-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Hd75Qivh4IEEdWBQMzj3nCSPdXwhg24dPWCzcQD3ssi0c1dgm7hfBwNjxEcLjRNA 4O96hRybck9q+jodB8Cp6w== 0000891020-99-001617.txt : 19991227 0000891020-99-001617.hdr.sgml : 19991227 ACCESSION NUMBER: 0000891020-99-001617 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19990630 FILED AS OF DATE: 19990928 FILER: COMPANY DATA: COMPANY CONFORMED NAME: INTERLINQ SOFTWARE CORP CENTRAL INDEX KEY: 0000802242 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-PREPACKAGED SOFTWARE [7372] IRS NUMBER: 911187540 STATE OF INCORPORATION: WA FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-21402 FILM NUMBER: 99717991 BUSINESS ADDRESS: STREET 1: 11980 N E 24TH STREET CITY: BELLEVUE STATE: WA ZIP: 98005 BUSINESS PHONE: 4258271112 MAIL ADDRESS: STREET 1: 11980 N E 24TH STREET CITY: BELLEVUE STATE: WA ZIP: 98005 10-K 1 FORM 10-K FOR PERIOD ENDED JUNE 30, 1999 1 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, 1999 OR __ Transition report pursuant to Section 14 or 15(d) of the Securities Exchange Act of 1934 COMMISSION FILE NUMBER 0-21402 INTERLINQ SOFTWARE CORPORATION (Exact name of registrant as specified in its charter) WASHINGTON 91-1187540 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 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 17, 1999 as reported on the Nasdaq National Market, was approximately $23,822,000. As of September 17, 1999, there were 5,150,665 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 9, 1999, which will be filed with the Securities and Exchange Commission within 120 days after June 30, 1999, are incorporated by reference into Part III of this report. 2 PART I ITEM 1. BUSINESS OVERVIEW INTERLINQ Software Corporation ("the Company") was founded in Washington in 1982 and over the last seventeen years has developed, marketed and sold software for the mortgage lending industry. Through the 1999 fiscal year the Company concentrated on this industry as a leading business solutions provider to approximately 2,000 banks, savings institutions, mortgage banks, mortgage brokers, and credit unions. 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"), in a transaction accounted for using the purchase method of accounting. The assets and technology acquired through this transaction included FlowMan version 3.2 ("FlowMan"). FlowMan is an award-winning enterprise software application 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. 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"). Over the last year, the Company has continued to develop the FlowMan product internally and expects to release version 4.0 in the first half of fiscal year 2000. The Company expects this version will offer significant enhancements over the current product. 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 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 only once, managed from a central point, and accessible from every desktop licensed to utilize products in the MortgageWare Enterprise. 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. As of June 30, 1999, MortgageWare products had been installed and were currently supported by the Company for approximately 2,000 financial institutions. The Company's target market is the approximately 34,400 financial institutions in the United States, Puerto Rico and the Virgin Islands. According to Company estimates based on available industry data, this market is comprised of approximately 20,000 mortgage banks and brokers, 9,000 banks, 4,000 credit unions and 1,400 savings institutions. 2 3 The Company intends to generate future revenue growth within MTD from the sale of mortgage loan servicing technology and products designed to provide customers with better information access and content. The Company integrated MortgageWare TC with FlowMan during fiscal year 1999 to create MortgageWare 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 cost of the mortgage loan cycle. In the near term, further penetration of the loan production market and the mortgage loan servicing market (along with additional sales of products and support services to existing customers with its current products) is expected to provide the majority of the Company's revenue. The Company has planned releases of new enhancements and upgrades to existing products targeted for fiscal year 2000. In addition, the Company intends to integrate FlowMan into MortgageWare Loan Servicing during the latter half of fiscal year 2000. 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-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, from time to time, enhance its products for certain customers on a "pay for priority" basis. In addition, product upgrades often include modifications and enhancements requested by customers. PC Platform The Company believes that reductions in the cost of and increases in the computing power of PCs make its systems increasingly affordable for all financial institutions. The Company's software runs on industry-standard PCs and networks, thereby providing power, flexibility, ease of use and distribution of workload at a price that the Company believes cannot be matched by minicomputer or mainframe solutions. It is the Company's belief that the underlying trend in computing price to performance will increasingly favor applications based upon the Windows/Intel environment on which the Company's products run. 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 and construction lending, as well as PC- 3 4 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 support and participation in user groups). The Company regularly uses an outside research firm to monitor customer satisfaction as well as industry-based survey research to stay abreast of industry needs. The Company believes that its focus on the customer and the industry strengthens its recurring revenue opportunities and decreases the possibility of customer attrition to competitive products 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(R) Loan Management System and MortgageWare(R)TC, MortgageWare TC Workflow Tools, MortgageWare for Brokers, MortgageWare MarketLINQ(R), MortgageWare InvestorLINQ(TM), MortgageWare Entre(TM), MortgageWare InfoLINQ(R), MortgageWare Loan Servicing(TM), and BuilderBLOCK$(R). Together, these business solutions make up the MortgageWare Enterprise -- which offers 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:
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
MORTGAGE LOAN MANAGEMENT SYSTEM (LMS) AND MORTGAGEWARE TC - ------------------------------------------------------------------------------------------------ Qualifying Allows quick assessment of a potential borrower's ability to qualify for a loan Processing Handles loan application data entry, document tracking and database maintenance Closing Produces closing documents, including jurisdiction-specific promissory notes and mortgages or deeds of trust Settlement Enables a lender or settlement agent to manage checking accounts, print checks and report IRS data Tracking Produces management reports designed to meet each customer's particular needs Workflow Tools Matches processes to resources and needs. Automates and adjusts 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. MortgageWare for Provides brokers with a scaled-down version of the MortgageWare LMS Brokers designed to meet their specific needs for product and pricing
4 5
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 their position.
LOAN SERVICING - ------------------------------------------------------------------------------------------------ Loan Servicing Provides lenders with a complete, scalable and cost-effective Windows-based loan servicing solution Servicing Gateway A streamlined version of Loan Servicing designed for lenders holding loans for sale
CONSTRUCTION LENDING - ------------------------------------------------------------------------------------------------ BuilderBLOCK$ Provides ability to service and report essential components of a construction loan
ANALYSIS AND COMMUNICATIONS - ------------------------------------------------------------------------------------------------ InfoLINQ Provides mortgage lenders with a complete intranet-based environment in which to collect, extract, and distribute business analysis COMLINQ Handles inter-branch electronic communications for MortgageWare software MELAPI Imports loan data from Web sites or call centers into MortgageWare MortgageBase Enables customers to access their MortgageWare data via FoxPro. Converts files into an xbase format and prints sophisticated reports Interfaces Interfaces link to Fannie Mae's MORNETPlus(R) Credit Information Service, Fannie Mae's Desk Top Underwriter, Freddie Mac Loan Prospector and systems run by M&I Data Services.
MortgageWare Entre. Provides loan officers or brokers ("Originators") with tools to tailor loan programs, enabling better customer service and more expedient completion of each loan application. 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 address 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, was 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, so lenders can compare actual locked interest rates 5 6 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 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 one time--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 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 true 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. MortgageWare Loan Servicing utilizes a 32-bit Windows client-server architecture, coupled with advanced information features that automate and manage business events for a loan servicer. Servicing Gateway. A streamlined version of Loan Servicing, Servicing Gateway is 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(R). Intranet-based application enables better business decisions by automatically collecting information from MortgageWare or other systems and providing tools for analysis. 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: 6 7 MortgageWare(R) External Loan-Application Interface. 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. Supports data integrity by flagging potential errors. COMLINQ. INTERLINQ's electronic communications system is designed to provide a fast, yet easy, method of transferring MortgageWare data between headquarters, branch offices and origination systems. MortgageWare MultiTrac. Multi-tasking capabilities have been added to MortgageWare Loan Management System and MortgageWare TC via MultiTrac, thereby providing users with the ability to multi-task and access numerous loan applications without interrupting in-progress activities. New Products/Modules Under Development Integration of FlowMan. During fiscal year 1999 the Company integrated its newly acquired FlowMan technology into MortgageWare TC and plans to integrate FlowMan into MortgageWare Loan Servicing during fiscal year 2000. This is expected to further broaden the capabilities and benefits of these packages and further strengthen the MortgageWare Enterprise. 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 CBF Systems, Inc., VMP Mortgage Forms Division ("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. 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 INTERLINQ 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 under its purchase option also purchase an annual support contract. 7 8 Regular feedback on the quality of customer service is an integral part of the Company's customer service strategy. The Company employs an independent research firm that calls each customer at least once a year to measure customer satisfaction. The reports are used by the Company to monitor its procedures to enhance customer satisfaction. In addition, the Company has advisory panels for each of its products. 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, 1999, 52 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, with 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 via the Internet (to registered customers) 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 product marketing. 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, software development and marketing. The Company examines new technologies and platforms on an ongoing basis to determine their potential benefits to customers. The Company currently develops products using Windows NT and Windows 95 operating systems, ODBC compliant database options (SQL Server(TM) and MS Access(TM)) Web browser-based interfaces and thin-client technology, Visual C++, and ActiveX programming tools on a PC network. Currently, MortgageWare Loan Management System runs on Windows platforms 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 MarketLINQ, Servicing Gateway and BuilderBLOCK$ all run under the Windows operating system. During fiscal year 2000, the Company plans to integrate FlowMan into MortgageWare Loan Servicing. This is expected to further broaden the capabilities and benefits of these packages and further strengthen the MortgageWare Enterprise. 8 9 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. The Company's direct sales force consists of a national sales manager and sales executives. These personnel are supported by sales administration and inside sales representatives. As of June 30, 1999, the Company employed 12 sales executives and one national sales manager located throughout the country that are each responsible for an assigned geographic territory. 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. Sales 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 approximately 2,000 customers in 50 states plus Puerto Rico, Guam, and the U.S. Virgin Islands. As of June 30, 1999, this customer base was comprised of approximately 800 mortgage brokers and bankers, 640 banks, 460 credit unions and 100 savings institutions. In fiscal year 1999, no single customer accounted for more than 5% 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. 9 10 In addition to the Company's current competitors, there are many companies involved in providing software and related services to segments of the financial services industry other than residential mortgage lending. Because of similarities both in the customer base and the types of products and services provided by these other companies compared to those of the Company, these companies are potential competitors of the Company. There is no assurance that the Company would be successful in competing against these potential competitors, should any of them decide to enter the Company's market. MORTGAGE LENDING REGULATIONS The residential mortgage lending industry is subject to a variety of government regulations, including the Equal Credit Opportunity Act, the Truth-in-Lending Act, the Real Estate Settlement Procedures Act and the Home Mortgage Disclosure Act, which prohibit discrimination and require the disclosure of certain basic information to borrowers concerning credit terms and settlement costs. Additionally, there are various federal, state and local laws and regulations that govern mortgage lending activities, including consumer protection and usury statutes. Entities engaged in making and selling mortgage loans are often subject to the rules and regulations of one or more of the investors, guarantors and insurers of residential mortgage loans, including the Federal Housing Authority, the Veteran's Administration, Fannie Mae, Freddie Mac and the Government National Mortgage Association. These agencies regulate the origination, processing, underwriting, selling, securitizing and servicing of mortgage loans, prohibit discrimination, establish underwriting guidelines, provide for inspections and appraisals, require credit reports on prospective borrowers and fix maximum loan amounts and interest rates. Failure to comply with these laws and regulations could lead to a lender's loss of approved status, termination of its servicing contracts without compensation, demands for indemnification or loan repurchase, class action lawsuits and administrative enforcement actions. Should loan production processes or documentation arising from use of the Company's products result in a customer's violation of such requirements, such customer, or the government authority whose requirements were not met, might claim that the Company is responsible, which could have an adverse effect upon the Company and its reputation in the mortgage lending industry. On October 2, 1995 the Company entered into an agency and compliance delegate agreement with CBF Systems, Inc, VMP Mortgage Forms Division (VMP). Under the terms of this agreement VMP assumes compliance responsibility for all documents sold by and through the Company. ENTERPRISE TECHNOLOGY DIVISION OVERVIEW Through its Enterprise Technology Division, the Company intends to maximize the value of its investment in the FlowMan technology while retaining the rights to use the technology within its MortgageWare Enterprise product suite. These alternatives include pressing forward with plans to take the FlowMan technology to market, which involves developing sales channels and identifying strategic partners; recapitalizing the division (as a joint venture or a separate subsidiary, for example); 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 10 11 execution and timing of all tasks, events and decisions for key business processes across legacy systems, enterprise applications, client-server systems and Internet technologies. If the Company decides to take FlowMan 4.0 to market, as discussed above, the Company expects sales of FlowMan to begin in the second half of fiscal year 2000. The Company believes that potential target markets for FlowMan include the Enterprise Application Integration ("EAI") market as well as a variety of vertical markets (such as healthcare, insurance, government, transportation and utilities, etc.). EAI technologies attempt to integrate applications at the business process level rather than at the data level. The Company believes that FlowMan enables reusability of integration techniques and processes across departments and environments and allows users to implement application integration and reengineer processes without extensive user knowledge or training in the specific underlying technologies. The Company also believes that software providers in vertical markets can use FlowMan as an integration/workflow toolkit or component to enhance their products' functionality and architecture. STRATEGY The Company is currently refining its strategy with respect to the Enterprise Technology Division and specifically, the FlowMan technology. In general, the Company is attempting to establish FlowMan as a leading technology in the EAI and workflow market contributing to overall Company growth and diversification by providing access to markets outside of the mortgage lending industry. The Company believes that this would require partnerships with industry experts with the required knowledge and skills to compete both as an enterprise solutions provider within the EAI market and as a leader in certain vertical markets. Enterprise Application Integration & Workflow Market The EAI market is a new and growing marketplace, which according to some industry analysts could reach $1 billion within a few years. This marketplace could potentially provide the Company access to both a much larger technology market and business opportunity. In addition, the Company believes a need exists in numerous vertical markets (such as healthcare, insurance, government, transportation and utilities, etc.) for an application integration/workflow technology that can be used to enhance existing and development stage products. The Company believes that these markets may offer a significant business opportunity for the Company. Although demand for EAI software products has grown in recent years, the EAI market is still an emerging market. 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 software will continue to grow. If the EAI software market fails to grow or grows more slowly than the Company currently anticipates, the Company's business, operating results and financial condition would be materially adversely affected. Indirect Sales Channel The Company believes that successful companies in the EAI market will be those that develop relationships with other experts in the field who have either specific software and 11 12 hardware expertise in the EAI market and/or specialized industry knowledge in particular vertical markets. There can be no assurance that the Company will be able to attract partners (such as OEMs, system integrators and third-party application providers) that will be able to market the Company's products effectively and will be qualified to provide timely and cost-effective customer support and service. In addition, the Company anticipates that its agreements with potential partners (when negotiated) may not be exclusive and many of these prospective partners may carry competing product lines. Therefore, there can be no assurance that any prospective partner will be dependable in representing or marketing the Company's products, and the inability to recruit, or the loss of important partners could adversely affect the Company's results of operations. In addition, if it is ultimately successful in selling products through these channels, the Company expects that any material increase in the Company's indirect sales as a percentage of total revenue will adversely affect the Company's average selling prices and gross margins due to the lower unit prices that the Company receives when selling through indirect channels. 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 removes 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 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 The Company is committed to enhancing the FlowMan technology to ensure that it maintains its recognition as a leading, award-winning and innovative technology. Flowman version 4.0, anticipated for commercial release during the first half of fiscal year 2000, will offer significant enhancements over version 3.2, including three-tier architecture for expanded 12 13 scalability, Component Object Model (COM) technology, object-oriented methodology and ActiveX controls. FlowMan version 4.0 will be deployable across distributed network environments. The EAI software market is characterized by rapid technological change, frequent new product introductions and evolving industry standards. 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 is also 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 regarding the best methods to take the FlowMan product to market. The Company currently employs two sales personnel and has not as yet developed a formal sales channel. CUSTOMERS The Company currently has 9 end-user installations of FlowMan. COMPETITION The EAI software market is 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 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. 13 14 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, 1999, the Company's backlog was not material. 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 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 value of the FlowMan technology. In addition, there is no assurance that FlowMan 4.0 will be released in a timely fashion or that, if and when released, it will be well received by its target market or that others will not successfully develop competing products and services. Each of these events could have a 14 15 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 would 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. The Company is unable to accurately estimate unit sales of its products and the volume of annual support contracts that its customers will purchase due 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 has seen increases in revenues, operating income and net income. During the fourth quarter of fiscal year 1999, mortgage-lending rates began to rise, coupled with an increase in interest rates by the Federal Reserve. There can be no assurance that mortgage-lending rates will not continue to increase. The Company also believes that this interest rate environment, coupled with the Year 2000 problem, is contributing to a softened sales environment. Such continued increases in interest rates and the Year 2000 problem could have a material adverse effect on the Company's revenues, profitability, and financial condition. EMPLOYEES As of August 31, 1999, the Company employed 182 people, including 37 in sales and marketing, 73 in product development, 46 in customer service and 26 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. 15 16 EXECUTIVE OFFICERS OF THE REGISTRANT The executive officers of the Company, as of September 17, 1999, are as follows:
NAME AGE POSITION - -------------------------- ------- --------------------------------------------------------------- Jiri M. Nechleba 41 President and Chief Executive Officer Stephen A. Yount 42 Executive Vice President, Enterprise Technology Division, Chief Financial Officer and Secretary Patricia R. Graham 46 Executive Vice President, Mortgage Technology Division
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, and a provider of information systems to the consumer packaged goods industry. From 1985 to 1993, Mr. Nechleba was an independent management consultant to a variety of industries. Mr. Nechleba holds two Bachelor of Science degrees from the Massachusetts Institute of Technology. STEPHEN A. YOUNT has been Executive Vice President - Enterprise Technology Division, Chief Financial Officer and Secretary of the Company since July 1998. Prior to this position he was the Vice President-Finance, Chief Financial Officer and Secretary since October 1991. Additionally, Mr. Yount served as Interim President from January to September 1995. During 1991, Mr. Yount held a temporary position with PF Industries & Acrotech, Inc., an aerospace company, where he served as Chief Financial Officer. From 1989 to 1991, Mr. Yount was the President and Chief Financial Officer of PacSoft Incorporated, a civil engineering software firm. Mr. Yount earned a CPA certificate in 1982 and holds a BA in Business Administration from the University of Washington. PATRICIA R. GRAHAM has been Executive Vice President-Mortgage Technology Division since July 1998. Prior to her promotion, Ms. Graham was 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. 16 17 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 2000. ITEM 3. LEGAL PROCEEDINGS The Company is not currently a party to any litigation that would have a material adverse effect on the Company or its business. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to a vote of security holders during the fourth quarter of fiscal year 1999. 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 1,652 beneficial shareholders as of August 30, 1999, based on computations including participants in security positions listings, as defined by Rule 17Ab-8 of the Exchange Act. Presented below are quarterly closing stock price ranges as reported on Nasdaq National Market for the periods indicated.
HIGH LOW ------------ ------------ 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 Fiscal year ended June 30, 1998 Fourth quarter $7.50 $4.50 Third quarter 5.50 3.88 Second quarter 4.75 3.75 First quarter 4.63 3.50
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. 17 18 ITEM 6. SELECTED FINANCIAL DATA
Years Ended June 30, 1999 1998 1997 1996 1995 - ---------------------------------------------------------------------------------------------------- (In thousands except per share data) STATEMENTS OF OPERATIONS DATA: Net revenues: Software license fees $13,092 $ 9,647 $ 7,055 $ 6,232 $ 4,314 Software support fees 8,637 6,976 6,073 5,773 5,483 Other 2,702 1,723 1,239 1,088 1,196 --------------------------------------------------- Total net revenues 24,431 18,346 14,367 13,093 10,993 --------------------------------------------------- Cost of revenues: Software license fees 2,506 1,778 1,500 1,653 1,424 Software support fees 2,731 2,445 1,856 1,678 1,788 Other 1,468 859 683 589 642 --------------------------------------------------- Total cost of revenues 6,705 5,082 4,039 3,920 3,854 --------------------------------------------------- Gross profit 17,726 13,264 10,328 9,173 7,139 --------------------------------------------------- Operating expenses: Product development 3,225 1,609 2,147 2,060 1,123 Sales and marketing 5,983 5,674 4,011 4,230 4,244 General and administrative 5,988 3,754 3,152 3,010 3,404 Purchase of in-process research & development -- 1,350 -- -- -- Amortization of goodwill and other intangible assets 858 -- -- -- -- Other general expenses - nonrecurring -- -- -- -- 952 --------------------------------------------------- Total operating expenses 16,054 12,387 9,310 9,300 9,723 --------------------------------------------------- Operating income (loss) 1,672 877 1,018 (127) (2,584) Net interest and other income 545 744 719 811 676 --------------------------------------------------- Income (loss) before income taxes 2,217 1,621 1,737 684 (1,908) Income taxes 820 616 627 251 (780) --------------------------------------------------- Net income (loss) $ 1,397 $ 1,005 $ 1,110 $ 433 ($1,128) =================================================== PER SHARE DATA: Net income (loss) - basic $ .27 $ .19 $ .19 $ .07 ($.19) --------------------------------------------------- Net income (loss) - diluted $ .25 $ .19 $ .19 $ .07 ($.19) --------------------------------------------------- Shares used to calculate net income (loss) - basic 5,174 5,213 5,707 5,965 5,831 Shares used to calculate net income (loss) - diluted 5,485 5,376 5,842 6,171 5,831 BALANCE SHEET DATA: Cash, cash equivalents and investments $11,763 $13,908 $13,831 $14,218 $14,373 Working capital 8,190 8,525 11,623 12,823 13,638 Total assets 25,797 26,770 21,067 22,321 21,609 Total shareholders' equity 17,517 17,155 16,050 17,771 17,338
18 19 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS GENERAL MORTGAGE TECHNOLOGY Prior to the mid-1980s, mortgage loans in the United States were originated in a manual and paper-intensive process. Then, beginning in the mid-1980s and running through the mid-1990s, the mortgage lending industry implemented its first wave of automation with PC-based software solutions for mortgage originations. During this period of time, INTERLINQ Software Corporation ("Company"), experienced rapid revenue and customer growth by providing its MortgageWare(R) Loan Management System - a robust, full-featured and cost-effective PC-based software solution. This first wave of automation was accelerated and amplified from 1992 to early 1994 as mortgage interest rates reached historically low levels and mortgage refinance volumes soared. Then, in early 1994, the Federal Reserve raised interest rates, which immediately caused mortgage refinance volumes to plummet. As a result, lenders found themselves with excess labor and mortgage processing capacity. During the remainder of 1994 and for most of 1995, the Company believes that the industry was focused more on staff reduction than adding new automated loan management systems. Beginning in fiscal year 1996 through fiscal year 1999, mortgage-lending rates have reflected a lending environment that has experienced a certain degree of volatility. In spite of this volatility, the overall lending conditions have been considered favorable for the borrower compared to most historical measures. With this overall favorable lending environment, mortgage-lending activity has increased, driven by an increase in financing of home sales and refinancing of existing mortgages. During the fiscal year ended June 30, 1999, the Company experienced increased license fees due to a combination of certain lenders once again needing additional production capacity and demand for MortgageWare products by existing and new customers. Looking forward, the Company believes that it will experience a softening sales environment through at least the first two to three quarters of fiscal year 2000, driven by reduced mortgage origination volumes (related to rising interest rates) as well as uncertainties related to Year 2000 issues. Mortgage interest rates increased during the fourth quarter of fiscal year 1999, coupled with an increase in interest rates by the Federal Reserve. In addition, the Company believes that due to its customers' continued lower profit margins, they will shift their long-term purchasing decisions to solutions that reduce unit costs and, accordingly, increase profit margins, rather than solely increasing production capacity. During fiscal years 1996 and 1997, the Company focused its product development effort to provide a more diverse and integrated "enterprise" solution for the mortgage lending industry. It is the Company's belief that its broader enterprise solution (including MortgageWare TC Workflow Tools) has positioned the Company well for recent changes in the mortgage lending industry and has contributed to the increases in software license revenues in fiscal years 1998 and 1999. This broader product offering focuses more on reducing the cost of originating, processing, and servicing a mortgage, than on increasing production capacity. 19 20 ENTERPRISE TECHNOLOGY At the end of fiscal 1998, the Company created the Enterprise Technology Division ("ETD") as a result of the acquisition of Logical Software Solutions Corporation ("LSS"). The Company has a two-prong strategy with regard to this acquisition. In the first prong, the Company is integrating the acquired FlowMan product with the Company's MortgageWare(R) Enterprise product suite. The Company released MortgageWare TC Workflow Tools in April of 1999 and is beginning the integration of the technology with MortgageWare Loan Servicing(TM). This is expected to further broaden the product offering of the Mortgage Technology Division ("MTD") and strengthen the commitment of the Company to enterprise solutions. In the second prong, the Company intends to examine a number of alternatives that will allow it to maximize the value of its investment in the FlowMan technology while retaining the rights to use FlowMan technology within its MortgageWare Enterprise product suite. These alternatives include pressing forward with plans to take the FlowMan technology to market, which involves developing sales channels and identifying strategic partners; recapitalizing the Company's Enterprise Technology Division - as a joint venture or a separate subsidiary, for example; or divesting the FlowMan technology. Regardless of the alternative chosen, the Company believes that FlowMan can be sold as an application package into other vertical markets and as a toolkit for use by other application providers. The Company believes that the Enterprise Application Integration ("EAI") marketplace is in its early stages and will grow significantly over the next few years. This two-prong strategy is intended to maximize the value of the FlowMan technology, while allowing the Company to continue to expand and excel in its core market of mortgage technology.
NET REVENUES - ------------------------------------------------------------------------------------------------ (In thousands) 1999 Increase 1998 Increase 1997 - ------------------------------------------------------------------------------------------------ Software license fees $13,092 36% $ 9,647 37% $ 7,055 Software support fees 8,637 24% 6,976 15% 6,073 Other 2,702 57% 1,723 39% 1,239 ------------------------------------------------------ Total net revenues 24,431 33% $18,346 28% $14,367 ================================================================================================
Net revenues consist of software license fees, software support fees, and other revenues (which include training fees, consulting fees, custom document fees and other miscellaneous sales), net of discounts and sales returns. Software license fees increased by 36% for fiscal year 1999 compared to fiscal year 1998, and increased by 37% for fiscal year 1998 compared to fiscal year 1997. The increase in software license fees in fiscal year 1999 compared to fiscal year 1998 was due primarily to a combination of the overall favorable lending conditions discussed above as well as sales of the Company's newer products, which make up the MortgageWare Enterprise. The Company continued to experience increasing sales of its MortgageWare TC product (released in fiscal year 1998), as well as the various interfaces that are sold in conjunction with MortageWare TC. 20 21 In addition, sales volume increased for MortgageWare Loan Servicing. The increase in software license fees in fiscal year 1998 compared to fiscal year 1997 was due primarily to a combination of the overall favorable lending conditions discussed above, the immediate acceptance of MortgageWare TC as well as increases in demand and related revenues for the Company's newer products, MortgageWare Loan Servicing, MortgageWare InfoLINQ and MortgageWare MarketLINQ. Software support fees increased by 24% for fiscal year 1999 compared to fiscal year 1998, and by 15% for fiscal year 1998 compared to fiscal year 1997. These year-to-year increases reflected a modest number of new customer additions and an increase in the volume of software licenses sold to new and existing customers, offset slightly by a low but fairly constant attrition rate in the installed customer base. Due in part to changes, from time to time, in government regulations applicable to documentation required for residential mortgage lending, the vast majority of the Company's customers purchase annual software support agreements. However, because software support fees are recognized ratably over the term of the annual support agreement, whereas software license fees are recognized on product shipment, the percentage increase in software support fees compared to software license fees is not directly proportional. The Company believes that, due to higher support fees charged on MortgageWare TC and MortgageWare Loan Servicing, that software support fees are likely to continue to increase at a modest rate in fiscal year 2000. Other revenues increased by 57% for fiscal year 1999 compared to fiscal year 1998, and by 39% for fiscal year 1998 compared to fiscal year 1997. 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. The increase in other revenues in fiscal year 1998 compared to fiscal year 1997 was due primarily to increases in training revenues and consulting fees. The Company expects consulting fees to increase during the latter half of fiscal year 2000 due primarily to increases in demand for MortgageWare Loan Servicing (which can require higher levels of customization and implementation services than the Company's other mortgage technology products), the expected customization and implementation services that will be sold with FlowMan and projects which have been delayed by customers due to the Year 2000 problem. Looking forward, the Company anticipates that its newer products, MortgageWare Loan Servicing, MortgageWare InvestorLINQ, MortgageWare TC Workflow Tools (which integrates FlowMan into MortgageWare TC) and FlowMan will deliver an increasing contribution to software license fees, and related increases to software support fees and other revenues. The Company also anticipates that if INTERLINQ decides to take FlowMan 4.0 to market, as discussed above, ETD will start selling the technology in fiscal year 2000. Revenues are dependent on the release of FlowMan 4.0 and the development of sales channels. Despite the current increasing interest rate environment described above, the Company believes the overall lending environment to be favorable as of the end of fiscal year 1999, as compared to most historical measures. Nonetheless, there can be no assurance that mortgage lending rates will not continue to increase or experience a high degree of volatility. Such continued increases or volatility could have a material adverse effect on the Company's revenues, profitability, and financial condition. Even if lending rates stabilize, if such rates are perceived as being too high, homeowners and potential homeowners may delay decisions that would otherwise result in mortgage lending transactions. Such delays may have an adverse effect upon the Company's customers, and upon the Company and its operations. The 21 22 Company is new to the EAI marketplace, which is a relatively new, constantly changing and intensely competitive market. In addition, many of the Company's competitors in this market have longer operating histories, greater name recognition, and significantly greater financial, technical and marketing resources than the Company. There is no assurance that the Company's products will be accepted by the market or that the Company will be competitive within the market, which would have a material adverse effect on the Company's revenues, profitability and financial condition.
COST OF REVENUES - ------------------------------------------------------------------------------------------------ (In thousands) 1999 Increase 1998 Increase 1997 - ------------------------------------------------------------------------------------------------ Software license fees $2,506 41% $1,778 19% $1,500 Percentage of software license fees 19% -- 18% -- 21% - ------------------------------------------------------------------------------------------------ Software support fees 2,731 12% 2,445 32% 1,856 Percentage of software support fees 32% -- 35% -- 31% - ------------------------------------------------------------------------------------------------ Other 1,468 71% 859 26% 683 Percentage of other revenues 54% -- 50% -- 55% - ------------------------------------------------------------------------------------------------ Total cost of revenues $6,705 32% $5,082 26% $4,039 Percentage of total net revenues 27% -- 28% -- 28% - ------------------------------------------------------------------------------------------------
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 19% for fiscal year 1999 compared to 18% for fiscal year 1998 and decreased to 18% for fiscal year 1998 compared to 21% for fiscal year 1997. 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 decrease for fiscal year 1998 compared to fiscal year 1997 was due primarily to revenues increasing at a rate substantially faster than cost of software license fees. 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(TM), 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. The dollar amount of the cost of software license fees increased by 19% from $1.50 million in fiscal year 1997 to $1.78 million in fiscal year 1998. This dollar increase was primarily the result of higher amortization of capitalized software development costs for MortgageWare Loan Servicing and MortgageWare Entre, offset by a decrease in amortization for MortgageWare Loan Management System. Amortization of capitalized software development costs was $2,200,000, $1,560,000, and $1,290,000 for fiscal years 1999, 1998 and 1997, respectively. The Company expects the dollar amount of its amortization of capitalized software development costs to continue to increase for fiscal year 2000 compared to fiscal year 1999 due primarily to the stage of development and the timing of the release of several of the Company's products. 22 23 Cost of software support fees includes salaries and other costs related to providing telephone support and the purchase, duplication and shipping of disks associated with software updates. As a percentage of software support fees, cost of software support fees decreased to 32% for fiscal year 1999 compared to 35% for fiscal year 1998 and increased to 35% for fiscal year 1998 compared to 31% for fiscal year 1997. The decrease in fiscal year 1999 compared to 1998 was due primarily to software support fees increasing at a rate substantially higher than the cost of software support fees. The dollar increase in the cost of software support fees was $286,000, which was due primarily to additional headcount and compensation related expenses. The increase in fiscal year 1998 compared to 1997 was due primarily to a higher salary cost and a less efficient ratio of customer support staff to customers as well as an increase in other direct cost of support expenses associated with supporting a higher software license volume. Looking forward, the Company expects the dollar cost of software support fees to increase due to the increased staffing that will be required to support a higher installed base of the Company's products and in order to support the FlowMan product. The Company also 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 54% for fiscal year 1999 compared to 50% for fiscal year 1998 and decreased to 50% for fiscal year 1998 compared to 55% for fiscal year 1997. The increase in fiscal year 1999 compared to 1998 was due primarily to lower gross margins on certain consulting engagements sold by the Company during the year. The improvement in 1998 compared to 1997 was due primarily to higher gross margins earned on training and consulting services. Looking forward, the Company expects the cost of other revenues to increase as the revenues for customization and implementation fees increase. Additional headcount and contract labor will be required both for customization and implementation services on MTD and ETD projects.
OPERATING EXPENSES - ------------------------------------------------------------------------------------------------ Increase (In thousands) 1999 Increase 1998 (Decrease) 1997 - ------------------------------------------------------------------------------------------------ Product development $3,225 100% $1,609 (25)% $2,147 Percentage of net revenues 13% -- 9% -- 15% - ------------------------------------------------------------------------------------------------ Sales and marketing 5,983 5% 5,674 41% 4,011 Percentage of net revenues 24% -- 31% -- 28% - ------------------------------------------------------------------------------------------------ General and administrative 5,988 60% 3,754 19% 3,152 Percentage of net revenues 25% -- 20% -- 22% - ------------------------------------------------------------------------------------------------ Purchase of in-process R&D -- -- 1,350 -- -- Percentage of net revenues -- -- 7% -- -- - ------------------------------------------------------------------------------------------------ Amortization of goodwill and other intangible assets 858 -- -- -- -- Percentage of net revenues 4% -- -- -- -- - ------------------------------------------------------------------------------------------------
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 13% for fiscal year 1999 compared to 9% for fiscal year 1998, and decreased to 23 24 9% for fiscal year 1998 compared to 15% for fiscal year 1997. The increase for 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. In addition, payroll and related expenses for MTD also increased due to increased headcount and higher salaries (due in part to the tight labor market for technical personnel). The increase in MTD was offset somewhat by an increase in the amount of software development costs that were capitalized and the Company allocating certain development resources to consulting and custom programming. The decrease for 1998 consisted of a dollar decrease of $538,000, which was due primarily to an increase in capitalized software development costs that were offset somewhat by increases in headcount and the related salary expenses. The Company capitalized $2,123,000, $1,846,000, and $877,000 of product development expenditures for fiscal years 1999, 1998 and 1997, respectively. The increase in capitalized product development expenses during fiscal year 1999 compared to fiscal year 1998 was due primarily to increases in costs capitalized for MortgageWare InvestorLINQ, MortgageWare MarketLINQ, MortgageWare InfoLINQ, and MortgageWare Entre, offset somewhat by decreases in costs capitalized for MortgageWare TC and MortgageWare Loan Servicing. The increase in capitalized product development expenses during fiscal year 1998 compared to fiscal year 1997 was due primarily to the fact that the Company had no significant capitalized costs for MortgageWare TC, MortgageWare Entre, and MortgageWare MarketLINQ during the 1997 fiscal year, but capitalized $750,000 of costs related to these products in fiscal year 1998. These costs related to the development of significant enhancements to these products during the year. As some of the Company's products have been on the market for a few years and are reaching more mature stages, the Company expects capitalized costs to decrease for these products during fiscal year 2000. The Company also anticipates the release of FlowMan 4.0 during fiscal year 2000 and expects to begin to capitalize the associated development costs as well as those for significant enhancements to this product. The Company expects the results of these two factors to be somewhat offsetting and believes they will result in the net capitalized software costs to remain relatively flat during fiscal year 2000. 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 decreased to 24% for fiscal year 1999 compared to 31% for fiscal year 1998, and increased to 31% for fiscal year 1998 compared to 28% for fiscal year 1997. The decrease for fiscal year 1999 resulted primarily from net revenues increasing at a substantially faster rate than sales and marketing expenses. 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. MTD's sales and marketing expenses were essentially flat for the year, although salaries and commissions increased (in correlation to the increase in revenue) while promotional costs (advertising, public relations, sales promotions etc.), depreciation, recruiting and other direct costs for this division decreased during the year. The increase for fiscal year 1998 represented a dollar increase of $1.66 million, which was due primarily to higher salaries and related payroll taxes, recruiting costs and commissions associated with a higher performing direct sales force. These expenses increased with the increases in revenue as discussed above (although not in direct proportion). In addition, the Company incurred increases in advertising, sales promotion and public relations, as well as travel and related direct costs of sales efforts in order to promote new products and the MortgageWare Enterprise offering. The Company expects sales and marketing expenses to increase on a dollar basis but to remain 24 25 relatively consistent on a percentage of revenue basis for fiscal year 2000 compared to fiscal year 1999. General and administrative expenses include costs associated with finance, accounting, purchasing, order fulfillment, administration and facilities. As a percentage of net revenues, general and administrative expenses increased to 25% for fiscal year 1999 compared to 20% for fiscal year 1998, and decreased to 20% for fiscal year 1998 compared to 22% for fiscal year 1997. The increase for fiscal year 1999 was due primarily to approximately $1.36 million of expenses associated with the proposed recapitalization of the Company that was terminated in June of 1999. These expenses included legal fees, investment banking fees, accounting fees, printing costs and other miscellaneous direct expenses. In addition, the Company moved its corporate headquarters in November of 1998, resulting in higher general and administrative costs associated with the move. Lastly, the Company's other direct general and administrative expenses have increased as a result of the growth of the Company and the additional infrastructure required to support this growth. The percentage decrease for fiscal year 1998 was due primarily to revenue increasing at a faster rate than general and administrative expenses. The Company expects general and administrative expenses to decrease on a dollar basis and a percentage of net revenues basis for fiscal year 2000 compared to fiscal year 1999, due primarily to the significant non-recurring expenses incurred in fiscal year 1999 related to the terminated recapitalization. Purchase of in-process research & development represented a one-time charge incurred by the Company upon the acquisition of LSS on June 30, 1998. This amount represented the estimated fair value of the purchased in-process research & development based upon risk adjusted estimated net cash flows related to the incomplete research and development projects. The technology obtained in this acquisition required significant further development so that it could be successfully integrated with the existing MortgageWare products and so that it could successfully compete in the Enterprise Application Integration market. Therefore, $1,350,000 of the purchase price was recorded as in-process research & development and expensed on the date of acquisition as the in-process technology had not yet reached technological feasibility and had no alternative future uses. LSS's FlowMan 4.0 product was under development at the time of the acquisition. This project encompassed significantly enhancing and adding features and functionality to the existing FlowMan 3.2 product. At the time of acquisition the Company expected FlowMan 4.0 to be completed during fiscal year 1999 at an estimated cost of $200,000. Due to unforeseen technical complexities and other project management issues, the development calendar has been extended and the Company expects the project to be completed in the first half of fiscal 2000. The Company has incurred approximately $875,000 in development costs through June 30, 1999, and estimates an additional $340,000 of costs through the date of project completion. At the time of the acquisition of LSS, revenues attributable to FlowMan 4.0 were projected for purposes of valuing the acquired in-process research & development. The Company continues to believe that FlowMan 4.0 will produce substantial revenues subsequent to successful completion. The Company originally expected to market both FlowMan 3.2 and 4.0 through its existing direct sales force and indirect distribution channels. During the quarter ended September 30, 1998, the Company concluded that a majority of sales would come through indirect channels that need to be developed. The increased need to develop indirect distribution channels and the delay in the expected completion date of FlowMan 4.0 from fiscal year 1999 to fiscal year 2000 have affected the amount and timing of projected revenues. As a result, during the quarter ended September 30, 1998, the Company revised its projected annual revenue ranges down to a range of $0.3 million to $6.5 million, as compared to the original 25 26 projected annual revenue ranges of $1.0 million to $10.3 million. The Company has not made any significant changes to these projections since the first quarter of fiscal 1999, other than to match the expected timing of those revenues to the expected completion date of the project. Though the Company currently expects that the acquired in-process technology will be successfully developed, there can be no assurance that commercial or technical viability of the product will be achieved. If the project is not successfully developed, the Company may not realize the value assigned to the in-process research & development. In addition, the value of goodwill and other acquired intangible assets may also become impaired. Ongoing operations and financial results for acquired businesses and the Company are subject to a variety of factors, which may or may not have been known or estimable at the time of such acquisition, and the estimates discussed above are subject to change.
NET INTEREST AND OTHER INCOME - ------------------------------------------------------------------------------------------------ (In thousands) 1999 Decrease 1998 Increase 1997 - ------------------------------------------------------------------------------------------------ Net interest and other income $545 (27)% $744 4% $719 Percentage of net revenues 2% -- 4% -- 5% - ------------------------------------------------------------------------------------------------
Interest income was $535,000, $766,000, and $747,000, for the fiscal years ended June 30, 1999, 1998 and 1997, respectively. Interest income decreased by 30% for fiscal year 1999 compared to fiscal year 1998, and remained relatively consistent from 1997 to 1998. The decrease in fiscal 1999 was due primarily to the lower average cash and investment portfolio balances held by the Company during the year combined with slightly lower interest rates. As of June 30, 1999, the Company had no interest-bearing debt outstanding, and anticipates no new debt financing in the foreseeable future. Accordingly, the Company expects net interest and other income for the foreseeable future to reflect net interest income.
INCOME TAXES - ------------------------------------------------------------------------------------------------ (In thousands) 1999 Increase 1998 Decrease 1997 - ------------------------------------------------------------------------------------------------ Income taxes $820 33% $616 (2)% $627 Effective income tax rate 37% -- 38% -- 36% - ------------------------------------------------------------------------------------------------
The provision for income taxes includes federal and state income taxes currently payable, and deferred taxes arising from temporary differences in determining income for financial statement and tax purposes. The effective 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 $8,190,000 as of June 30, 1999, compared to $8,525,000 at June 30, 1998. Cash and cash equivalents decreased by $1,345,000 for fiscal year 1999. Cash and cash equivalents provided by operating activities was $6,285,000 in fiscal year 1999. Principal uses of cash and cash equivalents included the repurchase of $1,253,000 of Company common stock, the cash outlay of $2,712,000 for the purchase of LSS (an additional $1,267,000 was paid on June 30, 1998), the purchase of $1,643,000 of furniture and equipment, $2,123,000 of capitalized software costs, and $813,000 of purchased technology. 26 27 The Company's capital expenditures for fiscal years 1999 and 1998 were $1,643,000 and $572,000, respectively. The Company expects to spend about $850,000 in fiscal year 2000. 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 2000. YEAR 2000 The Year 2000 problem arose because many existing computer programs use only the last two digits to refer to a year. Therefore, these computer programs do not properly recognize a year that begins with "20" instead of the familiar "19." If not corrected, many computer applications could fail or create erroneous results. The Company has 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. (i) Internal Products The Company has taken an inventory of all software and hardware systems used internally to conduct its ongoing business. These systems include client/server systems, LAN systems, PC systems and related software, security systems, and voice mail systems. The Company has performed testing to confirm Year 2000 readiness on these systems and believes that all significant systems are Year 2000-ready. The Company did not retain any outside consultants to assist in the Year 2000 problem and based on its review of its internal systems, the Company believes the aggregate costs of completing Year 2000 readiness were not material. There can be no assurances that the Company's internal systems do not contain undetected errors relating to the Year 2000 problem. The Company believes that significant record-keeping and operational deficiencies could occur should any of the Company's significant internal systems prove not to be Year 2000-ready, which could have material adverse effects on the Company's business, financial condition and results of operations. The Company has developed limited contingency plans to address operational issues should any deficiencies in its significant systems arise. (ii) The Company's Products The Company believes that all of the products it sells in the operation of its business have been made Year 2000-ready. In addition to internal testing, the Company has published recommendations to its customers with regard to the testing that they should be performing in-house on its products to ensure Year 2000 readiness. The Company did not calculate separately from its product development costs, the costs of making its products Year 2000-ready. The Company believes that any incremental Year 2000-related expense has been less than $100,000. Year 2000 readiness was addressed as a routine engineering exercise as successive versions or upgrades of the Company's products were released. No third-party consulting firms were retained to specifically address the Year 2000 issue relating to the Company's products. 27 28 There can be no assurances that the Company's products do not contain undetected errors relating to the Year 2000 problem that may result in material additional cost or liabilities of unknown magnitude, which could have a material adverse effect on the Company's business, financial condition and results of operations. However, because the Company believes that all of its products are Year 2000-ready, no formal contingency plans have been developed to respond to such effects. The Company believes that the purchasing patterns of customers and potential customers may be affected by the Year 2000 problem in a variety of ways. The Company believes that certain industry groups and large financial institutions have been making recommendations that mortgage lenders protect themselves from further Year 2000 exposure by deferring the purchase and implementation of new software programs (whether or not they purport to be Year 2000-ready) until after January 1, 2000. Also, the Company believes that some customers may defer purchasing the Company's products because those customers will be diverting resources to address their own Year 2000 problems. In contrast, other customers may accelerate their decisions to purchase the Company's products to replace non-Year 2000-ready applications. Although the Company believes that the impact of the Year 2000 problem is resulting in a reduction in software sales, the Company has not been able to directly measure the impact of these decisions for the fiscal year ended June 30, 1999. In addition, the Company believes that it is currently not possible to predict the overall impact of these decisions over the course of the next fiscal year. (iii) The Company's Vendors The Company has identified third-party vendors upon whom it places significant reliance and is attempting to ascertain their readiness for the Year 2000 problem. Although the Company believes it is prudent to assess its vendors' Year 2000 readiness, it is unable to accurately predict the impact to the Company if certain vendors are not Year 2000-ready. Significant disruption in the businesses of the Company's customers and third-party vendors may have material adverse effects on the Company's business, financial condition and results of operations. Limited contingency plans have been developed to address operational issues should certain of the Company's significant third-party vendors prove not to be Year 2000-ready. NEW ACCOUNTING STANDARDS On December 22, 1998, the AICPA Accounting Standards Executive Committee issued Statement of Position ("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 the undelivered elements is recognized as revenue related to the delivered elements. The "residual method" established by SOP 98-9 is effective for fiscal years 28 29 beginning after March 15, 1999. The Company believes that the adoption of SOP 98-9 will not have a material effect on the Company's revenue recognition. 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. 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 the financial statements. FORWARD-LOOKING STATEMENTS When used in this discussion, 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. 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. 29 30 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA INDEX TO FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Page # -------- Independent Auditors' Report 31 Balance Sheets as of June 30, 1999 and 1998 32 Statements of Income for the years ended June 30, 1999, 1998 and 1997 33 Statements of Shareholders' Equity for the years ended June 30, 1999, 1998 and 1997 34 Statements of Cash Flows for the years ended June 30, 1999, 1998 and 1997 35 Notes to Financial Statements 36 - 45 Schedule II - Valuation and Qualifying Accounts 48
30 31 INDEPENDENT AUDITORS' REPORT - -------------------------------------------------------------------------------- The Board of Directors and Shareholders INTERLINQ Software Corporation: We have audited the accompanying financial statements of INTERLINQ Software Corporation as listed in the accompanying index. In connection with our audits of these financial statements, we have also audited the financial statement schedule as listed in the accompanying index. These financial statements and financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of INTERLINQ Software Corporation as of June 30, 1999 and 1998, and the results of its operations and its cash flows for each of the years in the three-year period ended June 30, 1999 in conformity with generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein. /s/ KPMG LLP Seattle, Washington August 6, 1999 31 32 INTERLINQ SOFTWARE CORPORATION BALANCE SHEETS
As of June 30, 1999 1998 - ---------------------------------------------------------------------------------------- ASSETS Current assets: Cash and cash equivalents $ 5,888,630 $ 7,233,826 Investments available-for-sale, at fair value 3,805,102 3,406,389 Investments held-to-maturity, at amortized cost 2,069,116 3,267,534 Accounts receivable, less allowance for doubtful accounts of $322,000 in 1999 and $256,000 in 1998 3,763,446 3,400,194 Inventory, prepaid expenses and other current assets 934,008 732,273 ----------- ----------- Total current assets 16,460,302 18,040,216 ----------- ----------- Property and equipment, at cost 6,576,456 6,434,017 Less accumulated depreciation and amortization 4,872,314 5,434,285 ----------- ----------- Net property and equipment 1,704,142 999,732 ----------- ----------- Capitalized software costs, less accumulated amortization of $4,637,000 in 1999 and $2,439,000 in 1998 5,159,249 4,421,806 Goodwill and other intangible assets, less accumulated amortization of $858,000 in 1999 and $0 in 1998 2,384,377 3,198,021 Other assets 88,914 110,102 ----------- ----------- $25,796,984 $26,769,877 =========== =========== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable $ 440,962 $ 690,138 Accrued compensation and benefits 2,082,743 1,745,908 Other accrued liabilities 221,535 670,800 Purchase consideration payable -- 2,600,000 Customer deposits 965,204 374,151 Deferred software support fees 4,559,597 3,434,092 ----------- ----------- Total current liabilities 8,270,041 9,515,089 ----------- ----------- Noncurrent liabilities, excluding current installments 9,854 99,864 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 5,180,648 shares in 1999 and 5,350,559 shares in 1998 51,806 53,506 Additional paid-in capital 9,409,382 10,442,835 Retained earnings 8,055,901 6,658,583 ----------- ----------- Total shareholders' equity 17,517,089 17,154,924 Commitments =========== =========== $25,796,984 $26,769,877 =========== ===========
See accompanying notes to financial statements. 32 33 INTERLINQ SOFTWARE CORPORATION STATEMENTS OF INCOME
Years Ended June 30, 1999 1998 1997 - ------------------------------------------------------------------------------------------------ Net revenues: Software license fees $13,091,646 $ 9,646,819 $ 7,055,457 Software support fees 8,637,227 6,975,959 6,072,544 Other 2,702,338 1,723,615 1,239,045 ----------- ----------- ----------- Total net revenues 24,431,211 18,346,393 14,367,046 ----------- ----------- ----------- Cost of revenues: Software license fees 2,506,509 1,778,263 1,499,645 Software support fees 2,730,637 2,445,025 1,856,486 Other 1,468,295 859,269 682,666 ----------- ----------- ----------- Total cost of revenues 6,705,441 5,082,557 4,038,797 ----------- ----------- ----------- Gross profit 17,725,770 13,263,836 10,328,249 ----------- ----------- ----------- Operating expenses: Product development 3,225,035 1,608,840 2,147,546 Sales and marketing 5,982,424 5,674,475 4,011,440 General and administrative 5,988,056 3,754,222 3,151,761 Amortization of goodwill and other intangible assets 858,348 -- -- Purchase of in-process research and development -- 1,349,616 -- ----------- ----------- ----------- Total operating expenses 16,053,863 12,387,153 9,310,747 ----------- ----------- ----------- Operating income 1,671,907 876,683 1,017,502 Net interest and other income 545,522 744,865 719,275 ----------- ----------- ----------- Income before income tax expense 2,217,429 1,621,548 1,736,777 Income tax expense 820,111 616,066 626,900 ----------- ----------- ----------- Net income $ 1,397,318 $ 1,005,482 $ 1,109,877 =========== =========== =========== Net income per share - basic $ .27 $ .19 $ .19 Net income per share - diluted $ .25 $ .19 $ .19 Shares used to calculate net income per share - basic 5,174,341 5,213,217 5,707,374 Shares used to calculate net income per share - diluted 5,484,565 5,375,882 5,841,764
See accompanying notes to financial statements. 34 INTERLINQ SOFTWARE CORPORATION STATEMENTS OF SHAREHOLDERS' EQUITY
Additional Total Common Paid-in Retained Shareholders' Years Ended June 30, 1999, 1998, and 1997 Stock Capital Earnings Equity - ----------------------------------------------------------------------------------------------- Balances at June 30, 1996 $60,386 $13,167,629 $4,543,224 $17,771,239 Issuance of 19,962 shares of common stock 199 17,321 -- 17,520 Tax benefit realized upon exercise of stock options -- 10,967 -- 10,967 Repurchase of 642,000 shares of common stock (6,420) (2,852,830) -- (2,859,250) Net income for the year ended June 30, 1997 -- -- 1,109,877 1,109,877 - ----------------------------------------------------------------------------------------------- Balances at June 30, 1997 54,165 10,343,087 5,653,101 16,050,353 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 ===============================================================================================
See accompanying notes to financial statements. 34 35 INTERLINQ SOFTWARE CORPORATION STATEMENTS OF CASH FLOWS
Years Ended June 30, 1999 1998 1997 - --------------------------------------------------------------------------------------------------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 1,397,318 $ 1,005,482 $ 1,109,877 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization of property and equipment 939,051 1,094,884 1,111,438 Amortization of capitalized software costs 2,198,092 1,559,201 1,287,881 Amortization of goodwill & other intangible assets 858,348 Purchase of in-process research and development -- 1,349,616 -- Deferred income tax benefit (108,000) (305,290) (2,217) Tax benefit realized upon exercise of stock options 103,212 13,793 10,967 Change in operating assets and liabilities (net of acquisition): Accounts receivable (363,252) (1,505,816) 369,287 Inventory, prepaid expenses and other current assets (93,735) 82,882 (60,485) Other assets 21,188 (39,203) (44,878) Accounts payable (136,796) 99,527 77,669 Accrued compensation and benefits and other accrued liabilities (202,440) 1,172,553 47,235 Customer deposits 591,053 174,515 (164,067) Deferred software support fees 1,080,801 389,388 411,835 ----------- ----------- ------------ Net cash provided by operating activities 6,284,840 5,091,532 4,154,542 ----------- ----------- ------------ CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of property and equipment (1,643,461) (571,646) (547,059) Capitalized software costs (2,123,035) (1,845,881) (877,334) Purchase of source code and third-party technology (812,500) -- (275,000) Purchases of investments (3,295,774) (7,402,921) (14,511,012) Proceeds from sales and maturities of investments 4,095,479 6,766,543 16,180,313 Cash paid for acquisition (2,712,380) (1,266,520) -- ----------- ----------- ------------ Net cash used in investing activities (6,491,671) (4,320,425) (30,092) ----------- ----------- ------------ CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from issuance of common stock 114,385 31,059 17,520 Repurchase of common stock (1,252,750) (1,362,101) (2,859,250) ----------- ----------- ------------ Net cash used in financing activities (1,138,365) (1,331,042) (2,841,730) ----------- ----------- ------------ Net increase (decrease) in cash & cash (1,345,196) (559,935) 1,282,720 equivalents ----------- ----------- ------------ Cash and cash equivalents at beginning of year 7,233,826 7,793,761 6,511,041 ----------- ----------- ------------ Cash and cash equivalents at end of year $ 5,888,630 $ 7,233,826 $ 7,793,761 =========== =========== ============ SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Net cash paid during the year for income taxes $ 1,298,750 $ 703,816 $ 615,891 SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES: Acquisition effected through issuance of common stock and purchase consideration payable -- $ 4,016,338 --
See accompanying notes to financial statements. 35 36 INTERLINQ SOFTWARE CORPORATION NOTES TO FINANCIAL STATEMENTS JUNE 30, 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, 1999 and 1998, cash equivalents consisted primarily of commercial paper and were $3,200,000 and $4,650,000, respectively. (C) INVESTMENTS Investments at June 30, 1999 and 1998 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. Investments held-to-maturity are carried at amortized cost. At June 30, 1999 and 1998, 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 $3,800,000 and $3,400,000 of money market auction preferred securities as of June 30, 1999 and 1998, 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 to 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. Management periodically evaluates property and equipment for impairment whenever events or circumstances indicate that the carrying amount may not be recoverable. The amount of 36 37 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 cost is incurred until technological feasibility is established. Thereafter, all software product development costs are capitalized and reported at the lower of unamortized cost or net realizable value. Software costs incurred in conjunction with 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 will be 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 assets balance 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. On July 1, 1998, the Company adopted 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, installation, 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. The adoption of SOP 97-2 did not have a material effect on revenue recognition or the Company's results of operations. 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. 37 38 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 ("APB") Opinion No. 25, "Accounting for Stock issued to Employees", 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 ("SFAS") No. 123, "Accounting for Stock-Based Compensation" 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. (L) EARNINGS PER SHARE Basic earnings per share is computed using the weighted average number of common shares outstanding during the period. Diluted earnings per share is computed using the weighted average number of common and dilutive common equivalent shares outstanding during the period. The following table reconciles the shares used in calculating basic earnings per share to the shares used in calculating diluted earnings per share:
1999 1998 1997 --------- --------- --------- Shares used to calculate basic earnings per share 5,174,341 5,213,217 5,707,374 Dilutive effect of outstanding stock options 310,224 162,665 134,390 ========= ========= ========= Shares used to calculate diluted earnings per share 5,484,565 5,375,882 5,841,764 ========= ========= =========
38 39 Options to purchase shares of common stock where the exercise price exceeded the average market price were excluded from the computations in 1999, 1998 and 1997 because they would be anti-dilutive. The shares of stock excluded from the computations are as follows:
1999 1998 1997 ------------- ------------- ------------- Shares excluded 23,000 191,000 243,000 Exercise price $6.94 - $8.38 $4.97 - $8.38 $4.38 - $8.38
(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. (P) COMPREHENSIVE INCOME In fiscal year 1999, the Company adopted SFAS No. 130, "Reporting Comprehensive Income." SFAS 130 establishes new rules for the reporting and disclosure of comprehensive income and its components. 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, 1999, 1998 and 1997. (2) PROPERTY AND EQUIPMENT Major classes of property and equipment as of June 30 are as follows:
1999 1998 ---------- ---------- Leasehold improvements $ 595,601 $1,502,722 Furniture and fixtures 1,103,120 1,082,467 Computer equipment 4,222,678 3,475,017 Office equipment 655,057 373,811 ========== ========== $6,576,456 $6,434,017 ========== ==========
(3) ACQUISITION On June 30, 1998, the Company entered into a purchase and sale agreement to acquire 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 39 40 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). On June 30, 1998, the Company paid $1,000,000 in cash and recorded the remaining balance of the cash purchase price as purchase consideration payable. Direct acquisition costs that were unpaid at June 30, 1998, were recorded as accounts payable. 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. The purchase price was allocated to the acquired assets and assumed liabilities based on fair values as follows: Accounts receivable $ 292,158 Property and equipment 50,733 Workforce-in-place 142,149 Customer list 171,691 Tradename 213,632 Noncompete and employment agreements 263,172 Goodwill 2,407,377 Capitalized software 777,110 In-process research and development 1,349,616 Accounts payable and accrued liabilities (272,370) =========== $5,395,268 ===========
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. The following table presents pro forma results of operations as if the acquisition had occurred at the beginning of the 1998 fiscal year, excluding all nonrecurring acquisition-related charges. The table includes the impact of certain adjustments such as goodwill amortization and related tax effects. The pro forma information is not necessarily indicative of the combined results that would have occurred had the acquisition been in effect for the entire periods presented, nor is it necessarily indicative of results that may occur in the future.
1998 ------------ Total net revenues $19,477,617 Net income 1,041,241 Net income per share - basic and diluted .19
(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 liabilities at June 30, 1999, is $36,879 in deferred rent related to the Company's current premises. Included in liabilities at June 30, 1998 was $17,875 in deferred rent related to the Company's prior premises. 40 41 During fiscal year 1999, the Company also held a lease for previous premises, which expired in October 1998. The company negotiated a sublease to another tenant for the remaining lease term beginning in March 1994. Included in accrued liabilities at June 30, 1998, was $142,568, which represented the Company's remaining obligation under this lease, net of amounts to be received under the sublease. Future minimum lease payments under noncancelable operating leases are as follows:
Minimum lease payments ---------------------- Year ending June 30: 2000 $ 670,113 2001 691,873 2002 711,993 2003 730,473 2004 735,832 Thereafter 1,035,321 =========== $4,575,605 ===========
Total rent expense amounted to $634,904, $384,481, and $379,994 for the years ended June 30, 1999, 1998, and 1997, 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 $ 192,821 and $114,552 for the years ended June 30, 1999 and 1998, respectively. No contributions were made for the year ended June 30, 1997. The Company has no other postemployment or postretirement benefit plans. (5) INCOME TAXES Components of income taxes are summarized as follows:
1999 1998 1997 --------- --------- --------- Current: Federal $ 744,611 $ 830,022 $ 580,601 State 80,288 77,541 37,549 --------- --------- --------- Total current 824,899 907,563 618,150 --------- --------- --------- Deferred: Federal (94,188) (277,958) (2,032) State (13,812) (27,332) (185) --------- --------- --------- Total deferred (108,000) (305,290) (2,217) --------- --------- --------- Charge in lieu of taxes from employee stock options 103,212 13,793 10,967 ========= ========= ========= $ 820,111 $ 616,066 $ 626,900 ========= ========= =========
Income tax expense differs from "expected" income tax expense (computed by applying the U.S. federal income tax rate of 34%) as follows:
1999 1998 1997 --------- --------- --------- Computed "expected" tax expense $ 753,926 $ 551,326 $ 590,504 State income taxes, net of federal benefit and other items 66,185 64,740 36,396 --------- --------- --------- $ 820,111 $ 616,066 $ 626,900 --------- --------- ---------
41 42 The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and liabilities are as follows:
1999 1998 ----------- ----------- Deferred tax assets: Allowance for doubtful accounts receivable $ 119,140 $ 94,683 Deferred software support fees 87,702 120,201 Deferred rent -- 48,894 Accrued expenses 130,887 87,222 Property and equipment 739,408 638,866 Goodwill 238,704 -- Purchased in-process research & development 466,068 499,749 ----------- ----------- Total deferred tax assets 1,781,909 1,489,615 ----------- ----------- Deferred tax liabilities - capitalized software (1,407,909) (1,223,615) ----------- ----------- Net deferred tax asset $ 374,000 $ 266,000 =========== ===========
The Company believes that it is more likely than not that the results of future operations will generate sufficient taxable income to recover the net deferred tax asset. (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 Accounting Principles Board Opinion No. 25 and no compensation cost has been recognized related to its stock options. Had the Company determined compensation cost based on the fair value at the grant date for its stock options under SFAS No. 123, the Company's net income would have changed to the pro forma amounts indicated below:
1999 1998 1997 ---------- ---------- ---------- Net income: As reported $1,397,318 $1,005,482 $1,109,877 Pro forma 802,196 582,061 821,572 Per share amounts: As reported - basic $ .27 $ .19 $ .19 As reported - diluted $ .25 $ .19 $ .19 Pro forma - basic $ .16 $ .11 $ .14 Pro forma - diluted $ .15 $ .11 $ .14
Pro forma net income and net income per share reflect only options granted in the years ended June 30, 1999, 1998, 1997, and 1996. Therefore, the full impact of calculating compensation cost for stock options under SFAS No. 123 is not reflected in the pro forma net income and net income per share amounts presented above because compensation cost is reflected over the options' vesting period and compensation cost for options granted prior to July 1, 1995, is not considered. 42 43 The per share weighted-average fair value of stock options granted during the years ended June 30, 1999, 1998 and 1997 was $3.58, $2.71, and $3.28, respectively, on the date of grant using the Black Scholes option-pricing model with the following weighted-average assumptions:
1999 1998 1997 Expected dividend yield 0.0% 0.0% 0.0% Risk-free interest rate 4.54% 5.36% 6.02% Expected volatility 65% 65% 65% Expected life 5 years 5 years 5 years
The 1985 and 1993 Plans provide for both incentive stock options and other stock options that may be issued to attract and retain the services of employees. The incentive stock options vest over a four-year period and may be exercised during continued employment or within one month of terminating employment for the 1985 Plan and within three months for the 1993 Plan. All options expire ten years from the date of grant. The 1985 Plan has been suspended in regard to future grants, and stock options are currently granted pursuant to the 1993 Plan. The Company has authorized 1,150,000 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:
Outstanding options -------------------------------------------- Number of shares Weighted Options ------------------------------- Average Available 1985 1993 Directors Exercise For Grant Plan Plan Plan Price ---------- ---------- ---------- --------- ------------ Balances at June 30, 1996 382,538 162,418 506,962 79,000 3.17 Increase in shares reserved under Directors Plan 140,000 -- -- -- -- Options granted (228,180) -- 219,180 9,000 5.46 Options exercised -- (19,650) (312) -- .88 Options canceled 59,476 (19,150) (37,476) (22,000) 4.11 ------- ------- ------- ------- Balances at June 30, 1997 353,834 123,618 688,354 66,000 3.73 Options granted (220,100) -- 197,600 22,500 4.57 Options exercised -- (13,300) (4,813) -- 1.71 Options canceled 48,118 (800) (45,118) (3,000) 5.42 ------- ------- ------- ------- Balances at June 30, 1998 181,852 109,518 836,023 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 Options canceled 51,944 (2,400) (46,544) (3,000) 5.05 ------- ------- ------- ------- Balances at June 30, 1999 343,996 43,374 893,434 102,000 4.29 ------- ------- ------- -------
43 44 Additional information regarding options outstanding as of June 30, 1999 is as follows:
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 --------------- ----------- ------------ --------- ----------- --------- $ .100- .500 34,374 2.52 $.47 34,374 $ .47 2.500-3.875 491,010 5.87 $3.42 348,240 $3.40 3.969-5.844 369,291 7.33 $5.01 178,345 $5.00 6.125-8.375 144,133 8.11 $6.26 37,194 $6.50 ----------- ------- $ .100-8.375 1,038,808 6.60 $4.29 598,153 $3.92 ----------- -------
(7) NET INTEREST AND OTHER INCOME Net interest and other income consist of:
1999 1998 1997 -------- -------- -------- Interest income $535,025 $765,792 $746,712 Interest expense (2,384) (21,623) (27,713) Other, net 12,881 696 276 -------- -------- -------- $545,522 $744,865 $719,275 ======== ======== ========
(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 allowances for possible credit losses. (9) SEGMENT INFORMATION In fiscal 1999, the Company adopted SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information" ("SFAS 131") which requires disclosure of financial and descriptive information about the Company's reportable operating segments. 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 and Enterprise Technology Division. 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. 44 45 The operating segment information for fiscal year 1999 has been reported in accordance with the provisions of SFAS No. 131. 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):
MTD ETD TOTAL ------- ------- ------- 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 1998: Identifiable assets $22,452 $ 4,318 $26,770
(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 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 2000 fiscal year. (11) QUARTERLY FINANCIAL DATA (UNAUDITED) The following table summarizes the unaudited statements of operations for each quarter of fiscal 1999 and 1998 (in thousands, except per share amounts):
First Second Third Fourth ------ ------ ------ ------- 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 1998 Net revenues $3,642 $4,369 $4,787 $ 5,549 Gross profit 2,459 3,158 3,455 4,192 Operating income (loss) 165 382 648 (318) Net income (loss) 209 357 520 (81) Net income (loss) per share - basic and diluted $ .04 $ .07 $ .10 $ (.02)
In the fourth quarter of fiscal year 1998 the Company recorded a special charge of $1,349,616 related to its acquisition of LSS for in-process research and development. 45 46 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Incorporated by reference to the information under the captions "Election of Directors," "Continuing Class I Directors, Terms Expiring in 2000," "Nominees for Election as Class II Directors, Terms Expiring in 2001," "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 1999 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, 1999, 1998, and 1997 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. 46 47 3. EXHIBITS. The Exhibits listed on the accompanying Index to Exhibits immediately following the financial statement schedules are filed as part of, or incorporated by reference into, this report.
Exhibit Number Description - ----------- ----------- 3.1(1) Restated Articles of Incorporation of INTERLINQ Software Corporation 3.2(1) Restated Bylaws of INTERLINQ Software Corporation 10.1(1)(2) 1985 Restated Stock Option Plan 10.2(1)(2) 1993 Stock Option Plan 10.3(1)(2) Stock Option Plan for Non-Employee Directors, as amended 10.4(1) Amended and Restated Registration Rights Agreement between INTERLINQ Software Corporation and the partners listed on Schedule A thereto dated as of March 12, 1993 10.5(1) Form of Indemnification Agreement for Directors and Officers 10.6(3) Co-Marketing Agreement between INTERLINQ Software Corporation and CMCI Corporation dated as of July 1, 1993 10.7(2)(4) Letter dated August 25, 1995 regarding Jiri Nechleba Compensatory Arrangement 10.8(4) 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 10.9(4) Amendment of Co-marketing Agreement between INTERLINQ Software Corporation and CMCI Corporation dated October 1, 1995 10.10(5) Office Lease between Pine Forest Co. and INTERLINQ Software Corporation dated as of April 23, 1998 10.11 Licensing agreement for Rakis Software between CBF Systems, Inc. and INTERLINQ Software Corporation dated May 12, 1999 23.1 Consent of KPMG LLP 27.1 Financial data schedule
(1) Incorporated by reference to the Company's Registration Statement on Form S-1, as amended (Registration No. 33-59502) filed with the Securities and Exchange Commission on March 15, 1993, as same exhibit number. (2) Management contract or compensatory plan or arrangement. (3) Incorporated by reference to the Company's Annual Report on Form 10-K for the fiscal year ended June 30, 1993, as same exhibit number. Confidential treatment has been requested as to portions of this document. (4) Incorporated by reference to the Company's Annual Report on Form 10-K for the fiscal year ended June 30, 1996, as same exhibit number. (5) Previously filed with Form 10-K for the year ended June 30, 1998. (b) REPORTS ON FORM 8-K DURING THE FOURTH QUARTER ENDED JUNE 30, 1999 The Company filed a Current Report on Form 8-K, dated June 7, 1999 to report the termination of the proposed recapitalization with W.R. Hambrecht. 47 48 Schedule II INTERLINQ SOFTWARE CORPORATION VALUATION AND QUALIFYING ACCOUNTS Years ended June 30, 1999, 1998 and 1997
Additions ------------------------- Balance at Charged to Charged to beginning costs and other Balance at Description of year expenses accounts Deductions end of year - ----------------------------- ---------- ---------- ---------- ---------- ----------- Allowances for doubtful Accounts: 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 -- (371,100) 256,000 Year ended June 30, 1997: Accounts receivable 187,007 396,986 -- (407,993) 176,000
48 49 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 23rd day of September 1999. INTERLINQ SOFTWARE CORPORATION By: /s/ JIRI M. NECHLEBA -------------------------------------- Jiri Nechleba President and Chief Executive Officer
Signature Title --------- ----- /s/ JIRI M. NECHLEBA Chairman of the Board, President and Chief - ---------------------------- Executive Officer Jiri M. Nechleba (Principal Executive Officer) /s/ STEPHEN A. YOUNT Executive Vice President, Chief Financial - ---------------------------- Officer and Secretary Stephen A. Yount (Principal Accounting Officer) /s/ ROBERT W. O'REAR Director - ---------------------------- Robert W. O'Rear Director - ---------------------------- Theodore M. Wight /s/ ROBERT J. GALLAGHER Director - ---------------------------- Robert J. Gallagher
49 50 INTERLINQ SOFTWARE CORPORATION INDEX TO EXHIBITS
Exhibit Description - ----------- ----------- 3.1(1) Restated Articles of Incorporation of INTERLINQ Software Corporation 3.2(1) Restated Bylaws of INTERLINQ Software Corporation 10.1(1)(2) 1985 Restated Stock Option Plan 10.2(1)(2) 1993 Stock Option Plan 10.3(1)(2) Stock Option Plan for Non-Employee Directors, as amended 10.4(1) Amended and Restated Registration Rights Agreement between INTERLINQ Software Corporation and the partners listed on Schedule A thereto dated as of March 12, 1993 10.5(1) Form of Indemnification Agreement for Directors and Officers 10.6(3) Co-Marketing Agreement between INTERLINQ Software Corporation and CMCI Corporation dated as of July 1, 1993 10.7(2)(4) Letter dated August 25, 1995 regarding Jiri Nechleba Compensatory Arrangement 10.8(4) 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 10.9(4) Amendment of Co-marketing Agreement between INTERLINQ Software Corporation and CMCI Corporation dated October 1, 1995 10.10(5) Office Lease between Pine Forest Co. and INTERLINQ Software Corporation dated as of April 23, 1998 10.11 Licensing agreement for Rakis Software between CBF Systems, Inc. and INTERLINQ Software Corporation dated May 12, 1999 23.1 Consent of KPMG LLP 27.1 Financial data schedule
(1) Incorporated by reference to the Company's Registration Statement on Form S-1, as amended (Registration No. 33-59502) filed with the Securities and Exchange Commission on March 15, 1993, as same exhibit number. (2) Management contract or compensatory plan or arrangement. (3) Incorporated by reference to the Company's Annual Report on Form 10-K for the fiscal year ended June 30, 1993, as same exhibit number. Confidential treatment has been requested as to portions of this document. (4) Incorporated by reference to the Company's Annual Report on Form 10-K for the fiscal year ended June 30, 1996, as same exhibit number. (5) Previously filed with Form 10-K for the year ended June 30, 1998. 50 EX-10.11 2 LICENSING AGREEMENT DATED MAY 12, 1999 1 EXHIBIT 10.11 LICENSING AGREEMENT FOR RAKIS SOFTWARE BETWEEN CBF SYSTEMS, INC. (LICENSOR) AND INTERLINQ SOFTWARE CORPORATION (LICENSEE) This Agreement is made as of the 12 day of May, 1999, by and between CBF Systems, Inc., a Michigan corporation, ("Licensor") and Interlinq Software Corporation, a Washington corporation ("Licensee"). In consideration of the mutual promises contained herein, and for good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged by Licensee and Licensor, the parties hereto agree as follows: 1. Grant of License. In consideration for the payment of the licensing fees paid or to be paid by Licensee pursuant to this Agreement, Licensor grants Licensee a world wide, non-exclusive and non-transferable license (the "License") to install, use, sublicense, and distribute the Licensor's Products described in Exhibit "A" (the "Products & Prices") as hereinafter set forth, and the associated engineering and program documentation prepared by Licensor from time to time (collectively the "Documentation"). 2 2. Scope of License. A. Licensee may: 1. Install, download and use the Licensor's Products in Licensee's own facilities and permit its direct customer's to do the same in their business facilities on an undefined number of central processing units and network computer environments pursuant to the terms and conditions set forth in this Agreement. 2. Use and distribute the Licensor's Products as embedded within Licensee's software applications and/or to be bundled with Licensee's set of components utilized by Licensee's direct customers. The term "direct customer" as used herein is an entity for whom Licensee has provided and/or modified Licensee's software application, exclusive of any entity who's primary intent is to resell or redistribute Licensee's software application to others. 3. Use, copy and distribute to all users in either printed or electronic media, the human-readable material as provided by Licensor to Licensee and enabling Licensee to fully utilize the Licensor's Products, including operating instructions, user manuals, programming documentation and the like. 4. Use and execute the Licensor's Products on the computers owned/operated by Licensee and permit its direct customers to do the same only for purposes of serving the internal needs of Licensee's business and the use of Licensee's software at customer locations. 5. Store Licensor's Products machine-readable instructions or data in, transmitted through, and displayed on machines associated with Licensee's specified computers and permit its direct customers to do the same. 6. Make and permit each of its direct customers to make one copy of the Licensor's Products in machine/readable form for emergency back-up purposes, but only so long as Licensor's mark remains affixed to the copies of Licensor's Products; such emergency back-up copies to remain the property of Licensor. 2 3 7. Private label Licensor's Products to its direct customers. Those modifications will not, in any case, affect any of the Licensor's copyright messages already existing within the Licensor's Products. In addition, Licensor will, at Licensee's direction, delete any reference to Licensor's name and/or substitute Licensee's name in place thereof. 8. Licensee may use the Licensor's Products only for those purposes specified in this Agreement (including without limitation Exhibit "A" to this Agreement). Distribution of the Licensor's Products are limited to Licensee's direct customers only. No work for hire, multiple-user license or time sharing arrangement is permitted. Any other use or distribution of the Licensor's Products is expressly prohibited. Licensee's rights granted by this Agreement may not be transferred unless approved by Licensor. More specifically, Licensee may, at any time with Licensor's written approval, such approval not be withheld unreasonably, assign any and all of its rights granted by this Agreement to (i) a person or entity that is controlled by Licensee including without limitation a subsidiary of Licensee (an "affiliate") or (ii) as set forth in Section 13F. Notwithstanding the foregoing, Licensee is prohibited from assigning this Agreement to an entity whose business directly competes with Licensor's primary business. 9. Licensee acknowledges that any placement of Licensee's software with any entity that will resell or redistribute Licensee's software (hereinafter "third parties"), either in its present format or with modifications, will require such third parties to obtain a separate License Agreement from Licensor, with terms, conditions and pricing unique to the circumstances of that third party. 10. Licensee acknowledges that Licensor's Products are built in part on products developed and owned by Licensor and further that Licensor's Products rely upon a proprietary file format known as .uff (universal file format) as employed within Licensor's other proprietary products that work in conjunction with Licensor's Products. Licensee agrees to make 3 4 no changes, conversions, modifications or connections which would permit Licensor's Products to work in conjunction with any other file format that is unsupported by Licensor. 3. License Fee. A. As full consideration to Licensor for Licensor's grant of the License to Licensee, Licensee agrees to pay Licensor the license fees specified in Exhibit "A" in the amount and at the time specified therein. B. Licensee shall be responsible for any present or future taxes, duties, tariffs, withholdings or fees of any nature whatsoever based on Licensee's use of Licensor's Products, other than taxes based on Licensor's income. Licensee shall promptly pay to Licensor an amount equal to such tax(es) actually paid or required to be collected or paid by the Licensor. D. Within thirty (30) days following the end of each of Licensee's fiscal quarters during the term of this Agreement, Licensee shall submit to Licensor a detailed royalty report that shall specify the net end-user license values for new customers (as defined in Exhibit A) during the previous quarter, together with the royalty fees due to Licensor. Licensee agrees to allow Licensor's representatives, and/or independent auditors at Licensor's sole expense, to audit and analyze appropriate and relevant accounting of records of Licensee to verify accurate and full accounting for and payment of all monies due to Licensor hereunder. Any such audit shall be permitted during business hours within ten (10) days of receipt of Licensor's written request and shall not interfere unduly with the business of Licensee. No audit (other than the first audit) may be conducted less than six months after the previous audit. All information made available to Licensor or its representative in any such examination shall be held in confidence and not disclosed to any other person, firm or corporation unless a dispute arises regarding the transactions subject to such examination and provided however, that nothing herein contained shall be construed to prevent Licensor and/or its duly authorized representatives from testifying in any court of competent jurisdiction with respect to the information obtained as a result of such examination in any action instituted to enforce the rights of Licensor under this Agreement. 4 5 4. Additional Fees. In addition to the initial License Fee, Licensee will pay to Licensor the following fees for services rendered by Licensor: A. Maintenance Fee. In consideration of Licensor's performance of its maintenance obligations set forth herein, Licensee shall enter into a mutually acceptable Maintenance Agreement (Exhibit B) covering Licensor's Products. This Maintenance Agreement will be mandatory for the first year following Acceptance of Licensor's Products and optional thereafter. The Annual Maintenance Fee as set forth in Exhibit A shall be due and payable upon commencement of the Maintenance Agreement. Any Annual Maintenance Fee after the first year shall be determined by Licensor, subject to 7% annual increase cap, and shall be payable by Licensee at the commencement of subsequent Maintenance Agreement years. 5. Updates, Modifications and Corrections. So long as Licensee pays the Annual Maintenance Fee, Licensor shall provide Licensee with all updates, modifications, or, corrections, of the Licensor's Products which have the same or greater functionality as their predecessors. However, Licensor shall have no obligation to develop such items except as stipulated within the Maintenance Agreement which must be in effect at such time. Such items shall be: (i) delivered to Licensee as soon as they are available and (ii) accompanied by new or revised Documentation as necessary or appropriate. These updates, modifications, or, corrections of the Licensor's Products and associated Documentation shall constitute Licensor's Products under this Agreement and shall be covered by all terms of this Agreement, except that no additional license fees or other payments shall be due on account thereof. 6. Product Acceptance by Licensee. A. Not later than forty-five (45) days after the Date of this Agreement, Licensor shall deliver to Licensee two (2) acceptable copies of the fully functional object code version of the Licensor's Products suitable for testing together with the appropriate documentation for the Licensor's Products ("Delivery"). B. Following Delivery and the commencement of testing by Licensee, Licensee shall promptly advise Licensor of the discovery of any programming error or anomaly 5 6 (an "Error"). Licensor shall promptly correct all Errors and each such item shall again be subject to the acceptance procedure described herein. C. In the event that the Licensor's Products fails to achieve product acceptance in 60 days after the date of delivery (other than as a result of a delay caused by Licensee), Licensee may, without limiting any of its other remedies: 1. Extend the time for Licensor's performance; 2. Terminate this Agreement effective immediately upon notice to Licensor and receive an immediate refund of any monies paid to Licensor pursuant to Section 3 hereof. 7. Installation and Training. A. Initial Install at Direct Customer Site: Licensor shall provide to Licensee, at no additional cost to Licensee, the following installation support at a direct customer's site for each of the three of Licensee's product groups, as requested by Licensee, with Licensor being reimbursed by Licensee for the reasonable travel and lodging costs incurred by Licensor for the initial installation of Licensor's Products: 1. An on-site technical person for up to one (1) week. Any services required by Licensee in excess of such stated time periods shall be paid for by Licensee at Licensor's then prevailing hourly rates for such persons plus all travel, lodging and related expenses. Deployment Allowance at Licensee's Site: Licensor will provide an allowance of up to 350 hours of time in support of Licensor's release of the five major, scheduled version releases. This allowance will be for time incurred by Licensor's primary development contractor in installing, training and problem resolution at the Licensee's site. Any support requirement requested by Licensee in addition to this allowance shall be paid for by Licensee at Licensor's then prevailing hourly rates for such persons. 8. Licensor's Obligations. 6 7 A. So long as Licensee pays the Annual Maintenance Fee, should an error in any of the Licensor's Products be identified by Licensor, Licensee, Licensor's other customers or any other party at any time, then Licensor will, at Licensor's expense, make the necessary corrections to such Licensor's Products and deliver corrected versions as directed by Licensee. Licensor shall undertake such error or correction process upon the earlier of Licensor's discovery of the applicable error or Licensor's receipt of notice of the error. This shall be Licensor's sole obligations with respect to an error. In the event Licensor furnishes Licensee with an electronic file containing any defect or bug, including any defective disc or other medium, Licensor shall properly replace such electronic file at no cost to Licensee. B. To the extent that Licensor's Products perform calculations related to the year 2000, and it is expressly stated that the Licensor's Products generally rely upon such year 2000 data as generated by the software of others, Licensor's Products do and will remain capable of correctly performing all functions, calculations, comparisons and sequencing both before, during and after the year 2000 without error or degradation of performance. 9. Licensor's Proprietary Rights. A. Subject to Licensee's rights and license under Section 1 hereof, Licensee agrees that: (i) Licensor is and shall be the sole and exclusive owner of all intellectual property rights in and to the Licensor's Programs; and (ii) Licensee will honor and respect Licensor's copyrights and other intellectual property rights in and to the Licensor's Programs, and Licensee will not take (nor cause any person or entity to take) any actions detrimentally inconsistent therewith. Except as otherwise allowed by this Agreement, Licensee agrees that any copies of the Licensor's Products which it makes pursuant to this Agreement shall bear all copyright, trademark and other proprietary notices included therein by Licensor. B. Licensee may not use, copy, modify or distribute the Licensor's Products (electronically or otherwise), or any copy, annotation, transcription, or merge portion thereof, except as provided in this Agreement or as expressly authorized by Licensor. Licensee may not reverse assemble, reverse compile or otherwise translate the Licensor's Product. Licensee shall 7 8 use commercially reasonable efforts to protect the Licensor's Products against improper use including, but not limited to, notifying Licensee's customers using the Licensor's Products hereunder that use of the Licensor's Products may only be in connection with Licensee's or the customer's business, and not for purpose of re-selling or re-marketing the Licensor's Products. C. In the event of an actual breach of the provisions of this Section 9, Licensor, after providing written notice of such actual breach which permits Licensee a thirty (30) day period to cure such actual breach, shall be entitled to request an injunction restraining the Licensee from such breach, and this shall be in addition to any of the rights or remedies to which Licensor may be entitled. D. Licensee acknowledges that the Licensor's Products represent a substantial investment by Licensor in compliance, composition, computer system compatibility and creation costs. Licensee further acknowledges that Licensor claims that the value of the Licensor's Products is protected under various intellectual property laws such as trademark, copyright, trade secrets and/or the Berne Convention Implementation Act of 1988 and/or applicable common law. The grant of the License to Licensee does not imply or convey permission to reproduce, employ or otherwise use the Licensor's Products, except as set forth in this Agreement. The acknowledgment and agreement of Licensee to the provisions of this Paragraph D is an essential part of the License absent which Licensor would not have entered into this Agreement with Licensee. E. Licensor represents and warrants to Licensee that Licensor owns or otherwise has all rights, title and interest to the Licensor's Products and all modifications and enhancements to the Licensor's Products, and all applicable rights to the patents, copyrights, trademarks and trade secrets used in the Licensor's Products. Neither the Licensor's Products nor any part thereof infringes or misappropriates any copyright, patent, trade secret or other proprietary right of any third party. Licensor agrees to indemnify and hold Licensee and its customers harmless from any and all damages, costs, liabilities, expenses and attorneys fees (including without limitation royalties and license fees) incurred by Licensee which arise out of 8 9 any claim, suit or proceeding alleging that use of the Licensor's Products infringes upon any copyright, patent, trade secret or any other proprietary right of any third party. Licensor shall defend, compromise or settle any such claim, suit or proceeding without Licensee or its customers incurring liability and Licensee shall give Licensor all available information, assistance and authority to enable Licensor to do so. If any claim, demand or action brought hereunder against Licensor or Licensee is based on allegations which, if true, is made which, if true, would constitute a breach of the warranty of non-infringement contained in this Section 8.E., then Licensor, at its option and expense, shall have the right to do any one or more of the following: 1. Obtain for Licensee the right to continue using Licensor's Products or components of Licensor's Products or modified versions thereof while ensuring that the Licensor's Products maintain all of their functionality, or, 2. Replace all or part of the Licensor's Products or components with non-infringing Products or components while ensuring that the Licensor's Products maintain all of their functionality, or, 3. Terminate the license granted Licensee to the Licensor's Products or components and refund to the Licensee an amount equal to the payments made by Licensee as of the date of the breach of this warranty of non-infringement. 10. Term and Termination. The term of this Agreement shall commence as of the date hereof and shall continue until terminated for any of the following reasons: A. Licensee fails to pay Licensor any license fees or charges, excluding Maintenance Fees and such non-payment has not been cured within thirty (30) days following Licensor's written notice thereof. B. Licensee is in material default of any other provisions hereof and such material default has not been cured within thirty (30) days after Licensor gives Licensee written notice thereof. C. The parties mutually agree in writing to terminate this Agreement. 9 10 D. Ninety (90) days notice from Licensee to Licensor. E. Licensee becomes insolvent or seeks protection voluntarily or involuntarily under any bankruptcy law or discontinues it business style as it now exists. In the event of any termination pursuant to Section 10, the Licensee shall cease any further deployment at new customers' sites of the Licensor's Products. Licensee is specifically permitted, in the event of such termination, to continue to support with Licensor's Products its then installed customer base, conditioned upon all applicable portions of this Agreement being honored during this time, until such time as a mutually agreed upon cessation date is determined by Licensor and Licensee or two years from date of termination, which ever comes first. 11. Negation of Warranty and Limitation of Liability. A. The Licensor's Products are provided on an "as-is" basis, and except as expressly set forth in this Agreement, there are no warranties, expressed or implied, including but not limited to, any warranty of merchantability or fitness for a particular purpose. Licensee acknowledges that Licensee has examined or will examine Licensor's Products and found them acceptable for Licensee's purposes as set forth in this Agreement. Licensee shall be solely responsible for the selection, use, efficiency and suitability of the Licensor's Products and Licensor shall have no liability therefore. Furthermore, Licensor shall not be responsible for installing Licensor's Products nor for training Licensee's personnel in the operation of Licensor's Products, except as detailed in this Agreement. B. In no event shall Licensor be liable for any indirect, special or consequential damages or lost profits arising out of or related to this Agreement or the performance or breach hereof, even if Licensor has been advised of the possibility thereof, including but not limited to, any loss of data or software, even if the cause thereof is the inability of Licensor to correct any errors, malfunctions and defects in the software. Licensor's liability to Licensee, if any, shall in no event exceed the total of the license fees paid to Licensor hereunder by Licensee. 10 11 12. Source Code Escrow. Licensor shall place in escrow with Fort Knox Escrow Services, Inc., and both Licensor and Licensee shall enter into a standard Ft. Knox Three Party Agreement (Exhibit C), with Licensor absorbing the costs thereof, the compiled source code for all of the Licensor's Products used at any time by Licensee, as updated from time to time (the "Source Code"). Upon the occurrence of any of the following events, the Source Code shall be released to Licensee: A. (i) The commencement by Licensor as debtor of any case or proceeding under any bankruptcy, insolvency, reorganization, liquidation, dissolution or similar law, or Licensor seeking the appointment of a receiver, trustee, custodian, marshal (of assets) or similar official for Licensor or any substantial part of its property; or (ii) the commencement of any such case or proceeding against Licensor, or another seeking such appointment, or the filing against Licensor of an application for a protective decree that (a) is consented to or not timely contested by Licensor, (b) results in the entry of an order for relief, such an appointment, the issuance of such a protective decree or the entry of an order having a similar effect, or (c) is not dismissed within ninety (90) days; or (iii) the making of a general assignment by Licensor for the benefit of its creditors; or (iv) an admission in writing by Licensor of its inability to pay its debts as they become due or the nonpayment generally by Licensor of its debts as they become due. B. Material non-performance by Licensor of its obligations under this Agreement and such non-performance continues for a period of thirty (30) days after Licensee gives notice to Licensor of such non-performance. C. This Agreement is terminated by Licensor without cause or for any cause other than those described elsewhere in Section 10. In the event the Source Code is so released to Licensee, Licensee agrees that it will not at any time use the Source Code for the purpose of selling or licensing the Licensor's Products to entities which are not its then existing customers, except if such release is for the events covered in 12.B above, in which case Licensee may continue to sell and deploy to new customers. No termination of this Agreement shall release Licensee from its obligations to pay Licensor any 11 12 royalties or fees, which accrued prior to such termination or which shall accrue to Licensor after the effective date of such termination. 13. Miscellaneous. A. Notices. All notices, demands, requests, claims and other communications given in connection with this Agreement shall be in writing and shall be deemed duly given upon delivery if served personally or three (3) days after mailing if mailed by registered or certified United States mail, return receipt requested, postage prepaid. Either party may send any notice, demand, request, etc., in connection with this Agreement using any other means (including expedited courier, facsimile transmission or electronic mail), but no such communication shall be deemed to have been duly given unless and until it is actually received by the intended recipient. Notices shall be directed to the parties at their respective addresses set forth in the signature blocks below or at such other addresses as the parties may indicate by notice. B. Severability. If any provision of this Agreement is found to be unenforceable pursuant to an applicable judicial decree or decision, the provision shall be deemed to apply only to the maximum extent permitted by law, and the remainder of this Agreement shall remain valid and enforceable according to its terms. C. Interpretation. The titles and headings of the various sections of this Agreement are intended solely for reference and are not intended to explain, modify or place any interpretation upon any provision of this Agreement. The language used in this Agreement shall be deemed to be the language chosen by the parties to express their mutual intent, and no rule of strict construction shall be applied against either party. The provisions of this Agreement shall be interpreted in a reasonable manner to effect the purposes and intents of the parties. E. Entire Agreement; Inconsistencies. This Agreement, which includes and hereby incorporates the attached EXHIBIT A THROUGH C constitutes and sets forth the entire agreement between Licensee and Licensor concerning the subject matter of this Agreement and supersedes any prior promises, understandings, agreements, representations and warranties, 12 13 written or oral. If any inconsistencies should arise between the provisions of this Agreement and the provisions of the Exhibits, the provisions of this Agreement shall control. E. Modifications; Waivers. No provision of this Agreement may be changed, waived, discharged, modified, or amended except by an instrument in writing signed by the party to be charged. No delay or failure on the part of a party to exercise any power or right hereunder shall operate as a waiver thereof, nor shall any single or partial exercise of any power or right preclude any other further exercise thereof, or the exercise of any other power or right. F. Assignment. Subject to the limitations of Section 2.A.8., Licensee may assign its rights or delegate its duties under this Agreement, in whole or in part only to any Affiliate or other successor in interest to licensee who agrees in writing to the terms of this Agreement. Subject to the preceding sentence, this Agreement shall be binding on and inure to the benefit of the parties and their respective successors and assigns. G. Survival. The rights and obligations of the parties thereunder shall survive any termination of this Agreement. H. Costs. If any legal action, arbitration or other proceeding is instituted to enforce or declare rights under any provisions of this Agreement, or because of an alleged dispute, breach, default or misrepresentation under or in connection with this Agreement, the prevailing party shall be entitled to recover reasonable attorneys' fees and other costs incurred in that action, arbitration or proceeding in addition to any other relief to which the party may be entitled. I. Non-exclusive Remedies. No remedy conferred or reserved in this Agreement is intended to be exclusive of any other available remedy or remedies, and each and every remedy shall be cumulative and shall be in addition to and not to the exclusion of every other remedy now or hereafter existing at law or in equity, including foreign laws. J. Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the State of Michigan. 13 14 K. Counterparts. This Agreement may be executed in one or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. L. Force Majeure. Neither of the parties shall be deemed to be in default or to have breached any provision of this Agreement as a result of any delay, failure in performance, or interruption of service resulting directly or indirectly from acts of God, acts of civil or military authorities, civil disturbances, wars, strikes or other labor disputes, fires, transportation contingencies, laws, regulations, acts or orders of any government or agency or official thereof, other catastrophes or any other similar occurrences beyond the party's reasonable control. In every case, the delay or failure in performance or interruption of service must be without the fault or negligence of the party claiming the excusable delay, and the party claiming the excusable delay must promptly notify the other party of the delay and the reason therefor. Any performance time under this Agreement shall be considered extended for a period of time equivalent to the time lost because of any delay which is excusable under this Paragraph M; provided, however, that if any excusable delay continues for a period of more than 30 days, the party not claiming the excusable delay shall have the option of terminating this Agreement upon written notice to the party claiming the excusable delay. M. Authority. If the person signing this Agreement is doing so in a representative capacity, then by signing below, the representative warrants, in his/her individual capacity, that his/her principal has approved the terms and conditions of this Agreement and has duly authorized him/her to execute and deliver this Agreement on his/her principal's behalf. 14 15 This Agreement is executed on this 12 day of May, 1999. Licensor: CBF Systems, Inc., a Michigan corporation By: /s/ R.J. DART -------------------------------------- Name: R.J. Dart Title: President Address: 18050 Fifteen Mile Road Fraser, MI 48026 Licensee: Interlinq Software Corporation, a Washington corporation By: /s/ PATRICIA GRAHAM -------------------------------------- Name: Patricia Graham Title: Executive Vice-President Address: 11980 NE 24th Street Bellevue, WA 98005 15 16 EXHIBIT A PRODUCTS & PRICES This Exhibit is an integral part of a Licensing Agreement dated May 12, 1999 Between CBF Systems, Inc And Interlinq Software Corporation 1. Licensor's Products. The following proprietary products, commercially trademarked by Licensor, are the deliverables under this Agreement: A. Rakis Complete (version 4.1): Our client-server based, scalable document control system. B. Rakis Laptop: Our laptop subset of Rakis Complete, based upon Access Jet. C. I-32 Forms Design (version 6.0): An Interlinq labeled version of our forms design tool to be embedded within Licensee's software for use of their end users. D. Rakis Complete, Rakis Laptop and I-32 Forms Design Maintenance: Licensor will provide a software maintenance function to Licensee for bug fixes, modifications and corrections to these products. E. .pcl to .uff Conversion Program: Licensor will provide Licensee with a conversion routine for Licensee to distribute to its end-users to facilitate the conversion of custom forms created by the end-user in Licensee's format to Licensor's I-32 .uff format. F. Standard CDE's, Templates and Universal Template: Licensor will create and deliver to Licensee an agreed upon list and number of Standard CDE's, Templates and Universal Template in support of Licensor's Standard Forms Library for Licensee to embed within Licensee's software. G. Entre Forms Set: Licensor will create and permit the embedding of an agreed upon forms set for deployment with Licensee's Entre Loan Origination System. This forms set will be maintained as to compliance and file format by Licensor. Licensee is permitted to distribute the forms set to its licensed end-users. H. Core Document Set: Licensor will provide and maintain the Core Document Set (some 63 forms) for Licensee to distribute without additional charge to its end-users. This is based on condition that Licensee will support Licensor's Compliance Subscription Program as the primary mechanism for Licensee's end-users to obtain their mortgage lending documents. 17 2. Componentry Utilized. Rakis, and the subsets of Rakis listed in Section 1, employ licensed software components from the following companies:
Product Name Version Company ------------ ------- ------- Windows 95 95 Microsoft Windows NT 4.0 Microsoft Visual Basic 6.0 Microsoft Visual C++ 5.0 Microsoft SQL Server 7.0 Microsoft Access Jet Office 97 Microsoft SmartBatch(32) 2.03 Online Tool Works LanYard 3.18 CBF Systems, Inc. SeaReach 3.37 CBF Systems, Inc. SpreadVBX 2.5.3. Farpoint Technologies Crystal Reports 4.3/5.0 Seagate
3. Pricing. A. License Fees: 1. Licensee shall pay the following ONE TIME License fee to Licensor OF $812,500. Such fees shall be invoiced and payable upon the EARLIER of a.) Delivery of the products, or b) JUNE 30, 1999. THE PRODUCTS INCLUDE: a. Rakis Complete (version 4.1): b. Rakis Laptop c. I-32 Design -0-
B. Additional License Fees for Existing Users of Licensee's Products: 1. Licensee will pay a license fee for each copy of the private labeled I-32 Forms Design that is embedded with Licensee's products and delivered to an end-user. License fee per copy: $25.00 C. Additional License Fees for New Customers of Licensee's Products: 1. Licensee will pay to Licensor a flat percentage of Licensee's net end-user license value for all new customers of Licensee's TC, LMS and/or Entre products for the right to embed and distribute Licensor's Products within Licensee's software. A new customer is defined as any end-user not a licensed customer of Licensee's named software products as of June 30, 1999. Net end-user license value is defined as Licensee's revenue for TC, LMS and/or Entre invoiced by Licensee to an end-user, net of any discounts, bad debts, and, exclusive of taxes, shipping and returns. Licensee will report and remit this percentage within thirty (30) days following the close of each of Licensee's fiscal quarters. The flat percentage is established at: 2% of Net End-User License Value. 2. Licensee will pay a license fee for each copy of the private labeled I-32 Forms Design that is embedded with Licensee's products and delivered to a new end-user as defined above. License fee per copy: $25.00. - --------------- 18 D. Rakis Complete, Rakis Laptop and I-32 Forms Design Maintenance: As detailed in Exhibit C of this Agreement, Licensor products include a Maintenance Agreement for bug fixes, modifications, corrections, updates (collectively referred to as "Releases"), and, further Releases issued by Licensor to the supported products. The Maintenance Agreement is mandatory during the first year of the base License Agreement and is optional on the part of the Licensee for subsequent years. Annual Maintenance Contract: $55,000 E. Implementation and Training: Licensor, at Licensee's request, will provide its quotation for either of these professional services which in Licensee's sole judgement are required over and above the services offered within Licensor's base License Agreement. This Exhibit A of the License Agreement is executed on this 12 day of May, 1999. Licensor: Licensee: CBF Systems, Inc., Interlinq Software Corporation a Michigan corporation a Washington corporation By: /s/ ROBERT J. DART By: /s/ PATRICIA GRAHAM ----------------------- --------------------------- Name: Robert J. Dart Name: Patricia Graham Title: President Title: EVP Address: Address: 18050 Fifteen Mile Road 11980 NE 24th St. Fraser, MI 48026 Bellevue, WA 98005 19 EXHIBIT B SOFTWARE MAINTENANCE AGREEMENT This Software Maintenance Agreement ("Agreement") is made by and between Interlinq Software Corporation, a Washington corporation ("Interlinq") and CBF Systems, Inc., a Michigan corporation ("CBF"), effective as of the 12 day of May, 1999. RECITALS UNDERLYING THIS AGREEMENT Recital A. Interlinq and CBF entered into a certain Software License Agreement dated May 12, 1999, ("License Agreement") providing for the grant to Interlinq by CBF of a non-exclusive license to use CBF's Rakis Software ("Rakis Programs"). Recital B. The License Agreement requires that CBF maintain the Rakis Programs for at least the first year following Acceptance of the Rakis Programs by Interlinq and prepare and present Interlinq with a Software Maintenance Agreement defining the parties' duties with regard thereto. Recital C. Interlinq and CBF desire to enter into this Software Maintenance Agreement reflecting CBF's responsibilities for maintenance of the Rakis Programs. NOW, THEREFORE, for and in consideration of the premises and of the mutual representations, warranties, covenants, and agreements contained herein, and upon the terms and subject to the conditions hereinafter set forth, the parties agree as follows: 1.0. Duties of CBF. During the term of this Agreement, CBF shall perform the following services concerning the Rakis Programs: 1.1. CBF shall provide to Interlinq all updates, corrections, and, modifications (collectively referred to as "Releases") to the Rakis Programs in the form of fixes and further releases that CBF makes generally available to all licensed end-users as a part of its obligations under its Software Maintenance Agreements. Such Releases shall be without additional charges and shall be distributed at least once each year. 1.2. The Releases, when delivered, shall become part of the Rakis Programs, shall be maintained in accordance with this Agreement, and shall otherwise be subject to all of the terms of the License Agreement. 1 20 1.3. CBF shall correct, within a reasonable period of time as defined by Section 3, any material, reproducible error or malfunction in the Rakis Programs. CBF agrees to commence correction within eight (8) business hours after such error or malfunction is detected. If CBF, in its discretion, requests written verification of an error or malfunction discovered by Interlinq, Interlinq shall immediately provide such verification, by telecopy or overnight mail, setting forth in reasonable detail the respects in which the Rakis Programs fail to perform. An error or malfunction shall be "material" if it represents a nonconformity with CBF's current published specifications for the Rakis Programs and Interlinq, in its discretion, determines (and notifies CBF) that such error or malfunction interferes with its use or its direct customers' use of the Rakis Programs. 1.4. Interlinq shall reimburse CBF at CBF's then current time and material rates for all work of CBF spent investigating an error or malfunction that is caused by a modification to the Rakis Programs that was neither made nor authorized by CBF. 1.5. CBF shall, during the hours of 8:00 a.m. to 5:00 p.m. Pacific Time on weekdays (exclusive of holidays), make reasonable telephone support available to Interlinq. 2.0. RAKIS Program Modifications. Interlinq may at any time request that CBF make additional modifications to the Rakis Programs to add functions or improve performance. CBF shall, within sixty (60) days after receiving Interlinq's request in writing, take one of the following actions, in its sole discretion: 2.1. Notify Interlinq that CBF has determined that the modification would be of sufficient interest to enough licensees that CBF intends to provide such modification as part of its regular maintenance service. Such notice shall specify an estimated date on which the modification may be supplied. 2.2. Notify Interlinq that CBF has determined that the modification will be undertaken only on an individual basis and provide Interlinq with a written estimate of the charges for performing such modification. If Interlinq accepts CBF's proposal by written notice, CBF agrees to perform the modification for the estimated charges plus out-of-pocket expenses for travel and materials. Interlinq acknowledges that CBF may impose additional charges, calculated at its then current time and material rates, for work performed to accommodate revisions to the request for modification if such revisions are requested by Interlinq after Interlinq accepts the estimate. If CBF subsequently decides to include any substantial part of such modification in its regular maintenance services for other end-users, it shall rebate one half of the amount previously paid for such service by Interlinq. 3. Service Response and Correction Times. CBF agrees to respond to each request for 2 21 support, maintenance and other assistance as quickly as reasonably possible, but in any event within the following service levels: 3.1. Severity 1 bugs defined as Rakis print client or print server crashing, or causing data loss, or breaks in major functionality, or severe problems with no available workarounds. Response Time: One hour Problem Identification: One day Problem Resolution: One day Preferred Notification: Telephonic with written follow-up detailing problem 3.2. Severity 2 bugs defined as annoying, contributes to overall instability, crashes in obscure cases or in non critical modules, breaks in minor functionality where there is a work around, but the work around is cumbersome. Response Time: One day Problem Identification: One week Problem Resolution: Two weeks Preferred Notification: Telephonic with written follow-up detailing problem 3.3. Severity 3 bugs defined as minor, does not impair functionality, may affect "fit and finish". Response Time: One week Problem Identification: One month Problem Resolution: With release Preferred Notification: Electronic with detail of problem 3.4. Severity 4 bugs defined as trivial Response Time: One week Problem Resolution: With release Preferred Notification: Electronic with written detail of problem 3.5. Response Time is defined as acknowledgement of reported problem with detailed description. Problem Identification is defined as clear understanding of problem cause and our best effort in its reproduction in a development or test environment. Problem Resolution defined as distribution of appropriate code or instructions to remedy problem and includes remedies that may reclassify problems from a higher severity level to a lower severity level for continued Identification and Resolution. Aforementioned response times defined between the hours of 8:00 a.m. and 5:00 p.m. weekdays, Pacific Time excluding banking and federal holidays. The measure of CBF's response shall commence upon Interlinq' delivery of notice (written, facsimile, telephonic, electronic or otherwise) to CBF at 18050 Fifteen Mile road, Fraser, MI 48026, (810) 293-8100 or as designated by CBF. CBF agrees to use good faith efforts to promptly cure each problem claimed by Interlinq, upon notice from Interlinq as hereinbefore described. 3 22 4. Travel and Lodging. Any travel, lodging and related expenditures incurred by CBF's personnel in connection with the provision of services under this Agreement shall be CBF's sole responsibility unless CBF obtains prior written approval from Interlinq, in which case Interlinq agrees to reimburse CBF for reasonably incurred expenses in accordance with Interlinq's reimbursement policies. 5. Term. For a period commencing on the effective date hereof and ending one (1) year thereafter, CBF agrees to perform its obligations under this Agreement. Interlinq may, at its option, extend CBF's obligations under this agreement for successive additional one-year terms, upon written notice to CBF, given prior to the end of the then current term, provided Interlinq agrees to pay the fees set forth in the following Section 7. 7. Fees and Taxes. In consideration of CBF's performance of its obligations hereunder, Interlinq shall pay to CBF an annual maintenance fee for the first year of this Agreement of Fifty-Five Thousand Dollars ($55,000.00). The annual maintenance fees shall include all applicable taxes based on or in any way measured by this Agreement or any services related thereto. If Interlinq challenges the applicability of any such taxes, it shall pay the same to CBF and Interlinq may thereafter challenge such tax and seek refund thereof. The annual maintenance fees and taxes shall be due and payable in advance within ten days after the due date set forth hereof and the submission of an invoice therefor by CBF. Interlinq shall pay a late payment charge of 1.5 percent per month, or the maximum rate permitted by applicable law, whichever is less, on any unpaid amounts for each calendar month or fraction thereof that any payment to CBF is more than thirty (30) days in arrears. 8. Proprietary Rights and Indemnification. CBF shall own the entire right, title and interest in and to all corrections, programs, information and work product conceived, created or developed as a result of or related to the performance of this Agreement, including all proprietary rights therein or based thereon. All Modifications provided to Interlinq shall become part of the RAKIS Programs and their use by Interlinq shall be governed by the terms and conditions of the License Agreement. 9. Negation of Warranty. CBF DOES NOT WARRANT THE SERVICES PROVIDED UNDER THIS AGREEMENT OR THAT THE RAKIS PROGRAMS WILL MEET OR CONTINUE TO MEET THE SPECIFICATIONS OR THAT ANY OR ALL ERRORS, MALFUNCTIONS AND DEFECTS CAN OR WILL BE CORRECTED. ALL CORRECTIONS, PROGRAMS, INFORMATION AND SERVICES ARE PROVIDED ON AN "AS IS" BASIS, SUBJECT TO CBF'S BEST EFFORTS, AND THERE ARE NO WARRANTIES, EXPRESSED OR IMPLIED, INCLUDING, BUT NOT LIMITED TO, ANY WARRANTIES OF MERCHANTABILITY OR FITNESS FOR PARTICULAR PURPOSE. 4 23 10. Limitation of Liability. A. CBF SHALL NOT BE LIABLE TO INTERLINQ FOR ANY DAMAGES RESULTING FROM OR RELATED TO THE SERVICES PERFORMED BY CBF HEREUNDER, INCLUDING, BUT NOT LIMITED TO, ANY LOSS OF DATA OR SOFTWARE, INABILITY OF CBF TO CORRECT ANY ERRORS, MALFUNCTIONS AND DEFECTS IN THE SOFTWARE, OR DELAY OF CBF IN PERFORMING ANY SERVICES HEREUNDER. B. IN NO EVENT SHALL CBF BE LIABLE TO INTERLINQ FOR ANY INDIRECT, SPECIAL OR CONSEQUENTIAL DAMAGES OR LOST PROFITS ARISING OUT OF OR RELATED TO THIS AGREEMENT, EVEN IF CBF HAS BEEN ADVISED OF THE POSSIBILITY THEREOF OR KNEW OR SHOULD HAVE KNOWN THEREOF. CBF'S LIABILITY HEREUNDER TO INTERLINQ IF ANY, SHALL IN NO EVENT EXCEED THE CURRENT YEAR'S ANNUAL MAINTENANCE FEES PAID TO CBF HEREUNDER BY INTERLINQ. 11. Termination/Cancellation. This Agreement may be terminated by CBF if Interlinq fails to pay within thirty (30) days from receipt of an invoice the maintenance fees due CBF hereunder. In addition, this Agreement may be terminated/canceled by either party if the other party is in default of any material provision, including non-payment, of this Agreement, provided written notice of such alleged default has been given to the other party and such other party has not cured such default within thirty (30) days after the receipt of such notice. The failure of either party hereunder to exercise its rights of termination/cancellation as provided herein shall not be deemed a waiver or limitation of the rights of such party to subsequently terminate/cancel this Agreement for any other or similar default. In the event termination results from a breach or default by CBF, Interlinq shall be entitled to a pro rata reimbursement of the annual maintenance fee based upon the number of months remaining in the then current term of this Agreement. 12. Miscellaneous. 12.1. Notices. All notices, demands, requests, claims and other communications given in connection with this Agreement shall be in writing and shall be deemed duly given upon delivery if served personally or three (3) days after mailing if mailed by registered or certified United States mail, return receipt requested, postage prepaid. Either party may send any notice, demand, request, etc., in connection with this Agreement using any other means (including expedited courier, facsimile transmission or electronic mail), but no such communication shall be deemed to have been duly given unless and until it is actually received by the intended recipient. Notices shall be directed to the parties at their respective addresses set forth in the signature blocks below or at such other addresses as the parties may indicate by notice. 5 24 12.2. Severability. If any provision of this Agreement is found to be unenforceable pursuant to an applicable judicial decree or decision, the provision shall be deemed to apply only to the maximum extent permitted by law, and the remainder of this Agreement shall remain valid and enforceable according to its terms. 12.3. Interpretation. The titles and headings of the various sections of this Agreement are intended solely for reference and are not intended to explain, modify or place any interpretation upon any provision of this Agreement. The language used in this Agreement shall be deemed to be the language chosen by the parties to express their mutual intent, and no rule of strict construction shall be applied against either party. Any rule of law or legal decision that would require interpretation of any ambiguities in this Agreement against the party who has drafted it is not applicable and is hereby waived by each party. The provisions of this Agreement shall be interpreted in a reasonable manner to effect the purposes and intents of the parties. 12.4. Entire Agreement; Inconsistencies. This Agreement constitutes and sets forth the entire agreement between Interlinq and CBF concerning the subject matter of this Agreement and supersedes any prior promises, understandings, agreements, representations and warranties, written or oral. 12.5. Modifications; Waivers. No provision of this Agreement may be changed, waived, discharged, modified, or amended except by an instrument in writing signed by the party to be charged. No delay or failure on the part of a party to exercise any power or right hereunder shall operate as a waiver thereof, nor shall any single or partial exercise of any power or right preclude any other further exercise thereof, or the exercise of any other power or right. Only an executive officer of Interlinq and CBF is authorized to execute any waivers, modifications, amendments or other changes to this Agreement on behalf of Interlinq and CBF. 12.6. Assignment. Interlinq may assign its rights to this Agreement in accordance with the Assignment restrictions contained in Section 2.A.8. of the License Agreement. Subject to the preceding sentence, this Agreement shall be binding on and inure to the benefit of the parties and their respective successors and assigns. 12.7. Governing Law. This Agreement shall be governed by and construed in accordance with the domestic laws of the State of Michigan, without giving effect to any choice or conflict of law provision or rule (whether of the State of Michigan or any other jurisdiction), that would cause the application of the laws of any jurisdiction other than the State of Michigan. 12.8. Counterparts. This Agreement may be executed in one or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. 12.9. Force Majeure. Neither of the parties shall be deemed to be in default or to have 6 25 breached any provision of this Agreement as a result of any delay, failure in performance, or interruption of service resulting directly or indirectly from acts of God, acts of civil or military authorities, civil disturbances, wars, strikes or other labor disputes, fires, transportation contingencies, laws, regulations, acts or orders of any government or agency of official thereof, other catastrophes or any other similar occurrences beyond the party's reasonable control. In every case, the delay or failure in performance or interruption of service must be without the fault or negligence of the party claiming the excusable delay, and the party claiming the excusable delay must promptly notify the other party of the delay and the reason therefor. Any performance time under this Agreement shall be considered extended for a period of time equivalent to the time lost because of any delay which is excusable under this Section 12; provided, however, that if any excusable delay continues for a period of more than thirty (30) days, the party not claiming the excusable delay shall have the option of terminating this Agreement upon written notice to the party claiming the excusable delay. 12.10. Authority. If the person signing this Agreement is doing so in a representative capacity, then by signing below, the representative warrants, in his/her individual capacity, that his/her principal has approved the terms and conditions of this Agreement and has duly authorized him/her to execute and deliver this Agreement on his/her principal's behalf. 12.11. CBF's Ability to Sub-Contract. CBF hereby notifies Licensee that it intends to sub-contract this Maintenance Agreement to a vendor of its sole choosing and that vendor has reviewed and accepted each condition and requirement of this Maintenance Agreement. Such sub-contract does not in any way relieve CBF from fulfilling any of the terms and obligations of this Maintenance Agreement. This Agreement is executed on this 12 day of May 1999. Interlinq: CBF: Interlinq Software Corporation CBF Systems,Inc. a Washington corporation a Michigan corporation By: /s/ PATRICIA GRAHAM By: /s/ ROBERT J. DART --------------------------------- --------------------------------- Its: EVP Its: President Address: Address: 7 26 EXHIBIT C SOFTWARE ESCROW AGREEMENT This Escrow Agreement ("Agreement") is made as of this 12 day of May, 1999, by and between CBF Systems, Inc ("Producer"), Fort Knox Escrow Services, Inc. ("Fort Knox") and Interlinq Software Corporation ("Licensee"). Preliminary Statement. Producer intends to deliver to Fort Knox a sealed package containing magnetic tapes, disks, disk packs, or other forms of media, in machine readable form, and the written documentation prepared in connection therewith, and any subsequent updates or changes thereto (the "Deposit Materials") for the computer software products (the "System(s)"), all as identified from time to time on Attachment #2 hereto. Producer desires Fort Knox to hold the Deposit Materials, and, upon certain events, deliver the Deposit Materials (or a copy thereof) to Licensee, in accordance with the terms hereof. Now, therefore, in consideration of the foregoing, of the mutual promises hereinafter set forth, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties agree as follows: 1. Delivery by Producer. Producer shall be solely responsible for delivering to Fort Knox the Deposit Materials as soon as practicable. Fort Knox shall hold the Deposit Materials in accordance with the terms hereof and shall have no obligation to verify the completeness or accuracy of the Deposit Materials. 2. Duplication; Updates. (a) Fort Knox may duplicate the Deposit Materials by any means in order to comply with the terms and provisions of this Agreement, provided that Licensee shall bear the expense of duplication. Alternately, Fort Knox, by notice to Producer, may reasonably require Producer to promptly duplicate the Deposit Materials. (b) Producer shall deposit with Fort Knox any modifications, updates, new releases or documentation related to the Deposit Materials by delivering to Fort Knox an updated version of the Deposit Materials ("Additional Deposit") as soon as practicable after the modifications, updates, new releases and documentation have been developed by Producer. Fort Knox shall have no obligation to verify the accuracy or completeness of any Additional Deposit or to verify that any Additional Deposit is in fact a copy of the Deposit Materials or any modification, update, or new release thereof. 3. Notification of Deposits. Simultaneous with the delivery to Fort Knox of the Deposit Materials or any Additional Deposit, as the case may be, Producer shall deliver to Fort Knox and to Licensee a written statement specifically identifying all items deposited and stating that the Deposit Materials or any Additional Deposit, as the case may be, so deposited have been inspected by Producer and are complete and accurate. Fort Knox shall, within ten (10) business days of receipt of any Deposit Materials, send notification to Producer and Licensee that it has received from Producer such Deposit Materials. 4. Delivery by Fort Knox. 1 27 4.1 Delivery by Fort Knox to Licensee. Fort Knox shall deliver the Deposit Materials, or a copy thereof, to Licensee only in the event that: (a) Producer notifies Fort Knox to effect such delivery to Licensee at a specific address, the notification being accompanied by a check payable to Fort Knox in the amount of one hundred dollars ($100.00); or (b) Fort Knox receives from Licensee: (i) written notification that Producer has failed in a material respect to support the applicable System as required by a license agreement ("License Agreement") between Licensee and Producer or that Producer has otherwise defaulted in a material respect under the License Agreement ("Producer Default"); (ii) evidence satisfactory to Fort Knox that Licensee has previously notified Producer of such Producer Default in writing; (iii) a written demand that the Deposit Materials be released and delivered to Licensee; (iv) a written undertaking from the Licensee that the Deposit Materials being supplied to the Licensee will be used only as permitted under the terms of the License Agreement; (v) specific instructions from the Licensee for this delivery; and (vi) an initial check payable to Fort Knox in the amount of one hundred dollars ($100.00). (c) If the provisions of paragraph 4.1(a) are satisfied, Fort Knox shall, within five (5) business days after receipt of the notification and check specified in paragraph 4.1(a), deliver the Deposit Materials in accordance with the applicable instructions. (d) If the provisions of paragraph 4.1(b) are met, Fort Knox shall, within five (5) business days after receipt of all the documents specified in paragraph 4.1(b), send to Producer a photostatic copy of all such documents. Producer shall have fifteen (15) days from the date on which Producer receives such documents ("Objection Period") to notify Fort Knox of its objection ("Objection Notice") to the release of the Deposit Materials to Licensee and to request that the issue of Licensee's entitlement to a copy of the Deposit Materials be submitted to arbitration in accordance with the following provisions: (i) If Producer shall send an Objection Notice to Fort Knox during the Objection Period, the matter shall be submitted to, and settled by arbitration by, a panel of three (3) arbitrators chosen by the Atlanta Regional Office of the American Arbitration Association in accordance with the rules of the American Arbitration Association. The Arbitrators shall apply Georgia law. At least one (1) arbitrator shall be reasonably familiar with the computer software industry. The decision of the arbitrators shall be binding and conclusive on all parties involved, and judgment upon their decision may be entered in a court of competent jurisdiction. All costs of the arbitration incurred by Fort Knox, including reasonable attorneys' fees and costs, shall be paid by the party which does not prevail in the arbitration; 2 28 provided, however, if the arbitration is settled prior to a decision by the arbitrators, the Producer and Licensee shall each pay 50% of all such costs. (ii) Producer may, at any time prior to the commencement of arbitration proceedings, notify Fort Knox that Producer has withdrawn the Objection Notice. Upon receipt of any such notice from Producer, Fort Knox shall reasonably promptly deliver the Deposit Materials to Licensee in accordance with the instructions specified in paragraph 4.1(b)(v). (e) If, at the end of the Objection Period, Fort Knox has not received an Objection Notice from Producer, then Fort Knox shall reasonably promptly deliver the Deposit Materials to Licensee in accordance with the instructions specified in paragraph 4.1(b)(v). Both Producer and Licensee agree that Fort Knox shall not be required to deliver such Deposit Materials until all such fees then due Fort Knox have been paid. 4.2 Delivery by Fort Knox to Producer. Fort Knox shall release and deliver the Deposit Materials to Producer upon termination of this Agreement in accordance with paragraph 7(a) hereof. 5. Indemnity. Producer and Licensee shall, jointly and severally, indemnify and hold harmless Fort Knox and each of its directors, officers, agents, employees and stockholders ("Fort Knox Indemnities") absolutely and forever, from and against any and all claims, actions, damages, suits, liabilities, obligations, costs, fees, charges, and any other expenses whatsoever, including reasonable attorneys' fees and costs, that may be asserted against any Fort Knox Indemnitee in connection with this Agreement or the performance of Fort Knox or any Fort Knox Indemnitee hereunder. 6. Disputes and Interpleader (a) Fort Knox may submit the matter to any court of competent jurisdiction in an interpleader or similar action other than a matter submitted to arbitration after Fort Knox's receipt of an Objection Notice under Section 4 and the parties under this Agreement submit the matter to such arbitration as described in Section 4 of this Agreement. Any and all costs incurred by Fort Knox in connection therewith, including reasonable attorneys' fees and costs, shall be borne 50% by each of Producer and Licensee. (b) Fort Knox shall perform any acts ordered by any court of competent jurisdiction, without any liability or obligation to any party hereunder by reason of such act. 7. Term and Renewal. (a) The initial term of this Agreement shall be two (2) years, commencing on the date hereof (the "Initial Term"). This Agreement shall be automatically extended for an additional term of one year ("Additional Term") at the end of the Initial Term and at the end of each Additional Term hereunder and shall continue to be in effect as long as the License Agreement for Rakis Software, dated 5-12-99 is in effect. (b) In the event of termination of this Agreement in accordance with paragraph 7(a) hereof, Producer shall pay all fees due Fort Knox and shall promptly notify Producer that this Agreement has been terminated and that Fort Knox shall return to Producer all copies of the Deposit Materials then in its possession. 3 29 (c) Should, for any reason, the parties agree to place the Source Code with an Escrow Agent other than Ft. Knox, the parties will mutually instruct Ft. Knox in writing to toward the Source Code to the designated Escrow Agent. 8. Fees. Producer and Licensee shall pay to Fort Knox the applicable fees in accordance with Attachment #1 as compensation for Fort Knox's services under the Agreement. The first years fees are due upon receipt of the signed contract or Deposit Materials, whichever comes first, and shall be paid in U.S. Dollars. (a) Payment. Fort Knox shall issue an invoice to Producer following execution of this Agreement ("Initial Invoice"), on the commencement of any Additional Term hereunder, and in connection with the performance of any additional services hereunder. Payment is due upon receipt of invoice. All fees and charges are exclusive of, and Producer is responsible for the payment of, all sales, use and like taxes. Fort Knox shall have no obligations under this Agreement until the Initial Invoice has been paid in full by Producer. (b) Nonpayment. In the event of non-payment of any Fees or charges invoiced by Fort Knox, Fort Knox shall give notice of non-payment of any fee due and payable hereunder to the Producer and, in such an event, the Producer shall have the right to pay the unpaid fee within ten (10) days after receipt of notice from Fort Knox. If Producer fails to pay in full all fees due during such ten (10) day period, Fort Knox shall give notice of non-payment of any fee due and payable hereunder to Licensee and, in such event, Licensee shall have the right to pay the unpaid fee within ten (10) days of receipt of such notice from Fort Knox. Upon payment of the unpaid fee by either the Producer or Licensee, as the case may be, this Agreement shall continue in full force and effect until the end of the applicable term. Failure to pay the unpaid fee under this paragraph 8(b) by both Producer and Licensee shall result in termination of this Agreement. 9. Ownership of Deposit Materials. The parties recognize and acknowledge that ownership of the Deposit Materials shall remain with Producer at all times. 10. Available Verification Services. Upon receipt of a written request from Licensee, Fort Knox and Licensee may enter into a separate agreement pursuant to which Fort Knox will agree, upon certain terms and conditions, to inspect the Deposit Materials for the purpose of verifying its relevance, completeness, currency, accuracy and functionality ("Technical Verification Agreement"). Upon written request from Producer, Fort Knox will issue to Producer a copy of any written technical verification report rendered in connection with such engagement. If Fort Knox and Licensee enter into such Technical Verification Agreement, Producer shall reasonably cooperate with Fort Knox by providing its facilities, computer systems, and technical and support personnel for technical verification whenever reasonably necessary. If requested by Licensee, Producer shall permit one employee of Licensee to be present at Producer's facility during any such verification of the Deposit Materials. 11. Bankruptcy. Producer and Licensee acknowledge that this Agreement is an "agreement supplementary to" the License Agreement as provided in Section 365(n) of Title 11, United States Code (the "Bankruptcy Code"). Producer acknowledges that if Producer as a debtor in possession or a trustee in Bankruptcy in a case under the Bankruptcy Code rejects the License Agreement or this Agreement, Licensee may elect to retain its rights under the License Agreement and this Agreement as provided in Section 365(n) of the Bankruptcy Code. Upon written request of License to Producer or the Bankruptcy Trustee, Producer or such Bankruptcy Trustee shall not interfere with the rights of Licensee as provided in the License Agreement and this Agreement, including the right to obtain the Deposit Material from Fort Knox. 4 30 12. Miscellaneous. (a) Remedies. Except for intentional misrepresentation, gross negligence or intentional misconduct, Fort Knox shall not be liable to Producer or to Licensee for any act, or failure to act, by Fort Knox in connection with this Agreement. Any liability of Fort Knox regardless of the cause shall be limited to the fees exchanged under this Agreement. Fort Knox will not be liable for special, indirect, incidental or consequential damages hereunder. (b) Natural Degeneration; Updated Version. In addition, the parties acknowledge that as a result of the passage of time alone, the Deposit Materials are susceptible to loss of quality ("Natural Degeneration"). It is further acknowledged that Fort Knox shall have no liability or responsibility to any person or entity for any Natural Degeneration. For the purpose of reducing the risk of Natural Degeneration, Producer shall deliver to Fort Knox a new copy of the Deposit Materials at least once every three years. (c) Permitted Reliance and Abstention. Fort Knox may rely and shall be fully protected in acting or refraining from acting upon any notice or other document believed by Fort Knox in good faith to be genuine and to have been signed or presented by the proper person or entity. Fort Knox shall have no duties or responsibilities except those expressly set forth herein. (d) Independent Contractor. Fort Knox is an independent contractor, and is not an employee or agent of either the Producer or Licensee. (e) Amendments. This Agreement shall not be modified or amended except by another agreement in writing executed by the parties hereto. (f) Entire Agreement. This Agreement, including all attachments hereto, supersedes all prior discussions, understandings and agreements between the parties with respect to the matters contained herein, and constitutes the entire agreement between the parties with respect to the matters contemplated herein. All Attachments hereto are by this reference made a part of this Agreement and are incorporated herein. (g) Counterparts; Governing Law. This Agreement may be executed in counterparts, each of which when so executed shall be deemed to be an original and all of which when taken together shall constitute one and the same Agreement. This Agreement shall be construed and enforced in accordance with the laws of the State of Georgia. (h) Confidentiality. Fort Knox will hold and release the Deposit Materials only in accordance with the terms and conditions hereof, and will maintain the confidentiality of the Deposit Materials. (i) Notices. All notices, requests, demands or other communications required or permitted to be given or made under this Agreement shall be in writing and shall be delivered by hand or by commercial overnight delivery service which provides for evidence of receipt, or mailed by certified mail, return receipt requested, postage prepaid. If delivered personally or by commercial overnight delivery service, the date on which the notice, request, instruction or document is delivered shall be the date on which delivery is deemed to be made, and if delivered by mail, the date on which such notice, request, instruction or 5 31 document is received shall be the date on which delivery is deemed to be made. Any party may change its address for the purpose of this Agreement by notice in writing to the other parties as provided herein. (j) Survival. Paragraphs 5, 6, 8, 9 and 12 shall survive any termination of this Agreement. (k) No Waiver. No failure on the part of any party hereto to exercise, and no delay in exercising any right, power or single or partial exercise of any right, power or remedy by any party will preclude any other or further exercise thereof or the exercise of any other right, power or remedy. No express waiver or assent by any party hereto to any breach of or default in any term or condition of this Agreement shall constitute a waiver of or an assent to any succeeding breach of or default in the same or any other term or condition hereof. IN WITNESS WHEREOF each of the parties has caused its duly authorized officer to execute this Agreement as of the date and year first above written. FORT KNOX ESCROW SERVICES, INC. 3539A Church Street Phone: 1-800-875-5669 Clarkston, Georgia 30021-1717 Fax: 1-404-298-2010 E-mail: info@fortknoxescrow.com By: Title: -------------------------------- ----------------- Print Name: ------------------------------------------------------- PRODUCER By: /s/ ROBERT J. DART Title: President -------------------------------- ----------------- Print Name: Robert J. Dart Address: 18050 15 Mile Road Fraser, MI 48026 Phone: 810-293-8100 Fax: 810-293-5925 E-mail: Rdart@cbf.com LICENSEE By: /s/ PATRICIA GRAHAM Title: EVP -------------------------------- ----------------- Print Name: Patricia Graham ------------------------------------------------------ Address: 11980 NE 24th St. --------------------------------------------------------- Bellevue, WA 98005 --------------------------------------------------------- --------------------------------------------------------- 6 32 Phone: 800-589-3344 Fax: ------------ ---------------- E-mail: patg@interlinq.com ---------------------------------- 7 33 ATTACHMENT #1 FEE SCHEDULE FEES TO BE PAID BY PRODUCER SHALL BE AS FOLLOWS: Initialization fee (one time only) $850 ($765) for current clients) Annual maintenance/storage fee - includes two Deposit Material updates $900 - includes one cubic foot of storage space - if Producer is outside North America - $1000/Product
- -------------------------------------------------------------------------------- ADDITIONAL SERVICES AVAILABLE: Additional Updates $150/Product (above two per year) Additional Storage Space $150/Cubic foot Payable by Licensee or Producer Only Upon Release Request: Due Only Upon Licensee's or Producer's Request for Release of Deposit Materials $100/Product per Licensee for initial 2 hrs. and $50/hour for each additional hour
- -------------------------------------------------------------------------------- Fees due in full, in US dollars, upon receipt of signed contract or deposit material, whichever comes first. Thereafter, fees shall be subject to their current pricing, provided that such prices shall not increase by more than 10% per year. The renewal date for this Agreement will occur on the anniversary of the first invoice. 8 EX-23.1 3 CONSENT OF KPMG LLP 1 EXHIBIT 23.1 CONSENT OF INDEPENDENT AUDITORS - -------------------------------------------------------------------------------- The Board of Directors INTERLINQ Software Corporation: We consent to the incorporation by reference in the registration statements (Nos. 33-63388, 333-04558 and 333-21099) on Form S-8 of INTERLINQ Software Corporation of our report dated August 6, 1999, relating to the balance sheets of INTERLINQ Software Corporation as of June 30, 1999 and 1998, and the related statements of income, shareholders' equity, and cash flows for each of the years in the three-year period ended June 30, 1999, and the related schedule, which report appears in the June 30, 1999 annual report on Form 10-K of INTERLINQ Software Corporation. /s/ KPMG LLP Seattle, Washington September 23, 1999 51 EX-27.1 4 FINANCIAL DATA SCHEDULE
5 YEAR JUN-30-1999 JUL-01-1998 JUN-30-1999 5,889 5,874 3,763 0 0 16,460 6,576 4,872 25,797 8,270 0 0 0 52 17,465 25,797 13,092 24,431 2,506 6,705 16,054 0 0 2,217 820 1,397 0 0 0 1,397 .27 .25
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