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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 For the fiscal year ended JUNE 30, 1997
OR
__ Transition report pursuant to Section 14 or 15(d) of the Securities Exchange
Act of 1934
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
incorporation or organization) Identification No.)
11255 KIRKLAND WAY
KIRKLAND, WA 98033
(Address of principal executive offices)
(425) 827-1112
(Registrant's telephone number, including area code)
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 Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such report), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
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Indicate 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 the 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, 1997 as reported on the Nasdaq National Market, was approximately
$24,499,000
As of September 23, 1997, there were 5,297,012 shares of the Registrant's Common
Stock outstanding.
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 5, 1997, which
will be filed with the Securities and Exchange Commission within 120 days after
June 30, 1997 are incorporated by reference into Part III of this report.
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PART I
ITEM 1. BUSINESS
OVERVIEW
INTERLINQ Software Corporation ("INTERLINQ" or the "Company") works closely
with clients to provide comprehensive systems and business solutions for the
residential mortgage and construction lending industry. The Company offers a
suite of products that together, make up MortgageWare Enterprise ("MW
Enterprise"). MW Enterprise provides a business model for the mortgage lending
industry, based on enterprise-wide solutions for greater operational efficiency,
real-time access to data, and cost-effective means for managing and integrating
information. It is designed to automate and streamline business processes
companywide in order to lower the cost of each loan transaction. Equally
important to the bottom line, an integrated system of reliable information is
created by MW Enterprise for analysis within the company. Data is entered only
once, managed from a central point, and accessible from every desktop via a
browser-based intranet environment. Using this business model, information can
be leveraged to perform a variety of mission-critical applications companywide
- -- from matching loan programs to a lender and borrower's needs, to risk
analysis of all loans within an organization.
MortgageWare products are installed and currently supported by the Company
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 revenue growth to come from the sale of mortgage
loan servicing technology as well as from the sale of technology designed to
provide customers with information access and content, complimenting its current
products which address operational efficiency and decrease the costs of each
loan transaction. In the near term, continued penetration of the loan production
market, new penetration of the mortgage loan servicing 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 releases of new products and upgrades to existing products
scheduled for fiscal 1998.
There is no assurance that the Company will be successful in attracting new
customers in the loan production and servicing market, 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 (425) 827-1112.
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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 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 create customized software. The Company does, however, provide
customized integration of MW Enterprise and has, from time to time, upgraded its
products with certain customers on a "pay for priority" basis. Product upgrades,
nevertheless, often include modifications and enhancements requested by
customers.
PC Platform
The Company believes that reductions in the cost of and increases in the
computing power of PCs make its systems increasingly affordable for even small
financial institutions. The Company's software runs on industry-standard PCs and
networks, thereby providing power, flexibility, ease of use and distribution of
workload at a price that the Company believes cannot be matched by minicomputer
or mainframe solutions.
Direct Sales Force
The Company believes that industry specific expertise and knowledge of that
industry's technology demands is required to sell its products, and therefore,
employs a direct sales force. Its sales personnel are 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 attempts to build 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 as well
as industry based survey research to stay abreast of industry needs. The Company
believes that its focus on the customer and the industry strengthens its
recurring revenue opportunities and decreases the possibility of customer
attrition to competitive products.
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PRODUCTS AND SERVICES
The following table briefly describes INTERLINQ's MortgageWare Enterprise
products:
POINT-OF-SALE AND ORIGINATION
Entre Allows loan officers to prequalify applicants in the
field through the use of a Windows-based software that
runs on a laptop computer
Origination Allows loan officers to enter loan applications directly
into a PC, either in the office or in the field
MORTGAGE LOAN MANAGEMENT SYSTEM (LMS)
Qualifying Allows quick assessment of a potential borrower's
ability to qualify for a loan.
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 report IRS data
Tracking Produces management reports designed to meet each
customer's particular needs
MortgageWare for Provides brokers with a scaled-down version of the
Brokers MortgageWare LMS designed to meet their specific needs
for product and pricing
SECONDARY MARKETING
Secondary Marketing Allows lenders to evaluate and manage the risk of
selling loans on the secondary market
MarketLINQ Serves as a central point of data entry and
maintenance for all mortgage loan programs and
rates, providing automatic distribution
enterprise-wide.
LOAN SERVICING
Loan Servicing Provides lenders with a complete and cost-effective
Windows-based loan servicing solution
Servicing Gateway A streamlined version of Loan Servicing designed for
lenders holding loans for sale
CONSTRUCTION LENDING
BuilderBLOCK$ Provides ability to service and report essential
components of a construction loan
ANALYSIS AND COMMUNICATIONS
InfoLINQ Provides mortgage lenders with a complete intranet-based
environment in which to collect, extract, and distribute
business analysis
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
Interfaces Utilizing our SmartLINQ technology, customers can
interface to other products and systems
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INTERLINQ's believes its strength lies in its ability to provide customers with
an integrated approach to originating, servicing, and analysis of loans. The
Company offers a variety of products for strategic and tactical business
solutions in the mortgage industry, including the MortgageWare Loan Management
System, MortgageWare for Brokers, MortgageWare MarketLINQ, MortgageWare Entre,
MortgageWare InfoLINQ, MortgageWare Loan Servicing, MortgageWare Secondary
Marketing, and BuilderBLOCK$. Together, these technology tools enable the
MortgageWare Enterprise business model--a means for greater operational
efficiency enterprise-wide, faster access to information, and cost-effective
management of information content.
MortgageWare Entre. Provides loan officers or brokers ("Originators") with
tools to tailor loan programs, enabling better customer service and more
expedient completion of each loan application. Designed to improve communication
between Originators in the field and the processing department, MortgageWare
Entre increases accuracy, timeliness, and back-office tracking of each loan. The
Company believes that MortgageWare Entre gives Originators 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.
MortgageWare Loan Management System. The core product in the MortgageWare
family, the MortgageWare Loan Management System, is a PC-based system for
residential mortgage loan management, is currently installed in more than 7,000
locations. The latest version of this system has been upgraded to mirror the
enterprise-wide data access enhancements of MortgageWare Entre, the Company's
laptop origination tool, including the ability to order risk grade evaluation
and mortgage insurance through Freddie Mac's Loan Prospector Second Generation,
and the ability to request underwriting directly from Fannie Mae. This version
has also been enhanced to receive tiered pricing from MarketLINQ, so that
lenders can compare actual locked interest rates against rate sheet data. This
"intelligent" system directs and streamlines the flow of work throughout a
company, supporting the transition from individual workflow to an organizational
workflow that boosts efficiency across the entire enterprise.
MortgageWare Loan Management System is a modular system that addresses
qualifying, point-of-sale origination, processing, closing, settlement, pipeline
tracking and management, and inter-branch electronic communications.
MortgageWare TC, currently under development, is a Web-based, thin-client
version of the MortgageWare Loan Management System. With this technology, the
Company believes lenders will be able to support distributed MortgageWare
throughout a geographically dispersed user community, thereby enhancing
operational efficiency and realizing cost benefits.
MortgageWare 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 has a visual spreadsheet-style user interface which is designed to
enhance its ease of use.
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MortgageWare MarketLINQ. A Windows 95-based product, MarketLINQ serves as a
central point of data entry and maintenance for all mortgage loan programs and
rates including tiered pricing, which allows an administrator to electronically
distribute up-to-date information enterprise-wide on demand. This program
ensures that data is entered into the system only one time -- whether it's being
used for in-house purposes (such as determining how many current loans are at
risk of defaulting), or by a loan officer working to obtain the best interest
rate for a borrower. Direct links into Knight-Ridder and Dow Jones Telerate
enables the pricing for loan programs to be efficiently managed and rapidly
recalculated as changes in mortgage pricing occur (often multiple times daily).
MortgageWare Loan Servicing System. The Company believes that its
MortgageWare Loan Servicing enhances a customer's profitability by moving from
the current "rent model" to a "buy model." An alternative to service bureau and
mainframe-based servicing is offered by the Company. MortgageWare Loan Servicing
was designed to exceed industry standards, while being offered at a highly
competitive price-point for the industry, along with no-charge access to a
customer's servicing information, allowing servicers to gain a cost and
information advantage. MortgageWare Loan Servicing utilizes a 32-bit Windows
client-server architecture, coupled with advanced information features that
automate and manage business events for a loan servicer.
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$. For construction lending, BuilderBLOCK$ offers a Windows-based
system that simplifies and streamlines the management of construction loans.
This construction lending product offers an alternative to manual or spreadsheet
calculations. The product enables users to automatically prepare 1099 and 1098
forms, enter draw requests, track inspections and print checks. Key features
include the automation of IRS reporting for both suppliers and borrowers; the
ability for lenders to 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.
MortgageWare InfoLINQ. Introduced in January 1997, MortgageWare InfoLINQ
integrates all of INTERLINQ's products to create the synergy of the MW
Enterprise business model. InfoLINQ provides mortgage lenders one of the first,
complete intranet-based environments in which to collect, extract, and
distribute business information. Data in all operational systems of MW
Enterprise is accessible for the automated creation and distribution of
real-time business reports and analyses through easy-to-use browser-based
desktops, to users throughout the enterprise.
Rather than committing resources to gathering and crunching of loan data,
InfoLINQ users can access real-time information via a customizable "desktop"
that is similar to a Web site. InfoLINQ automatically distributes information to
each desktop based on what company information is relevant to each user's job.
Users can tailor their desktops to most efficiently review the information they
want to track, helping them to quickly respond to changes in the market, and
optimize profitability. InfoLINQ users can access the MortgageWare database
from
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any location on a PC, to speed the process of researching and analyzing the
entire mortgage business. This means that after mortgage professionals begin to
move a business transaction through the pipeline -- fueled by competitive
decisions based on InfoLINQ's access to real-time information and industry-wide
analysis -- MortgageWare can be called on to move the process through the
pipeline's final stages.
Other MortgageWare Information Management Tools. INTERLINQ frequently
develops products that it believes speed up the cycle of mortgage loan creation.
Other products the Company offers include:
COMLINQ. INTERLINQ's electronic communications system is designed to provide
a fast, yet easy, method of transferring MortgageWare data between headquarters,
branch offices and origination systems.
MortgageWare MultiTrac. Multi-tasking capabilities have been added to
MortgageWare Loan Management System via MultiTrac, providing one of Windows'
main advantages, while retaining MortgageWare functionality.
New Products Under Development
MortgageWare TC. A browser-based version of the MortgageWare Loan Management
System scheduled to ship by the end of 1997, is the first mortgage loan
management system to take advantage of the thin-client technology that the
Company believes will become the future industry standard. Not only does an
enhanced graphical interface heighten MortgageWare's ease-of-use, but
thin-client technology also provides cost and efficiency benefits through
central management of technology and upgrades at the server level -- lowering
costs of managing the desktop and the system. In addition, the improved remote
access capabilities allowed with thin-client technology enable lenders to work
effectively over a true wide area network (WAN).
MortgageWare TC is designed to provide quick and easy access through a Web
browser to MortgageWare's integrated modules for each step in the cycle of
generating and processing a mortgage loan. All of these modules work from a
single database, so information has to be input only once and can be immediately
accessed by any authorized user. The Company believes that these features,
combined with the capabilities of InfoLINQ, facilitate accessing the most
current information possible in a quick and intuitive manner.
Secondary Marketing for Windows. Secondary Marketing for Windows is being
designed to provide the ability for lenders to automate the process of selling
individual loans on the secondary market to investors such as Fannie Mae,
Freddie Mac and other secondary market investors. This product, which will
interface with other MortgageWare products, is being designed to provide timely
data capture from a customer's branch office to its main secondary marketing
database, eliminating redundant data entry.
Complementary Products and Services
INTERLINQ provides training, implementation services and consulting
services to assist its customers in the use of its 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.
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Electronic forms and custom electronic documents necessary in the loan
production process are available to INTERLINQ customers through a special
marketing agreement with 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, 1997, 38 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 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, as well as advisory panels for each
product. 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
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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)) Web browser-based
interfaces and thin-client technology, and Visual C++ , ACTIVE X 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. A Windows version of Secondary Marketing is planned for fiscal year
1998. Additionally, a thin-client version of the MortgageWare Loan Management
System is scheduled to be released by the end of calendar 1997. The Company's
other products --MortgageWare Entre, Loan Servicing, MarketLINQ, 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
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 account/sales executives. These
personnel are supported by sales administration and inside sales
representatives. As of June 30, 1997, the Company employed 17 sales executives
located throughout the country who are each responsible for an assigned
geographic territory. An additional sales representative is exclusively devoted
to sales of INTERLINQ'S servicing products. Sales executives are expected to
maintain relationships with existing customers and are responsible for the
generation of new business and expansion of existing 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, industry databases, trade shows, purchased lists, direct mail,
telemarketing, customer referral and membership in various trade organizations.
The Company tracks lead sources to determine the most cost-effective use of its
promotional budget.
The Company offers an unconditional, 60-day, money-back guarantee on most
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
Company believes that CMCI's familiarity with credit unions provides the
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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 1997.
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. Approximately 95% 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 the
MortgageWare LMS 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 the MortgageWare LMS 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 750 mortgage brokers
and bankers, 650 banks, 500 credit unions and 100 savings institutions. In
fiscal year 1997, 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 compatibility 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.
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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 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. On 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
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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 has experienced occasional
backlogs. At June 30, 1997, the Company's backlog was not material.
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 most of fiscal year 1995. During fiscal years 1997 and 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, 1997, the Company employed 133 people, including 31 in
sales and marketing, 40 in product development, 39 in customer service and 23 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.
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EXECUTIVE OFFICERS OF THE REGISTRANT
The executive officers of the Company, as of September 27, 1997, are as follows:
<TABLE>
<CAPTION>
NAME Age Position
- ------------------------------- ------ -------------------------------------------------------------
<S> <C> <C>
Jiri M. Nechleba 39 President and Chief Executive Officer
Stephen A. Yount 40 Vice President-Finance, Chief Financial Officer and Secretary
Patricia R. Graham 44 Vice President-Sales and Marketing
David A. Sperline 48 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 1985 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. Additionally, 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. 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.
PATRICIA R. GRAHAM has been Vice President-Sales and Marketing of the Company
since March 25, 1996. From 1990 to 1995, she was with A.C. Nielsen Co., a
subsidiary of Dun & Bradstreet and served in various capacities including
executive vice president. From 1981 to 1990 she was employed by Information
Resources, Inc. and departed holding the position of Senior Vice President. Ms.
Graham holds a Masters degree in political science from Rutgers University.
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.
13
<PAGE> 14
ITEM 2. PROPERTIES
The Company is currently subleasing and occupying approximately 46,000 square
feet of office space in Kirkland, Washington. This sublease expires in November
1998 and does not contain a renewal option. The Company believes that its
current facilities will be adequate for its needs through the end of fiscal year
1998, as well as the remaining term of the sublease. Because the Company does
not have a renewal option for its current facilities, it anticipates a thorough
evaluation of the available office space near its current headquarters in
Kirkland, Washington. As of September 1997, the vacancy rate has declined for
office space and, accordingly, lease rates have increased substantially in the
geographic area where the Company's headquarters are located. Accordingly, the
Company anticipates a potential substantial increase in its lease rate for its
current facility or another facility when the current sublease expires in
November 1998.
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 1997.
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 2,812 shareholders as of September
23, 1997, based on computations including participants in security positions
listings, as defined by Rule 17Ab-8 of the Exchange Act. Presented below are
quarterly closing stock price ranges as reported on Nasdaq National Market for
the periods indicated.
<TABLE>
<CAPTION>
HIGH Low
------------ ----------
<S> <C> <C>
Fiscal year ended June 30, 1998
First quarter (through September 23, 1997) $4.63 $3.50
Fiscal year ended June 30, 1997
Fourth quarter $4.13 $3.63
Third quarter 6.00 3.75
Second quarter 5.50 3.50
First quarter 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
</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.
14
<PAGE> 15
ITEM 6. SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
Years Ended June 30, 1997 1996 1995 1994 1993
- ------------------------------------------------ -------- --------- -------- -------- -------
(In thousands except per share data)
<S> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA:
Net revenues:
Software license fees $ 7,055 $ 6,232 $ 4,314 $11,438 $10,122
Software support fees 6,073 5,773 5,483 4,707 2,824
Other 1,239 1,088 1,196 2,344 2,086
-------- --------- -------- -------- -------
Total net revenues 14,367 13,093 10,993 18,489 15,032
-------- --------- -------- -------- -------
Cost of revenues:
Software license fees 1,500 1,653 1,424 1,244 1,188
Software support fees 1,856 1,678 1,788 2,062 1,791
Other 683 589 642 1,014 943
-------- --------- -------- -------- -------
Total cost of revenues 4,039 3,920 3,854 4,320 3,922
-------- --------- -------- -------- -------
Gross profit 10,328 9,173 7,139 14,169 11,110
-------- --------- -------- -------- -------
Operating expenses:
Product development 2,147 2,060 1,123 891 670
Sales and marketing 4,011 4,230 4,244 5,801 4,366
General and administrative 3,152 3,010 3,404 3,278 2,147
Other general expenses - nonrecurring _____ _____ 952 _____ _____
-------- --------- -------- -------- -------
Total operating expenses 9,310 9,300 9,723 9,970 7,183
-------- --------- -------- -------- -------
Operating income (loss) 1,018 (127) (2,584) 4,199 3,927
Net interest and other income (expense) 719 811 676 322 (98)
-------- --------- -------- -------- -------
Income (loss) before income taxes,
extraordinary item and cumulative
effect of change in accounting principle 1,737 684 (1,908) 4,521 3,829
Income taxes 627 251 (780) 1,532 1,368
-------- --------- -------- -------- -------
Income (loss) before extraordinary
item and cumulative effect of
change in accounting principle 1,110 433 (1,128) 2,989 2,461
Extraordinary item - tax benefit of net
operating loss carryforwards _____ _____ _____ _____ 138
Cumulative effect of change
in accounting principle _____ _____ _____ (109) _____
-------- --------- -------- -------- -------
Net income (loss) $1,110 $433 ($1,128) $2,880 $2,599
======== ========= ======== ======== =======
PER SHARE DATA:
Income (loss) before extraordinary
item and cumulative effect of
change in accounting principle $.19 $.07 ($.19) $.46 $.47
-------- --------- -------- -------- -------
Net income (loss) $.19 $.07 ($.19) $.45 $.50
-------- --------- -------- -------- -------
Weighted average number of common and
common equivalent shares outstanding 5,842 6,171 5,831 6,471 5,241
BALANCE SHEET DATA:
Cash, cash equivalents and investments $13,831 $14,218 $14,373 $14,585 $14,434
Working capital 11,623 12,823 13,638 13,753 13,233
Total assets 21,067 22,321 21,609 23,838 20,306
Total shareholders' equity 16,050 17,771 17,338 18,703 16,121
</TABLE>
15
<PAGE> 16
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
GENERAL
Prior to the mid 1980's, mortgage loans in the United States were
originated in a manual and paper-intensive process. Then, beginning in the mid
1980's and running through the mid 1990's, the mortgage lending industry
implemented its first wave of automation with PC-based software solutions for
mortgage originations. During this period of time, the Company experienced rapid
revenue and customer growth by providing its MortgageWare Loan Management System
- - a robust, full-featured and cost-effective PC-based software solution. This
first wave of automation was accelerated and amplified from 1992 to early 1994
as mortgage interest rates reached historically low levels and mortgage
refinance volumes soared. Then, in early 1994, the Federal Reserve raised
interest rates. This event immediately caused mortgage refinance volumes to
plummet. As a result, lenders found themselves with excess labor and mortgage
processing capacity. During the remainder of 1994 and for most of 1995, the
Company believes that the industry was focused more on staff reduction, than
adding new automated loan management systems.
Mortgage lending rates available during the Company's fiscal years 1996 and
1997 reflected a lending environment that experienced a high degree of
volatility. In spite of this volatility, the overall lending conditions have
been considered favorable for the borrower 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. However, during the last half
of fiscal year 1997, the Company began to observe a shift in the mortgage
origination business. There appeared to be a trend towards sufficient production
capacity coupled with a reduced profit margin. Although lending activity has
increased, the Company believes that because most mortgage lenders have already
automated their origination operations and have sufficient production capacity,
the Company experienced only a modest increase in software license fees during
fiscal year 1997 compared to fiscal year 1996 for its loan origination software.
Historically, when mortgage origination volumes increased due to favorable
lending rates, the Company experienced increased software license fees as
lenders increased production capacity. The Company now believes that due to
reduced profit margins, its customers are shifting their purchasing decisions to
solutions that reduce unit costs and accordingly, increase profit margins,
rather than increasing production capacity. During fiscal years 1996 and 1997,
the Company focused its product development effort to provide a more diverse and
integrated "enterprise" solution for the mortgage lending industry. It is the
Company's belief that this broader "enterprise" solution will position the
Company well for this recent change in the mortgage lending industry. This
broader product offering focuses more on reducing the cost of originating,
processing, and servicing a mortgage, than on solely increasing production
capacity.
NET REVENUES
<TABLE>
<CAPTION>
Increase
(In thousands) 1997 Increase 1996 (Decrease) 1995
- -------------- ---- -------- ---- ---------- ----
<S> <C> <C> <C> <C> <C>
Software license fees $ 7,055 13% $ 6,232 44% $ 4,314
Software support fees 6,073 5% 5,773 5% 5,483
Other 1,239 14% 1,088 (9)% 1,196
------- -- ------- -- -------
Total net revenues $14,367 10% $13,093 19% $10,993
======= == ======= == =======
</TABLE>
16
<PAGE> 17
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 13% for fiscal year 1997 compared to
fiscal year 1996, and increased by 44% for fiscal year 1996 compared to fiscal
year 1995. The increase in software license fees in fiscal year 1997 compared to
fiscal year 1996 was primarily due to a combination of the overall favorable
lending conditions discussed above, which resulted in modest increases in
software license fees for most previously developed products, and software
license fees for three new products: MortgageWare Loan Servicing, MortgageWare
InfoLINQ and MortgageWare MarketLINQ. 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 previously developed products, and software license
fees for three new products: MortgageWare Entre and interfaces to Freddie Mac's
and Fannie Mae's automated underwriting systems.
Software support fees increased by 5% for fiscal year 1997 compared to
fiscal year 1996, and by 5% as well, for fiscal year 1996 compared to fiscal
year 1995. These year-to-year increases reflected a combination of a modest
number of new customer additions during fiscal years 1997 and 1996, and, to a
lesser extent, a low, but fairly constant attrition rate in the installed
customer base during both fiscal years. 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. The Company believes software support fees are likely to
continue to increase at a modest rate in fiscal year 1998.
Other revenues -- training fees, custom document fees, and other
miscellaneous sales -- increased by 14% for fiscal year 1997 compared to fiscal
year 1996, and decreased by 9% for fiscal year 1996 compared to fiscal year
1995. The increase in other revenues in fiscal year 1997 compared to fiscal year
1996, was primarily due to an increase in on-site training fees. This increase
in training fees was primarily due to an increase, beginning in the first
quarter of fiscal year 1997, in the daily fee charged for on-site training.
Additionally, the document fees from the marketing agreement with VMP Electronic
Laser Forms increased substantially in fiscal year 1997 compared to fiscal year
1996. The Company expects these fees to continue to increase in fiscal year
1998. The decrease in other revenues 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 was slower than
anticipated in fiscal year 1996. In addition to the expected increase in revenue
from documents discussed above, the Company also expects an increase in
consulting fees during fiscal year 1998 compared to fiscal year 1997, due to the
Company's recent recognition of demand for its services to assist customers in
effectively implementing and integrating its product suite to reduce the cost of
originating and processing a mortgage loan, as well as providing timely and
relevant information for its customers' decision-makers.
17
<PAGE> 18
Looking forward, the Company anticipates an increasing contribution to
software license fees, and related increases to software support fees and other
revenues, from its newer products MortgageWare Loan Servicing, MortgageWare
InfoLINQ, and MortgageWare MarketLINQ. As discussed above, the Company believes
the overall lending environment to be favorable as of the end of fiscal year
1997 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.
COST OF REVENUES
<TABLE>
<CAPTION>
Increase Increase
(In thousands) 1997 (Decrease) 1996 (Decrease) 1995
- ------------------------------------- ------ ---------- ------ ---------- ------
<S> <C> <C> <C> <C> <C>
Software license fees $1,500 (9)% $1,653 16% $1,424
Percentage of software license fees 21% _____ 27% _____ 33%
------ ------ ------ ------ ------
Software support fees 1,856 11% 1,678 (6)% 1,788
Percentage of software support fees 31% _____ 29% _____ 33%
------ ------ ------ ------ ------
Other 683 16% 589 (8)% 642
Percentage of other revenues 55% _____ 54% _____ 54%
------ ------ ------ ------ ------
Total cost of revenues $4,039 3% $3,920 2% $3,854
Percentage of net revenues 28% _____ 30% _____ 35%
====== ====== ====== ====== ======
</TABLE>
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 27% to 21% for fiscal year 1997 compared to fiscal
year 1996, and decreased from 33% to 27% for fiscal year 1996 compared to fiscal
year 1995. The decrease for fiscal year 1997 compared to fiscal year 1996 was
primarily due to a combination of software license fees increasing and the cost
of software license fees decreasing. The dollar amount of cost of software
license fees decreased 9% to $1.50 million for fiscal year 1997, compared to
$1.65 million for fiscal year 1996. This decrease was primarily due to a
decrease in amortization of capitalized software development costs associated
with the MortgageWare Loan Management System for DOS that was partially offset
by the introduction of amortization of capitalized software development costs
for MortgageWare Loan Servicing released during the first quarter of fiscal year
1997. Amortization of capitalized software development costs was $1,290,000,
$1,430,000, and $1,250,000 for fiscal years 1997, 1996, and 1995, respectively.
As a result of releasing several new products during fiscal year 1997 that will
have amortization of capitalized software development costs, the Company expects
the dollar amount of its amortization of capitalized software development costs
to increase significantly for fiscal year 1998 compared to 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
18
<PAGE> 19
increased from 29% to 31% for fiscal year 1997 compared to fiscal year 1996, and
decreased from 33% to 29% for fiscal year 1996 compared to fiscal year 1995. The
increase in fiscal year 1997 compared to fiscal year 1996 was primarily due to a
higher salary cost and a less efficient ratio of customer support staff to
customers. The decrease in fiscal year 1996 compared to fiscal year 1995 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 increase 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 and consultation 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 slightly from 54% to 55% for
fiscal year 1997 compared to fiscal year 1996 and was unchanged at 54% for
fiscal year 1996 compared to fiscal year 1995. The slight increase in fiscal
year 1997 compared to fiscal year 1996 was primarily due to a combination of a
slightly higher payroll cost and increased depreciation from upgrading the
trainers' equipment.
OPERATING EXPENSES
<TABLE>
<CAPTION>
Increase Increase
(In thousands) 1997 (Decrease) 1996 (Decrease) 1995
------ ---------- ------- ---------- ------
<S> <C> <C> <C> <C> <C>
Product development $2,148 4% $2,060 83% $1,123
Percentage of net revenues 15% _____ 16% _____ 10%
------ ------ ------- ------ ------
Sales and marketing 4,011 (5)% 4,230 0% 4,244
Percentage of net revenues 28% _____ 32% _____ 39%
------ ------ ------- ------ ------
General and administrative 3,152 5% 3,010 (12)% 3,404
Percentage of net revenues 22% _____ 23% _____ 31%
------ ------ ------- ------ ------
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 decreased from 16% to 15% for fiscal year 1997 compared to fiscal year
1996, and increased from 10% to 16% for fiscal year 1996 compared to fiscal year
1995. The decrease for fiscal year 1997 compared to fiscal year 1996 is
primarily due to net revenues increasing more than product development expenses.
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, which is capitalized. The Company capitalized $877,000, $790,000,
and $1,793,000 of development expenditures for fiscal years 1997, 1996, and
1995, respectively. During fiscal year 1997, the Company released three
significant new products, MortgageWare Loan Servicing, MortgageWare InfoLINQ,
and MortgageWare
19
<PAGE> 20
MarketLINQ. During fiscal year 1998 the Company plans significant enhancements
to these new products as well as significant enhancements to the MortgageWare
Loan Management System and MortgageWare Entre. Accordingly, the Company
anticipates a significant increase in capitalized development expenditures and a
decrease in product development expense for fiscal year 1998.
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 32% to
28% for fiscal year 1997 compared to fiscal year 1996 and decreased from 39% to
32% for fiscal year 1996 compared to fiscal year 1995. The decrease for fiscal
year 1997 compared to fiscal year 1996 was primarily due to revenue increasing
and sales and marketing expenses decreasing. The decrease in sales and marketing
expenses was primarily due to the elimination of outsourced telemarketing fees
during the quarter ended March 31, 1996. The decrease, as a percentage of
revenues, 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 Company expects sales and marketing expenses to increase
both on a dollar basis and as a percentage of revenue for fiscal year 1998
compared to fiscal year 1997, due to substantial marketing, promotional, and
sales efforts planned to increase sales of the new products released during
fiscal year 1997.
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 23% to 22% for fiscal 1997 compared to
fiscal year 1996, and decreased from 31% to 23% for fiscal year 1996 compared to
fiscal year 1995. The decrease for fiscal year 1997 compared to fiscal year 1996
was primarily due to revenue increasing more than general and administrative
expense. 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 quarter
ended March 31, 1995, a lower bad debt provision and reduced professional
services expense. The Company expects general and administrative expenses on a
dollar basis to increase somewhat for fiscal year 1998 compared to fiscal year
1997, but hold steady or decrease slightly as a percentage of net revenues.
Other general expenses - nonrecurring, consists of the write-off of
capitalized software costs associated with purchased software code originally
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.
20
<PAGE> 21
NET INTEREST AND OTHER INCOME (EXPENSE)
<TABLE>
<CAPTION>
(In thousands) 1997 Decrease 1996 Increase 1995
- ---------------------------------------- ------ ---------- ----- --------- -----
<S> <C> <C> <C> <C> <C>
Net interest and other income (expense) $719 (11)% $811 20% $676
Percentage of net revenues 5% -- 6% -- 6%
</TABLE>
Interest income was $747,000, $801,000, and $728,000 for the fiscal years
ended June 30, 1997, 1996, and 1995, respectively. The decrease for fiscal year
1997 was primarily due to a combination of a slightly lower average portfolio
balance and a lower average rate of return on the portfolio. The increase for
fiscal year 1996 was primarily due to earning a higher average interest rate on
the investment portfolio.
As of June 30, 1997, 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.
INCOME TAXES
<TABLE>
<CAPTION>
(In thousands) 1997 Increase 1996 Increase 1995
- -------------------------- ------ -------- ------ --------- -------
<S> <C> <C> <C> <C>
Income taxes $627 151% $250 n/m $(779)
Effective income tax rate 36% -- 37% -- (41)%
</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 certain
tax-free interest income combined with a net loss.
LIQUIDITY AND CAPITAL RESOURCES
Working capital, which consists principally of cash, cash equivalents, and
short-term investments, was $11,623,000 as of June 30, 1997, compared to
$12,823,000 at June 30, 1996. Cash and cash equivalents increased by $1,283,000
for fiscal year 1997. There was $4,155,000 added to cash and cash equivalents by
operating activities. Principal uses of cash and cash equivalents included the
repurchase of $2,859,000 of Company common stock, the purchase of $547,000 of
furniture and equipment, and $877,000 of capitalized software costs.
The Company's capital expenditures for fiscal years 1997 and 1996 were
$547,000 and $690,000, respectively. Although the Company currently has no
material commitment for additional capital expenditures, it expects to spend
approximately $500,000 during the fiscal year ending 1998, 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
21
<PAGE> 22
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 1998.
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.
22
<PAGE> 23
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
<TABLE>
<CAPTION>
Page #
------------------
<S> <C>
Independent Auditors' Report 24
Balance Sheets as of June 30, 1997 and 1996 25
Statements of Operations for the years ended June 30, 1997, 1996 and 1995 26
Statements of Shareholders' Equity for the years ended June 30, 1997,1996 and 1995 27
Statements of Cash Flows for the years ended June 30, 1997, 1996 and 1995 28
Notes to Financial Statements 29 - 36
Schedule II - Valuation and Qualifying Accounts 39
</TABLE>
23
<PAGE> 24
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 these 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 standards 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, 1997 and 1996, and the results of its operations and its cash
flows for each of the years in the three-year period ended June 30, 1997 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.
/s/ KPMG Peat Marwick LLP
Seattle, Washington
August 1, 1997
24
<PAGE> 25
INTERLINQ SOFTWARE CORPORATION
BALANCE SHEETS
<TABLE>
<CAPTION>
As of June 30, 1997 1996
----------- -----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 7,793,761 $ 6,511,041
Investments available-for-sale, at fair value 4,024,651 3,909,917
Investments held-to-maturity, at amortized cost 2,012,894 3,796,929
Accounts receivable, less allowance for doubtful accounts of
$176,000 in 1997 and $187,007 in 1996 1,602,220 1,971,507
Inventory 55,246 72,644
Prepaid expenses 408,909 331,026
Deferred income taxes 267,660 172,041
----------- -----------
Total current assets 16,165,341 16,765,105
----------- -----------
Property and equipment, at cost 5,836,895 5,289,836
Less accumulated depreciation and amortization 4,364,628 3,253,190
----------- -----------
Net property and equipment 1,472,267 2,036,646
----------- -----------
Capitalized software costs, less accumulated amortization of
$1,718,683 in 1997 and $1,509,305 in 1996 3,358,016 3,493,563
Other assets 70,899 26,021
----------- -----------
$21,066,523 $22,321,335
=========== ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 235,895 $ 158,226
Accrued compensation and benefits 555,402 402,701
Other accrued liabilities 498,276 380,435
Customer deposits 199,636 363,703
Deferred software support fees 3,052,822 2,637,500
----------- -----------
Total current liabilities 4,542,031 3,942,565
----------- -----------
Noncurrent liabilities, excluding current installments:
Deferred rent and other lease obligations 160,443 383,750
Deferred software support fees 6,746 10,233
Deferred income taxes 306,950 213,548
----------- -----------
Total noncurrent liabilities 474,139 607,531
----------- -----------
Shareholders' equity:
Series A convertible preferred stock, $.01 par value -- --
Authorized 5,000,000 shares; no shares issued and
outstanding in 1997 and 1996 -- --
Common stock, $.01 par value. Authorized 30,000,000
shares; issued and outstanding 5,416,512 shares in 1997
and 6,038,550 shares in 1996 54,165 60,386
Additional paid-in capital 10,343,087 13,167,629
Retained earnings 5,653,101 4,543,224
----------- -----------
Total shareholders' equity 16,050,353 17,771,239
Commitments
----------- -----------
$21,066,523 $22,321,335
=========== ============
</TABLE>
See accompanying notes to financial statements.
25
<PAGE> 26
INTERLINQ SOFTWARE CORPORATION
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Years Ended June 30, 1997 1996 1995
------------ ------------ -----------
<S> <C> <C> <C>
Net revenues:
Software license fees $ 7,055,457 $ 6,232,011 $ 4,314,189
Software support fees 6,072,544 5,772,791 5,482,938
Other 1,239,045 1,087,613 1,196,321
------------ ------------ -----------
Total net revenues 14,367,046 13,092,415 10,993,448
------------ ------------ -----------
Cost of revenues:
Software license fees 1,499,645 1,652,627 1,423,772
Software support fees 1,856,486 1,678,255 1,788,177
Other 682,666 588,987 641,700
------------ ------------ -----------
Total cost of revenues 4,038,797 3,919,869 3,853,649
------------ ------------ -----------
Gross profit 10,328,249 9,172,546 7,139,799
------------ ------------ -----------
Operating expenses:
Product development 2,147,546 2,060,427 1,123,093
Sales and marketing 4,011,440 4,229,994 4,244,444
General and administrative 3,151,761 3,010,223 3,403,827
Other general expenses - nonrecurring -- -- 952,043
------------ ------------ -----------
Total operating expenses 9,310,747 9,300,644 9,723,407
------------ ------------ -----------
Operating income (loss) 1,017,502 (128,098) (2,583,608)
Net interest and other income 719,275 811,272 675,786
------------ ------------ -----------
Income (loss) before income tax expense (benefit) 1,736,777 683,174 (1,907,822)
Income tax expense (benefit) 626,900 250,398 (779,326)
------------ ------------ -----------
Net income (loss) $ 1,109,877 $ 432,776 $ (1,128,496)
============ ============ ============
Net income (loss) per share $ .19 $ .07 $ (.19)
Weighted average number of common and common
equivalent shares outstanding 5,841,764 6,171,210 5,830,842
</TABLE>
See accompanying notes to financial statements.
26
<PAGE> 27
INTERLINQ SOFTWARE CORPORATION
STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
Total
Common Additional Retained Shareholders'
Years Ended June 30, 1997, 1996, 1995 Stock Paid-in Capital Earnings Equity
- ------------------------------------- ------- --------------- ----------- -----------
<S> <C> <C> <C> <C>
Balances at June 30, 1994 $57,937 $13,406,325 $5,238,944 $18,703,206
Issuance of 313,790 shares of common
stock 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 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
Issuance of 19,962 shares of common
stock 199 17,321 -- 17,520
Tax benefit realized upon exercise of stock
options -- 10,967 -- 10,967
Repurchase of 642,000 shares of common
stock (6,420) (2,852,830) -- (2,859,250)
Net income for the year ended June 30,
1997 -- -- 1,109,877 1,109,877
------- ----------- ----------- -----------
Balances at June 30, 1997 $54,165 $10,343,087 $5,653,101 $16,050,353
======= =========== =========== ===========
</TABLE>
See accompanying notes to financial statements.
27
<PAGE> 28
INTERLINQ SOFTWARE CORPORATION
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years Ended June 30, 1997 1996 1995
- -------------------- ------------ ------------ ------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 1,109,877 $ 432,776 $ (1,128,496)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization of property and equipment 1,111,438 1,014,452 1,180,679
Amortization of capitalized software costs 1,287,881 1,430,111 1,249,849
Write-off of purchased software -- -- 391,518
Amortization of other assets -- -- 221,073
Write-off of LoanStar acquisition costs -- -- 330,817
Loss (gain) on disposition of equipment -- (1,473) 4,041
Deferred income tax expense (benefit) (2,217) (156,727) 31,388
Tax benefit realized upon exercise of stock options 10,967 96,651 366,604
Change in certain assets and liabilities:
Accounts receivable 369,287 (745,365) 1,047,738
Income taxes refundable -- 987,429 (603,346)
Inventory and prepaid expenses (60,485) (88,508) 79,859
Other assets (44,878) 9,613 128,924
Accounts payable 77,669 34,971 (230,958)
Accrued compensation and benefits, other accrued
liabilities and deferred rent and other lease obligations 47,235 51,136 45,445
Customer deposits (164,067) 256,613 (167,983)
Deferred software support fees 411,835 93,400 (430,452)
------------ ------------ ------------
Net cash provided by operating activities 4,154,542 3,415,079 2,516,700
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (547,059) (689,857) (338,381)
Capitalized software costs (877,334) (789,792) (1,793,182)
Purchase of source code (275,000) (2,000,000) --
Purchases of investments (14,511,012) (18,734,310) (4,496,002)
Proceeds from sales and maturities of investments 16,180,313 12,498,246 10,671,287
Proceeds from sale of equipment -- 5,435 6,865
------------ ------------ ------------
Net cash provided by (used in) investing activities (30,092) (9,710,278) 4,050,587
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock 17,520 216,193 44,180
Repurchase of common stock (2,859,250) (312,500) (647,375)
------------ ------------ ------------
Net cash used in financing activities (2,841,730) (96,307) (603,195)
------------ ------------ ------------
Net increase (decrease) in cash & cash equivalents 1,282,720 (6,391,506) 5,964,092
------------ ------------ ------------
Cash and cash equivalents at beginning of year 6,511,041 12,902,547 6,938,455
------------ ------------ ------------
Cash and cash equivalents at end of year $ 7,793,761 $ 6,511,041 $ 12,902,547
============ ============ ============
Supplemental disclosure of cash flow information - net cash
paid (received) during the year for income taxes $ 615,891 $ (691,880) $ (623,362)
See accompanying notes to financial statements
</TABLE>
28
<PAGE> 29
INTERLINQ SOFTWARE CORPORATION
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 1997 AND 1996
(1) DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) DESCRIPTION OF BUSINESS
INTERLINQ Software Corporation (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, 1997 and 1996 consist principally of
investment-grade, interest-bearing securities.
The Company classifies investment securities as either
available-for-sale or held-to-maturity depending upon its
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, 1997 and 1996, 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 two years to thirty-two 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.
Management periodically evaluates property and equipment for
impairment whenever events or circumstances indicate that the
carrying amount may not be recoverable.
(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 conjunc
tion with acquisition of technologically feasible products
developed externally are capitalized and reported at the lower of
unamortized cost or net realizable value.
29
<PAGE> 30
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 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 if 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 revenue.
Other revenues include training fees and custom document fees.
Training fees are recognized when 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) STOCK-BASED COMPENSATION
The Company accounts for its stock option plans using the
intrinsic value method. As such, compensation expense is recorded
only if, on the date of grant, the current market price of the
underlying stock exceeded the exercise price.
(j) INCOME TAXES
The Company records income taxes under the asset and liability
method, whereby 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. 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. Management evaluates the need to
establish valuation allowances for deferred tax assets based upon
the amount of existing temporary differences, the period in which
they are expected to be recovered, and expected levels of taxable
income.
30
<PAGE> 31
(k) EARNINGS PER SHARE
Earnings per share amounts are based on the weighted average
number of common and dilutive common equivalent 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.
(l) 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.
(m) 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.
(n) RECLASSIFICATIONS
Certain reclassifications have been made to the prior period
financial statements to conform with the current year
presentation.
(o) NEW ACCOUNTING STANDARD
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards (SFAS) No. 128,
Earnings Per Share. SFAS No. 128 establishes standards for the
computation, presentation, and disclosure of earnings per share
(EPS), replacing the presentation of currently required Primary
EPS with a presentation of Basic EPS. It also requires dual
presentation of Basic EPS and Diluted EPS on the face of the
income statement for entities with complex capital structures.
Basic EPS excludes all dilution, while Diluted EPS reflects the
potential dilution that could occur from the exercise or
conversion of securities into common stock or from other contracts
to issue common stock. SFAS No. 128 is effective for financial
statements for periods ending after December 15, 1997, including
interim periods, and earlier application is not permitted. When
adopted, the Company will be required to restate its EPS data for
all prior periods presented. The Company is in the process of
evaluating this statement and its impact on the Company's reported
EPS amounts.
(2) PROPERTY AND EQUIPMENT
Major classes of property and equipment as of June 30 are as follows:
<TABLE>
<CAPTION>
1997 1996
---------- ----------
<S> <C> <C>
Leasehold improvements $1,501,349 $1,501,349
Furniture and fixtures 1,044,088 1,016,490
Computer equipment 2,919,194 2,399,733
Office equipment 372,264 372,264
---------- ----------
$5,836,895 $5,289,836
========== ==========
</TABLE>
31
<PAGE> 32
(3) 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 for the
year ended June 30, 1995, and is included in general and administrative
expense. During the year ended June 30, 1995, the level of conversions of
LoanStar customers to the Company's software was 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.
(4) 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 $142,568 and $322,978 which represents the
Company's remaining obligation under this lease, net of amounts to
be received under the sublease at June 30, 1997 and 1996,
respectively. Accrued liabilities at June 30, 1997 and 1996
include $223,307 and $67,842, respectively, representing the
current portion of deferred rent payable.
Future minimum lease payments under noncancelable operating leases
are as follows:
<TABLE>
<CAPTION>
Net
Minimum minimum
lease Sublease lease
payments receipts payments
--------- --------- ---------
<S> <C> <C> <C> <C>
Year ending June 30:
1998 874,974 (248,598) 626,376
1999 327,020 (5,257) 321,763
--------- --------- ---------
1,201,994 (253,855) 948,139
========= ========= =========
</TABLE>
Total rent expense amounted to $379,994, $381,447 and $382,505 for
the years ended June 30, 1997, 1996, and 1995, respectively.
32
<PAGE> 33
(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, 1997, 1996 and 1995. The Company has no other postemployment
or postretirement benefit plans.
(5) INCOME TAXES
Components of income taxes are summarized as follows:
<TABLE>
<CAPTION>
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
Current:
Federal $ 580,601 $ 291,906 $(1,173,047)
State 37,549 18,568 (4,271)
----------- ----------- -----------
Total current 618,150 310,474 (1,177,318)
----------- ----------- -----------
Deferred:
Federal (2,032) (151,137) 31,741
State (185) (5,590) (353)
----------- ----------- -----------
Total deferred (2,217) (156,727) 31,388
----------- ----------- -----------
Charge in lieu of taxes from employee
stock options 10,967 96,651 366,604
----------- ----------- -----------
$ 626,900 $ 250,398 $ (779,326)
=========== =========== ===========
</TABLE>
Income tax expense (benefit) differs from "expected" income tax expense
(benefit) (computed by applying the U.S. Federal income tax rate of 34%)
as follows:
<TABLE>
<CAPTION>
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Computed "expected" tax expense $ 590,504 $ 232,279 $(648,659)
(benefit)
Tax exempt interest -- (574) (129,196)
State income taxes, net of Federal 24,660 8,565 (3,052)
benefit
Other 11,736 10,128 1,581
--------- --------- ---------
$ 626,900 $ 250,398 $(779,326)
--------- --------- ---------
</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>
1997 1996
--------- ---------
<S> <C> <C>
Deferred tax assets:
Allowance for doubtful accounts receivable $ 62,112 $ 65,776
Deferred software support fees 59,254 36,662
Deferred rent 110,646 131,580
Accrued expenses 78,775 69,603
Property and equipment 461,183 299,324
--------- ---------
Total deferred tax assets 771,970 602,945
Deferred tax liabilities - capitalized software (811,260) (644,452)
--------- ---------
Net deferred tax liability $ (39,290) $ (41,507)
========= =========
</TABLE>
33
<PAGE> 34
(6) 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 Company accounts for its option plans in
accordance with the provisions of Accounting Principles Board
Opinion No. 25 and no compensation cost has been recognized
related to its stock options. Had the Company determined
compensation cost based on the fair value at the grant date for
its stock options under SFAS No. 123, the Company's net income
would have decreased to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
1997 1996
----------- ----------
<S> <C> <C>
Net income:
As reported $1,109,877 $432,776
Pro forma 821,572 265,341
Net income per share:
As reported $ .19 $ .07
Pro forma $ .14 $ .04
</TABLE>
Pro forma net income and net income per share reflect only options
granted in the years ended June 30, 1997 and 1996. Therefore, the
full impact of calculating compensation cost for stock options
under SFAS No. 123 is not reflected in the pro forma net income
and net income per share amounts presented above because
compensation cost is reflected over the options' vesting period
and compensation cost for options granted prior to July 1, 1995,
is not considered.
The per share weighted-average fair value of stock options granted
during the years ended June 30, 1997 and 1996 was $3.28 and $2.05,
respectively, on the date of grant using the Black Scholes
option-pricing model with the following weighted-average
assumptions: 1997 expected dividend yield of 0.0%, risk-free
interest rate of 6.02%, expected volatility of 65%, and an
expected life of 5 years; 1996 - expected dividend yield of 0.0%,
risk-free interest rate of 5.11%, expected volatility of 65%, and
an expected life of 5 years.
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. 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. The 1985 Plan has been suspended in
regard to future grants, and stock options are currently 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 has
authorized 215,000 shares of common stock to be reserved for
grants pursuant to the Directors Plan.
34
<PAGE> 35
(b) STOCK OPTION PLANS (CONTINUED)
A summary of stock option activity under the stock option plans
follows:
<TABLE>
<CAPTION>
Outstanding options
--------------------------------------------
Number of shares Weighted
Options ------------------------------- average
available 1985 1993 Directors exercise
for grant Plan Plan Plan price
--------- -------- -------- -------- ---------
<S> <C> <C> <C> <C> <C>
Balances at June 30, 1994 308,392 661,208 54,608 12,000 $ 1.30
Options granted (276,900) -- 214,900 62,000 4.00
Options exercised -- (313,790) -- -- .14
Options canceled 104,547 (17,150) (104,547) -- 4.72
-------- -------- -------- --------
Balances at June 30, 1995 136,039 330,268 164,961 74,000 2.52
Increase in shares reserved
under 1993 Plan 600,000 -- -- -- --
Options granted (472,275) -- 417,275 55,000 3.45
Options exercised -- (164,050) (6,500) -- 1.27
Options canceled 118,774 (3,800) (68,774) (50,000) 3.84
-------- -------- -------- --------
Balances at June 30, 1996 382,538 162,418 506,962 79,000 3.17
Increase in shares reserved
under Directors Plan 140,000 -- -- -- --
Options granted (228,180) -- 219,180 9,000 5.46
Options exercised -- (19,650) (312) -- .88
Options canceled 59,476 (19,150) (37,476) (22,000) 4.11
-------- -------- -------- --------
Balances at June 30, 1997 353,834 123,618 688,354 66,000 3.73
======== ======== ======== ========
</TABLE>
Additional information regarding options outstanding as of June
30, 1997 is as follows:
<TABLE>
<CAPTION>
Options outstanding Options exercisable
-------------------------------------------------------------------------- ----------------------------------
Weighted-
average Weighted- Weighted-
remaining average average
Range of Number contractual exercise Number exercise
exercise prices outstanding life (yrs) price exercisable price
--------------- ----------- --------- -------- ----------- ---------
<S> <C> <C> <C> <C> <C>
$ .100 - .500 98,918 3.83 $ .37 98,918 $ .37
2.500-3.875 530,976 8.25 3.41 173,960 3.30
4.031-5.844 217,278 9.19 5.56 32,828 4.48
7.000-8.375 30,800 6.30 7.27 26,066 7.30
--------------- --------- --------- -------- --------- ---------
$ .100-8.375 877,972 7.92 $3.73 331,772 $2.86
--------------- --------- --------- -------- --------- ---------
</TABLE>
(7) NET INTEREST AND OTHER INCOME (EXPENSE)
Net interest and other income (expense) consist of:
<TABLE>
<CAPTION>
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Interest income $ 746,712 801,434 728,457
Interest expense (27,713) (27,579) (26,566)
Other, net 276 37,417 (26,105)
--------- --------- ---------
$ 719,275 $ 811,272 $ 675,786
========= ========= =========
</TABLE>
35
<PAGE> 36
(8) FINANCIAL INSTRUMENTS
The Company's financial instruments consist primarily of investments,
accounts 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.
(9) 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.
(10) QUARTERLY FINANCIAL DATA (UNAUDITED)
The following table summarizes the unaudited statements of operations for
each quarter of fiscal 1997 and 1996 (in thousands, except per share
amounts):
<TABLE>
<CAPTION>
First Second Third Fourth
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
1997
Net revenues $3,579 $3,516 $3,534 $3,738
Gross profit 2,620 2,530 2,509 2,669
Operating income 318 246 86 368
Net earnings 326 271 161 352
Earnings per share $ .05 $ .05 $ .03 $ .06
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
</TABLE>
36
<PAGE> 37
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," "Continuing Class I Directors, Terms Expiring in 1998," "Nominees
for Election as Class II Directors, Terms Expiring in 1999," "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 1997 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 STATEMENT 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, 1997, 1996, and 1995
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.
37
<PAGE> 38
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.
<TABLE>
<CAPTION>
Exhibit
Number Description
------ -----------
<S> <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)(5) 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
</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 10-K
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 10-K
for the fiscal year ended June 30, 1994, as same exhibit number.
(5) Incorporated by reference to the Company's Annual Report on Form 10-K
for the fiscal year ended June 30, 1996, as same exhibit number.
(6) Incorporated by reference to the Company's Quarterly Report on Form
10-Q 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, 1997
None
38
<PAGE> 39
Schedule II
INTERLINQ SOFTWARE CORPORATION
VALUATION AND QUALIFYING ACCOUNTS
Years ended June 30, 1997, 1996 and 1995
<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, 1997:
Accounts receivable $ 187,007 $ 396,986 -- $(407,993) $ 176,000
Year ended June 30, 1996:
Accounts receivable 152,287 331,224 -- (296,504) 187,007
Year ended June 30, 1995:
Accounts receivable 403,341 704,618 -- (955,672) 152,287
</TABLE>
39
<PAGE> 40
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 26th day of September, 1997.
INTERLINQ SOFTWARE CORPORATION
By: /s/ JIRI M. NECHLEBA
-------------------------------------
Jiri Nechleba
President and Chief Executive Officer
<TABLE>
<CAPTION>
Signature Title
--------- -----
<S> <C>
/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
</TABLE>
40
<PAGE> 41
INTERLINQ SOFTWARE CORPORATION
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit # Description
- ------------ ------------------------------------------------------------------------------------
<S> <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)(5) 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
</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 10-K
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 10-K
for the fiscal year ended June 30, 1994, as same exhibit number.
(5) Incorporated by reference to the Company's Annual Report on Form 10-K
for the fiscal year ended June 30, 1996, as same exhibit number.
(6) Incorporated by reference to the Company's Quarterly Report on Form
10-Q for the quarterly period ended September 30, 1995, as same exhibit
number. Confidential treatment has been requested as to portions of
this document.
41
<PAGE> 1
CONSENT OF INDEPENDENT AUDITORS
The Board of Directors and Shareholders
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 1, 1997, relating to the balance sheets of INTERLINQ
Software Corporation as of June 30, 1997 and 1996, 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,
1997, which report appears in the June 30, 1997 annual report on Form 10-K.
/s/ KPMG Peat Marwick LLP
Seattle, Washington
September 26, 1997
42
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-START> JUL-01-1996
<PERIOD-END> JUN-30-1997
<CASH> 7,794
<SECURITIES> 6,038
<RECEIVABLES> 1,602
<ALLOWANCES> 0
<INVENTORY> 55
<CURRENT-ASSETS> 16,165
<PP&E> 5,837
<DEPRECIATION> 4,365
<TOTAL-ASSETS> 21,067
<CURRENT-LIABILITIES> 4,542
<BONDS> 0
0
0
<COMMON> 54
<OTHER-SE> 15,996
<TOTAL-LIABILITY-AND-EQUITY> 21,067
<SALES> 7,055
<TOTAL-REVENUES> 14,367
<CGS> 1,500
<TOTAL-COSTS> 4,039
<OTHER-EXPENSES> 9,311
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 1,737
<INCOME-TAX> 627
<INCOME-CONTINUING> 1,110
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,110
<EPS-PRIMARY> .19
<EPS-DILUTED> .19
</TABLE>
