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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
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For the Quarter ended: SEPTEMBER 30, 2001 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)
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
--------- ---
The number of shares of the registrant's Common Stock outstanding on September
30, 2001 was 46,006,319.
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INTELIDATA TECHNOLOGIES CORPORATION
QUARTERLY REPORT ON FORM 10-Q
TABLE OF CONTENTS
Page
----
PART I - FINANCIAL INFORMATION
Item 1. Unaudited Condensed Consolidated Financial Statements
Condensed Consolidated Balance Sheets
September 30, 2001 and December 31, 2000 ......................... 3
Condensed Consolidated Statements of Operations
Three and Nine Months Ended September 30, 2001 and 2000 .......... 4
Condensed Consolidated Statement of Changes in Stockholders' Equity
Nine Months Ended September 30, 2001.............................. 5
Condensed Consolidated Statements of Cash Flows
Nine Months Ended September 30, 2001 and 2000..................... 6
Notes to Condensed Consolidated Financial Statements ............. 7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations ........................................ 14
Item 3. Quantitative and Qualitative Disclosures About Market Risk........ 22
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.................................. 22
SIGNATURE ........................................................... 23
PART I: FINANCIAL INFORMATION
- -----------------------------------
ITEM 1. FINANCIAL STATEMENTS
- ----------------------------------
INTELIDATA TECHNOLOGIES CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 2001 AND DECEMBER 31, 2000
(in thousands, except share data)
<table>
2001 2000
------------------------------
(unaudited) (audited)
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 6,540 $ 27,255
Restricted cash -- 440
Investments 2,751 10,217
Accounts receivable, net of allowance for doubtful accounts 6,000 1,486
Other receivables 1,408 83
Prepaid expenses and other current assets 544 320
------------ ------------
Total current assets 17,243 39,801
NONCURRENT ASSETS
Property and equipment, net 4,350 3,282
Goodwill, net 33,184 --
Other assets 195 195
------------ ------------
TOTAL ASSETS $ 54,972 $ 43,278
============ ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 5,579 $ 4,288
Accrued expenses 5,251 3,651
Deferred revenues 3,426 1,014
Other liabilities 332 --
Net liabilities of discontinued operations 271 455
------------ ------------
TOTAL CURRENT LIABILITIES 14,859 9,408
Net liabilities of discontinued operations 300 300
Other liabilities 600 --
------------ ------------
TOTAL LIABILITIES 15,759 9,708
------------ ------------
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 60,000,000 shares;
issued 46,812,663 shares in 2001 and 39,320,609 shares in 2000;
outstanding 46,006,319 shares in 2001 and 38,629,897 shares in 2000 47 39
Additional paid-in capital 295,916 261,552
Treasury stock, at cost: 806,344 shares in 2001 and 690,712 shares in 2000 (2,473) (2,123)
Deferred compensation (1,847) (1,375)
Accumulated other comprehensive (loss) income (1,046) 494
Accumulated deficit (251,384) (225,017)
------------ ------------
TOTAL STOCKHOLDERS' EQUITY 39,213 33,570
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 54,972 $ 43,278
============ ============
</table>
See accompanying notes to condensed consolidated financial statements.
INTELIDATA TECHNOLOGIES CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2001 AND 2000
(in thousands, except per share data; unaudited)
<table>
Three months ended Nine months ended
September 30, September 30,
----------------------------- -------------------------------
2001 2000 2001 2000
----------- ----------- ----------- -----------
Revenues
Software $ 1,195 $ 54 $ 1,603 $ 655
Consulting and services 4,112 1,387 11,210 3,300
Royalties and other -- 75 -- 544
----------- ----------- ----------- -----------
Total revenues 5,307 1,516 12,813 4,499
----------- ----------- ----------- -----------
Cost of revenues
Software -- -- 5 --
Consulting and services 2,421 850 6,435 2,357
----------- ----------- ----------- -----------
Total cost of revenues 2,421 850 6,440 2,357
----------- ----------- ----------- -----------
Gross profit 2,886 666 6,373 2,142
Operating expenses
General and administrative 3,058 1,748 8,550 4,598
Selling and marketing 2,167 1,554 7,318 4,694
Research and development 3,850 3,801 12,635 9,428
Amortization of goodwill 1,291 -- 3,819 --
----------- ----------- ----------- -----------
Total operating expenses 10,366 7,103 32,322 18,720
----------- ----------- ----------- -----------
Operating loss (7,480) (6,437) (25,949) (16,578)
Realized gains on sales of investments -- 3,831 1,130 47,822
Unrealized loss on Sybase warrants (1,554) -- (2,268) --
Other income (expenses), net 79 339 560 659
----------- ----------- ----------- -----------
Income (loss) before income taxes (8,955) (2,267) (26,527) 31,903
Provision (benefit) for income taxes (160) (57) (160) 633
----------- ----------- ----------- -----------
Income (loss) from continuing operations (8,795) (2,210) (26,367) 31,270
Income (loss) from discontinued operations
of Caller ID leasing, net of income taxes -- (633) -- (267)
----------- ----------- ----------- -----------
Net income (loss) $ (8,795) $ (2,843) $(26,367) $ 31,003
=========== =========== =========== ===========
BASIC EARNINGS PER COMMON SHARE
Income (loss) from continuing operations $ (0.19) $ (0.06) $ (0.59) $ 0.82
Income (loss) from discontinued operations 0.00 (0.01) 0.00 (0.01)
----------- ----------- ----------- -----------
Net income (loss) $ (0.19) $ (0.07) $ (0.59) $ 0.81
=========== =========== =========== ===========
DILUTED EARNINGS PER COMMON SHARE
Income (loss) from continuing operations $ (0.19) $ (0.06) $ (0.59) $ 0.77
Income (loss) from discontinued operations 0.00 (0.01) 0.00 (0.01)
----------- ----------- ----------- -----------
Net income (loss) $ (0.19) $ (0.07) $ (0.59) $ 0.76
=========== =========== =========== ===========
Basic weighted-average common shares outstanding 45,521 38,265 45,007 38,199
=========== =========== =========== ===========
Diluted weighted-average common shares outstanding 45,521 38,265 45,007 40,994
=========== =========== =========== ===========
</table>
See accompanying notes to condensed consolidated financial statements.
INTELIDATA TECHNOLOGIES CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
NINE MONTHS ENDED SEPTEMBER 30, 2001
(in thousands; unaudited)
<table>
Accumulated
Common stock Additional Other
------------------------- Paid-in Treasury Deferred Comprehensive
Shares Amount Capital Stock Compensation Income (Loss)
----------- ------------- ------------- ----------- --------------- ----------------
Balance at January 1, 2001 39,321 $ 39 $ 261,552 $ (2,123) $ (1,375) $ 494
Issuances of common stock:
Acquisition of Home Account 6,900 7 31,950 - - -
Exercises of stock options 199 - 369 - - -
Employee stock purchase plan 11 - 23 - - -
Exercises of stock warrants 3 - 11 - - -
Issuances of restricted stock 430 1 1,857 - (1,858) -
Cancellations of restricted stock (51) - (293) - 293 -
Home Account Incentive Plan - - 447 - (447) -
Purchases of treasury stock - - - (350) - -
Amortization of deferred compensation - - - - 1,540 -
Recognized gain on investments - - - - - (180)
Unrealized loss on investments,
net of income taxes - - - - - (1,360)
Net loss - - - - - -
Comprehensive loss
----------- ------------- ------------- ----------- --------------- ----------------
Balance at September 30, 2001 46,813 $ 47 $ 295,916 $ (2,473) $ (1,847) $ (1,046)
=========== ============= ============= =========== =============== ================
Accumulated Comprehensive
Deficit Income (Loss) Total
-------------- --------------- ------------
Balance at January 1, 2001 $ (225,017) $ 33,570
Issuances of common stock:
Acquisition of Home Account - 31,957
Exercises of stock options - 369
Employee stock purchase plan - 23
Exercises of stock warrants - 11
Issuances of restricted stock - -
Cancellations of restricted stock - -
Home Account Incentive Plan - -
Purchases of treasury stock - (350)
Amortization of deferred compensation - 1,540
Recognized gain on investments - $ (180) (180)
Unrealized loss on investments,
net of income taxes - (1,360) (1,360)
Net loss (26,367) (26,367) (26,367)
----------
Comprehensive loss $ (27,907)
==========
-------------- -----------
Balance at September 30, 2001 $ (251,384) $ 39,213
============== ===========
See accompanying notes to condensed consolidated financial statements.
</Table>
INTELIDATA TECHNOLOGIES CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 2001 AND 2000
(in thousands; unaudited)
<Table>
2001 2000
------------ -----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net (loss) income from continuing operations $ (26,367) $ 31,270
Adjustments to reconcile net (loss) income to net cash used in
operating activities:
Realized gains on sales of investments, net (1,130) (47,822)
Unrealized loss on Sybase warrants 2,268 --
Amortization of goodwill 3,819 --
Depreciation and amortization 1,266 363
Amortization of deferred compensation 1,540 400
Deferred income taxes -- 633
Changes in certain assets and liabilities:
Accounts receivable (3,200) (51)
Other receivables (1,325) --
Prepaid expenses and other current assets (6) (199)
Accounts payable (463) 1,439
Accrued expenses (805) 1,450
Deferred revenues 1,233 (616)
------------ ----------
Net cash used in operating activities (23,170) (13,133)
------------ ----------
CASH (USED IN) PROVIDED BY OPERATING ACTIVITIES OF
DISCONTINUED OPERATIONS (184) 438
------------ -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from the sales of investments 4,883 34,145
Release of cash from escrow 311 --
Purchases of investments -- (251)
Purchases of property and equipment (712) (2,861)
Sale of property and equipment 121 --
Payment of acquisition costs for Home Account (1,749) --
Cash paid for Home Account common stock (268) --
------------ -----------
Net cash provided by investing activities 2,586 31,033
------------ -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of common stock 403 802
Capital contribution -- 857
Purchases of treasury stock (350) (59)
------------ -----------
Net cash provided by financing activities 53 1,600
------------ -----------
(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (20,715) 19,938
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 27,255 8,496
------------ -----------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 6,540 $ 28,434
============ ============
See accompanying notes to condensed consolidated financial statements.
</table>
INTELIDATA TECHNOLOGIES CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED SEPTEMBER 30, 2001 AND 2000
(UNAUDITED)
(1) BASIS OF PRESENTATION
The condensed consolidated balance sheet of InteliData
Technologies Corporation ("InteliData" or the "Company") as of
September 30, 2001, and the related condensed consolidated statements
of operations, changes in stockholders' equity, and cash flows for the
nine month periods ended September 30, 2001 and 2000 presented in this
Form 10-Q are unaudited. In the opinion of management, all adjustments
necessary for a fair presentation of such financial statements have
been included. Such adjustments consist only of normal recurring
items. Interim results are not necessarily indicative of results for a
full year. Certain amounts in the prior periods have been reclassified
to conform to the current period presentation.
The condensed consolidated financial statements and notes are
presented as required by Form 10-Q, and do not contain certain
information included in the Company's annual audited financial
statements and notes. These financial statements should be read in
conjunction with the annual audited financial statements of the
Company and the notes thereto, together with management's discussion
and analysis of financial condition and results of operations,
contained in the Form 10-K for the fiscal year ended December 31,
2000.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Revenue Recognition - The Company supplies Internet banking
and electronic bill presentment and payment software to financial
institutions. 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.
Starting late in 2000, the Company entered into contracts for its
bill payment technology software. This software does 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 when-and-if 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
<page>
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 service
bureaus, is recognized as transactions are processed.
(b) Adoption of New Accounting Pronouncement - 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 Standards No. 115,
Accounting for Certain Investments in Debt and Equity Securities.
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.
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 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 fair value under the previous accounting
guidance. In accordance with SFAS 133, the Company recorded an
unrealized loss on investment of $2,268,000 for the nine months ended
September 30, 2001. For the nine months ended September 30, 2000, pro
forma net income (assuming that SFAS 133 was adopted effective January
1, 2000) was $31,922,000 due to an unrealized gain on investment of
$919,000, while pro forma earnings per share were $0.84 and $0.78 on a
basic and diluted basis, respectively.
(c) Recent Accounting Pronouncements - In June 2001, the
Financial Accounting Standards Board issued Statement of Financial
Accounting Standards 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
will not 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.
<page>
The amortization and non-amortization provisions of SFAS 142 will be
applied to all goodwill and intangible assets acquired after June 30,
2001. The provisions of each statement which apply to goodwill and
intangible assets acquired prior to June 30, 2001 will be adopted by
the Company on January 1, 2002. We expect the adoption of these
accounting standards will have the impact of reducing our amortization
of the current goodwill commencing January 1, 2002 and reviews for
impairment may result in future periodic write-downs.
(3) 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 an agreement and plan of merger whereby a
wholly-owned subsidiary of the Company merged with and into Home
Account, with Home Account surviving the merger as the Company's
wholly-owned subsidiary. Home Account is an application services and
software provider to financial institutions for the delivery of
financial products and services over the Internet. Home Account
provides a suite of UNIX-based Electronic banking and Electronic Bill
Presentment and Payment (EBPP) products and services in an Application
Services Provider (ASP) environment.
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. The value of the shares issued as part of the
purchase consideration of approximately $29,011,000 was measured based
on the average of the market price of the issued common stock a few
days before and after January 11, 2001 - the date that the merger
transaction was agreed to and announced. This amount coupled with the
liability associated with the Home Account Incentive Plan of
$2,946,000 (see below) resulted in an increase of $31,957,000 in the
accompanying statement of changes in stockholders' equity. The total
estimated purchase price of approximately $31,186,000 consisted of the
following (in thousands):
Consideration and acquisition costs:
Value of shares issued $ 29,011
Home Account expense reimbursement 250
Cash consideration 320
Acquisition costs 1,605
-----------
$ 31,186
===========
The assets acquired and liabilities assumed were recorded at
estimated fair values as determined by the Company's management based
on information currently available and on current assumptions as to
future operations. The Company will obtain an independent appraisal of
the fair values of the acquired property, plant and equipment,
<page>
and identified intangible assets, and their remaining useful lives.
The Company is also completing the review and determination of the
fair values of the other assets acquired and liabilities assumed.
Accordingly, the allocation of the purchase price is subject to
revision, which is not expected to be material, based on the final
determination of appraised and other fair values. A summary of the
assets acquired and liabilities assumed in the acquisition follows (in
thousands):
Preliminary allocation of purchase price:
Current assets $ 1,562
Property, plant and equipment 1,743
Liabilities assumed and other (4,344)
Liabilities associated with Home Account Incentive Plan (2,946)
Acquisition integration liabilities (1,832)
Goodwill (7-year, straight-line amortization) 37,003
-----------
$ 31,186
===========
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
balance of $1,832,000 included in the purchase price allocation are
approximately $1,010,000 for lease costs for the now vacated Home
Account headquarters in Emeryville, California, and $822,000 related
to workforce reduction.
The workforce reductions focused on three key areas: 1)
streamlining development efforts, 2) eliminating redundant
administrative overhead and support activities, and 3) restructuring
and repositioning of the sales/marketing and research and development
organizations to eliminate redundancies in these activities. As of
September 30, 2001, 87 positions have been terminated and
approximately $822,000 had been paid.
Certain aspects of the integration plan will be refined as
additional studies are completed, including the evaluation of capacity
of existing and acquired facilities to accommodate new manufacturing
and administrative processes and the appropriate positioning of the
sales/marketing and research development organizations to best serve
customer needs. Adjustments to the estimated acquisition integration
liabilities based on these refinements, if any, will be generally
included in the allocation of the purchase price.
The following pro forma quarterly financial information presents
the combined results of operations of InteliData Technologies
Corporation and Home Account Holdings, Inc. and gives effect to the
acquisition of Home Account as if it occurred on January 1, 2000. The
pro forma condensed combined financial information set forth
<page>
below reflects certain adjustments, including among others,
adjustments to reflect the amortization of the goodwill associated
with the acquisition. However, pro forma results do not include any
anticipated cost savings. The pro forma condensed combined financial
information set forth below neither purports to represent what the
consolidated results of operations or financial condition of
InteliData would actually have been if the Home Account acquisition
had in fact occurred on such date nor projects the future consolidated
results of operations or financial condition of InteliData.
Nine Months Nine Months
Ended Ended
9/30/2001 9/30/2000
--------- -----------
(in thousands, except per share data)
Revenue $ 12,813 $ 10,403
Net (loss) income (30,048) 12,646
Basic net (loss) income per share (0.67) 0.28
Diluted net (loss) income per share (0.67) 0.26
Pro forma basic net income (loss) per share is computed using the
weighted-average number of shares of common stock outstanding after
the issuance of InteliData's common stock to acquire the outstanding
shares of Home Account. Pro forma diluted net income (loss) per share
also gives effect to any dilutive options. Options and warrants are
excluded from the computation during loss periods, as their effect is
anti-dilutive.
(4) 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 is payable in the form
of InteliData common stock and such payments are to be made by the
group of former Home Account preferred stockholders (who are
collectively considered as a "principal stockholder"). Two-thirds of
the 2000 Incentive Plan allocation would vest 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. As of September
30, 2001, this receivable balance was $1,116,000 and is included in
the "Other receivable" balance. The shares allocable to the
participants were placed in an escrow account and are released to the
Home Account Stockholders' Representative in accordance with the
Merger Consideration Escrow Agreement. As of September 30, 2001,
690,000 shares of InteliData common stock had been released to the
Stockholders' Representative. Upon the sale of the merger
consideration shares by the Stockholders'
<page>
Representative, the Company will be paid the receivable balance from
the proceeds of the sale of stock.
The remaining one-third of the participants' allocation would
vest one year from the transaction closing date and will be charged to
expense over the vesting period. All forfeited shares revert to the
preferred stockholders of Home Account. In connection with the 2000
Incentive Plan allocation, the deferred compensation for the one-third
portion is estimated to be $447,000 based on $3.28 (the closing price
of the Company's common stock at September 30, 2001). For the nine
months ended September 30, 2001, the Company recorded compensation
expense of approximately $321,000.
(5) DISCONTINUED OPERATIONS
As of September 30, 2001, the net liabilities of discontinued
operations of $571,000 relate to the telecommunications divisions.
Approximately $448,000 of the net liabilities of discontinued
operations relates to the potential environmental clean up associated
with InteliData's former New Milford, Connecticut property. In January
2000, InteliData sold the New Milford, Connecticut building, its only
remaining asset in 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
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 September 30, 2001, this escrow
account balance remained at $200,000. 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 liability related to this matter to be
approximately $448,000 and has recorded a liability for that amount.
We have 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 three to
five years under the Company's proposed compliance plan, which
involves a natural attenuation and periodic compliance monitoring
approach.
The remaining net liabilities of discontinued operations balance
of approximately $123,000 relates to warranties, royalty costs and
potential settlements with telecom customers and others.
(6) EARNINGS PER SHARE
Basic earnings per share are calculated using the weighted
average number of shares of common stock outstanding during each
period. Diluted earnings per share
<page>
reflect the dilutive effect of stock options and other stock awards
granted to employees under stock-based compensation plans, as well as
stock warrants. Basic and diluted earnings per share are calculated as
follows (in thousands, except per share data):
<Table>
Three months ended Nine months ended
September 30, September 30,
------------------- ------------------
2001 2000 2001 2000
---- ---- ---- ----
Basic EPS
Income (loss) from continuing operations $ (8,795) $ (2,210) $ (26,367) $ 31,270
Weighted-average common shares outstanding 45,521 38,265 45,007 38,199
-------- --------- --------- --------
Basic earnings (loss) per share from continuing operations $ (0.19) $ (0.06) $ (0.59) $ 0.82
======== ======== ========= ========
Diluted EPS
Income (loss) from continuing operations $ (8,795) $ (2,210) $ (26,367) $ 31,270
-------- --------- --------- --------
Weighted-average common shares outstanding 45,521 38,265 45,007 38,199
Effect of dilutive securities:
Stock options and awards - - - 2,721
Stock warrants - - - 74
-------- --------- --------- --------
Weighted-average dilutive common shares outstanding 45,521 38,265 45,007 40,994
-------- --------- --------- --------
Diluted earnings (loss) per common share from continuing operat $ (0.19) $ (0.06) $ (0.59) $ 0.77
======== ======== ========= ========
</Table>
Options to purchase 285,000 shares of common stock at a range of
$7.25 to $19.44 were outstanding during 2000, but were not included in
the computation of diluted earnings per share, because the options'
exercise price was greater than the average market price of the common
share.
(7) SUBSEQUENT EVENT
During October 2001, the Company sold its remaining investment in
the Sybase common stock and received proceeds of approximately
$1,775,000 and recognized a realized loss from sales of investments of
approximately $717,000. This realized loss represents the decrease in
value from the $18.88 closing price at the time of the Home Financial
Network and Sybase merger on January 20, 2000 to the actual
dispositions at the average sales price of $13.45 during October 2001.
As of October 31, 2001, the Company still maintained all of its
warrants to purchase Sybase common stock.
* * * * * *
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
- ----------------------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS
-----------------------------------
RESULTS OF OPERATIONS
The following represents the results of operations for InteliData
Technologies Corporation for the three and nine months ended September 30, 2001
and 2000. Such information should be read in conjunction with the interim
financial statements and the notes thereto in Part I, Item 1 of this Quarterly
Report.
THREE MONTHS ENDED SEPTEMBER 30, 2001 AND 2000
Revenues
The Company's third quarter revenues were $5,307,000 in 2001 compared to
$1,516,000 in 2000, an increase of 250% or $3,791,000. The increase is
attributable primarily to an increase in software and related professional
services revenues, including the addition of the Home Account results, offset by
the cessation of royalties relating to the Visa Bill-Pay System. During the
third quarter of 2001, software revenues contributed $1,195,000 and consulting
and services revenues contributed $4,112,000.
During the third quarter of 2000, software revenues contributed $54,000,
consulting and services revenues contributed $1,387,000, and royalties and other
revenues contributed $75,000, all of which were royalties relating to the
original sale of the Visa Bill-Pay system.
Cost of Revenues
The Company's third quarter cost of revenues was $2,421,000 in 2001
compared to $850,000 in 2000, an increase of 185% or $1,571,000. The increase is
attributable primarily to increased revenues and changes in product mix. During
the third quarter of 2001, consulting and services costs totaled $2,421,000.
During the third quarter of 2000, consulting and services costs totaled
$850,000.
Overall gross profit margins increased to 54% for the third quarter of 2001
from 44% for the third quarter of 2000. The increase in gross profit margins was
attributable to an increase in software and recurring revenue, including the
addition of Home Account customers. The Company anticipates that gross profit
margins may fluctuate in the future due to changes in product mix and
distribution, outsourcing activities associated with a service bureau business
model, competitive pricing pressure, and the introduction of new products and
changes in volume.
General and Administrative
General and administrative expenses were $3,058,000 for the third quarter
of 2001 as compared to $1,748,000 in the third quarter of 2000. The increase of
$1,310,000 was primarily the result of additional corporate and administrative
expenses associated with the purchase of Home Account, including an increase in
facilities expense and in bad debt expense associated with the Home Account
receivables assumed in connection with the acquisition. The Company expects to
continue controlling general and administrative expenses and plans to
continually assess its operations in managing the continued development of
infrastructure to handle anticipated business levels.
Selling and Marketing
Selling and marketing expenses increased to $2,167,000 for the third
quarter of 2001 from $1,554,000 for the same period last year. The increase of
$613,000 is attributable primarily to increases in the number of selling and
marketing employees, travel and outside professional services, and the
additional expenses associated with the sales and marketing efforts of Home
Account.
Research and Development
Research and development costs were $3,850,000 in the third quarter of
2001, as compared to $3,801,000 in the same period in 2000. The increase of
$49,000 was attributable to the additional expenses associated with the research
and development staff of Home Account, offset by the cost reduction efforts of
the Company's acquisition integration plan. The Company incurs research and
development expenses primarily in writing and developing the Interpose
Transaction Engine for the Open Financial Exchange ("OFX") standard and building
the Interactive Financial Exchange ("IFX")-based network electronic bill payment
switch.
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.
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 is entitled to
receive $1.153448 in cash and 0.34794 share of Sybase common stock. There were
no warrant exercises or sales of Sybase common stock in the third quarter of
2001.
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
<page>
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 sheets include ($1,046,000) and
$494,000 of unrealized (loss) gain on investments (net of taxes), within
stockholders' equity as of September 30, 2001 and December 31, 2000,
respectively. As of December 31, 2000, the unrealized gain on investments
balance represented the increase in the fair market value of the Sybase holdings
from the January 20, 2000 merger transaction date to the respective balance
sheet date. As of September 30, 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).
No sales of Sybase common stock occurred during the third quarter of 2001.
During the same period of 2000, the Company recorded a gain of $3,831,000 from
sales of Sybase common stock.
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
$1,554,000 for the three months ended September 30, 2001.
Other Income
Other income, primarily interest income, was $79,000 for the third quarter
of 2001 compared to $339,000 for the same period in the prior year. The decrease
of $260,000 was due to the decreased cash and cash equivalents balance for the
third quarter of 2001 compared to the third quarter of 2000.
Discontinued Operations
During 2000, US West notified the Company that US West would no longer
permit InteliData to include the lease billing on the US West telephone bills.
As such, InteliData has discontinued billing its legacy customers for Caller ID
adjunct unit leases in the US West
<page>
telephone service territory, because the cost of individually billing and
pursuing collections for the leases would have made it impractical and
uneconomical for the Company to continue the lease program. Accordingly, the
results of operations from leasing activities have been reported as discontinued
operations. During the third quarter of 2000, the Company had a loss from
discontinued operations of the Caller ID leasing business of $633,000, net of
income taxes. The stream of revenues from this lease base ceased in June 2000.
Weighted-Average Common Shares Outstanding and Basic and Diluted Loss Per Common
Share
The basic and diluted weighted-average shares increased to 45,521,000 for
the third quarter of 2001 compared to 38,265,000 for the third quarter of 2000.
The increase resulted primarily from the exercise of stock options and warrants,
stock purchases under the Employee Stock Purchase Plan, the granting of certain
stock awards during 2001, and the issuance of 6,900,000 shares for the
acquisition of Home Account.
Basic and diluted loss per common share was ($0.19) for the third quarter
of 2001 compared to a basic and diluted loss per common share from continuing
operations of ($0.06) and a basic and diluted loss per common share from
discontinued operations of ($0.01) for the third quarter of 2000. Basic and
diluted net loss per common share was ($0.19) compared to ($0.07) for the third
quarters of 2001 and 2000, respectively.
NINE MONTHS ENDED SEPTEMBER 30, 2001 AND 2000
Revenues
The Company's revenues for the first nine months of 2001 were $12,813,000
compared to $4,499,000 for the same period in 2000, an increase of 185% or
$8,314,000. The Company recognized $1,603,000 in software revenue during the
first nine months of 2001. During the same period in 2000, the Company
recognized $655,000 in software revenue. Consulting and services revenues
aggregated $11,210,000 in the first nine months of 2001 while during the same
period in 2000, the Company recognized $3,300,000. Royalties and other revenues
were $0 in the first nine months of 2001 compared to $544,000 in the first nine
months of 2000. The $544,000 represents royalties related to the VISA Bill-Pay
system and this stream of revenues from royalties ceased in September 2000.
Cost of Revenues
The Company's cost of revenues for the first nine months of 2001 were
$6,440,000 compared to $2,357,000 for the same period in 2000, an increase of
173% or $4,083,000. The Company incurred $5,000 in software related expenses
during the first nine months of 2001, but did not incur any software related
expenses during the same period in 2000. Consulting and services cost of
revenues aggregated $6,435,000 in the first nine months of 2001, while during
the same period in 2000, the Company's costs aggregated $2,357,000.
<page>
Overall gross profit margins increased to 50% for the first nine months of
2001 from 48% for the same period in 2000. The increase in gross profit margins
was attributable to an increase in software and recurring revenue, including the
addition of Home Account customers. The Company anticipates that gross profit
margins may fluctuate in the future due to changes in product mix and
distribution, outsourcing activities associated with a service bureau business
model, competitive pricing pressure, and the introduction of new products and
changes in volume.
General and Administrative
General and administrative expenses were $8,550,000 for the first nine
months of 2001, as compared to $4,598,000 for the first nine months of 2000. The
increase of $3,952,000 was primarily the result of additional corporate and
administrative expenses associated with the purchase of Home Account, including
an increase in facilities expense and in bad debt expense associated with the
Home Account receivables assumed in connection with the acquisition. The Company
expects to continue controlling general and administrative expenses and plans to
continually assess its operations in managing the continued development of
infrastructure to handle anticipated business levels.
Selling and Marketing
Selling and marketing expenses increased to $7,318,000 for the first nine
months of 2001 from $4,694,000 for the same period last year. The increase of
$2,624,000 was attributable primarily to increases in the number of selling and
marketing employees, travel and outside professional services, and the
additional expenses associated with the sales and marketing efforts of Home
Account.
Research and Development
Research and development costs were $12,635,000 in the first nine months of
2001 compared to $9,428,000 for the same period in 2000. The increase of
$3,207,000 was largely attributable to increases in outside consulting services
and the additional expenses associated with the research and development staff
of Home Account, offset by the cost of reduction efforts of the Company's
acquisition integration plan. The Company incurs research and development
expenses primarily in writing and developing the Interpose Transaction Engine
for the Open Financial Exchange ("OFX") standard and building the Interactive
Financial Exchange ("IFX")-based network electronic bill payment switch.
Realized Gains on Sales of Investments
As discussed above, on January 20, 2000, Home Financial Network, Inc.
(HFN), a company in which InteliData held approximately a 25% ownership
interest, merged with Sybase, Inc. 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 received 640,000 "warrant
units" with an exercise price of $2.60 per warrant unit. Upon exercise
<page>
of each warrant unit, the Company is entitled to receive $1.153448 in cash and
0.34794 share of Sybase common stock.
For the nine months ended September 30, 2001 and 2000, InteliData
recognized net gains of approximately $1,130,000 and $47,822,000, respectively
on the merger transaction and the subsequent disposition of a portion of the
investment in Sybase common stock.
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 fair value under the previous accounting guidance. In accordance with
SFAS 133, the Company recorded an unrealized loss on investment of $2,268,000
for the nine months ended September 30, 2001.
Other Income
Other income, primarily investment and interest income, was $560,000 and
$659,000 for the nine months ended September 30, 2001 and 2000, respectively.
The decrease of $99,000 was due to the decreased levels of cash and cash
equivalents in 2001 as compared to 2000.
Discontinued Operations
During 2000, US West notified the Company that US West would no longer
permit InteliData to include the lease billing on the US West telephone bills.
As such, InteliData has discontinued billing its legacy customers for Caller ID
adjunct unit leases in the US West telephone service territory, because the cost
of individually billing and pursuing collections for the leases would have made
it impractical and uneconomical for the Company to continue the lease program.
Accordingly, the results of operations from leasing activities have been
reported as discontinued operations. During the first nine months of 2000, the
Company had a loss from discontinued operations of the Caller ID leasing
business of $267,000, net of income taxes. The stream of revenues from this
lease base ceased in June 2000.
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
nine months ended September 30, 2001 was 45,007,000, compared to a basic
weighted-average common shares outstanding of 38,199,000 and a diluted
weighted-average common shares outstanding of 40,994,000 for the same period in
2000. The increase resulted primarily from the exercise of stock options and
warrants, stock purchases under the Employee Stock Purchase Plan, the
<page>
granting of certain stock awards during 2001, and the issuance of 6,900,000
shares for the acquisition of Home Account.
Basic and diluted loss per common share was ($0.59) for the nine month
period in 2001, compared to a basic and diluted income per common share from
continuing operations of $0.82 and $0.77, respectively, and a basic and diluted
loss per common share from discontinued operations of ($0.01) for the same
period in 2000. Basic and diluted net loss per common share was ($0.59) for the
nine-month period in 2001, compared to a basic net income per common share of
$0.81 and a diluted net income per common share of $0.76 for the same period in
2000.
LIQUIDITY AND CAPITAL RESOURCES
During the first nine months of 2001, the Company's cash and cash
equivalents decreased by $20,715,000. At September 30, 2001, the Company had
$6,540,000 in cash and cash equivalents, $2,751,000 in investments, and working
capital of $2,384,000, with $900,000 of long-term liabilities and no long-term
debt.
During the first nine months of 2001, cash used in operating activities was
$23,170,000 compared to $13,133,000 in the same period in 2000. Cash flows from
operating activities during the first nine months of 2001 included uses of cash
for operating expenses and increases for accounts receivable, accounts payable
and accrued expenses.
Discontinued operations used net cash of $184,000 in the first nine months
of 2001 compared to providing $438,000 in the first nine months of 2000. The
Company received net proceeds of $988,000 for the sale of the building during
January 2000. Liabilities remaining in the discontinued operations include a
reserve for potential environmental clean-up at the New Milford location, costs
for legal shut-down of the former operating subsidiaries, potential warranty
costs, and further potential settlements with telecom customers and others.
The Company's net cash provided by investing activities was $2,586,000 in
the first nine months of 2001 compared to $31,033,000 in the same period in
2000. The difference was primarily due to the gain recognized in January 2000 in
connection with the Home Financial Network, Inc. merger with Sybase, Inc.
Financing activities provided $53,000 in the first nine months of 2001
compared to $1,600,000 in the same period in 2000. Financing activities in the
first quarter of 2001 consisted of proceeds from the sale of the Company's
common stock through stock option exercises offset by the purchases of treasury
stock. The activity in 2000 consisted of proceeds from a capital contribution
and the issuances of the Company's common stock through stock options exercises,
stock warrant exercises and the Employee Stock Purchase Plan.
During 2001, the Company has focused on reducing its cash burn rate from
quarter to quarter and has periodically rationalized its headcount and other
expenses in light of its available capital and anticipated business forecast.
However, in order for the Company to continue
<page>
funding its product development efforts and operations at the current level, it
may be necessary to obtain additional sources of working capital. The Company is
currently engaged in efforts to obtain such additional capital; however, we can
make no assurances that these efforts will be successful. Whether or not these
efforts are successful, the Company expects to continue to control its expenses
in light of its available capital.
CAUTIONARY STATEMENT FOR PURPOSES OF THE "SAFE HARBOR" PROVISIONS OF THE PRIVATE
SECURITIES LITIGATION REFORM ACT OF 1995
The information contained in this report includes forward-looking
statements, the realization of which may be impacted by the factors discussed
below. The forward-looking statements are made pursuant to the safe harbor
provisions of the Private Securities Litigation Reform Act of 1995 (the "Act").
This report contains forward looking statements that are subject to risks and
uncertainties, including, but not limited to, risks associated with the
acquisition and assimilation of Home Account, the Company's ability to continue
funding operating losses, the ability of the Company to complete product
implementations in required time frames and the Company's ability to increase
its recurring revenues and profits through its ASP business model, the impact of
competitive products, pricing pressure, product demand and market acceptance
risks, pace of consumer acceptance of home banking and reliance on the Company's
bank clients to increase usage of Internet banking by their customers, mergers
and acquisitions, risk of integration of the Company's technology by large
software companies, the ability of financial institution customers to implement
applications in the anticipated time frames or with the anticipated features,
functionality or benefits, reliance on key strategic alliances and newly
emerging technologies, the ability of the Company to leverage its Spectrum
relationship into new business opportunities in the EBPP market, the on-going
viability of the mainframe marketplace and demand for traditional mainframe
products, the ability to attract and retain key employees, the availability of
cash for long-term growth, product obsolescence, ability to reduce product
costs, fluctuations in operating results, delays in development of highly
complex products and other risks detailed from time to time in InteliData
filings with the Securities and Exchange Commission, including the risk factors
disclosed in the Company's Form 10-K for the fiscal year ended December 31,
2000. These risks could cause the Company's actual results for 2001 and beyond
to differ materially from those expressed in any forward looking statements made
by, or on behalf of, InteliData. The foregoing 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. InteliData is not under any obligation (and expressly disclaims an
obligation) to update or alter its forward-looking statements, whether as a
result of new information or otherwise.
* * * * * *
ITEM 3. 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.
As of September 30, 2001, the fair value of the Company's investment
portfolio is approximately $2,751,000, which consisted of $1,235,000 of Sybase
common stock, $1,275,000 of warrants to purchase Sybase common stock, and
$241,000 of fixed income securities. Changes in the fair value of the Sybase
common stock and fixed income securities will continue to be recognized in
shareholders' equity (as a component of comprehensive income). SFAS 133, which
the Company adopted effective January 1, 2001, requires that changes in the fair
value of the warrants to purchase Sybase common stock to be recognized
periodically in income. A 10% decline in the stock price would result in
approximate decreases of $128,000 in the fair value of the Company's holdings of
Sybase warrants.
During October 2001, the Company sold its remaining investment in the
Sybase common stock and received proceeds of approximately $1,775,000 and
recognized a realized loss from sales of investments of approximately $717,000.
This realized loss represents the decrease in value from the $18.88 closing
price at the time of the Home Financial Network and Sybase merger on January 20,
2000 to the actual dispositions at the average sales price of $13.45 during
October 2001. As of October 31, 2001, the Company still maintained all of its
warrants to purchase Sybase common stock.
PART II: OTHER INFORMATION
- --------------------------
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
- -----------------------------------------
(a) Exhibits
--------
None.
(b) Reports on Form 8-K
--------------------
None.
SIGNATURE
Pursuant to the requirements of the Securities 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.
President, Chief Executive Officer,
and Director