<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: December 31, 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)
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.
Outstanding as of
Class January 31, 2000
--------------- ----------------
Common stock,
$.001 par value 17,401,197 shares
This document is comprised of 12 pages.
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION Page
Item 1. Financial Statements
<S> <C>
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 4. Submission of Matters to a Vote of Security Holders.......... 10
Item 6. Exhibits and Reports on Form 8-K............................. 10
SIGNATURE................................................................... 11
</TABLE>
2
<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
INTELLICORP, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31, June 30,
(In thousands) 1999 1999 (1)
-------- --------
(unaudited)
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 2,760 $ 2,619
Accounts receivable, net 6,131 6,297
Other current assets 362 472
-------- --------
Total current assets 9,253 9,388
Property and equipment, net 1,000 1,046
Purchased intangibles, net 2,316 2,597
Other assets 144 159
-------- --------
$ 12,713 $ 13,190
======== ========
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $ 1,325 $ 1,272
Accrued compensation 1,458 1,266
Accrued royalties 126 64
Other current liabilities 1,316 1,271
Bank loan 700 453
Deferred revenues 2,711 2,063
-------- --------
Total current liabilities 7,636 6,389
Convertible notes 350 1600
Stockholders' equity:
Preferred stock 1 1
Common stock 16 16
Additional paid - in capital 61,640 60,266
Accumulated deficit (56,930) (55,082)
-------- --------
Total stockholders' equity 4,727 5,201
-------- --------
$ 12,713 $ 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
<PAGE> 4
INTELLICORP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Three months ended Six months ended
(In thousands, except December 31, December 31,
per share amounts) 1999 1998 1999 1998
-------- -------- -------- --------
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
Revenues:
Software $ 2,499 $ 1,581 $ 5,218 $ 2,859
Contract services 3,067 3,231 6,240 6,296
Other services 868 838 1,710 1,633
-------- -------- -------- --------
Total revenues 6,434 5,650 13,168 10,788
-------- -------- -------- --------
Costs and expenses:
Cost of revenues:
Software 211 344 474 613
Contract services 2,176 2,335 4,114 4,431
Other services 169 173 387 368
Research and development 1,128 1,657 2,543 3,223
Marketing, general, and
administrative 3,673 3,198 7,117 5,951
-------- -------- -------- --------
Total costs and expenses 7,357 7,707 14,635 14,586
-------- -------- -------- --------
Loss from operations (923) (2,057) (1,467) (3,798)
Other income (expense), net (49) (18) (87) 49
-------- -------- -------- --------
Loss before provision
for income taxes (972) (2,075) (1,554) (3,749)
Provision for income taxes 18 - 24 20
-------- -------- -------- --------
Net loss $ (990) $ (2,075) $ (1,578) $ (3,769)
======== ======== ======== ========
Series A and Series B Preferred
stock dividends (135) (135) (270) (270)
-------- -------- -------- --------
Net loss available to
common shareholders $ (1,125) $ (2,210) $ (1,848) $ (4,039)
======== ======== ======== ========
Basic and diluted net loss per
common shares $ (0.07) $ (0.15) $ (0.11) $ (0.27)
======== ======== ======== ========
Shares used in computing basic and
diluted net loss per common share 17,092 15,215 16,757 15,194
======== ======== ======== ========
</TABLE>
See notes to condensed consolidated financial statements.
4
<PAGE> 5
INTELLICORP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Six months ended
Increase (decrease) in cash and December 31,
cash equivalents (in thousands) 1999 1998
------- -------
(unaudited)
<S> <C> <C>
Cash flows from operating activities:
Net loss $(1,578) $(3,769)
Adjustments to reconcile net loss to net
cash provided by (used in) operating activities:
Depreciation and amortization 621 825
Compensation related to certain stock option grants 99 --
Changes in assets and liabilities:
Accounts receivable 166 845
Other current assets 110 (106)
Other assets 15 74
Accounts payable 53 (113)
Accrued compensation 192 (116)
Other current liabilities 107 160
Deferred revenues 648 (509)
------- -------
Net cash provided by (used in) operating activities 433 (2,709)
------- -------
Cash flows from investing activities:
Property and equipment purchases (294) (447)
Maturities of short-term investments - 1,472
------- -------
Net cash provided by (used in) investing activities (294) 1,025
------- -------
Cash flows from financing activities:
Bank credit line 247 -
Payment of dividends (270) (270)
Cash received from sale of common stock 25 35
------- -------
Net cash provided by (used in) financing activities 2 (235)
------- -------
Increase (decrease) in cash and cash equivalents 141 (1,919)
Cash and cash equivalents, beginning of period 2,619 4,714
------- -------
Cash and cash equivalents, end of period $ 2,760 $ 2,795
======= =======
</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 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 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 AND EXPORT SALES. A related party accounted for 16%
($1,050,000) and 15% (1,931,000), respectively, of the total revenues for the
three and six month periods ended December 31, 1999 and 24% ($1,373,000) and 27%
($2,878,000), respectively, of the revenues for the three and six month periods
ended December 31, 1998. One other related party accounted for 11% ($604,000)
and 10% ($1,107,000), respectively, of the total revenues for the three and six
month periods ended December 31, 1998.
3. INCOME TAXES. The Company's provision for income taxes of $18,000 and $24,000
for the three and six months ended December 31, 1999, respectively, is
attributable to local taxes and foreign withholding taxes. The provision for
income taxes of $20,000 for the six months ended December 31, 1998 is
attributable to local taxes and foreign withholding taxes.
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. As of December 31, 1999, the Company had capitalized $148,000
related to an internal-use software implementation project. Once the project is
completed the total cost will be amortized over five years, the estimated useful
life of the internal-use software.
5. COMPREHENSIVE LOSS. For the three and six months ended December 31, 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% (10.50 %
as of December 31, 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 December 31, 1999, the Company has issued
1,160,000 shares of common stock at $1.50 per share for aggregate proceeds of
$1,740,000.
8. NET LOSS PER SHARE. Net loss per share is computed using the weighted-average
number of shares of common stock outstanding. Common stock equivalent shares
from outstanding stock options and warrants are not included as their effect is
antidilutive.
9. NOTE CONVERSION. For the three and six months ended December 31, 1999, note
holders converted $975,000 and $1,250,000 of the convertible notes into 634,311
and 813,220 shares of common stock, respectively, in accordance with the terms
of the Company's 1996 Convertible Note Agreement.
6
<PAGE> 7
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: contract services,
software licenses, and other services. Other services are primarily comprised of
product support revenue. Total revenues were $6,434,000 and $13,168,000,
respectively, for the three and six months ended December 31, 1999, compared to
$5,650,000 and $10,788,000, respectively, for the same periods in the prior
year. This represents a 14% and 22% increase, respectively, for the three and
six month periods ended December 31, 1999 compared to the same prior year
periods.
The geographic breakdown of revenue is as follows:
<TABLE>
<CAPTION>
Three months ended % Six months ended %
(In thousands) December 31, Change December 31, Change
1999 1998 1999 1998
------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
North America $ 3,302 $ 3,778 (13)% $ 8,006 $ 7,376 9%
Europe 2,971 1,728 72% 4,672 3,095 51%
Pacific Rim/Latin America 161 144 12% 490 317 55%
------- ------- ------- ------- ------- -------
Total revenue $ 6,434 $ 5,650 14% $13,168 $10,788 22%
</TABLE>
The geographic revenue as a percentage of revenue is as follows:
<TABLE>
<CAPTION>
Three months ended Six months ended
December 31, December 31,
1999 1998 1999 1998
----- ----- ----- ----
<S> <C> <C> <C> <C>
North America 51% 67% 61% 68%
Europe 46% 30% 35% 29%
Pacific/Latin America 3% 3% 4% 3%
----- ----- ----- ----
Total 100% 100% 100% 100%
</TABLE>
Software revenues for the three and six month periods ended December 31, 1999
respectively, increased 58% and 83% compared to the same periods in the prior
year. Both the three and six month increases are primarily attributable to
progress made in strengthening the Company's sales and marketing organization,
higher sales in Europe (partially offset by lower sales in North America for the
three months ended December 31, 1999), improving sales of LiveInterface and the
new LiveCapture product.
Contract services revenues, which includes training revenues, for the three and
six month periods ended December 31, 1999, respectively, decreased 5% and 1%
compared to the same periods a year ago. The decreases are due to reduced
contract services to a related party customer.
Other services revenue increased 4% and 5% during the three and six months ended
December 31, 1999, compared to the same periods a year ago, respectively. The
increase is primarily due to product support revenues related to LiveInterface
and LiveModel.
7
<PAGE> 8
Gross margin, as a percentage of total revenues for the three and six months
ended December 31, 1999 was 60% and 62% compared to 50% in the same periods in
the prior year. Software margins were 92% and 91% for the three and six months
ended December 31, 1999, compared to 78% and 79% for same prior year periods.
The increase in software margins is due to lower third party royalty costs and
lower amortization expense incurred in fiscal 2000 related to acquired
technology. Contract services margins were 29% and 34% for the three and six
months ended December 31, 1999, compared to 28% and 30% in the same periods in
the prior year. The increase in contract services margins compared to the prior
year quarters is due to improved labor utilization and higher average pricing of
services. Other services margins were 81% and 77% for the three and six month
periods ended December 31, 1999 compared to 79% and 77% for the same prior year
periods. The increases in the fiscal 2000 quarters over the prior year quarters
is primarily due to increased support revenues on a relatively fixed cost base.
Research and development (R&D) expenses decreased $529,000 (32%) and $680,000
(21%) during the three and six months ended December 31, 1999 from the same
prior year periods. The decreases are due primarily to re-deployment of
resources to revenue generating services and normal attrition. R&D expenses, as
a percentage of total revenues for the three and six months ended December 31,
1999 were 18% and 19% compared to 29% and 30% in the same prior year periods.
Marketing, general and administrative expenses increased $475,000 (15%) and
$1,166,000 (20%), respectively, during the three and six months ended December
31, 1999, compared to the same prior year periods. The increases are due to
several factors, including, labor costs, contractor and consultant fees,
recruiting costs, trade show expenses, expenses related to the opening of a
French office, provision for bad debt, sales training expense, and expenses
related to the LiveInterface operations in Philadelphia. In total, marketing,
general and administrative expenses were 57% and 54% of revenues for the three
and six months ended December 31, 1999, compared to 57% and 55% of revenues for
the same periods last year.
Other income and expense, net, which includes interest income and expense, for
the three and six months ended December 31, 1999 increased $31,000 and $136,000
compared with the same periods in the prior year primarily due to increased
interest expense from bank borrowings.
The provision for income taxes of $18,000 and $24,000 for the three and six
months ended December 31, 1999 is due primarily to foreign withholding taxes and
state and local taxes. This compares to $20,000 related to local and foreign
withholding taxes for the three and six months ended in the prior year.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1999, cash, cash equivalents and short-term investments were
$2,760,000 compared to $2,619,000 at June 30, 1999.
Cash provided by operations was $433,000 during the six months ended December
31, 1999, compared to $2,709,000 used by operations in the same period of the
prior year. The increase in cash provided in operations is primarily due to the
decrease in net losses, increase in deferred revenue and decrease in accounts
receivable from the same period in prior year. Cash used by investing activities
was $294,000 in the six months ended December 31, 1999 compared to $1,025,000
provided by investing activities in the same period in the prior year. The
increase in cash used by investing activities is due to the liquidation of
short-term investments.
Cash provided by financing activities was $2,000 for the six months ended
December 31, 1999 compared to $235,000 used in financing activities in the same
prior year period. The increase in cash provided by financing activities was due
to the Company's 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
8
<PAGE> 9
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 December 31, 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% (10.50 % as of December 31, 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 December 31, 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 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. To
date, the Company has not experienced any year 2000 problems either in-house or
with any of our vendors and suppliers. However, that can be no assurance that
the Company, vendors or suppliers will not encounter any year 2000 problems in
the coming months.
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
<PAGE> 10
PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
a) On December 7, 1999, the Registrant held its Annual Meeting of
stockholders.
b) As listed below, all of management's nominees for directors were elected
at the meeting:
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------
Name of Nominee No. of Votes For No. of Votes No. of Votes
Withheld Abstain
--------------------------------------------------------------------------------------
<S> <C> <C> <C>
Arthur W. Berry 14,913,929 358,666 0
Katharine C. Branscomb 14,423,212 849,383 0
Kenneth H. Haas 14,879,029 393,566 0
Robert A. Lauridsen 14,912,729 359,866 0
Norman J. Wechsler 14,952,154 320,441 0
--------------------------------------------------------------------------------------
</TABLE>
c) The proposal to amend the Company's 1991 Non-employee Directors Stock Option
Plan to increase the numbers of options automatically granted to non-employee
directors under the Plan and to provide that such options will be fully vested
and exercisable on grant was approved with 13,970,042 shares voting in favor,
1,235,449 voting against and 67,104 shares abstaining.
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 December 31, 1999.
10
<PAGE> 11
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
<PAGE> 12
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
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-2000
<PERIOD-START> OCT-31-1999
<PERIOD-END> DEC-31-1999
<CASH> 2,760
<SECURITIES> 0
<RECEIVABLES> 6,644
<ALLOWANCES> 513
<INVENTORY> 0
<CURRENT-ASSETS> 362
<PP&E> 10,438
<DEPRECIATION> 9,438
<TOTAL-ASSETS> 12,713
<CURRENT-LIABILITIES> 7,636
<BONDS> 0
0
1
<COMMON> 16
<OTHER-SE> 4,710
<TOTAL-LIABILITY-AND-EQUITY> 12,713
<SALES> 6,434
<TOTAL-REVENUES> 6,434
<CGS> 2,556
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 4,801
<LOSS-PROVISION> 923
<INTEREST-EXPENSE> 43
<INCOME-PRETAX> 972
<INCOME-TAX> 18
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 990
<EPS-BASIC> .07
<EPS-DILUTED> .07
</TABLE>
