Partnerships. Landlord herein is a limited partnership. It is
understood and agreed that any claims by Tenant on Landlord shall be limited to
the assets of the limited
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partnership. And furthermore, Tenant expressly waives any and all rights to
proceed against the individual partners or the officers, directors or
shareholders of any corporate partner, except to the extent of their interest in
said limited partnership.
25. GENERAL PROVISIONS.
25.1 Exhibits. Exhibits attached hereto, and addendums initialed by the parties,
are deemed to constitute a part hereof.
25.2 Waiver. The waiver by Landlord of any provision of this Lease shall not be
deemed to be a waiver of any subsequent breach of the same or any other
provisions of this Lease herein contained. The subsequent acceptance of rent
hereunder by Landlord shall not be deemed to be a waiver of any preceding breach
by Tenant of any provision of this Lease, other than the failure of the Tenant
to pay the particular rental so accepted, regardless of Landlord's knowledge of
such preceding breach at the time of the acceptance of such rent.
25.3 Notices. All notices and demands which may or are required to be given by
either party to the other hereunder shall be in writing. All notices and demands
by the Landlord to the Tenant shall be sufficient if delivered in person or sent
by first class mail, postage prepaid, addressed to the Tenant at the Premises or
to such other place as Tenant may from time to time designate in a written
notice to the Landlord. All written notices and demands by the Tenant to the
Landlord shall be sufficient if delivered in person or sent by first class mail,
postage prepaid, addressed to the Landlord at the office of the building or to
such other person or place as the Landlord may from time to time designate in a
notice to the Tenant. Any such notice is effective at the time of delivery or 48
hours after mailing.
25.4 Rentable Area. Rentable square footage, as herein used, is the actual
square footage of the office suite plus a load factor for gallerias, restrooms,
hallways and other common areas. The stated rentable area will not be used as a
basis for either party making any claim against the other.
25.5 Joint and Several Obligations. If there be more than one Tenant, the
obligations hereunder imposed upon tenants shall be joint and several.
25.6 Captions. The captions of the paragraphs of this Lease are
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not a part of this Lease and shall have no effect upon the construction or
interpretation of any part hereof.
25.7 Time. Time is of the essence hereof.
25.8 Successors and Assigns. The provisions of this Lease, subject to the
provisions as to assignment, apply to and bind the successors and assigns of the
parties hereto.
25.9 Recording. Neither Landlord nor Tenant shall record this Lease or a short
form memorandum hereof without the prior written consent of the other party.
25.10 Scope and Amendments. This Lease is and shall be considered to be the only
agreement between the parties hereto. All negotiations and oral agreements
acceptable to both parties are included herein. No amendment or other
modification of this Lease shall be effective unless in a writing signed by
Landlord and by Tenant.
25.11 Legal Fees. In the event of any action brought by either party against the
other under this Lease, the prevailing party shall be entitled to recover all
costs including the fees of its attorneys as the court may adjudge reasonable.
25.12 Sale. In the event of any sale of the building, Landlord shall be released
of any liability under this Lease, and the purchaser of the Premises shall be
deemed to have assumed and agreed to carry out all of the obligations of the
Landlord under this Lease.
25.13 Lender Requirements. Upon request of the Landlord, Tenant will, in
writing, subordinate its rights hereunder to the rights of any mortgagee, under
a deed of trust held by any bank, insurance company or other lending
institution, (collectively Lender) now or hereafter in force against the land
and building of which the Premises are a part, and to all advances made or
hereafter to be made upon the security thereof. If any proceedings are brought
for foreclosure, or in the event of the exercise of the power of sale under any
mortgage or deed of trust made by the Landlord covering the Premises, the Tenant
shall recognize such purchaser as the Landlord under this Lease. Tenant's
obligation to subordinate it's rights hereunder is conditioned upon Lender's
agreement not to disturb Tenant's possession or quiet enjoyment of Premises.
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25.14 Name. Tenant shall not use the name of the development in which the
Premises are situated for any purpose other than as an address of the business
to be conducted by the Tenant in the Premises, unless written authorization is
obtained from Landlord.
25.15 Severability. Any provision of this Lease which shall prove to be invalid,
void or illegal shall in no way affect, impair or invalidate any other provision
hereof.
25.16 Applicable Law. This Lease shall be governed by the laws of the State of
California.
25.17 Toxics. Landlord and Tenant acknowledge that they have been advised that
numerous federal, state, and/or local laws, ordinances and regulations ("law")
affect the existence and removal, storage, disposal, leakage of contamination by
materials designated as hazardous or toxic ("Toxics"). Many materials, some
utilized in everyday business activities and property maintenance, are
designated as hazardous or toxic. Some of the Laws require that Toxics be
removed or cleaned up without regard to whether the party required to pay for
the "clean up" caused the contamination, owned the property at the time the
contamination occurred or even knew about the contamination. Some items, such as
asbestos or PCB's, which were legal when installed, now are classified as
Toxics, and are subject to removal requirements. Civil lawsuits for damages
resulting from Toxics may be filed by third parties in certain circumstances.
Tenant and Landlord agree to hold the other harmless from any responsibility for
any Toxics which are brought on to the Premises or the project by themselves,
their agents, employees or contractors.
25.18 SIGNAGE. The original standard tenant identification sign on the main door
to the Premises will be installed at Landlord's expense. Landlord will not
charge Tenant for this sign for the duration of the lease unless Tenant requests
a change in the sign.
26. ELECTRICAL, COMMUNICATIONS AND ALARM WIRING.
26.1 Tenant shall contact the Landlord prior to installing or relocating any
electrical, telephone, network, LAN, intercom, doorbell, or alarm wiring systems
at the Atrium Business Center.
26.2 All electrical wiring shall be installed by a licensed
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contractor in expanded metal tubing in accordance with the most current
electrical code, etc.
26.3 All communication cabling shall be installed by a licensed contractor and
shall be plenum rated and shall not be installed as to "lay" on ceiling tile or
t-bar grid systems. A certificate of compliance shall be provided by contractor
to Landlord at time of completion.
26.4 Landlord shall not be financially responsible for any repair or replacement
of any communication cables, telephone lines, telephone feeders, or trunk lines
beyond the M.P.O. (minimum point of entry) established by Pacific Bell. If one
or more of these lines serve several tenants, the cost of installation and
repair shall be divided among tenants currently being served by said cable.
26.5 Not all existing telephone rooms/punchdown boards are permanent. Tenant and
his contractor must verify location of termination points with the Landlord
prior to installation.
26.6 No audible alarm systems will be permitted. Landlord will not assume any
financial responsibility for any alarms attributable to its employees,
contractors, including janitors, guards, or service personnel.
26.7 Any work requiring access to adjoining tenant spaces shall be prearranged
so that Landlord can obtain permission for the intrusion/interruption of the
space. Tenant shall reasonably cooperate in arranging access to contractors for
adjoining tenant when requested by Landlord.
26.8 Upon request of Landlord, Tenant shall remove all communication cable that
Tenant has installed in the Premises upon expiration of this Lease and repair
all damage caused by said removal.
27. ASSIGNMENT OF RENTS. In the event of Tenant's receipt of a Notice from
Principal Mutual Life Insurance Company or its nominee that Landlord is in
default under its mortgage, Tenant shall make all future rent payments directly
to Principal at the address Lender directs in the Notice.
28. AMERICANS WITH DISABILITIES ACT. Landlord believes the Premises complies
with the "Americans With Disabilities Act"
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(ADA), but no independent investigation has been made to ensure compliance with
the "Americans With Disabilities Act" (ADA). This Act may require a variety of
changes to a facility, including potential removal of barriers to access by
disabled persons and provision of auxiliary aids and services for hearing,
vision or speech impaired persons, some of which would be the Landlord's
responsibility and some would be the Tenant's responsibility. Landlord urges all
parties to obtain independent legal and technical advice with respect to the
physical and environmental conditions and ADA compliance of the Property. The
Parties agree that it will rely solely on their own investigations and/or that
of a licensed professional specializing in these areas, and not on the
investigation, assurances or opinion of Landlord or Broker, if any.
29. BROKERS. Tenant warrants that it has had no dealing with any real estate
broker or agent in connection with the negotiation of this Lease excepting only
of Thrust IV, and it knows of no other real estate broker or agent who is
entitled to a commission in connection with this Lease. Commissions shall be
paid by Landlord to Broker(s) on the following schedule: 50/50 - 6%, 5%, 4%. No
commissions shall be paid on Tenant Improvement Amortizations, CPI Increases or
any other rent adjustment covered in section 4.2 herein. No commission shall be
paid by Tenant.
30. CARPETS. Landlord shall, at its cost, clean the carpets on or before August
31, 1998.
31. COVERED PARKING. The covered parking in the rear of the building will
continue, at the discretion of the Landlord, to be assigned in accordance with
the January 26, 1993 letter from Landlord to Tenant.
32. EXTRA HVAC AND UTILITY USAGE. Except for Tenant's computer room and machine
room, Landlord acknowledges that Tenant's current use of utilities in the
Premises is not in excess of that usually furnished for use of the Premises as
general office space. Landlord has (1) disconnected the supplemental
air-condition system serving the Machine Room on the 2nd floor, (2) installed an
outside air supply and exhaust system to said Machine Room, and (3) disconnected
the reheat and humidifier system in the main Computer Room on the 1st floor.
Landlord and Tenant shall share equally the "electrical cost" of operating the
above fans and the remaining two supplemental air-condition units supplying the
Computer Room. This cost is now estimated to be
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$2,981.66 per month (Tenant's share = $1,490.83). When that energy demand (on a
yearly average) is changed on either or both of these rooms, or the electric
rate changes, the electric cost shall be changed to reflect such different usage
or rate. Landlord shall establish a preventive maintenance program and both
arrange for and pay for all maintenance and repair directly with a service
company, and Tenant shall reimburse the Landlord one-half the costs thereof.
33. Tenant shall also be directly responsible for arranging and paying for any
and all costs of maintaining and/or repairing of the HALON fire extinguishing
system in Tenant's computer room.
34. Tenant shall be directly responsible for the private access system and door
hardware related to Tenant's security system, which shall not include the two
exterior doors and the spa door which the Landlord has replaced with its own
system.
35. Main Building "House Air" system operates on a standard office building
schedule of 7AM to 6PM on weekdays. Any after hours/weekend cooling required by
Tenant will be billed to Tenant on an hourly rate of $24.00 for one side of the
building and $39.00 for both sides, with a six hour daily minimum. Said rate
shall be adjusted by Landlord from time to time to reflect rate and usage
changes. To request this extra service Tenant will phone Landlord and then FAX
the main office with Tenant's exact requirements no later than 12 noon on a
weekday preceding the after hours or weekend of desired usage.
36. Landlord agrees that Tenant is not responsible for the security of other
Tenants in the building and that Tenant's retention of dedicated guard service,
and dedicated security system or dedicated perimeter alarm system does not make
Tenant responsible for the security of other Tenants.
37. Tenant's private phone system and Tenant's private security access system
shall remain the sole responsibility of the Tenant and Landlord shall have no
responsibility for said private phone and security systems.
38. Amendments To The Above.
Delete Paragraphs 6.1 & 6.2
Paragraph 7.2c; delete the last sentence and add in its place, "In
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matters related to Tenant's improvements or activity, Tenant shall at its cost
promptly comply with all laws now in force or which may hereafter be in force
and with the requirements of any board of fire underwriters or other similar
body."
Paragraph 8, Page 5, Line 2; after, "shall belong to the",delete, "Landlord and"
and add "Tenant during the term of this Lease but"...
Paragraph 8, Page 5, Line 3; after, "surrendered with the Premises", add "and
shall become the property of the Landlord"...
Paragraph 8, Page 5, Line 8; after "alterations, additions or improvements",
delete "requested by Tenant" and add "done for or by the tenant unless the
Landlord has previously waived its right to ask for said removal".
Paragraph 8, Page 5; Insert the following at the end of the paragraph, "Tenant
may be permitted to make alternations and additions to the PRemises provided
that (1) Tenant first seeks Landlord's consent (which consent shall not be
unreasonably withheld), and (2) such alterations and additions are constructed
by or under the direction of Landlord as general contractor, Landlord agrees to
make such alterations and/or additions at competitive prices and that its
charges for supervision and/or overhead will not exceed 15% and (3) a deposit to
cover the cost of removal of the improvements and restoring of the premises may
be required by the Landlord"
Paragraph 10, Page 6, Line 1; after "Tenant shall pay to Landlord", add "or
Insurance Company."
Paragraph 10, Page 6, Line 2; after "maintenance and repairs", add "subject
however to the provisions of Paragraph 13.3."
Paragraph 11, Page 6; Insert at the end of the first sentence, "which will not
be unreasonably withheld".
Paragraph 11, Page 6, Insert the following at the end of Paragraph 11 as amended
above: "The provisions of this paragraph shall not apply to any transfer or
assignment of the Lease to any entity resulting from a merger of ,
reorganization of or consolidation with Tenant; or to any entity which acquires
all or substantially all of the assets of Tenant, as a going concern, with
respect to the business that is being conducted in the Premises provided that
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if such entity does not have the same financial strength as Tenant, in
Landlord's sole judgement, Landlord shall have the right to demand reasonable
additional security for the Lease."
Paragraph 12, Page 7, Line 2, after "negligence or willful misconduct of
Landlord", insert "or a willful breach of the lease by the Landlord,"
Paragraph 16, Page 9, Line 3; after "this Lease, as well as such", insert
"nondiscriminatory"
Paragraph 16, Page 9, Line 4; after "shall from time to time", insert
"reasonable"
Paragraph 18, Page 10, Line 8. Insert the following at the end of the first
sentence: "In exercising its rights pursuant to the prior sentence. Landlord
agrees to use its best efforts to minimize any disruption to tenant occasioned
by such entry".
Paragraph 19, Page 11, Insert at the end of the last sentence, "nor shall the
following termination clause apply."
Paragraph 19, Page 11 Insert at the end of the paragraph, "If one-third or more
of the Premises is rendered unusable the following shall apply:
(a) Landlord shall give notice to Tenant of its election to rebuild or
not to rebuild the Premises within Forty Five (45) days of casualty to the
Premises and such notice shall specify Landlord's architect's or engineer's
reasonable estimate as to the time required to rebuild or restore the Premises;
(b) If, in the reasonable opinion of Landlord's architect or engineer,
the Premises will take longer than nine (9) months to rebuild or restore and
Landlord has elected to perform such rebuilding or restoration, Tenant may,
notwithstanding Landlord's election, terminate this Lease by written notice to
Landlord of such termination within five (5) days after its receipt of
Landlord's notice. Such termination shall be effective as of the date of the
casualty as to the unusable space and 180 days after Landlords receipt of
Tenant's termination notice as to the remainder of the premises.
(c) If the remaining unusable space is more than one-third of the
Premises and Landlord fails to restore this unusable portion of the Premises
(including reasonable means of access thereto) within a period which is sixty
days longer than the period stated in Landlord's notice to Tenant as the
estimated rebuilding period,
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Tenant may by giving notice to Landlord prior to the expiration of the 60 days
immediately terminate this Lease as to the remaining unusable space, in which
event the Lease on the remaining usable space shall terminate 180 days after the
date of the giving of such notice.
Paragraph 20.1d, Page 11; Change "sixty (60) days" to "ninety (90) days" and
change the first "thirty (30) days" to "sixty (60) days" and change the second
"thirty (30) days" to "ninety (90) days"
Paragraph 26.5, Page 17; add at the end of the paragraph, "of new phone and data
lines."
Paragraph 26.8, Page 18; add at the end of the paragraph, "Notwithstanding the
above, if the communication lines were installed with Landlord's permission, in
a manor previously approved by Landlord and they meet current code and they are
in good working order and they are useful to the next tenant, Landlord shall not
request the lines meeting all of the above criteria to be removed."
This lease supersedes all previous Leases, Modifications, Written Agreements and
Oral Agreements.
The parties hereto have executed this Lease on the dates specified immediately
adjacent to their respective signatures.
LANDLORD: EL CAMINO OFFICE INVESTMENTS
By: THRUST IV, INC., General Partner
By: Hugh P. Bikle Date: March 18, 1998
-------------------------
Hugh P. Bikle, President
TENANT: INTELLICORP, INC.
By: K. Czaja Date: March 18, 1998
-------------------------
(SIGNATURE)
K. A. Czaja CFO Tax ID# 94-275-6073
-------------------------
(PRINT NAME) (TITLE)
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LENDER: PRINCIPAL FINANCIAL GROUP
By:___________________________ Date:_________________
(SIGNATURE)
---------------------------
(PRINT NAME) (TITLE)
Attachments:
Exhibit A - Floor Plan with Suite marked
Exhibit B - Rules & Regulations
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EXHIBIT "A"
Floor Plan with Suite marked
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<PAGE> 26
EXHIBIT "B"
Rules & Regulations
26
<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 Nos. 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 Nos. 33-9466, 33-11244, 33-30345, 33-34598, 33-34599,
33-34600 and 33-40614), pertaining to the Amended and Restated 1982 Stock Option
Plan and the 1986 Employee Stock Purchase Plan, and in the Registration
Statements (Form S-3 Nos. 33-78718, 333-16879 and 333-29823), pertaining to the
registration of Common Stock Warrants and the Common Stock of IntelliCorp, Inc.,
of our report dated July 31, 1998, with respect to the consolidated financial
statements of IntelliCorp, Inc. included in this Annual Report (Form 10-KSB) for
the year ended June 30, 1998.
/s/ ERNST & YOUNG LLP
Palo Alto, California
October 6, 1998
IntelliCorp is a registered trademark of IntelliCorp, Inc. ModelWorks,
ModelStore, LiveModel, LiveAnalyst, GoLive, LiveDesign, R/Viewer, and
ModelCapture are trademarks of IntelliCorp, Inc. PowerModel, Kappa-PC, and KEE
are registered trademarks of IntelliCorp. SAP, R/3, SAPPHIRE, and Business
Engineer are trademarks or registered trademarks of SAP AG. Bonapart is a
registered trademark of UBIS GmbH. All other marks are used for the benefit of
their respective owners, and IntelliCorp, Inc. disclaims any interest in such
marks. [update based on trademarks used -- Veronica will know this information
or see prior work samples]
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<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-START> JUL-01-1997
<PERIOD-END> JUN-30-1998
<CASH> 4,714
<SECURITIES> 0
<RECEIVABLES> 7,151
<ALLOWANCES> 591
<INVENTORY> 0
<CURRENT-ASSETS> 13,670
<PP&E> 9,518
<DEPRECIATION> 8,418
<TOTAL-ASSETS> 18,454
<CURRENT-LIABILITIES> 6,697
<BONDS> 1,600
0
1
<COMMON> 15
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 18,454
<SALES> 13,861
<TOTAL-REVENUES> 24,445
<CGS> 1,266
<TOTAL-COSTS> 22,370
<OTHER-EXPENSES> 2,700
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 177
<INCOME-PRETAX> (492)
<INCOME-TAX> 206
<INCOME-CONTINUING> (698)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (698)
<EPS-PRIMARY> (.10)
<EPS-DILUTED> (.10)
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