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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended June 30, 1996
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 14 OR 15(d) OF THE SECURITIES ACT OF
1934 [NO FEE REQUIRED]
For transition period from _____________ to ______________
Commission file number: 0-21402
INTERLINQ SOFTWARE CORPORATION
(Exact name of registrant as specified in its charter)
Washington 91-1187540
(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
11255 Kirkland Way
Kirkland, Washington 98033
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (206) 827-1112
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock, $.01
par value per share
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 and Exchange Act of 1934
during the preceding 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
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. / /
The aggregate market value of the voting stock held by non-affiliates of the
registrant, based upon the closing sale price of the Common Stock on September
23, 1996 as reported on the Nasdaq National Market was approximately
$22,267,000.
As of September 23, 1996, the registrant had outstanding 6,142,550 shares of
Common Stock.
DOCUMENTS INCORPORATED BY REFERENCE
Certain portions of the Company's definitive proxy statement for the annual
meeting of shareholders of the Company to be held on November 6, 1996, which
will be filed with the Securities and Exchange Commission within 120 days after
June 30, 1996 are incorporated by reference into Part III of this report.
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PART I
ITEM 1. BUSINESS
INTERLINQ Software Corporation ("INTERLINQ" or the "Company") provides
residential mortgage lending and construction lending software. INTERLINQ
develops, markets and supports PC-based software products, both stand-alone and
networked, for mortgage brokers and bankers, banks, credit unions and savings
institutions. The Company's MortgageWare product line encompasses all major
components of the loan production, secondary marketing and loan servicing
processes for residential mortgage loans, as well as loan servicing for
construction loans. The Company's business strategy is to provide easy-to-use,
Personal Computer("PC")-based software solutions marketed through a direct sales
force and to maintain long-term customer relationships, which generate recurring
revenues. MortgageWare products are installed and currently supported for
approximately 2,000 customers in 7,000 locations.
INTERLINQ's target market is the approximately 32,500 financial institutions
in the United States. According to Company estimates based on available industry
data, this market is comprised of approximately 20,000 mortgage brokers and
bankers, 6,000 banks, 4,500 credit unions and 2,000 savings institutions.
The Company expects future growth to come from the sale of technology
designed to provide customers with information access and content complimenting
its current products which address operational efficiency. In the near term
continued penetration of the loan production market, and additional sales of
products and support services to existing customers with its current products
are expected to provide the majority of the Company's revenue. The Company has
planned release of new products and upgrades to existing products scheduled for
fiscal 1997 and 1998.
There is no assurance that the Company will be successful in attracting new
customers or that its existing customers will continue to purchase the Company's
products and support services. In addition, there is no assurance that the
Company's new products and services will be released in a timely fashion, that,
if and when released, new products or services will be well received by its
target market or that others will not successfully develop competing products
and services. Each of these events could have a material adverse effect upon the
Company's revenues, gross margins and cash flows.
The Company was incorporated in Washington in 1982. Its principal executive
office is located at 11255 Kirkland Way, Kirkland, Washington 98033 and its
telephone number is (206) 827-1112.
INTERLINQ'S STRATEGY
The Company's strategy is to provide easy-to-use, PC-based software
solutions marketed through a direct sales force and to maintain long-term
customer relationships which generate recurring revenue.
Easy-to-Use Software
INTERLINQ believes its customers require software solutions that are
specifically designed for financial institutions and that are easy to use and
support. Because the residential mortgage lending and construction lending
processes are complex and many of these processes are performed by individuals
with little computer experience, the Company's strategy is to provide software
solutions that can be purchased, installed and used without extensive technical
knowledge. In order to provide consistent, high-quality support and service, the
Company does not
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create customized software. Product upgrades, however, often include
modifications and enhancements requested by customers.
PC Platform
The Company believes that reductions in the cost and increases in the
computing power of PCs makes its systems affordable for even small financial
institutions. Its software runs on industry-standard PCs and networks, thereby
providing power, flexibility, ease of use and distribution of workload at a
price that generally cannot be matched by minicomputer or mainframe solutions.
Direct Sales Force
The Company believes that industry specific expertise is required to sell
its products, and therefore, employs a direct sales force. Its sales personnel
are typically skilled in both residential mortgage and construction lending, as
well as PC-based software applications. The Company believes that maintaining
its own sales force allows it to develop long-term customer relationships.
Long-term Customer Relationships
INTERLINQ builds long-term relationships with its customers by providing
them with personal contact from management, proactive implementation of training
and installation and continuing services such as consulting, toll-free telephone
support and participation in user groups. The Company regularly uses an outside
research firm to monitor customer satisfaction. The Company believes that its
focus on the customer strengthens its recurring revenue opportunities and
decreases the possibility of a customer switching to a competitive product.
PRODUCTS AND SERVICES
Under its MortgageWare logo, INTERLINQ offers a complete line of software
products for all facets of a residential mortgage loan, including loan
origination and production, the sale of mortgage loans to the secondary market
and loan servicing. Additionally, the Company offers a specialized software
product for servicing a portfolio of construction loans. The Company also
provides its customers with training, consultation, support, documents and other
services.
MortgageWare Product Line
INTERLINQ's MortgageWare product line consists of 15 products including
various interfaces to other systems that run under Windows and DOS operating
systems and on major PC networks. MortgageWare software contains many features
that contribute to its combination of ease-of-use and power. These features
include extensive on-line help facilities at both the field and menu levels and
an on-line reference guide. Customers may also incorporate their own policies
and procedures into the on-line help system. MortgageWare software is flexible
enough to allow beginners to navigate through the system, while others can
bypass menus and go directly to a desired screen. The system uses "intelligent"
fields which, based on previous input, are automatically completed without
additional operator input. INTERLINQ's "Notepad" feature permits lender
personnel to maintain a record of conversations with parties involved in the
transaction. The MortgageWare product line also contains import/export
capabilities that allow the system to be interfaced with other systems such as
spreadsheets, databases, loan servicing systems and credit bureaus. System
managers may set security levels to control access to each menu and screen in
the MortgageWare system.
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The following table briefly describes INTERLINQ's MortgageWare products:
PRODUCT DESCRIPTION
MORTGAGE LENDING:
Qualifying Allows quick assessment of a potential borrower's
ability to qualify for a loan
Origination Allows loan officers to enter applications directly into
a PC, either in the office or in the field
Processing Handles loan application data entry, document tracking
and database maintenance
Closing Produces closing documents, including
jurisdiction-specific promissory notes and mortgages or
deeds of trust
Settlement Enables a lender or settlement agent to manage checking
accounts, print checks and export IRS reporting data
Tracking Produces management reports designed to meet each
customer's particular needs
COMLINQ Handles inter-branch electronic communications for
MortgageWare software
MortgageBase Enables customers to access their MortgageWare database
from FoxPro, convert files into an xbase format and
print more sophisticated reports
MortgageWare Provides brokers with a scaled-down version of
MortgageWare for Brokers designed to meet their specific
needs for product and pricing
Interfaces Utilizing our SmartLINQ technology, customers can
interface to other products and systems
MortgageWare Allows loan officers to prequalify applicants in the
Entre field through the use of a Windows-based software
that runs on a laptop computer
Secondary Allows lenders to evaluate and manage the risk of
Marketing selling loans on the secondary market
Loan Provides lenders with a complete Windows-based
Servicing loan servicing solution
Servicing A streamlined version of Loan Servicing designed for
Gateway lenders holding loans for sale
CONSTRUCTION LENDING:
BuilderBLOCK$ Provides ability to service and report essential
components of a construction loan.
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Qualifying. INTERLINQ's Qualifying product includes several analytical
tools to assist a loan officer in qualifying a buyer. The buying power analysis
helps determine the amount an applicant can afford to pay for a house based upon
the lender's loan programs and information provided by the applicant. This
simple one-screen analysis replaces and improves upon traditional calculator
methods. The selling power analysis enables a lender to create a financial
profile of potential buyers for a particular house. These profiles are useful
for real estate agents and builders with open houses. Once a loan applicant has
found a house, the best-fit analysis determines the loan products that are best
suited to the applicant. In addition, the financing comparison analysis provides
a side-by-side comparison of loan programs, allowing a loan officer to
illustrate easily an applicant's options, and the what-if analysis allows a loan
officer to respond to potential changes in a transaction.
Origination. A loan officer using MortgageWare Origination can enter a loan
application directly into a PC, either in the office or in the field, reducing
the need for separate data entry personnel. If the loan application is taken in
the field, a loan officer using COMLINQ can electronically transmit the loan
application to the office for processing.
Processing. The INTERLINQ Processing product enables loan processors to
enter loan application data and print necessary documents. The system follows
the Uniform Residential Loan Application, which is the nationwide standard for
residential mortgage loan applications. Several product features streamline the
process and give a processor quick access to needed data: document tracking
keeps track of all documents for a loan, flagging missing ones as appropriate;
status tracking provides a processor with the ability to create status reports
for Realtors and others; and credit verification allows credit reports to be
ordered electronically, thereby reducing turnaround time. The system facilitates
processing large volumes of documents by allowing screens to be used
repetitively for different loan applications without switching to a menu.
Closing. MortgageWare Closing contains tools for lenders to create and
maintain their own laser-printed documents and to extract data from the loan
database to merge with these documents. The integration of MortgageWare products
enables loan closing personnel to review and verify data that has been
previously entered in the loan database. A key system feature that expedites
loan closings is the ability to define and generate complete sets of documents
with one command.
Settlement. INTERLINQ's Settlement product manages fund disbursements and
generates settlement documents at the close of a mortgage transaction. Its
integration with other MortgageWare products speeds the settlement process by
reducing redundant data entry. When settlement of a loan transaction is
completed by an entity other than the lender, data can be sent electronically to
a settlement agent that uses MortgageWare software.
Tracking. MortgageWare Tracking allows lender management to produce
customized reports, monitoring such areas as projected funding requirements,
loan status, estimated closing dates or volumes, sources of business and sales
and employee productivity. Regulatory reports can also be generated using this
product.
COMLINQ. The COMLINQ product allows electronic inter-branch communications,
thereby providing an efficient means of gathering data from branches to merge
into a central database. It may also be used with the Origination product to
transmit loan applications originated in the field.
MortgageBase. MortgageBase is an export which gives customers access to
their entire MortgageWare database from FoxPro. MortgageBase is a tool used for
more sophisticated reporting and for writing interfaces to other systems.
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MortgageWare for Brokers. Mortgage brokerages (companies specializing in
the origination of mortgage loans) are the largest originator of mortgages of
any single group. To meet their specific product and pricing needs, the company
repackaged MortgageWare, including only the Qualifying and Processing modules
with a limited database.
Interfaces. INTERLINQ has developed interfaces to other products and
systems, including Freddie Mac's Loan Prospector(SM) and Fannie Mae's Desktop
Underwriter automated underwriting services. These interfaces utilize our
SmartLINQ technology to transmit borrower and property information to the
services. In minutes, the lender receives an underwriting decision.
MortgageWare Entre. MortgageWare Entre gives loan officers a competitive
advantage by enabling them to quickly prequalify borrowers for purchases and
refinances, show side-by-side comparisons of different loan programs, take the
loan application, give the borrower conditional loan approval on the spot, and
produce professional-looking open-house flyers. Additionally, this Windows-based
system includes a contact manager for efficient follow-up.
Secondary Marketing. Secondary Marketing refers to managing the risk of
financial loss in the origination and subsequent selling of mortgage loans. In
order to maximize profit from the sale of loans in the secondary market, an
organization's Secondary Marketing Department requires pipeline information to
price loan products and hedge their position. INTERLINQ's Secondary Marketing
product offers lenders the ability to examine in-process loans to determine how
best to meet loan sale commitments the lender may have made to Fannie Mae,
Freddie Mac or other secondary market investors. This product, which interfaces
with other MortgageWare products, provides timely data capture from a customer's
branch office to its main secondary marketing database, eliminating redundant
data entry. This product has a visual spreadsheet-style user interface which
enhances its ease of use.
MultiTrac. Multi-tasking capabilities are available to the MortgageWare
loan-management system through the use of MortgageWare MultiTrac. Lenders
benefit from one of Windows' main advantages, while retaining the full
functionality, robustness, and reliability of the tried-and-true product. This
added functionality, which enhances productivity and efficiency, is available at
a very low price, and requires no hardware upgrades or staff re-training.
Loan Servicing. The MortgageWare Loan Servicing system, the only complete
Windows-based loan servicing product on the market today, opens the doors to
in-house servicing. It is easy-to-use, cost-effective, and gives lenders control
over their own data. As an open database system, it can download information
directly to Excel, Word, Crystal Reports, or another Windows product, enabling
lenders to access and manipulate their servicing data in many ways.
Servicing Gateway. A streamlined version of Loan Servicing - Servicing
Gateway, is an abbreviated, low-cost product designed specifically for those
lenders holding loans for sale, so they can collect payments and account for
interest paid without the cost of a full servicing operation.
BuilderBLOCK$. This construction lending product compliments the Company's
existing family of products and provides (the approximately 80% of) its
customers who offer construction loans an alternative to manual or spreadsheet
calculations. Key features include the automation of IRS reporting for both
suppliers and borrowers; the ability for lenders to easily compare the
percentage of building completion against the percentage of funds disbursed to
date; and the maintenance of a historical record of all transactions by supplier
and contractor. The system is designed to provide quick and easy entry of
inspection data; one screen captures information for all loans, and the
information is then automatically transferred to each individual loan.
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Product Under Development
MortgageWare InfoLINQ. By using an Intranet environment to deliver business
information, MortgageWare InfoLINQ will be designed to provide easy access to
comprehensive management analyses. Using existing Web-based browser technology,
users of InfoLINQ will have one familiar interface to access information.
InfoLINQ will provide up-to-the-minute information through customized desktops.
By automatically gathering, filtering, analyzing, and distributing information
on key indicators of a customer's business, InfoLINQ will be designed to help
customers leverage information to respond quickly to the pressures of a
competitive marketplace. Version 1.0, planned for release during the fourth
calendar quarter of 1996, will be designed to access the data residing in
MortgageWare loan production software. Subsequent versions will access data from
other customer systems if desired, regardless of their hardware platform or
operating system.
Complementary Products and Services
INTERLINQ provides training and consulting services to assist its customers
in the use of MortgageWare software. These services are typically performed at
the customer's location and are tailored to meet the customer's needs. Customers
may also attend regional training seminars or consult one of the Company's
regionally based trainers for individual assistance.
Electronic forms and custom electronic documents necessary in the loan
production process are available to INTERLINQ customers through a special
marketing agreement from CBF Systems, Inc., VMP Mortgage Forms Division (VMP).
Under this agreement, customers are introduced to these products by INTERLINQ's
direct sales force. Responsibility for producing, maintaining compliance and
shipping documents to customers is held by VMP. INTERLINQ receives a portion of
the revenue collected by VMP.
The Company also sells laser font cartridges and provides laser logo
services. The Company has developed interfaces to Fannie Mae's Mornet product
and Freddie Mac's Midanet product, which facilitate loan delivery once a loan is
closed. In addition, the Company has developed several programs to export
servicing data to loan servicing systems for its customers.
Customer Service and Support
INTERLINQ believes that excellent customer service is key to its success
and future growth. For many customers, the MortgageWare product line becomes
critical to their daily operations. Accordingly, customers rely on the Company
for continued support and enhancement of its products. Customers who buy
licenses to use MortgageWare products under the Company's purchase option
typically purchase an annual support contract. The support fee for customers who
choose INTERLINQ's Partnership Plan or rental option (discussed below) is
included in their monthly charge.
Regular feedback on the quality of the Company's customer service is an
integral part of its customer service strategy. The Company employs an
independent research firm that calls each customer at least annually to
determine customer satisfaction. The reports are produced monthly and are used
by the Company to monitor its procedures to enhance customer satisfaction. In
addition, certain customers belong to special interest groups that serve as a
resource for product ideas. Currently, there are groups for regulatory
compliance, loan processing, secondary marketing, closing/settlement, portable
origination, software interfaces, government lending, communications, documents
and forms, brokered lending, user interface and training, underwriting, and loan
servicing.
The Company has a Major Account Services group to serve the needs of its
largest customers. As of June 30, 1996, 35 of its customers were included in the
program. The Major Account Services staff acts as liaison for each major account
customer, following up on issues and setting
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priorities for system enhancements. With this program, the Company believes that
it can better address the needs of its largest customers and improve overall
service for all its customers.
PRODUCT DEVELOPMENT
The MortgageWare product line continues to evolve, with input from many
sources, including customers who submit software enhancement request forms
suggesting corrections or enhancements. The Company also maintains a database of
all product support calls, which provides feedback to its Product Development
Department.
The Company has organized its Product Development Department into teams
working on products or closely related groups of products. These teams include
personnel with experience in product analysis, software engineering, research
and technology, quality assurance, and product marketing. Their objective is to
ensure that all products meet INTERLINQ's standards. Employees in these teams
are selected for their skills in mortgage lending, software development and
marketing.
INTERLINQ examines new technologies and platforms on an ongoing basis to
determine their potential benefits to customers. The Company currently develops
products using the DOS, Windows NT and Windows 95 operating systems, ODBC
compliant database options (SQL Server(TM) and MS Access(TM)) and Visual C++
programming tools on a PC network. Currently, the MortgageWare loan management
system and Secondary Marketing product run under the DOS operating system and
on major PC networks. The Company's other products, MortgageWare Entre, Loan
Servicing, Servicing Gateway and BuilderBLOCK$ all run under the Windows
operating system. The Company's software is generally written in the C language
for speed, reliability and ease of maintenance. The Company writes screens,
reports and documents in a simple object oriented language to reduce
development time.
SALES AND MARKETING
Sales
The Company employs a direct sales force for all of its markets because it
believes that considerable expertise is required to sell its products and that
strong customer relationships are key to its success. The Company's direct sales
force consists of national sales managers and sales executives. These personnel
are supported by sales administration and inside sales representatives. As of
June 30, 1996, the Company employed 18 sales executives located throughout the
country who are each responsible for an assigned geographic territory. Sales
executives are expected to maintain relationships with existing customers and
are responsible for the generation of new business. Sales administration
representatives handle contracts and other administrative details, and inside
sales representatives qualify sales leads, setting appointments for account and
sales executives, and managing much of the sales follow-up.
Sales leads are generated through various sources, including magazine
advertising, trade shows, purchased lists, direct mail, telemarketing, customer
referral and membership in various trade organizations. The Company tracks lead
sources to determine the best usage of its promotional budget.
The Company offers an unconditional, 60-day, money-back guarantee on all of
its products. To date, it has not experienced significant returns under this
guarantee.
Effective October 1, 1995 the Company amended an existing co-marketing
agreement with CMCI Corporation ("CMCI"). The agreement provides for discounted
software sold to credit unions through CMCI and a referral fee paid to CMCI for
software sold to credit unions directly by the Company and adds conditions
allowing for the transfer of CMCI customers to INTERLINQ. The transfer is to
take place by September 30, 1998 at which time the agreement is to expire. The
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Company believes that CMCI's familiarity with credit unions provides the Company
with a strategic advantage in that market. Revenues under the CMCI arrangement
accounted for less than 2% of the Company's net revenues in fiscal year 1996.
Licensing Options
To attract and retain a wide diversity of customers in the residential
mortgage lending industry, the Company has developed three licensing options for
its products:
Purchase Option. Under this option, the Company's customers may purchase a
standard non-exclusive software license to use its products. The Company offers
financing for the purchase option and, for an additional annual fee, provides
product support services. The vast majority of the Company's customers select
the purchase option and the additional support services.
Partnership Plan Option. Under the Partnership Plan option, customers pay
an initial commitment fee, plus a monthly fee based upon the number of loan
applications entered into the system. The Partnership Plan option includes
MortgageWare software and software support and is targeted to customers who are
unwilling or unable to make the capital commitment associated with the purchase
option.
Rental Option. Because customers may not wish to commit to the purchase
option or the Partnership Plan option, the Company created a limited-capacity
version of MortgageWare software for brokers that is available on a monthly
rental plan. In addition, the Secondary Marketing product is also available on a
monthly rental plan.
CUSTOMERS
The Company's customer base is geographically diverse and covers a broad
range of sizes and types of financial institutions. MortgageWare products are
installed and currently supported for approximately 2,000 customers in 7,000
locations in all 50 states plus Puerto Rico, Guam, and the U.S. Virgin Islands.
This customer base is currently comprised of approximately 820 mortgage brokers
and bankers, 640 banks, 440 credit unions and 100 savings institutions. In
fiscal year 1996, no single customer accounted for more than 3% of the Company's
net revenues.
COMPETITION
The market for the Company's software products is highly competitive. The
Company competes with software vendors offering integrated financial services
packages, software consultants and value-added resellers who deliver custom or
customized software products, in-house management information services and
programming resources of some of the Company's larger existing and potential
customers, as well as software vendors offering specialized products for the
mortgage lending industry. The Company believes the main competitive factors
include price, operating platform and customer support. Some competitive
products cost significantly less than MortgageWare software, and price-sensitive
buyers tend to choose these products. Many competitors market competing products
on mainframe, mini-computer and PC platforms with a wide array of pricing and
have significantly greater financial, technical, marketing and sales resources
than the Company; some offer financial services products not offered by the
Company. The Company believes it is the leading provider of PC-based software
for residential mortgage lending solutions.
In addition to the Company's current competitors, there are many companies
involved in providing software and related services to segments of the financial
services industry other than residential mortgage lending. Because of
similarities both in the customer base and the types of products and services
provided by these other companies compared to those of the Company, these
companies are potential competitors of the Company. There is no assurance that
the
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Company would be successful in competing against these potential competitors,
should any of them decide to enter the Company's market.
INTELLECTUAL PROPERTY AND OTHER PROPRIETARY RIGHTS
INTERLINQ regards its software as proprietary and essential to its
business. The Company relies primarily on a combination of copyright, trademark
and trade secret laws, employee and third-party nondisclosure agreements,
license agreements and other intellectual property protection methods to protect
its proprietary technology. The Company has no patents.
MORTGAGE LENDING REGULATIONS
The residential mortgage lending industry is subject to a variety of
government regulations, including the Equal Credit Opportunity Act, the
Truth-in-Lending Act, the Real Estate Settlement Procedures Act and the Home
Mortgage Disclosure Act, which prohibit discrimination and require the
disclosure of certain basic information to borrowers concerning credit terms and
settlement costs. Additionally, there are various federal, state and local laws
and regulations that govern mortgage lending activities, including consumer
protection and usury statutes. Entities engaged in making and selling mortgage
loans are often subject to the rules and regulations of one or more of the
investors, guarantors and insurers of residential mortgage loans, including the
Federal Housing Authority, the Veteran's Administration, Fannie Mae, Freddie Mac
and the Government National Mortgage Association. These agencies regulate the
origination, processing, underwriting, selling, securitizing and servicing of
mortgage loans, prohibit discrimination, establish underwriting guidelines
provide for inspections and appraisals, require credit reports on prospective
borrowers and fix maximum loan amounts and interest rates.
Failure to comply with these laws and regulations could lead to a lender's
loss of approved status, termination of its servicing contracts without
compensation, demands for indemnification or loan repurchase, class action
lawsuits and administrative enforcement actions. Should loan production
processes or documentation arising from use of the Company's products result in
a customer's violation of such requirements, such customer, or the government
authority whose requirements were not met, might claim that the Company is
responsible, which could have an adverse effect upon the Company and its
reputation in the mortgage lending industry. Certain of the Company's forms are
based on information supplied by a third-party vendor pursuant to a licensing
agreement expiring in 1996. Under the terms of this agreement, such vendor is
obligated to provide only limited indemnification for errors or omissions.
Beginning October 2, 1995 the Company entered into an agency and compliance
delegate agreement with CBF Systems, Inc, VMP Mortgage Forms Division (VMP).
Under the terms of this agreement VMP assumes compliance responsibility for all
documents sold by and through the Company.
MANUFACTURING
The principal materials used in the Company's products include computer
diskettes and documentation. The manufacturing process includes the development
and testing of software by the Company, plus the production of a master copy for
duplication. The Company contracts with an outside source for all disk
duplication for major product releases and updates. Accompanying documentation,
which is minimal since most documentation is on-line, is created by the Company
and sent to an outside source to be reproduced. The Company generally ships
products within a few business days after receipt of an order. Normally the
Company has little or no backlog, but may experience occasional backlogs. At
June 30, 1996, the Company's backlog was not material.
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CERTAIN FACTORS
The Company is unable to accurately estimate unit sales of its products and
the volume of annual support contracts that its customers will purchase due to
the nature of the software markets generally and, in particular, the residential
mortgage lending market. In early 1994, the residential mortgage lending market
experienced a reduction in mortgage refinance volumes due to a sharp rise in
interest rates. The Company experienced a significant decrease in net revenues,
operating income and net income during the fourth quarter of fiscal 1994 which
continued through much of fiscal year 1995. During fiscal 1996 as a result of
the moderate increase in mortgage lending and refinance volumes, the Company has
seen increases in revenues, operating income and net income.
EMPLOYEES
As of August 31, 1996, the Company employed 123 people, including 36 in
sales and marketing, 34 in product development, 32 in customer service and 21 in
operations. None of the Company's employees is represented by a labor union, and
the Company believes that its relationship with its employees is good.
EXECUTIVE OFFICERS OF THE REGISTRANT
The executive officers of the Company, as of September 27, 1996, are as follows:
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<S> <C> <C>
Jiri M. Nechleba 38 President and Chief Executive Officer
Stephen A. Yount 39 Vice President-Finance, Chief Financial
Officer and Secretary
Patricia R. Graham 43 Vice President-Sales and Marketing
David A. Sperline 47 Vice President-Customer Service
</TABLE>
JIRI M. NECHLEBA has been President and Chief Executive Officer since
September 11, 1995. From 1993 through August, 1995, he served as Senior Vice
President and General Manager of SolutionWare, a subsidiary of A.C. Nielsen, a
division of Dun & Bradstreet, and a provider of information systems to the
consumer packaged goods industry. From 1983 to 1993, Mr. Nechleba was an
independent management consultant to a variety of industries. Mr. Nechleba holds
two Bachelor of Science degrees from the Massachusetts Institute of Technology.
STEPHEN A. YOUNT has been Vice President-Finance, Chief Financial Officer and
Secretary of the Company since October 1991. During 1991, Mr. Yount held a
temporary position with PF Industries & Acrotech, Inc., an aerospace company,
where he served as Chief Financial Officer. From 1989 to 1991, Mr. Yount was the
President and Chief Financial Officer of PacSoft Incorporated, a civil
engineering software firm. Mr. Yount earned a CPA certificate in 1982 and holds
a BA in Business Administration from the University of Washington. Upon the
resignation of the Company's President and Chief Executive Officer, Robert M.
Delf in January, 1995, Mr. Yount was appointed Interim President by the Board of
Directors. He continued in this capacity until the hiring of Jiri Nechleba as
President and Chief Executive Officer on September 11, 1995.
PATRICIA R. GRAHAM has been Vice President-Sales and Marketing of the Company
since March 25, 1996. From 1990 to 1995, she served in various capacities and
most recently was executive vice president of A.C. Nielsen Co., a subsidiary of
Dun & Bradstreet. Ms. Graham holds a Masters degree in political science from
Rutgers University.
11
<PAGE> 12
DAVID A. SPERLINE has been Vice President-Customer Service of the Company
since January 1992. Mr. Sperline worked briefly as an independent consultant
before joining the Company. From March 1988 to 1991, Mr. Sperline was Director
of Product Quality Assurance at Aldus Corporation, a desk-top publishing
software company. Prior to that, he was Director of Software Development for
Pacer Corporation, a producer of computer hardware and software for movie
theaters. Mr. Sperline holds a BA in Business Administration from the University
of Washington.
ITEM 2. PROPERTIES
The Company is currently leasing and occupying approximately 46,000 square
feet of office space in Kirkland, Washington. Certain account executives and
trainers located across the country also lease individual office space for their
use. The Company believes that its current facilities will be adequate for its
needs through the end of fiscal year 1997 and that additional office space is
readily available.
ITEM 3. LEGAL PROCEEDINGS
The Company is not party to any litigation that would have a material
adverse effect on the Company or its business.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter of fiscal year 1996.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Common Stock has traded on the Nasdaq National Market under the
symbol INLQ since April 27, 1993. The Company has 2,776 shareholders as of
September 23, 1996, based on computations including participants in security
position listings, as defined by Rule 17Ab-8 of the Exchange Act. The following
table sets forth the high and low bid prices as reported on NASDAQ National
Market for the periods indicated. The bid prices represent inter-dealer
quotations, without adjustment for retail mark-ups, mark-downs or commissions
and may not necessarily represent actual transactions.
<TABLE>
<CAPTION>
HIGH LOW
---------------------------
<S> <C> <C>
Fiscal year ended June 30, 1997
First quarter (through September 23, 1996) $4.50 $3.38
Fiscal year ended June 30, 1996
Fourth quarter $5.50 $3.19
Third quarter 3.75 2.88
Second quarter 3.50 3.00
First quarter 4.13 3.25
Fiscal year ended June 30, 1995
Fourth quarter $4.00 $3.00
Third quarter 4.13 3.00
Second quarter 5.50 3.50
First quarter 5.50 4.13
</TABLE>
The Company has never paid dividends on its Common Stock. The Company intends
to retain future earnings for use in its business and therefore does not
anticipate paying dividends in the foreseeable future. There is no assurance
that the Company will ever pay dividends on its Common Stock.
12
<PAGE> 13
ITEM 6. SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
Year Ended June 30, 1996 1995 1994 1993 1992
- ---------------------------------------------------------------------------------------------------------------------------
(In thousands except per share data)
<S> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA:
Net revenues:
Software license fees $ 6,232 $ 4,314 $ 11,438 $ 10,122 $ 6,563
Software support fees 5,773 5,483 4,707 2,824 1,719
Other 1,088 1,196 2,344 2,086 991
----------------------------------------------------------------
Total net revenues 13,093 10,993 18,489 15,032 9,273
----------------------------------------------------------------
Cost of revenues:
Software license fees 1,653 1,424 1,244 1,188 903
Software support fees 1,678 1,788 2,062 1,791 1,024
Other 589 642 1,014 943 485
----------------------------------------------------------------
Total cost of revenues 3,920 3,854 4,320 3,922 2,412
----------------------------------------------------------------
Gross profit 9,173 7,139 14,169 11,110 6,861
----------------------------------------------------------------
Operating expenses:
Product development 2,060 1,123 891 670 488
Sales and marketing 4,230 4,244 5,801 4,366 2,808
General and administrative 3,010 3,404 3,278 2,147 1,337
Other general expenses - nonrecurring -- 952 -- -- --
----------------------------------------------------------------
Total operating expenses 9,300 9,723 9,970 7,183 4,633
----------------------------------------------------------------
Operating income (loss) (127) (2,584) 4,199 3,927 2,228
Net interest and other income (expense) 811 676 322 (98) (35)
----------------------------------------------------------------
Income (loss) before income taxes,
extraordinary item and cumulative
effect of change in accounting principle 684 (1,908) 4,521 3,829 2,193
Income taxes 251 (780) 1,532 1,368 785
----------------------------------------------------------------
Income (loss) before extraordinary
item and cumulative effect of
change in accounting principle 433 (1,128) 2,989 2,461 1,408
Extraordinary item - tax benefit of net
operating loss carryforwards -- -- -- 138 688
Cumulative effect of change
in accounting principle -- -- (109) -- --
----------------------------------------------------------------
Net income (loss) $ 433 ($ 1,128) $ 2,880 $ 2,599 $ 2,096
================================================================
PER SHARE DATA:
Income (loss) before extraordinary
item and cumulative effect of
change in accounting principle $ .07 ($ .19) $ .46 $ .47 $ .27
Net income (loss) $ .07 ($ .19) $ .45 $ .50 $ .41
Weighted average number of common and
common equivalent shares outstanding 6,171 5,831 6,471 5,241 5,177
BALANCE SHEET DATA:
Cash, cash equivalents and investments $ 14,218 $ 14,373 $ 14,585 $ 14,434 $ 1,829
Working capital 12,823 13,638 13,753 13,233 725
Total assets 22,321 21,609 23,838 20,306 5,655
Total shareholders' equity 17,771 17,338 18,703 16,121 2,902
</TABLE>
13
<PAGE> 14
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
GENERAL
Mortgage interest rates available during fiscal year 1996 reflected a
lending environment that experienced a high degree of volatility. During the
first two quarters of the fiscal year, lending rates experienced a significant
decline and then, during the third quarter, rates increased substantially
(approximately one percentage point) and remained at about that level through
the end of the fiscal year. 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 home 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.
<TABLE>
<CAPTION>
NET REVENUES
Increase Increase
(In thousands) 1996 (Decrease) 1995 (Decrease) 1994
- -----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Software license fees $ 6,232 44% $ 4,314 (62%) $11,438
Software support fees 5,773 5% 5,483 16% 4,707
Other 1,088 (9)% 1,196 (49)% 2,344
-----------------------------------------------------
Total net revenues $13,093 19% $10,993 (41)% $18,489
=====================================================
</TABLE>
Net revenues consist of software license fees, software support fees, and
other revenues, which include training fees, custom document fees, and other
miscellaneous sales, net of discounts and sales returns.
Software license fees increased by 44% for fiscal year 1996 compared to
fiscal year 1995, and decreased by 62% for fiscal year 1995 compared to fiscal
year 1994. The increase in software license fees in fiscal year 1996 compared to
fiscal year 1995 was primarily due to a combination of the overall favorable
lending conditions discussed above, which increased software license fees for
existing products, and software license fees for three new products --
MortgageWare Entre (formerly MortgageWare Loan Officer Plus for Windows) and
interfaces to Freddie Mac's and Fannie Mae's automated underwriting systems. The
decrease in software license fees in fiscal year 1995 compared to fiscal year
1994 was primarily due to a sudden substantial increase, beginning in early
1994, in mortgage lending rates in the United States. This increase in mortgage
lending rates found many of the Company's customers and prospects overstaffed as
mortgage refinance volumes declined rapidly. With this rapid decline in mortgage
refinance activity, sales to existing customers declined significantly as loan
production decreased for these customers and they no longer needed increased
loan production capacity. Additionally, sales to new customers declined
substantially, as prospects began focusing on staff reductions rather than
improving their operations with new mortgage loan management systems.
Software support fees increased by 5% for fiscal year 1996 compared to
fiscal year 1995, and by 16% for fiscal year 1995 compared to fiscal year 1994.
These year-to-year increases slowed due to the decrease in software license fees
in fiscal year 1995 compared to fiscal year 1994. 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
14
<PAGE> 15
product shipment, the percentage increase in software support fees compared to
software license fees is not directly proportional. Due to a lower number of new
customer additions during fiscal years 1996 and 1995 compared to fiscal year
1994, and, to a lesser extent, a slightly higher attrition rate in the installed
customer base during fiscal year 1995, software support fees experienced a lower
growth rate in both fiscal year 1996 and 1995 compared to fiscal year 1994.
However, because of the increase in software license fees experienced during
fiscal year 1996, the Company believes software support fees are likely to
increase at a higher rate in fiscal year 1997 than in fiscal year 1996.
Other revenues -- training fees, custom document fees, and other
miscellaneous sales -- decreased by 9% for fiscal year 1996 compared to fiscal
year 1995, and decreased by 49% for fiscal year 1995 compared to fiscal year
1994. The decrease in other revenue in fiscal year 1996 compared to fiscal year
1995 was primarily due 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
its own lending documents to offering this comprehensive library has been slower
than anticipated. However, revenue from this agreement increased from the third
quarter to the fourth quarter of fiscal year 1996 and the Company expects
document revenue to continue to increase during fiscal year 1997. The decrease
in other revenue in fiscal year 1995 compared to fiscal year 1994 was primarily
due to the decrease in software license fees, since other revenue is generally
associated with license fees. In addition to the expected increase in revenue
from documents discussed above, the Company expects its training fees to
increase during fiscal year 1997 compared to fiscal year 1996, due to an
increase, beginning in the first quarter of fiscal year 1997, in the daily fee
charged for on-site training.
Looking forward, the Company anticipates an increasing contribution to
software license fees, and related increases to software support fees and other
revenue, from its new products MortgageWare Loan Servicing, BuilderBlock$, and
MortgageWare InfoLINQ, expected to be released during the first half of fiscal
year 1997. As discussed above, the Company believes the overall lending
environment to be favorable as of the end of fiscal year 1996 despite
experiencing a high degree of volatility. Nonetheless, there can be no assurance
that mortgage lending rates will not increase or continue to experience a high
amount of volatility. Such increases or continued volatility could have a
material adverse effect on the Company's revenues, profitability, and financial
condition. Even if lending rates stabilize, if such rates are perceived 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.
<TABLE>
<CAPTION>
COST OF REVENUES
Increase Increase
(In thousands) 1996 (Decrease) 1995 (Decrease) 1994
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Software license fees $1,653 16% $1,424 14% $1,244
Percentage of software license fees 27% -- 33% -- 11%
------------------------------------------------------
Software support fees 1,678 (6)% 1,788 (13)% 2,062
Percentage of software support fees 29% -- 33% -- 44%
------------------------------------------------------
Other 589 (8)% 642 (37)% 1,014
Percentage of other revenues 54% -- 54% -- 43%
------------------------------------------------------
Total cost of revenues $3,920 2% $3,854 (11)% $4,320
Percentage of net revenues 30% -- 35% -- 23%
======================================================
</TABLE>
15
<PAGE> 16
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 33% to 27% for fiscal year 1996 compared to fiscal
year 1995, and increased from 11% to 33% for fiscal year 1995 compared to fiscal
year 1994. The decrease for fiscal year 1996 compared to fiscal year 1995 was
primarily due to software license fees increasing more than the cost of software
license fees. The dollar amount of cost of software license fees increased 16%
to $1.65 million for fiscal year 1996, compared to $1.42 million for fiscal year
1995. This increase was primarily due to an increase in amortization of
capitalized software development costs resulting from the release of Secondary
Marketing and MortgageWare Entre (formerly MortgageWare Loan Officer Plus for
Windows). This increase was partially offset by a decrease in amortization of
capitalized software development costs associated with MortgageWare for DOS. The
increase for fiscal year 1995 compared to fiscal year 1994 was primarily due to
an increase in amortization of capitalized software development costs against a
significant decrease in software license fees. Amortization of capitalized
software development costs was $1,430,000, $1,250,000, and $874,000 for fiscal
years 1996, 1995, and 1994, respectively. The Company expects the dollar amount
of its amortization of capitalized software development costs to hold steady or
decrease slightly for fiscal year 1997 compared to 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 33% to 29% for fiscal year
1996 compared to fiscal year 1995, and decreased from 44% to 33% for fiscal year
1995 compared to fiscal year 1994. These year-to-year decreases were primarily
due to a combination of a more efficient ratio of customer service support staff
to customers and the implementation during fiscal year 1994 of the use of disk
file compression for disk duplication associated with software updates. Looking
forward, because the level of staffing and customer service expenses are related
to the size of the Company's customer base and the number of different products
offered, the Company expects the dollar cost of software support fees to
increase in accordance with its customer base and expanded product offering, and
to remain flat or increase slightly as a percentage of software support fees.
Cost of other revenue includes the purchase and duplication of disks
associated with custom documents, the salaries and reimbursable expenses for the
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 was unchanged at 54% for fiscal year 1996
compared to fiscal year 1995, and increased from 43% to 54% for fiscal year 1995
compared to fiscal year 1994. Although unchanged as a percentage of other
revenue for the fiscal year 1996 on the whole, the cost of other revenue
decreased as a percentage for the second half of fiscal year 1996. 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 increase for fiscal year 1995 compared to fiscal
year 1994 was primarily due to the relatively fixed nature of the salaries for
the employees who provide training against a lower overall level of other
revenue.
16
<PAGE> 17
<TABLE>
<CAPTION>
OPERATING EXPENSES
Increase Increase
(In thousands) 1996 (Decrease) 1995 (Decrease) 1994
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Product development $2,060 83% $1,123 26% $ 891
Percentage of net revenues 16% -- 10% -- 5%
--------------------------------------------------------------
Sales and marketing 4,230 0% 4,244 (27)% 5,801
Percentage of net revenues 32% -- 39% -- 31%
--------------------------------------------------------------
General and administrative 3,010 (12)% 3,404 4% 3,278
Percentage of net revenues 23% -- 31% -- 18%
--------------------------------------------------------------
Other general expenses - nonrecurring -- -- 952 -- --
Percentage of net revenues -- -- 9% -- --
--------------------------------------------------------------
</TABLE>
Product development expenses include salaries for software developers and
analysts, facility costs, and expenses associated with computer equipment used
in software development. As a percentage of net revenues, product development
expenses increased from 10% to 16% for fiscal year 1996 compared to fiscal year
1995, and increased from 5% to 10% for fiscal year 1995 compared to fiscal year
1994. The increase for fiscal year 1996 compared to fiscal year 1995 is
primarily due to a combination of increased costs associated with the
development of new software products, MortgageWare Entre, MortgageWare Loan
Servicing, and MortgageWare for Windows, and the maturity of MortgageWare for
DOS requiring a greater percentage of development expenditures for maintenance,
instead of enhancement. The increase for fiscal year 1995 compared to fiscal
year 1994 is primarily attributable to the continued development effort
associated with Loan Servicing, and the increased efforts, during the second
half of fiscal year 1995, in the development of MortgageWare for Windows. The
Company capitalized $752,000, $1,793,000, and $1,442,000 of development
expenditures for fiscal years 1996, 1995, and 1994, respectively. The Company is
developing and plans release of three new products, MortgageWare Loan Servicing,
MortgageWare InfoLINQ (intranet technology solution), and BuilderBlock$ during
the first half of fiscal year 1997 and accordingly, anticipates an increase in
both capitalized development expenditures and product development expense for
fiscal year 1997.
Sales and marketing expenses include salaries, sales commissions, travel,
and facility costs for the Company's sales and marketing personnel. Sales and
marketing expenses also includes advertising, telemarketing, and trade shows. As
a percentage of net revenues, sales and marketing expenses decreased from 39% to
32% for fiscal year 1996 compared to fiscal year 1995. The decrease for fiscal
year 1996 compared to fiscal year 1995 was primarily due to the benefit of
expense and staff reduction measures during the quarters ended September 30,
1995 and December 31, 1995, and to revenue increasing faster than sales and
marketing expenses, which was somewhat offset by increased sales commission
expense. The increase for fiscal year 1995 compared to fiscal year 1994 is
primarily due to significantly lower revenues against relatively fixed sales and
marketing expenses. However, on a dollar basis, sales and marketing expenses
decreased 27% from fiscal year 1994 to fiscal year 1995. This decrease was
primarily due to a substantial reduction in sales commissions.
General and administrative expenses include costs associated with finance,
accounting, purchasing, order fulfillment, administration and facilities, as
well as the amortization of certain LoanStar Systems assets, subsequent to their
acquisition during the quarter ended March 31, 1994 and discontinuing with the
write-off of their remaining net book value during the quarter ended March 31,
1995, as discussed below. As a percentage of net revenues, general and
administrative expenses decreased from 31% to 23% for fiscal 1996 compared to
fiscal year 1995, and increased from 18% to 31% for fiscal year 1995 compared to
fiscal year 1994. The decrease for fiscal year 1996 compared to fiscal year 1995
is primarily due to a combination of the elimination of the ongoing amortization
of certain LoanStar Systems assets subsequent to their write-off during the
17
<PAGE> 18
quarter ended March 31, 1995, a lower bad debt provision and reduced
professional services expense. The increase for fiscal year 1995 compared to
fiscal year 1994 is primarily attributable to a combination of a larger
corporate facility expense and the amortization of certain LoanStar Systems
assets which were partially offset by a reduction in payroll and bad debt
expense. The Company expects general and administrative expenses on a dollar
basis to increase somewhat for fiscal year 1997 compared to fiscal year 1996,
but decrease as a percentage of net revenues.
Other general expenses - nonrecurring, consists of the write-off of
capitalized software costs associated with purchased software code intended for
use in the development of one of the Company's new products ($391,000) during
the quarter ended June 30, 1995, 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) during the quarter ended March 31, 1995.
During the fourth quarter of fiscal year 1995, the Company determined that
purchased software intended to be an integral part of the development of one of
its new products no longer had value for that purpose, and that there was not a
future alternative use. Accordingly, this asset was written off in the fourth
quarter of fiscal year 1995. In March 1994, the Company acquired substantially
all of the assets of LoanStar Systems including a customer base of approximately
1,000 customers. With this acquisition, the Company intended to convert as many
LoanStar customers as possible to its MortgageWare system over the next 12 to 15
months. LoanStar's product was designed for the lower end of the market -- the
small mortgage broker. Unfortunately, this segment of the market was
significantly affected by the sudden substantial increase in interest rates that
occurred during the second half of fiscal year 1994. As a result, conversions
were below management's expectations and, at March 31, 1995, the Company
determined this asset no longer had value. Additionally, during the quarter
ended March 31, 1995, the Company's President and CEO, and Vice President of
Product Development both resigned from their positions with the Company. With
their departure, the Company incurred one-time costs of $230,000.
<TABLE>
<CAPTION>
NET INTEREST AND OTHER INCOME (EXPENSE)
Increase Increase
(In thousands) 1996 (Decrease) 1995 (Decrease) 1994
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net interest and other income (expense) $811 20% $676 110% $322
Percentage of net revenues 6% -- 6% -- 2%
---------------------------------------------------------
</TABLE>
Interest income was $801,000, $728,000, and $447,000 for the fiscal years
ended June 30, 1996, 1995, and 1994, respectively. The increase for fiscal year
1996 was primarily due to earning a higher average interest rate on the
investment portfolio. The increase for fiscal year 1995 was primarily
attributable to a shift during the second quarter, to taxable investments from
tax-free investments.
During the third quarter of fiscal 1994, the Company moved into its current
premises, which it leases under a noncancelable operating lease expiring in
November 1998. The lease for the Company's previous premises remains in effect
until its expiration in October 1998. The Company negotiated a sublease to
another tenant for the remaining lease term. Included in net interest and other
income (expense) for the fiscal year 1994 is approximately $100,000 of
nonrecurring expenses associated with this move. See Note 5 of Notes to
financial Statements.
As of June 30, 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 (expense) for the foreseeable
future to reflect net interest income.
18
<PAGE> 19
INCOME TAXES AND EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE
<TABLE>
<CAPTION>
Increase Increase
(In thousands) 1996 (Decrease) 1995 (Decrease) 1994
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Income taxes $250 n/m $(779) n/m $ 1,532
Effective income tax rate 37% -- (41)% -- 34%
----------------------------------------------------------
Cumulative effect of change in accounting
principle -- -- -- -- $ (109)
------------------------------------------------------------
</TABLE>
The provision for income taxes includes federal and state income taxes
currently payable, and deferred taxes arising from temporary differences in
determining income for financial statement and tax purposes. The effective
income tax rate for fiscal year 1995 reflects a higher benefit due to the
tax-free interest component combined with a net loss. On July 1, 1993, the
Company adopted Statement of Financial Accounting Standards No. 109, Accounting
for Income Taxes ("SFAS 109"). The effect of this adoption of SFAS 109 was
recorded as a $109,000 charge and reported as a cumulative effect of a change in
accounting principle in the income statement for the fiscal year 1994. See Note
1(k) of Notes to Financial Statements.
LIQUIDITY AND CAPITAL RESOURCES
Working capital, which consists principally of cash, cash equivalents, and
short-term investments, was $12,823,000 as of June 30, 1996, compared to
$13,638,000 at June 30, 1995. Cash and cash equivalents decreased by $6,392,000
for fiscal year 1996. There was $3,415,000 added to cash and cash equivalents by
operating activities. Principal uses of cash and cash equivalents included the
net purchase of $6,236,000 of investment securities, the purchase of $2,000,000
of LOP source code, the purchase of $690,000 of furniture and equipment, the
repurchase of $313,000 of Company common stock, and $790,000 of capitalized
software costs.
The Company's capital expenditures for fiscal years 1996 and 1995 were
$690,000 and $338,000, respectively. Although the Company currently has no
material commitment for additional capital expenditures, it expects to spend
approximately $600,000 during the fiscal year ending 1997, primarily for
computer software and hardware, furniture, and fixtures. The Company expects
these additional capital expenditures to be funded through cash from operations.
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; and 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 fiscal
year 1997.
FORWARD-LOOKING STATEMENTS
When used in this discussion, the words "believes," "anticipates," and
similar expressions are intended to identify forward-looking statements. Such
statements are subject to certain risks and uncertainties that could cause
actual results to differ materially from those projected. Readers are cautioned
not to place undue reliance on these forward-looking statements, which speak
only as of the date hereof. The Company undertakes no obligation to publicly
release the result of any revisions to these forward-looking statements that may
be made to reflect events or circumstances after the date hereof or to reflect
the occurrence of unanticipated events.
19
<PAGE> 20
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
<TABLE>
<CAPTION>
Page #
----------------
<S> <C>
Independent Auditors' Report 21
Balance Sheets as of June 30, 1996 and 1995 22
Statements of Operations for the years ended June 30, 1996, 1995 and 1994 23
Statements of Shareholders' Equity for the years ended June 30, 1996,1995 and 1994 24
Statements of Cash Flows for the years ended June 30, 1996, 1995 and 1994 25
Notes to Financial Statements 26 - 32
Schedule II - Valuation and Qualifying Accounts 35
</TABLE>
20
<PAGE> 21
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders
INTERLINQ Software Corporation:
We have audited the accompanying financial statements of INTERLINQ Software
Corporation as listed in the accompanying index. In connection with our audits
of the financial statements, we have also audited the financial statement
schedule as listed in the accompanying index. These financial statements and
financial statement schedule are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements and financial statement schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those stan dards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of INTERLINQ Software Corporation
as of June 30, 1996 and 1995, and the results of its operations and its cash
flows for each of the years in the three-year period ended June 30, 1996 in
conformity with generally accepted accounting principles. Also, in our opinion,
the related financial statement schedule, when considered in relation to the
basic financial statements taken as a whole, presents fairly, in all material
respects, the information set forth therein.
As discussed in note 1 to the financial statements, the Company changed its
method of accounting for income taxes in 1994 to adopt the provisions of
Statement of Financial Accounting Standards No. 109, Accounting for Income
Taxes.
/s/ KPMG Peat Marwick LLP
Seattle, Washington
August 6, 1996
21
<PAGE> 22
INTERLINQ SOFTWARE CORPORATION
BALANCE SHEETS
<TABLE>
<CAPTION>
As of June 30, 1996 1995
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 6,511,041 $12,902,547
Investments available-for-sale, at fair value 3,909,917 --
Investments held-to-maturity, at amortized cost 3,796,929 1,470,782
Accounts receivable, less allowance for doubtful accounts of
$157,630 in 1996 and $118,766 in 1995 1,847,836 1,074,667
Current portion of contracts receivable, less allowance for
doubtful contracts of $29,377 in 1996 and $33,521 in 1995 (Note 2) 123,671 151,475
Income taxes refundable -- 987,429
Inventory 72,644 33,032
Prepaid expenses 331,026 282,130
Deferred income taxes 172,041 171,739
-----------------------------
Total current assets 16,765,105 17,073,801
-----------------------------
Property and equipment, at cost (Notes 3 and 5) 5,289,836 4,620,025
Less accumulated depreciation and amortization 3,253,190 2,254,822
-----------------------------
Net property and equipment 2,036,646 2,365,203
-----------------------------
Contracts receivable, excluding current portion (Note 2) 18,521 28,134
Capitalized software costs, less accumulated amortization of
$1,509,305 in 1996 and $1,186,760 in 1995 (Note 10) 3,493,563 2,133,882
Other assets 7,500 7,500
-----------------------------
$22,321,335 $21,608,520
=============================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 158,226 $ 123,255
Accrued compensation and benefits 402,701 390,466
Other accrued liabilities (Note 5) 380,435 279,491
Customer deposits 363,703 107,090
Deferred software support fees 2,637,500 2,535,441
-----------------------------
Total current liabilities 3,942,565 3,435,743
-----------------------------
Noncurrent liabilities, excluding current installments:
Deferred rent and other lease obligations (Note 5) 383,750 445,793
Deferred software support fees 10,233 18,892
Deferred income taxes 213,548 369,973
-----------------------------
Total noncurrent liabilities 607,531 834,658
-----------------------------
Shareholders' equity (Note 7):
Series A convertible preferred stock, $.01 par value
Authorized 5,000,000 shares; no shares issued and outstanding in
1996 and 1995 -- --
Common stock, $.01 par value. Authorized 30,000,000 shares;
issued and outstanding 6,038,550 shares in 1996 and 5,968,000
shares in 1995 60,386 59,680
Additional paid-in capital 13,167,629 13,167,991
Retained earnings 4,543,224 4,110,448
-----------------------------
Total shareholders' equity 17,771,239 17,338,119
-----------------------------
Commitments (Notes 5 and 7)
-----------------------------
$22,321,335 $21,608,520
=============================
</TABLE>
See accompanying notes to financial statements
22
<PAGE> 23
INTERLINQ SOFTWARE CORPORATION
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Years Ended June 30, 1996 1995 1994
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net revenues:
Software license fees $ 6,232,011 $ 4,314,189 $ 11,437,999
Software support fees 5,772,791 5,482,938 4,707,329
Other 1,087,613 1,196,321 2,343,343
--------------------------------------------------------------
Total net revenues 13,092,415 10,993,448 18,488,671
--------------------------------------------------------------
Cost of revenues:
Software license fees 1,652,627 1,423,772 1,244,111
Software support fees 1,678,255 1,788,177 2,061,819
Other 588,987 641,700 1,013,686
--------------------------------------------------------------
Total cost of revenues 3,919,869 3,853,649 4,319,616
--------------------------------------------------------------
Gross profit 9,172,546 7,139,799 14,169,055
--------------------------------------------------------------
Operating expenses:
Product development 2,060,427 1,123,093 890,586
Sales and marketing 4,229,994 4,244,444 5,801,111
General and administrative 3,010,223 3,403,827 3,278,006
Other general expenses - nonrecurring (Note 4) -- 952,043 --
--------------------------------------------------------------
Total operating expenses 9,300,644 9,723,407 9,969,703
--------------------------------------------------------------
Operating income (loss) (128,098) (2,583,608) 4,199,352
Net interest and other income (Notes 5 and 8) 811,272 675,786 322,340
--------------------------------------------------------------
Income (loss) before income tax expense (benefit) and
cumulative effect of change in accounting principle 683,174 (1,907,822) 4,521,692
Income tax expense (benefit) (Note 6) 250,398 (779,326) 1,532,376
--------------------------------------------------------------
Income (loss) before cumulative effect of change in
accounting principle 432,776 (1,128,496) 2,989,316
Cumulative effect at July 1, 1993 of a change in accounting
for income taxes /Note 1(i)/ -- -- (109,104)
--------------------------------------------------------------
Net income (loss) $ 432,776 $ (1,128,496) $ 2,880,212
==============================================================
Income (loss) per share before cumulative effect of change
in accounting principle $ .07 $ (.19) $ .46
Net income (loss) per share $ .07 $ (.19) $ .45
Weighted average number of common and common
equivalent shares outstanding 6,171,210 5,830,842 6,470,951
</TABLE>
See accompanying notes to financial statements.
23
<PAGE> 24
INTERLINQ SOFTWARE CORPORATION
STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
Series A Additional Total
Preferred Common Paid-in Retained Shareholders'
Years Ended June 30, 1994 to 1996 Stock Stock Capital Earnings Equity
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balances at June 30, 1993 $ -- $ 55,016 $ 13,707,431 $2,358,732 $ 16,121,179
Issuance of 349,152 shares of
common stock (Note 7) -- 3,491 38,777 -- 42,268
Tax benefit realized upon exercise of
stock options -- -- 81,730 -- 81,730
Initial public offering costs -- -- (32,183) -- (32,183)
Repurchase of 57,000 shares of
common stock -- (570) (389,430) -- (390,000)
Net income for the year ended June
30, 1994 -- -- -- 2,880,212 2,880,212
-----------------------------------------------------------------------------------
Balances at June 30, 1994 -- 57,937 13,406,325 5,238,944 18,703,206
Issuance of 313,790 shares of
common stock (Note 7) -- 3,138 41,042 -- 44,180
Tax benefit realized upon exercise of
stock options -- -- 366,604 -- 366,604
Repurchase of 139,500 shares of
common stock -- (1,395) (645,980) -- (647,375)
Net loss for the year ended June 30,
1995 -- -- -- (1,128,496) (1,128,496)
-----------------------------------------------------------------------------------
Balances at June 30, 1995 -- 59,680 13,167,991 4,110,448 17,338,119
Issuance of 170,550 shares of
common stock (Note 7) -- 1,706 214,487 -- 216,193
Tax benefit realized upon exercise of
stock options -- -- 96,651 -- 96,651
Repurchase of 100,000 shares of
common stock -- (1,000) (311,500) -- (312,500)
Net income for the year ended June
30, 1996 -- -- -- 432,776 432,776
-----------------------------------------------------------------------------------
Balances at June 30, 1996 $ -- $ 60,386 $ 13,167,629 $4,543,224 $ 17,771,239
===================================================================================
</TABLE>
See accompanying notes to financial statements.
24
<PAGE> 25
INTERLINQ SOFTWARE CORPORATION
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
Years Ended June 30, 1996 1995 1994
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 432,776 $ (1,128,496) $ 2,880,212
Adjustments to reconcile net income (loss) to net cash provided by
operating activities:
Depreciation and amortization of property and equipment 1,014,452 1,180,679 868,607
Amortization of capitalized software costs 1,430,111 1,249,849 874,159
Write-off of purchased software -- 391,518 --
Amortization of software license fee rights -- -- 7,512
Amortization of other assets -- 221,073 97,620
Write-off of LoanStar acquisition costs -- 330,817 --
Loss (gain) on disposition of equipment (1,473) 4,041 115,436
Deferred income tax expense (benefit) (156,727) 31,388 206,846
Tax benefit realized upon exercise of stock options 96,651 366,604 81,730
Cumulative effect of change in accounting principle -- -- 109,104
Change in operating assets and liabilities:
Accounts receivable (773,169) 825,042 (112,137)
Contracts receivable 37,417 316,379 300,298
Income taxes refundable 987,429 (603,346) (384,083)
Inventory and prepaid expenses (88,508) 79,859 (221,964)
Other assets -- 35,241 (35,241)
Accounts payable 34,971 (230,958) (149,275)
Accrued profit sharing -- -- (219,610)
Accrued compensation and benefits, other accrued liabilities
and deferred rent and other lease obligations 51,136 45,445 232,863
Customer deposits 256,613 (167,983) (160,761)
Income taxes payable -- -- (195,347)
Deferred software support fees 93,400 (430,452) 991,245
---------------------------------------------------------
Net cash provided by operating activities 3,415,079 2,516,700 5,287,214
---------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (689,857) (338,381) (2,949,649)
Capitalized software costs (789,792) (1,793,182) (1,442,089)
Purchase of LOP source code (2,000,000) -- --
Purchases of investments (18,734,310) (4,496,002) (10,046,799)
Proceeds from sales and maturities of investments 12,498,246 10,671,287 3,900,732
Proceeds from sale of equipment 5,435 6,865 284,804
Purchase of certain LoanStar Systems assets -- -- (649,510)
---------------------------------------------------------
Net cash provided by (used in) investing activities (9,710,278) 4,050,587 (10,902,511)
---------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock 216,193 44,180 42,268
Repurchase of common stock (312,500) (647,375) (390,000)
Payments of initial public offering costs -- -- (32,183)
---------------------------------------------------------
Net cash used in financing activities (96,307) (603,195) (379,915)
---------------------------------------------------------
Net increase (decrease) in cash & cash equivalents (6,391,506) 5,964,092 (5,995,212)
---------------------------------------------------------
Cash and cash equivalents at beginning of year 12,902,547 6,938,455 12,933,667
---------------------------------------------------------
Cash and cash equivalents at end of year $ 6,511,041 $ 12,902,547 $ 6,938,455
=========================================================
Supplemental disclosure of cash flow information - net cash paid
(received) during the year for income taxes $ (691,880) $ (623,362) $ 1,823,230
</TABLE>
See accompanying notes to financial statements.
25
<PAGE> 26
INTERLINQ SOFTWARE CORPORATION
NOTES TO FINANCIAL STATEMENTS
NOTE 1 DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
a. DESCRIPTION OF BUSINESS
INTERLINQ Software Corporation ("The Company") develops, markets and supports
personal computer ("PC")-based software products, both stand-alone and
networked, for mortgage brokers and bankers, banks, credit unions, and savings
institutions located primarily throughout the United States. Credit is extended
to such customers in the Company's normal course of business. The Company's
product line encompasses all major components of the mortgage loan production
process, secondary marketing activities, mortgage loan servicing, and
construction loan servicing. The Company's business strategy is to provide
easy-to-use, PC-based software solutions marketed through a direct sales force
and to maintain long-term customer relationships which generate recurring
revenues.
b. CASH EQUIVALENTS
All highly liquid investments purchased with a maturity of three months or less
are considered to be cash equivalents.
c. INVESTMENTS
Investments at June 30, 1996 and 1995 consist principally of investment-grade,
interest-bearing securities.
The Company classifies investment securities as either available-for-sale
or held-to-maturity, depending upon their intentions at the time the securities
are acquired. Investments available-for- sale are carried at fair value, with
any unrealized holding gains and losses reported as a separate component of
shareholders' equity. Investments held-to-maturity are carried at amortized
cost.
At June 30, 1996 and 1995, the fair value of all securities approximated
amortized cost and there were no material unrealized holding gains or losses.
Investments held-to-maturity have contractual maturities of less than one
year. Investments available-for-sale have contractual maturities ranging from
three years to 33 years, and carry adjustable rates of interest with periodic
reset dates.
d. INVENTORY
Inventory is stated at the lower of cost (first-in, first-out) or replacement
market.
e. PROPERTY AND EQUIPMENT
Depreciation and amortization of property and equipment are provided on the
straight-line method over the estimated useful lives of the assets or respective
lease terms if shorter.
f. PRODUCT DEVELOPMENT AND CAPITALIZED SOFTWARE COSTS
Software development costs incurred in conjunction with product development are
charged to product development expense in the period the cost is incurred until
technological feasibility is established. Thereafter, all software product
development costs are capitalized and reported at the lower of unamortized cost
or net realizable value. Software costs incurred in conjunction with acquisition
of technologically feasible products developed externally are capitalized and
reported at the lower of unamortized cost or net realizable value.
Amortization of capitalized software costs begins when the related software
is available for general release to customers and is provided for each software
product based on the greater of (i) the ratio of current gross revenues to total
current and anticipated future gross revenues for the
26
<PAGE> 27
related software or (ii) the straight-line method over two to five years, based
on the remaining economic life of the software.
The estimates of anticipated future gross revenues and remaining economic
life of the company's products are subject to risks inherent in the software
industry, such as changes in technology and customer perceptions. Management
regularly reviews these estimates and makes adjustments as appropriate.
g. REVENUE RECOGNITION
Net revenues consist of software license fees, software support fees and other
revenues.
Software license fees are earned under three different types of licensing
agreements. Under the purchase option, a one-time license fee is recognized when
the goods are shipped because no significant obligations remain on the part of
the Company and collection of any resulting receivables is deemed probable.
Under the Partnership Plan option, revenues are recognized each month based on
the monthly volume of loan transactions processed by the customer using the
Company's software. Under the software rental option, revenues are recognized
each month based on the monthly license fee.
Software support fees relate only to licensing agreements under the
purchase option and are charged separately, on an annual or quarterly basis, and
are recognized over the life of the related service contracts. Deferred software
support fees represent fees charged to customers but not yet recognized as
income.
Other revenues include training fees and custom document fees. Training
fees are recognized when the related training is completed. Custom document fees
are recognized when the goods are shipped.
h. COST OF REVENUES
Cost of software license fees includes costs related to sales of licenses such
as disks and supplies, amortization of capitalized software costs, depreciation
of hardware under the Partnership Plan, and other direct costs. Cost of software
support fees includes salaries and other costs related to providing telephone
support and the costs of disks and supplies related to product enhancements
provided under support contracts. Cost of other revenues includes direct costs
related to training, custom document fees and other revenue.
i. INCOME TAXES
Effective July 1, 1993, the Company adopted the provisions of Statement of
Financial Accounting Standards No. 109, Accounting for Income Taxes ("SFAS
109"). SFAS 109 supersedes Accounting Principles Board Opinion No. 11,
Accounting for Income Taxes ("APB 11").
The adoption of SFAS 109 changed the Company's method of accounting for
income taxes from the deferred method (APB 11) to an asset and liability method.
Under the asset and liability method of SFAS 109, deferred tax assets and
liabilities are recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts of existing assets
and liabilities and their respective tax bases and operating loss and tax credit
carryforwards. Deferred tax assets and liabilities are measured using enacted
tax rates expected to apply to taxable income in the years in which those
temporary differences are expected to be recovered or settled. Under SFAS 109,
the effect on deferred tax assets and liabilities of a change in tax rates is
recognized in income in the period that includes the enactment date.
The cumulative effect of that change in the method of accounting for income
taxes of $109,104 is reported in the 1994 statement of operations.
27
<PAGE> 28
j. EARNINGS PER SHARE
Earnings per share amounts are based on the weighted average number of common
shares outstanding assuming exercise of all common stock options using the
"treasury stock" method. For the year ended June 30, 1995, earnings per share
amounts are based on weighted average shares outstanding only since using the
treasury stock method would be antidilutive in periods where the Company has a
net loss.
k. USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
l. CONCENTRATION OF MARKET RISK
The Company markets its products primarily to businesses involved in the
residential loan production process. Changes in mortgage lending rates and other
economic factors could affect the economic stability of these businesses and
their ability, as a group, to purchase the Company's products. As a result, the
Company's success in marketing its products may fluctuate in accordance with
these economic factors.
m. NEW ACCOUNTING STANDARD
In October 1995, the Financial Accounting Standards Board issued Statement No.
123, Accounting for Stock-Based Compensation. This statement established
financial accounting and reporting standards for stock-based employee
compensation plans. It allows an entity to continue to measure compensation cost
for those plans using the intrinsic value based method of accounting prescribed
by APB Opinion No. 25, Accounting for Stock Issued to Employees, or the fair
value based method of accounting defined under this new standard. Entities
electing to remain with the accounting in Opinion No. 25 must make pro forma
disclosures of net income and earnings per share, as if the fair value method
had been applied. The Company must adopt this new standard for the fiscal year
ending June 30, 1997. The Company will continue to account for stock-based
employee compensation plans using the intrinsic value based method of accounting
and, therefore, believes adoption of Statement No. 123 will not impact the
Company's financial position and results of operations.
NOTE 2 CONTRACTS RECEIVABLE
Contracts receivable represent agreements with customers for the purchase of
software licenses. These contracts bear interest at rates that generally range
from 15% to 21% per annum and have terms of either 15 months or 27 months.
Interest income from these contracts is reported as other revenue. When the
customer fully pays amounts under the contract, the customer retains a perpetual
license for use of the Company's software. An allowance for estimated
uncollectible amounts is provided at the inception of each contract and
evaluated on an ongoing basis.
NOTE 3 PROPERTY AND EQUIPMENT
Major classes of property and equipment as of June 30 are as follows:
<TABLE>
<CAPTION>
1996 1995
----------------------------------------
<S> <C> <C>
Leasehold improvements $1,501,349 $1,501,349
Furniture and fixtures 1,016,490 1,006,501
Computer equipment 2,399,733 1,742,522
Office equipment 372,264 369,653
----------------------------------------
$5,289,836 $4,620,025
========================================
</TABLE>
28
<PAGE> 29
NOTE 4 OTHER GENERAL EXPENSES - NONRECURRING
Other general expenses - nonrecurring represents three separate charges recorded
in 1995 consisting of the write-off of unamortized intangible assets acquired in
1994, the write-off of certain capitalized software costs, and costs associated
with the 1995 departure of two executives as more fully described below.
In March 1994, the Company signed an agreement to acquire certain assets of
LoanStar Systems ("LoanStar"), a provider of loan processing software located in
California. The purchase agreement included a noncompete agreement, the source
code of LoanStar's software and a list of active LoanStar customers. The cost of
the assets acquired was $649,510. Amortization of the cost of these assets
amounted to $221,073 and $97,620 for the years ended June 30, 1995 and 1994,
respectively, and is included in general and administrative expense.
Additionally, the Company agreed that it would pay LoanStar 10% of all software
license fees received from LoanStar customers who converted to the Company's
software during the 15-month period following the date of the purchase
agreement. In return, LoanStar continued to provide technical support for its
customers until conversion.
During the year ended June 30, 1995, the level of conversions to the
Company's software were significantly below management's expectations. As a
result, the Company determined that the LoanStar assets had no continuing value
and wrote off the remaining net book value of $330,817 at March 31, 1995.
Other general expenses - nonrecurring also includes $391,518 representing
primarily the cost of purchased software acquired in a prior year. The software
was previously intended for use in one of the Company's products. In connection
with management's ongoing review of its development plans and consideration of
alternative future uses of the acquired software, the Company determined that
this software was of no further value in the ongoing development of the
Company's product and charged off such capitalized costs during the fourth
quarter of 1995.
During the third quarter of 1995, the Company incurred $229,708 of costs in
connection with the departure of its President and Chief Executive Officer and
its Vice President of Product Development.
NOTE 5 COMMITMENTS
a. LEASES
In March 1994, the Company moved into its current premises, which it leases
under a noncancelable operating lease expiring in November 1998. The total of
the scheduled lease payments is being charged to expense on the straight-line
method over the life of the lease. The lease for the Company's previous
premises, into which the Company moved in October 1992, remains in effect until
its expiration in October 1998. The Company negotiated a sublease to another
tenant for the remaining lease term beginning in March 1994. Included in
deferred rent payable and other lease obligations is $322,978 and $342,123 which
represents the Company's remaining obligation under this lease, net of amounts
to be received under the sublease at June 30, 1996 and 1995, respectively.
Accrued liabilities at June 30, 1996 and 1995 include $67,842 and $42,898,
respectively, representing the current portion of deferred rent payable.
Future minimum lease payment under noncancelable operating leases are as
follows:
<TABLE>
<CAPTION>
Minimum Lease Net Minimum Lease
Payments Sublease Receipts Payments
--------------------------------------------------
<S> <C> <C> <C>
Year ending:
June 30, 1997 $ 870,801 $ (393,801) $ 477,000
June 30, 1998 874,974 (248,598) 626,376
June 30, 1999 327,020 (5,257) 321,763
--------------------------------------------------
$ 2,072,795 $ (647,656) $1,425,139
==================================================
</TABLE>
29
<PAGE> 30
Total rent expense amounted to $381,447, $382,505, and $481,759 for the years
ended June 30, 1996, 1995, and 1994, respectively.
b. 401(K) PLAN
The Company sponsors a 401(k) plan that covers substantially all employees. At
its own discretion, the Company may make contributions to the plan based on a
percentage of participants' contributions. No contributions were made for the
years ended June 30, 1996, 1995, and 1994. The Company has no other
postemployment or postretirement benefit plans.
NOTE 6 INCOME TAXES
Components of income taxes are summarized as follows:
<TABLE>
<CAPTION>
1996 1995 1994
----------------------------------------------
<S> <C> <C> <C>
Current:
Federal $ 291,906 $(1,173,047) $1,106,087
State 18,568 (4,271) 137,713
----------------------------------------------
Total current 310,474 (1,177,318) 1,243,800
----------------------------------------------
Deferred:
Federal (151,137) 31,741 196,850
State (5,590) (353) 9,996
----------------------------------------------
Total deferred (156,727) 31,388 206,846
----------------------------------------------
Charge in lieu of taxes from employee
stock options (96,651) 366,604 81,730
----------------------------------------------
$ 250,398 $ (779,326) $1,532,376
==============================================
</TABLE>
Income tax expense differs from "expected" income tax expense (benefit)
(computed by applying the U.S. federal income tax rate of 34%) as follows:
<TABLE>
<CAPTION>
1996 1995 1994
------------------------------------------------
<S> <C> <C> <C>
Computed "expected" tax expense
(benefit) $ 232,279 $ (648,659) $ 1,537,375
Tax exempt interest (574) (129,196) (121,914)
State income taxes, net of federal
benefit 8,565 (3,052) 97,488
Other 10,128 1,581 19,427
-----------------------------------------------
$ 250,398 $ (779,326) $ 1,532,376
===============================================
</TABLE>
The tax effects of temporary differences that give rise to significant portions
of the deferred tax assets and liabilities are as follows:
<TABLE>
<CAPTION>
1996 1995
----------------------------
<S> <C> <C>
Deferred tax assets:
Allowances for doubtful accounts and contracts
receivable $ 65,776 $ 53,592
Deferred software support fees 36,662 45,807
Deferred rent 131,580 107,623
Accrued expenses 69,603 72,356
Property and equipment 299,324 221,923
Capitalized software 93,491 --
Total deferred tax assets 696,436 501,301
Deferred tax liabilities:
Capitalized software (737,943) (699,535)
--------------------------
Net deferred tax liability $ (41,507) $(198,234)
==========================
</TABLE>
30
<PAGE> 31
NOTE 7 SHAREHOLDERS' EQUITY
a. PREFERRED STOCK
Preferred stock authorized consists of 5,000,000 shares of Series A preferred
stock. The Series A preferred stock is convertible at any time into two times
the number of shares of common stock and has the same voting rights as its
common stock equivalent. However, Series A preferred stock has preferential
treatment with respect to any payment of dividends and any distributions of
assets upon liquidation.
b. STOCK OPTION PLANS
The Company has three stock option plans: the 1985 Restated Stock Option Plan
("1985 Plan"), the 1993 Stock Option Plan ("1993 Plan") and the 1993 Stock
Option Plan for Nonemployee Directors ("Directors Plan").
The 1985 and 1993 Plans provide for both incentive stock options and other
stock options that may be issued to attract and retain the services of employees
and others. The incentive stock options vest over a four-year period and may be
exercised during continued employment or within one month of terminating
employment for the 1985 Plan and within three months for the 1993 Plan. All
options expire ten years from the date of grant. During the year ended June 30,
1993, the 1985 Plan was suspended in regard to future grants. All future stock
options will be granted pursuant to the 1993 Plan. The Company has authorized
900,000 shares of common stock to be reserved for grants pursuant to the 1993
Plan.
The Directors Plan provides for stock options that may be issued to attract
and retain services of the members of the Board of Directors who are not
otherwise employees of the Company. The stock options vest six months from the
date of grant and may be exercised during the director's term or within three
months of the date the option holder ceases to be a director. All options expire
five years from the date of grant. The Company currently has authorized 75,000
shares of common stock to be reserved for grants pursuant to the Directors Plan.
The Company is in the process of amending the Directors Plan to authorize an
additional 140,000 shares of common stock. The amendment is subject to
regulatory and shareholder approvals.
A summary of stock options under the stock option plans follows:
<TABLE>
<CAPTION>
Outstanding Options
---------------------------------------------------------------
Number of Shares
Options -----------------------------------------
Available Directors Price per
for Grant 1985 Plan 1993 Plan Plan Share
-----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balances at June 30, 1993 355,683 1,084,910 7,317 12,000 $ .10 - 8.00
Options granted (65,941) -- 59,941 6,000 7.00 - 8.375
Options exercised -- (349,152) -- -- .10 - 3.125
Options canceled 18,650 (74,550) (12,650) (6,000) .10 - 8.375
-----------------------------------------------------------------------------
Balances at June 30, 1994 308,392 661,208 54,608 12,000 .10 - 8.375
Options granted (276,900) -- 214,900 62,000 3.3125 - 5.00
Options exercised -- (313,790) -- -- .10 - 3.125
Options canceled 104,547 (17,150) (104,547) -- .15 - 8.375
-----------------------------------------------------------------------------
Balances at June 30, 1995 136,039 330,268 164,961 74,000 .10 - 8.375
Increase in shares reserved under
1993 Plan 600,000 -- -- -- --
Options granted (472,275) -- 417,275 55,000 3.125 - 3.875
Options exercised -- (164,050) (6,500) -- .10 - 4.375
Options canceled 118,774 (3,800) (68,774) (50,000) 2.50 - 8.375
-----------------------------------------------------------------------------
Balances at June 30, 1996 382,538 162,418 506,962 79,000 $ .10 - 8.375
=============================================================================
</TABLE>
At June 30, 1996, options to purchase a total of 230,641 shares were exercisable
at an average exercise price of $2.30 per share.
31
<PAGE> 32
NOTE 8 NET INTEREST AND OTHER INCOME (EXPENSE)
Net interest and other income (expense) consists of:
<TABLE>
<CAPTION>
1996 1995 1994
-------------------------------------------
<S> <C> <C> <C>
Interest income $801,434 $728,457 $ 446,881
Interest expense (27,579) (26,566) (8,095)
Other, net (Note 5) 37,417 (26,105) (116,446)
-------------------------------------------
$811,272 $675,786 $ 322,340
===========================================
</TABLE>
NOTE 9 FINANCIAL INSTRUMENTS
The Company's financial instruments consist primarily of investments, accounts
receivable, contracts receivable, accounts payable, and accrued liabilities. The
financial instruments have a short term until maturity or settlement in cash
and, therefore, the carrying value approximates fair value.
NOTE 10 ACQUISITION OF PRODUCT SOURCE CODE
On April 4, 1995, the Company entered into a marketing agreement with Tuttle &
Co. ("Tuttle"), a California limited partnership, to market and support its
software product, Loan Officer Plus (LOP) for Windows. LOP is designed for use
on laptop computers and enables loan officers to prequalify applications and
originate loans in the field. The agreement provided that the Company pay Tuttle
a license fee for each unit of LOP that it sold and certain amounts received by
the Company for product support. In return, Tuttle provided all regulatory and
regular enhancements of LOP to the Company.
Pursuant to their right to terminate the marketing agreement for
convenience, Tuttle delivered to the Company a notice of termination dated
September 1, 1995. On October 31, 1995, the effective date of termination, the
Company received a nonexclusive, perpetual license for the LOP source code in
exchange for $2 million. With this license, the Company received the right to
continue to market, develop and support the LOP source code, with no further
compensation to Tuttle. The Company currently markets this source code under the
name MortgageWare Entre.
NOTE 11 QUARTERLY FINANCIAL DATA (UNAUDITED)
The following table summarizes the unaudited statements of operations for each
quarter of fiscal 1996 and 1995 (in thousands, except per-share amounts):
<TABLE>
<CAPTION>
First Second Third Fourth
------------------------------------------
<S> <C> <C> <C> <C>
1996
Net revenues $2,954 $3,109 $3,345 $3,684
Gross profit 1,980 2,113 2,450 2,629
Operating income (loss) (369) (311) 180 372
Net earnings (loss) (104) (76) 242 371
Earnings (loss) per share $(.02) $(.01) $.04 $.06
1995
Net revenues $2,968 $2,714 $2,428 $2,883
Gross profit 1,977 1,786 1,467 1,909
Operating loss (284) (338) (1,170) (792)
Net loss (70) (69) (647) (342)
Loss per share $(.01) $(.01) $(.10) $(.06)
</TABLE>
32
<PAGE> 33
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Incorporated by reference to the information under the captions "Election
of Directors," "Nominees for Election as Class I Directors, Terms Expiring in
1998," "Continuing Class II Directors, Terms Expiring in 1997," "Directors'
Fees," and "Filing of Forms Pursuant to Section 16 of the Securities Exchange
Act of 1934" in the Company's Proxy Statement relating to its 1996 Annual
Meeting of Shareholders (the "Proxy Statement"). Certain information regarding
the executive officers of the Company is set forth in Part I.
ITEM 11. EXECUTIVE COMPENSATION
Incorporated by reference to the information under the captions "Directors
Fees," "Compensation of Officers," and "Employment Contracts, Termination of
Employment and Change of Control Arrangements" in the Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
Incorporated by reference to the information under the caption "Voting
Securities and Principal Holders Thereof" in the Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
None.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS SCHEDULES AND REPORTS ON FORM 8-K
(a) THE FOLLOWING DOCUMENTS ARE FILED AS A PART OF THIS REPORT:
1. FINANCIAL STATEMENTS
The Financial Statements, Notes thereto, and independent
Auditor's Report are included in Part II, Item 8 of this Report.
2. FINANCIAL STATEMENT SCHEDULES
The following documents are filed as part of this report and
should be read in conjunction with the Financial Statements of INTERLINQ
Software Corporation.
Schedule II - Valuation and Qualifying Accounts for the years
ended June 30, 1996, 1995, and 1994
Schedules not listed above have been omitted because they are not applicable or
are not required or the information required to be set forth therein is included
in the Financial Statements or Notes thereto.
33
<PAGE> 34
3. EXHIBITS.
The Exhibits listed on the accompanying Index to Exhibits immediately
following the financial statement schedules are filed as part of, or
incorporated by reference into, this report.
Exhibit
Number Description
- ------- -----------
3.1(1) Restated Articles of Incorporation of INTERLINQ Software
Corporation
3.2(1) Restated Bylaws of INTERLINQ Software Corporation
10.1(1)(2) 1985 Restated Stock Option Plan
10.2(1)(2) 1993 Stock Option Plan
10.3(1)(2) Stock Option Plan for Non-Employee Directors, as amended
10.4(1) Amended and Restated Registration Rights Agreement between
INTERLINQ Software Corporation and the partners listed on
Schedule A thereto dated as of March 12, 1993
10.6(1) Office Lease between Yarrow Bay Office III Limited Partnership
and INTERLINQ Software Corporation dated as of July 31, 1992
10.7(1) Forms Remarketing Agreement between INTERLINQ Software
Corporation and Great Lakes Business Forms, Inc. dated as of
April 10, 1989
10.8(1) Form of Indemnification Agreement for Directors and Officers
10.10(3) Co-Marketing Agreement between INTERLINQ Software Corporation and
CMCI Corporation dated as of July 1, 1993
10.12(4) Office sublease between Halliburton Company and INTERLINQ
Software Corporation dated January 21, 1994
10.15(2) Letter dated August 25, 1995 regarding Jiri Nechleba Compensatory
Arrangement
10.16(5) Appointment of Licensing Agent and Compliance Delegate Agreement
between VMP's Electronic Laser Forms, Inc. A division of CBF
Systems, Inc. And INTERLINQ Software Corporation dated October 2,
1995
10.17(5) Amendment of Co-marketing Agreement between INTERLINQ Software
Corporation and CMCI Corporation dated October 1, 1995
23.1 Consent of KPMG Peat Marwick LLP
27.1 Financial data schedule
(1) Incorporated by reference to the Company's Registration Statement on
Form S-1 as amended (Registration No. 33-59502) filed with the
Securities and Exchange Commission on March 15, 1993, as same exhibit
number.
(2) Management contract or compensatory plan or arrangement.
(3) Incorporated by reference to the Company's Annual Report on Form 10K
for the fiscal year ended June 30, 1993, as same exhibit number.
Confidential treatment has been requested as to portions of this
document.
(4) Incorporated by reference to the Company's Annual Report on Form 10K
for the fiscal year ended June 30, 1994, as same exhibit number.
(5) Incorporated by reference to the Company's Quarterly Report on Form
10Q for the quarterly period ended September 30, 1995, as same exhibit
number. Confidential treatment has been requested as to portions of
this document.
(b) REPORTS ON FORM 8-K DURING THE FOURTH QUARTER ENDED JUNE 30, 1996
None
34
<PAGE> 35
Schedule II
INTERLINQ SOFTWARE CORPORATION
VALUATION AND QUALIFYING ACCOUNTS
Years ended June 30, 1996, 1995 and 1994
<TABLE>
<CAPTION>
Additions
------------------------
Balance at Charged to Charged to
beginning of costs and other Balance at
Description year expenses accounts Deductions end of year
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Allowances for doubtful
accounts:
Year ended June 30, 1996:
Accounts receivable $ 118,766 $ 331,224 -- $(292,360) $ 157,630
Contracts receivable 33,521 -- -- (4,144) 29,377
------------------------------------------------------------------------
152,287 331,224 -- (296,504) 187,007
========================================================================
Year ended June 30, 1995:
Accounts receivable 160,336 626,467 -- (668,037) 118,766
Contracts receivable 243,005 78,151 -- (287,635) 33,521
------------------------------------------------------------------------
403,341 704,618 -- (955,672) 152,287
========================================================================
Year ended June 30, 1995:
Accounts receivable 128,592 488,581 -- (456,837) 160,336
Contracts receivable 92,725 240,373 -- (90,093) 243,005
------------------------------------------------------------------------
221,317 728,954 -- (546,930) 403,341
========================================================================
</TABLE>
35
<PAGE> 36
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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, in the City of Seattle,
State of Washington, on the 27th day of September, 1996.
INTERLINQ SOFTWARE CORPORATION
By: /s/ JIRI M. NECHLEBA
-----------------------
Jiri Nechleba
President and Chief Executive Officer
Signature Title
--------- -----
/s/ JIRI M. NECHLEBA Chairman of the Board, President and
- -------------------------------- Chief Executive Officer
Jiri M. Nechleba (Principal Executive Officer)
/s/ STEPHEN A. YOUNT Vice President-Finance,
- -------------------------------- Chief Financial Officer and Secretary
Stephen A. Yount (Principal Accounting Officer)
/s/ ROBERT W. O'REAR Director
- --------------------------------
Robert W. O'Rear
/s/ THEODORE M. WIGHT Director
- --------------------------------
Theodore M. Wight
/s/ ROBERT J. GALLAGHER Director
- --------------------------------
Robert J. Gallagher
36
<PAGE> 37
INTERLINQ SOFTWARE CORPORATION
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit # Description Page #
- -------------------------------------------------------------------------------------------------
<S> <C> <C>
3.1(1) Restated Articles of Incorporation of INTERLINQ Software
Corporation
3.2(1) Restated Bylaws of INTERLINQ Software Corporation
10.1(1)(2) 1985 Restated Stock Option Plan
10.2(1)(2) 1993 Stock Option Plan
10.3(1)(2) Stock Option Plan for Non-Employee Directors, as amended
10.4(1) Amended and Restated Registration Rights Agreement between
INTERLINQ Software Corporation and the partners listed on
Schedule A thereto dated as of March 12, 1993
10.6(1) Office Lease between Yarrow Bay Office III Limited Partnership
and INTERLINQ Software Corporation dated as of July 31, 1992
10.7(1) Forms Remarketing Agreement between INTERLINQ Software
Corporation and Great Lakes Business Forms, Inc. dated as of
April 10, 1989
10.8(1) Form of Indemnification Agreement for Directors and Officers
10.10(3) Co-Marketing Agreement between INTERLINQ Software Corporation and
CMCI Corporation dated as of July 1, 1993
10.12(4) Office sublease between Halliburton Company and INTERLINQ
Software Corporation dated January 21, 1994
10.15(2) Letter dated August 25, 1995 regarding Jiri Nechleba Compensatory
Arrangement
10.16(5) Appointment of Licensing Agent and Compliance Delegate Agreement
between VMP's Electronic Laser Forms, Inc. A division of CBF
Systems, Inc. And INTERLINQ Software Corporation dated October 2,
1995
10.17(5) Amendment of Co-marketing Agreement between INTERLINQ Software
Corporation and CMCI Corporation dated October 1, 1995
23.1 Consent of KPMG Peat Marwick LLP 35
27.1 Financial data schedule
</TABLE>
(1) Incorporated by reference to the Company's Registration Statement on
Form S-1, as amended (Registration No. 33-59502) filed with the
Securities and Exchange Commission on March 15, 1993, as same exhibit
number.
(2) Management contract or compensatory plan or arrangement.
(3) Incorporated by reference to the Company's Annual Report on Form 10K
for the fiscal year ended June 30, 1993, as same exhibit number.
Confidential treatment has been requested as to portions of this
document.
(4) Incorporated by reference to the Company's Annual Report on Form 10K
for the fiscal year ended June 30, 1994, as same exhibit number.
(5) Incorporated by reference to the Company's Quarterly Report on Form 10Q
for the quarterly period ended September 30, 1995, as same exhibit
number. Confidential treatment has been requested as to portions of
this document.
37
<PAGE> 1
CONSENT OF INDEPENDENT
CERTIFIED PUBLIC ACCOUNTANTS
- -------------------------------------------------------------------------------
The Board of Directors
INTERLINQ Software Corporation:
We consent to incorporation by reference in the registration statements (No.
33-63388 and 333-4558) on Form S-8 of INTERLINQ Software Corporation of our
report dated August 6, 1996, relating to the balance sheets of INTERLINQ
Software Corporation as of June 30, 1996 and 1995, and the related statements of
operations, shareholders' equity, and cash flows and the related financial
statement schedule for each of the years in the three-year period ended June 30,
1996, which report appears in the June 30, 1996 annual report on Form 10-K.
Our report refers to a change in the method of accounting for income taxes
effective July 1, 1993.
/s/ KPMG Peat Marwick LLP
Seattle, Washington
September 27, 1996
38
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-30-1996
<PERIOD-START> JUL-01-1995
<PERIOD-END> JUN-30-1996
<CASH> 6,511
<SECURITIES> 7,707
<RECEIVABLES> 1,848
<ALLOWANCES> 0
<INVENTORY> 73
<CURRENT-ASSETS> 16,765
<PP&E> 5,290
<DEPRECIATION> 3,253
<TOTAL-ASSETS> 22,321
<CURRENT-LIABILITIES> 3,943
<BONDS> 0
0
0
<COMMON> 60
<OTHER-SE> 17,711
<TOTAL-LIABILITY-AND-EQUITY> 22,321
<SALES> 6,232
<TOTAL-REVENUES> 13,092
<CGS> 1,653
<TOTAL-COSTS> 3,920
<OTHER-EXPENSES> 9,300
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 683
<INCOME-TAX> 250
<INCOME-CONTINUING> 433
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 433
<EPS-PRIMARY> .07
<EPS-DILUTED> .07
</TABLE>
