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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
(Mark One)
/X/ Quarterly report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended March 31, 1996
/ / Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from__________to__________
COMMISSION FILE NUMBER 0-21402
INTERLINQ SOFTWARE CORPORATION
(Exact name of registrant as specified in its charter)
Washington 91-1187540
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(State of jurisdiction of (I.R.S.Employer
incorporation or organization) Identification Number)
11255 Kirkland Way 98033
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Kirkland, Washington (Zip Code)
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(Address of principal executive
offices)
206) 827-1112
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(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period
that the registrant was required to file such report), and (2) has been
subject to such filing requirements for the past 90 days.
YES X NO
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Indicate the number of shares outstanding of each of the issuer's classes
of common stock.
OUTSTANDING AT
CLASS MAY 13, 1996
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Common Stock 5,920,850
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
INTERLINQ SOFTWARE CORPORATION
BALANCE SHEETS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
ASSETS
MARCH 31, JUNE 30,
1996 1995
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(UNAUDITED)
<S> <C> <C>
Current assets:
Cash and cash equivalents $8,257 $12,903
Short-term investments, at cost 5,818 1,471
Accounts receivable, net 1,504 1,075
Current portion of contracts receivable, net 99 151
Income taxes refundable --- 987
Inventory 41 33
Prepaid expenses 317 282
Deferred income taxes 190 172
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Total current assets 16,226 17,074
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Property and equipment, at cost 4,928 4,620
Less accumulated depreciation and
amortization 2,998 2,255
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Net property and equipment 1,930 2,365
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Contracts receivable, excluding
current portion 18 28
Capitalized software costs, net 3,747 2,134
Other assets 8 8
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$21,929 $21,609
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LIABILITIES AND SHAREHOLDERS' EQUITY
(DOLLARS IN THOUSANDS)
MARCH 31, JUNE 30,
1996 1995
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(UNAUDITED)
Current liabilities:
Accounts payable $ 278 $ 123
Accrued compensation and benefits 368 391
Other accrued liabilities 272 280
Customer deposits 357 107
Income taxes payable 11 ---
Deferred software support fees 2,846 2,535
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Total current liabilities 4,132 3,436
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Noncurrent liabilities:
Deferred rent 418 446
Deferred software support fees 11 19
Deferred income taxes 264 370
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Total noncurrent liabilities 693 835
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Shareholders' equity:
Common stock 59 60
Additional paid-in capital 12,873 13,168
Retained earnings 4,172 4,110
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Total shareholders' equity 17,104 17,338
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$21,929 $21,609
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</TABLE>
<PAGE>
INTERLINQ SOFTWARE CORPORATION
STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
MARCH 31, MARCH 31,
1996 1995 1996 1995
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<S> <C> <C> <C> <C>
Net revenues:
Software license fees $1,671 $780 $4,396 $3,058
Software support fees 1,426 1,345 4,220 4,137
Other 248 303 792 915
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Total net revenues 3,345 2,428 9,408 8,110
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Cost of revenues:
Software license fees 390 376 1,142 1,052
Software support fees 383 431 1,281 1,343
Other 121 154 441 485
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Total cost of revenues 894 961 2,864 2,880
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Gross profit 2,451 1,467 6,544 5,230
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Operating expenses:
Product development 464 230 1,544 707
Sales and marketing 1,099 996 3,174 3,113
General and administrative 708 850 2,327 2,641
Other general expenses
- nonrecurring 0 561 0 561
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Total operating expenses 2,271 2,637 7,045 7,022
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Operating income(loss) 180 (1,170) (501) (1,792)
Net interest and other income 191 185 600 462
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Income (loss) before
income taxes 371 (985) 99 (1,330)
Income taxes 129 (338) 37 (544)
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Net income (loss) $ 242 ($ 647) $ 62 ($ 786)
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Net income (loss) per common
and common equivalent share $.04 ($.10) $.01 ($.12)
======= ======= ======= =======
Weighted average number of
common and common equivalent
shares outstanding 6,123 6,197 6,155 6,296
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</TABLE>
<PAGE>
INTERLINQ SOFTWARE CORPORATION
STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
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MARCH 31, MARCH 31,
1996 1995
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<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 62 ($ 786)
Adjustments to reconcile net loss to net
cash provided by operating activities:
Depreciation and amortization 760 894
Amortization of capitalized software costs 983 904
Amortization of LoanStar intangible --- 228
Write-off of Loanstar intangible --- 331
Gain on disposition of equipment (1) (1)
Decrease (increase) in accounts receivable (429) 955
Decrease in contracts receivable 62 332
Decrease (increase) in inventory and
prepaid expenses (43) 121
Increase (decrease) in deferred
income taxes (124) 178
Increase in accounts payable 155 11
Decrease in accrued compensation and
benefits,other accrued liabilities and
deferred rent (59) (183)
Increase in customer deposits 250 41
Decrease (increase) in income taxes
refundable and payable 998 (169)
Increase (decrease) in deferred software
support fees 303 (415)
Other --- 28
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Net cash provided by operating
activities 2,917 2,469
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Cash flows from investing activities:
Purchases of property and equipment (328) (304)
Capitalized software costs (2,596) (1,395)
Net sale (purchase) of short-term
investments (4,347) 4,605
Proceeds from sale of property and equipment 5 5
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Net cash provided by (used in)
investing activities (7,266) 2,911
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Cash flows from financing activities:
Proceeds from issuance of common stock 16 41
Repurchase of common stock (313) (647)
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Net cash used in financing activities (297) (606)
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Net increase (decrease) in cash and
cash equivalents (4,646) 4,774
Cash and cash equivalents at beginning
of period 12,903 6,938
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Cash and cash equivalents at end of period $8,257 $11,712
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</TABLE>
<PAGE>
Item 2.
Management's Discussion and Analysis
of Financial Condition and Results of Operations
General
Beginning with the fourth quarter of fiscal year 1995 and continuing into
the second quarter of fiscal year 1996, long-term mortgage lending rates
experienced their first significant decline since their increase early in
calendar year 1994. However, during the most recent quarter ended March
31, 1996, long-term mortgage lending rates increased approximately one
percentage point, demonstrating a lending environment that continues to
experience a high degree of volatility. However, even after this recent
increase in lending rates, the overall lending conditions are considered
favorable compared to most historical measures. With this overall
favorable lending environment, the Company believes that mortgage lending
activity has increased, driven by an increase in financing of homes sales
and refinancing of existing mortgages. If lending conditions and activity
continue to be favorable, the Company believes mortgage lenders will be
more inclined to improve their loan management systems and capacity,
through the purchase of the Company's products and services.
<PAGE>
NET REVENUES
Three months ended March 31,
(In thousands) 1996 1995 Change
- ----------------- -------- -------- -------
Software license fees $1,671 $780 114%
Software support fees 1,426 1,345 6%
Other 248 303 (18%)
- ----------------- -------- -------- -------
Total net revenues $3,345 $2,428 38%
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Net revenues consist of software license fees, software support fees and
other revenues, which include training fees, custom document fees,
interest income on contracts receivable and other miscellaneous sales,
net of discounts and sales returns.
Software license fees increased by 114% for the quarter ended March 31,
1996 compared to the quarter ended March 31, 1995. This period-to-period
increase was primarily attributable to a combination of the recovery in
mortgage lending activity discussed above, which increased software
license fees of existing products, and software license fees for three
new products - MortgageWare Entre (formerly Loan Officer Plus for
Windows), and interfaces to Freddie Mac's and Fannie Mae's automated
underwriting systems.
Software support fees increased by 6% for the quarter ended March 31,
1996 compared to the quarter ended March 31, 1995. This period-to-period
increase was primarily attributable to the low rate of attrition in the
Company's existing customer base, combined with a modest increase in new
customers. Due in part to changes, from time to time, in government
regulations applicable to documentation required for residential mortgage
lending, the vast majority of the Company's customers purchase annual
software support agreements. However, because software support fees are
recognized ratably over the term of the annual support agreement, whereas
software license fees are recognized on product shipment, the percentage
change in software support fees compared to software license fees is not
directly proportional. For the balance of fiscal year 1996 and beyond,
should the Company continue to experience an increase in software
license fees, software support fees are likely to experience an increase
as well.
Training fees, custom document fees and other miscellaneous sales
decreased by 18% for the quarter ended March 31, 1996 compared to the
quarter ended March 31, 1995. This period-to-period decrease was
attributable primarily to a decrease in document fees. During the
quarter ended December 31, 1995, the Company announced a marketing
agreement with VMP Electronic Laser Forms to market their comprehensive
library of mortgage lending documents to MortgageWare customers. The
transition from the Company offering their own lending documents, to
offering this comprehensive library, has been slower than anticipated.
However, the Company expects revenue from this agreement to be greater
in the quarter ended June 30, 1996 and going forward, than it was in the
quarter ended March 31, 1996.
While lending rates have remained in a generally favorable range, as
discussed above, there can be no assurance that mortgage lending rates
will not increase beyond a perceived favorable range or experience a high
amount of volatility. Such increases or volatility could have a material
adverse effect on the Company's revenues, profitability, and financial
condition. Even if lending rates remain at their current level, if a
change in perception dictates rates as being too high, homeowners and
potential homeowners may delay decisions that would otherwise result in
mortgage lending transactions. Such delays may have an adverse effect
upon the Company's customers, and upon the Company and its operations.
<PAGE>
COST OF REVENUES
Three months ended March 31,
(In thousands) 1996 1995 Change
- ---------------------- -------- -------- --------
Software license fees $390 $376 4%
Percentage of software
license fees 23% 48%
- ---------------------- -------- -------- --------
Software support fees 383 431 (11%)
Percentage of software
support fees 27% 32%
- ---------------------- -------- -------- --------
Other 121 154 (21%)
Percentage of other 49% 51%
- ---------------------- -------- -------- --------
Total cost of revenues $894 $961 (7%)
Percentage of net revenues 27% 40%
- ---------------------- -------- -------- --------
Cost of software license fees includes the purchase and duplication of
disks, product documentation, and amortization of capitalized software
development costs. As a percentage of software license fees, cost of
software license fees decreased from 48% to 23% for the quarter ended
March 31, 1996 compared to the quarter ended March 31, 1995. This
decrease was primarily attributable to software license fees increasing
more than the cost of software license fees, which include the
relatively fixed component of amortization of capitalized software. The
dollar amount of cost of software license fees increased 4% from
$376,000 to $390,000 for the quarter ended March 31, 1996 compared to
the same period in the previous year. This increase was primarily
attributable to an increase in amortization of capitalized software
development costs associated with the Secondary Marketing product and
MortgageWare Entre (formerly Loan Officer Plus for Windows). These
increases were partially offset by a decrease in amortization of
capitalized software development costs associated with the MortgageWare
for DOS product. Amortization of software development costs increased
to $354,000 in the quarter ended March 31, 1996 compared to $348,000 for
the same quarter in the previous year. The Company expects the dollar
amount of its amortization of capitalized software development costs to
hold steady or increase slightly for the remainder of fiscal year 1996.
Cost of software support fees includes salaries and other costs related
to providing telephone support, and the purchase, duplication and
shipping of disks associated with software updates. As a percentage of
software support fees, cost of software support fees decreased from 32%
to 27% for the quarter ended March 31, 1996 compared to the quarter
ended March 31, 1994. This decrease was primarily attributable to the
ongoing benefit of a reduced staffing level in conjunction with an
expense reduction program implemented during the quarter ended December
31, 1995. The Company expects cost of software support fees to remain
flat or increase slightly as a percentage of software support fees for
the remainder of fiscal year 1996.
Cost of other revenue includes the purchase and duplication of disks
associated with custom documents, the salaries and reimbursable expenses
for the customer service department employees who provide training
services and the net cost of the Company's annual MortgageWare software
users' group meeting. As a percentage of other revenue, cost of other
revenue decreased from 51% to 49% for the quarter ended March 31, 1996
compared to the same period the previous year. This decrease was
primarily attributable to the ongoing benefit of a reduced staffing level
in conjunction with an expense reduction program implemented during the
quarter ended December 31, 1995.
<PAGE>
OPERATING EXPENSES
Three months ended March 31,
(In thousands) 1996 1995 Change
- ----------------------- -------- -------- --------
Product development $464 $230 102%
Percentage of net revenues 14% 9%
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Sales & marketing 1,099 996 10%
Percentage of net revenues 33% 41%
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General & administrative 708 850 (17%)
Percentage of net revenues 21% 35%
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Other general expense -
nonrecurring 0 561 (100%)
Percentage of net revenues 0% 23%
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Total operating expenses $2,271 $2,637 (14%)
Percentage of net revenues 68% 109%
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Product development expenses include salaries for software developers and
analysts, facilities costs, and expenses associated with computer
equipment used in software development. Product development expenses
increased substantially by 102%, from $230,000 to $464,000, for the
quarter ended March 31, 1996 compared to the quarter ended March 31,
1995. Product development expenses as a percentage of net revenues,
increased from 9% to 14% for the quarter ended March 31, 1996 compared
to the same period in 1995. This increase in product development
expenditures is primarily due to a combination of increased costs
associated with the development of new software products, MortgageWare
Entre and loan servicing, and the maturity of MortgageWare for DOS
requiring a greater percentage of development expenditures for
maintenance, instead of enhancement. The Company capitalized $194,000
and $457,000 of development expenditures for the quarters ended March
31, 1996 and 1995 respectively.
Sales and marketing expenses include salaries, sales commissions, as well
as travel and facility costs for the Company's sales and marketing
personnel. Sales and marketing expenses also include programs, such as
advertising and trade shows. As a percentage of net revenues, sales and
marketing expenses decreased from 41% to 33% for the quarter ended March
31, 1996 compared to the same period in the previous year. This decrease
is primarily attributable to revenue increasing faster than sales and
marketing expenses, which was somewhat offset by increased sales
commission expense due to increased commissionable sales.
General and administrative expenses include costs related to the finance,
purchasing, order fulfillment, administrative and facility costs, and the
amortization of certain LoanStar System assets. As a percentage of net
revenues, general and administrative expenses decreased from 35% to 21%
for the quarter ended March 31, 1996 compared to the same period the
previous year. This decrease is primarily attributable to a combination
of the elimination of the ongoing amortization of certain LoanStar
System assets subsequent to their write-off during the quarter ended
March 31, 1995, a lower bad debt provision and reduced professional
services expense. The Company expects general and administrative costs
to hold steady or decrease slightly for the remainder of fiscal year
1996.
Other general expenses - nonrecurring, which occurred during the quarter
ended March 31, 1995, consists of the write-off of the remaining net book
value of the acquired assets of Loanstar Systems, Inc. ($331,000) and
costs associated with departed executives ($230,000). There were no such
expenses during the quarter, nor nine months ended March 31, 1996.
<PAGE>
NET INTEREST AND OTHER INCOME
Three months ended March 31,
(In thousands) 1996 1995 Increase
- -------------------------- -------- -------- --------
Net interest and other
income (expense) $191 $185 3%
Percentage of net revenues 6% 8%
- -------------------------- -------- -------- --------
Interest income was $194,000 and $189,000 for the quarters ended March
31, 1996 and 1995 respectively. This increase in interest income was
attributable to higher rates earned on the investment portfolio.
As of March 31, 1996, the Company had no interest-bearing debt
outstanding, and anticipates no new debt financing in the foreseeable
future. Accordingly, the Company expects net interest and other income
for the foreseeable future to reflect net interest income.
INCOME TAXES
Three months ended March 31,
(In thousands) 1996 1995 Decrease
- ---------------------------- -------- -------- --------
Income taxes $129 ($338) n/m
Effective tax rate 35% (34%)
The provision for income taxes includes federal and state income taxes
currently payable or receivable, and deferred taxes arising from
temporary differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax basis. The
Company's effective income tax rate for the quarter ended March 31, 1996
reflects a shift to profitable operations from operations at a loss for
the quarter ended March 31,1995.
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
Working capital, which consists principally of cash, cash equivalents and
short-term investments was $12,094,000 as of March 31, 1996, compared to
$13,638,000 at June 30, 1995. Cash and cash equivalents decreased by
$4,646,000 for the nine months ended March 31, 1996. Additions to cash
and cash equivalents included $2,917,000 provided by operating
activities. Principal uses of cash and cash equivalents included the
purchase of $4,347,000 in short-term investments and $2,596,000 of
capitalized software costs.
Although the Company at March 31, 1996 has no material commitment for
additional capital expenditures, it expects to spend approximately
$500,000 for the fiscal year ending June 30, 1996, primarily for computer
software and equipment.
Long-term cash requirements, other than normal operating expenses, are
anticipated for development of new software products and enhancement of
existing products, financing anticipated growth, the possible acquisition
of other software products, technologies and businesses and, the possible
repurchase of the Company's common stock. The Company believes that its
existing cash, cash equivalents, short-term investments, and cash
generated by operations will be sufficient to satisfy its currently
anticipated cash requirements for the balance of fiscal 1996 and the
foreseeable future.
<PAGE>
PART II. OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
None.
Item 2. CHANGES IN SECURITIES
None.
Item 3. DEFAULTS UPON SENIOR SECURITIES
None.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS
None.
Item 5. OTHER INFORMATION
None.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
None.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by
the undersigned thereunto duly authorized.
INTERLINQ SOFTWARE CORPORATION
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(Registrant)
Date: May 12, 1996 By: /s/ Stephen A. Yount
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Stephen A. Yount
Vice President, Finance
Chief Financial Officer
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EXHIBIT INDEX
Exhibit Method of Filing
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27. Financial Data Schedules Filed herewith electronically
