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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, 2000
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 Identification No.)
incorporation or organization)
11980 N.E. 24TH STREET
BELLEVUE, WA 98005
(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 [ ]
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
15, 2000 as reported on the Nasdaq National Market, was approximately
$16,884,270.
As of September 15, 2000, there were 4,825,077 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 14, 2000, which
will be filed with the Securities and Exchange Commission within 120 days after
June 30, 2000, are incorporated by reference into Part III of this report.
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PART I
ITEM 1. BUSINESS
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.
OVERVIEW
INTERLINQ Software Corporation, a Washington corporation ("the Company")
incorporated in 1982 in the state of Washington. The Company is a leading
provider of technology that helps organizations effectively manage complex,
information-intensive business transactions. The company's mortgage technology
division offers server-based business solutions to commercial banks, mortgage
banks, mortgage brokers, credit unions and savings institutions, including a
number of the top mortgage originators. The Company's lending systems process
approximately one in eight retail residential mortgage loans, more than any
other lending system.
Pursuant to a purchase and sale agreement dated June 30, 1998, the Company
acquired substantially all the assets and business of Logical Software Solutions
Corporation ("LSS"). The assets and technology acquired through this transaction
included FlowMan(R) version 3.2 ("FlowMan"), an award-winning enterprise
application integration ("EAI") software application that integrates disparate
systems and applications. In connection with this acquisition, the Company
formed the Enterprise Technology Division ("ETD") and reorganized the Company's
existing mortgage software business into the Mortgage Technology Division
("MTD").
MORTGAGE TECHNOLOGY DIVISION
OVERVIEW
Through its Mortgage Technology Division, the Company works closely with
clients to provide comprehensive software applications and business solutions
for the residential mortgage and construction lending industry. MTD offers a
suite of products called MortgageWare(R) Enterprise, which manages the entire
life cycle of a mortgage loan. MortgageWare Enterprise is designed to provide
greater operational efficiency, real-time access to data, and a cost-effective
means for managing and integrating information. It is designed to allow mortgage
lenders to improve their business processes and practices, thereby improving
their efficiency and profitability. MortgageWare Enterprise creates an
integrated system of reliable information for business analysis; data is entered
once, managed from a central point, and accessible by any licensed user.
MortgageWare Enterprise can perform a wide variety of mission-critical
enterprise tasks, including matching loan programs for lenders and borrowers,
originating and servicing mortgage loans and risk analysis of all loans within
an organization's pipeline.
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The Company's target market includes all mortgage lenders, the larger
brokerage companies and the specialty servicing institutions in the United
States, Puerto Rico, Guam and the Virgin Islands. According to Company estimates
based on available industry data, this market is comprised of approximately
1,200 mortgage banks, 10,000 mortgage brokers, 4,300 commercial banks, 1,800
credit unions, 1,300 savings institutions and 1,000 specialty servicing
institutions.
The Company intends to generate future revenue growth within MTD from the
sale of mortgage loan servicing technology and products designed to further
increase operational efficiency. The Company integrated MortgageWare(R)TC (the
Thin-client version of the MortgageWare(R) Loan Management System) with FlowMan
during fiscal year 1999 to create MortgageWare(R)TC Workflow Tools and expects
this product to contribute to future revenue growth as well. These areas of
growth are expected to complement the Company's current products, which address
operational efficiency in order to decrease the time and cost of the mortgage
loan cycle. The Company has planned releases of new enhancements and upgrades to
existing products targeted for fiscal year 2001. In addition, the Company
intends to integrate FlowMan into MortgageWare(R) Loan Servicing (the Company's
client-server loan servicing system) during the latter half of fiscal year 2001.
STRATEGY
The Company's strategy with respect to MTD is to strengthen and leverage its
position as a leading technology provider in the mortgage industry. This
strategy includes extending the scope of the Company's easy-to-use, PC- and
client-server-based offerings in order to help customers shape their business
activities through the use of technology and information. The Company is
supported in this strategy by a strong base of recurring revenue from long-term
customer relationships and the activities of a direct sales force.
Easy-to-Use Software
The Company believes its customers require software solutions that are
specifically designed for financial institutions and that are easy to use and
support (since the residential mortgage and construction lending processes are
complex and many are performed by individuals with modest computer experience).
The Company's strategy is to provide software solutions that can be easily
installed and used. In order to provide consistent, high-quality support and
service, the Company does not create customized software; however, it does
enhance its products, from time to time, for certain customers on a "pay for
priority" basis. In addition, product upgrades often include modifications and
enhancements requested by customers.
PC and Server Platform
The Company believes that reductions in the cost of and increases in the
computing power of PCs make its systems increasingly affordable for all
financial institutions. The Company's software runs on industry-standard PCs,
servers 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 are
required to sell its products and therefore, it employs a direct sales force.
The Company retains sales personnel who it believes are skilled in residential
mortgage, construction lending and loan servicing, as well as PC- and
client-server-
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based software applications. The Company believes that maintaining its own sales
force allows it to develop long-term customer relationships.
Long-term Customer Relationships
The Company attempts to build long-term relationships with its customers by
providing them with personal contact from management, training and
implementation and continuing services (such as consulting, toll-free telephone,
email and web-based support and participation in user groups). The Company
monitors customer satisfaction and sponsors or purchases 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 by maintaining its
responsiveness to changing customer demands.
PRODUCTS AND SERVICES
The Company believes the strength of its Mortgage Technology Division lies
in its ability to provide customers with an integrated approach to originating,
processing, secondary marketing, servicing, and analyzing loans. The Company
offers a variety of products for strategic and tactical business solutions in
the mortgage industry, including the MortgageWare Loan Management System and
MortgageWareTC, MortgageWare Entre(TM), MortgageWare(R)TC Workflow Tools,
MortgageWare InfoLINQ(R), MortgageWare MarketLINQ(R), MortgageWare
InvestorLINQ(R), MortgageWare Loan Servicing(TM), and BuilderBLOCK$(R).
Together, these business solutions make up the MortgageWare Enterprise -- which
offers a means for greater operational efficiency enterprise-wide, faster access
to information, and cost-effective management of information content.
The following table briefly describes INTERLINQ's MortgageWare Enterprise
products:
<TABLE>
<S> <C>
POINT-OF-SALE AND ORIGINATION
------------------------------------------------------------------------------------------------
Entre Loan officers pre-qualify applicants in the field through the use of a
Windows-based software that runs on a laptop computer
Origination Loan officers enter loan applications directly into a PC, either in
the office or in the field
LOAN PRODUCTION SYSTEMS
------------------------------------------------------------------------------------------------
MortgageWare Loan Modular network production system to manage a loan from origination
Management System through funding
MortgageWare TC Thin-client production system with a centralized database to enable
seamless data transfer through all data modules, from origination
through funding. Uses less network bandwidth than traditional production
systems and simplifies software version control
MortgageWare TC Matches processes to resources and needs. Automates and adjusts
Workflow Tools business processes to reflect shifts in interest rates or changes in
staffing. Graphical interface allows non-technical managers to design
and adjust processes without programming.
SECONDARY MARKETING
------------------------------------------------------------------------------------------------
MarketLINQ Serves as a central point of data entry and maintenance
for all mortgage loan programs and rates, providing
automatic distribution enterprise-wide
InvestorLINQ Manages the risk of financial loss in the origination and
subsequent selling of mortgage loans; helps secondary
marketing departments maximize profits from the sale of
loans in the secondary market by providing pipeline
information to price loan products and hedge positions
</TABLE>
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<TABLE>
<S> <C>
LOAN SERVICING
------------------------------------------------------------------------------------------------
Loan Servicing A complete, scalable and cost-effective client-server-based loan
servicing solution
Loan Servicing A streamlined version of Loan Servicing designed for
Gateway lenders holding loans for sale
CONSTRUCTION LENDING
------------------------------------------------------------------------------------------------
BuilderBLOCK$ Provides ability to service and report essential components of a
construction loan
ANALYSIS AND COMMUNICATIONS
------------------------------------------------------------------------------------------------
InfoLINQ Provides mortgage lenders with a complete intranet-based environment
in which to collect, extract, and distribute business information
MortgageWare(R) Imports loan data from Web sites or call centers into MortgageWare
External Loan-
Application Interface
Other Interfaces Interfaces link to Fannie Mae MORNETPlus(R) credit
information service, Fannie Mae Desktop Underwriter(R),
Fannie Mae Desktop Originator(R), Freddie Mac Loan
Prospector(R), systems run by Metavante Corporation
(formerly M&I Data Services) and others.
</TABLE>
MortgageWare Entre. Provides loan officers or brokers ("Originators") with
tools to tailor loan programs, thereby enabling better customer service and more
expedient completion of each loan application. In order to improve communication
between Originators in the field and the processing department, MortgageWare
Entre is designed to increase accuracy, timeliness, and back-office tracking of
each loan. The Company believes that MortgageWare Entre gives mortgage
Originators a competitive advantage by enabling them to quickly pre-qualify
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 (this Windows-based system includes a contact manager for
efficient follow-up). In addition, MortgageWare Entre provides the ability to
order risk grade evaluation and mortgage insurance and request underwriting
through Freddie Mac's Loan Prospector, and the ability to request underwriting
directly from Fannie Mae's Desktop Underwriter.
MortgageWare TC and MortgageWare Loan Management System. MortgageWare TC and
MortgageWare Loan Management System are modular systems for residential mortgage
loan management that accommodate qualifying, point-of-sale origination,
processing, closing, settlement, pipeline tracking and management, and
inter-branch electronic communications. MortgageWare TC, the thin-client version
of the MortgageWare Loan Management System, has been designed to reduce network
traffic, improve performance, simplify hardware requirements and reduce exposure
to network-related problems. These systems can also receive tiered pricing from
MarketLINQ, allowing lenders to 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 TC utilizes a 32-bit Windows client-server architecture.
MortgageWare TC Workflow Tools. MortgageWare TC Workflow Tools automates
complex processes and help lenders match those processes to their resources and
needs. Its graphical interface allows on-technical managers to design and adjust
processes without programming.
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MortgageWare MarketLINQ. A Windows-based product, MortgageWare 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 once --whether it's
being used for in-house purposes or by a loan officer working to obtain the best
interest rate for a borrower. Direct links into Bridge Information Systems
enable the pricing for loan programs to be efficiently managed and rapidly
recalculated as changes in mortgage pricing occur (often multiple times daily).
MortgageWare MarketLINQ utilizes a 32-bit architecture.
MortgageWare InvestorLINQ. A Windows-based product, MortgageWare
InvestorLINQ is a complete risk-management and analysis tool. The system helps
lenders accurately measure exposure, decide what and how to sell, make trades,
allocate loans and analyze performance. MortgageWare InvestorLINQ utilizes a
32-bit architecture.
MortgageWare Loan Servicing. The Company believes that its MortgageWare Loan
Servicing enhances a customer's profitability by offering an alternative to
service bureau and mainframe-based servicing. MortgageWare Loan Servicing is
offered at a competitive price that provides substantial economic benefit to
customers. In addition, it offers open access to the loan servicing information,
which gives loan servicers a cost and an information advantage over other
systems. 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.
MortgageWare Loan Servicing Gateway. A streamlined version of Loan
Servicing, Servicing Gateway is a low-cost product designed specifically for
those lenders holding loans for sale. Using Servicing Gateway 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 Forms 1099 and 1098, 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. MortgageWare InfoLINQ is an intranet-based
application enabling better business decisions by automatically collecting
information from MortgageWare or other systems and providing tools for analysis.
Additionally, customized desktop reports can be distributed even to
non-MortgageWare users.
Other MortgageWare Information Management Tools. The Company has developed
and expects to continue to develop products that it believes speed up the cycle
of mortgage loan creation. Other mortgage technology products offered by the
Company include:
MortgageWare External Loan-Application Interface. This product imports data
captured in a MORNETPlus Version 3.0 format, translating leads collected by call
centers, Web sites or other loan-origination vehicles into loan applications
ready for processing in MortgageWare. It also supports data integrity by
flagging potential errors.
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NEW PRODUCTS
Support for Fannie Mae Desktop Underwriter(R) and Desktop Originator(R) on
the Web. MortgageWare Loan Management System, MortgageWare TC and MortgageWare
Entre have been enhanced to support MORNETPlus(R) on the Web, Fannie Mae's new
operating environment. Loan application information can now be sent to Fannie
Mae's Desktop Underwriter on the Web and Desktop Originator on the Web from the
above referenced applications.
MortgageWare(R)TC Polling Agent. The Polling Agent, which was released
during the first half of fiscal 2001, gives customers the ability to generate a
Microsoft SQL Server 7.0 Version of their MortgageWare database.
MortgageWare InvestorLINQ(R) Pooling Module. This module, release during the
first half of fiscal 2001 provides easy allocation of loans to pools. Secondary
Marketing personnel can use this module to manage the risks inherent with
securities trading.
PRODUCTS/MODULES UNDER DEVELOPMENT
Entre 5.0. This latest upgrade to Entre is targeted for release during the
first half of fiscal 2001. This product features a new business-object-based
architecture facilitating the use of business objects, improvements to data
handling and the user interface, refined export options and expanded options for
documents. The architecture for this product is also the basis of the Company's
next generation of MortgageWare technology.
Next-generation MortgageWare. The business-object architecture that debuts
in Entre 5.0 is the basis for the next generation of MortgageWare technology.
Toolkits for larger lenders that enable the origination and processing
capabilities are scheduled to be released during the second half of fiscal 2001.
The Company will later offer packaged applications to meet the needs of lenders
of different sizes and with different business models.
Integration of FlowMan with MortgageWare Loan Servicing. During fiscal year
2001, the Company plans to integrate FlowMan into MortgageWare Loan Servicing.
This is expected to further broaden the capabilities and benefits of this
product and further strengthen the MortgageWare Enterprise.
MortgageWare MarketLINQ(R) Characteristic Based Pricing Engine. Scheduled
for release during the first half of fiscal 2001, the pricing engine toolkit
allows customers the ability to maintain and distribute an unlimited number of
product offerings across multiple channels by allowing rules that automatically
adjust pricing based on specific criteria, calculate when additional fees may be
required or offer special rates.
Complementary Products and Services
The Company 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.
Electronic forms and custom electronic documents necessary in the loan
production process are available to customers through a special marketing
agreement with VMP's Electronic Laser Forms, Inc., a division of CBF Systems,
Inc. ("VMP"). Under this agreement, customers are introduced to these products
by the Company's direct sales force. Responsibility for producing, maintaining
compliance, and shipping documents to customers is held by VMP. The Company
receives a percentage of the revenue collected by VMP.
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The Company also sells laser fonts and font cartridges and provides laser
logo services. The Company has developed interfaces to Fannie Mae, Freddie Mac,
and Ginnie Mae networks to facilitate delivery of closed loans. In addition, the
Company has developed several programs to export servicing data to loan
servicing systems for its customers.
Customer Service and Support
The Company believes that excellent customer service is vital to its success
and future growth. For many customers, the MortgageWare Enterprise products
become 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 the Company's products also purchase an annual support contract.
Customers are required to purchase support contracts to receive product upgrades
and to receive customer support services.
Regular feedback on the quality of customer service is an integral part of
the Company's customer service strategy. In addition, the Company has advisory
panels for each of its products. The advisory panels consist of customers who
are chosen to be representative of the Company's diverse mortgage lending
customer base. As a subset to the advisory panels, the Company holds annual
focus group meetings to obtain information and feedback on specific
cross-product issues.
The Company has a Major Account Services group to serve the needs of its
largest customers. As of June 30, 2000, 45 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 Enterprise continues to evolve based on input from many
sources, including customers who submit software enhancement request forms
suggesting corrections or enhancements, as well as the advisory panels for each
product. The Company maintains a database of all product support calls, which
provides feedback to its Product Development Department. In addition, the
Company maintains a database that is accessible to registered customers via the
Internet that provides product, troubleshooting and contact information.
The Company has organized its Product Development Department into teams
working on products or closely related groups of products. These teams include
personnel with experience in product analysis, software engineering, research
and technology, quality assurance and documentation. Their objective is to
ensure that all products meet the Company's standards while developing products
that meet the market's needs. Employees on these teams are selected for their
skills in mortgage lending and software development. The Company examines new
technologies and platforms on an ongoing basis to determine their potential
benefits to customers. The Company currently develops products using
Microsoft(R) Windows(R) and Microsoft(R) Windows NT(R) operating systems, ODBC
compliant database options (Microsoft(R) SQL Server, MSDE and Access), Web
browser-based interfaces and thin-client technology, Microsoft(R) Visual C++(R),
Microsoft(R) Visual Basic(R) and Microsoft(R) ActiveX(R) programming tools on a
PC network. Currently, MortgageWare Loan Management System runs on Windows
platforms and most major networks and uses licensed technology to run on the DOS
operating system and on major PC networks. Other products, such as MortgageWare
TC, MortgageWare Entre, MortgageWare Loan Servicing, MortgageWare Servicing
Gateway, MortgageWare MarketLINQ and BuilderBLOCK$ all run under the Windows
operating system.
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SALES AND MARKETING
The Company employs a direct sales force in its MTD because it believes that
considerable expertise is required to sell its mortgage technology products and
that strong customer relationships are key to its success. As of June 30, 2000,
the Company employed one national sales manager and 10 sales executives who are
located throughout the country and are each responsible for an assigned
geographic territory. These personnel are supported by sales administration and
inside sales representatives. Certain sales representatives are exclusively
devoted to sales of the Company's servicing products. The Company expects its
sales executives to maintain relationships with existing customers and to be
responsible for the generation of new business and expansion of existing
business. License administration representatives handle contracts and other
administrative details, while inside sales representatives qualify sales leads,
set appointments for sales executives, and manage 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 mortgage-related software products. To date, it has not experienced
significant returns under this guarantee.
CUSTOMERS
The Company's mortgage technology 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 customers in 50
states plus Puerto Rico , Guam, and the U.S. Virgin Islands. As of June 30,
2000, this customer base was comprised of approximately 23% mortgage brokers,
11% mortgage banks, 31% commercial banks, 24% credit unions, 5% savings
institutions and 6% specialized servicing institutions and other organizations.
In fiscal year 2000, no single customer accounted for more than 10% of the
Company's net revenues.
COMPETITION
The market for mortgage-related 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.
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
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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.
MORTGAGE LENDING REGULATIONS
The residential mortgage lending industry is subject to a variety of
government regulations, including the Fair Credit Reporting 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 VMP's Electronic
Laser Forms, Inc., a division of CBF Systems, Inc. ("VMP"). Under the terms of
this agreement VMP assumes compliance responsibility for all documents sold by
and through the Company.
ENTERPRISE TECHNOLOGY DIVISION
OVERVIEW
Through its ETD, 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. These alternatives
include recapitalizing the division (as a joint venture or a separate
subsidiary, for example), strategic partnering or divesting the FlowMan
technology.
FlowMan is an award-winning technology that integrates disparate systems and
applications in order to facilitate ongoing process knowledge management by
applying its business process and rules technology across an entire enterprise.
FlowMan is designed to coordinate the execution and timing of all tasks, events
and decisions for key business processes across legacy systems, enterprise
applications, client-server systems and Internet technologies. The Company does
not intend to launch FlowMan technology outside of the financial services
industry unless it identifies and associates with a strategic partner.
FlowMan technology can be marketed as an advanced workflow technology that
automates complex processes within applications or as EAI technology that
integrates disparate systems and integrates process flow across applications.
The Company believes that potential target markets for FlowMan include vertical
markets that encompass complex, information-intensive business transactions
(such as
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healthcare, insurance, government, transportation and utilities, etc.) as well
as the broader EAI market. The Company believes that software providers in
vertical markets can use FlowMan as an integration/workflow toolkit or component
to enhance their products' functionality and architecture. The Company also
believes that with FlowMan companies can reuse integration techniques and
processes across departments and environments and users can implement
application integration and reengineer processes without engineering knowledge
or training in the specific underlying technologies.
STRATEGY
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. These alternatives include recapitalizing
the division (as a joint venture or a separate subsidiary, for example),
strategic partnering or divesting the FlowMan technology.
Workflow Market & Enterprise Application Integration
The Company believes a need exists in numerous information intensive
vertical markets (such as healthcare, insurance, government, transportation and
utilities, etc.) for workflow/EAI technology that can be used to enhance
existing and developmental stage products. The Company believes that these
markets may offer a significant business opportunity for the Company.
Another significant business opportunity is represented by the horizontal
EAI market. This is a growing marketplace, which according to some industry
analysts could reach $2.5 billion this year. This marketplace could potentially
provide the Company access to both a much larger technology market and business
opportunity.
The Company's future financial performance will depend in large part on the
strategy it ultimately chooses and on continued growth in the number of
organizations adopting EAI computing environments and the number of applications
developed for use in those environments. There can be no assurance that the
Company's strategic objectives will succeed or that the market for EAI and
workflow software will continue to grow.
PRODUCTS AND SERVICES
FlowMan
FlowMan is comprised of an enterprise application framework, engineering
tools and a user interface. The enterprise application framework manages and
controls transactions throughout the enterprise allowing collaboration between
application components. The framework serves as a communication "pipeline"
throughout the enterprise. The framework core elements, the business process
engine, business rules engine and component interface, allow abstraction of the
process model and business rules from third-party and legacy applications and
technology components such as imaging, forms, DBMS and other products connected
into the FlowMan framework. This tight integration results in one common
enterprise-wide system, protects the organization's technology investment and
eliminates the need to mandate standard enterprise components in favor of a
best-of-breed approach. FlowMan also provides flexibility through rapid
implementation and modification of the enterprise technology framework.
Applications can be added, removed, or replaced by other application components
in a plug-and-play fashion. The interface layer of the FlowMan framework
provides a means for the easy integration of each
11
<PAGE> 12
component into the overall enterprise framework allowing interoperability
between applications and across the enterprise.
FlowMan has won numerous awards over the past several years, including:
o 1998 AIIM Process Innovation Award
o 1998 GIGA Silver Award
o 1997 GIGA Gold Award
o 1996 GIGA Merit Award
o 1995 and 1996 CIPA Winning Solutions Provider
PRODUCT DEVELOPMENT
FlowMan version 4.0, completed during the first half of fiscal 2000, offers
significant enhancements over version 3.2, including three-tier architecture for
expanded scalability, Component Object Model (COM) technology, object-oriented
methodology and ActiveX(R) controls. FlowMan version 4.0 is deployable across
distributed network environments.
The introduction of products embodying new technologies and the emergence of
new industry standards can render existing products obsolete and unmarketable.
There can be no assurance that the Company will be successful in developing and
marketing product enhancements or new products that respond to technological
change or evolving industry standards, that the Company will not experience
difficulties that could delay or prevent the successful development,
introduction and marketing of these products, or that its new products and
product enhancements will adequately meet the requirements of the marketplace
and achieve market acceptance. There also can be no assurance that the Company
will be successful in attracting appropriate partners with whom to develop,
market, and/or otherwise receive value for the FlowMan product. If the Company
is unable, for technological or other reasons, to develop and introduce new
products or enhancements of existing products in a timely manner in response to
changing market conditions or customer requirements, or if the Company is unable
to develop appropriate partnerships to bring this product to market, the
Company's business, operating results and financial condition will be materially
adversely affected.
SALES AND MARKETING
The Company is currently evaluating strategic alternatives to maximize the
return of its investment in the FlowMan technology. The Company currently
employs one sales person.
CUSTOMERS
The Company has retained a portion of the small customer base it acquired in
1998 from LSS.
COMPETITION
The workflow and EAI software markets are intensely competitive and subject
to rapid change. Competitors vary in size and in the scope and breadth of the
products and services offered. The majority of these companies are interested in
providing specialized services or products to complement true EAI provider's
products. Some suppliers are contending for position as full-fledged EAI
software system providers. These include IBM and New Era of Networks among
others.
Many of the Company's current and potential competitors have significantly
greater financial, technical, marketing and other resources than the Company;
some offer complementary products not offered by the Company. As a result, they
may be able to respond more quickly to new or emerging
12
<PAGE> 13
technologies and changes in customer requirements, or to devote greater
resources to the development, promotion and sale of their products than the
Company can. There can be no assurance that the Company will be able to compete
successfully against current and future competitors or that competitive
pressures faced by the Company will not materially adversely affect its
business, operating results and financial condition.
GENERAL CORPORATE INFORMATION
INTELLECTUAL PROPERTY AND OTHER PROPRIETARY RIGHTS
The Company 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 received a patent covering part of the
FlowMan technology in September of 1998, which will expire in April 2015.
Despite the Company's efforts to protect its proprietary rights,
unauthorized parties may attempt to copy the Company's products or to obtain and
use its proprietary information. Policing unauthorized use of the Company's
products is difficult, and since the Company is unable to determine the extent
to which piracy of its software products exists, software piracy can be expected
to be a persistent problem. There can be no assurance that the Company's means
of protecting its proprietary rights will be adequate or that competitors will
not independently develop similar technology.
There has been frequent litigation in the computer industry regarding
intellectual property rights. There can be no assurance that third-parties will
not in the future claim infringement by the Company with respect to current or
future products, trademarks or other proprietary rights. Any such claims could
be time-consuming, result in costly litigation, cause diversion of management's
attention, cause product release delays, require the Company to redesign its
products or require the Company to enter into royalty or licensing agreements.
These royalty or licensing agreements, if required, may not be available on
terms acceptable to the Company, or at all, any of which occurrences could have
a material adverse effect upon the Company's business, financial condition and
results of operations.
MANUFACTURING
The principal materials used in the Company's products include compact disks
(or computer diskettes) and documentation. The manufacturing process includes
the development and testing of software by the Company, plus the production of a
master copy for duplication. The Company contracts with an outside source for
all disk duplication for major product releases and updates. Accompanying
documentation, which is minimal since most documentation is on-line, is created
by the Company and sent to an outside source to be reproduced. The Company
generally ships products within a few business days after receipt of an order.
Normally the Company has little or no backlog, but has experienced occasional
backlogs. At June 30, 2000, the Company's backlog was insignificant.
CERTAIN ADDITIONAL FACTORS AFFECTING FUTURE RESULTS
There is 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 is 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 its 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
13
<PAGE> 14
services. Each of these events could have a material adverse effect upon the
Company's revenues, financial condition, and results of operations.
There is no assurance that the Company will be successful achieving its
strategic objectives in maximizing the return of its investment in the FlowMan
technology. In addition, there is no assurance 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.
Potential expansion of the Company's operations in the EAI software market
might require significant additional expenses and capital and could strain the
Company's management, financial and operational resources. Furthermore, there
can be no assurance that the Company's experience and leadership in the
mortgage-related software market would benefit the Company as it entered new
markets, and gross margins attributable to new business areas could be lower
than those associated with the Company's existing business activities. There can
be no assurance that the Company would 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 year 1994 which continued through most of fiscal year 1995. During fiscal
years 1999, 1998 and 1997, in part due to the increase in mortgage lending and
refinance volumes, the Company had increased revenues, operating income and net
income.
During the fourth quarter of fiscal year 1999 and through fiscal year 2000,
mortgage-lending rates began to rise and the mortgage lending and refinance
volumes decreased substantially. As a result, the Company experienced a
significant decrease in net revenues, operating income and net income. There can
be no assurance that mortgage-lending rates will not continue to rise. A
continued high-interest-rate environment could have a material adverse effect on
the Company's revenues, profitability, and financial condition
EMPLOYEES
As of September 15, 2000, the Company employed 187 people, including 31 in
sales and marketing, 81 in product development, 45 in customer service and 30 in
operations. None of the Company's employees is represented by a labor union, and
the Company believes that its relationship with its employees is good.
EXECUTIVE OFFICERS OF THE REGISTRANT
As of September 17, 2000, the executive officers of the Company are as
follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
-----------------------------------------------------------------------------------------
<S> <C> <C>
Jiri M. Nechleba 43 President and Chief Executive Officer
</TABLE>
14
<PAGE> 15
<TABLE>
<S> <C> <C>
Patricia R. Graham 47 Executive Vice President, Mortgage Technology Division
Alan R. Pickerill 34 Vice President of Finance and Secretary
</TABLE>
JIRI M. NECHLEBA has been President and Chief Executive Officer since
September 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, 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.
PATRICIA R. GRAHAM has been Executive Vice President-Mortgage Technology
Division since July 1998. Prior to her promotion, Ms. Graham served as Vice
President - Sales and Marketing since March 1996. From 1990 to 1995, she served
in various capacities with A.C. Nielsen Co., a subsidiary of Dun & Bradstreet,
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.
ALAN R. PICKERILL has over 12 years of finance and financial management
experience and has played key roles in evaluating potential acquisitions for
INTERLINQ. He started with the company in 1998 as controller, was later promoted
to Director of Finance, and became Vice President of Finance in January 2000.
Previously, he was a divisional controller at Mosaix, a software developer, and
an audit manager at accounting firm Deloitte & Touche. Mr. Pickerill holds a
Bachelor of Arts degree in Business Administration from the University of
Washington. He earned his CPA certificate in 1990.
ITEM 2. PROPERTIES
The Company is currently leasing and occupying approximately 35,000 square
feet of office space in Bellevue, Washington. This lease expires in November
2005 and contains two consecutive renewal options for five years each. The
Company believes that its current facilities will be adequate for its needs
through the end of fiscal year 2001.
ITEM 3. 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.00-2-01814-2SEA) 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 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 2000.
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 1,342 beneficial shareholders as of
September 7, 2000, based on computations including participants in security
positions listings, as defined by Rule 17Ab-8 of the Exchange Act.
15
<PAGE> 16
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, 2000
Fourth quarter $ 5.13 $ 2.19
Third quarter 5.38 3.88
Second quarter 4.75 3.25
First quarter 7.25 3.75
Fiscal year ended June 30, 1999
Fourth quarter $ 8.13 $ 6.25
Third quarter 8.56 7.63
Second quarter 9.00 5.00
First quarter 7.75 4.69
</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.
16
<PAGE> 17
ITEM 6. SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
Years Ended June 30, 2000 1999 1998 1997 1996
---------------------------------------------------------------------------------------------------------
(In thousands except per share data)
<S> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA:
Net revenues:
Software license fees $ 6,934 $ 13,092 $ 9,647 $ 7,055 $ 6,232
Software support fees 9,768 8,637 6,976 6,073 5,773
Other 2,209 2,702 1,723 1,239 1,088
-------- -------- -------- -------- --------
Total net revenues 18,911 24,431 18,346 14,367 13,093
-------- -------- -------- -------- --------
Cost of revenues:
Software license fees 2,245 2,506 1,778 1,500 1,653
Software support fees 2,600 2,731 2,445 1,856 1,678
Other 1,420 1,468 859 683 589
-------- -------- -------- -------- --------
Total cost of revenues 6,265 6,705 5,082 4,039 3,920
-------- -------- -------- -------- --------
Gross profit 12,646 17,726 13,264 10,328 9,173
-------- -------- -------- -------- --------
Operating expenses:
Product development 4,018 3,225 1,609 2,147 2,060
Sales and marketing 4,870 5,983 5,674 4,011 4,230
General and administrative 4,984 5,988 3,754 3,152 3,010
Amortization of goodwill and other
intangible assets 859 858 -- -- --
Purchase of in-process research &
development -- -- 1,350 -- --
-------- -------- -------- -------- --------
Total operating expenses 14,731 16,054 12,387 9,310 9,300
-------- -------- -------- -------- --------
Operating income (loss) (2,085) 1,672 877 1,018 (127)
Net interest and other income 544 545 744 719 811
-------- -------- -------- -------- --------
Income (loss) before income tax
expense (benefit) (1,541) 2,217 1,621 1,737 684
-------- -------- -------- -------- --------
Income tax expense (benefit) (539) 820 616 627 251
-------- -------- -------- -------- --------
Net income (loss) $ (1,002) $ 1,397 $ 1,005 $ 1,110 $ 433
======== ======== ======== ======== ========
PER SHARE DATA:
Net income (loss) - basic $ (.20) $ .27 $ .19 $ .19 $ .07
-------- -------- -------- -------- --------
Net income (loss) - diluted $ (.20) $ .25 $ .19 $ .19 $ .07
-------- -------- -------- -------- --------
Shares used to calculate net income (loss)
per share - basic 4,912 5,174 5,213 5,707 5,965
Shares used to calculate net income (loss)
per share - diluted 4,912 5,485 5,376 5,842 6,171
BALANCE SHEET DATA:
Cash, cash equivalents and investments $ 10,111 $ 11,763 $ 13,908 $ 13,831 $ 14,218
Working capital 6,877 8,227 8,525 11,623 12,823
Total assets 22,190 25,797 26,770 21,067 22,321
Total shareholders' equity 14,752 17,517 17,155 16,050 17,771
</TABLE>
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<PAGE> 18
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
INTRODUCTION
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.
OVERVIEW
INTERLINQ Software Corporation (the "Company"), established in 1982,
provides software technology for organizations in the mortgage-lending
marketplace. Customers include banks, savings institutions, mortgage banks,
mortgage brokers, and credit unions, including a number of the top 100 mortgage
originators. This marketplace began automating the process of originating,
processing and closing mortgage loans in the mid-1980's at which time the
Company introduced its flagship product MortgageWare Loan Management System.
Since then, the Company has introduced a number of additional products
additional products to manage a loan through its entire life cycle, including
MortgageWare Loan Servicing which is used to service mortgage loans after they
have been closed and funded. Generally, when interest rates are low and mortgage
volumes are high, customers and prospects purchase more automation
infrastructure. On the other hand, when interest rates are high and mortgage
volumes are low, customers and prospects slow down or stop purchasing automation
infrastructure. As a result, the Company's financial results have generally
followed the cyclical nature of the mortgage-lending marketplace.
During the fiscal year ended June 30, 1999, the Company experienced record
software license fees due to the success of INTERLINQ products in a record
mortgage-lending marketplace. Near the end of the 1999 fiscal year, mortgage
lending rates began to rise. As a result, the Company began to observe a
softening in the sales environment driven by reduced mortgage origination
volumes as well as to uncertainties related to Year 2000 issues. This
environment continued through fiscal year 2000 as interest rates increased
periodically over the course of the year and as such, the Company's software
license fee revenues declined substantially.
Looking forward, the Company has no reason to believe that the
mortgage-lending environment will change substantially through fiscal year 2001.
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<PAGE> 19
NET REVENUES
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------
(In thousands) 2000 Change 1999 Change 1998
--------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Software license fees $ 6,934 (47)% $13,092 36% $ 9,647
Software support fees 9,768 13 % 8,637 24% 6,976
Other 2,209 (18)% 2,702 57% 1,723
-----------------------------------------------
Total net revenues $18,911 (23)% $24,431 33% $18,346
============================================================================================
</TABLE>
Software license fees decreased by 47% for fiscal year 2000 compared to
fiscal year 1999, and increased by 36% for fiscal year 1999 compared to fiscal
year 1998. The decrease in software license fees in fiscal year 2000 was due
primarily to a softened sales environment caused by increasing interest rates as
well as to customers' concerns over the change to the year 2000. The increase in
software license fees in fiscal year 1999 compared to fiscal year 1998 was due
primarily to the success of the Company's products in the record lending market
during that year.
Software support fees increased by 13% for fiscal year 2000 compared to
fiscal year 1999, and increased by 24% for fiscal year 1999 compared to fiscal
year 1998. The increase for fiscal year 2000 was primarily a result of the
record software license fee revenue earned by the Company in fiscal year 1999
combined with increases in support fees on certain of the Company's products.
The increase for fiscal year 1999 was due primarily to an increase in the
installed base of the Company's software, higher software license fees in that
year and increases in support fees on certain of the Company's products.
Other revenues decreased by 18% for fiscal year 2000 compared to fiscal year
1999, and increased by 57% for fiscal year 1999 compared to fiscal year 1998.
The decrease in other revenues in fiscal year 2000 compared to fiscal year 1999
was due primarily to the related decrease in software license fee revenue
discussed above. This included reductions in training revenue and consulting
revenue offset slightly by an increase in document referral fees. The increase
in other revenues in fiscal year 1999 compared to fiscal year 1998 was due
primarily to an increase in training revenue (associated with increased software
sales volume), an increase in custom programming, consulting and data conversion
revenue, as well as an increase in document referral fees.
Looking forward, the Company has no reason to believe that the market's
mortgage-lending volume will change significantly in the foreseeable future,
leading to continued pressure on software license fee revenue. However, the
Company believes that certain customers and prospects may increase their
purchasing levels for technological infrastructure that helps them improve
profits in times of low origination volume. The Company believes that certain of
its products including, MortgageWare Loan Servicing, MortgageWare InvestorLINQ,
MortgageWare MarketLINQ, MortgageWare TC Workflow Tools (which integrates
FlowMan into MortgageWare TC) and MortgageWare Entre 5.0 (scheduled for release
in October 2000) are positioned well for this environment and should provide an
increasing contribution to software license fee revenue during fiscal year 2001.
The Company believes higher support fees in fiscal year 2001 on certain of the
Company's products will offset the small decline in the installed base of the
Company's software during fiscal year 2000 (as a result of the soft mortgage
lending environment). It follows that software support fees for fiscal year 2001
are likely to remain relatively consistent with the levels earned in fiscal year
2000. Other revenues are expected to remain consistent or increase slightly in
fiscal year 2000.
COST OF REVENUES
19
<PAGE> 20
<TABLE>
<CAPTION>
(In thousands) 2000 Change 1999 Change 1998
------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Software license fees $2,245 (10)% $2,506 41% $1,778
Percentage of software license fees 32% -- 19% -- 18%
------------------------------------------------------------------------------------------
Software support fees 2,600 (5)% 2,731 12% 2,445
Percentage of software support fees 27% -- 32% -- 35%
------------------------------------------------------------------------------------------
Other 1,420 (3)% 1,468 71% 859
Percentage of other revenues 64% -- 54% -- 50%
------------------------------------------------------------------------------------------
Total cost of revenues $6,265 (7)% $6,705 32% $5,082
Percentage of total net revenues 33% -- 27% -- 28%
==========================================================================================
</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, the purchase and
duplication of disks and product documentation. As a percentage of software
license fees, cost of software license fees increased to 32% for fiscal year
2000 compared to 19% for fiscal year 1999 and increased to 19% for fiscal year
1999 compared to 18% for fiscal year 1998. The increase for fiscal year 2000
compared to fiscal year 1999 was primarily due to the substantial decrease in
software license fee revenue described above coupled with a slight decrease in
the amortization of capitalized software development costs. The increase for
fiscal year 1999 compared to fiscal year 1998 was due primarily to an increase
in sales of interface products that require third party commissions and
royalties.
The dollar amount of the cost of software license fees decreased by 10% from
$2.51 million in fiscal year 1999 to $2.25 million in fiscal year 2000. This
dollar decrease was primarily the result of a portion of purchased code used in
the Company's MortgageWare Entre product becoming fully amortized at the end of
fiscal year 1999 resulting in reduced amortization expense in fiscal year 2000.
The dollar amount of the cost of software license fees increased by 41% from
$1.78 million in fiscal year 1998 to $2.51 million in fiscal year 1999. This
dollar increase was primarily the result of higher amortization of capitalized
software development costs for virtually all of the Company's newer products
(MortgageWare Loan Servicing, MortgageWare TC, FlowMan, MortgageWare Entre,
MortgageWare InfoLINQ and MortgageWare MarketLINQ) offset only slightly by
decreases in amortization for MortgageWare Loan Management System and the
Company's discontinued secondary marketing product. In addition, as described
above, the Company paid higher third party commissions for sales of certain
interface products that it sells. Amortization of capitalized software
development costs was $2,060,000, $2,200,000, and $1,560,000 for fiscal years
2000, 1999, and 1998, respectively. The Company expects the dollar amount of its
amortization of capitalized software development costs to increase for fiscal
year 2001 compared to fiscal year 2000 due primarily to the stage of development
and the timing of the release of several of the Company's products.
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, the
cost of software support fees decreased to 27% for fiscal year 2000 compared to
fiscal year 1999 and decreased to 32% for fiscal year 1999 compared to 35% for
fiscal year 1998. These period-to-period decreases were due primarily to
software support fees increasing substantially in both fiscal years. As
discussed above, software support fees increased by 13% in fiscal year 2000 and
by 24% in fiscal year 1999. In addition, the dollar amount of the cost of
software support fees remained relatively flat decreasing by 5% in fiscal year
2000 compared to fiscal year 1999. Looking forward, the Company expects the
dollar cost of software support fees to increase slightly due to the increased
staffing
20
<PAGE> 21
that will be required to support a higher installed base of the Company's
products combined with higher labor costs. Because the Company expects software
support fees to remain relatively flat for fiscal year 2000, the Company expects
that these factors may lead to a modest increase in the ratio of the cost of
software support fees to software support fees.
Cost of other revenues consists primarily of the salaries and
non-reimbursable expenses for the employees who provide training, custom
programming, data conversions and consulting services. As a percentage of other
revenues, cost of other revenues increased to 64% for fiscal year 2000 compared
to 54% for fiscal year 1999 and increased to 54% for fiscal year 1999 compared
to 50% for fiscal year 1998. These increases were due primarily to lower gross
margins on certain consulting engagements sold by the Company during fiscal
years 1999 and 1998. In fiscal year 2000, the increase was primarily due to the
substantial decrease in other revenues earned. Looking forward, the Company
expects the cost of other revenues to stabilize somewhat and increase only to
the extent that other revenues increase.
OPERATING EXPENSES
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------
(In thousands) 2000 Change 1999 Change 1998
------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Product development $4,018 25 % $3,225 100% $1,609
Percentage of net revenues 21% -- 13% -- 9%
------------------------------------------------------------------------------------------------
Sales and marketing 4,870 (19)% 5,983 5% 5,674
Percentage of net revenues 26% -- 24% -- 31%
------------------------------------------------------------------------------------------------
General and administrative 4,984 (17)% 5,988 60% 3,754
Percentage of net revenues 26% -- 25% -- 20%
------------------------------------------------------------------------------------------------
Purchase of in-process R&D -- -- -- -- 1,350
Percentage of net revenues -- -- -- -- 7%
------------------------------------------------------------------------------------------------
Amortization of goodwill and other
intangible assets $ 859 -- $ 858 -- --
Percentage of net revenues 5% -- 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 21% for fiscal year 2000 compared to
13% for fiscal year 1999 and increased to 13% for fiscal year 1999 compared to
9% for fiscal year 1998. The increase in product development expenses as a
percentage of net revenues for fiscal year 2000 consisted of a dollar increase
of $793,000 combined with the substantial decrease in net revenues discussed
above. The dollar increase was due primarily to increasing payroll and related
expenses associated with a tight labor market combined with a decrease in the
amount of product development expenses that were capitalized. The increase for
fiscal year 1999 consisted of a dollar increase of $1.62 million, which was due
primarily to the ETD development costs associated with efforts to complete
FlowMan 4.0 and to operate the ETD development facility. Net product development
expenses are affected by the amount of costs capitalized. The Company
capitalized $1,995,000, $2,123,000, and $1,846,000, of product development
expenditures for fiscal years 2000, 1999, and 1998, respectively. Looking
forward, the Company expects the majority of its product development costs to be
related to products that will not meet capitalization requirements during fiscal
year 2001. In addition, the Company recently announced a significant new product
development initiative called Project IQ which is expected to cost as much as $3
million over the next twelve to eighteen months. As such, the Company believes
that product development spending will increase significantly during fiscal year
2001 with a corresponding
21
<PAGE> 22
decrease in the amount capitalized. This will result in increasing product
development expenses during fiscal year 2001.
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 include advertising, telemarketing and trade show
expenses. As a percentage of net revenues, sales and marketing expenses
increased slightly to 26% in fiscal year 2000 compared to 24% for fiscal year
1999 and decreased to 24% for fiscal year 1999 compared to 31% for fiscal year
1998. The increase for fiscal year 2000 resulted primarily from net revenues
decreasing at a faster rate than sales and marketing expenses. Sales and
marketing expenses decreased on a dollar basis by $1.1 million, due primarily to
lower commissions associated with the lower sales volume. In addition, the sales
and marketing group successfully controlled other headcount costs and certain
other direct expenses in a time of reduced activity. The decrease for fiscal
year 1999 resulted primarily from net revenues increasing at a substantially
faster rate than sales and marketing expenses compared to 1998. Sales and
marketing expenses increased on a dollar basis by $309,000, which was due
primarily to the costs of the ETD sales and marketing efforts during the year.
The Company expects sales and marketing expenses to increase on a dollar basis
but to improve slightly on a percentage of revenue basis for fiscal year 2001
compared to fiscal year 2000.
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 remained
relatively consistent in fiscal year 2000 increasing to 26% compared to 25% for
fiscal year 1999. General and administrative expenses increased to 25% for
fiscal year 1999 compared to 20% for fiscal year 1998. The increase for fiscal
year 2000 was due primarily to net revenues decreasing at a faster rate than
general and administrative expenses. During fiscal year 1999, the Company
incurred approximately $1.36 million of expenses associated with the proposed
recapitalization of the Company that was terminated in June of 1999. This was
the primary reason for the dollar increase in general and administrative
expenses in fiscal year 1999 and the subsequent decrease in fiscal year 2000. In
addition, the Company had increased expenses in both years, compared to fiscal
year 1998, as a result of the growth of the Company in fiscal 1999, higher
facility costs associated with a corporate move in November of 1998 and
increased labor costs in a tight labor market. The Company expects general and
administrative expenses to remain relatively flat on a dollar basis and improve
slightly on a percentage of net revenues basis for fiscal year 2001 compared to
fiscal year 2000.
Purchase of in-process research & development represented a one-time charge
incurred by the Company upon the acquisition of LSS on June 30, 1998.
Amortization of goodwill and other intangible assets resulted from this
acquisition and did not change in fiscal year 2000 compared to fiscal year 1999.
NET INTEREST AND OTHER INCOME
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------
(In thousands) 2000 Change 1999 Change 1998
------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net interest and other income $544 -- $545 (27)% $744
Percentage of net revenues 3% -- 2% -- 4%
------------------------------------------------------------------------------------------------
</TABLE>
Interest and other income consists primarily of interest earned on the
Company's cash and investment balances. Interest and other income remained
fairly consistent during fiscal year 2000 compared to fiscal year 1999 due
primarily to higher interest rates which resulted in a higher return on
investments despite a lower cash and investment portfolio. Interest and other
income decreased by 27% for fiscal year 1999 compared to fiscal year 1998 due
primarily to a lower cash and investment portfolio balance combined with
slightly lower interest rates.
22
<PAGE> 23
As of June 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 TAX EXPENSE (BENEFIT)
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------
(In thousands) 2000 Change 1999 Change 1998
-----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Income tax expense (benefit) $(539) (166)% $820 33% $616
Effective income tax rate 35% -- 37% -- 38%
-----------------------------------------------------------------------------------------------
</TABLE>
The provision for income taxes includes federal and state income taxes
currently payable, and deferred taxes arising from temporary differences in
determining income (loss) for financial statement and tax purposes. The
effective tax rate has been relatively consistent over the past three fiscal
years.
LIQUIDITY AND CAPITAL RESOURCES
Working capital, which consists principally of cash, cash equivalents and
short-term investments, was $6,877,000 as of June 30, 2000, compared to
$8,227,000 as of June 30, 1999. Cash and cash equivalents increased by
$1,865,000 for fiscal year 2000. Cash provided by operating activities was
$3,012,000 in fiscal year 2000. Principal uses of cash included the repurchase
of $2,174,000 of the Company's common stock, the purchase of $803,000 of
furniture and equipment and $1,995,000 of capitalized software costs.
The Company's capital expenditures for fiscal years 2000 and 1999 were
$803,000 and $1,643,000, respectively. The Company expects to spend about
$850,000 in 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 fiscal
year 2001.
YEAR 2000
During the quarter ended December 31, 1999, the Company completed efforts to
mitigate the impact of the Year 2000 problem on three levels: (i) the products
that the Company uses internally to conduct its business, (ii) the products that
it sells, and (iii) the Year 2000 readiness of the Company's vendors. The
Company has not encountered nor is the Company aware of any significant issues
or discrepancies due to the change to the Year 2000.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board 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.
23
<PAGE> 24
This Statement is effective for financial statements for periods beginning after
June 15, 2000. The Company does not expect the adoption of this Statement to
have a material impact on its financial statements.
In December 1999, the Securities and Exchange Commission released Staff
Accounting Bulletin No. 101 ("SAB 101") "Revenue Recognition in Financial
Statements" which the Company expects to adopt no later than the fourth quarter
of fiscal year 2001. SAB 101 provides guidance on revenue recognition issues.
The Company does not expect the adoption of SAB 101 to have a material impact on
its financial statements.
In March 2000, the Financial Accounting Standards Board issued
Interpretation No. 44, "Accounting for Certain Transactions Involving Stock
Compensation, an interpretation of APB Opinion No. 25" ("FIN 44"). FIN 44 will
be effective July 1, 2000. This interpretation provides guidance for applying
APB Opinion No. 25 "Accounting for Stock Issued to Employees." The Company does
not expect the adoption of FIN 44 to have a material impact on its financial
statements.
In March 2000, the Emerging Issues Task Force of the Financial Accounting
Standards Board 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 consensus for web site development
costs is effective July 1, 2000. The Company has not yet determined the impact,
if any, this Issue will have on the Company's financial statements.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE 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,
thus, fluctuations in interest rates would not have a material impact on the
fair value of these securities.
24
<PAGE> 25
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
<TABLE>
<CAPTION>
Page
#
-------
<S> <C>
Independent Auditors' Report 26
Balance Sheets as of June 30, 2000 and 1999 27
Statements of Operations for the years ended June 30, 2000, 1999, and 1998 28
Statements of Shareholders' Equity for the years ended June 30, 2000, 1999, and 1998 29
Statements of Cash Flows for the years ended June 30, 2000, 1999, and 1998 30
Notes to Financial Statements 31 - 41
Schedule II - Valuation and Qualifying Accounts 44
</TABLE>
25
<PAGE> 26
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 auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audits 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, 2000 and 1999, and the results of its operations and its cash
flows for each of the years in the three-year period ended June 30, 2000, in
conformity with accounting principles generally accepted in the United States of
America. 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.
KPMG LLP
Seattle, Washington
August 8, 2000
26
<PAGE> 27
INTERLINQ SOFTWARE CORPORATION
BALANCE SHEETS
<TABLE>
<CAPTION>
As of June 30, 2000 1999
----------- -----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 7,753,916 $ 5,888,630
Investments available-for-sale, at fair value 1,602,932 3,805,102
Investments held-to-maturity, at amortized cost 754,110 2,069,116
Accounts receivable, less allowance for doubtful
accounts of $222,000 in 2000 and $322,000 in 1999 1,982,668 3,763,446
Current deferred tax asset 422,707 337,729
Inventory, prepaid expenses and other current assets 1,292,753 596,279
----------- -----------
Total current assets 13,809,086 16,460,302
----------- -----------
Property and equipment, at cost 7,379,228 6,576,456
Less accumulated depreciation and amortization 5,686,542 4,872,314
----------- -----------
Net property and equipment 1,692,686 1,704,142
----------- -----------
Capitalized software costs, less accumulated amortization
of $6,697,000 in 2000 and $4,637,000 in 1999 5,094,766 5,159,249
Goodwill and other intangible assets, less accumulated
amortization of $1,718,000 in 2000 and $858,000 in 1999 1,525,057 2,384,377
Noncurrent deferred tax asset -- 36,314
Other assets 68,284 52,600
----------- -----------
$22,189,879 $25,796,984
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 559,339 $ 440,962
Accrued compensation and benefits 897,367 2,082,743
Other accrued liabilities 124,038 184,656
Customer deposits 820,112 965,204
Deferred software support fees 4,531,712 4,559,597
----------- -----------
Total current liabilities 6,932,568 8,233,162
----------- -----------
Noncurrent liabilities, excluding current installments 86,760 46,733
Noncurrent deferred tax liability 418,662 --
Shareholders' equity:
Preferred stock, $.01 par value. Authorized 5,000,000
shares; no shares issued and outstanding -- --
Common stock, $.01 par value. Authorized 30,000,000
shares; issued and outstanding 4,824,077 shares in
2000 and 5,180,648 shares in 1999 48,241 51,806
Additional paid-in capital 7,649,952 9,409,382
Retained earnings 7,053,696 8,055,901
----------- -----------
Total shareholders' equity 14,751,889 17,517,089
Commitments and contingencies
----------- -----------
$22,189,879 $25,796,984
=========== ===========
</TABLE>
See accompanying notes to financial statements.
27
<PAGE> 28
INTERLINQ SOFTWARE CORPORATION
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Years Ended June 30, 2000 1999 1998
------------ ------------ ------------
<S> <C> <C> <C>
Net revenues:
Software license fees $ 6,933,734 $ 13,091,646 $ 9,646,819
Software support fees 9,767,879 8,637,227 6,975,959
Other 2,208,881 2,702,338 1,723,615
------------ ------------ ------------
Total net revenues 18,910,494 24,431,211 18,346,393
------------ ------------ ------------
Cost of revenues:
Software license fees 2,245,066 2,506,509 1,778,263
Software support fees 2,599,919 2,730,637 2,445,025
Other 1,419,739 1,468,295 859,269
------------ ------------ ------------
Total cost of revenues 6,264,724 6,705,441 5,082,557
------------ ------------ ------------
Gross profit 12,645,770 17,725,770 13,263,836
------------ ------------ ------------
Operating expenses:
Product development 4,017,697 3,225,035 1,608,840
Sales and marketing 4,870,209 5,982,424 5,674,475
General and administrative 4,984,115 5,988,056 3,754,222
Amortization of goodwill and other intangible 859,320 858,348 --
assets
Purchase of in-process research and development -- -- 1,349,616
------------ ------------ ------------
Total operating expenses 14,731,341 16,053,863 12,387,153
------------ ------------ ------------
Operating income (loss) (2,085,571) 1,671,907 876,683
Net interest and other income 544,208 545,522 744,865
------------ ------------ ------------
Income (loss) before income tax expense (benefit) (1,541,363) 2,217,429 1,621,548
Income tax expense (benefit) (539,158) 820,111 616,066
------------ ------------ ------------
Net income (loss) $ (1,002,205) $ 1,397,318 $ 1,005,482
============ ============ ============
Net income (loss) per share - basic $(.20) $.27 $.19
Net income (loss) per share - diluted $(.20) $.25 $.19
Shares used to calculate net income (loss)
per share - basic 4,912,038 5,174,341 5,213,217
Shares used to calculate net income (loss)
per share - diluted 4,912,038 5,484,565 5,375,882
</TABLE>
See accompanying notes to financial statements.
28
<PAGE> 29
INTERLINQ SOFTWARE CORPORATION
STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
Additional Total
Common Paid-in Retained Shareholders'
Years Ended June 30, 2000, 1999, and 1998 Stock Capital Earnings Equity
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Balances at June 30, 1997 $ 54,165 $ 10,343,087 $ 5,653,101 $ 16,050,353
Issuance of 251,447 shares of common
stock 2,515 1,444,882 -- 1,447,397
Tax benefit realized upon exercise of
stock options -- 13,793 -- 13,793
Repurchase of 317,400 shares of common
stock (3,174) (1,358,927) -- (1,362,101)
Net income for the year ended June 30, 1998 -- -- 1,005,482 1,005,482
------------ ------------ ------------ ------------
Balances at June 30, 1998 53,506 10,442,835 6,658,583 17,154,924
Issuance of 80,089 shares of common stock
800 113,585 -- 114,385
Tax benefit realized upon exercise of
stock options -- 103,212 -- 103,212
Repurchase of 250,000 shares of common
stock (2,500) (1,250,250) -- (1,252,750)
Net income for the year ended June 30, 1999 -- -- 1,397,318 1,397,318
------------ ------------ ------------ ------------
Balances at June 30, 1999 51,806 9,409,382 8,055,901 17,517,089
Issuance of 117,529 shares of common
stock 1,175 307,161 -- 308,336
Tax benefit realized upon exercise of
stock options -- 102,894 -- 102,894
Repurchase of 474,100 shares of common
stock (4,740) (2,169,485) -- (2,174,225)
Net loss for the year ended June 30, 2000 -- -- (1,002,205) (1,002,205)
------------ ------------ ------------ ------------
Balances at June 30, 2000 $ 48,241 $ 7,649,952 $ 7,053,696 $ 14,751,889
============ ============ ============ ============
</TABLE>
See accompanying notes to financial statements.
29
<PAGE> 30
INTERLINQ SOFTWARE CORPORATION
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years Ended June 30, 2000 1999 1998
---------- ----------- -----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $(1,002,205) $ 1,397,318 $ 1,005,482
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization of property and 814,228 939,051 1,094,884
equipment
Amortization of capitalized software costs 2,059,717 2,198,092 1,559,201
Amortization of goodwill & other intangible assets 859,320 858,348
Purchase of in-process research and development -- -- 1,349,616
Deferred income tax expense (benefit) 369,998 (108,000) (305,290)
Tax benefit realized upon exercise of stock options 102,894 103,212 13,793
Change in operating assets and liabilities (net of
acquisition):
Accounts receivable 1,780,778 (363,252) (1,505,816)
Inventory, prepaid expenses, and other current
assets (696,474) (93,735) 82,882
Other assets (15,684) 21,188 (39,203)
Accounts payable 118,377 (136,796) 99,527
Accrued compensation and benefits and other accrued
liabilities (1,205,967) (202,440) 1,172,553
Customer deposits (145,092) 591,053 174,515
Deferred software support fees (27,885) 1,080,801 389,388
----------- ----------- -----------
Net cash provided by operating activities 3,012,005 6,284,840 5,091,532
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (802,772) (1,643,461) (571,646)
Capitalized software costs (1,995,234) (2,123,035) (1,845,881)
Purchase of source code and third-party technology -- (812,500) --
Purchases of investments (2,737,851) (3,295,774) (7,402,921)
Proceeds from sales and maturities of investments 6,255,027 4,095,479 6,766,543
Cash paid for acquisition -- (2,712,380) (1,266,520)
----------- ----------- -----------
Net cash provided by (used in) investing 719,170 (6,491,671) (4,320,425)
activities
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock 308,336 114,385 31,059
Repurchase of common stock (2,174,225) (1,252,750) (1,362,101)
----------- ----------- -----------
Net cash used in financing activities (1,865,889) (1,138,365) (1,331,042)
----------- ----------- -----------
Net increase (decrease) in cash & cash 1,865,286 (1,345,196) (559,935)
equivalents
----------- ----------- -----------
Cash and cash equivalents at beginning of year 5,888,630 7,233,826 7,793,761
----------- ----------- -----------
Cash and cash equivalents at end of year $ 7,753,916 $ 5,888,630 $ 7,233,826
=========== =========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Net cash paid during the year for income taxes $ 59,134 $ 1,298,750 $ 703,816
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING
ACTIVITIES:
Acquisition effected through issuance of common stock and
purchase consideration payable -- -- $ 4,016,338
</TABLE>
See accompanying notes to financial statements.
30
<PAGE> 31
INTERLINQ SOFTWARE CORPORATION
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 2000, 1999 AND 1998
1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) DESCRIPTION OF BUSINESS
INTERLINQ Software Corporation ("Company") provides technology that
helps organizations effectively manage complex, information-intensive
business transactions. The Company's Mortgage Technology Division
("MTD") provides business solutions to banks, savings institutions,
mortgage banks, mortgage brokers, and credit unions. This division'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 Enterprise
Technology Division ("ETD") provides application integration/workflow
solutions that integrate disparate systems and applications to route
information and processes seamlessly across an entire enterprise.
These solutions coordinate activities across legacy systems,
enterprise applications, databases and Internet technologies.
The Company sells its products primarily through a direct sales
force.
(b) CASH EQUIVALENTS
All highly liquid investments purchased with a maturity of three
months or less are considered to be cash equivalents. At June 30,
2000 and 1999, cash equivalents consisted primarily of commercial
paper and were $5,900,000 and $3,200,000, respectively.
(c) INVESTMENTS
Investments at June 30, 2000 and 1999 consist of investment-grade,
interest-bearing corporate debt securities and money market auction
preferred 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 other
comprehensive income, net of income taxes. Investments
held-to-maturity are carried at amortized cost.
At June 30, 2000 and 1999, 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 include approximately
$1,600,000 and $3,800,000 of money market auction preferred
securities as of June 30, 2000 and 1999, respectively. These money
market auction preferred securities are perpetual preferred stocks
with floating rate dividends that are reset every 49 days. These
investments are designed to minimize principal risk and trade at par
without principal volatility. The available for sale investments are
corporate debt securities and have contractual maturities of less
than one year.
(d) INVENTORY
Inventory is stated at the lower of cost (first-in, first-out) or
market (replacement cost).
(e) PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation and
amortization of property and equipment is on the straight-line method
over the two to seven year estimated useful lives of the assets or
respective lease terms if shorter.
31
<PAGE> 32
Management periodically evaluates property and equipment for
impairment whenever events or circumstances indicate that the
carrying amount may not be recoverable. The amount of any impairment
is measured as the difference between the carrying value and the fair
value of the impaired asset.
(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 costs are incurred until technological feasibility is
established. Thereafter, all software product development costs are
capitalized and reported at the lower of unamortized cost or net
realizable value. Software costs incurred in conjunction with the
acquisition of technologically feasible products developed externally
are capitalized and reported at the lower of unamortized cost or net
realizable value.
Amortization of capitalized software costs begins when the related
software is available for general release to customers and is
provided for each software product based on the greater of (i) the
ratio of current gross revenues to total current and anticipated
future gross revenues for the 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) GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill represents the excess of the cost of Logical Software
Solutions Corporation ("LSS") - acquired on June 30, 1998 - over the
fair value of tangible and identifiable intangible assets at the date
of acquisition. Other intangible assets include the value of
workforce-in-place, customer list, tradename, and non-compete and
employment agreements acquired in connection with the acquisition of
LSS. Goodwill and other intangible assets are amortized over their
estimated useful lives ranging from three to four years. The
recoverability of goodwill and other intangible assets is determined
by assessing whether the amortization of the assets balances over
their remaining life can be recovered through undiscounted future net
operating cash flows of the Company. If it is determined that the
goodwill and other intangible asset balances cannot be recovered
through undiscounted future net operating cash flows, the amount of
impairment is measured based on projected discounted future operating
cash flows using a discount rate reflecting the Company's average
borrowing rate.
(h) 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.
32
<PAGE> 33
On July 1, 1999, the Company adopted 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 fiscal
year ended June 30, 2000.
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.
(i) 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 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, consultation services,
custom document fees and other revenue.
(j) STOCK-BASED COMPENSATION
The Company accounts for its employee stock-based compensation
arrangements in accordance with the provisions of Accounting
Principles Board Opinion No. 25, "Accounting for Stock issued to
Employees" ("APB 25"), and related interpretations. As such,
compensation expense related to employee stock options granted under
fixed plans is recorded only if, on the date of grant, the fair value
of the underlying stock exceeds the exercise price. The Company
provides pro forma net income disclosures for employee stock options
grants made in 1995 and subsequent years as if the fair-value based
method of accounting provided by Statement of Financial Accounting
Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS
123") had been applied to these transactions.
(k) 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 for operating loss
and tax credit carryforwards. Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply 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.
33
<PAGE> 34
(l) EARNINGS (LOSS) PER SHARE
Basic earnings (loss) per share is computed using the weighted
average number of common shares outstanding during the period.
Diluted earnings (loss) per share is computed using the weighted
average number of common and dilutive common equivalent shares
outstanding during the period.
The following table reconciles the shares used in calculating basic
earnings (loss) per share to the shares used in calculating diluted
earnings (loss) per share:
<TABLE>
<CAPTION>
2000 1999 1998
--------- --------- ---------
<S> <C> <C> <C>
Shares used to calculate basic earnings (loss) 4,912,038 5,174,341 5,213,217
per share
Dilutive effect of outstanding stock options -- 310,224 162,665
--------- --------- ---------
Shares used to calculate diluted earnings
(loss) per share 4,912,038 5,484,565 5,375,882
========= ========= =========
</TABLE>
Options to purchase shares of common stock were not included in the
diluted earnings (loss) per share computation for fiscal year 2000 as
the inclusion of these options would be anti-dilutive. Options to
purchase common stock where the exercise price exceeded the average
market price were excluded from the computations in 1999, and 1998 as
the inclusion of these options would be anti-dilutive. The shares of
stock excluded from the computations are as follows:
<TABLE>
<CAPTION>
2000 1999 1998
------------- ------------- --------------
<S> <C> <C> <C>
Shares excluded 1,098,000 23,000 191,000
Exercise price $0.10 - $8.38 6.94 - $8.38 $4.97 - $8.38
</TABLE>
(m) 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.
(n) CONCENTRATION OF MARKET RISK
The Company markets a substantial portion of its products 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.
(o) RECLASSIFICATIONS
Certain reclassifications have been made to the prior period
financial statements to conform with the current year presentation.
34
<PAGE> 35
(p) COMPREHENSIVE INCOME
Comprehensive income measures all changes in equity of an enterprise
that do not result from transactions with owners. The Company has no
components of comprehensive income for the fiscal years ended June
30, 2000, 1999 and 1998.
(2) PROPERTY AND EQUIPMENT
Major classes of property and equipment as of June 30 are as follows:
<TABLE>
<CAPTION>
2000 1999
---------- ----------
<S> <C> <C>
Leasehold improvements $600,086 $595,601
Furniture and fixtures 1,135,256 1,103,120
Computer equipment 4,984,468 4,222,678
Office equipment 659,418 655,057
---------- -----------
$7,379,228 $6,576,456
========== ===========
</TABLE>
(3) ACQUISITION
On June 30, 1998, the Company acquired Logical Software Solutions
Corporation. LSS was an enterprise application integration software
developer and service provider. The purchase price consisted of 233,334
shares of common stock valued at $1,416,338, cash of $3,600,000, and
direct acquisition costs of $378,930. The 233,334 shares of common stock
issued in the acquisition were placed in escrow and will vest with time
over a six-year period (subject to certain accelerated vesting
provisions).
The acquisition was accounted for using the purchase method of accounting.
Accordingly, the results of operations of the acquired business and the
fair market values of the acquired assets and assumed liabilities were
included in the Company's financial statements as of the date of
acquisition.
A portion of the purchase price represented purchased in-process research
and development that had not yet reached technological feasibility and had
no alternative future use. The value assigned to purchased in-process
research and development was determined by identifying research projects
in areas for which technological feasibility had not been established;
estimating the costs to develop the purchased in-process research and
development into commercially viable products; estimating the resulting
net cash flows from such projects; discounting the net cash flows back to
the time of acquisition; and applying an attribution rate based on the
estimated percent complete.
(4) COMMITMENTS
(a) LEASES
The Company leases its current premises under a noncancelable
operating lease, which commenced in November 1998 and expires in
October 2005. The Company charges the total of the scheduled lease
payments to rent expense using the straight-line method over the life
of the lease. Included in other noncurrent liabilities at June 30,
2000 and 1999, is $83,407 and $36,879 respectively, in deferred rent
related to the Company's current premises.
Future minimum lease payments under the noncancelable operating lease
are as follows:
35
<PAGE> 36
<TABLE>
<CAPTION>
Minimum lease payments
----------------------
Year ending June 30:
<S> <C>
2001 $ 724,901
2002 745,021
2003 763,706
2004 749,554
2005 764,322
Thereafter 321,533
----------
$4,069,037
==========
</TABLE>
Total rent expense amounted to $987,572, $767,328, and $384,481, for
the years ended June 30, 2000, 1999, and 1998, respectively.
(b) 401(K) PLAN
The Company sponsors a 401(k) plan that covers substantially all
employees. At its own discretion, the Company may make contributions
to the plan based on a percentage of participants' contributions. The
Company made contributions of $236,643, $192,821, and $114,552 for
the years ended June 30, 2000, 1999 and 1998, respectively. The
Company has no other postemployment or postretirement benefit plans.
(5) INCOME TAXES
Components of income taxes are summarized as follows:
<TABLE>
<CAPTION>
2000 1999 1998
--------- ---------- ----------
<S> <C> <C> <C>
Current:
Federal (929,019) $744,611 $830,022
State (83,031) 80,288 77,541
---------- --------- --------
Total current (1,012,050) 824,899 907,563
---------- --------- --------
Deferred:
Federal 357,110 (94,188) (277,958)
State 12,888 (13,812) (27,332)
---------- --------- --------
Total deferred 369,998 (108,000) (305,290)
---------- --------- --------
Charge in lieu of taxes from
employee stock options 102,894 103,212 13,793
---------- --------- --------
$(539,158) $820,111 $616,066
========== ========= ========
</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>
2000 1999 1998
--------- -------- --------
<S> <C> <C> <C>
Computed "expected" tax expense
(benefit) $(524,063) $753,926 $551,326
State income taxes, net of federal
benefit and other items (15,095) 66,185 64,740
--------- -------- --------
$(539,158) $820,111 $616,066
--------- -------- --------
</TABLE>
36
<PAGE> 37
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and liabilities are as follows:
<TABLE>
<CAPTION>
2000 1999 1998
----------- ----------- -----------
<S> <C> <C> <C>
Deferred tax assets:
Allowance for doubtful accounts $ 83,885 $ 119,140 $ 94,683
receivable
Deferred software support fees 106,568 87,702 120,201
Accrued liabilities 232,254 130,887 136,116
Property and equipment 295,514 739,408 638,866
Goodwill 477,768 238,704 --
Purchased in-process research &
development 432,777 466,068 499,749
----------- ----------- -----------
Total deferred tax assets 1,628,766 1,781,909 1,489,615
----------- ----------- -----------
Deferred tax liabilities - capitalized (1,624,766) (1,407,909) (1,223,615)
software
----------- ----------- -----------
Net deferred tax asset $ 4,000 $ 374,000 $ 266,000
=========== =========== ===========
</TABLE>
In assessing the realizability of deferred tax assets, management considers
whether it is more likely than not that some portion or all of the deferred tax
assets will not be realized. Management considers the scheduled reversal of
deferred tax liabilities, projected future taxable income, and tax planning
strategies in making this assessment. Based upon the level of historical taxable
income and projections for future taxable income over the periods which the
deferred tax assets are deductible, management believes it is more likely than
not the Company will realize the benefits of these deductible differences.
At June 30, 2000 and 1999, the Company had income tax receivables of $867,723
and $201,092, respectively, which are included in other current assets.
(6) SHAREHOLDERS' EQUITY
(a) PREFERRED STOCK
Preferred stock authorized consists of 5,000,000 shares, none of
which are issued or outstanding.
(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 APB 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 123, the Company's net income (loss) would have changed to
the pro forma amounts indicated below:
<TABLE>
<CAPTION>
2000 1999 1998
----------- ------------ ----------
<S> <C> <C> <C>
Net income (loss):
As reported $(1,002,205) $1,397,318 $1,005,482
Pro forma (1,406,794) 802,196 582,061
Per share amounts:
As reported - basic $(.20) $.27 $.19
As reported - diluted (.20) .25 .19
</TABLE>
37
<PAGE> 38
<TABLE>
<S> <C> <C> <C>
Pro forma - basic (.29) .16 .11
Pro forma - diluted (.29) .15 .11
</TABLE>
Pro forma net income (loss) and net income (loss) per share reflect
only options granted subsequent to June 30, 1995. Therefore, the full
impact of calculating compensation cost for stock options under SFAS
123 is not reflected in the pro forma net income (loss) and net
income (loss) 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, 2000, 1999, and 1998 was $3.53,
$3.58, and $2.71, respectively, on the date of grant using the Black
Scholes option-pricing model with the following weighted-average
assumptions:
<TABLE>
<CAPTION>
2000 1999 1998
------ ------- ------
<S> <C> <C> <C>
Expected dividend yield 0.0% 0.0% 0.0%
Risk-free interest rate 6.74% 4.54% 5.36%
Expected volatility 65% 65% 65%
Expected life 5 YEARS 5 years 5 years
</TABLE>
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 1,400,000 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.
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, 1997 353,834 123,618 688,354 66,000 3.73
Options granted (220,100) -- 197,600 22,500 4.57
Options exercised -- (13,900) (7,213) -- 1.71
Options canceled 48,118 (800) (45,118) (3,000) 5.42
-------- -------- -------- ------
Balances at June 30, 1998 181,852 108,918 833,623 85,500 3.87
Increase in shares reserved
under 1993 Plan 250,000 -- -- -- --
Options granted (139,800) -- 117,300 22,500 6.12
Options exercised -- (63,744) (13,345) (3,000) 1.43
</TABLE>
38
<PAGE> 39
<TABLE>
<S> <C> <C> <C> <C> <C>
Options canceled 51,944 (2,400) (46,544) (3,000) 5.05
-------- ------ ------- -------
Balances at June 30, 1999 343,996 42,774 891,034 102,000 4.29
Increase in shares reserved
under 1993 Plan 250,000 -- -- -- --
Options granted (338,700) -- 306,200 32,500 5.81
Options exercised -- (38,750) (78,779) -- 2.62
Options canceled 159,117 -- (150,117) (9,000) 5.65
------- ------ ------- -------
Balances at June 30, 2000 414,413 4,024 968,338 125,500 4.75
------- ------ ------- -------
</TABLE>
Additional information regarding options outstanding as of June 30,
2000 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 (years) Price Exercisable Price
------------------- ------------- ------------- ------------ ----------- -------------
<S> <C> <C> <C> <C> <C>
$ .100- .500 1,624 1.12 $.15 1,624 $.15
2.500-3.875 428,900 5.19 3.45 344,900 3.45
3.969-5.844 346,966 6.55 4.84 219,723 4.89
6.125-8.375 320,372 8.29 6.40 106,140 6.40
--------- -------
.100-8.375 1,097,862 6.52 4.75 672,387 4.38
--------- -------
</TABLE>
(7) NET INTEREST AND OTHER INCOME
Net interest and other income consist of:
<TABLE>
<CAPTION>
2000 1999 1998
----------- ---------- -----------
<S> <C> <C> <C>
Interest income $544,208 $535,025 $765,792
Interest expense -- (2,384) (21,623)
Other, net -- 12,881 696
-------- -------- --------
$544,208 $545,522 $744,865
======== ======== ========
</TABLE>
(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. Credit is
extended to customers based on an evaluation of their financial condition
and the Company generally requires a down payment between 25% and 50% of
the total purchase price for new customers. No additional collateral is
required. The Company performs ongoing credit evaluations of its customers
and maintains an allowance for possible credit losses.
39
<PAGE> 40
(9) 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").
The Company's Mortgage Technology Division provides business solutions to
banks, savings institutions, mortgage banks, mortgage brokers, and credit
unions. This division'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 Enterprise Technology Division was created on June 30, 1998,
when the Company acquired Logical Software Solutions Corporation. This
division provides application integration/workflow solutions that
integrate disparate systems and applications to route information and
processes seamlessly across an entire enterprise. These solutions
coordinate activities across legacy systems, enterprise applications,
databases and Internet technologies.
The operating segment information for fiscal years ended June 30, 2000 and
1999 have been reported in accordance with the provisions of Statement of
Financial Accounting Standard No. 131 "Disclosures about Segments of an
Enterprise and Related Information". The Company operated in only one
operating segment prior to June 30, 1998, and therefore no segment
information is provided prior to that date.
The Company evaluates performance and allocates resources based on profit
or loss from operations before income taxes, as well as other
non-financial criteria. The accounting policies of the reportable segments
are substantially the same as those described in the summary of
significant accounting policies.
Information by operating segment is set forth below (in thousands):
<TABLE>
<CAPTION>
MTD ETD TOTAL
------- ------ --------
2000:
<S> <C> <C> <C>
Net revenue $18,883 $27 $18,910
Depreciation and amortization 2,596 1,137 3,733
Operating income (loss) before
income tax expense benefit 1,097 (2,638) (1,541)
Capital expenditures 766 37 803
Identifiable assets 19,183 3,007 22,190
1999:
Net revenue 24,273 158 24,431
Depreciation and amortization 2,823 1,172 3,995
Operating income (loss)
before income taxes 4,048 (2,376) 1,672
Capital expenditures 1,519 124 1,643
Identifiable assets 22,575 3,222 25,797
</TABLE>
(10) TECHNOLOGY LICENSE
On May 12, 1999, the Company entered into a license agreement with CBF
Systems, Inc. ("CBF"), to license printing technology for integration with
certain of the Company's products. The Company paid an initial license fee
of $812,500 in June 1999, and will pay a periodic royalty to CBF of up to
40
<PAGE> 41
2% of software license fee revenue for products sold with the integrated
technology. The integration of this technology is expected to be completed
during the 2001 fiscal year.
(11) QUARTERLY FINANCIAL DATA (UNAUDITED)
The following table summarizes the unaudited statements of operations for
each quarter of fiscal year 2000 and 1999 (in thousands, except per share
amounts):
<TABLE>
<CAPTION>
First Second Third Fourth
-------- ------- ------- -------
2000
<S> <C> <C> <C> <C>
Net revenues $4,867 $4,713 $4,606 $4,724
Gross profit 3,268 3,130 3,136 3,112
Operating income (loss) (399) (525) (585) (577)
Net income (loss) (163) (254) (286) (299)
Net income (loss) per share - basic ($ .03) ($ .05) ($ .06) ($ .06)
Net income (loss) per share - diluted ($ .03) ($ .05) ($ .06) ($ .06)
1999
Net revenues $5,808 $5,805 $6,254 $6,564
Gross profit 4,367 4,282 4,488 4,589
Operating income 783 188 530 171
Net income 590 205 416 186
Net income per share - basic $ .11 $ .04 $ .08 $ .04
Net income per share - diluted $ .11 $ .04 $ .08 $ .03
</TABLE>
(12) LEGAL PROCEEDINGS
In the ordinary course of business, the Company is subject to legal
proceedings and claims including, contract related claims and claims of
alleged infringement of third-party patents, trademarks and other
intellectual property rights. These claims, even if not meritorious, could
force the company to spend significant financial and managerial resources.
The Company is currently not aware of any claims that it believes will
have, individually or in aggregate, a material adverse effect on its
business, prospects, financial condition and results of operations.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
41
<PAGE> 42
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 2001," "Nominees
for Election as Class II Directors, Terms Expiring in 2002," "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 2000 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, 2000, 1999, and 1998
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.
42
<PAGE> 43
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
10.5(1) Form of Indemnification Agreement for Directors and Officers
10.7(2)(3) Letter dated August 25, 1995 regarding Jiri Nechleba Compensatory Arrangement
10.8(3) 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
10.10(4) Office Lease between Pine Forest Co. and INTERLINQ Software Corporation dated
as of April 23, 1998
10.11(5) Licensing agreement for RAKIS Software between CBF Systems, Inc. and INTERLINQ
Software Corporation dated May 12, 1999
23.1 Consent of independent auditor
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, 1996, as same exhibit number.
(4) Previously filed with Form 10-K for the year ended June 30, 1998.
(5) Previously filed with Form 10-K for the year ended June 30, 1999
(b) REPORTS ON FORM 8-K DURING THE FOURTH QUARTER ENDED JUNE 30, 2000
None.
43
<PAGE> 44
Schedule II
INTERLINQ SOFTWARE CORPORATION
VALUATION AND QUALIFYING ACCOUNTS
Years ended June 30, 2000, 1999 and 1998
<TABLE>
<CAPTION>
Additions
------------------------------
Balance at Charged to Charged to
beginning costs and other Balance at
Description of year expenses accounts Deductions end of year
----------- ---------- ---------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C>
Allowances for doubtful
Accounts:
Year ended June 30, 2000:
Accounts receivable $322,000 $438,000 -- ($538,000) $222,000
Year ended June 30, 1999:
Accounts receivable 256,000 326,000 -- (260,000) 322,000
Year ended June 30, 1998:
Accounts receivable 176,000 451,000 -- (371,000) 256,000
</TABLE>
44
<PAGE> 45
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 22nd day of September 2000.
INTERLINQ SOFTWARE CORPORATION
By: /s/ JIRI M. NECHLEBA
-----------------------------------
Jiri M. 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/ ALAN R. PICKERILL. Vice President of Finance, Secretary
---------------------------------- (Principal Financial and Accounting
Alan R. Pickerill Officer)
/s/ ROBERT W. O'REAR. Director
---------------------------------
Robert W. O'Rear
/s/THEODORE M. WRIGHT. Director
----------------------------------
Theodore M. Wight
/s/ ROBERT J. GALLAGHER. Director
----------------------------------
Robert J. Gallagher
/s/GEORGE SARLO. Director
----------------------------------
George Sarlo
</TABLE>
45
<PAGE> 46
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
10.5(1) Form of Indemnification Agreement for Directors and Officers
10.7(2)(3) Letter dated August 25, 1995 regarding Jiri Nechleba Compensatory Arrangement
10.8(3) 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
10.10(4) Office Lease between Pine Forest Co. and INTERLINQ Software Corporation dated
as of April 23, 1998
10.11(5) Licensing agreement for RAKIS Software between CBF Systems, Inc. and INTERLINQ
Software Corporation dated May 12, 1999
23.1 Consent of independent auditor
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, 1996, as same exhibit number.
(4) Previously filed with Form 10-K for the year ended June 30, 1998.
(5) Previously filed with Form 10-K for the year ended June 30, 1999.
46
