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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
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For the fiscal year ended: December 31, 2003 Commission File Number 000-21685
INTELIDATA TECHNOLOGIES CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 54-1820617
(State of incorporation) (I.R.S. Employer Identification Number)
11600 Sunrise Valley Drive, Suite 100, Reston, VA 20191
(Address of Principal Executive Offices)
(703) 259-3000
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class Name of Each Exchange on Which Registered
- ------------------- -----------------------------------------
None None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock par value $0.001 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 reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K [ X ].
The aggregate market value of the Common Stock held by non-affiliates of the
registrant on June 30, 2003, was approximately $136,936,000 based on the last
sales price reported that date on the Nasdaq Stock Market of $3.02 per share. In
determining this figure, the Registrant has assumed that all of its directors
and executive officers and each person who owns 5% or more of the outstanding
common stock are affiliates. Such assumptions should not be deemed to be
conclusive for any other purpose.
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act):
Yes X No
----------- ----------
The number of shares of the registrant's Common Stock outstanding on March 9,
2004 was 51,291,734.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of InteliData Technologies Corporation's Proxy Statement for its 2004
Annual Stockholder Meeting are incorporated by reference into Part III of this
Report.
INTELIDATA TECHNOLOGIES CORPORATION
2003 ANNUAL REPORT ON FORM 10-K
TABLE OF CONTENTS
Page
----
PART I
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Item 1. Business..............................................................3
Item 2. Properties............................................................8
Item 3. Legal Proceedings.....................................................9
Item 4. Submission of Matters to a Vote of Security Holders...................9
PART II
- -------
Item 5. Market for Registrant's Common Stock and Related Stockholder
Matters..............................................................10
Item 6. Selected Financial Data..............................................11
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations................................................12
Item 7a. Quantitative and Qualitative Disclosures about Market Risk...........31
Item 8. Financial Statements and Supplementary Data..........................32
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.............................................52
Item 9A. Controls and Procedures..............................................52
PART III
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Item 10. Directors and Executive Officers of the Registrant...................52
Item 11. Executive Compensation...............................................52
Item 12. Security Ownership of Certain Beneficial Owners and Management.......52
Item 13. Certain Relationships and Related Transactions.......................53
Item 14. Principal Accounting Fees and Services ..............................53
Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.....53
SIGNATURES ...................................................................56
PART I
======
ITEM 1. BUSINESS
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COMPANY OVERVIEW
InteliData Technologies Corporation and subsidiaries ("InteliData" or the
"Company") provides electronic bill payment and presentment ("EBPP") and online
banking solutions to the financial services industry. The Company's products
provide financial institutions ("FI's") with the real-time financial processing
infrastructure needed to provide their customers with payment and presentment
services and online banking via the Internet and other online delivery channels.
The Company markets its products and services to banks, credit unions, brokerage
firms, financial institution processors and credit card issuers.
InteliData's product suite consists of three complementary product
offerings:
Payment and Presentment
-----------------------
o Payment Solutions - providing payment warehousing, payment matching,
biller directory management, and least cost routing functionality for
EBPP transactions;
o Card Services - providing Internet-based account activation, bill
presentment, balance consolidation, and e-Statement capabilities; and
Online Banking
--------------
o Online Banking - providing Internet-based access to real-time account
information, as well as interfaces to personal financial management
software such as Intuit's Quicken(R) and Microsoft Money(R).
These product offerings are described in more detail below.
The Company has invested in developing products and capabilities designed
to establish a leadership position in the online bill payment market. The
Company believes this market opportunity is significant based on the billions of
recurring bills that consumers and businesses pay each year, primarily via paper
check. FI's should be able to realize significant cost and efficiency benefits
from initiating these payments online and processing them electronically.
Migrating to online electronic payments will require significant investment in
online bill payment infrastructure, which is where the Company's products are
focused.
In January 2001, InteliData acquired Home Account Holdings, Inc. and its
operating subsidiary, Home Account Network, Inc., by means of the merger of one
of the Company's wholly owned subsidiaries with and into Home Account Holdings,
with Home Account Holdings surviving the merger. Home Account Holdings is a
wholly owned subsidiary of InteliData. This acquisition was accounted for as a
purchase. Through this transaction, InteliData acquired the products and
customer base of Home Account Holdings, Inc., including i) the Card Services
sector, ii) the Online Banking platform, Canopy(TM) Banking, for commercial
banks, and iii) an OFX solution that provides Payment Solutions capabilities.
The Company's principal executive offices are located at 11600 Sunrise
Valley Drive, Suite 100, Reston, Virginia 20191, and its telephone number is
(703) 259-3000.
INDUSTRY BACKGROUND
The market for online banking and bill payment infrastructure has grown
considerably over the last two to three years, and the Company believes that
significant growth opportunities remain. As Internet financial services have
become more mainstream, FI's have focused less on innovation and more on
broadening existing operations - adding functionality, improving operating
efficiencies, and migrating significant portions of their online banking and
bill payment operations in-house. The Company's product suite consists of three
complementary product offerings serving the core infrastructure needs of three
distinct, but related markets: Payment Solutions, Card Services, and Online
Banking.
The market for Payment Solutions has been the primary focus of InteliData's
development and marketing efforts during the past three years. The Company views
this as the market sector with the greatest growth potential.
While the Company's revenue from this sector has not achieved the growth rate
that the Company anticipated during the past year, industry reports from sources
such as The Tower Group confirm that the market has grown and is still emerging.
The Company believes that future growth opportunities in this market segment are
significant based on FI's increasing recognition of financial benefits related
to the bill payment customer base, increasing consumer adoption rates, and the
increasing competitive pressure to provide "free bill payment" services to all
consumers. The resulting growth, both in number of users and number of
transactions, has caused larger FI's to rethink their approach to bill payment
processing. Until recently, most large FI's elected to outsource their bill
payment processing to a third-party processor such as CheckFree or Metavante.
Increasingly however, FI's are migrating "front end" bill payment processing and
data warehousing to an in-house platform, offering the FI's greater control,
while also developing "least cost routing" strategies aimed at reducing overall
processing costs.
The market for Card Services has matured considerably in recent years. Most
of the Company's current and potential card issuer customers have deployed an
online solution and are now seeking to add subscribers and incremental
functionality. Consequently, InteliData expects limited growth opportunities
across this market sector, primarily driven by anticipated subscriber increases
from within the Company's current outsourced services customer base.
The market for Online Banking is the most mature of the markets served by
the Company. Most larger FI's are deploying second and third generation
solutions. The goal of these initiatives typically includes increasing
processing capacity and performance, adding incremental new user features,
improving overall user experience, improving back-office processes, reducing
processing costs, and migrating certain core components from outsourced
solutions to in-house solutions. While InteliData has developed and maintains a
customer base within this market sector that is significant to our operations,
the opportunity for significant new business in this market has diminished.
Therefore, the Company expects to limit its future activities in the Online
Banking sector to providing certain enhancements and upgrades for the Company's
established customer base.
PRODUCTS AND SERVICES
InteliData's suite of software products and services provide our FI
customers with the infrastructure to implement and support online banking and
bill payment. The Company's products and services are designed to enable
consumers to transact with their FI's electronically and to assist FI's in
connecting to third-party processors to complete these transactions. The
Company's product suite consists of three complementary product offerings
serving the core infrastructure needs of three distinct, but related markets:
Payment Solutions, Card Services, and Online Banking.
Each product offering is available on a stand-alone basis or may be
integrated with other InteliData offerings. InteliData's products are designed
to be highly modular, customizable, reliable, and scalable transaction
processing applications, making them well suited to the large bank market. The
Company's products may also be integrated with other technology that a FI may
be using or will add.
The Company offers its solutions through several business models. A FI can
i) directly license the software and operate it in-house, ii) license the
software but have the software hosted in an outsourced environment (with the
opportunity to bring the software in-house in the future), or iii) use the
software in an outsourced environment through an application service provider
("ASP") arrangement. Each of these models gives the customer an opportunity to
make decisions based on the customer's individual economics and marketing
strategy. The Company also offers its customers software upgrades, consulting
expertise to assist with implementation, training and customization, and
maintenance and support services pursuant to contractual agreements that are
typically renewable on an annual basis.
Payment Solutions
- -----------------
InteliData's Payment Solutions have been designed to meet the current and
emerging online bill payment market opportunities. These solutions include a
broad set of capabilities to support "pay-anyone" online bill payment, as well
as an expanding range of online transfers and internal payments. In contrast to
current third-party outsourced solutions, the Company's bill payment solutions
are designed to give the FI more control over the bill payment warehousing and
routing functions, making bill payment processing more like other forms of
electronic payment processing (such as ACH and ATM transactions), while reducing
the overall expense of offering bill payment.
The Payment Solutions consist of several key components to facilitate
deployment in a variety of environments and to allow the incremental deployment
of a subset of the overall capabilities. These components include the following:
o Payment Warehouse
o Transfer Warehouse
o Payment Matching and Routing
o Merchant Directory Management
o Web Billpay Interface
o OFX Interface
Each component of the overall solution can be delivered independently or as
part of a larger integration that may include a FI's existing technology.
Payment Warehouse - The central feature of the Company's Payment Solutions
is the Payment Warehouse. The Payment Warehouse is designed to provide banks
with increased control over valuable customer payment information, as well as
the ability to reduce bill payment processing costs.
Using the Payment Warehouse, FI's can capture and warehouse all customer
payment and payee information prior to processing, giving them control of
customer payment data and transaction routing to various payment processors.
This provides the FI greater control over service quality of the increasingly
important bill payment service. It also provides FI's greater control of payment
processing costs, which is becoming critical as FI's have recognized that "free
billpay" promotions drive customer and transaction volumes. The warehouse also
allows FI's to capture "on-us" transactions, which are payments within an FI,
and route these internally rather than through a more costly third-party
service.
Transfer Warehouse - The Transfer Warehouse is designed to extend the
payment capabilities of the InteliData Payment Solution offering to meet the
growing need for a broader range of online payment capabilities. Expanding
online payments beyond basic electronic bill payment allows FI's to become a
central "payment hub" for their consumers, with a resulting increase in customer
retention, cross-selling, and fees for the FI's.
By using the Transfer Warehouse, the FI's can add additional payment
capabilities:
o Allow loan, credit card, and mortgage customers to make a payment from
another FI's checking account.
o Transfer funds on a scheduled and recurring basis between multiple
accounts inside the FI.
o Pay internal bills from multiple internal accounts.
o Transfer funds into the FI from another deposit account (e.g.,
brokerage account, credit union, and bank).
o Transfer funds to another FI into an account held by the customer.
Payment Matching and Routing - InteliData's Payment Decisioning Engine
permits FI's to manage and control "Least Cost Routing" of electronic bill
payments to multiple remittance processors, including MasterCard RPPS,
CheckFree, Metavante, Princeton eCom, Online Resources Corporation, and numerous
in-house systems. While the solution has been tailored for InteliData's Payment
Warehouse, the technology is designed to work with other payment warehouses
currently on the market.
Merchant Directory Management - The central feature of the InteliData
Payment Decisioning Engine is the Merchant Directory. The Merchant Directory
manages detailed information about merchants from multiple processors, including
information needed for electronic payment routing. Directory Management Tools
automate and support the management of the Merchant Directory and the management
of payee matching and payment routing.
Web Billpay Interface - InteliData's Web Billpay Interface is a turnkey Web
front-end, designed to let consumers and small business users manage online
transactions quickly and easily. This solution includes:
o Screens to support payment, funds transfer, and bill presentment.
o Flexible payment scheduling, including single, recurring, and express
transactions.
o Transaction search capability, allowing searches by date, status,
account, merchant, and other options.
o A set of branding and configuration options for controlling the look
and feel of the screens.
OFX Interface - The OFX Interface provides direct connectivity between the
FI and users of Intuit Quicken(R) and Microsoft Money(R) client software through
the industry standard Open Financial Exchange ("OFX") protocol. It also provides
synchronization with Quicken(R) or Money(R).
Card Services
- -------------
InteliData's Card Services provide credit card issuers with an end-to-end
solution for serving customers via the Internet. The solution provides consumers
with online account access, customer self-service, and bill presentment
capabilities. By providing these online services, the credit card issuer
benefits through reduced customer service expenditures and lower billing costs.
The Card Services offering provides cardholders a wide range of online
features, including the ability to view credit card account information, apply
for credit increases, change mailing addresses, and perform a variety of other
account management activities. Additionally, consumers are able to apply for a
card, view and pay their bill, consolidate their balances and receive electronic
statements. InteliData offers a modular approach for Card Services, which
enables an issuer to deploy a total solution or to augment an existing online
offering by deploying individual components of the overall solution. Card
Services offer several modular components:
Account Management Module is the base module for Card Services. This module
provides cardholders the ability to view their credit card account information,
such as balance, payment status, next payment due date, and cycle-to-date
transactions. Additional functions allow cardholders to view previous months'
statement activity and download the data to a Personal Finance Manager (PFM),
pay their credit card bills, utilize a secure messaging process for submitting
customer service inquiries, request a credit line increase, and update address
and other account information online.
Acquisition Module lets card issuers enroll and authorize new accounts
online. The Acquisition Module supports a wide range of deployment options. It
can perform fraud screening, provide application decisioning, provide an
applicable response, and book approved applicants.
Activation Module lets consumers activate new accounts online. This helps
issuers reduce costs and provides an opportunity to promote additional revenue
generating products and services such as balance transfers.
Balance Transfer Module gives consumers the ability to transfer credit card
balances from other credit cards online. This module provides online credit
approval, available balance decisioning, and movement of funds. When integrated
with a credit decision engine, this module enables issuers to utilize a lead
generation tool that can determine appropriate credit limits and percentage
rates, and effect balance transfers for new and existing customers.
e-Statement Module enables card issuers to realize savings by suppressing
the printing and mailing of paper credit card statements to customers. This
module allows either the cardholder or a customer service representative ("CSR")
to initiate e-Statement delivery, and allows the card issuers to eliminate the
paper statement. A number of Web-based CSR management tools are provided to the
card issuers to help manage the e-Statement process, including the ability to
manage disclosures and statement backer documentation, display and manage
statement messages for both printed and online only messages, manage "bounced"
email notifications, and provide reporting tools to ensure that registered
e-Statement cardholders are receiving a compliant e-Statement.
Online Banking
- ---------------
InteliData's Online Banking solution provides FI's a highly scalable,
end-to-end solution for providing their consumers with real-time account
information online via the Web, Intuit Quicken(R) and Microsoft Money(R). The
software allows consumers access to account information online, including the
ability to review transaction history, initiate funds transfers, and perform
various account management functions in real-time.
InteliData's Online Banking solution consists of three complementary
components: i) Interpose(R) Transaction Engine ("ITE"), ii) Interpose(R) Web
Banking ("IWB") front-end interface, and iii) Interpose(R) OFX Gateway.
Together, these products provide a solution that supports real-time account
access to user-accessible accounts from multiple online delivery channels. The
solution also provides synchronized access from the Internet, Intuit Quicken(R),
and Microsoft Money(R) and offers an optional turnkey Web interface for both
consumers and CSR's. Each component of the overall solution can be delivered
independently or may be combined as part of a larger implementation.
Interpose(R) Transaction Engine - The Interpose(R) Transaction Engine
("ITE") is the core processing component of the InteliData Online Banking
solution. It provides transaction processing, logging, and warehousing for
online banking transactions. ITE includes i) a Profile System for managing
online account permissions and profiles, ii) an Account Repository for
warehousing extended account history as well as transaction data from remote
systems, and iii) a CSR system to allow CSR's to manage consumer online
profiles. ITE provides real-time connectivity to the FI's legacy data, and is
designed to allow capacity to be added without increased complexity.
Interpose(R) Web Banking - The Interpose(R) Web Banking ("IWB") interface
provides a Web user interface for the InteliData Online Banking solution. IWB
provides a range of Internet-accessible banking capabilities, including account
access, transfers, payments, and account management. IWB features a turnkey user
interface, but may also be customized to meet an FI's requirements.
Interpose(R) OFX Gateway - The Interpose(R) OFX Gateway provides direct
connectivity between the FI and users of Intuit Quicken(R) and Microsoft
Money(R) client software through the industry standard Open Financial Exchange
("OFX") protocol. The OFX Gateway provides consumers with access to real-time
account information directly from the FI, as well as access to information that
is synchronized between the Web and Quicken(R) or Money(R).
Additionally, the Company acquired an Online Banking platform, Canopy(TM)
Banking, as part of the Home Account acquisition. The Canopy(TM) Banking
solution serves the community banking and brokerage markets to provide online
banking and bill payment services. This solution was a significant revenue
contributor in 2002, but less so in 2003. Because the Company's focus going
forward is expected to be on the large FI's, the Company expects the Canopy(TM)
Banking's revenue contribution to be even less significant in the future.
MARKETING AND DISTRIBUTION
The Company concentrates its marketing efforts through a direct sales model
targeting FI's in the United States, including banks, credit unions, brokerage
firms, financial institution processors and credit card issuers. The Company
markets its solutions primarily to large FI's, generally those with assets in
excess of $3 billion. In addition, the Company markets its Card Solutions to
credit card issuers through a processing arrangement with First Data Resources,
a subsidiary of First Data Corp. In 2003, three customers represented
appoximately 13.7%, 11.4%, and 10.9% of our revenue, respectively.
The Company maintains alliance relationships with a number of processing
partners, including First Data and Fidelity National Information Systems
("Fidelity") for data center operations, and MasterCard RPPS, Princeton eCom,
and Online Resources Corporation for payment processing. The Company's
relationship with Fidelity also includes a joint-marketing agreement; however,
to date, this joint marketing agreement has not resulted in any significant
revenue contributions from sales made by Fidelity.
COMPETITION
The Company competes with several different types of competitors. Some FI's
have elected to develop internally their own online banking and payment
solutions, instead of purchasing products and services from the Company or other
vendors, making internal development a competitor to the Company. FI's may also
obtain similar technology products from other software providers, including S1
Corporation, Corillian Corporation, and Financial Fusion, Inc. FI's may obtain
similar services on an outsourced basis from CheckFree Corporation, Online
Resources Corporation, Princeton eCom Corporation, Digital Insight Corporation,
and Metavante Corporation. For Card Services, the Company's principal
competitors are Incurrent Solutions, Inc., First Data Resources, and our
customers' own in-house solutions.
The Company expects that competition in these areas will continue to
increase. Most of our competitors have substantially greater resources than us,
which could impact our ability to compete. Competition will be based upon price,
performance, product functionality, customer service and the effectiveness of
marketing and sales efforts. The Company competes in its target markets by
leveraging its market experience and current customer base to develop innovative
technology solutions and market them effectively.
PRODUCT DEVELOPMENT
The Company operates in industries that are evolving and characterized by
technology innovation. In an effort to improve the Company's position with
respect to its competition, the Company has continued its new product
development and focused its efforts in the area of product development primarily
for the Payment Solutions market. In 2003, 2002, and 2001, the Company's
research and development expenditures were $5,020,000, $8,807,000, and
$15,729,000, respectively. At December 31, 2003 and 2002, approximately 27 and
26 employees were engaged in product development, respectively. The Company's
ability to attract and retain highly skilled research and development personnel
is important to the Company's continued success.
GOVERNMENT REGULATION
The Company markets its products and services to the financial services
market, which is highly regulated at both the federal and state levels.
Interpretation, implementation or revision of banking regulations can accelerate
or hinder the ultimate success of the Company and its products.
PATENTS, PROPRIETARY RIGHTS AND LICENSES
The Company holds limited registered intellectual property rights with
respect to its products. The Company relies on trade secret laws and licensing
agreements to establish and maintain its proprietary rights to its products.
Although the Company has obtained confidentiality agreements from its key
executives and engineers in its product development group, there can be no
assurance that third parties will not independently develop the same or similar
alternative technology, obtain unauthorized access to the Company's proprietary
technology or misuse the technology to which the Company has granted access.
The Company does not believe that its products and services infringe on the
rights of third parties. It is possible that third parties could assert
infringement claims against the Company. There can be no assurance that any such
assertion will not result in costly litigation or require the Company to cease
using, or obtain a license to use, intellectual property of such parties.
EMPLOYEES
At December 31, 2003 and 2002, the Company had approximately 83 and 89
employees, respectively. The Company has no collective bargaining agreements
with its employees.
AVAILABLE INFORMATION
The Company files annual, quarterly, and current reports, proxy statements,
and other documents with the Securities and Exchange Commission (the "SEC")
under the Securities Exchange Act. The public may read and copy any materials
that the Company files with the SEC at the SEC's Public Reference Room at 450
Fifth Street, NW, Washington, DC 20549. The public may obtain information on the
operation of the Public Reference Room by calling the SEC at (800) SEC-0330.
Also, the SEC maintains an Internet website that contains reports, proxy and
information statements, and other information regarding issuers, including the
Company, that file electronically with the SEC. The public can obtain any
documents that the Company files with the SEC at http://www.sec.gov.
------------------
The Company also makes available free of charge on or through our Internet
website (http://www.intelidata.com) our Annual Report on Form 10-K, Quarterly
-------------------------
Reports on Form 10-Q, Current Reports on Form 8-K, and, if applicable,
amendments to those reports filed or furnished pursuant to Section 13(a) of the
Securities Exchange Act as well as Section 16 reports on Forms 3, 4 and 5 as
soon as reasonably practicable after the Company electronically files such
material with, or furnishes it to, the SEC.
ITEM 2. PROPERTIES
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The Company's headquarters are located in Reston, Virginia, where it leases
25,200 square feet of office space; this lease expires in December 2006. During
2003, the Company ceased using 8,200 square feet of the Reston, Virginia leased
space and subleased the office space to a third party. The Company also leases
8,800 square feet of office space for its product development and operations
facilities in Toledo, Ohio; this lease expires in April 2006.
In January 2001, the Company acquired Home Account Holdings, Inc., which
had leased facilities in Emeryville, California, Omaha, Nebraska, and
Charleston, South Carolina. In February 2001, the facility in California, which
served as the headquarters for the pre-merger Home Account Holdings, was shut
down. In August 2002 the Company subleased the 7,200 square feet of space for
the remainder of the lease term, ending in February 2005. The Nebraska lease for
9,200 square feet of office space, used for product development and customer
service, expires in March 2006. The South Carolina lease for 5,300 square feet
of office space, used for product development and customer service, will
terminate in April 2006.
All of the lease and sublease arrangements were made with unaffiliated
parties. The Company believes that its leased properties are sufficient for its
current operations and for the foreseeable future.
ITEM 3. LEGAL PROCEEDINGS
- --------------------------
The Company is not currently a party to any material litigation. From time
to time, the Company is a party to routine litigation incidental to its
business. Management does not believe that the resolution of any or all such
routine litigation will be likely to have a material adverse effect on the
Company's financial condition, cash flows, or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- ------------------------------------------------------------
None.
EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth the names and ages of all executive officers
of the Company and all positions and offices within the Company presently held
by such executive officers:
Name Age Position Held
---- --- -------------
Alfred S. Dominick, Jr. 58 Chairman and Chief Executive Officer
Michael E. Jennings 58 President and Chief Operating Officer
John R. Polchin 40 Vice President, Chief Financial Officer
and Treasurer
Albert N. Wergley 56 Vice President, General Counsel and Secretary
Alfred S. Dominick, Jr. has served as the Chief Executive Officer of the
Company since August 1998 and Chairman of the Board of Directors since August
2002. Mr. Dominick was also the President of the Company from August 1998 to May
2003. Prior to joining InteliData, Mr. Dominick served as President of the
Retail Products Delivery Group at M&I Data Services. Prior to joining M&I Data
Services in July 1995, he was Executive Vice President of Retail Banking and a
member of the Executive Committee for Boatmen's Bancshares Corporation for three
years. Prior to that Mr. Dominick was an Executive Vice President with Bank One
Texas, since 1989. Prior to his employment with Bank One Texas, Mr. Dominick was
a Senior Vice President with Fleet National Bank.
Michael E. Jennings was promoted to President and Chief Operating Officer
in May 2003. Mr. Jennings oversees product development efforts, engineering,
operations, ASP initiatives and customer care for all InteliData product
offerings. Prior to this, he served as the Executive Vice President of Product
Management and Payment Solutions since joining InteliData in June 2000. He was
in charge of overall business planning and business development activities for
electronic bill presentment and payment, Internet banking, and operations. Prior
to joining InteliData, Mr. Jennings served at Bank of America as a Senior Vice
President of Self Service Delivery. During the eight years prior to joining
InteliData, he worked on alternative delivery strategies and managing several
different areas of electronic banking including: Debit Cards, ATMs, ATM/POS
Operations, PC and Internet Banking, and EFT switches. Mr. Jennings is a former
director of CIRRUS, Money Transfer Systems, Credit Systems Inc., and was
chairman of the American Banking Association's Retail Payment Systems Committee.
John R. Polchin has served as Vice President, Chief Financial Officer and
Treasurer since April 2002. Prior to joining InteliData, Mr. Polchin served as
Vice President and Chief Financial Officer of Orblynx, Incorporated, a global
Internet infrastructure firm. Prior to that, Mr. Polchin held the positions of
Vice President and Treasurer and Senior Vice President, Chief Financial Officer
for e.Spire Communications, a publicly traded Competitive Local Exchange
Carrier. Additionally, he has served as Vice President of Finance and Controller
for Appworx Corporation, an enterprise software concern. From 1987 to 1994, he
held various financial positions within UNC Incorporated
(subsequently acquired by General Electric). Mr. Polchin began his career at
NCNB Corporation, now Bank of America.
Albert N. Wergley has served as Vice President, General Counsel, and
Secretary of the Company since 1996, and of its predecessor, US Order, since
1995. From 1986 to 1994, Mr. Wergley was Vice President and General Counsel of
Verdix Corporation (subsequently Rational Software Corporation, which was
acquired by IBM), a manufacturer of software development tools. Previous to
that, he was associated with the McLean, Virginia office of the law firm of Reed
Smith Shaw & McClay and with the law firm of Howrey & Simon in Washington, D.C.
PART II
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ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED
- ---------------------------------------------------------------
STOCKHOLDER MATTERS
-------------------
The Company's common stock is traded on the Nasdaq National Market under
the symbol INTD. The table below sets forth the high and low quarterly sales
prices for the common stock of the Company as reported in published financial
sources for each quarter during the last two years:
High Low
-------------- --------------
2003 Fourth Quarter $ 2.62 $ 1.40
Third Quarter 3.60 2.15
Second Quarter 3.24 1.19
First Quarter 1.84 0.84
2002 Fourth Quarter $ 1.03 $ 0.57
Third Quarter 1.50 0.66
Second Quarter 2.74 1.13
First Quarter 3.00 1.50
On March 9, 2004, the last reported sales price for the Company's common
stock was $1.27. The number of stockholders of record at March 9, 2004 was 671
and does not include those stockholders who hold shares in street name accounts.
The Company has never declared or paid any cash dividends on its common
stock. The Company currently intends to retain its future earnings, if any, to
fund the development and growth of its business and, therefore, does not
anticipate paying any cash dividends in the foreseeable future. Any future
decision concerning the payment of dividends on the Company's common stock will
depend upon the results of operations, financial condition and capital
expenditure plans of the Company, as well as such other factors as the Board of
Directors, in its sole discretion, may consider relevant.
Information regarding securities authorized for issuance under the
Company's equity compensation plans as of December 31, 2003 is set forth in Item
12 "Security Ownership of Certain Beneficial Owners and Management."
ITEM 6. SELECTED FINANCIAL DATA (in thousands, except per share data)
- -----------------------------------------------------------------------
Years Ended December 31,
--------------------------------------------------------------------
RESULTS OF OPERATIONS: 2003 2002 2001 2000 1999
- ---------------------- ----------- ----------- ------------ ----------- ----------
Revenues $ 20,630 $ 21,495 $ 18,296 $ 5,101 $ 6,493
Cost of revenues 7,549 8,474 9,010 2,720 1,743
Operating expenses 15,146 21,103 39,624 27,699 12,800
----------- ----------- ---------- ---------- ----------
Operating loss (2,065) (8,082) (30,338) (25,318) (8,050)
Other income, net 179 (649) 137 49,726 350
Provision (benefit) for income taxes (288) (137) (160) 488 --
----------- ----------- ---------- ---------- ----------
Income (loss) from continuing operations (1,598) (8,594) (30,041) 23,920 (7,700)
Income (loss) from discontinued operations -- -- -- (262)(1) 5,805
----------- ----------- ---------- ---------- ----------
Net income (loss) (1,598) (8,594) (30,041) 23,658 (1,895)
Preferred stock dividend requirement -- -- -- -- (1,936)(2)
----------- ----------- ---------- ---------- ----------
Net income (loss) attributable to
common stockholders $ (1,598) $ (8,594) $ (30,041) $ 23,658 $ (3,831)
=========== =========== ========== ========== ==========
Basic earnings per common share
Income (loss) from continuing operations $ (0.03) $ (0.18) $ (0.65) $ 0.63 $ (0.29)
Income (loss) from discontinued operations 0.00 0.00 0.00 (0.01) 0.18
----------- ---------- ---------- ---------- ----------
Net income (loss) $ (0.03) $ (0.18) $ (0.65) $ 0.62 $ (0.11)
=========== ========== ========== ========== ==========
Diluted earnings per common share
Income (loss) from continuing operations $ (0.03) $ (0.18) $ (0.65) $ 0.59 $ (0.29)
Income (loss) from discontinued operations 0.00 0.00 0.00 (0.01) 0.18
----------- ---------- ---------- ---------- ----------
Net income (loss) $ (0.03) $ (0.18) $ (0.65) $ 0.58 $ (0.11)
=========== ========== ========== ========== ==========
Weighted-average common shares outstanding
Basic 50,028 48,869 45,897 38,237 33,367
=========== =========== ========== ========== ==========
Diluted 50,028 48,869 45,897 40,843 33,367
=========== =========== ========== ========== ==========
December 31,
--------------------------------------------------------------------
FINANCIAL POSITION: 2003 2002 2001 2000 1999
- ------------------- ----------- ----------- ------------ ----------- ----------
Cash and cash equivalents $ 7,603 $ 5,674 $ 12,026 $ 27,255 $ 8,496
Total assets 44,336 44,506 57,710 43,278 11,212
Long-term debt -- -- -- -- --
Stockholders' equity 38,991 36,454 44,475 33,570 7,087
(1) During the fiscal year ended December 31, 2000, the leasing business
segment was discontinued, and accordingly, has been reported as
discontinued operations.
(2) Preferred stock dividends for 1999 include the effects of accretion of
discounts arising from the allocation of proceeds from issuance of
preferred stock to warrants and a beneficial conversion feature. Such
preferred stock was converted to common stock in late 1999.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
- ------- -------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS
-----------------------------------
Overview
InteliData Technologies Corporation and subsidiaries ("InteliData" or the
"Company") provides electronic bill payment and presentment ("EBPP") and online
banking solutions to the financial services industry. The Company's products
provide financial institutions ("FI's") with the real-time financial processing
infrastructure needed to provide their customers with payment and presentment
services and online banking via the Internet and other online delivery channels.
The Company markets its products and services to banks, credit unions, brokerage
firms, financial institution processors and credit card issuers.
Products - InteliData's product suite consists of three complementary
product offerings:
Payment and Presentment
-----------------------
o Payment Solutions - providing payment warehousing, payment matching,
biller directory management, and least cost routing functionality for
EBPP transactions;
o Card Services - providing Internet-based account activation, bill
presentment, balance consolidation, and e-Statement capabilities; and
Online Banking
--------------
o Online Banking - providing Internet-based access to real-time account
information, as well as interfaces to personal financial management
software such as Intuit's Quicken(R) and Microsoft Money(R).
The market for online banking and bill payment infrastructure has grown
considerably over the last two to three years, and the Company believes that
significant growth opportunities remain. As Internet financial services have
become more mainstream, FI's have focused less on innovation and more on
broadening existing operations - adding functionality, improving operating
efficiencies, and migrating significant portions of their online banking and
bill payment operations in-house. The Company's product suite consists of three
complementary product offerings serving the core infrastructure needs of three
distinct, but related markets: Payment Solutions, Card Services, and Online
Banking.
The market for Payment Solutions has been the primary focus of InteliData's
development and marketing efforts during the past three years. The Company views
this as the market sector with the greatest growth potential. While the
Company's revenue from this sector has not achieved the growth rate that the
Company anticipated during the past year, industry reports from sources such as
The Tower Group confirm that the market has grown and is still emerging. The
Company believes that future growth opportunities in this market segment are
significant based on FI's increasing recognition of measurable financial
benefits related to the bill payment customer base, increasing consumer adoption
rates, and the increasing competitive pressure to provide "free bill payment"
services to all consumers. The resulting growth, both in number of users and
number of transactions, has caused larger FI's to rethink their approach to bill
payment processing. Until recently, most large FI's elected to outsource their
bill payment processing to a third-party processor such as CheckFree or
Metavante. Increasingly however, FI's are migrating "front end" bill payment
processing and data warehousing to an in-house platform, offering the FI's
greater control while also developing "least cost routing" strategies aimed at
reducing overall processing costs.
The market for Card Services has matured considerably in recent years. Most
of the Company's current and potential card issuer customers have deployed an
online solution and are now seeking to add subscribers and incremental
functionality. Consequently, InteliData expects limited growth opportunities
across this market sector, primarily driven by anticipated subscriber increases
from within the Company's current outsourced services customer base.
The market for Online Banking is the most mature of the markets served by
the Company. Most larger FI's are deploying second and third generation
solutions. The goal of these initiatives typically includes increasing
processing capacity and performance, adding incremental new user features,
improving overall user experience, improving back-office processes, reducing
processing costs, and migrating certain core components from outsourced
solutions to in-house solutions. While InteliData has developed and maintains a
customer base within this market sector that is significant to our operations,
the opportunity for significant new business in this market has diminished.
Therefore, the Company expects to limit its future activities in the Online
Banking sector to providing certain enhancements and upgrades for the Company's
established customer base.
Acquisition
In January 2001, InteliData acquired Home Account Holdings, Inc. and its
operating subsidiary, Home Account Network, Inc., by means of the merger of one
of the Company's wholly owned subsidiaries with and into Home Account Holdings,
with Home Account Holdings surviving the merger. Home Account Holdings is a
wholly owned subsidiary of InteliData. This acquisition was accounted for as a
purchase. Through this transaction, InteliData acquired the products and
customer base of Home Account Holdings, Inc., including i) the Card Services
sector, ii) the Online Banking platform, Canopy(TM) Banking, for commercial
banks and iii) an OFX solution that provides Payment Solutions capabilities.
Results of Operations
The following represents the results of operations for InteliData. Such
information should be read in conjunction with the financial statements and the
notes thereto in Part II, Item 8 of this Annual Report on Form 10-K, as well as
the cautionary statements and risk factors in this section.
The Company generates revenues from each of its three product offerings -
Payment Solutions, Card Services, and Online Banking. Within these product
offerings, the Company obtains revenues from various sources - software license
fees, consulting services fees, use-based fees, maintenance fees, and other
fees. Software license fees include revenues generated from license sales.
Consulting services fees include revenues generated from professional services
rendered. Use-based fees include revenues generated from user accounts,
transactions, remittances and other related activities. Maintenance fees include
revenues generated from maintenance agreements for support services for licensed
software. Other fees are termination charges levied for early termination of
contracts.
Within revenues generated from Payment Solutions, consulting services will
fluctuate with the demand of services based on client internal projects as well
as new system implementations. Use-based fees will fluctuate based on the
addition of new clients and user adoption rates that translate into additional
users and additional transactions. Additionally, use-based revenues may decline
with departures of clients for other solutions and/or clients' migrating the
InteliData solution in-house through a license arrangement that may eliminate
user fees.
Within revenues generated from Card Services, consulting services will
fluctuate with the demand of services based on client internal projects as well
as new client implementations. Use-based fees will fluctuate based on the
addition of new clients and user adoption rates that translate into additional
users and additional transactions. Additionally, use-based revenues may increase
due to added functionalities or may decline with departures of clients for other
solutions.
Within revenues generated from Online Banking, use-based revenues will
fluctuate based on the addition of new clients and user adoption rates that
translate into additional users and additional transactions. However, use-based
revenues may decline with departures of clients for other solutions and/or
clients' migrating the InteliData solution in-house through a license
arrangement that may eliminate user fees.
The following table sets forth the Company's sources of revenue for each of
the three fiscal years ended December 31, 2003, 2002 and 2001:
2003 2002 2001
-------- ---------- -------
Payment Solutions
Software license $ 759 $ 771 $ 1,010
Consulting services 2,192 3,406 2,754
Use-based 4,179 3,151 1,903
Maintenance 892 796 348
-------- ---------- -------
Subtotal 8,022 8,124 6,015
-------- ---------- -------
Card Services
Consulting services 332 894 596
Use-based 4,595 3,054 2,142
Other 13 -- --
-------- ---------- -------
Subtotal 4,940 3,948 2,738
-------- ---------- -------
Online Banking
Software license 476 518 780
Consulting services 1,440 1,485 1,867
Use-based 5,100 6,697 5,717
Maintenance 652 470 573
Other -- 253 606
-------- ---------- -------
Subtotal 7,668 9,423 9,543
-------- ---------- -------
Total
Software license 1,235 1,289 1,790
Consulting service 3,964 5,785 5,217
Use-based 13,874 12,902 9,762
Maintenance 1,544 1,266 921
Other 13 253 606
-------- ---------- -------
Total $20,630 $21,495 $18,296
======== ========== =======
Years Ended December 31, 2003 and 2002
Revenues
The Company's total revenues were $20,630,000 in 2003 compared to
$21,495,000 in 2002, a decrease of $865,000.
The revenues from Payment Solutions were $8,022,000 in 2003 compared to
$8,124,000 in 2002, a decrease of $102,000. These revenues include items related
to the Company's billpay warehouse, funds transfer and certain OFX solutions, as
well as the billpay portions of the ASP offerings. Consulting services decreased
$1,214,000, while use-based fees increased $1,028,000 year over year. The
decrease in consulting services was primarily due to the completion of projects
in 2002 that did not carryover to 2003 and limited new projects in 2003, while
the increase in use-based fees was due to the growth from existing clients.
The revenues from Card Services were $4,940,000 in 2003 compared to
$3,948,000 in 2002, an increase of $992,000. Consulting services decreased
$562,000, while use-based fees increased $1,541,000 year over year. The decrease
in consulting services was primarily due to the completion of projects in 2002
and limited new projects in 2003, while the increase in use-based fees was due
to the growth from existing clients.
The revenues from Online Banking were $7,668,000 in 2003 compared to
$9,423,000 in 2002, a decrease of $1,755,000. These revenues include items
related to the Company's Interpose(R) Web Banking, Interpose(R) Transaction
Engine, and certain OFX solutions, as well as the online banking portions of the
ASP offerings. The decrease was primarily attributable to the $1,597,000
decrease in use-based fees. Three large customers who were
operating in the ASP environment during 2002 and a part of 2003 ceased paying
recurring fees during 2003. In one instance, a bank that used the Company's
online banking platform based on older Home Account Canopy(TM) Banking
technology, converted to a competitor's product. Two other banks paid the
Company a one-time license fee in 2003 and moved the InteliData software
in-house in 2003, which resulted in a decrease to the Company's monthly fees for
hosting the software in an ASP arrangement. The resulting decrease was partially
offset by growth in user fees from existing clients.
Cost of Revenues and Gross Profit
The Company's cost of revenues decreased $925,000 to $7,549,000 in 2003
from $8,474,000 in 2002. The decrease was primarily due to decreases in cost of
revenues associated with decreased professional services. The cost structures to
generate the revenues are bundled together and cannot be broken out in the same
manner as the revenues. Costs of revenues include vendors for outsourced
services and employees directly working to generate revenues.
Overall gross profit margin increased to 63% for 2003 from 61% for 2002.
The increase in gross profit margin was attributable to a decrease in cost of
revenues as discussed above. The Company anticipates that gross profit margins
may fluctuate in the future due to changes in product mix and distribution,
outsourcing activities associated with an ASP business model, competitive
pricing pressure, and the introduction of new products and changes in volume.
The Company entered into multiple vendor agreements for outsourced services
as part of its ASP solution offering for certain Online Banking and Payment
Solutions clients. Some of these vendor agreements are long-term (i.e., expire
in April and May 2005) and commit the Company to specified minimum charges
during the terms of the contracts. During 2003, several of the Company's clients
migrated from this ASP environment to an in-house solution utilizing
InteliData's licensed software. As a result, a possibility exists for future
losses due to the decrease in estimated future revenue streams when compared
with the Company's current contractual cost structure for outsourced services
within this ASP environment. Entering 2004, the projected costs are estimated to
exceed projected revenues by approximately $79,000 on a monthly basis; this gap
will fluctuate based on monthly activity.
In assessing potential future losses associated with the Company's ASP
business, the Company may include the possibility of new clients that would add
incremental revenue to this ASP environment. Additionally, the Company may have
the opportunity to restructure vendor contracts and decrease contractual charges
(i.e., extend the current contract with lower minimum charges or migrate to
different vendors). Management continues to assess both the potential for new
business prospects and the possibility of reducing the Company's costs through
renegotiation of existing agreements. In accordance with generally accepted
accounting principles, the Company is accounting for these contract costs as
they are incurred. There can be no assurance that the Company will be successful
in mitigating these factors. In the event that new client revenues do not
materialize, user growth rates from existing clients do not meet expected
projections and/or the Company is not successful in its renegotiation efforts,
the Company may experience future period losses from the Company's ASP business,
which could have a material adverse impact on the Company's financial position,
results of operations, and cash flows.
General and Administrative
General and administrative expenses decreased $1,133,000 to $7,496,000 in
2003 from $8,629,000 in 2002. The decrease was primarily attributable to the
Company's reduction of corporate and administrative expenses that resulted from
employee-related actions and aggressive expense controls. This included the
reversal in the first quarter of approximately $630,000 in estimated accrued
bonuses that were not paid, but were previusly provided for during 2002, and the
Company did not accrue for bonuses in fiscal year 2003 as none will be paid.
Additionally, during the year, the Company ceased using one of its leased spaces
at its Reston, Virginia facility and recorded an expense of $625,000 and
corresponding liability for the estimated remaining lease payments net of
estimated fair value of any sublease. This charge was offset by savings from
telecommunication expenses and a one-time, favorable settlement of a matter
related to tax payments made in 1996. The Company plans to continually assess
its operations to manage its expenses and infrastructures in light of
anticipated business levels.
Selling and Marketing
Selling and marketing expenses decreased $1,037,000 to $1,910,000 in 2003
from $2,947,000 in 2002. This was primarily attributable to employee-related
actions, lower travel costs and a reduction in tradeshow-related expenses. The
Company plans to continually assess its operations to manage its expenses and
infrastructures in light of anticipated business levels.
Research and Development
Research and development costs decreased $3,787,000 to $5,020,000 in 2003
from $8,807,000 in 2002. The decrease was primarily attributable to the
Company's reduction of research and development expenses that resulted from
employee-related actions and reductions in consultant expenses. The Company
plans to continually assess its operations to manage its expenses and
infrastructures in light of anticipated business levels.
In 2004, the Company expects to focus its research and development efforts
on its Payment Solutions product offerings. The development efforts for Online
Banking and Card Services products will likely be focused primarily on product
upgrades and product maintenance.
Amortization of Goodwill and Intangibles
Statement of Financial Accounting Standards No. 142, Goodwill and Other
Intangible Assets ("SFAS 142"), requires the Company to not amortize goodwill
and certain intangibles into results of operations, but instead the Company
would review these assets for impairment. The assets would be written down and
impairment losses would be charged to results of operations only in the periods
in which the recorded values are determined to be more than their fair values.
The amortization of certain intangibles continued at an annualized rate of
$720,000. As of January 1, 2002, in accordance with SFAS 142, the Company ceased
recognizing amortization expense on goodwill and the assembled workforce
intangible asset, and the assembled workforce intangible asset was combined with
goodwill for financial accounting and reporting.
In accordance with SFAS 142, the Company had six months from adoption (up
until June 30, 2002) to complete the initial test for impairment as of January
1, 2002, the adoption date of SFAS 142. In accordance with the transition
provisions of SFAS No. 142, the Company conducted the first step of the
impairment tests. The Company assessed the fair value of its only reporting unit
by considering its projected cash flows, comparable company valuations, and
recent purchase prices paid for entities within our industry. Given
consideration of these factors, the Company concluded that the fair value of the
reporting unit exceeded the carrying amount of its net assets. The Company is
required to perform reviews for impairment in future periods, at least annually,
that may result in future periodic write-downs. Tests for impairment between
annual tests may be required if events occur or circumstances change that would
more likely than not reduce the fair value of the net carrying amount. As of
June 30, 2003, the Company performed the required annual review for impairment
using the same approach and similar consideration as the initial test. As a
result, the Company concluded that the fair value of the reporting unit exceeds
the carrying amount of its net assets. As of December 31, 2003, the Company is
not aware of such events or circumstances that could indicate potential
impairment.
Realized Gains on Sales of Investments
At December 31, 2001, the Company owned 640,000 warrant units to purchase
Sybase, Inc. common stock. During June 2002, the Company exercised all of its
640,000 warrants units and sold the resulting 223,000 shares of Sybase common
stock. The Company received net proceeds of approximately $1,718,000 and
recognized a realized loss from sales of investments of approximately $748,000.
The Company had no such liquidating events in 2003.
Other Income
Other income, primarily sublease rent receipts, interest income and other
expenses, including state and local taxes, increased $80,000 to $179,000 in 2003
from $99,000 in 2002. The increase is primarily due to the recognition of
approximately $158,000 of sublease rent receipts in 2003, offset by the
decreased interest income resulting from lower levels of average cash and cash
equivalents in 2003 as compared to 2002.
Income Taxes
The provisions (benefit) for income taxes were $(288,000) and $(137,000)
for the years ended December 31, 2003 and 2002, respectively. The benefit in
2003 represents the reversal of a prior year accrual for exposure that did not
materialize and no longer exists at December 31, 2003. The benefit in 2002
represents a refund of taxes paid in 2000 as a result of tax legislation enacted
during 2002. At December 31, 2003, the Company had net operating loss
carryforwards for federal income tax purposes of approximately $205 million,
which expire in 2005 through 2010, and an alternative minimum tax credit
carryforward of approximately $60,000, which may be carried forward indefinitely
and used to offset future regular taxable income. Approximately $45 million of
the net operating losses were incurred by Home Account prior to its acquisition
by the Company and are subject to annual limitations pursuant to Internal
Revenue Code Section 382 as a result of cumulative changes in ownership of more
than 50% in 2001. A valuation allowance was established for deferred tax assets
as of December 31, 2003 and 2002 because it was deemed, based on available
evidence, that it is more likely than not that all of the deferred tax asset
will not be realized.
Discontinued Operations
Under various disposal plans adopted in 1997, 1998, and 2000, the Company
completed the divestiture of all of its telecommunications, interactive services
businesses and the Caller ID adjunct leasing activities, respectively.
In 2003 and 2002, the Company did not have any income statement activity in
discontinued operations.
As of December 31, 2003 and 2002, the net liabilities of discontinued
operations of $120,000 and $251,000, respectively, relate to the
telecommunications divisions. These liabilities relate to the environmental
clean up associated with prior tenants' operations at InteliData's former New
Milford, Connecticut property. In January 2000, InteliData sold the New Milford,
Connecticut property and the building located thereon, its only remaining asset
in its discontinued operations of the telecommunications division. In the
context of this sale, InteliData agreed to undertake limited remediation of the
site in accordance with applicable state and federal law. The subject site is
not a listed federal or state Superfund site and InteliData has not been named a
"potentially responsible party" at the site. The remediation plan agreed to with
the purchaser allows InteliData to use engineering and institutional controls
(e.g., deed restrictions) to minimize the extent and costs of the remediation.
Further, at the time of the sale of the facility, InteliData established a
$200,000 escrow account from the proceeds of the sale for certain
investigation/remediation costs. As of December 31, 2003, this escrow account
balance was $223,000, which is to be paid out to InteliData. Moreover,
InteliData has obtained environmental insurance to pay for remediation costs up
to $6,600,000 in excess of a retained exposure limit of $600,000. InteliData
estimates its remaining liability at December 31, 2003 related to this matter
and other costs to be approximately $120,000 and has recorded a liability for
this amount.
The Company has engaged a legal firm and an environmental specialist firm
to represent it regarding this matter. The timing of the ultimate resolution of
this matter is estimated to be from two to four years under the Company's
proposed compliance plan, which involves a natural attenuation and periodic
compliance monitoring approach. Management does not believe that the resolution
of this matter will likely have a material adverse effect on the Company's
financial condition or results of operations.
Income (Loss) from Continuing and Discontinued Operations, Weighted-Average
Common Shares Outstanding and Basic and Diluted Earnings (Loss) Per Common Share
The basic and diluted weighted-average common shares outstanding for the
year ended December 31, 2003 was 50,028,000, compared to a basic and diluted
weighted-average common shares outstanding of 48,869,000 for the year ended
December 31, 2002. The increase resulted primarily from the issuance of stock
awards to employees, issuance of stock pursuant to the exercises of stock
warrants and stock options, and stock purchases under the Employee Stock
Purchase Plan.
Losses from continuing operations were $(1,598,000) and $(8,594,000) for
the years ended December 31, 2003 and 2002, respectively, while there was no
gain or loss from discontinued operations in either period. Net
losses were $(1,598,000) and $(8,594,000) for 2003 and 2002, respectively. As a
result of the foregoing, basic and diluted net loss per common share was ($0.03)
for the year ended December 31, 2003 compared to a basic and diluted net loss
per common share of ($0.18) for the year ended December 31, 2002.
Years Ended December 31, 2002 and 2001
Revenues
The Company's total revenues were $21,495,000 in 2002 compared to
$18,296,000 in 2001, an increase of $3,199,000.
The revenues from Payment Solutions were $8,124,000 in 2002 compared to
$6,015,000 in 2001, an increase of $2,109,000. These revenues include items
related to the Company's bill payment warehouse, funds transfer and certain OFX
solutions, as well as the bill payment portions of the ASP offerings. Software
license fees decreased $239,000, consulting services increased $652,000,
use-based fees increased $1,248,000 and maintenance increased $448,000 year over
year. The decrease in software license fees is primarily due to the timing of
system deliveries and fewer software license sales, while the increase in
consulting services was primarily due to the increase in demand for customer
projects and the increase in the hourly rates. Use-based revenues increased due
to growth from existing clients, while maintenance increased due to new rates
and additional software licenses sold.
The revenues from Card Services were $3,948,000 in 2002 compared to
$2,738,000 in 2001, an increase of $1,210,000. Consulting services increased
$298,000, while use-based fees increased $912,000 year over year. The increase
in consulting services was primarily due to the completion of projects in 2002
as compared to 2001, while the increase in use-based fees was due to the growth
from existing clients.
The revenues from Online Banking were $9,423,000 in 2002 compared to
$9,543,000 in 2001, a decrease of $120,000. These revenues include items related
to the Company's Interpose(R) Web Banking, Interpose(R) Transaction Engine, and
certain OFX solutions, as well as the online banking portions of the ASP
offerings. The decrease was primarily attributable to software fees due to
timing of system deliveries and fewer software license sales, consulting
services due to fewer system implementations, and maintenance due to contract
terminations that occurred in 2001. These decreases were substantially offset by
an increase of $980,000 in use-based fees from growth in users and transactions.
Cost of Revenues and Gross Profit
The Company's cost of revenues decreased $536,000 to $8,474,000 in 2002
from $9,010,000 in 2001. The decrease was due to the offsetting of approximately
$254,000 of costs against a forward loss accrual that was expensed in previous
periods, a decrease in professional services costs and a decrease in service
provider costs due to contract renegotiations.
Overall gross profit margin increased to 61% for 2002 from 51% for 2001.
The increase in gross profit margin was attributable to an increase in recurring
revenue coupled with the decrease in cost of revenues as discussed above.
General and Administrative
General and administrative expenses decreased $1,436,000 to $8,629,000 in
2002 from $10,065,000 in 2001. The decrease was primarily attributable to the
Company's reduction of corporate and administrative expenses that resulted from
continued evaluation of on-going cost structures and synergies achieved from the
purchase of Home Account.
Selling and Marketing
Selling and marketing expenses decreased $6,628,000 to $2,947,000 in 2002
from $9,575,000 in 2001. This was primarily attributable to decreases in the
number of sales and marketing employees, travel and outside professional
consulting expenses related to both continued evaluation of on-going cost
structure and synergies achieved from the purchase of Home Account.
Research and Development
Research and development costs decreased $6,922,000 to $8,807,000 in 2002
from $15,729,000 in 2001.
The decrease was primarily attributable to the Company's expense reduction
efforts and the reduction of employees after combining the operations of
InteliData and Home Account and finding efficiencies and synergies.
Amortization of Goodwill and Intangibles
Statement of Financial Accounting Standards No. 142, Goodwill and Other
Intangible Assets ("SFAS 142"), requires the Company to not amortize goodwill
and certain intangibles into results of operations, but instead the Company
would review these assets for impairment. The assets would be written down and
impairment losses would be charged to results of operations only in the periods
in which the recorded values are determined to be more than their fair values.
The adoption of this accounting standard, as of January 1, 2002, reduced the
amortization expense associated with goodwill by $3,555,000 to $0 in 2002 from
$3,555,000 in 2001. The amortization of certain intangibles continued at an
annualized rate of $720,000. As of January 1, 2002, in accordance with SFAS 142,
the Company ceased recognizing amortization expense on goodwill and the
assembled workforce intangible asset, and the assembled workforce intangible
asset was combined with goodwill for financial accounting and reporting.
In accordance with SFAS 142, the Company had six months from adoption (up
until June 30, 2002) to complete the initial test for impairment as of January
1, 2002, the adoption date of SFAS 142. In accordance with the transition
provisions of SFAS No. 142, the Company conducted the first step of the
impairment tests. The Company assessed the fair value of its only reporting unit
by considering its projected cash flows, comparable company valuations, and
recent purchase prices paid for entities within our industry. Given
consideration of these factors, the Company concluded that the fair value of the
reporting unit exceeded the carrying amount of its net assets. The Company is
required to perform reviews for impairment in future periods, at least annually,
that may result in future periodic write-downs. Tests for impairment between
annual tests may be required if events occur or circumstances change that would
more likely than not reduce the fair value of the net carrying amount. As of
December 31, 2002, the Company was not aware of such events or circumstances
that could indicate potential impairment.
Realized Gains on Sales of Investments
On January 20, 2000, Home Financial Network, Inc. ("HFN"), a company in
which InteliData held approximately a 25% ownership interest, merged with
Sybase, Inc. ("Sybase"). InteliData accounted for its investment in HFN using
the equity method. As of the merger date, such investment's carrying value was
zero. In exchange for its portion of ownership in HFN, InteliData received
approximately $5,867,000 in cash and approximately 1,770,000 shares of Sybase
stock. The Company also held warrants to purchase HFN common stock. As part of
the merger agreement, such warrants were converted into warrants to purchase
Sybase common stock. The Company received 640,000 "warrant units" with an
exercise price of $2.60 per warrant unit. Upon exercise of each warrant unit,
the Company was entitled to receive $1.153448 in cash and 0.34794 share of
Sybase common stock.
As part of this merger transaction, an escrow account was established to
provide Sybase indemnity protection against possible claims that might arise
against HFN. Approximately 133,000 shares of Sybase common stock owned by
InteliData were put in escrow, along with approximately $440,000 of cash. In
March 2001, the Company received the escrow payments less approximately $129,000
for miscellaneous claims under the escrow provision. During 2000, InteliData
recognized a gain of approximately $42,604,000 on this transaction and a gain of
$5,998,000 on the subsequent disposition of some of the Sybase common stock. The
remaining holdings of Sybase common stock were sold during 2001 for a net gain
of $507,000. This net gain combined with the loss of $129,000 from the escrow
claims represent the $378,000 realized gains on sales of investments for the
year ended December 31, 2001. At December 31, 2001, the Company owned all
640,000 warrant units described above. During June 2002, the Company exercised
all of its 640,000 warrants units to purchase Sybase common stock and sold the
resulting 223,000 shares of Sybase common stock. The Company received net
proceeds of approximately $1,718,000 and recognized a realized loss from sales
of investments of approximately $748,000.
Prior to January 1, 2001, the Company considered its investment in Sybase
common stock and warrants to purchase Sybase common stock to be
available-for-sale under the provisions of Statement of Financial Accounting
Standards No. 115, Accounting for Certain Investments in Debt and Equity
Securities ("SFAS 115"). Effective January 1, 2001, the Company adopted
Statement of Financial Accounting Standards No. 133, Accounting for Derivative
Instruments and Hedging Activities ("SFAS 133"), which establishes accounting
and reporting standards for derivative instruments and for hedging activities by
requiring that all derivatives be recognized in the balance sheet and measured
at fair value.
In accordance with SFAS 115, the balance sheet included $210,000 of
unrealized gain on investments (net of taxes), within stockholders' equity as of
December 31, 2001. As of December 31, 2001, the accumulated other comprehensive
loss balance represents the changes in the fair market value of the Sybase
common stock. In accordance with SFAS 133, the change in the fair market value
of the Sybase warrants was recorded in the statement of operations (see below).
SFAS 133 requires that all derivative financial instruments, such as
forward currency exchange contracts, interest rate swaps and the Company's
warrants to purchase Sybase stock, be recognized in the financial statements and
measured at fair value regardless of the purpose or intent for holding them.
Changes in the fair value of derivative financial instruments are either
recognized periodically in income or shareholders' equity (as a component of
comprehensive income), depending on whether the derivative is being used to
hedge changes in fair value or cash flows. The Company's adoption of this
pronouncement, effective January 1, 2001, did not result in an adjustment for
the cumulative effect of an accounting change, because the carrying value
reflected the fair value under the previous accounting guidance. In accordance
with SFAS 133, the Company recorded an unrealized loss on investment of $866,000
in the statement of operations for the year ended December 31, 2001.
Other Income
Other income, primarily investment and interest income, decreased $526,000
to $99,000 in 2002 from $625,000 in 2001. The decrease is associated with
decreased levels of cash and cash equivalents in 2002 as compared to 2001.
Income Taxes
The provisions (benefit) for income taxes were $(137,000) and $(160,000)
for the years ended December 31, 2002 and 2001, respectively. The benefit in
2002 represents a refund of taxes paid in 2000 as a result of tax legislation
enacted during 2002. The benefit in 2001 also represented a refund related to
2000.
Discontinued Operations
In 2002 and 2001, the Company did not have any income statement activity in
discontinued operations.
As of December 31, 2002 and 2001, the net liabilities of discontinued
operations of $251,000 and $504,000, respectively, relate to the
telecommunications divisions. This relates to the potential environmental clean
up associated with the prior tenants' operations at InteliData's former New
Milford, Connecticut property. In January 2000, InteliData sold the New Milford,
Connecticut property and the building located thereon, its only remaining asset
in its discontinued operations of the telecommunications division. In the
context of this sale, InteliData agreed to undertake limited remediation of the
site in accordance with applicable state and federal law. The subject site is
not a federal or state Superfund site and InteliData has not been named a
"potentially responsible party" at the site. The remediation plan agreed to with
the purchaser allows InteliData to use engineering and institutional controls
(e.g., deed restrictions) to minimize the extent and costs of the remediation.
Further, at the time of the sale of the facility, InteliData established a
$200,000 escrow account for certain investigation/remediation costs. As of
December 31, 2002, this escrow account balance remained at $200,000 plus accrued
interest, which is to be paid out to InteliData. Moreover, InteliData has
obtained environmental insurance to pay for remediation costs up to $6,600,000
in excess of a retained exposure limit of $600,000. InteliData has recorded its
estimated liability related to this matter and other costs related to the
discontinued operations.
The Company has engaged a legal firm and an environmental specialist firm
to represent InteliData regarding this matter. The timing of the ultimate
resolution of this matter is estimated to be from two to four years
under the Company's proposed compliance plan, which involves a natural
attenuation and periodic compliance monitoring approach. Management does not
believe that the resolution of this matter will be likely to have a material
adverse effect on the Company's financial condition or results of operations.
Income (Loss) from Continuing and Discontinued Operations, Weighted-Average
Common Shares Outstanding and Basic and Diluted Income (Loss) Per Common Share
The basic and diluted weighted-average common shares outstanding for the
year ended December 31, 2002 was 48,869,000, compared to a basic and diluted
weighted-average common shares outstanding of 45,897,000 for the year ended
December 31, 2001. The increase resulted primarily from stock awards to
employees, the exercise of stock options, stock purchases under the Employee
Stock Purchase Plan, and the issuance of 2,863,000 shares for the private
placements of the Company's common stock that closed in November and December of
2001.
Losses from continuing operations were $(8,594,000) and $(30,041,000) for
the years ended December 31, 2002 and 2001, respectively, while there was no
gain or loss from discontinued operations in either period. Net losses were
$(8,594,000) and $(30,041,000) for 2002 and 2001, respectively. As a result of
the foregoing, basic and diluted net loss per common share was ($0.18) for the
year ended December 31, 2002 compared to a basic and diluted net loss per common
share of ($0.65) for the year ended December 31, 2001.
Liquidity and Capital Resources
During 2003, the Company's cash and cash equivalents increased by
$1,929,000. At December 31, 2003, the Company had $7,603,000 in cash and cash
equivalents, $6,408,000 of working capital, no long-term debt, and $38,991,000
in stockholders' equity.
The Company's principal needs for cash in 2003 were for funding operating
losses and balance sheet items, which included a decrease in accounts payable of
$550,000, a decrease in accrued expenses and other liabilities of $1,704,000,
and a decrease in deferred revenue of $322,000.
The Company's cash requirements for operating activities in 2003 were
financed primarily by cash and cash equivalents on hand and the proceeds from
the issuance of common stock. Total cash proceeds from the issuance of common
stock were approximately $3,951,000.
Net cash used in investing activities in 2003 was $150,000 for the
purchases of property and equipment.
Financing activities provided net cash of $3,878,000 in 2003 from the
issuance of the Company's common stock through stock option exercises, sales of
stock to employees pursuant to the Employee Stock Purchase Plan, and the
exercise of the warrants from the 2001 private placement, offset by $73,000
related to payments made to acquire treasury stock. During July 2003, the
Company issued 1,431,364 shares of its common stock pursuant to the exercise of
warrants, as amended, by institutional investors who participated in the
Company's private placement of common stock in November and December, 2001. The
warrant exercise resulted in gross proceeds of approximately $3,335,000. The
placement agent in the transaction received approximately $200,000 in
commissions. All of the warrants that were issued as part of the 2001 private
placement have now been exercised.
Off-Balance Sheet Arrangements and Contractual Obligations - The decision
by the Company to divest itself of its telecommunications business segment
created certain financial obligations and uncertainties for the future. The
Company is required to satisfy certain obligations of the telecommunications
business that will carry on beyond December 31, 2003. As of December 31, 2003,
the Company had $120,000 in remaining liabilities related to the discontinued
operations. During 2000, the Company sold the only remaining asset it had in the
discontinued operations - the property and the building located thereon in New
Milford, Connecticut. Liabilities remaining in the discontinued operations
represent the Company's estimated liability related to the environmental clean
up associated with prior tenants' operations at the New Milford location and
other costs. The Company is working with its professional advisors and insurer
to manage its exposure to liability for the potential environmental clean up.
The Company has hired an environmental specialist firm to perform a study of the
damages, to prepare a project plan, to work with the state and federal agencies,
and to remediate the property. Additionally, the Company has acquired insurance
to cap the potential costs and losses at a reasonable amount. Such amounts and
insurance costs have been accrued for as of December 31, 2003. Management
believes that the combination of the project plan and the
insurance arrangements will cause the resolution of this matter to not have a
material adverse effect on the Company's financial condition or results of
operations.
The Company entered into multiple vendor agreements for outsourced services
as part of its ASP solution offering for certain Online Banking and Payment
Solutions clients. Some of these vendor agreements are long-term (i.e., expire
in April and May 2005) and commit the Company to specified minimum charges
during the terms of the contracts. These long-term obligations are disclosed
below. During 2003, several of the Company's clients migrated from this ASP
environment to an in-house solution utilizing InteliData's licensed software. As
a result, a possibility exists for future losses due to the decrease in
estimated future revenue streams when compared with the Company's current
contractual cost structure for outsourced services within this ASP environment.
Entering 2004, the projected costs are estimated to exceed projected revenues by
approximately $79,000 on a monthly basis; this gap will fluctuate based on
monthly activity.
In assessing potential future losses associated with the Company's ASP
business, the Company may include the possibility of new clients that would add
incremental revenue to this ASP environment. Additionally, the Company may have
the opportunity to restructure vendor contracts and decrease contractual charges
(i.e., extend the current contract with lower minimum charges or migrate to
different vendors). Management continues to assess both the potential for new
business prospects and the possibility of reducing the Company's costs through
renegotiation of existing agreements. In accordance with generally accepted
accounting principles, the Company is accounting for these contract costs as
they are incurred. There can be no assurance that the Company will be successful
in mitigating these factors. In the event that new client revenues do not
materialize, growth rates do not meet expected projections and/or the Company is
not successful in its renegotiation efforts, the Company may experience future
period losses from the Company's ASP business, which could have a material
adverse impact on the Company's financial position or results of operations.
The Company leases facilities and equipment under cancelable and
noncancelable operating lease agreements. Future minimum lease payments under
noncancelable operating leases and future minimum payments under purchase
obligations for outsourced services were as follows (in thousands) at December
31, 2003:
- -------------------------------------- -------------------------------------------------------------------------------
Payment due by period
Contractual Obligations
- -------------------------------------- -------------------------------------------------------------------------------
Less than 1-3 3-5 More than
Total 1 year years years 5 years
- -------------------------------------- --------------- ----------------- --------------- --------------- -------------
- -------------------------------------- --------------- ----------------- --------------- --------------- -------------
Operating Lease Obligations $ 3,291 $ 1,317 $ 1,974 $ - $ -
- -------------------------------------- --------------- ----------------- --------------- --------------- -------------
- -------------------------------------- --------------- ----------------- --------------- --------------- -------------
Purchase Obligations 4,260 3,180 1,080 - -
- -------------------------------------- --------------- ----------------- --------------- --------------- -------------
- -------------------------------------- --------------- ----------------- --------------- --------------- -------------
Total $ 7,551 $ 4,497 $ 3,054 $ - $ -
- -------------------------------------- --------------- ----------------- --------------- --------------- -------------
The future minimum lease obligations do not include $560,000 of expected
receipts from subleases.
Litigation - The Company is not currently a party to any material
litigation. From time to time, the Company may be a party to routine litigation
incidental to its business. Management does not believe that the resolution of
any or all of such routine litigation will be likely to have a material adverse
effect on the Company's financial condition or results of operations.
Based on the Company's current capital levels and its assumptions about
future operating results, the Company believes that it will have sufficient
resources to fund existing operating plans. The Company's achievement of its
operating plan remains predicated upon both existing and prospective customer
decisions to procure certain products and services in a timeframe consistent
with the operating plan assumptions. Historically, these decisions have not
evolved timely for varying reasons, including slower than expected market
demand, budgetary constraints, and internal product development and resource
initiatives. As such, the Company believes it would be able to adjust certain
expense structures, if necessary, to mitigate the potential impact that customer
delays would have on its capital levels. These opportunities include additional
reductions in selling, general and administrative expenditures, the potential of
consolidating certain operational activities, the ability to negotiate more
favorable terms associated with existing service provider contracts and the
elimination of certain marketing costs. However, if actual results differ
materially from current assumptions, the Company may not have sufficient capital
resources and may have to modify operating plans and/or seek additional capital
resources. If the Company engages in efforts to obtain additional capital, it
can make no assurances that these efforts will be successful or that the terms
of such funding would be beneficial to the common stockholders.
Critical Accounting Policies
The following accounting policies are either ones that the Company
considers to be the most important to its financial position and results of
operations or ones that require the exercise of significant judgment and/or
estimates.
Revenue Recognition - The Company considers its revenue recognition policy
critical to the understanding of our business operations and results of
operations. The Company supplies online banking and bill payment software to
FI's. The Company's revenues associated with integrated solutions that bundle
software products with customization, installation and training services are
recognized using the percentage of completion method of accounting.
The Company enters into contracts where the delivered software may not
require significant customization. Upon delivery, the Company either recognizes
revenue ratably over the contract period for contracts where vendor specific
objective evidence ("VSOE") of fair value for post contract customer support
("PCS") does not exist or recognizes revenue in full where VSOE of fair value
for PCS does exist.
The Company enters into multiple element arrangements. Elements typically
include software, consulting, implementation and PCS. PCS contracts generally
require the Company to provide technical support and unspecified readily
available software updates and upgrades to customers. Revenue for these multiple
element arrangements is recognized when there is persuasive evidence of an
arrangement and delivery to the customer has occurred, the fee is fixed and
determinable, and collectibility is considered probable. Advance payments are
recorded as deferred revenue until the products are shipped, services are
delivered and all obligations are met. Currently, the Company does not have VSOE
of fair value for some of the elements within its multiple element arrangements.
Therefore, all revenue under such arrangements is being recognized ratably over
the term of the PCS contract. Revenue from transactional services, which
includes hosting and application services provider ("ASP") services, is
recognized as transactions are processed.
Emerging Issues Task Force Abstract Issue No. 00-3, Application of AICPA
Statement of Position 97-2 to Arrangements that Include the Right to Use
Software Stored on Another Entity's Hardware ("EITF 00-3"), provides guidance in
determining whether or not the provisions of Statement of Position No. 97-2,
Software Revenue Recognition ("SOP 97-2"), should be applied to hosting
arrangements. The Company has some contracts where the customers operate
software in an ASP environment. The customer may not take possession of the
software without incurring significant transition and infrastructure costs, as
well as potential payments of fees to the Company for the termination of such
arrangements. In cases where the customer has not licensed software from
InteliData, the customer must also purchase a license prior to having the right
to use the software in its own operating environment, in addition to the
aforementioned fees. In these situations, the Company applies the guidance under
EITF 00-3 and the Staff Accounting Bulletin No. 101, Revenue Recognition in
Financial Statements, and recognizes the revenue associated with the license
and/or implementation fees ratably over the initial term of the contract.
Additionally, based on the EITF 00-3 guidance, the Company concluded that
SOP 97-2 should not be applied to certain of its software hosting contracts.
Accordingly, the related revenues for license and professional services were
recognized under the percentage of completion method. In addition to developing
and delivering the solution, the Company is entitled to use fees based on the
number of users and transactions. These use-based fees are earned based on the
monthly user counts and as transactions are processed.
Estimates at Completion - Revenues related to some of the Company's
contracts are recognized using the percentage of completion method of
accounting, which requires that we make estimates and judgments as to
anticipated project scope, timing and costs to complete the projects. The
completion of certain development efforts are critical for the Company to
perform on certain contracts. Delays in product implementation or new product
development at customer locations and product defects or errors could affect
estimates and judgments. Additionally, we may experience delays when
implementing our products at customer locations, and customers may be unable to
implement our products in the time frames and with the functionalities that they
expect or require. The accuracy of these estimates and judgments could affect
the Company's business, operations, cash flows and financial condition.
Allowance for Doubtful Accounts - Determination of our allowance for
doubtful accounts requires significant estimates. Financial instruments that
potentially subject the Company to credit risk consist principally of trade
receivables. The Company sells its products primarily to FI's in the United
States. The Company believes that
the concentration of credit risk in its trade receivables is substantially
mitigated by the Company's on-going credit evaluation process and the financial
position of the FI's that are highly regulated. The Company does not generally
require collateral from customers. The Company establishes an allowance for
doubtful accounts based upon factors surrounding the credit risk of specific
customers, historical trends and other information. As of December 31, 2003, the
Company's top eight customers comprised approximately 58% of the net accounts
receivable balance.
A number of factors are considered in establishing the allowance, including
historical collection experience, the macro-economic environment, estimates of
forecasted write-offs, the aging of the accounts receivable portfolio, and
others. If the financial condition of our accounts receivable portfolio
deteriorates, additional allowances would be required.
As part of the Home Account acquisition in 2001, the Company acquired
certain accounts receivables that were outstanding as of the acquisition date.
The Company pursued collection efforts, but ultimately determined that some of
these accounts were uncollectible. Such doubtful accounts related to these
acquired assets could not be adjusted as part of the purchase price allocation,
so the bad debt expense was recognized in operations in 2001. During 2001, the
Company recorded costs associated with these particular uncollectible accounts
and began to write off certain accounts. Additionally in 2002, the Company wrote
off some previously reserved legacy InteliData accounts. During 2003 and 2002,
the Company experienced improved cash collections on some previously reserved
accounts and an account that had been written off. As a result of these
collection efforts and the resulting cash receipts, the Company reduced its bad
debt expense in 2003 and 2002 by approximately $70,000 and $340,000,
respectively, to reflect the positive developments.
Valuation of Long-Lived Assets - On an annual basis, we review long-lived
assets such as identifiable intangibles and goodwill for impairment whenever
events or changes in circumstances indicate that the carrying amount may not be
recoverable. This review requires us to make estimates of our undiscounted
future cash flows in order to determine if our long-lived assets are impaired.
If the total of the expected undiscounted future cash flows is less than the
carrying amount of the assets, we are required to make estimates of our
discounted future cash flows in order to calculate a loss for the difference
between the fair value and carrying value of the assets. We make significant
assumptions and estimates in this process regarding matters that are inherently
uncertain, such as calculating remaining useful lives and assuming discount
rates. The resulting cash flows are computed over an extended period of time,
which subjects those assumptions and estimates to an even larger degree of
uncertainty. When known and available, we also use comparable values of similar
businesses in corroborating the results from the discounted cash flows approach.
This process involves making estimates about matters that are inherently
uncertain. Reviews for impairment between annual reviews may be required if
events occur or circumstances change that would more likely than not reduce the
fair value of the net carrying amount. While we believe that our estimates are
reasonable, different assumptions regarding such cash flows could materially
affect our valuation.
Depreciation of Fixed Assets - The Company's business requires our
investment in office and computer equipment to facilitate certain research and
development activities and to support the operations in serving our customers.
We record these assets at cost and depreciate the assets over their estimated
useful lives. We periodically reassess the economic life of these elements and
make adjustments to these useful lives using, among others, historical
experience, capacity requirements, and assessments of new product and market
demands. When these factors indicate certain elements may not be useful for as
long as anticipated, we depreciate the remaining book value over the remaining
useful life. Further, the timing and deployment of any new technologies could
affect the estimated lives of our assets, which could have significant impacts
on results of operations in the future.
Recent Accounting Pronouncements - In May 2003, the Financial Accounting
Standards Board ("FASB") issued Statement of Financial Accounting Standards
("SFAS") No. 150, Accounting for Certain Financial Instruments with
Characteristics of both Liabilities and Equity ("SFAS 150"), which requires that
an issuer classify financial instruments that are within scope of SFAS 150 as a
liability. Under prior guidance, these same instruments would be classified as
equity. SFAS 150 is effective for all financial instruments entered into or
modified after May 31, 2003. Otherwise, it is effective on July 1, 2003. The
adoption of SFAS 150 did not have a material effect on our financial position,
results of operations, or cash flows.
In May 2003, the FASB issued SFAS No. 149, Amendment of Statement 133 on
Derivative Instruments and Hedging Activities ("SFAS 149"), which amends and
clarifies financial accounting and reporting for derivative instruments,
including certain derivative instruments embedded in other contracts
(collectively referred to as
derivatives) and for hedging activities under SFAS No. 133, Accounting for
Derivative Instruments and Hedging Activities. SFAS 149 is effective for
contracts entered into or modified after June 30, 2003, and for hedging
relationships designated after June 30, 2003. The adoption of SFAS 149 did not
have a material impact on our financial position, results of operations, or cash
flows.
In June 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated
with Exit or Disposal Activities (including Certain Costs Incurred in a
Restructuring) ("SFAS 146"), which supersedes Emerging Issues Task Force Issue
No. 94-3, Liability Recognition for Certain Employee Termination Benefits and
Other Costs to Exit an Activity ("EITF 94-3"). SFAS 146 requires recognition of
a liability for costs associated with an exit or disposal activity when the
liability is incurred, rather than when the entity commits to an exit plan under
EITF 94-3. The provisions of SFAS 146 are effective for exit or disposal
activities that are initiated after September 30, 2002. As of March 31, 2003,
the Company ceased using one of its leased spaces at its office space in its
corporate offices in Reston, Virginia. The remaining obligation on this lease
was approximately $1,080,000 through December 31, 2006. In accordance with SFAS
146, the Company estimated the fair value of net sublease rent to be
approximately $465,000 over the remaining term. Accordingly, the Company
recorded an expense of $625,000 and a corresponding liability as of March 31,
2003. As of May 1, 2003, the Company has a subtenant for this space for the
majority of the remaining lease term and the actual results of net sublease rent
could differ from the above estimates. As of December 31, 2003, the estimated
remaining liability was approximately $435,000.
In November 2002, the Emerging Issues Task Force issued a final consensus
on Issue No. 00-21, "Revenue Arrangements with Multiple Deliverables" ("EITF
00-21"). In an arrangement with multiple deliverables, EITF 00-21 provides
guidance on how the arrangement consideration should be measured, whether the
arrangement should be divided into separate units of accounting and how the
arrangement consideration should be allocated among the separate units of
accounting. To the extent that a multiple-deliverable arrangement or a
deliverable in a multiple-deliverable arrangement is within the scope of
higher-level authoritative literature, EITF 00-21 does not apply. The guidance
in this Issue is effective for revenue arrangements entered into in fiscal
periods beginning after June 15, 2003. The adoption of EITF 00-21 did not have a
significant effect on our operations, financial position, or cash flows.
Cautionary Statement for Purposes of the "Safe Harbor" Provisions of the Private
Securities Litigation Reform Act of 1995
This Form 10-K filing and the documents incorporated by reference herein
contain forward-looking statements within the meaning of Section 27A of the
Securities Act of 1933, as amended (the "Securities Act") and Section 21E of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), the
realization of which may be impacted by the factors discussed below. These
forward-looking statements are made pursuant to the safe harbor provisions of
the Private Securities Litigation Reform Act of 1995 (the "Act"). The Company
cautions readers that the following important factors, among others, in some
cases have affected the Company's actual results, and could cause the Company's
actual results to differ materially from those expressed in any forward-looking
statements made by, or on behalf of, the Company. The following list of factors
should not be construed as exhaustive or as any admission regarding the adequacy
of disclosures made by the Company prior to the date hereof or the effectiveness
of said Act. Additionally, the Company is not under any obligation (and
expressly disclaims an obligation to) to update or alter its forward-looking
statements, whether as a result of new information or otherwise. We wish to
caution you that such risks and uncertainties include, but are not limited to:
o our ability to continue funding operating losses;
o our ability to develop, sell, deliver and implement our payment
solution products and services, some of which are largely unproven in
a production environment, to financial institution customers;
o our ability to manage our expenses in line with anticipated business
levels;
o our ability to complete product implementations in required time
frames;
o our ability to increase our ASP customer base and to increase our
recurring revenues and/or lower fixed costs of operating our ASP
business in order to make this operation profitable;
o the impact of customers deconverting from use of our products and
services to the use of competitive products or in-house solutions;
o the effect of planned customer migrations from outsourced solutions to
in-house solutions with a resulting loss of recurring revenue;
o the impact of competitive products, pricing pressure, product demand
and market acceptance risks;
o the pace of consumer acceptance of home banking and electronic
payments and reliance on our bank clients to increase usage of
Internet banking and electronic payments by their customers;
o the effect of general economic conditions on the financial services
industries;
o mergers and acquisitions;
o the risk of integration of our technology;
o the ability of our FI customers to implement applications in the
anticipated time frames or with the anticipated features,
functionality or benefits;
o our reliance on key strategic alliances and newly emerging
technologies;
o our ability to leverage our third-party relationships;
o the on-going viability of the mainframe marketplace and demand for
traditional mainframe products and our ability to expand our offerings
to other platforms;
o our ability to attract and retain key employees;
o the availability of cash for long-term growth;
o product obsolescence;
o our ability to reduce product costs;
o fluctuations in our operating results;
o delays in development of highly complex products; and
o other risks detailed from time to time in our filings with the
Securities and Exchange Commission.
In some cases, you can identify forward-looking statements by terms such as
"may," "will," "should," "could," "would," "expects," "intends," "plans,"
"anticipates," "believes," "estimates," "projects," "predicts," "potential," and
similar expressions intended to identify forward-looking statements. These
statements reflect our current views with respect to future events and are based
on assumptions and subject to risks and uncertainties. Given these
uncertainties, you should not place undue reliance on these forward-looking
statements. We discuss many of these risks in this prospectus in greater detail
under the heading "Risk Factors." In connection with forward-looking statements
that appear in these disclosures, readers hereby should carefully consider the
factors set forth under "Risk Factors."
RISK FACTORS
Risk Factors Particular to Our Company
We may require additional capital, which we may not be able to obtain, to
be able to fund future operating losses, working capital needs and capital
expenditures.
The continuation, development, and growth of our business may require
additional capital in the future to fund our operating losses, working capital
needs and capital expenditures. The capital markets are very volatile and we may
not be able to obtain future equity or debt financing in the future on
satisfactory terms or at all. Our failure to generate sufficient cash flows from
sales of products and services or to raise sufficient funds may require us to
delay or abandon some or all of our development and expansion plans or otherwise
forego market opportunities. Our inability to obtain additional capital on
satisfactory terms may impact our ability to continue our business at current
levels or expand our business in the future, which could cause our business,
operating results and financial condition to suffer.
The Company's future success is highly dependent on our ability to develop,
sell, implement and deliver Payment Solutions products and services, some of
which are new and unproven in a financial institution's production environment.
The Company has invested heavily in its Payment Solutions products for the
EBPP market and believes that the success of our offerings for this market is
critical to our long-term success. Because some of the Company's products for
this market are relatively new and have not been fully deployed either at a
customer's site or for a customer in an ASP environment, there can be no
assurance that the products will perform with the capabilities expected or that
the products will be competitive without further significant development
efforts.
We may not be able to manage our expenses in line with anticipated business
levels.
We continually seek to control our general and administrative expenses and
assess our operations in managing the continued development of infrastructure to
handle anticipated business levels. Our inability to control
expenses and manage our infrastructure could cause our business, operating
results and financial condition to suffer. The Company has imposed expense
controls in an attempt to conserve available cash. However, at our current
revenue levels, it is unlikely that the Company will be able to achieve
profitability through expense controls alone and expense controls may also
impact our ability to increase revenues.
Rapidly changing technologies could make our products obsolete, which may
adversely affect our business, operations and financial condition.
Our business activities are concentrated in fields characterized by rapid
and significant technological advances. It is possible that our products and
services will not remain competitive technologically or that our products,
processes or services will not continue to be reflective of such advances. The
following, among other factors, may adversely affect our ability to be
technologically competitive:
o our competitors may develop other technologies that could render our
products and services noncompetitive or obsolete;
o we may be unable to locate, hire and retain management and other key
personnel with the skills and abilities required to further advance
and develop our software products and services and to maintain our
technological competitiveness;
o we may be unable to introduce new products or product enhancements
that achieve timely market acceptance and meet financial institutions'
or Internet banking or EBPP customers' needs;
o we may encounter unanticipated technical, marketing or other problems
or delays relating to new products, features or services that we
recently introduced or that we may introduce in the future;
o we may be unable to keep pace with our competitors' spending on
research and development of new products because most of our
competitors and potential competitors have significantly greater
financial, technological and research and development resources than
we have;
o we may be unable to develop, produce and market new products as
cheaply as our competitors and we may not be able to offer new
products to customers at a competitive price; and
o we may be unable to leverage our relationships with third parties.
An inability to compete successfully in an increasingly competitive and
crowded marketplace could adversely affect our business, operations and
financial condition.
The market for Internet banking and other interactive financial products
and services is highly competitive and subject to rapid innovation and
technological change, shifting consumer preferences and frequent new product
introductions. A number of corporations, including S-1 Corporation, Corillian
Corporation, Financial Fusion, Inc., CheckFree Corporation, Online Resources
Corporation, Digital Insight Corporation, Metavante Corporation, and Incurrent
Solutions, Inc., most of which have greater resources than us, offer products
and services that compete directly with the products and services we offer. We
expect the number of competitors in the Internet banking and EBPP products and
services industry to expand greatly as a result of the popularity of the
Internet and widespread ownership of personal computers. We foresee our future
competitors as including:
o banks that have already developed (or plan to develop) Internet
banking and EBPP products for their own customers, with the
possibility of offering the products to other banks and other banks'
customers;
o non-banks that may develop Internet banking and EBPP products to offer
to banks; and
o computer software and data processing companies that currently offer,
or will offer, Internet banking and EBPP services through the use of
their broad distribution channels that may be used to bundle competing
products directly to end-users or purchasers.
Our operating results fluctuate, which could have an adverse effect on our
business, operations and financial condition.
Our quarterly operating results have varied significantly in the past, and
it is likely that they will vary greatly in the future. Some of the factors that
will likely cause our operating results to fluctuate are:
o the size and timing of customer orders;
o changes in our pricing policies or those of our competitors;
o new product introductions or enhancements by our competitors or by us;
o delays in the introduction of new products or product enhancements by
our competitors or by us;
o customer order deferrals by our customers in anticipation of upgrades
and new products;
o the loss of revenue from customers either converting to an in-house
solution or to a competitor's solution;
o the reduction in recurring revenue from a customer converting from an
outsourced solution to an in-house solution using our products after
paying a one-time license fee;
o the possibility of future losses due to the decrease in estimated
future ASP revenue streams when compared with our current contractual
costs for outsourced services in our ASP operations;
o market acceptance of new products;
o the timing and nature of sales, marketing, and research and
development expenses by our competitors or by us; and
o other changes in operating expenses, personnel changes and general
economic conditions.
Additionally, certain banks and other financial institutions recently have
combined or are proposing to combine, and we are unable to assess the future
effect that those combinations and other possible consolidations in the banking
industry will have upon us. Merger and acquisition activity almost always causes
delays in procurement decisions by banks and also reduces the number of
potential customers in our market. No assurance can be given that quarterly
variations in our operating results will not occur in the future, and
accordingly, the results of any one quarter may not be indicative of the
operating results for future quarters.
Our stock price fluctuates significantly and could adversely affect our
business, operations and financial condition.
It is likely that in the future our common stock will continue to
experience the significant volatility it has experienced in the past. Our common
stock is traded on the Nasdaq National Market. The stock market, particularly in
recent years, has experienced volatility that has been especially acute with
respect to high technology-based stocks such as ours. The volatility of
technology-based and development stage stocks has often been unrelated to the
operating performance of the companies represented by the stock. Factors such as
announcements of the introduction of new products or services by our competitors
or by us, market conditions in the banking and other emerging growth company
sectors and rumors relating to our competitors or us have had a significant
impact on the market price of our common stock in the past.
We possess limited patent or registered intellectual property rights with
respect to our technology and any loss or infringement of those rights could
cause us to lose a valuable competitive advantage or incur costly litigation
expenses that adversely affect our business, operations and financial condition.
We possess limited patent or registered intellectual property rights with
respect to our technology. We depend, in part, upon our proprietary technology
and know-how to differentiate our products from those of our competitors and
work independently and from time to time with third parties with respect to the
design and engineering of our own products. We also rely on a combination of
contractual provisions, trademarks, and trade secret laws to protect our
proprietary technology. There can be no assurance, however, that we will be able
to protect our technology or successfully develop new technology or gain access
to such technology, that third parties will not be able to develop similar
technology independently or design around our intellectual property rights, that
competitors will not obtain unauthorized access to our proprietary technology,
that third parties will not misuse the technology to which we have granted them
access, or that our contractual or legal remedies will be sufficient to protect
our interests in our proprietary technology. Enforcing or defending our
intellectual property rights could be very expensive. If we cannot preserve our
intellectual property rights, we may be at a competitive disadvantage.
Claims against us for infringement of another party's intellectual property
rights could cause us to incur costly litigation expenses or impact our ability
to offer products or services to our market.
The Internet banking software and services industry has become an area of
substantial litigation concerning intellectual property rights. Claims of
infringement by third parties could have a significant adverse impact on our
business. The expenses associated with defending claims, even if successful, are
often significant. In the event that we were found to infringe a third party's
rights, we would be required to enter into a royalty arrangement to continue to
offer the infringing products and services. If we were unable to obtain
acceptable royalty terms, we would be forced to discontinue offering the
infringing products and services or modify the products and services to become
non-infringing. This could result in the significant loss of revenues or
considerable additional expense.
Delays in the development of new products or in the implementation of new
or existing products at customer locations and defects or errors in the products
we sell could adversely affect our business, operations and financial condition.
Software development for our market is highly complex. We may experience
delays in the development of the software and computing systems underlying our
products and services. Additionally, we may experience delays when implementing
our products at customer locations, and customers may be unable to implement our
products in the time frames and with the functionalities that they expect or
require. There can be no assurance that, despite our testing, errors will not be
found in the underlying software, or that we will not experience development
delays, resulting in delays in the shipment of our products, the commercial
release of our products or in the market acceptance of our products, each of
which could have a material adverse effect on our business, operations and
financial condition.
We are dependent on key personnel, the loss of whom could adversely affect
our business, operations and financial condition. Additionally, we will need to
locate, hire and retain additional qualified personnel to continue to grow our
business.
Our performance is substantially dependent on the performance of our
executive officers and key employees. We depend on our ability to retain and
motivate high quality personnel, especially management and skilled development
teams. The loss of services of any of our executive officers or other key
employees could have a material adverse effect on our business, operations or
financial condition.
Our future success also depends on our continuing ability to identify,
hire, train and retain other highly qualified technical and managerial
personnel. Competition for such personnel is intense, and there can be no
assurance that we will be able to attract, assimilate or retain other highly
qualified technical and managerial personnel in the future. The inability to
attract and retain the necessary technical and managerial personnel could have a
material adverse effect upon our business, operations or financial condition.
Certain provisions of Delaware law, our certificate of incorporation and
bylaws make a takeover by a third-party difficult.
Certain provisions of Delaware law and of our certificate of incorporation
and bylaws could have the effect of making it more difficult for a third party
to acquire, or of discouraging a third party from attempting to acquire, control
of us. These provisions include:
o a provision allowing us to issue preferred stock with rights senior to
those of the common stock without any further vote or action by the
holders of common stock. The issuance of preferred stock could
decrease the amount of earnings and assets available for distribution
to the holders of common stock or could adversely affect the rights
and powers, including voting rights, of the holders of the common
stock. In certain circumstances, such issuance could have the effect
of decreasing the market price of the common stock;
o the existence of a stock rights plan that results in the dilution of
the value of common stock held by a potential acquirer;
o the existence of a staggered board of directors in which there are
three classes of directors serving staggered three-year terms, and
thereby expanding the time required to change the composition of a
majority of directors and perhaps discouraging someone from making an
acquisition proposal for us;
o the bylaws' requirement that stockholders provide advance notice when
nominating our directors;
o the inability of stockholders to convene a stockholders' meeting
without the meeting first being called by the chairman of the board of
directors or the secretary at the request of a majority of the
directors; and
o the application of Delaware law prohibiting us from entering into a
business combination with the beneficial owner of 15% or more of our
outstanding voting stock for a period of three years after the 15% or
greater owner first reached that level of stock ownership, unless
certain criteria are met.
Risk Factors Associated With Our Industry
Our Payment Solution products and services are targeted for the EBPP
industry, which is a relatively new and developing market, and our success
depends on the acceptance and growing use of electronic bill presentment and
payment.
EBPP continues to be a developing market. Our future financial success in
the relatively new EBPP marketplace depends, in part, upon:
o consumer acceptance of, and financial institutions' support for, EBPP
technologies;
o continued growth in personal computer sales and the number of personal
computers with Internet access and continued reductions in the cost of
personal computers and Internet access;
o the degree of financial institutions' success in marketing EBPP
products to their customers at little or no cost to the customer, and
the ability of these institutions to implement applications in
anticipated time frames or with anticipated features and
functionalities; and
o the impact of current and future regulatory controls and oversight of
the Internet and electronic commerce.
Even if this market experiences substantial growth, there can be no
assurance that our products and services will be commercially successful or that
we will benefit from such growth. Therefore, there can be no assurance as to the
timing, introduction, or market acceptance of, or necessary regulatory approvals
for, our products and services.
Concerns related to system security and consumer protections could prevent
the widespread acceptance of Internet banking and EBPP and could adversely
affect our business, operations and financial condition. The willingness of
consumers and financial institutions to use personal computer and Internet-based
banking, bill payment and other financial services will depend, in part, upon
the following factors:
o our ability to protect consumer information relating to personal
computer and Internet-based banking and other financial services
against the risk of fraud, counterfeit and technology failure;
o the frequency of interruptions, delays and cessation in service to
financial institutions and individuals resulting from computer
viruses, break-ins or other problems;
o the increase in the cost of our services and products, as well as the
cost to up-grade the services and products to keep pace with rapidly
changing computer and Internet technologies, may be increased by
expenditures of capital and resources to reduce security breaches,
break-ins and computer viruses;
o the erosion of public and consumer confidence in the security and
privacy of Internet banking and EBPP; and
o whether financial institutions are able to offer internal banking and
EBPP service to their customers at little or no cost.
The threat of increased government regulation of the Internet and the
continuing legal uncertainty and potential liabilities associated with sharing
personal and financial information on the Internet could adversely affect our
business, operations and financial condition.
Our products rely on the cost-effectiveness of, and ease of access to, the
Internet. There are currently few laws or regulations directly applicable to
commerce or other communications on the Internet. However, due to the increasing
popularity and use of the Internet, it is possible that new laws and regulations
may be adopted with respect to the Internet, covering issues such as user
privacy, the collection or processing of personal information, copyright
infringement and the pricing, characteristics and quality of products and
services. Consumers' concerns relating to privacy, security and increasing
regulation could hinder the use of the Internet and the growth of our business.
The adoption of restrictive laws or regulations may increase the cost of doing
business over the Internet. The application to the Internet of existing laws and
regulations governing such issues as property ownership and personal privacy is
subject to substantial uncertainty. Mandatory privacy and security standards and
protocols still are being developed by government agencies, and we may incur
significant expenses to comply with any requirements that are ultimately
adopted. Our financial institution customers require that our products and
services will permit them to operate in compliance with all applicable laws and
regulations. We may become subject to direct regulation as the market for our
products and services evolves. Additionally, current or new government laws and
regulations, or the application of existing laws and regulations, may expose us
to significant liabilities or otherwise impair our ability to achieve our
strategic objectives through increased operating costs or reduced market
acceptance. If Internet use does not grow as a result of privacy or security
concerns, increasing regulation or for other reasons, the sale of Internet
banking and electronic bill presentment and payment products would be hindered
and our business, operations and financial condition would be adversely
affected.
ITEM 7a. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
- ------------------------------------------------------------------------
The Company currently has no long-term debt and is not currently engaged in
any transactions that involve foreign currency. The Company does not engage in
hedging activities.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
- -----------------------------------------------------
INDEX TO THE CONSOLIDATED FINANCIAL STATEMENTS
Page
====
Consolidated Financial Statements
Consolidated Balance Sheets as of December 31, 2003 and 2002................33
Consolidated Statements of Operations for the Years Ended
December 31, 2003, 2002, and 2001.........................................34
Consolidated Statements of Changes in Stockholders' Equity for the Years Ended
December 31, 2003, 2002, and 2001.........................................35
Consolidated Statements of Cash Flows for the Years Ended
December 31, 2003, 2002, and 2001.........................................36
Notes to the Consolidated Financial Statements for the Years Ended
December 31, 2003, 2002, and 2001.........................................37
Independent Auditors' Report..................................................51
INTELIDATA TECHNOLOGIES CORPORATION
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2003 AND 2002
(in thousands, except share data)
2003 2002
------------ -------------
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 7,603 $ 5,674
Accounts receivable, net 2,890 2,974
Other receivables 180 309
Prepaid expenses and other current assets 625 802
------------ ------------
Total current assets 11,298 9,759
NONCURRENT ASSETS
Property and equipment, net 1,529 2,554
Goodwill, net 26,238 26,238
Intangibles, net 5,060 5,780
Other assets 211 175
------------ ------------
TOTAL ASSETS $ 44,336 $ 44,506
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 1,531 $ 2,081
Accrued expenses 1,599 3,458
Deferred revenues 1,351 1,673
Accrued rent 364 252
Net liabilities of discontinued operations 45 51
------------ ------------
TOTAL CURRENT LIABILITIES 4,890 7,515
Accrued rent 380 337
Net liabilities of discontinued operations 75 200
------------ ------------
TOTAL LIABILITIES 5,345 8,052
------------ ------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Preferred stock, $0.001 par value; authorized 5,000,000 shares;
no shares issued and outstanding -- --
Common stock, $0.001 par value; authorized 100,000,000 shares;
issued 52,065,000 shares in 2003 and 49,797,000 shares in 2002;
outstanding 51,231,000 shares in 2003 and 48,991,000 shares in 2002 52 50
Additional paid-in capital 306,963 302,833
Treasury stock, at cost: 834,000 shares in 2003 and 806,000 shares in 2002 (2,546) (2,473)
Deferred compensation (228) (304)
Accumulated other comprehensive income -- --
Accumulated deficit (265,250) (263,652)
------------ ------------
TOTAL STOCKHOLDERS' EQUITY 38,991 36,454
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 44,336 $ 44,506
============ ============
See accompanying notes to the consolidated financial statements.
INTELIDATA TECHNOLOGIES CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001
(in thousands, except per share data)
2003 2002 2001
----------- ----------- -----------
Revenues
Software $ 1,235 $ 1,289 $ 1,790
Consulting services, recurring and termination fees 19,395 20,206 16,506
----------- ----------- -----------
Total revenues 20,630 21,495 18,296
----------- ----------- -----------
Cost of revenues
Software -- -- 5
Consulting services, recurring and termination fees 7,549 8,474 9,005
----------- ----------- -----------
Total cost of revenues 7,549 8,474 9,010
----------- ----------- -----------
Gross profit 13,081 13,021 9,286
Operating expenses
General and administrative 7,496 8,629 10,065
Selling and marketing 1,910 2,947 9,575
Research and development 5,020 8,807 15,729
Amortization of goodwill and intangibles 720 720 4,255
----------- ----------- -----------
Total operating expenses 15,146 21,103 39,624
----------- ----------- -----------
Operating loss (2,065) (8,082) (30,338)
Realized gain (loss) on sales of investments -- (748) 378
Unrealized loss on Sybase warrants -- -- (866)
Other income (expenses), net 179 99 625
----------- ----------- -----------
Loss before income taxes (1,886) (8,731) (30,201)
Provision (benefit) for income taxes (288) (137) (160)
----------- ----------- -----------
Net loss $ (1,598) $ (8,594) $ (30,041)
=========== =========== ===========
Basic and diluted earnings (loss) per common share $ (0.03) $ (0.18) $ (0.65)
=========== =========== ===========
Basic and diluted weighted-average common shares outstanding 50,028 48,869 45,897
=========== =========== ===========
See accompanying notes to the consolidated financial statements.
INTELIDATA TECHNOLOGIES CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 2003, 2002, AND 2001
(in thousands)
Accumulated
Additional Other
Preferred Stock Common stock Paid-in Treasury Deferred Comprehensive
Shares Amount Shares Amount Capital Stock Compensation Income (Loss)
------ ------ ------ ------ ------- ----- ------------ -------------
Balance at January 1, 2001 -- $ -- 39,321 $ 39 $ 261,552 $ (2,123) $ (1,375) $ 494
Issuance of common stock:
Acquisition of Home Account -- -- 6,900 7 31,950 -- -- --
Private placement -- -- 2,863 3 7,228 -- -- --
Exercise of stock options -- -- 220 -- 412 -- -- --
Employee stock purchase plan -- -- 29 -- 66 -- -- --
Exercise of stock warrants -- -- 3 -- 11 -- -- --
Issuance of restricted stock -- -- 481 1 2,082 -- (2,083) --
Cancellation of restricted stock -- -- (92) -- (509) -- 509 --
2000 Home Account Incentive Plan -- -- -- -- 349 -- (349) --
Purchase of treasury stock,
at cost -- -- -- -- -- (350) -- --
Realized gains on investments
sold -- -- -- -- -- -- -- (284)
Amortization of deferred
compensation -- -- -- -- -- -- 1,903 --
Net loss -- -- -- -- -- -- -- --
Comprehensive loss
--- ------ -------- -------- ---------- ---------- ---------- -----------
Balance at December 31, 2001 -- $ -- 49,725 $ 50 $ 303,141 $ (2,473) $ (1,395) $ 210
--- ------ -------- -------- ---------- ---------- ---------- -----------
Issuance of common stock:
Exercise of stock options -- -- 11 -- 15 -- -- --
Employee stock purchase plan -- -- 30 -- 30 -- -- --
Issuance of restricted stock -- -- 139 -- 247 -- (247) --
Cancellation of restricted stock -- -- (108) -- (406) -- 406
2000 Home Account Incentive Plan -- -- -- -- (194) -- 194
Realized gains on investments
sold -- -- -- -- -- -- -- (210)
Amortization of deferred
compensation -- -- -- -- -- -- 738 --
Net loss -- -- -- -- -- -- -- --
Comprehensive loss
--- ------ --------- -------- ---------- ---------- ---------- -----------
$ (8,804)
Balance at December 31, 2002 -- $ -- 49,797 $ 50 $ 302,833 $ (2,473) $ (304) $ --
--- ------ --------- -------- ---------- ---------- ---------- -----------
Issuance of common stock:
Exercise of stock options -- -- 669 1 802 -- -- --
Employee stock purchase plan -- -- 16 -- 15 -- -- --
Exercise of stock warrants -- -- 1,454 1 3,132 -- -- --
Issuance of restricted stock -- -- 155 -- 226 -- (226) --
Cancellation of restricted
stock -- -- (26) -- (45) -- 45 --
Purchase of treasury stock,
at cost -- -- -- -- -- (73) -- --
Amortization of deferred
compensation -- -- -- -- -- -- 257 --
Net loss -- -- -- -- -- -- -- --
Comprehensive loss
--- ------ --------- -------- ---------- ---------- ---------- -----------
Balance at December 31, 2003 -- $ -- 52,065 $ 52 $ 306,963 $ (2,546) $ (228) $ --
=== ====== ========= ======== ========== ========== ========== ===========
Accumulated Comprehensive
Deficit Loss Total
------- ---- -----
Balance at January 1, 2001 $(225,017) $33,570
Issuance of common stock:
Acquisition of Home Account -- 31,957
Private placement -- 7,231
Exercise of stock options -- 412
Employee stock purchase plan -- 66
Exercise of stock warrants -- 11
Issuance of restricted stock -- --
Cancellation of restricted stock -- --
2000 Home Account Incentive Plan -- --
Purchase of treasury stock,
at cost -- (350)
Realized gains on investments
sold -- $ (284) (284)
Amortization of deferred
compensation -- 1,903
Net loss (30,041) (30,041) (30,041)
----------
Comprehensive loss $ (30,325)
========= ---------- --------
Balance at December 31, 2001 $(255,058) $44,475
---------- --------
Issuance of common stock:
Exercise of stock options -- 15
Employee stock purchase plan -- 30
Issuance of restricted stock -- --
Cancellation of restricted stock -- --
2000 Home Account Incentive Plan -- --
Realized gains on investments
sold -- $ (210) (210)
Amortization of deferred
compensation -- 738
Net loss (8,594) (8,594) (8,594)
----------
Comprehensive loss $ (8,804)
-------- ========== --------
Balance at December 31, 2002 $(263,652) $36,454
Issuance of common stock:
Exercise of stock options -- 803
Employee stock purchase plan -- 15
Exercise of stock warrants -- 3,133
Issuance of restricted stock -- --
Cancellation of restricted
stock --
Purchase of treasury stock,
at cost -- (73)
Amortization of deferred
compensation -- 257
Net loss (1,598) $ (1,598) (1,598)
Comprehensive loss ----------
$ (1,598)
Balance at December 31, 2003 ==========
$(265,250) $38,991
========== ========
See accompanying notes to the consolidated financial statements.
INTELIDATA TECHNOLOGIES CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2003, 2002, AND 2001
(in thousands)
2003 2002 2001
----------- ----------- -----------
Cash flows from operating activities
Net loss from continuing operations $ (1,598) $ (8,594) $ (30,041)
Adjustments to reconcile loss from continuing operations
to net cash used in operating activities of continuing operations:
Realized loss (gain) on sales of investments -- 748 (378)
Unrealized loss on Sybase warrants -- -- 866
Amortization of goodwill and intangibles 720 720 4,255
Depreciation and amortization 1,037 1,532 2,061
Deferred compensation expense 257 738 1,903
Net loss (gain) on disposal of property and equipment 138 23 (60)
Changes in operating assets and liabilities:
Accounts receivable 84 2,018 (2,192)
Prepaid expenses and other current assets 270 31 (501)
Accounts payable (550) (1,215) (2,588)
Accrued expenses and accrued rent (1,704) (2,183) (771)
Deferred revenue (322) (1,491) 971
---------- ---------- ----------
Net cash used in operating activities of
continuing operations (1,668) (7,673) (26,475)
Net cash used in discontinued operations (131) (253) (251)
---------- ---------- ----------
Net cash used in operating activities (1,799) (7,926) (26,726)
---------- ---------- ----------
Cash flows from investing activities
Proceeds from sales of investments -- 1,968 6,637
Release of cash escrow -- -- 311
Proceeds from disposal of property and equipment -- -- 225
Purchases of property and equipment (150) (389) (921)
Payments on acquisition related costs -- (50) (1,805)
Cash paid for Home Account common stock -- -- (320)
---------- ---------- ----------
Net cash (used in) provided by investing activities (150) 1,529 4,127
----------- ---------- ----------
Cash flows from financing activities
Proceeds from the issuance of common stock 3,951 45 7,720
Payments to acquire treasury stock (73) -- (350)
---------- ---------- ----------
Net cash provided by financing activities 3,878 45 7,370
---------- ---------- ----------
Increase (decrease) in cash and cash equivalents 1,929 (6,352) (15,229)
Cash and cash equivalents, beginning of year 5,674 12,026 27,255
---------- ---------- ----------
Cash and cash equivalents, end of year $ 7,603 $ 5,674 $ 12,026
========== ========== ==========
See accompanying notes to the consolidated financial statements.
INTELIDATA TECHNOLOGIES CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2003, 2002, AND 2001
(1) ORGANIZATION
InteliData Technologies Corporation and subsidiaries ("InteliData" or the
"Company") provides electronic bill payment and presentment ("EBPP") and online
banking solutions to the financial services industry. The Company's products
provide financial institutions ("FI's") with the real-time financial processing
infrastructure needed to provide their customers with bill payment services and
online banking via the Internet and other online delivery channels. The Company
markets its products and services to banks, credit unions, brokerage firms,
financial institution processors and credit card issuers.
InteliData's product suite consists of three complementary product
offerings:
Payment and Presentment
------------------------
o Payment Solutions - providing payment warehousing, payment matching,
biller directory management, and least cost routing functionality for
EBPP transactions;
o Card Services - providing Internet-based account activation, bill
presentment, balance consolidation, and e-Statement capabilities; and
Online Banking
--------------
o Online Banking - providing Internet-based access to real-time account
information, as well as interfaces to personal financial management
software such as Intuit's Quicken(R) and Microsoft Money(R).
The market for online banking and bill payment infrastructure has grown
considerably over the last two to three years, and the Company believes that
significant growth opportunities remain. As Internet financial services have
become more mainstream, FI's have focused less on innovation and more on
broadening existing operations - adding functionality, improving operating
efficiencies, and migrating significant portions of their online banking and
bill payment operations in-house.
In January 2001, InteliData acquired Home Account Holdings, Inc. and its
operating subsidiary, Home Account Network, Inc., by means of the merger of one
of the Company's wholly owned subsidiaries with and into Home Account Holdings,
with Home Account Holdings surviving the merger. Home Account Holdings is a
wholly owned subsidiary of InteliData. This acquisition was accounted for as a
purchase.
The Company is incorporated in the State of Delaware and has its corporate
headquarters in Reston, Virginia. There are operating facilities in Charleston,
South Carolina, Omaha, Nebraska, and Toledo, Ohio.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Principles of Consolidation - The consolidated financial statements include
the accounts of the Company and its wholly owned subsidiaries after elimination
of all material inter-company balances and transactions. Certain
reclassifications have been made to the prior year financial statements to
conform to the 2003 financial statement presentation.
(b) Accounting Estimates - The preparation of financial statements in
conformity with accounting principles generally accepted in the United States of
America 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 period. Estimates include, but are not
limited to, allowance for doubtful accounts, costs of environmental remediation
for real property previously sold, depreciation of fixed assets, valuation of
long-lived assets, provision for discontinued operations, and project plans for
the completion and delivery of certain solutions. These accounting estimates are
based on information
currently available. Actual results could differ from those estimates and in
some cases the actual results could vary materially from the estimates.
(c) Revenue Recognition - The Company supplies online banking and bill payment
software to FI's. The Company's revenues associated with integrated solutions
that bundle software products with customization, installation and training
services are recognized using the percentage of completion method of accounting
based on cost incurred as compared to estimated costs at completion.
The Company enters into contracts where the delivered software may not
require significant customization. Upon delivery, the Company either recognizes
revenue ratably over the contract period for contracts where vendor specific
objective evidence ("VSOE") of fair value for post contract customer support
("PCS") does not exist or recognizes revenue in full where VSOE of fair value
for PCS does exist.
The Company also enters into multiple element arrangements. Elements
typically include software, consulting, implementation and PCS. PCS contracts
generally require the Company to provide technical support and unspecified,
readily available software updates and upgrades to customers. Revenue for these
multiple element arrangements is recognized when there is persuasive evidence of
an arrangement and delivery to the customer has occurred, the fee is fixed and
determinable, and collectibility is considered probable. Advance payments are
recorded as deferred revenue until the products are shipped, services are
delivered and all obligations are met. Currently, the Company does not have VSOE
of fair value for some of the elements within its multiple element arrangements.
Therefore, all revenue under such arrangements is being recognized ratably over
the term of the PCS contract. Revenue from transactional services, which
includes hosting and application services provider ("ASP") services, is
recognized as transactions are processed.
Emerging Issues Task Force Abstract Issue No. 00-3, Application of AICPA
Statement of Position 97-2 to Arrangements that Include the Right to Use
Software Stored on Another Entity's Hardware ("EITF 00-3"), provides guidance in
determining whether or not the provisions of Statement of Position No. 97-2,
Software Revenue Recognition ("SOP 97-2"), should be applied to hosting
arrangements. The Company has some contracts where the customers operate
software in an ASP environment. The customer may not take possession of the
software without incurring significant transition and infrastructure costs, as
well as potential payments of fees to the Company for the termination of such
arrangements. In cases where the customer has not licensed software from
InteliData, the customer must also purchase a license prior to having the right
to use the software in its own operating environment, in addition to the
aforementioned fees. In these situations, the Company applies the guidance under
EITF 00-3 and the Staff Accounting Bulletin No. 101, Revenue Recognition in
Financial Statements, and recognizes the revenue associated with the license
and/or implementation fees ratably over the initial term of the contract.
Additionally, based on the EITF 00-3 guidance, the Company concluded that
SOP 97-2 should not be applied to certain of its software hosting contracts.
Accordingly, the related revenues for license and professional services were
recognized under the percentage of completion method. In addition to developing
and delivering the solution, the Company is entitled to use fees based on the
number of users and transactions. These use-based fees are earned based on the
monthly user counts and as transactions are processed.
(d) Cash and Cash Equivalents - The Company considers all non-restricted,
highly liquid investments with original maturities of three months or less to be
cash equivalents. Cash and cash equivalents are stated at cost, which
approximates their fair market value.
(e) Investments - Prior to January 1, 2001, the Company considered its
investment in warrants to purchase common stock of Sybase, Inc. ("Sybase") to be
available-for-sale under the provisions of Statement of Financial Accounting
Standard ("SFAS") No. 115, Accounting for Certain Investments in Debt and Equity
Securities ("SFAS 115"). Effective January 1, 2001, the Company adopted SFAS No.
133, Accounting for Derivative Instruments and Hedging Activities ("SFAS 133"),
which establishes accounting and reporting standards for derivative instruments
and for hedging activities by requiring that all derivatives be recognized in
the balance sheet and measured at fair value. Effective January 1, 2001, the
Company's investment in the Sybase warrants was accounted for in accordance with
SFAS 133.
The Company reported its investments in marketable securities as
available-for-sale with any unrealized holding gains and losses, net of the
related income tax effect, excluded from earnings and reported as a separate
component of stockholders' equity until such gains or losses are realized.
Dividends and interest income are recognized when earned. Realized gains or
losses are included in earnings and are derived using the first-in, first-out
method for determining cost of securities sold.
(f) Property and Equipment - Property and equipment is stated at cost, net of
any accumulated depreciation. Depreciation of property and equipment is
calculated using the straight-line method over the estimated useful lives of the
assets, which are generally in the range of two to seven years.
(g) Deferred Revenues - Deferred revenues represent unearned revenues for
services that have not yet been provided or where certain accounting revenue
recognition criteria have not yet been met.
(h) Income Taxes - Income taxes are accounted for in accordance with the
asset and liability method. 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. Deferred tax assets and liabilities are measured
using enacted tax rates expected to apply to taxable income in the years in
which those temporary differences are expected to be recovered or settled. The
effect on deferred tax assets and liabilities of a change in tax rates is
recognized in income in the period that includes the enactment date. Valuation
allowances are established against deferred tax assets when it is deemed, based
on available evidence, that it is more likely than not that some portion or all
of the deferred tax asset will not be realized.
(i) Accounting for Stock-Based Compensation - The Company accounts for
employee stock options in accordance with Accounting Principles Board Opinion
No. 25, Accounting for Stock Issued to Employees ("APB 25"). Under APB 25, the
Company recognizes no compensation expense related to employee stock options, as
no options are granted at a price below the market price on the day of grant.
The Company accounts for stock options issued to non-employees in accordance
with the provisions of SFAS No. 123, Accounting for Stock-Based Compensation
("SFAS 123").
SFAS 123 prescribes the recognition of compensation expense based on the
fair value of options on the grant date and allows companies to continue
applying APB 25 if certain pro forma disclosures are made assuming hypothetical
fair value method application. The Company has elected to continue to apply the
provisions of APB 25 for options granted to employees and provide the pro forma
disclosures pursuant to SFAS 123. Pro forma information regarding the Company's
net loss has been determined as if the Company had accounted for its employee
stock options under the fair value method of SFAS 123. Under the fair value
method, compensation costs are measured at the grant date based on the fair
value of the award and is recognized over the service period. The
weighted-average fair values of options granted during 2003, 2002, and 2001 were
$1.70, $0.95, and $3.57, per share, respectively. The fair value is determined
by using the Black-Scholes option-pricing model with the following assumptions:
2003 2002 2001
------ ------ ------
Risk free interest rate 2.97% 3.82% 4.56%
Dividend yield 0% 0% 0%
Volality 81% 105% 92%
Expected life of options (years) 6 6 6
Had compensation cost been determined based on the fair value method of
SFAS 123, the Company's results of operation would have been as follows (in
thousands, except for per share data) for the years ended December 31:
2003 2002 2001
--------- -------- ----------
Net loss, as reported $ (1,598) $ (8,594) $ (30,041)
Stock-based employee compensation expense (1,327) (3,264) (5,305)
--------- -------- ----------
Pro forma net loss $ (2,925) $(11,858) $ (35,346)
========= ======== ==========
Basic and diluted loss per common share $ (0.06) $ (0.24) $ (0.77)
========= ======== ==========
(j) Earnings (Loss) Per Common Share - Basic earnings (loss) per common share
("EPS") is computed by dividing net income (loss) by the basic weighted-average
common shares outstanding during the year. Diluted EPS
reflects the dilutive effect of stock options and stock awards granted to
employees under stock-based compensation plans, as well as stock warrants. The
effects of stock options and warrants were not included in the loss per share
computations in 2003, 2002 and 2001, because they would have been anti-dilutive.
(k) Fair Value of Financial Instruments - The carrying values of the Company's
financial instruments such as cash and cash equivalents, accounts receivable,
accounts payable and accrued expenses, approximate their fair values.
(l) Concentration of Credit Risk - Financial instruments that potentially
subject the Company to credit risk consist principally of trade receivables. The
Company sells its products primarily to FI's in the United States. The Company
believes that the concentration of credit risk in its trade receivables is
substantially mitigated by the Company's on-going credit evaluation process and
the financial position of the FI's that are highly regulated. The Company does
not generally require collateral from customers. The Company establishes an
allowance for doubtful accounts based upon factors surrounding the credit risk
of specific customers, historical trends and other information. As of December
31, 2003, the Company's top eight customers comprised approximately 58% of the
net accounts receivable balance.
(m) Recent Accounting Pronouncements - In May 2003, the Financial Accounting
Standards Board ("FASB") issued SFAS No. 150, Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity ("SFAS 150"),
which requires that an issuer classify financial instruments that are within the
scope of SFAS 150 as a liability. Under prior guidance, these same instruments
would be classified as equity. SFAS 150 is effective for all financial
instruments entered into or modified after May 31, 2003. Otherwise, it is
effective on July 1, 2003. The adoption of SFAS 150 did not have a material
effect on our financial position, results of operations, or cash flows.
In May 2003, the FASB issued SFAS No. 149, Amendment of Statement 133 on
Derivative Instruments and Hedging Activities ("SFAS 149"), which amends and
clarifies financial accounting and reporting for derivative instruments,
including certain derivative instruments embedded in other contracts
(collectively referred to as derivatives) and for hedging activities under SFAS
No. 133, Accounting for Derivative Instruments and Hedging Activities. SFAS 149
is effective for contracts entered into or modified after June 30, 2003, and for
hedging relationships designated after June 30, 2003. The adoption of SFAS 149
did not have a material impact on our financial position, results of operations,
or cash flows.
In December 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based
Compensation-Transition and Disclosure-an amendment of FAS 123 ("SFAS 148").
SFAS 148 amends SFAS No. 123, Accounting for Stock-Based Compensation ("SFAS
123"), to provide alternative methods of transition for an entity that
voluntarily changes to the fair value based method of accounting for stock-based
employee compensation. It also amends the disclosure provisions of SFAS 123 to
require prominent disclosure about the effects on reported net income of an
entity's accounting policy decisions with respect to stock-based employee
compensation as noted in note 2(i). SFAS 148 also amends APB Opinion No. 28,
Interim Financial Reporting, to require disclosure about those effects in
interim financial information. SFAS 148 is effective for annual and interim
periods beginning after December 15, 2002. As the Company has elected not to
change to the fair value based method of accounting for stock-based employee
compensation, SFAS 148 did not have any impact on our financial position,
results of operations, or cash flows.
In June 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated
with Exit or Disposal Activities (including Certain Costs Incurred in a
Restructuring) ("SFAS 146"), which supersedes Emerging Issues Task Force Issue
No. 94-3, Liability Recognition for Certain Employee Termination Benefits and
Other Costs to Exit an Activity ("EITF 94-3"). SFAS 146 requires recognition of
a liability for costs associated with an exit or disposal activity when the
liability is incurred, rather than when the entity commits to an exit plan under
EITF 94-3. The provisions of SFAS 146 are effective for exit or disposal
activities that are initiated after September 30, 2002. As of March 31, 2003,
the Company ceased using one of its leased spaces at its offices in Reston,
Virginia. The remaining obligation on this lease was approximately $1,080,000
through December 31, 2006. In accordance with SFAS 146, the Company estimated
the fair value of net sublease rent to be approximately $465,000 over the
remaining term. Accordingly, the Company recorded an expense of $625,000 and a
corresponding liability as of March 31, 2003. As of May 1, 2003, the Company has
a subtenant for this space for the majority of the remaining
lease term and the actual results of net sublease rent could differ from the
above estimates. As of December 31, 2003, the estimated remaining liability was
approximately $435,000.
In August 2001, the FASB issued SFAS No. 144, Accounting for the Impairment
or Disposal of Long-Lived Assets ("SFAS 144"), which became effective January 1,
2002. This statement replaces SFAS No. 121, Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of, and some
provisions of Accounting Principles Board Opinion No. 30, Reporting the Effects
of Disposal of a Segment of a Business and Extraordinary, Unusual and
Infrequently Occurring Events and Transactions. SFAS 144 requires that one
accounting model be used for long-lived assets to be disposed of by sale,
whether previously held and used or newly acquired. It also broadens the
presentation of discontinued operations to include more disposal transactions.
The Company's adoption of this pronouncement on January 1, 2002 did not have a
material affect on the Company's financial position, results of operations, or
cash flows.
In June 2001, the FASB issued SFAS No. 141, Business Combinations ("SFAS
141"), and SFAS No. 142, Goodwill and Other Intangible Assets ("SFAS 142"). SFAS
141 requires business combinations initiated after June 30, 2001 to be accounted
for using the purchase method of accounting, and broadens the criteria for
recording intangible assets separate from goodwill. SFAS 142 requires the use of
an amortization and non-amortization approach to account for purchased goodwill
and certain intangibles. Under a non-amortization approach, goodwill and certain
intangibles are not to be amortized into results of operations, but instead
would be reviewed for impairment and written down and charged to results of
operations only in the periods in which the recorded value of goodwill and
certain intangibles is more than its fair value. The amortization and
non-amortization provisions of SFAS 142 are to be applied to all goodwill and
intangible assets acquired after June 30, 2001. The provisions of each statement
that apply to goodwill and intangible assets acquired prior to June 30, 2001 was
adopted by the Company on January 1, 2002.
In November 2002, the Emerging Issues Task Force issued a final consensus
on Issue No. 00-21, "Revenue Arrangements with Multiple Deliverables" ("EITF
00-21"). In an arrangement with multiple deliverables, EITF 00-21 provides
guidance on how the arrangement consideration should be measured, whether the
arrangement should be divided into separate units of accounting, and how the
arrangement consideration should be allocated among the separate units of
accounting. To the extent that a multiple-deliverable arrangement or a
deliverable in a multiple-deliverable arrangement is within the scope of
higher-level authoritative literature, EITF 00-21 does not apply. The guidance
in this Issue is effective for revenue arrangements entered into in fiscal
periods beginning after June 15, 2003. The adoption of EITF 00-21 did not have a
significant effect on our operations, financial position, or cash flows.
(3) INVESTMENTS
On January 20, 2000, Home Financial Network, Inc. ("HFN"), a company in
which InteliData held approximately a 25% ownership interest, merged with
Sybase, Inc. ("Sybase"). InteliData accounted for its investment in HFN using
the equity method. In exchange for its portion of ownership in HFN, InteliData
received approximately $5,867,000 in cash and approximately 1,770,000 shares of
Sybase stock. The Company also held warrants to purchase HFN common stock. As
part of the merger agreement, such warrants were converted into warrants to
purchase Sybase common stock. The Company received 640,000 "warrant units" with
an exercise price of $2.60 per warrant unit. Upon exercise of each warrant unit,
the Company was entitled to receive $1.153448 in cash and 0.34794 share of
Sybase common stock.
As part of this merger transaction, an escrow account was established to
provide Sybase indemnity protection against possible claims that might arise
against HFN. Approximately 133,000 shares of Sybase common stock owned by
InteliData were put in escrow, along with approximately $440,000 of cash. In
March 2001, the Company received the escrow payments less approximately $129,000
for miscellaneous claims under the escrow provision. During 2000, InteliData
disposed of some of the Sybase common stock. The remaining holdings of Sybase
common stock were sold during 2001.
Prior to January 1, 2001, the Company considered its investment in warrants
to purchase common stock of Sybase, Inc. ("Sybase") to be available-for-sale
under the provisions of SFAS 115. Effective January 1, 2001, the
Company adopted SFAS 133, which establishes accounting and reporting standards
for derivative instruments and for hedging activities by requiring that all
derivatives be recognized in the balance sheet and measured at fair value.
SFAS 133 requires that all derivative financial instruments, such as
forward currency exchange contracts, interest rate swaps and the Company's
warrants to purchase Sybase stock, be recognized in the financial statements and
measured at fair value regardless of the purpose or intent for holding them.
Changes in the fair value of derivative financial instruments are either
recognized periodically in income or stockholders' equity (as a component of
comprehensive income), depending on whether the derivative is being used to
hedge changes in fair value or cash flows. The Company's holdings of the Sybase
warrants are defined as derivatives under this guidance. The Company's adoption
of SFAS 133, effective January 1, 2001, did not have a material effect on the
Company's financial statements as of the adoption date and did not result in an
adjustment for the cumulative effect of an accounting change, because the
carrying value reflected fair value under the previous accounting guidance. In
accordance with SFAS 133, the Company recorded an unrealized loss on investment
of $866,000 for the year ended December 31, 2001. During June 2002, the Company
exercised all of its 640,000 warrants units to purchase Sybase common stock and
sold the resulting 223,000 shares of Sybase common stock. The Company received
net proceeds of approximately $1,718,000 and recognized a realized loss from
sales of investments of approximately $748,000.
As of December 31, 2001, the accumulated other comprehensive loss balance
of $210,000 represented the changes in the fair market value of the Sybase
common stock recorded as unrealized gains on investments under SFAS 115. This
amount was realized with the Company's disposition of the remaining Sybase
investments in June 2002. Additionally, in 2001, the Company sold its investment
in marketable securities at their carrying values and received net proceeds of
$250,000.
(4) PROPERTY AND EQUIPMENT
Property and equipment consists of the following at December 31 (in
thousands):
2003 2002
------- --------
Building improvements $ 194 $ 457
Office equipment 4,844 6,408
Furniture and fixtures 765 765
------- --------
5,803 7,630
Accumulated depreciation (4,274) (5,076)
------- --------
Total $1,529 $ 2,554
======= ========
(5) ACCRUED EXPENSES AND OTHER LIABILITIES
Accrued expenses and other liabilities consists of the following at
December 31 (in thousands):
2003 2002
------- -------
Accrued compensation $ 773 $ 1,772
Provision for forward loss - 120
Accrued professional fees 215 595
Accrued insurance 257 250
Deferred taxes - 288
Other liabilities 354 433
------- -------
Total $1,599 $ 3,458
======= =======
The provision for forward loss of $120,000 as of December 31, 2002
represented the future anticipated loss based on the excess of the estimates at
completion of the total contract costs over total contract revenues. The
contract related to the $120,000 accrual was completed during 2003.
(6) DISCONTINUED OPERATIONS
Under various disposal plans adopted in 1997, 1998, and 2000, the Company
completed the divestiture of all of its telecommunications, interactive services
businesses and the Caller ID adjunct leasing activities, respectively.
As of December 31, 2003, the net liabilities of discontinued operations of
$120,000 relate to the telecommunications divisions. These liabilities relate to
the environmental clean up associated with prior tenants' operations at
InteliData's former New Milford, Connecticut property. In January 2000,
InteliData sold the New Milford, Connecticut property and the building located
thereon, its only remaining asset in its discontinued operations of the
telecommunications division. In the context of this sale, InteliData agreed to
undertake limited remediation of the site in accordance with applicable state
and federal law. The subject site is not a listed federal or state Superfund
site and InteliData has not been named a "potentially responsible party" at the
site. The remediation plan agreed to with the purchaser allows InteliData to use
engineering and institutional controls (e.g., deed restrictions) to minimize the
extent and costs of the remediation. Further, at the time of the sale of the
facility, InteliData established a $200,000 escrow account from the proceeds of
the sale for certain investigation/remediation costs. As of December 31, 2003,
this escrow account balance was $223,000, which is to be paid out to InteliData.
Moreover, InteliData has obtained environmental insurance to pay for remediation
costs up to $6,600,000 in excess of a retained exposure limit of $600,000.
InteliData estimates its remaining liability at December 31, 2003 related to
this matter and other costs to be approximately $120,000 and has a liability
recorded for this amount.
The Company has engaged a legal firm and an environmental specialist firm
to represent it regarding this matter. The timing of the ultimate resolution of
this matter is estimated to be from two to four years under the Company's
proposed compliance plan, which involves a natural attenuation and periodic
compliance monitoring approach. Management does not believe that the resolution
of this matter will likely have a material adverse effect on the Company's
financial condition or results of operations. The net liabilities of
discontinued operations as of December 31, are as follows (in thousands):
2003 2002
------ ------
Other current liabilities $ 45 $ 51
Other noncurrent liabilities 75 200
----- ------
Total $ 120 $ 251
===== ======
(7) STOCKHOLDERS' EQUITY
(a) Issuance and Subsequent Conversion of Preferred Stock and Warrants - In
July 1999, the Company issued 600 shares of 4% Convertible Preferred Stock and
warrants to purchase 120,000 shares of InteliData common stock. As of December
31, 1999, all of the preferred stock was converted into common stock.
The fair value of these 120,000 warrants, which expire five years from the
issuance date and have an exercise price of $4.53, was estimated as of the grant
date using the Black-Scholes model. The following assumptions were used: no
dividend yield, expected volatility of 129%, life of 5 years, and a risk free
interest rate of 4.00% per annum. Accordingly, the Company allocated
approximately $369,000 to these warrants and the charge was amortized over the
period that the preferred stock was outstanding. As of December 31, 2003 and
2002, 101,500 warrants remained outstanding. These warrants expire on July 22,
2004.
(b) Stock Options and Awards - The Company sponsors several stock option and
award plans that cover substantially all employees and members of the board of
directors. Options and awards granted under such plans typically vest over
periods ranging from one to five years and generally expire in eight and ten
years, although some grants provide for vesting in annual increments or allow
for accelerated vesting based upon reaching performance milestones.
The Company amortizes the fair value of the stock awards (based on the fair
value of common stock on the grant dates multiplied by the number of shares
granted) over the respective vesting periods. In 2003, 2002, and
2001, the Company recorded $178,000, $841,000, and $1,484,000, respectively, of
compensation expense related to these awards.
Options granted under the plans allow the purchase of stock at the fair
value of such common stock at the respective grant dates. Because options are
issued with exercise prices equal to the fair value of the common stock on the
grant dates, the Company does not record any compensation expense for these
options.
A summary of stock option activity for each of the Company's stock option
plans is as follows:
Exercise Prices
----------------------------- Number
Minimum Maximum Of Options
------- ------- ----------------
January 1, 2001 $ 0.69 $ 19.44 3,603,775
Granted $ 1.00 $ 5.90 1,139,834
Exercised $ 0.68 $ 4.91 (220,000)
Canceled $ 0.81 $ 18.94 (665,482)
----------------
December 31, 2001 $ 0.69 $ 19.44 3,858,127
Granted $ 0.60 $ 2.35 1,302,000
Exercised $ 1.00 $ 2.31 (11,825)
Canceled $ 0.80 $ 10.31 (914,505)
----------------
December 31, 2002 $ 0.60 $ 19.44 4,233,797
Granted $ 1.50 $ 3.02 111,000
Exercised $ 0.60 $ 1.83 (668,645)
Canceled $ 0.60 $ 7.56 (225,423)
----------------
December 31, 2003 $ 0.60 $ 19.44 3,450,729
================
The Company has options outstanding and exercisable in varying price
ranges. The schedule below details the Company's options by price range:
Options Outstanding Options Exercisable
-------------------------------------------------------------- -----------------------------
Weighted Weighted
Weighted Average Average
Range of Number Average Exercise Number of Exercise
Exercise Prices Of Options Life Price Options Price
--------------- ---------- ---- ----- -------- -----
$ 0.000 - 1.000 593,336 6.2 years $ 0.73 250,197 $ 0.78
1.001 - 1.500 1,576,585 4.7 years 1.23 959,626 1.22
1.501 - 2.000 264,645 5.8 years 1.78 190,532 1.81
2.001 - 2.500 88,000 6.5 years 2.20 58,244 2.21
2.501 - 3.000 145,558 4.5 years 2.97 130,144 2.98
3.001 - 5.000 462,675 5.4 years 4.15 405,428 4.20
5.001 -10.000 298,000 4.7 years 7.25 296,665 7.26
10.001 -21.375 21,930 3.2 years 15.80 21,930 15.80
----------------- ------------ ----------- ----------- ----------- ------------
3,450,729 2,312,766
============ ===========
(c) Employee Stock Purchase Plan - Under the Employee Stock Purchase Plan
(approved by the Company's stockholders in 1996), the Company is authorized to
issue up to 500,000 shares of common stock to its full-time employees, nearly
all of whom are eligible to participate. Under the terms of the Plan, employees
can choose each period to have up to twenty percent of their annual base
earnings withheld to purchase the Company's common stock. The purchase price of
the stock is 85 percent of the lower of its beginning-of-period or end-of-period
market price. During the years ended December 31, 2003, 2002, and 2001, the
Company issued 15,640, 29,868, and 28,822, shares of stock under the Plan,
respectively.
(d) Treasury Stock - In 2003 and 2001, the Company paid $73,000 and $41,000 to
acquire an additional 27,310 and 15,632 shares of its own common stock,
respectively. These shares were surrendered by employees of the Company to
satisfy tax-withholding obligations associated with the vesting of certain
restricted stock awards. Additionally, the Company participated in a program
permitted by the Securities and Exchange Commission and Nasdaq and purchased
100,000 shares of its common stock shortly after the events surrounding the
terrorist attacks
on September 11, 2001 for a total of $309,000. As of December 31, 2003 and 2002,
the Company had a total of 834,000 and 806,000 common shares in treasury at an
aggregate cost of $2,546,000 and $2,473,000, respectively.
(e) Stockholder Rights Plan - In January 1998, the Company's Board of
Directors adopted a Stockholder Rights Plan. This plan was amended on May 24,
2000. The rights are designed to assure that all the Company's stockholders
receive fair and equal treatment in the event of any proposed takeover of the
Company and to guard against partial tender offers, open market accumulations
and other tactics to gain control of the Company without paying all stockholders
a control premium.
Terms of the Stockholder Rights Plan provide for a dividend distribution of
one right for each share of common stock to holders of record at the close of
business on February 6, 1998. Shareholders will be able to exercise the rights
only in the event, with certain exceptions, an acquiring party accumulates 20
percent or more of the Company's voting stock, or if a party (an acquiring
person) announces an offer to acquire 20 percent or more without prior approval
of the Company's Board of Directors. The rights will expire on January 21, 2008.
Each right initially will entitle the holder to buy one one-thousandth of a
share of a new series of preferred stock at a price of $42.50.
In addition, upon the occurrence of certain events, holders of the rights
will be entitled to purchase either the Company's common stock or shares in an
acquiring person at half of market value. Further, at any time after a person or
group acquires 20 percent or more of the Company's outstanding voting stock, the
board of directors may, at its option, exchange part or all of the rights (other
than rights held by the acquiring person, which will become void) for shares of
the Company's common stock on a one-for-one basis. The rights will therefore
cause substantial dilution to a person or group that acquires 20 percent or more
of the Company's common stock on terms not approved by the board.
(f) Stock Warrants - In 2000, the Company entered into a five-year
agreement with an unrelated party, whereby the Company issued warrants to this
entity in exchange for the entity's becoming a premier reference site. As a
premier reference site, the entity would make its facility and personnel
reasonably accessible for InteliData, InteliData's potential clients, analysts,
and industry publication reporters, in order to demonstrate or answer questions
regarding InteliData's solution and its capabilities. On June 30, 2000,
InteliData issued five-year, fully-vested warrants to purchase 50,000 shares of
InteliData common stock at an exercise price of $4.75 per share. The fair value
of these warrants was estimated as of the grant date using the Black-Scholes
model. The following assumptions were used: no dividend yield, expected
volatility of 143%, life of 2 years, and a risk free interest rate of 6.44% per
annum. Accordingly, the Company recorded approximately $419,000 of deferred
compensation that is being amortized over the term of this agreement. For the
years ended December 31, 2003, 2002 and 2001, the Company incurred expenses
related to these warrants were $80,000 per year. As of December 31, 2003, all of
these warrants were still outstanding. These warrants expire on June 30, 2005.
(g) Private Placement and Warrants - In November and December 2001, the
Company closed private placement sales of an aggregate of 2,863,000 shares of
its common stock for a price of $2.75 per share, and warrants exercisable for
the purchase of 1,431,364 shares of its common stock, at an exercise price of
$2.75 per share, resulting in a gross proceeds of approximately $7,873,000. The
placement agent in the transaction received approximately $472,000 in
commissions and warrants exercisable for the purchase of 286,000 shares of
InteliData's common stock, at an exercise price of $2.75 per share.
During July 2003, the Company issued 1,431,000 shares of its common stock
pursuant to the exercise of warrants, as amended. The warrant exercise resulted
in gross proceeds of approximately $3,335,000. The placement agent in the
transaction received approximately $200,000 in commissions, and exercised the
net issuance provision within their 286,000 warrants and received 23,000 shares
of the Company's common stock. All of the warrants that were issued as part of
the 2001 private placement have been exercised.
(8) EMPLOYEE 401(k) PLAN
The Company sponsors a defined contribution plan ("Plan") that qualifies
for tax treatment under Section 401(a) of the Internal Revenue Code.
Participation in the Plan is available to employees who are at least twenty-one
years of age. Company contributions to the Plan are based on a percentage of
employee contributions. The Company
contributed $86,000, $118,000, and $153,000 in 2003, 2002, and 2001,
respectively. The Company also pays for administrative expenses incurred by the
Plan.
(9) INCOME TAXES
A reconciliation of income taxes computed at the statutory federal tax rate
on earnings (loss) before income taxes (from continuing operations) to actual
income taxes for the years ended December 31, is as follows (in thousands):
2003 2002 2001
----------- ---------- ---------
Income tax liability (benefit) computed at the statutory rate $ (660) $ (3,056) $ (10,570)
Other (736) (1,207) 1,264
Change in valuation allowance 1,108 4,126 9,146
--------- --------- ---------
Provision (benefit) for income taxes $ (288) $ (137) $ (160)
========= ========= =========
The current federal income tax benefit of $288,000 represents the reversal
of a prior year accrual for exposure that did not materialize and no longer
exists at December 31, 2003. The tax effects of temporary differences that give
rise to significant portions of the deferred tax assets and liabilities at
December 31, 2003 and 2002 are as follows (in thousands):
2003 2002
--------- ---------
Net operating loss carryforwards $ 71,576 $ 70,153
Basis differences in intangibles (3,241) (3,399)
Accounts receivable 38 112
Property and equipment (11) 44
General business credit carryforward 489 489
Other 423 767
Alternative minimum tax credit carryforward 60 60
--------- ---------
Total gross deferred tax assets 69,334 68,226
Valuation allowance (69,334) (68,226)
--------- ---------
Net deferred tax assets $ -- $ --
========= =========
The net changes in the total valuation allowance for the years ended
December 31, 2003, 2002, and 2001, were an increase of $1,108,000, $4,126,000,
and $30,020,000, respectively. A valuation allowance was established for
deferred tax assets as of December 31, 2003 and 2002 because it was deemed,
based on available evidence, that it is more likely than not that all of the
deferred tax asset will not be realized.
At December 31, 2003, the Company had net operating loss carryforwards for
federal income tax purposes of approximately $205 million, which expire in 2008
through 2023, general business tax credits of approximately $489,000, which
expire in 2005 through 2010, and an alternative minimum tax credit carryforward
of approximately $60,000, which may be carried forward indefinitely and used to
offset future regular taxable income. Approximately $45 million of the net
operating loss were incurred by Home Account prior to its acquisition by the
Company and are subject to an annual limitation pursuant to Internal Revenue
Code Section 382 as a result of cumulative changes in ownership of more than 50%
in 2001.
(10) COMMITMENTS AND CONTINGENCIES
(a) Purchase Obligations - The Company entered into multiple vendor agreements
for outsourced services as part of its ASP solution offering for certain Online
Banking and Payment Solutions clients. Some of these vendor agreements are
long-term (i.e., expire in April and May 2005) and commit the Company to
specified minimum charges during the terms of the contracts. These long-term
obligations are disclosed below. During 2003, several of the Company's clients
migrated from this ASP environment to an in-house solution utilizing
InteliData's licensed software. As a result, a possibility exists for future
losses due to the decrease in estimated future revenue streams when compared
with the Company's current contractual cost structure for outsourced services
within this ASP environment. Entering 2004, the projected costs are estimated to
exceed projected revenues by approximately $79,000 on a monthly basis; this gap
will fluctuate based on monthly activity.
In assessing potential future losses associated with the Company's ASP
business, the Company may include the possibility of new clients that would add
incremental revenue to this ASP environment. Additionally, the Company may have
the opportunity to restructure vendor contracts and decrease contractual charges
(i.e., extend the current contract with lower minimum charges or migrate to
different vendors). Management continues to assess both the potential for new
business prospects and the possibility of reducing the Company's costs through
renegotiation of existing agreements. In accordance with generally accepted
accounting principles, the Company is accounting for these contract costs as
they are incurred. Expenses were $3,158,000, $2,832,000, and $2,325,000 for the
years ended December 31, 2003, 2002, and 2001, respectively.
Leases - The Company leases facilities and equipment under cancelable and
noncancelable operating lease agreements. The facility leases have remaining
terms from two to three years. Rent expense was $1,111,000, $1,369,000, and
$1,436,000 for the years ended December 31, 2003, 2002, and 2001, respectively.
Future minimum lease payments under noncancelable operating leases with
initial or remaining terms in excess of one year at December 31, 2003, and
future minimum payments under purchase obligations for outsourced services were
as follows (in thousands):
Lease Purchase
Years Ending December 31, Obligations Obligations Total
------------------------- --------------- ----------- -----------
2004 $ 1,317 $ 3,180 $ 4,497
2005 1,138 1,080 2,218
2006 836 -- 836
2007 -- -- --
2008 and thereafter -- -- --
---------- ---------- -----------
Total minimum lease payments $ 3,291 $ 4,260 $ 7,551
=========== ========== ===========
The future minimum lease obligations do not include $560,000 of expected
receipts from subleases. See Notes 2(m) and 13 for additional information on the
subleased space.
(b) Patent Matters - The Company does not believe that its products and
services infringe on the rights of third parties. From time to time, third
parties may assert infringement claims against InteliData. There can be no
assurance that any such assertion will not result in costly litigation or
require the Company to cease using, or obtain a license to use, intellectual
property of such parties.
(c) Litigation - The Company is not currently a party to any material
litigation. From time to time, the Company may be a party to routine litigation
incidental to its business. Management does not believe that the resolution of
any or all of such routine litigation will be likely to have a material adverse
effect on the Company's financial condition or results of operations.
(11) VALUATION AND QUALIFYING ACCOUNTS
The components of significant valuation and qualifying accounts associated
with accounts receivable for the years ended December 31, 2003 and 2002 were as
follows (in thousands):
Balance, January 1, 2002 $ 1,044
Recoveries 252
Charged to costs and expenses (340)
Write-offs (635)
------------
Balance, December 31, 2002 321
Charged to costs and expenses (70)
Write-offs (141)
------------
Balance, December 31, 2003 $ 110
============
As part of the Home Account acquisition in 2001, the Company acquired
certain accounts receivables that were outstanding as of the acquisition date.
The Company pursued collection efforts, but ultimately determined that some of
these accounts were uncollectible. Such doubtful accounts related to these
acquired assets could not be adjusted as part of the purchase price allocation,
so the bad debt expense has been recognized in operations in 2001.
During 2001, the Company recorded costs associated with these particular
uncollectible accounts and began to write off some accounts. Additionally in
2002, the Company wrote off some previously reserved legacy InteliData accounts.
During 2003 and 2002, the Company experienced improved cash collection on some
previously reserved accounts and an account that had been written off. As a
result of these collection efforts and the resulting cash receipts, the Company
reduced its bad debt expense in 2003 and 2002 by approximately $70,000 and
$340,000, respectively, to reflect the positive developments.
(12) GOODWILL AND OTHER INTANGIBLES
In June 2001, the FASB issued SFAS No. 141, Business Combinations ("SFAS
141"), and SFAS No. 142, Goodwill and Other Intangible Assets ("SFAS 142"). SFAS
141 requires business combinations initiated after June 30, 2001 to be accounted
for using the purchase method of accounting, and broadens the criteria for
recording intangible assets separate from goodwill. SFAS 142 requires the use of
an amortization and non-amortization approach to account for purchased goodwill
and certain intangibles. Under a non-amortization approach, goodwill and certain
intangibles are not to be amortized into results of operations, but instead
would be reviewed for impairment and written down and charged to results of
operations only in the periods in which the recorded value of goodwill and
certain intangibles is more than its fair value. The amortization and
non-amortization provisions of SFAS 142 are to be applied to all goodwill and
intangible assets acquired after June 30, 2001. The provisions of each statement
that apply to goodwill and intangible assets acquired prior to June 30, 2001 was
adopted by the Company on January 1, 2002.
As of January 1, 2002, in accordance with SFAS 142, the Company ceased
recognizing amortization expense on goodwill and the assembled workforce
intangible asset, and the assembled workforce intangible asset was combined with
goodwill for financial accounting and reporting. Accordingly, the goodwill and
intangible asset consist of the following components (in thousands):
As of December 31, 2003: Goodwill Intangible Total
----------- ----------- ---------
Gross carrying amount $ 29,793 $ 7,200 $ 36,993
Accumulated amortization (3,555) (2,140) (5,695)
----------- ----------- ---------
Net $ 26,238 $ 5,060 $ 31,298
=========== =========== =========
As of December 31, 2002: Goodwill Intangible Total
----------- ----------- ---------
Gross carrying amount $ 29,793 $ 7,200 $ 36,993
Accumulated amortization (3,555) (1,420) (4,975)
----------- ----------- ---------
Net $ 26,238 $ 5,780 $ 32,018
=========== =========== ========
The Company's intangible asset consists of $7,200,000 related to
contracts/relationships, which has an estimated useful life of ten years.
Contracts/relationships was determined based on the history of low attrition,
the high cost of switching, market prices, forecasted revenues, evaluation of
competitors, and other factors. The estimated aggregate amortization expense
related to the contracts/relationships intangible asset for each of the next
five years is as follows (in thousands):
Year ending December 31: Expense
-------
2004 $ 720
2005 720
2006 720
2007 720
2008 720
In accordance with SFAS 142, the Company had six months from adoption (up
until June 30, 2002) to complete the initial test for impairment as of January
1, 2002, the adoption date of SFAS 142. In accordance with the transition
provisions of SFAS 142, the Company conducted the first step of the impairment
tests. The Company assessed the fair value of its only reporting unit by
considering its projected cash flows, comparable company valuations, and recent
purchase prices paid for entities within our industry. Given consideration of
these factors, the Company concluded that the fair value of the reporting unit
exceeded the carrying amount of its net assets. The Company is required to
perform reviews for impairment in future periods, at least annually, that may
result in future
periodic write-downs. Tests for impairment between annual tests may be required
if events occur or circumstances change that would more likely than not reduce
the fair value of the net carrying amount. As of June 30, 2003, the Company
performed the required annual review for impairment using the same approach and
similar considerations as the initial test. As a result, the Company concluded
that the fair value of the reporting unit exceeds the carrying amount of its net
assets. As of December 31, 2003, the Company is not aware of such events or
circumstances that could indicate potential impairment.
(13) ACQUISITION OF HOME ACCOUNT
On January 11, 2001, the Company acquired Home Account Holdings, Inc.
("Home Account") and its operating subsidiary, Home Account Network, Inc.
Pursuant to the merger agreement, the Company purchased Home Account for
approximately $320,000 in cash and 6,900,000 shares of Company common stock and
the merger was accounted for as a purchase. The purchase price was the result of
an arm's-length negotiation between the Company and Home Account, based on the
Company's evaluation of the fair market value of Home Account's business,
including its revenues.
As a result of the acquisition of Home Account, InteliData incurred
acquisition expenses for costs to exit certain activities at Home Account
locations and to involuntarily terminate employees of the acquired company.
Generally accepted accounting principles require that these acquisition
integration expenses, which are not associated with the generation of future
revenues, have no future economic benefit and which meet certain other criteria,
be reflected as assumed liabilities in the allocation of the purchase price to
the net assets acquired. The components of the acquisition integration
liabilities included approximately $1,010,000 for lease costs for the vacated
Home Account headquarters in Emeryville, California. As of December 31, 2003,
the Company had a remaining liability of $309,000 associated with such lease
costs, of which $258,000 is current and $51,000 is noncurrent. Beginning in
August 2002, the Company subleased this space for the remainder of the lease,
ending in February 2005.
Due to the fact that the acquisition was completed on January 11, 2001, no
pro forma financial information is presented to give effect to the acquisition
of Home Account as if it occurred on January 1, 2001. The Company believes that
the results of operations for the eleven-day period are not material.
(14) HOME ACCOUNT INCENTIVE PLAN
In 2000, Home Account approved the 2000 Incentive Plan to encourage the
retention of certain officers of Home Account through a change of control
transaction, and after such a transaction to the extent, up to one year, as
desired by the acquirer. Upon acquisition of Home Account by an acquirer, the
2000 Incentive Plan provided for the granting to plan participants of an
aggregate of 15% of the net amount of the merger consideration allocable to Home
Account's preferred stockholders after payment of the debt preference and other
expenses associated with a transaction. Under the InteliData and Home Account
merger transaction, this incentive plan was payable in the form of InteliData
common stock and such payments were made by the group of former Home Account
preferred stockholders (who are collectively considered a "principal
stockholder"). Two-thirds of the 2000 Incentive Plan allocation vested on the
transaction closing date and represent a pre-acquisition expense to Home
Account. In connection with the merger transaction, the Company agreed to
advance the participants funds to pay for their tax withholding obligations
associated with the two-thirds portion. The original principal amount of this
receivable balance was approximately $1,116,000. The shares allocable to the
participants were placed in an escrow account and were released to the Home
Account Stockholders' Representative in accordance with the Merger Consideration
Escrow Agreement. As of December 31, 2001, the remaining outstanding receivable
balance, including interest, was approximately $466,000 and is reflected in the
"Other receivable" balance. On February 4, 2002, the remaining outstanding
balance plus additional interest accrued was paid in full.
The remaining one-third of the participants' allocation vested on January
11, 2002 (one year from the transaction closing date). All forfeited shares
reverted to the former preferred stockholders of Home Account. In connection
with the 2000 Incentive Plan allocation, the deferred compensation for the
one-third portion became fixed and measurable on April 1, 2002 at $155,000 based
on $1.20 (the closing price of the Company's common stock at April 1, 2002). The
difference between this amount and the recognized expense in the prior periods
was recorded as an $183,000 reduction of expense during 2002.
(15) UNAUDITED QUARTERLY FINANCIAL DATA
The results of the Company's quarterly operations for the years ended
December 31, 2003 and 2002 are set forth in the following table (in thousands,
except per share data):
First Second Third Fourth Year
----------- ----------- ------------ ----------- ----------
2003
- ----
Revenues $ 5,625 $ 5,951 $ 4,692 $ 4,362 $ 20,630
Cost of revenues 1,934 1,948 1,858 1,809 7,549
Operating expenses 3,809(A) 4,026 3,417 3,894 15,146(B)
----------- ----------- ---------- ---------- ----------
Operating loss (118) (23) (583) (1,341) (2,065)
Other income (expense), net (29) 12 16 180 179
Provision (benefit) for income taxes - - - (288) (288)
----------- ----------- ---------- ---------- ----------
Net loss $ (147) $ (11) $ (567) $ (873) $ (1,598)
=========== =========== ========== ========== ==========
Basic and diluted earnings (loss)
per common share $ (0.00) $ (0.00) $ (0.01) $ (0.02) $ (0.03)
=========== =========== ========== ========== ==========
Basic and diluted weighted-average
common shares outstanding 48,853 49,002 50,864 51,078 50,028
=========== =========== ========== ========== ==========
(A) Operating expenses reflect a reversal of approximately $630,000 in
estimated bonus accruals that were not paid, but were previously
provided for in 2002.
(B) The Company did not accrue for bonuses in fiscal year 2003 as none
will be paid.
2002
- ----
Revenues $ 4,708 $ 5,461 $ 6,010 $ 5,316 $ 21,495
Cost of revenues 1,959 2,079 2,376 2,060 8,474
Operating expenses 6,066 6,151 5,281 3,605 21,103
----------- ----------- ---------- ---------- ----------
Operating loss (3,317) (2,769) (1,647) (349) (8,082)
Other income (expense), net 391 (1,084) 32 12 (649)
Provision (benefit) for income taxes - - - (137) (137)
----------- ----------- ---------- ---------- ----------
Net loss $ (2,926) $ (3,853) $ (1,615) $ (200) $ (8,594)
=========== =========== ========== ========== ==========
Basic and diluted earnings (loss)
per common share $ (0.06) $ (0.08) $ (0.03) $ (0.00) $ (0.18)
=========== =========== ========== ========== ==========
Basic and diluted weighted-average
common shares outstanding 48,494 48,501 48,815 48,840 48,869
=========== =========== ========== ========== ==========
* * * * * *
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
InteliData Technologies Corporation
Reston, Virginia
We have audited the accompanying consolidated balance sheets of InteliData
Technologies Corporation and subsidiaries (the "Company") as of December 31,
2003 and 2002, and the related consolidated statements of operations, changes in
stockholders' equity, and cash flows for each of the three years in the period
ended December 31, 2003. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the 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, such consolidated financial statements present fairly, in
all material respects, the financial position of the Company and subsidiaries as
of December 31, 2003 and 2002, and the results of their operations and their
cash flows for each of the three years in the period ended December 31, 2003, in
conformity with accounting principles generally accepted in the United States of
America.
/s/ Deloitte & Touche LLP
McLean, Virginia
March 10, 2004
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
- --------------------------------------------------------------
ACCOUNTING AND FINANCIAL DISCLOSURE
-----------------------------------
None.
ITEM 9A. CONTROLS AND PROCEDURES
- ----------------------------------
(a) EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
Pursuant to Rule 13a-15(b) under the Securities Exchange Act of 1934, the
Company carried out an evaluation, with the participation of the Company's
management, including the Company's Chief Executive Officer and Chief Financial
Officer, of the effectiveness of the Company's disclosure controls and
procedures (as defined under Rule 13a-15(e) under the Securities Exchange Act of
1934) as of the end of the period covered by this report. Based upon that
evaluation, the Company's Chief Executive Officer and Chief Financial Officer
concluded that the Company's disclosure controls and procedures are effective in
timely alerting them to material information relating to the Company (including
its consolidated subsidiaries) required to be included in the Company's periodic
SEC filings.
(b) CHANGE IN INTERNAL CONTROLS
There has been no change in the Company's internal control over financial
reporting during the quarter ended December 31, 2003 that has materially
affected, or is reasonably likely to materially affect, the Company's internal
control over financial reporting.
PART III
========
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
- -------------------------------------------------------------
Directors and Executive Officers - The Company incorporates herein by
reference the information concerning directors and executive officers contained
in its Proxy Statement for its 2004 Stockholders' Meeting to be filed within 120
days after the end of the Company's fiscal year (the "2004 Proxy Statement").
Section 16(a) Beneficial Ownership Reporting Compliance - The Company
incorporates herein by reference the information concerning Section 16(a)
beneficial ownership reporting compliance contained in its 2004 Proxy Statement.
Code of Ethics - The Company incorporates herein by reference the
information concerning its code of ethics contained in its 2004 Proxy Statement.
ITEM 11. EXECUTIVE COMPENSATION
- -------------------------------
The Company incorporates herein by reference the information concerning
executive officer and director compensation contained in the 2004 Proxy
Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
- -----------------------------------------------------------------------
The Company incorporates herein by reference the information concerning
security ownership of certain beneficial owners and management contained in the
2004 Proxy Statement.
SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS
Number of Weighted average
securities to exercise Number of
be issued upon price of securities
exercise of outstanding remaining
outstanding options, available
options, warrants warrants for future
and rights and rights issuance
---------------- ---------------- -----------
Equity compensation plans
approved by stockholders 2,386,000 $ 2.69 541,000
Equity compensation plans
not approved by stockholders 1,351,000 $ 1.60 -
--------- ------ -------
Total 3,737,000 $ 2.30 541,000
========= ====== =======
The equity compensation plans not approved by stockholders consists of
warrants that are described in Note 7 to the consolidated financial statements
included in this Annual Report on Form 10-K and the 1998 Chief Executive
Officer's Plan.
The 1998 Chief Executive Officer's Plan (the "Plan") was adopted to induce
Alfred S. Dominick, Jr. to become the Company's Chief Executive Officer in
August 1998. The Plan provided for the grant of an option to purchase 1,200,000
shares of the Company's common stock at an exercise price of $1.22. Of the
option grant, 200,000 vested in one-third increments over a three-year period
from August 1998 to August 2001. Another 500,000 vested based on the achievement
of specified trading prices for the Company's common stock. The remaining
500,000 will vest subject to Mr. Dominick's continued employment and upon the
earlier of i) the Company's common stock trading above $25.00 per share for
sixty consecutive days, or ii) April 15, 2008.
Additionally, the Company has no i) individual options, rights or warrants
assumed in any merger, acquisition or consolidation transaction; ii) securities
available for future issuance under a compensation plan other than upon exercise
of options, rights or warrants; and iii) equity compensation plan that contains
a formula for calculating the number of securities available for issuance under
the plan.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
- -------------------------------------------------------
The Company incorporates herein by reference the information concerning
certain relationships and related transactions contained in the 2004 Proxy
Statement.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
- -------------------------------------------------
The Company incorporates herein by reference the information concerning
principal accounting fees and services and the audit committee's pre-approval
policies and procedures contained in the 2004 Proxy Statement.
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
- -------------------------------------------------------------------------
(a) DOCUMENTS FILED AS PART OF THIS REPORT
1. FINANCIAL STATEMENTS - See Item 8 of this Report
2. FINANCIAL STATEMENT SCHEDULES - None
3. EXHIBITS
(b) REPORTS ON FORM 8-K
The Company furnished a Current Report on Form 8-K (Item 12) to the
Securities and Exchange Commission on November 6, 2003, to report InteliData's
results of operations and financial condition for the quarter ended September
30, 2003 (not incorporated by reference).
The Company filed a Current Report on Form 8-K (Item 5) with the Securities
and Exchange Commission on July 9, 2003, relating to the July 8, 2003 issuance
of 1,431,364 shares of its common stock pursuant to the exercise of warrants, as
amended, by institutional investors who participated in the Company's private
placement of common stock in November and December, 2001.
(c) EXHIBITS
Exhibit No. Description
---------- -----------
3.1 Amended and Restated Certificate of Incorporation, dated June 14, 2002
(Incorporated herein by reference to Exhibit 3.1 to the Company's
Report on Form 10-Q for the quarter ended June 30, 2002).
3.2 Bylaws of InteliData Technologies Corporation. (Incorporated herein by
reference to Appendix V to the Joint Proxy Statement /Prospectus
included in the Registration Statement on Form S-4 filed with the
Commission on August 29, 1996, as amended, File Number 333-11081).
4.1 Rights Agreement, dated as of January 21, 1998, by and between the
Company and American Stock Transfer & Trust Company, as Rights Agent.
(Incorporated herein by reference to the Registration Statement on
Form 8-A filed with the Commission on January 26, 1998).
4.1.1 Amendment No. 1 dated May 24, 2000 to the Rights Agreement, dated as
of January 21, 1998, by and between the Company and American Stock
Transfer & Trust Company, as Rights Agent. (Incorporated herein by
reference to the Current Report on Form 8-A/A filed with the
Commission on July 6, 2000).
4.2 Form of Warrant Certificate. (Incorporated herein by reference to the
Company's Registration Statement on Form S-3, File Number 333-85313).
10.1 Description of InteliData Technologies Corporation Merger Stock
Compensation Plan. (Incorporated herein by reference to the Company's
Registration Statement on Form S-8, File Number 333-76631).
10.2 InteliData Technologies Corporation 1996 Incentive Plan. (Incorporated
herein by reference to the Company's Registration Statement on Form
S-8, File Number 333-16115).
10.2.1 Description of Amendment to the 1996 Incentive Plan. (Incorporated
herein by reference to the Company's Proxy Statement filed with the
Commission on August 6, 1999).
10.2.2 Description of Amendment to the 1996 Incentive Plan. (Incorporated
herein by reference to the Company's Proxy Statement filed with the
Commission on April 24, 2000).
10.2.3 Description of Amendment to the 1996 Incentive Plan. (Incorporated
herein by reference to the Company's Proxy Statement filed with the
Commission on April 20, 2001).
10.3 InteliData Technologies Corporation Non-Employee Directors' Stock
Option Plan. (Incorporated herein by reference to the Company's
Registration Statement on Form S-8, File Number 333-16117).
10.4 InteliData Technologies Corporation Employee Stock Purchase Plan.
(Incorporated herein by reference to the Company's Registration
Statement on Form S-8, File Number 333-16121).
10.5 Employment Agreement dated April 5, 1999 between InteliData
Technologies Corporation and Alfred S. Dominick, Jr. (Incorporated
herein by reference to the Company's Report on Form 10-Q for the
quarter ended March 31, 1999).
10.5.1 InteliData Technologies Corporation 1998 Chief Executive Officer's
Plan. (Incorporated herein by reference to Exhibit 10 to the Company's
Report on Form 10-K for the year ended December 31, 1999).
10.5.2 First Amendment to Employment Agreement between InteliData
Technologies Corporation and Alfred S. Dominick, Jr., dated April 5,
2002 (Incorporated herein by reference to Exhibit 10.5.2 to the
Company's Report on Form 10-Q for the quarter ended June 30, 2002).
10.5.3 Second Amendment to Employment Agreement between InteliData
Technologies Corporation and Alfred S. Dominick, Jr., dated January
14, 2003 (Incorporated herein by reference to Exhibit 10.5.3 to the
Company's Report on Form 10-K for the year ended December 31, 2002).
10.5.4 Third Amendment to Employment Agreement between InteliData
Technologies Corporation and Alfred S. Dominick, Jr., dated April 2,
2003 (Incorporated herein by reference to Exhibit 10.5.4 to the
Company's Report on Form 10-Q for the quarter ended March 31, 2003).
*10.5.5 Amended and Restated Change In Control Severance Agreement between
InteliData Technologies Corporation and Alfred S. Dominick, Jr., dated
February 3, 2003.
10.6 Employment and Non-Competition Agreement dated December 17, 1997
between InteliData Technologies Corporation and Albert N. Wergley.
(Incorporated herein by reference to Exhibit 10 to the Company's
Report on Form 10-K for the year ended December 31, 1997).
10.6.1 Amendment to the Employment and Non-Competition Agreement between
InteliData Technologies Corporation and Albert N. Wergley, dated June
14, 1999. (Incorporated herein by reference to Exhibit 10 to the
Company's Report on Form 10-K for the year ended December 31, 1999).
*10.6.2 Amended and Restated Change In Control Severance Agreement between
InteliData Technologies Corporation and Albert N. Wergley, dated
February 3, 2003.
10.7 Employment and Non-Competition Agreement between InteliData
Technologies Corporation and Michael E. Jennings, dated June 14, 2000
(Incorporated herein by reference to Exhibit 10 to the Company's
Report on Form 10-Q for the quarter ended September 30, 2000).
10.7.1 Amended and Restated Change In Control Severance Agreement between
InteliData Technologies Corporation and Michael E. Jennings, dated
February 3, 2003.
10.8 Employment and Non-Competition Agreement between InteliData
Technologies Corporation and John R. Polchin, dated April 8, 2002
(Incorporated herein by reference to Exhibit 3.1 to the Company's
Report on Form 10-Q for the quarter ended June 30, 2002).
*10.8.1 Amended and Restated Change In Control Severance Agreement between
InteliData Technologies Corporation and John R. Polchin, dated
February 3, 2003.
* 21.1 InteliData Technologies Corporation List of Significant Subsidiaries.
* 23.1 Consent of Deloitte & Touche LLP.
* 31.1 Certification of Principal Executive Officer pursuant to Section 302
of the Sarbanes-Oxley Act of 2002.
* 31.2 Certification of Principal Financial Officer pursuant to Section 302
of the Sarbanes-Oxley Act of 2002.
* 32.1 Certification of Principal Executive Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.
* 32.2 Certification of Principal Financial Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.
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* Filed herewith.
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.
INTELIDATA TECHNOLOGIES CORPORATION
By: /s/ Alfred S. Dominick, Jr.
------------------------------------
Alfred S. Dominick, Jr.
Chairman and Chief Executive Officer
(Principal Executive Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Signature Title Date
- --------- ----- ----
/s/ Alfred S. Dominick, Jr. Chairman and Chief Executive Officer March 12, 2004
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Alfred S. Dominick, Jr.
/s/ John R. Polchin Vice President, Chief Financial Officer, March 12, 2004
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John R. Polchin and Treasurer (Principal Financial and
Accounting Officer)
/s/ Neal F. Finnegan Director March 12, 2004
- -------------------------------
Neal F. Finnegan
/s/ Patrick F. Graham Director March 12, 2004
- -------------------------------
Patrick F. Graham
/s/ John J. McDonnell, Jr. Director March 12, 2004
- -------------------------------
John J. McDonnell, Jr.
/s/ L. William Seidman Director March 12, 2004
- -------------------------------
L. William Seidman
/s/ Norman J. Tice Director March 12, 2004
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Norman J. Tice