<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------
FORM 10-Q
(Mark One)
[X] Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the quarterly period ended December 31, 1996
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the transition period from ________ to ________
COMMISSION FILE NUMBER 0-21402
INTERLINQ SOFTWARE CORPORATION
(Exact name of registrant as specified in its charter)
Washington 91-1187540
---------- ----------
(State of jurisdiction of (I.R.S. Employer
incorporation or organization Identification Number)
11255 Kirkland Way
Kirkland, Washington 98033
------------------ -----
(Address of principal executive offices) (Zip Code)
(206) 827-1112
--------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such report), and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO
--- ---
Indicate the number of shares outstanding of each of the issuer's classes of
common stock.
OUTSTANDING AT
CLASS FEBRUARY 10, 1997
----- -----------------
Common Stock 5,485,350
<PAGE> 2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
INTERLINQ SOFTWARE CORPORATION
BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1996 1996
----------- -----------
(UNAUDITED)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 5,727,230 $ 6,511,041
Short-term investments 6,377,681 7,706,846
Accounts receivable, net 2,226,394 1,847,836
Current portion of contracts receivable, net 96,363 123,671
Inventory 92,410 72,644
Prepaid expenses 379,446 331,026
Deferred income taxes 172,041 172,041
----------- -----------
Total current assets 15,071,565 16,765,105
----------- -----------
Property and equipment, at cost 5,666,119 5,289,836
Less accumulated depreciation and amortization 3,809,213 3,253,190
----------- -----------
Net property and equipment 1,856,906 2,036,646
----------- -----------
Contracts receivable, excluding current portion 2,512 18,521
Capitalized software costs, net 3,509,886 3,493,563
Other assets 95,000 7,500
----------- -----------
$20,535,869 $22,321,335
=========== ===========
</TABLE>
2
<PAGE> 3
INTERLINQ SOFTWARE CORPORATION
BALANCE SHEETS
LIABILITIES AND SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1996 1996
----------- -----------
(UNAUDITED)
<S> <C> <C>
Current liabilities:
Accounts payable $ 129,096 $ 158,226
Accrued compensation and benefits 459,346 402,701
Other accrued liabilities 343,194 380,435
Customer deposits 273,590 363,703
Deferred software support fees 2,990,496 2,637,500
----------- -----------
Total current liabilities 4,195,722 3,942,565
----------- -----------
Noncurrent liabilities:
Deferred rent and other lease obligations 312,179 383,750
Deferred software support fees 4,426 10,233
Deferred income taxes 213,548 213,548
----------- -----------
Total noncurrent liabilities 530,153 607,531
----------- -----------
Shareholders' equity:
Common stock 54,843 60,386
Additional paid-in capital 10,615,373 13,167,629
Retained earnings 5,139,778 4,543,224
----------- -----------
Total shareholders' equity 15,809,994 17,771,239
----------- -----------
$20,535,869 $22,321,335
=========== ===========
</TABLE>
3
<PAGE> 4
INTERLINQ SOFTWARE CORPORATION
STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
DECEMBER 31, DECEMBER 31,
1996 1995 1996 1995
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net revenues:
Software license fees $ 1,780,399 $ 1,435,088 $ 3,563,558 $ 2,724,904
Software support fees 1,480,747 1,396,274 2,975,243 2,794,139
Other 255,266 277,250 556,598 543,957
----------- ----------- ----------- -----------
Total net revenues 3,516,412 3,108,612 7,095,399 6,063,000
----------- ----------- ----------- -----------
Cost of revenues:
Software license fees 371,600 391,150 714,088 751,880
Software support fees 429,818 427,600 877,004 898,653
Other 184,584 177,269 353,468 319,413
----------- ----------- ----------- -----------
Total cost of revenues 986,002 996,019 1,944,560 1,969,946
----------- ----------- ----------- -----------
Gross profit 2,530,410 2,112,593 5,150,839 4,093,054
----------- ----------- ----------- -----------
Operating expenses:
Product development 510,670 513,394 1,038,325 1,079,975
Sales and marketing 949,330 1,040,155 1,946,196 2,075,035
General and administrative 824,127 870,325 1,602,259 1,618,734
----------- ----------- ----------- -----------
Total operating expenses 2,284,127 2,423,874 4,586,780 4,773,744
----------- ----------- ----------- -----------
Operating income (loss) 246,283 (311,281) 564,059 (680,690)
Net interest and other income 176,543 198,664 367,768 408,807
----------- ----------- ----------- -----------
Income (loss) before income taxes 422,826 (112,617) 931,827 (271,883)
Income taxes 152,033 (36,938) 335,273 (92,139)
----------- ----------- ----------- -----------
Net income (loss) $ 270,793 $ (75,679) $ 596,554 $ (179,744)
=========== =========== =========== ===========
Net income (loss) per common and
common equivalent share $ .05 $ (.01) $ .10 $ (.03)
=========== =========== =========== ===========
Weighted average number of common and
common equivalent shares outstanding 5,976,000 5,983,000 5,836,000 5,970,000
=========== =========== =========== ===========
</TABLE>
4
<PAGE> 5
INTERLINQ SOFTWARE CORPORATION
STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
----------------------------
DECEMBER 31, DECEMBER 31,
1996 1995
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 596,554 $ (179,744)
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Depreciation and amortization 556,023 530,001
Amortization of capitalized software costs 619,911 629,705
Gain on disposition of equipment -- (69)
Change in operating assets and liabilities:
Accounts receivable (378,558) (300,421)
Contracts receivable 43,317 62,100
Inventory and prepaid expenses (68,186) (23,350)
Deferred income taxes -- (163,019)
Other assets (87,500) --
Accounts payable (29,130) 78,449
Accrued compensation and benefits,
other accrued liabilities and deferred rent (52,167) 889,789
Customer deposits (90,113) 34,812
Deferred software support fees 347,189 227,626
----------- -----------
Net cash provided by operating activities 1,457,341 1,785,879
----------- -----------
Cash flows from investing activities:
Purchases of property and equipment (376,283) (234,602)
Purchases of source code (232,773) (2,000,000)
Capitalized software costs (403,461) (383,767)
Sale (purchase) of short-term investments 1,329,165 (3,793,314)
Proceeds from sale of property and equipment -- 625
----------- -----------
Net cash provided by (used in) investing activities 316,647 (6,411,058)
----------- -----------
Cash flows from financing activities:
Proceeds from issuance of common stock 3,325 14,915
Repurchase of common stock (2,561,124) (140,625)
----------- -----------
Net cash used in financing activities (2,557,799) (125,710)
----------- -----------
Net decrease in cash and cash equivalents (783,811) (4,750,889)
Cash and cash equivalents at beginning of period 6,511,041 12,902,547
----------- -----------
Cash and cash equivalents at end of period $ 5,727,230 $ 8,151,658
=========== ===========
</TABLE>
5
<PAGE> 6
INTERLINQ SOFTWARE CORPORATION
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996
(UNAUDITED)
1. Basis of presentation
The accompanying unaudited financial statements have been prepared in accordance
with generally accepted accounting principles for interim financial information
pursuant to the rules and regulations of the Securities and Exchange Commission.
Accordingly, they do not include all of the information and footnotes required
by generally accepted accounting principles for complete financial statements.
In the opinion of management, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation have been included.
Operating results for the six-month period ended December 31, 1996 are not
necessarily indicative of the results for the year ending June 30, 1997. The
financial statements should be read in conjunction with the financial statements
and notes thereto included in the Company's Form 10K for the fiscal year ended
June 30, 1996.
6
<PAGE> 7
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
Mortgage interest rates available for the last several quarters have reflected a
lending environment with a high degree of volatility. During the second half of
fiscal year 1996, rates increased substantially (approximately one percentage
point) and remained at about that level through the end of the quarter ended
December 31, 1996. 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 improved, 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.
The Company has announced and released several new products during fiscal year
1997. These new products are MortgageWare Loan Servicing and Loan Servicing
Gateway, BuilderBLOCK$ and MortgageWare InfoLINQ. Although the Company is
uncertain about the ultimate sales closing ratios and the length of the sales
cycle for these new products, initial response from customers and prospects for
these new products has been favorable.
NET REVENUES
<TABLE>
<CAPTION>
Three months ended December 31,
(In thousands) 1996 1995 Change
- -------------------------------------------------------
<S> <C> <C> <C>
Software license fees $1,780 $1,435 24%
Software support fees 1,481 1,396 6%
Other 255 277 (8%)
- -------------------------------------------------------
Total net revenues $3,516 $3,109 13%
- -------------------------------------------------------
</TABLE>
Net revenues consist of software license fees, software support fees and
other revenues, which include training fees, custom document fees, interest
income on contracts receivable and other miscellaneous sales, net of discounts
and sales returns.
Software license fees increased by 24% for the quarter ended December 31,
1996 compared to the quarter ended December 31, 1995. This period-to-period
increase was primarily due to a combination of the overall favorable lending
conditions discussed above, which increased software license fees for existing
MortgageWare DOS-based products, and software license fees for four recently
released Windows-based products - MortgageWare Entre, BuilderBLOCK$,
MortgageWare Loan Servicing and MultiTrac.
Software support fees increased by 6% for the quarter ended December 31,
1996 compared to the quarter ended December 31, 1995. This period-to-period
increase was primarily due to a
7
<PAGE> 8
combination of a modest increase in customer growth and a low rate of attrition
in the Company's customer base. Due in part to changes, from time to time, in
government regulations applicable to documentation required for residential
mortgage lending, the vast majority of the Company's customers purchase annual
software support agreements. However, because software support fees are
recognized ratably over the term of the annual support agreement, whereas
software license fees are recognized on product shipment, the percentage
increase in software support fees compared to software license fees is not
directly proportional. Nevertheless, the Company believes software support fees
are likely to increase modestly during fiscal year 1997 due to the increase in
software license fees experienced over the last several quarters.
Training fees, custom document fees and other miscellaneous sales decreased by
8% for the quarter ended December 31, 1996 compared to the quarter ended
December 31, 1995. This period-to-period decrease resulted from an increase in
training fees that was more than offset by a decrease in document sales and font
cartridge sales. The increase in on-site training fees was due to a combination
of increased demand for this service and an increase, beginning in the quarter
ended September 30, 1996, in the daily fee charged. 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. Although the transition from the Company
offering its own lending documents to offering this comprehensive library has
been slower than anticipated, the Company expects document revenue to increase
during fiscal year 1997. In addition, the Company expects its training fees to
increase modestly during fiscal year 1997 compared to fiscal year 1996, due to a
combination of increased demand driven by new products and, the increase in the
daily fee charged for on-site training.
COST OF REVENUES
<TABLE>
<CAPTION>
Three months ended December 31,
(In thousands) 1996 1995 Change
- ---------------------------------------------------------
<S> <C> <C> <C>
Software license fees $372 $391 (5%)
Percentage of software
license fees 21% 27%
- ---------------------------------------------------------
Software support fees 430 428 1%
Percentage of software
support fees 29% 31%
- ---------------------------------------------------------
Other 185 177 4%
Percentage of other 73% 64%
- ---------------------------------------------------------
Total cost of revenues $986 $996 (1%)
Percentage of net revenues 28% 32%
- ---------------------------------------------------------
</TABLE>
Cost of software license fees includes the purchase and duplication of disks,
product documentation, license fees under the Tuttle & Co. marketing agreement
for Loan Officer Plus for Windows, and amortization of capitalized software
development costs. As a percentage of software license fees, cost of software
license fees decreased from 27% to 21% for the quarter ended December 31, 1996
compared to the quarter ended December 31, 1995. This
8
<PAGE> 9
decrease was primarily due to software license fees increasing while the cost of
software license fees decreased slightly due to a combination of the elimination
of license fees to Tuttle & Co. resulting from the termination of the marketing
agreement for Loan Officer Plus for Windows, during the quarter ended December
31, 1995 and a slight decrease in amortization of capitalized software
development costs. Amortization of capitalized software development costs
decreased slightly to $326,000 in the quarter ended December 31, 1996 compared
to $342,000 for the same quarter in the previous year. The Company expects the
dollar amount of its amortization of capitalized software development costs to
hold steady or decrease slightly for the remainder of fiscal year 1997.
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 31% to 29% for the quarter ended
December 31, 1996 compared to the quarter ended December 31, 1995. This decrease
was primarily due to a more efficient ratio of customer service support staff to
customers. 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
customer service department employees who provide training services and the net
cost of the Company's annual MortgageWare software users' group meeting. As a
percentage of other revenue, cost of other revenue increased from 64% to 73% for
the quarter ended December 31, 1996 compared to the same period the previous
year. This increase was primarily due to a combination of a decrease in other
revenue (discussed above) and an increase in staff and related expenses for the
Training Group in preparation for the new products discussed above.
OPERATING EXPENSES
<TABLE>
<CAPTION>
Three months ended December 31,
(In thousands) 1996 1995 Change
- ----------------------------------------------------------
<S> <C> <C> <C>
Product development $511 $513 (1%)
Percentage of net revenues 15% 17%
- ----------------------------------------------------------
Sales & marketing 949 1,040 (9%)
Percentage of net revenues 27% 33%
- ----------------------------------------------------------
General & administrative 824 870 (5%)
Percentage of net revenues 23% 28%
- ----------------------------------------------------------
</TABLE>
Product development expenses include salaries for software developers and
analysts, facilities costs and expenses associated with computer equipment used
in software development. Product development expenses were essentially
unchanged, decreasing by 1%, from $513,000 to $511,000, for the quarter ended
December 31,
9
<PAGE> 10
1996 compared to the quarter ended December 31, 1995. Product development
expenses as a percentage of net revenues, decreased from 17% to 15% for the
quarter ended December 31, 1996 compared to the same period in 1995. The
decrease as a percentage of revenue was primarily due to revenues increasing
while costs remained constant. The Company capitalized $203,000 and $212,000 of
development expenditures for the quarters ended December 31, 1996 and 1995
respectively. The Company released two new products, MortgageWare Loan Servicing
and BuilderBlock$ during the quarter ended September 30, 1996. Additionally, the
Company announced its release of, MortgageWare InfoLINQ in January 1997 and
plans to release MarketLINQ during the second half of fiscal year 1997.
Accordingly, the Company anticipates an increase in both capitalized development
expenditures and product development expense for the second half of fiscal year
1997.
Sales and marketing expenses include salaries, sales commissions, as well as
travel and facility costs for the Company's sales and marketing personnel. Sales
and marketing expenses also includes advertising and trade shows. As a
percentage of net revenues, sales and marketing expenses decreased from 33% to
27% for the quarter ended December 31, 1996 compared to the same period in the
previous year. This decrease is primarily due to a net reduction in
telemarketing expense resulting from a change from outsourcing this activity to
a focus on less expensive internal programs.
General and administrative expenses include costs related to finance,
purchasing, order fulfillment, administration and facilities costs. As a
percentage of net revenues, general and administrative expenses decreased from
28% to 23% for the quarter ended December 31, 1996 compared to the same period
the previous year. This decrease is primarily due to net revenue increasing
while general and administrative expenses experienced a modest decrease. As a
percentage of net revenues, the Company expects general and administrative
expenses to hold steady or decrease slightly for the remainder of fiscal year
1997.
NET INTEREST AND OTHER INCOME
<TABLE>
<CAPTION>
Three months ended December 31,
(In thousands) 1996 1995 Increase
- ------------------------------------------------------
<S> <C> <C> <C>
Net interest and other
income (expense) $177 $199 (11%)
Percentage of net revenues 5% 6%
- ------------------------------------------------------
</TABLE>
Interest income was $183,000 and $200,000 for the quarters ended December 31,
1996 and 1995 respectively. The decrease in interest income was due to a
combination of slightly lower rates earned on the investment portfolio and a
slightly lower investment portfolio balance.
As of December 31, 1996, the Company had no interest-bearing debt
outstanding, and anticipates no new debt financing in the foreseeable future.
Accordingly, the Company
10
<PAGE> 11
expects net interest and other income for the foreseeable future to reflect net
interest income.
INCOME TAXES
<TABLE>
<CAPTION>
Three months ended December 31,
(In thousands) 1996 1995 Change
-----------------------------------------------------
<S> <C> <C> <C>
Income taxes $152 ($37) n/m
Effective tax rate 36% (33%)
</TABLE>
The provision for income taxes includes federal and state income taxes currently
payable or receivable, and deferred taxes arising from temporary differences
between the financial statement carrying amounts of existing assets and
liabilities and their respective tax basis.
LIQUIDITY AND CAPITAL RESOURCES
Working capital, which consists principally of cash, cash equivalents and
short-term investments was $12,105,000 as of December 31, 1996, compared to
$14,218,000 at June 30, 1996. Cash and cash equivalents decreased by $784,000
for the six months ended December 31, 1996. Additions to cash and cash
equivalents included $1,457,000 provided by operating activities. Additionally,
$1,329,000 was provided by the sale of short-term investments. Principal uses of
cash and cash equivalents included $2,561,000 for the repurchase of common
stock, $636,000 of capitalized software costs, and the purchase of $376,000 of
property and equipment.
Although the Company at December 31, 1996 has no material commitment for
additional capital expenditures, it expects to spend approximately $600,000 for
the fiscal year ending June 30, 1997, primarily for computer software and
equipment.
Long-term cash requirements, other than normal operating expenses, are
anticipated for development of new software products and enhancement of existing
products; financing anticipated growth; 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.
11
<PAGE> 12
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None.
ITEM 2. CHANGES IN SECURITIES
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the Company's Annual Meeting of Shareholders held on November
6, 1996:
The following nominees were elected to the Board of Directors:
<TABLE>
<CAPTION>
Affirmative Votes
Votes Withheld
----- --------
<S> <C> <C>
Robert W. O'Rear 5,463,829 20,950
Robert J. Gallagher 5,463,229 21,550
</TABLE>
Directors Jiri M. Nechleba and Theodore M. Wight will continue
their current terms as directors.
A proposal to amend the Company's Stock Option Plan for
Non-Employee Directors (the Plan) to increase the number of
shares of Common Stock to be granted under the Plan, to
increase the number of shares of Common Stock subject to
options to be granted automatically each year immediately
following the Annual Meeting to each eligible director, to
increase the number of shares of Common Stock subject to
options granted to eligible Directors upon their initial
election to the Board of Directors, and to provide for the
grant on January 19, 1996 of Common Stock subject to options
was approved.
<TABLE>
<CAPTION>
Affirmative Votes
Votes Withheld Abstentions
----- -------- -----------
<S> <C> <C>
3,944,262 1,490,744 49,773
</TABLE>
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
27. Financial Data Schedule
(b) REPORTS ON FORM 8-K
None.
12
<PAGE> 13
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
INTERLINQ SOFTWARE CORPORATION
(Registrant)
Date: February 12, 1997 By: /s/ Stephen A. Yount
----------------------------
Stephen A. Yount
Vice President, Finance
Chief Financial Officer
13
<PAGE> 14
EXHIBIT INDEX
EXHIBITS
27. Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-START> JUL-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 5,727
<SECURITIES> 6,378
<RECEIVABLES> 2,226
<ALLOWANCES> 0
<INVENTORY> 92
<CURRENT-ASSETS> 15,072
<PP&E> 5,666
<DEPRECIATION> 3,809
<TOTAL-ASSETS> 20,536
<CURRENT-LIABILITIES> 4,196
<BONDS> 0
0
0
<COMMON> 55
<OTHER-SE> 15,755
<TOTAL-LIABILITY-AND-EQUITY> 20,536
<SALES> 1,780
<TOTAL-REVENUES> 3,516
<CGS> 372
<TOTAL-COSTS> 986
<OTHER-EXPENSES> 2,284
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 423
<INCOME-TAX> 152
<INCOME-CONTINUING> 271
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 271
<EPS-PRIMARY> 0
<EPS-DILUTED> .05
</TABLE>
