<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, 1999
[ ] 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)
<TABLE>
<S> <C>
DELAWARE 94-2756073
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
</TABLE>
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 31, 1999
----------------------- -----------------
<S> <C>
Common stock,
$.001 par value 17,093,076 shares
</TABLE>
This document is comprised of 12 pages.
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TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
PART I. FINANCIAL INFORMATION
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
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations.........................7-9
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.......................................10
SIGNATURE.......................................................................11
</TABLE>
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
INTELLICORP, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
September 30, June 30,
1999 1999(1)
------------- --------
(In thousands) (unaudited)
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 1,428 $ 2,619
Accounts receivable, net 7,793 6,297
Other current assets 540 472
-------- --------
Total current assets 9,761 9,388
Property and equipment, net 937 1,046
Purchased intangibles, net 2,456 2,597
Other assets 145 159
-------- --------
$ 13,299 $ 13,190
======== ========
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $ 1,153 $ 1,272
Accrued compensation 1,514 1,266
Accrued royalties 132 64
Other current liabilities 1,296 1,271
Bank loan 1,058 453
Deferred revenues 2,050 2,063
-------- --------
Total current liabilities 7,203 6,389
Convertible notes 625 1,600
Stockholders' equity:
Preferred stock 1 1
Common stock 16 16
Additional paid - in capital 61,259 60,266
Accumulated deficit (55,805) (55,082)
-------- --------
Total stockholders' equity 5,471 5,201
-------- --------
$ 13,299 $ 13,190
======== ========
</TABLE>
(1) The consolidated balance sheet at June 30, 1999, 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
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INTELLICORP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Three months ended
September 30,
-----------------------
(In thousands, except 1999 1998
per share amounts) -------- --------
(unaudited)
<S> <C> <C>
Revenues:
Software $ 2,719 $ 1,278
Contract services 3,173 3,065
Other services 842 795
-------- --------
Total revenues 6,734 5,138
-------- --------
Costs and expenses:
Cost of revenues:
Software 263 269
Contract services 1,938 2,096
Other services 218 195
Research and development 1,415 1,566
Marketing, general, and
administrative 3,444 2,753
-------- --------
Total costs and expenses 7,278 6,879
-------- --------
Loss from operations (544) (1,741)
Other income (expense), net (38) 67
-------- --------
Loss before provision
for income taxes (582) (1,674)
Provision for income taxes 6 20
-------- --------
Net loss $ (588) $ (1,694)
======== ========
Series A and Series B Preferred
stock dividends (135) (135)
-------- --------
Net loss available to
common shareholders $ (723) $ (1,829)
======== ========
Basic and diluted net loss per
common share $ (0.04) $ (0.12)
======== ========
Shares used in computing basic and
diluted net loss per common share 16,421 15,173
======== ========
</TABLE>
See notes to condensed consolidated financial statements.
4
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INTELLICORP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Three months ended
September 30,
---------------------
Increase (decrease) in cash and 1999 1998
cash equivalents (in thousands) ------ -------
(unaudited)
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (588) $(1,694)
Adjustments to reconcile net loss to net
cash provided by (used in) operating activities:
Depreciation and amortization 314 456
Changes in assets and liabilities:
Accounts receivable (1,496) 1,083
Other current assets (68) (51)
Other assets 14 (17)
Accounts payable (119) (513)
Accrued compensation 248 51
Other current liabilities 93 (92)
Deferred revenues (13) (244)
------- -------
Net cash provided by (used in) operating activities (1,615) (1,021)
------- -------
Cash flows from investing activities:
Property and equipment purchases (64) (184)
Purchases of short term investments, net -- (20)
------- -------
Net cash used in investing activities (64) (204)
------- -------
Cash flows from financing activities:
Net borrowings under bank credit line 605 --
Payment of dividends (135) (135)
Cash received from sale of stock 18 7
------- -------
Net cash provided by (used in) financing activities 488 (128)
------- -------
Decrease in cash and cash equivalents (1,191) (1,353)
Cash and cash equivalents, beginning of period 2,619 4,714
------- -------
Cash and cash equivalents, end of period $ 1,428 $ 3,361
======= =======
</TABLE>
See notes to condensed consolidated financial statements.
5
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NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION. The accompanying condensed consolidated financial
statements should be read in conjunction with the Company's consolidated
financial statements for the fiscal year ended June 30, 1999, 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 financial 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
that may be expected for the full fiscal year ending June 30, 2000.
2. SIGNIFICANT CUSTOMERS. A related party accounted for 13% ($881,000) and 29%
($1,506,000) of the total revenues for the three month periods ended September
30, 1999 and 1998, respectively. One other related party accounted for 10%
($503,000) of total revenues for the three month period ended September 30,
1998. A commercial customer accounted for 7% ($454,000) of the total revenues
for the three month period ended September 30, 1999.
3. INCOME TAXES. The Company's provision for income taxes of $6,000 for the
three months ended September 30, 1999 is attributable to income taxes, primarily
state and local.
4. NEW ACCOUNTING STANDARD. As of July 1, 1999, the Company adopted SOP No.
98-1, Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use. The adoption of SOP 98-1 had no material impact on the Company's
financial position or results of operations.
5. COMPREHENSIVE LOSS. For the three months ended September 30, 1999 and 1998,
respectively, comprehensive loss equaled net loss.
6. BANK LOAN. In March 1999, the Company secured a $3,000,000 credit facility
from a bank, bearing annual interest at the bank's prime rate plus 2% (10.25 %
as of September 30, 1999). The credit line is an asset-based facility, and the
amount that can be borrowed under the loan is the lesser of $3,000,000 or 80% of
the eligible accounts receivable balances at any point in time. The amounts
collected from outstanding, eligible accounts receivable balances are remitted
to the bank as loan payments when such amounts are received. The initial term of
this facility is two years. The credit facility is secured by essentially all of
the assets of the Company.
7. EQUITY INVESTMENT. In March 1999, the Company consummated an equity
arrangement which requires certain investors to purchase, in a private
placement, up to $3,000,000 of the Company's common stock over the next year, if
and when requested by the Company. The arrangement expires in March 2000. The
purchase price of the common stock is at 10% above the market price at the time
the purchase is made, with a minimum price of $1.50 per share and a maximum
price of $3.00 per share. As of September 30, 1999, the Company has issued
1,160,000 shares of common stock at $1.50 per share for aggregate proceeds of
$1,740,000.
9. NOTE CONVERSION. In September 1999, a note holder converted $975,000 of the
convertible notes to 634,311 shares of common stock in accordance with the terms
of the Company's 1996 Convertible Note Agreement.
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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, 1999.
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.
Total revenues were $6,734,000 for the three months ended September 30, 1999,
compared to $5,138,000 for the same period in the prior year.
The geographic breakdown of revenue is as follows:
<TABLE>
<CAPTION>
Three months ended %
(In thousands) September 30, Change
--------------------- ------
1999 1998
------- -------
<S> <C> <C> <C>
North America $ 4,704 $ 3,598 31%
Europe 1,701 1,367 24%
Pacific Rim/Latin America 329 173 90%
------- ------- ---
Total revenue $ 6,734 $ 5,138 31%
</TABLE>
The geographic revenue as a percentage of revenue is as follows:
<TABLE>
<CAPTION>
Three months ended
September 30,
--------------------
1999 1998
----- -----
<S> <C> <C>
North America 70% 70%
Europe 25% 27%
Pacific/Latin America 5% 3%
----- -----
Total 100% 100%
</TABLE>
Software revenues for the three month period ended September 30, 1999 increased
113% compared to the same period in the prior year. This increase is primarily
attributable to the increase revenue from some of our key product offerings,
particularly LiveCompass(TM), as well as continued sales execution, particularly
in the United States.
Contract services revenues, which includes training revenues, for the three
month period ended September 30, 1999, increased 4% compared to the same prior
year period. The increase is due to growth in Customer Relationship Management
(CRM) consulting services.
Other services revenue increased 6% during the three months ended September 30,
1999, compared to the same period a year ago. The increase is primarily due to
product support revenues related to LiveInterface and LiveModel.
Gross margin, as a percentage of total revenues for the three months ended
September, 1999, was 64% compared to 50% in the same period in the prior year.
Software margins were 90% for the three months ended September 30, 1999,
compared to 79% for the same prior year period. The increase in software
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margins is due to increased sales volume on a relatively fixed cost base and,
lower royalty and amortization expense related to acquired technology. Contract
services margins were 39% for the three months ended September 30, 1999,
compared to 32% in the same period in the prior year. The increase in contract
services margins compared to the prior year quarter is due to improved labor
utilization on billable customer projects. The margin on other services was 74%
for the three months period ended September 30, 1999, compared to 75% for the
same prior year period.
Research and development (R&D) expenses decreased $151,000 (10%) during the
three months ended September 30, 1999 from the same prior year period. The
decrease is due primarily to minor headcount attrition and improved cost
controls. R&D expenses as a percentage of total revenues for the three months
ended September 30, 1999 were 21% compared to 30% in the same prior year period.
Marketing, general and administrative expenses increased $691,000 (25%) during
the three months ended September 30, 1999, compared to the same prior year
period. The increase is due to several factors, including increased sales head
count, contractor and consultant fees, recruiting costs, trade show expenses,
and sales training expense. In total, marketing, general and administrative
expenses were 51% of revenues for the three months ended September 30, 1999
compared to 54% of revenues for the same period last year.
Other income and expense, net, which includes interest income and expense, for
the three months ended September 30, 1999 decreased $105,000 compared with the
same period in the prior year. The decrease is primarily due to increased
interest expense on the bank loan this period and non-recurring foreign currency
translation gain in the prior period.
The provision for income taxes of $6,000 for the three months ended September
30, 1999 is due to income taxes (primarily state and local). This compares to
$20,000 related to income and foreign withholding taxes in the same prior year
period.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 1999, cash, cash equivalents and short-term investments were
$1,428,000 compared to $2,619,000 at June 30, 1999.
Cash used in operations was $1,615,000 during the three months ended September
30, 1999 , compared to $1,021,000 in the same period of the prior year. The
increase in cash used in operations is primarily due to the increase in accounts
receivable of $1,496,000 during the period. Cash used by investing activities
was $64,000 in the the three months ended September 30, 1999 compared to
$184,000 in the same period the prior year.
Cash provided by financing activities was $488,000 for the three months ended
September 30, 1999 compared to $128,000 used in financing activities in the same
prior year period. The increase in cash provided by financing activities was due
to a draw down of $605,000 from the Company's revolving bank credit line.
In March 1999, the Company consummated an equity arrangement which requires
certain investors to purchase, in a private placement, up to $3,000,000 of the
Company's common stock over the next year, if and when requested by the Company.
The purchase price is set at 10% above the market price at the time the purchase
is made, with a minimum price of $1.50 per share and a maximum price of $3.00
per share. As of September 30, 1999, the Company has issued 1,160,000 shares of
common stock at $1.50 per share for aggregate proceeds of $1,740,000.
In addition to the equity investment agreement, the Company secured a $3,000,000
credit facility from a bank, bearing annual interest at the bank's prime rate
plus 2% (10.25 % as of September 30, 1999). The credit line is an asset-based
facility, and the amount that can be borrowed under the loan is the lesser of
$3,000,000 or 80% of the eligible accounts receivable balances at any point in
time. The amounts collected from outstanding, eligible accounts receivable
balances are remitted to the bank as loan payments when such amounts are
received. The initial term of this facility is two years. The credit facility is
secured by essentially all of the assets of the Company.
The Company believes its cash and cash equivalents at September 30, 1999, along
with expected cash generated from operations and available funds from the equity
arrangement and bank credit line, will be adequate to fund its operations during
fiscal 2000. There can be no assurance, however, that the
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Company will be able to raise additional capital on favorable terms, if at all.
If revenues for the remainder of fiscal 2000 do not meet management's
expectations, and additional financing is not available, management has the
ability to, and may, reduce certain planned expenditures to lower the Company's
operating costs, if required.
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 has made modifications deemed necessary and does not believe that the
cost of additional modifications, if any, 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 active products and services of
the Company are year 2000 compliant. The Company has been encouraging customers
on older versions of software no longer supported by the Company 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 has obtained assurances from such
vendors that their systems are year 2000 compliant. In the event any such third
parties cannot provide the Company with products that are compliant in a timely
manner, 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, if needed, 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.
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. As of the end of
the first quarter of fiscal 2000, the Company believes that total revenues over
the life of the product will not differ to such an extent as to require a
devaluation of the current carrying value of the intangible assets. 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.
9
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PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a) Exhibits
27 Financial Data Schedule.
b) Reports on Form 8-K
No reports have been filed for the quarter ended September 30, 1999.
10
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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
11
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INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit Sequentially
No. Description Numbered Page
- ------- ----------- -------------
<S> <C> <C>
27 Financial Data Schedule
</TABLE>
12
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-2000
<PERIOD-START> JUL-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 1,428
<SECURITIES> 0
<RECEIVABLES> 8,111
<ALLOWANCES> (318)
<INVENTORY> 0
<CURRENT-ASSETS> 9,761
<PP&E> 10,226
<DEPRECIATION> (9,217)
<TOTAL-ASSETS> 13,299
<CURRENT-LIABILITIES> 7,203
<BONDS> 0
0
1
<COMMON> 16
<OTHER-SE> 5,454
<TOTAL-LIABILITY-AND-EQUITY> 13,299
<SALES> 6,734
<TOTAL-REVENUES> 6,734
<CGS> 2,419
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 4,859
<LOSS-PROVISION> (544)
<INTEREST-EXPENSE> (43)
<INCOME-PRETAX> (582)
<INCOME-TAX> 6
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (588)
<EPS-BASIC> (0.04)
<EPS-DILUTED> (0.04)
</TABLE>
