<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
FORM 10-Q
(Mark One)
[X] Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 For the quarterly period ended SEPTEMBER 30, 2000
OR
[ ] Transition report pursuant to Section 13 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.)
11980 N.E. 24TH STREET
BELLEVUE, WA 98005
(Address of principal executive offices)
(425) 827-1112
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such report), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No[ ]
As of October 27, 2000, there were 4,824,077 shares of the Registrant's Common
Stock outstanding.
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
INTERLINQ SOFTWARE CORPORATION
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
SEPTEMBER 30, JUNE 30,
2000 2000
---------------- ----------------
(unaudited)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 6,409,558 $ 7,753,916
Short-term investments 3,054,403 2,357,042
Accounts receivable, net 1,676,531 1,982,668
Current deferred tax asset 422,707 422,707
Inventory, prepaid expenses, and
other current assets 1,518,952 1,292,753
---------------- ----------------
Total current assets 13,082,151 13,809,086
---------------- ----------------
Property and equipment, net 1,760,874 1,692,686
Capitalized software costs, net 4,893,675 5,094,766
Goodwill and other intangible assets, net 1,310,227 1,525,057
Other assets 68,284 68,284
---------------- ----------------
$ 21,115,211 $ 22,189,879
================ ================
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 359,414 $ 559,339
Accrued compensation and benefits 627,163 897,367
Other accrued liabilities 122,475 124,038
Customer deposits 798,730 820,112
Deferred software support fees 4,879,595 4,531,712
---------------- ----------------
Total current liabilities 6,787,377 6,932,568
---------------- ----------------
NONCURRENT LIABILITIES
Noncurrent liabilities, excluding current installments 96,875 86,760
Noncurrent deferred tax liability 418,662 418,662
================ ================
Total noncurrent liabilities 515,537 505,422
================ ================
SHAREHOLDERS' EQUITY:
Common stock 48,241 48,241
Additional paid-in capital 7,649,952 7,649,952
Retained earnings 6,114,104 7,053,696
---------------- ----------------
Total shareholders' equity 13,812,297 14,751,889
---------------- ----------------
$ 21,115,211 $ 22,189,879
================ ================
</TABLE>
See accompanying notes to condensed financial statements.
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INTERLINQ SOFTWARE CORPORATION
CONDENSED STATEMENTS OF OPERATIONS
(unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
SEPTEMBER 30,
---------------------------------------
2000 1999
--------------- -----------------
<S> <C> <C>
NET REVENUES:
Software license fees $ 968,396 $ 1,802,468
Software support fees 2,292,753 2,459,401
Other 586,465 604,849
--------------- -----------------
Total net revenues 3,847,614 4,866,718
--------------- -----------------
COST OF REVENUES:
Software license fees 791,097 525,352
Software support fees 589,961 705,460
Other 346,297 368,098
--------------- -----------------
Total cost of revenues 1,727,355 1,598,910
--------------- -----------------
Gross profit 2,120,259 3,267,808
--------------- -----------------
OPERATING EXPENSES:
Product development 1,077,430 935,499
Sales and marketing 1,083,969 1,365,389
General and administrative 1,397,635 1,151,533
Amortization of goodwill and other
intangible assets 214,830 214,830
--------------- -----------------
Total operating expenses 3,773,864 3,667,251
--------------- -----------------
Operating loss (1,653,605) (399,443)
Net interest and other income 162,189 140,142
--------------- -----------------
Loss before income taxes (1,491,416) (259,301)
Income tax benefit (551,824) (95,941)
--------------- -----------------
Net loss ($939,592) ($163,360)
=============== =================
Net loss per share - basic and diluted ($.19) ($.03)
Shares used to calculate net loss
per share - basic and diluted 4,824,077 5,137,937
</TABLE>
See accompanying notes to condensed financial statements.
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INTERLINQ SOFTWARE CORPORATION
CONDENSED STATEMENTS OF CASH FLOWS
(unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
SEPTEMBER 30,
------------------------------------
2000 1999
----------------- -----------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (939,592) $ (163,360)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Depreciation and amortization 220,290 196,344
Amortization of capitalized software costs 760,056 465,189
Amortization of goodwill and other
intangible assets 214,830 214,830
Change in operating assets and liabilities:
Accounts receivable 306,137 697,918
Inventory, prepaid expenses and other
current assets (226,199) (156,841)
Other assets -- 7,393
Accounts payable (199,925) (84,780)
Accrued compensation and benefits,
and other accrued liabilities (271,767) (1,143,512)
Customer deposits (21,382) (132,766)
Deferred software support fees 347,883 282,290
Noncurrent liabilities 10,115 --
----------------- ------------------
Net cash provided by operating activities 200,446 182,705
----------------- ------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (288,478) (213,537)
Capitalized software costs (558,965) (517,022)
Purchase of investments (697,361) (1,261,044)
Proceeds from sales and maturities of
short-term investments -- 927,685
----------------- ------------------
Net cash used in investing activities (1,544,804) (1,063,918)
----------------- ------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock -- 152,189
Repurchase of common stock -- (1,558,188)
----------------- ------------------
Net cash used in financing activities -- (1,405,999)
----------------- ------------------
Net decrease in cash and cash equivalents (1,344,358) (2,287,212)
Cash and cash equivalents at beginning of period 7,753,916 5,888,630
----------------- ------------------
Cash and cash equivalents at end of period $ 6,409,558 $ 3,601,418
================= ==================
</TABLE>
See accompanying notes to condensed financial statements.
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INTERLINQ SOFTWARE CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS
SEPTEMBER 30, 2000
(unaudited)
1. BASIS OF PRESENTATION
The accompanying unaudited financial statements have been prepared in accordance
with generally accepted accounting principles for interim financial information
pursuant to the rules and regulations of the Securities and Exchange Commission.
Accordingly, they do not include all of the information and footnotes required
by generally accepted accounting principles for complete financial statements.
In the opinion of management, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation have been included.
Operating results for the three-month period ended September 30, 2000, are not
necessarily indicative of the results for the year ending June 30, 2001. The
financial statements should be read in conjunction with the financial statements
and notes thereto included in the Company's Annual Report on Form 10-K for the
fiscal year ended June 30, 2000.
2. EARNINGS PER SHARE
Basic earnings per share is computed using the weighted average number of common
shares outstanding during the period. Diluted earnings per share is computed
using the weighted average number of common and potentially dilutive securities
outstanding during the period using the treasury stock method. Since the Company
had a net loss for the quarters ended September 30, 2000 and 1999, the following
options were excluded from the computation of diluted earnings per share because
their inclusion would be anti-dilutive.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
SEPTEMBER 30,
----------------------------
2000 1999
------------ -----------
<S> <C> <C>
Options excluded from computation 1,082,186 1,195,750
Weighted-average exercise price $4.74 $4.74
</TABLE>
3. REVENUE RECOGNITION
Net revenues consist of software license fees, software support fees, and other
revenues.
The Company recognizes revenue in accordance with the provisions of Statement of
Position 97-2, Software Revenue Recognition ("SOP 97-2"), which provides
specific industry guidance and stipulates that revenue recognized from software
arrangements is to be allocated to each element of the arrangement based on the
relative fair values of the elements, such as software products, upgrades,
enhancements, post contract customer support, consulting and implementation
services, or training. Under SOP 97-2, the determination of fair value is based
on objective evidence that is specific to the vendor. If such evidence of fair
value for each element of the arrangement does not exist, all revenue from the
arrangement is deferred until such time that evidence of fair value does exist
or until all elements of the arrangement are delivered. Revenue is recognized
when persuasive evidence of an arrangement exists and delivery has occurred,
provided the fee is fixed and determinable, collectibility is probable and the
arrangement does not require significant customization of the software.
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The Company also recognizes revenue in accordance with Statement of Position
98-9 ("SOP 98-9"). SOP 98-9 amends paragraphs 11 and 12 of SOP 97-2 to require
recognition of revenue using the "residual method" when (1) there is
vendor-specific objective evidence of the fair values of all undelivered
elements in a multiple element arrangement that is not accounted for using
long-term contract accounting, (2) vendor-specific objective evidence of fair
value does not exist for one or more of the delivered elements in the
arrangement, and (3) all revenue-recognition criteria in SOP 97-2 other than the
requirement for vendor-specific objective evidence of the fair value of each
delivered element of the arrangement are satisfied. Under the residual method,
the arrangement fee is recognized as follows: (1) the total fair value of the
undelivered elements, as indicated by vendor-specific objective evidence, is
deferred and subsequently recognized in accordance with the relevant sections of
SOP 97-2 and (2) the difference between the total arrangement fee and the amount
deferred for undelivered elements is recognized as revenue related to the
delivered elements. The adoption of SOP 98-9 did not have a material impact on
the Company's financial statements for the quarter ended September 30, 2000.
In December 1999, the Securities and Exchange Commission released Staff
Accounting Bulletin No. 101 "Revenue Recognition in Financial Statements" ("SAB
101"). SAB 101 provides guidance on revenue recognition issues. The Company
adopted SAB 101 on July 1, 2000. The adoption of SAB 101 did not have a material
impact on the Company's financial statements.
Software support fees 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, consultation services, and custom document
fees. These revenues are recognized when the related service is completed or
when the goods are shipped, as applicable.
4. SEGMENT INFORMATION
The operating segments reported below are the segments of the Company for which
separate financial information is available and for which operating profit and
loss amounts are evaluated and used by the chief operating decision maker for
making operating decisions, assessing performance and deciding on how to
effectively allocate resources. The Company has two principal businesses and,
therefore, two reportable business segments: Mortgage Technology Division
("MTD") and Enterprise Technology Division ("ETD").
Information by operating segment is set forth below:
<TABLE>
<CAPTION>
QUARTER ENDED SEPTEMBER 30: MTD ETD TOTAL
--------------------------------------------------------------------------
2000 (IN THOUSANDS):
<S> <C> <C> <C>
Net revenue $3,848 -- $3,848
Depreciation and amortization 908 287 1,195
Operating loss (1,092) (562) (1,654)
Capital expenditures 278 10 288
1999 (IN THOUSANDS):
Net revenue 4,849 18 4,867
Depreciation and amortization 648 228 876
Operating income (loss) 290 (689) (399)
Capital expenditures 209 5 214
</TABLE>
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<TABLE>
<CAPTION>
MTD ETD TOTAL
--------------------------------------------------------------------------
IDENTIFIABLE ASSETS WERE AS FOLLOWS AS OF (IN THOUSANDS):
<S> <C> <C> <C>
September 30, 2000 $18,221 2,894 $21,115
June 30, 2000 19,183 3,007 22,190
</TABLE>
5. NEW ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standard No. 133 "Accounting for Derivative
Instruments and Hedging Activities" ("SFAS 133"). SFAS 133 establishes
accounting and reporting standards for derivative instruments embedded in other
contracts, and for hedging activities. The Statement requires that entities
recognize all derivatives as either assets or liabilities on the balance sheet
and measure these derivatives at fair value. SFAS 133 also specifies a new
method of accounting for hedging transactions, prescribes the type of items and
transactions that may be hedged, and specifies detailed criteria to be met to
qualify for hedge accounting. The Company adopted SFAS 133 on July 1, 2000. The
adoption of this Statement did not have a material impact on the Company's
financial statements.
In March 2000, the FASB issued Interpretation No. 44 (FIN 44), "Accounting for
Certain Transactions Involving Stock Compensation, an interpretation of APB
Opinion No. 25." This interpretation provides guidance for applying APB Opinion
No. 25 "Accounting for Stock Issued to Employees." The Company adopted FIN 44 on
July 1, 2000. The adoption of FIN 44 did not have a material impact on the
Company's financial statements.
In March 2000, the Emerging Issues Task Force (EITF) of the FASB reached a
consensus on Issue No. 00-2, "Accounting for Web Site Development Costs" which
provides guidance on when to capitalize versus expense costs incurred to develop
a web site. The Company adopted Issue No. 00-2 on July 1, 2000. The adoption of
this Issue did not have a material impact on the Company's financial statements.
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ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
OVERVIEW
INTERLINQ Software Corporation (the "Company"), established in 1982, is a
leading provider of technology that helps organizations effectively manage
complex, information-intensive business transactions. The Company's mortgage
technology products are business solutions for commercial banks, mortgage banks,
mortgage brokers, credit unions and savings institutions, including a number of
the top mortgage originators. During the quarter ended September 30, 2000, the
Company retained U.S. Bancorp Piper Jaffray to assist it in an on-going
evaluation and consideration of strategic alternatives to capitalize on the
Company's value as a leading provider of mortgage technology solutions. These
alternatives could include business combinations such as a sale, merger or
partnership.
The Company's enterprise technology product (FlowMan) is a business solution
designed to provide a process-centered, enterprise application integration
framework. FlowMan is currently being integrated with the Company's suite of
mortgage technology products. In addition to this integration, the Company
believes that significant opportunity exists to realize additional value from
this technology. The Company intends to maximize the return of its investment in
the FlowMan technology while retaining the rights to use the technology within
its MortgageWare Enterprise product suite and the financial services industry.
These alternatives include recapitalizing the division (as a joint venture or a
separate subsidiary, for example), strategic partnering or divesting the FlowMan
technology.
The Company continued to experience a downturn in software license fee
revenue due to a softened sales environment during the quarter ended September
30, 2000. This environment was driven by reduced mortgage-lending volumes over
the past five quarters (as indicated by the mortgage market volume index
provided by the Mortgage Bankers Association) along with mortgage lenders
requiring increased amounts of due diligence to justify any significant
technology purchases.
The Company believes that over the course of the last decade mortgage lenders
have purchased technological infrastructure in order to improve their profit
margins as well as to increase their production capacity in times of high
mortgage origination volume. In 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. The product suite
developed by the Company was designed to provide customers with a platform that
would help them reduce their unit costs and, accordingly, increase their profit
margins. As a result of lower origination volumes and lower profit margins, the
Company believes that mortgage lenders will need to continue to focus their
long-term purchasing decisions on solutions that reduce unit costs and,
accordingly, increase profit margins, and will not need to significantly
increase their production capacity. The Company believes that its product
development plans and its suite of mortgage
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technology products position the Company well for this environment. In
addition, the Company has seen recent changes in the nature of its prospective
sales pipeline from numerous transactions representing additional production
capacity to fewer, but in certain cases larger, transactions representing
wholesale infrastructure changes for current and prospective customers. This
change in the nature of the Company's sales pipeline could lead to revenue
streams that are much less predictable than those experienced historically.
Looking forward, the Company is expecting the lower mortgage-lending environment
to continue to cause a softened sales environment. Changes in this environment
are difficult to predict and the Company is not expecting any significant
changes in mortgage lending volumes through the end of fiscal year 2001.
NET REVENUES
<TABLE>
<CAPTION>
Three months ended September 30,
(In thousands) 2000 1999 Change
------------------------------------------------
<S> <C> <C> <C>
Software license fees $968 $1,802 (46%)
Software support fees 2,293 2,459 (7%)
Other 586 605 (3%)
------------------------------------------------
Total net revenues $3,847 $4,866 (21%)
------------------------------------------------
</TABLE>
Net revenues consist of software license fees, software support fees and
other revenues (which include training, consulting fees, document fees, and
other miscellaneous sales), net of discounts and sales returns.
Software license fees were $968,000 for the quarter ended September 30, 2000,
a decrease of 46% from $1,802,000 in the comparable quarter of the prior year.
This decrease in software license fees was the result of a softened sales
environment primarily due to lower mortgage-lending volumes (as previously
discussed). The market index published by the Mortgage Bankers Association
remained relatively flat throughout the quarter ended September 30, 2000,
indicating that mortgage origination volumes have not changed significantly in
the last three months. Although the Company cannot predict volume changes in the
mortgage-lending environment, the Company does not anticipate any significant
changes in mortgage-lending volumes through the end of fiscal year 2001. The
Company's sales pipeline remains strong and as such the Company is cautiously
optimistic that software license fees will increase somewhat in the second
quarter of fiscal year 2001 compared to the quarter ended September 30, 2000. It
is difficult for the Company to measure the impact of the mortgage-lending
volume environment and to estimate the related future impact on software license
fees.
Software support fees were $2,293,000 for the quarter ended September 30, 2000,
a decrease of 7% from $2,459,000 in the comparable quarter of the prior year.
This period-to-period decrease was due primarily to lower software sales volume
through fiscal year 2000 and a relatively low customer attrition rate, slightly
offset by a higher percentage rate of software support fees. Due in part to
changes, from time to time, in government regulations relating to documentation
required for residential mortgage lending, the vast majority of the Company's
customers purchase annual software support agreements. Because software support
fees are recognized ratably over the term of the annual support agreement (while
software license fees are typically recognized on product
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shipment), the percentage change in software support fees compared to the
percentage change in software license fees is not proportional. The Company
believes software support fees will remain relatively flat or decrease slightly
for the remainder of fiscal year 2001 as a result of lower software license fees
earned in fiscal year 2000.
Other revenues were $586,000 for the quarter ended September 30, 2000, a
decrease of 3% from $605,000 in the comparable quarter of the prior year. This
decrease was due primarily to decreases in training and consulting revenue. The
Company expects its other revenues to remain relatively flat during the second
quarter of fiscal year 2001 compared to the quarter ended September 30, 2000.
Despite the mortgage-lending volume environment discussed above, the Company
believes the overall lending environment as of September 30, 2000, to be
favorable as compared to most historical measures. Nonetheless, there can be no
assurance that mortgage-lending volumes will not decrease or experience a high
amount of volatility. Such decreases or volatility could have a material adverse
effect on the Company's business, financial condition and results of operations.
Even if mortgage lending volumes increase, the Company's customers may not have
the need for additional capacity nor desire additional technological infrasture
which could result in an adverse effect on the Company and its results of
operations.
The Company is new to the enterprise application integration (EAI) and
workflow marketplace, which is a relatively new, constantly changing and
intensely competitive market. In addition, many of the Company's competitors in
this market have longer operating histories, greater name recognition, and
significantly greater financial, technical and marketing resources than the
Company. There can be no assurance that the Company's products will be accepted
by the market or that the Company will be competitive within the market; lack of
acceptance of the Company's EAI product in the market or an inability to compete
effectively against the Company's competitors would have a material adverse
effect on the Company's revenues, profitability and financial condition.
COST OF REVENUES
<TABLE>
<CAPTION>
Three months ended September 30,
(In thousands) 2000 1999 Change
---------------------------------------------------
<S> <C> <C> <C>
Software license fees $791 $525 51%
Percentage of software
license fees 82% 29%
---------------------------------------------------
Software support fees $590 $705 (16%)
Percentage of software
support fees 26% 29%
---------------------------------------------------
Other $346 $368 (6%)
Percentage of other 59% 61%
---------------------------------------------------
Total cost of revenues $1,727 $1,598 8%
Percentage of net revenues 45% 33%
---------------------------------------------------
</TABLE>
Cost of software license fees consists primarily of the amortization of
capitalized software development costs and, to a lesser extent, commissions and
royalties paid to third parties for certain interface products, and the purchase
and duplication of disks and product documentation. As a percentage of software
license fees, cost of software license fees increased to 82% for the quarter
ended September 30, 2000, compared to 29% for the quarter ended September 30,
1999. This
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increase was due primarily to software license fees decreasing substantially
during the first quarter of fiscal year 2001 while the cost of software license
fees increased 51% compared to the same quarter a year ago. Amortization of
capitalized software development costs account for the majority of the increase
in the cost of software license fees and increased to $760,000 for the quarter
ended September 30, 2000, compared to $465,000 in the comparable quarter of the
prior year.
Cost of software support fees includes salaries and other costs related to
providing telephone support, and the purchase, duplication and shipping of disks
associated with software updates. As a percentage of software support fees, cost
of software support fees decreased to 26% for the quarter ended September 30,
2000, compared to 29% for the quarter ended September 30, 1999. This decrease
was primarily due to software support fees decreasing at a lower rate than the
related costs were decreasing. The dollar cost of software support fees
decreased 16% over the year ago quarter, primarily representing decreased
payroll, travel, and freight costs for the customer support group. The Company
expects the dollar cost of software support fees to remain relatively flat
through the end of fiscal year 2001.
Cost of other revenue includes primarily the salaries and non-reimbursable
expenses for the employees who provide training and consulting services. As a
percentage of other revenue, cost of other revenue decreased to 59% for the
quarter ended September 30, 2000, which is relatively consistent with the 61%
for the quarter ended September 30, 1999.
As a percentage of net revenues, total cost of revenues increased to 45% for
the quarter ended September 30, 2000, compared to 33% for the quarter ended
September 30, 1999.
OPERATING EXPENSES
<TABLE>
<CAPTION>
Three months ended September 30,
(In thousands) 2000 1999 Change
--------------------------------------------------------
<S> <C> <C> <C>
Product development $1,077 $936 15%
Percentage of net revenues 28% 19%
--------------------------------------------------------
Sales & marketing $1,084 $1,365 (21%)
Percentage of net revenues 28% 28%
--------------------------------------------------------
General & administrative $1,398 $1,152 21%
Percentage of net revenues 36% 24%
--------------------------------------------------------
Amortization of goodwill $215 $215 0%
Percentage of net revenues 6% 4%
--------------------------------------------------------
</TABLE>
Product development expenses include salaries for software developers
and analysts, facility costs and expenses associated with computer equipment
used in software development, net of costs capitalized. As a percentage of net
revenues, product development expenses increased to 28% for the quarter ended
September 30, 2000, compared to 19% for the quarter ended September 30, 1999.
The increases in percentages were due primarily to decreasing revenue combined
with increasing product development expenses. The dollar increases in product
development expenses were due primarily to increases in payroll and related
expenses for additional development and quality assurance staff as well as to
increasing overall salaries in a tight labor market. These increases were offset
slightly by an increase in the amount of capitalized software development costs.
The Company capitalized $559,000 and $517,000 of development expenditures for
the quarters ended September 30, 2000, and 1999, respectively. The Company
expects overall development
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spending to increase slightly for the remainder of fiscal year 2001. In
addition, the Company is investing in resources to expedite the development of
the business-objects based architecture, which is the basis for the Company's
next generation of MortgageWare technology. This project is expected to result
in a series of flexible lending systems aligned with specific business needs and
will migrate the Company's MortgageWare lending system to a new architectural
platform. As a result, the Company expects product development expenses to
increase accordingly over the next fiscal year.
Sales and marketing expenses consist primarily of salaries, sales
commissions, travel and facility costs for the Company's sales and marketing
personnel, and, to a lesser extent, advertising, trade shows and other
promotional activities. As a percentage of net revenues, sales and marketing
expenses remained consistent at 28% for the quarter ended September 30, 2000,
compared to the quarter ended September 30, 1999. This percentage remained
relatively consistent primarily due to revenues decreasing at a similar rate as
the sales and marketing expenses. The dollar decreases in sales and marketing
expenses were due primarily to a reduction in advertising, reduced commissions
from the decreases in sales volumes, and a decrease in travel expense.
General and administrative expenses include costs associated with finance,
accounting, purchasing, order fulfillment, administration and facilities. As a
percentage of net revenues, general and administrative expenses increased to 36%
for the quarter ended September 30, 2000, compared to 24% for the quarter ended
September 30, 1999. On a dollar basis, general and administrative expenses
increased by $246,000 for the quarter ended September 30, 2000. This increase
was primarily due to increased consulting and professional fees and to a lesser
extent, increases in payroll and related expenses for additional administrative
staff as well as to increasing overall salaries in a tight labor market. The
Company expects general and administrative expenses to remain relatively
consistent for the remainder of fiscal year 2001.
Amortization of goodwill and other intangible assets consists of the
straight-line amortization of assets obtained by the Company as a result of its
acquisition of Logical Software Solutions Corporation ("LSS") on June 30, 1998.
These assets include workforce-in-place, customer lists, trade name, non-compete
and employment agreements and goodwill, which are being amortized over their
estimated useful lives of three to four years. The Company accounted for the
acquisition of LSS under the purchase method of accounting.
NET INTEREST AND OTHER INCOME
<TABLE>
<CAPTION>
Three months ended September 30,
(In thousands) 2000 1999 Change
----------------------------------------------------
<S> <C> <C> <C>
Net interest and other income $162 $140 16%
Percentage of net revenues 4% 3%
----------------------------------------------------
</TABLE>
As a percentage of net revenues, net interest and other income increased
to 4% in the quarter ended September 30, 2000 compared to 3% for the quarter
ended September 30, 1999. This increase was primarily due to higher interest
rates which resulted in a higher return on the Company's investments despite a
slightly lower cash and investment portfolio.
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As of September 30, 2000, the Company had no interest-bearing debt outstanding
and anticipates no new debt financing in the foreseeable future. Accordingly,
the Company expects net interest and other income for the foreseeable future to
reflect net interest income.
INCOME TAXES
<TABLE>
<CAPTION>
Three months ended September 30,
(In thousands) 2000 1999 Change
------------------------------------------------
<S> <C> <C> <C>
Income taxes ($552) ($96) (475%)
Effective tax rate 37% 37%
------------------------------------------------
</TABLE>
Income taxes include federal and state income taxes currently payable
and deferred taxes arising from temporary differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases. The effective tax rate was consistent for the quarters
ended September 30, 2000, and 1999, respectively.
LIQUIDITY AND CAPITAL RESOURCES
Working capital, which consists principally of cash, cash equivalents,
short-term investments, and accounts receivable, was $6,295,000 as of September
30, 2000, compared to $6,877,000 at June 30, 2000. Cash and cash equivalents
decreased by $1,344,000 for the quarter ended September 30, 2000. The decrease
in cash was primarily due to the purchase of investments and the investment in
capitalized software development and fixed assets.
The Company expects to spend approximately $562,000 for property, plant and
equipment during the remainder of fiscal year 2001.
Long-term cash requirements, other than normal operating expenses, are
anticipated for development of new software products and enhancement of existing
products, financing anticipated growth, the possible acquisition of other
software products, technologies and businesses, and the possible repurchase of
the Company's common stock. The Company believes that its existing cash, cash
equivalents, short-term investments, and cash generated by operations will be
sufficient to satisfy its currently anticipated cash requirements for the
remainder of fiscal year 2001.
FORWARD-LOOKING STATEMENTS
The Company's disclosure and analysis in this report contain some forward
looking statements. When used in this report, the words "believes,"
"anticipates," "expects," "intends," 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. The discussion and analysis herein should be read in
conjunction with the Risk Factors and other information contained in the
Company's Annual Report on Form 10-K for the year ended June 30, 2000,
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and "Certain Additional Factors Affecting Future Results" below.
CERTAIN ADDITIONAL FACTORS AFFECTING FUTURE RESULTS
There can be no assurance that the Company will be successful in attracting
new customers in the mortgage technology market or that its existing customers
will continue to purchase its products and support services. In addition, there
can be no assurance that the Company's new mortgage technology products and
services will be released in a timely fashion and that, if and when released,
new products or services or its efforts to integrate the FlowMan product into
its existing mortgage software products 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, financial condition and results of operations.
There can be no assurance that the Company will be successful in attracting
new customers in the EAI market or that its existing customers will continue to
purchase its products and support services. In addition, there can be no
assurance that FlowMan 4.0 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,
financial condition and results of operations.
Expansion of the Company's operations in the EAI software market would
require significant additional expenses and capital and could strain the
Company's management, financial and operational resources. There can be no
assurance that the Company's experience and leadership in the mortgage-related
software market will benefit the Company as it enters new markets, and gross
margins attributable to new business areas may be lower than those associated
with the Company's existing business activities. Similarly, there can be no
assurance that the Company will be able to expand its operations in a
cost-effective or timely manner. Furthermore, any new business launched by the
Company that is not favorably received by consumers could damage the Company's
reputation or the INTERLINQ brand. The lack of market acceptance of such efforts
or the Company's inability to generate satisfactory revenues from such expanded
services or products to offset their cost could have a material adverse effect
on the Company's business, prospects, financial condition and results of
operations.
It is difficult for the Company to accurately estimate unit sales of its
products and the volume of annual support contracts that its customers will
purchase due in general to the nature of the software markets, and specifically
to the cyclical and volatile nature of the residential mortgage lending market
and the development stage of the EAI market. In early 1994, the residential
mortgage lending market experienced a reduction in mortgage refinance volumes
due to a 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. The Company
believes that the current environment of lower mortgage lending volumes
contributed
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to the downturn in net revenues for the quarter ended September 30, 2000.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company does not use derivative financial instruments in its investment
portfolio. Its financial instruments consist of cash and cash equivalents,
short-term investments, trade accounts and contracts receivable and accounts
payable. The Company's exposure to market risk for changes in interest rates
relates primarily to its short-term investments and short-term obligations;
accordingly, fluctuations in interest rates would not have a material impact on
the fair value of these securities.
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company received a complaint from one of its customers regarding the
performance of purchased product and services. This complaint resulted in the
Company filing a lawsuit for declaratory relief in Washington on January 19,
2000 (INTERLINQ Software Corporation v. Molton, Allen & Williams Corporation
d/b/a MAW Corporation, King County Superior Court No.00-2-01 814-2SEA) and the
customer filing a lawsuit in its home state of Alabama on January 24, 2000
(Molton Allen & Williams Corporation v. Interlinq Software Corporation, District
Court for Jefferson County No. CV0000422). The Company has negotiated a
settlement of the dispute for a non-material amount.
ITEM 2. CHANGES IN SECURITIES
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a) EXHIBITS
27.1 Financial Data Schedule
b) REPORTS ON FORM 8-K
None
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SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
DATED: November 9, 2000
INTERLINQ SOFTWARE CORPORATION
(Registrant)
/s/ Alan Pickerill
-------------------------
Alan Pickerill
Vice President Finance
(Principal Financial and Accounting Officer)
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EXHIBIT INDEX
EXHIBIT NUMBER TITLE
------------------------- -------------------------------
27.1 FINANCIAL DATA SCHEDULE
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