<PAGE> 1
FORM 10-QSB
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended: September 30, 1998
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES ACT
OF 1934
For the transition period from to
Commission File Number 0-13022
INTELLICORP, INC.
(Exact name of small business issuer as specified in its charter)
DELAWARE 94-2756073
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1975 EL CAMINO REAL WEST
MOUNTAIN VIEW, CALIFORNIA 94040-2216
(Address of principal executive offices)
(Zip Code)
(650) 965-5500
(Issuer's telephone number, including area code)
Check whether the issuer (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 [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practicable date.
<TABLE>
<CAPTION>
Outstanding as of
Class October 30, 1998
----- -----------------
<S> <C>
Common stock,
$.001 par value 15,211,307 shares
</TABLE>
This document is comprised of 15 pages.
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION PAGE
----
<S> <C> <C>
Item 1. Financial Statements
Condensed Consolidated Balance Sheets................................3
Condensed Consolidated Statements of Operations......................4
Condensed Consolidated Statements of Cash Flows......................5
Notes to Condensed Consolidated Financial Statements...............6-7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations.....................8-11
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K....................................12
SIGNATURE..........................................................................13
</TABLE>
2
<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
INTELLICORP, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
September 30, June 30,
(In thousands) 1998 1998(1)
------------- --------
(unaudited)
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 3,361 $ 4,714
Short-term investments 1,492 1,472
Accounts receivable, net 6,074 7,157
Other current assets 378 327
-------- --------
Total current assets 11,305 13,670
Property and equipment, net 1,126 1,101
Purchased intangibles, net 3,183 3,431
Capitalized software, net -- 49
Other assets 220 203
-------- --------
$ 15,834 $ 18,454
======== ========
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $ 897 $ 1,410
Accrued compensation 1,372 1,321
Other current liabilities 1,497 1,589
Deferred revenues 2,133 2,377
-------- --------
Total current liabilities 5,899 6,697
Convertible notes 1,600 1,600
Stockholders' equity:
Preferred stock 1 1
Common stock 15 15
Additional paid - in capital 58,494 58,487
Accumulated deficit (50,175) (48,346)
-------- --------
Total stockholders' equity 8,335 10,157
-------- --------
$ 15,834 $ 18,454
======== ========
</TABLE>
(1) The consolidated balance sheet at June 30, 1998, has been derived from
the audited consolidated financial statements at that date but does not
include all of the information and footnotes required by generally
accepted accounting principles for complete financial statements.
See notes to condensed consolidated financial statements.
3
<PAGE> 4
INTELLICORP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Three months ended
September 30,
(In thousands, except -----------------------------
per share amounts) 1998 1997
-------- --------
(unaudited)
<S> <C> <C>
Revenues:
Software $ 1,278 $ 2,900
Contract services 3,065 1,450
Other services 795 430
-------- --------
Total revenues 5,138 4,780
-------- --------
Costs and expenses:
Cost of revenues:
Software 269 262
Contract services 2,096 680
Other services 195 177
Research and development 1,566 1,072
Marketing, general, and
administrative 2,753 2,151
-------- --------
Total costs and expenses 6,879 4,342
-------- --------
Income / (loss) from operations (1,741) 438
Other income (expense), net 67 24
-------- --------
Income / (loss) before taxes (1,674) 462
Provision for income taxes 20 37
-------- --------
Net income (loss) $ (1,694) $ 425
======== ========
Series A and Series B Preferred
stock dividends (135) (162)
-------- --------
Income (loss) available to
common shareholders (1,829) 263
======== ========
Net income (loss) per share - basic $ (0.12) $ 0.02
======== ========
Net income (loss) per share - diluted $ (0.12) $ 0.02
======== ========
Shares used in computation of net
income (loss) per share - basic 15,173 13,044
======== ========
Shares used in computation of net
income (loss) per share - diluted 15,173 14,899
======== ========
</TABLE>
See notes to condensed consolidated financial statements.
4
<PAGE> 5
INTELLICORP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Three months ended
September 30,
Increase (decrease) in cash and ---------------------------
cash equivalents (in thousands) 1998 1997
------- -------
(unaudited)
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $(1,694) $ 425
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization 456 128
Changes in assets and liabilities:
Accounts receivable 1,083 (1,737)
Other current assets (51) (127)
Other assets (17) 74
Accounts payable (513) 204
Accrued compensation 51 (23)
Other current liabilities (92) 73
Deferred revenues (244) 950
------- -------
Net cash used in operating activities (1,021) (33)
------- -------
Cash flows from investing activities:
Property and equipment purchases (184) (109)
Purchase of short-term investments -- (3,078)
Unrealized gain on short term investments (20) --
Maturities of short-term investments -- 985
------- -------
Net cash used in investing activities (204) (2,202)
------- -------
Cash flows from financing activities -
Payment of dividends (135) --
Cash collected from exercise of warrants -- 712
Cash collected from sale of stock 7 54
------- -------
Net cash provided by (used in) financing activities (128) 766
------- -------
Decrease in cash and cash equivalents (1,353) (1,469)
Cash and cash equivalents, beginning of period 4,714 4,363
------- -------
Cash and cash equivalents, end of period $ 3,361 $ 2,894
======= =======
</TABLE>
See notes to condensed consolidated financial statements.
5
<PAGE> 6
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION. The accompanying condensed consolidated financial
statements should be read in conjunction with the Company's financial statements
for the fiscal year ended June 30, 1998, included in the Company's Annual Report
on Form 10-KSB filed with the Securities and Exchange Commission. In the opinion
of management, the interim statements reflect all adjustments (consisting of
normal recurring entries) which are necessary for a fair presentation of the
results of the interim periods presented. The interim results are not
necessarily indicative of the results for the full year.
RECLASSIFICATIONS. The Company has reclassified certain prior year balances to
conform with current year presentation.
2. SIGNIFICANT CUSTOMERS AND EXPORT SALES. A related party accounted for 29%
($1,506,000) and 27% ($1,305,000) of the total revenues for the three month
periods ended September 30, 1998 and 1997, respectively. One other related party
accounted for 10% ($503,000) of total revenues for the three months ended
September 30, 1998.
3. INCOME TAXES. The Company's provision for income taxes of $20,000 for the
three months ended September 30, 1998 is attributable to income taxes, primarily
state and local. The provision for income taxes of $37,000 for the three months
ended September 30, 1997 is attributable to federal (Alternative Minimum Tax),
state, and local income taxes and foreign withholding taxes.
6
<PAGE> 7
4. EARNINGS PER SHARE. In 1997, The Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128, Earnings Per Share.
Statement 128 replaced primary and fully diluted earnings per share under APB 15
with basic and diluted earnings per share. Unlike primary earnings per share,
basic earnings per share excludes any dilutive effects of options, warrants, and
convertible securities. Diluted earnings per share is very similar to the
previously reported fully diluted earnings per share. All earnings per share
amounts for all periods have been presented, and where necessary, restated to
conform to the Statement 128 requirements. The following table sets forth the
computation of basic and diluted net income/(loss) per share.
<TABLE>
<CAPTION>
(in thousands, except per share amounts)
Three Months Ended
September 30,
-----------------------------
1998 1997
-------- --------
<S> <C> <C>
Numerator:
Net income/(loss) $ (1,694) $ 425
Preferred stock dividends (135) (162)
-------- --------
Income / (loss) available to common
shareholders (1,829) (263)
======== ========
Denominator:
Average shares outstanding-basic 15,173 13,044
Effect of dilutive securities:
Employee and director stock options -- 1,604
Warrants -- 251
-------- --------
Share used in computation of
net income/(loss) per share-assuming dilution 15,173 14,899
======== ========
Net income/(loss) per share-basic $ (0.12) $ 0.02
======== ========
Net income/(loss) per share-assuming dilution $ (0.12) $ 0.02
======== ========
</TABLE>
5. NEW ACCOUNTING STANDARD. As of July 1, 1998, the Company adopted Statement
130 (SFAS 130), "Reporting Comprehensive Income." SFAS 130 establishes new rules
for the reporting and display of comprehensive income and its components;
however, the adoption of SFAS 130 had no impact on the Company's net loss or
stockholders' equity. SFAS 130 requires unrealized gains or losses on the
Company's available for-sale securities, which prior to adoption were reported
separately in stockholders' equity, to be included in other comprehensive
income.
During the quarter ended September 30, 1998 and 1997, total comprehensive income
approximated net income/(loss).
7
<PAGE> 8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Other than statements of historical fact, the statements made in this report on
Form 10-QSB are forward-looking statements that involve risks and uncertainties.
The Company's actual results may differ materially from the results discussed in
the forward-looking statements. Factors that might cause such a difference
include, but are not limited to, those discussed in "Results of Operations" and
"Liquidity and Capital Resources" below and in "Risk Factors" in the Company's
Annual Report on Form 10-KSB for the fiscal year ended June 30, 1998.
In particular, it is important to note that achievement of revenue goals is
affected by numerous factors beyond the Company's control, including
competitors' product introductions, market price competition and market
acceptance of the Company's products. Historical results of the Company may not
be indicative of future operating results.
RESULTS OF OPERATIONS
The Company's total revenue is derived from three sources: software licenses,
contract services, and other services, which is primarily comprised of product
support revenue. In prior periods training revenue was included in other
services. The change in the classification of training revenue from other
services to contract services was made to more accurately reflect the manner in
which the business is managed internally. Certain prior period balances have
been restated to reflect the reclassification.
Total revenues were $5,138,000 for the three months ending September 30, 1998,
compared to $4,780,000 for the same period in the prior year. This represents a
7% increase over the same period a year ago.
The geographic breakdown of revenue is as follows:
<TABLE>
<CAPTION>
Three months ended
(In thousands) September 30,
------------------------ %
1998 1997 Change
------ ------ ------
<S> <C> <C> <C>
North America $3,598 $3,659 (2)%
Europe 1,367 795 72 %
Pacific Rim/Latin America 173 326 (47)%
------ ------ ------
Total revenue $5,138 $4,780 7%
</TABLE>
The geographic revenue as a percentage of revenue is as follows:
<TABLE>
<CAPTION>
Three months ended
September 30,
------------------
1998 1997
----- -----
<S> <C> <C>
North America 70% 76%
Europe 27% 17%
Pacific Rim/Latin America 3% 7%
----- -----
Total 100% 100%
</TABLE>
8
<PAGE> 9
Software revenues for the three months ended September 30, 1998 decreased 56%
compared to the same period in the prior year. This decrease is primarily
attributable to transitions in the Company's sales and marketing organization
and temporary uncertainties regarding SAP's business process modeling direction.
Several actions have been and are being taken to address these issues. In
August, the Company hired a new vice president of marketing and is now in the
process of announcing a new executive vice president of worldwide sales. In
addition, SAP has issued a press release in September that reinforced
Intellicorp's role as SAP's strategic partner to enhance Accelerated SAP(TM) and
R/S(TM) for viewing the R/3 Reference Model. SAP also reiterated its plans to
make LiveModel available through the SAP standard price list.
Contract services revenues, which includes training revenues, increased 111%
during the first quarter of 1999 compared to the same period a year ago. The
increase is primarily due to revenue from consulting related to LiveModel: SAP
R/3.
Other services revenue increased 85% for the first quarter of 1999 compared to
the same period a year ago. The increase is mainly due to product support
revenues related to the LiveModel: SAP R/3 product.
Gross margin, as a percentage of total revenues for the three months ended
September 30, 1998 was 50% compared to 77% in the same period in the prior year.
Software margins were 79% for the three months ended September 30,1998 compared
to 91% for the same period in the prior year. The decrease in software margins
was due to amortization of acquired technology in the first quarter of fiscal
1999. No such amortization expense was incurred in the prior year quarter.
Contract services margins were 32% for the three months ended September 30, 1998
compared to 53% for the same period in the prior year. The decrease is
attributable to higher employee costs in the current year quarter, increased
infrastructure costs necessitated by the Q3 fiscal 1998 hiring of additional
employees to perform UPI consulting services, and lower utilization rates of
Intellicorp, employee consultants compared to the prior year quarter. Other
services margins were 75% for the three months ended September 30, 1998 compared
to 59% in the same period in the prior year. This increase in margins is
attributable to increased sales volume on a relatively fixed cost base.
Research and development (R&D) expenses increased $494,000 (46%) for the three
months ended September 30, 1998 compared to the prior year quarter. The increase
is due to the acquisition of the UPI technology in the third quarter of fiscal
1998 which necessitated an increased number of R&D staff to develop the the next
generation of Live Interface products. R&D expenses, as a percentage of total
revenues for the three months ended September 30, 1998 were 30% compared to 22%
in the same prior year period.
Marketing, general and administrative expenses increased $602,000 during the
three months ended September 30, 1998, compared to the prior year quarter. The
increase is due to several factors, including, labor costs and a general
expansion of the sales force, including headcount increases both in the U.S. and
Europe and a new sales office in France. In total, marketing, general and
administrative expenses were 54% of revenues for the three months ended
September 30, 1998, compared to 45% of revenues for the same period last year.
Other income, net, which includes interest income, interest expense and foreign
currency translation gains and losses increased by $43,000 for the three months
ended September 30, 1998 compared to the same period in the prior year. The
increase is due primarily to favorable foreign currency fluctuations during the
first three months of fiscal year 1999 compared to the same prior year period.
9
<PAGE> 10
The provision for income taxes of $20,000 for the three months ended September
30, 1998 is due to income taxes. This compares to $37,000 for income and foreign
withholding taxes for the prior year period. For the first quarter of fiscal
1999, the Company reported a net loss of $1,694,000 ($0.12 per common share
after deducting preferred stock dividends), compared to net income of $425,000
($0.02 per common share after deducting preferred stock dividends) in the first
quarter of fiscal 1998.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 1998, cash, cash equivalents and short-term investments were
$4,853,000 compared to $7,016,000 at September 30, 1997.
The Company had a net loss of $1,694,000 for the first three months of fiscal
1999 compared to a net income of $425,000 for the first three months of fiscal
1998. Cash used in operations was $1,021,000 during the first quarter of fiscal
1999, compared to $33,000 in the same period in the prior year. The increase in
cash used in operations is primarily due to the net loss incurred in the current
year quarter versus the net income in the prior year quarter.
Cash used in investing activities was $204,000 in the first quarter of fiscal
1999 compared to $2,202,000 in the first quarter of fiscal 1998. The decrease in
cash used in investing activities is due primarily to the purchase of short term
investments of $3,078,000, offset by the sale of short term investments of
$985,000 in the prior year quarter.
Cash used in financing activities was $128,000 in the current year quarter
versus $766,000 provided by financing activities in the prior year quarter. In
the current year quarter the Company paid cash dividends of $135,000 on the
Company's outstanding Preferred stock whereas in the prior year quarter the
Company issued common stock in lieu of cash dividends on the Company's
outstanding Preferred stock. Additionally, the Company received $712,000 from
warrants exercised in the prior year quarter.
Management's plans for fiscal year 1999 anticipate sufficient revenues so as not
to require additional capital resources. However, the Company may, from time to
time, raise additional capital through debt or equity financing to take
advantage of market opportunities. There can be no assurance, however, that the
Company will be able to raise additional capital on favorable terms, if at all.
If revenues for the remainder of fiscal 1999 do not meet management's
expectations, and additional financings are not available, management has the
ability and may further 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 September 30, 1998 and expected
cash generated from operations will be adequate to fund its operations during
fiscal 1999.
10
<PAGE> 11
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 that any
third parties cannot provide the Company with products, services or systems that
meet the year 2000 requirements in a timely manner, the Company's operating
results could be materially adversely affected. Although the Company believes
that the cost of year 2000 modifications for internal use software and systems
and the Company's products is not material, there can be no assurance that
various factors relating to year 2000 compliance issues, including litigation,
will not have a material adverse effect on the Company's business, operating
results or financial position.
PURCHASED INTANGIBLE ASSETS
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.
At the time of acquisition, revenues for developed and core technology were
estimated for the remainder of fiscal 1998 through fiscal 2004. The Company
anticipated that sales of the acquired developed product would decline
significantly during fiscal 1999. While Q1 fiscal 1999 revenues were lower than
initial estimates, revenues from the acquisition date through the end of the
first quarter of fiscal 1999, related to the developed and core technology, have
not been significantly differrent from initial expectations due to higher than
expected revenues in the last two quarters of fiscal 1998. As of the end of the
first quarter of fiscal 1999, the Company believes that total revenues over the
life of the product will not differ significantly from initial estimates. As of
the end of the first quarter of fiscal 1999 no change has occurred with respect
to management's expectation that 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.
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. As of the end of the first quarter of fiscal 1999, the Company
has no reason to believe that actual costs needed to develop a viable product
offering or the timing needed to develop said product offering from the acquired
in-process research and development is materially different from the initial
estimates.
11
<PAGE> 12
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a) Exhibits
27 - Financial Data Schedule.
c) Reports on Form 8-K
No reports have been filed for the quarter ended September 30, 1998.
12
<PAGE> 13
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
INTELLICORP, INC.
/s/ Kenneth A. Czaja
----------------------------------------
Kenneth A. Czaja
Chief Financial Officer
13
<PAGE> 14
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit Sequentially
No. Description Numbered Page
------ ----------------------- -------------
<S> <C>
27 Financial Data Schedule
</TABLE>
14
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-START> JUL-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 3,361
<SECURITIES> 1,492
<RECEIVABLES> 6,074
<ALLOWANCES> 411
<INVENTORY> 0
<CURRENT-ASSETS> 11,305
<PP&E> 9,702
<DEPRECIATION> 8,576
<TOTAL-ASSETS> 15,834
<CURRENT-LIABILITIES> 5,899
<BONDS> 1,600
0
1
<COMMON> 15
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 8,335
<SALES> 1,278
<TOTAL-REVENUES> 5,138
<CGS> 269
<TOTAL-COSTS> 6,879
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 40
<INCOME-PRETAX> (1,674)
<INCOME-TAX> 20
<INCOME-CONTINUING> (1,694)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,694)
<EPS-PRIMARY> (0.12)
<EPS-DILUTED> (0.12)
</TABLE>
