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, 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, 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
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 March 8, 2002, was approximately $98,332,000. In determining this
figure, the Registrant has assumed that all of its directors and executive
officers are affiliates. Such assumptions should not be deemed to be conclusive
for any other purpose.
The number of shares of the registrant's Common Stock outstanding on March 8,
2002 was 49,022,634.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of InteliData Technologies Corporation's Proxy Statement for its 2002
Annual Stockholder Meeting are incorporated by reference into Part III of this
Report.
INTELIDATA TECHNOLOGIES CORPORATION
2001 ANNUAL REPORT ON FORM 10-K
TABLE OF CONTENTS
Page
----
PART I
Item 1. Business..............................................................3
Item 2. Properties............................................................9
Item 3. Legal Proceedings.....................................................9
Item 4. Submission of Matters to a Vote of Stockholders.......................9
PART II
Item 5. Market for Registrant's Common Stock and Related Stockholder
Matters.............................................................11
Item 6. Selected Financial Data..............................................12
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations...............................................13
Item 7a. Quantitative and Qualitative Disclosures about Market Risk...........29
Item 8. Financial Statements and Supplementary Data..........................30
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure............................................51
PART III
Item 10. Directors and Executive Officers of the Registrant...................51
Item 11. Executive Compensation...............................................51
Item 12. Security Ownership of Certain Beneficial Owners and Management.......51
Item 13. Certain Relationships and Related Transactions.......................51
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.....51
Signatures ...................................................................54
PART I
======
ITEM 1. BUSINESS
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GENERAL
InteliData Technologies Corporation ("InteliData" or the "Company")
provides the real-time financial processing infrastructure to enable financial
institutions ("FI's") to provide services over the Internet. The Company
develops and markets software products and consulting services for the financial
services industry. InteliData also services the emerging electronic bill
presentment and payment ("EBPP") market with the development of its end-to-end,
biller-to-consumer EBPP solutions.
Our products and services are designed to assist consumers in accessing and
transacting business with their FI's electronically, and to assist FI's in
connecting to and transacting business with third party processors. The Company
also serves as an Application Service Provider ("ASP") by providing Internet
hosting and service bureau solutions to FI's, including bankcard issuers.
On January 11, 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 now a wholly owned subsidiary of InteliData. This acquisition was accounted
for as a purchase. As a result of the Company's acquisition of Home Account
Holdings, InteliData now offers a suite of UNIX-based Internet banking and
electronic bill presentment and payment products and services in an application
services provider environment.
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 Company provides software products and implementation services to FI's
whose processes and systems are subject to regulatory approvals. Internet
banking and EBPP are developing marketplaces. FI's are gradually expanding their
Internet banking services to permit customers not only to access historical
account information from remote locations, but also to engage in transactions
such as receiving and/or paying bills and transferring funds. The Company's
future growth and profitability will depend, in part, upon consumer acceptance
of Internet banking and EBPP processes and the speed at which such acceptance
occurs.
EBPP has been in existence for over a decade but has not enjoyed
significant consumer adoption due to cost, service quality and service
availability factors. Adoption has been gaining momentum as consumers have
gravitated to the Internet. Historically banks have outsourced their bill
payment services to third party payment processors to execute bill payment
transactions initiated by consumers on behalf of the bank.
In 2001, the Company saw increased efforts of FI's to examine their bill
payment operations as the progression of such services for customers grew in
strategic importance within the industry. This resulted in the addition of
several new customers for the Company, including First Union and Washington
Mutual. Our in-house revenue included increases in recurring revenue and
software maintenance fees from our existing customers such as National City,
First Hawaiian, and Bank of the West, BB&T, First Tennessee, Bank of America,
CitiBank, Associated Bank and four Corporate Credit Union processors. Further,
the Company completed its next generation of payment system products
(InteliWorks(TM) CSP), which were designed to provide FI's with the ability to
connect to payment switches, receive presented bills and pay bills in the least
costly manner. InteliWorks(TM) CSP was certified with Spectrum, a payment switch
established by JP Morgan Chase, Wells Fargo and Wachovia/First Union, in
September 2001 and was the first such product to be certified.
Banks who implement our system are able to use our Least Cost Routing(TM)
capabilities to save a potentially significant amount on remittance expense.
Transactions routed by our Least Cost Routing(TM) software to Spectrum or
<page>
MasterCard RPPS should result in substantial savings compared to what the market
currently charges for such transactions through other service providers. To
achieve these savings, the FI's must utilize a Payment Warehouse, a biller
directory and a Least Cost Routing(TM) gateway, all of which InteliData offers
through a license arrangement or on an ASP environment.
PRODUCTS AND SERVICES
The Company's business strategy is to develop products and services,
including software, to meet the needs of FI's and their customers in the
Internet banking and EBPP markets. The Company strives to develop products with
broad appeal that are easy-to-use, practical and built around common industry
standards. In addition, the products and services the Company develops are
designed to support not only Internet access, but also other access methods that
are newly developing. The Company currently supports Wireless access and the new
InteliWorks(TM) architecture has been designed to accommodate requests from
customers to add additional channels of access such as a Personal Digital
Assistant ("PDA").
The Company offers its clients consulting services to assist in
implementation, training and customization on a time and materials basis, and
provides maintenance and support services and software upgrades pursuant to
agreements that are typically renewable on an annual basis. Additionally, the
Company offers consulting services regarding the application and feasibility of
implementing Internet banking products within the FI's computer environment.
InteliData also serves as an ASP solution to meet the anticipated growth and
demands of providing Internet banking and EBPP outsourcing services to its
customers.
The Company currently offers products and services in four major areas:
Internet Banking, Interpose(R) OFX Gateway, Card Solutions(TM), and EBPP
Solutions.
Internet Banking
- ----------------
InteliData has two Internet banking platforms: Interpose(R) and Canopy(TM).
Interpose(R) is the Company's Internet banking solution for large banks, while
Canopy(TM) banking serves the community banking market. InteliData acquired the
Canopy(TM) banking platform and customer base as part of the Home Account
acquisition. The Canopy(TM) banking business was a significant revenue and
margin contributor in 2001 and is expected to contribute similarly in 2002.
However, because the Company's focus and development resources going forward are
expected to be on the large bank and EBPP markets, the Company expects the
Canopy(TM) banking's contribution to be less significant after 2002.
The Interpose(R) Transaction Engine ("ITE") and Interpose(R) Web Banking
("IWB") are the heart of the Company's Internet banking software system. ITE
runs on the FI's host computer system, providing real-time connectivity to
remote delivery channels. Along with this host connection, ITE provides customer
profiling and control over system security. Its Advanced Financial Message Set
gives FI's the functionality to offer a wide range of online financial services.
IWB runs on a Windows NT Server environment and interfaces to the FI's host
computer systems through ITE. It provides the FI's end user access to all of
their financial transactions that are available under the Internet banking
product. InteliData's products and services provide for:
Control - Internet banking and bill payment is becoming a critical
touch point for retail and commercial customers. InteliData provides a
system that puts FI's in control of its delivery channels, customer
data, and payment systems.
Flexibility - With rapid evolution of technology and market
requirements, the FI's can have an online banking solution that allows
them to adapt quickly to new technology, new products, and new service
providers. InteliData's solution is designed to provide the necessary
room for such growth.
Reliability - InteliData provides a solid solution that is designed to
run in today's high-availability environments.
<page>
Scalability - As the demand for online banking and bill payment grows,
transaction volume and complexity will grow. The InteliData solution
is designed to allow the addition of capacity without increasing
complexity.
Interpose(R) OFX Gateway
- ------------------------
The Interpose(R) OFX Gateway allows FI's to support applications and
devices that conform to the Open Financial Exchange ("OFX") message standards.
The Interpose(R) OFX Gateway delivers comprehensive support for the OFX
specification including direct support for customers who use Intuit Quicken(R),
Microsoft Money(R), and other OFX compliant client software.
The flexible and high performance architecture of the Interpose(R) OFX
Gateway provides an Enterprise Gateway for the delivery of bill payment, bill
presentment, investment, and banking transactions across a variety of delivery
channels including the Internet, Personal Financial Manager desktop
applications, and Wireless devices. ___ Furthermore, the Interpose(R) OFX
Gateway synchronizes information across these delivery channels to give
end-users real-time, consistent information.
Currently in production at some of the nation's largest FI's, the
Interpose(R) OFX Gateway delivers a proven, reliable, and highly scalable
solution for managing the delivery of financial transaction information across a
variety of consumer channels.
Card Solutions(TM)
- ------------------
Commencing with the Company's purchase of Home Account, the Company began
offering Card Solutions(TM), which was previously provided by Home Account. This
product offers bankcard issuers the ability to acquire new credit card accounts
using the Company's Internet account acquisition product, to provide
self-service functionalities to current cardholders with the Internet
self-service product, and to market the self-service functionalities to the
cardholder base using the issuer marketing program.
InteliData Card Solutions(TM) provides online solutions for many of the
leading issuers in the credit card industry. Our products and services offer
issuers the ability to acquire new credit card accounts with InteliData's
Internet Account Acquisition product. We also provide self-service capabilities
to current cardholders with our Internet Self-Service product and market the
self-service functionalities to our customers' cardholder base using
InteliData's Issuer Marketing Program. Each of our products contains Web and
application hosting resources and can be integrated with the issuer's current
Web site's look and feel. Our Card Solutions(TM) offers several modules and
programs:
Internet Self-Service - InteliData Card Solutions(TM) is marketed as a
--------------------- cost-effective offering that may potentially
reduce call center expense by providing the same functionality as a
call center through a less expensive Internet delivery channel.
Internet Self-Service is designed in a modular approach for our
customers to choose the functionality they want to provide to the
end-users.
The base module contains dynamic enrollment functionality, ensuring a
secure experience. When a cardholder has enrolled, this module
contains account information, such as balance, payment status, next
payment due date, and cycle-to-date transactions. Additional modules
contain the functionality for cardholders to view previous statements
and download the data to a PFM (Personal Finance Manager), pay their
credit card bills, and utilize a secure messaging process for
submitting customer service inquiries.
Internet Account Acquisition - InteliData Card Solutions(TM) Internet
----------------------------
Account Acquisition enables our customers to acquire new credit card
accounts utilizing the Internet by providing a secured platform for
hosting customized application and response pages. Through a
relationship with First Data Resources, Internet Account Acquisition
utilizes enhanced fraud screening, decisions applications, provides an
applicable response, and books approved applicants on the First Data
Resources system all within sixty seconds, depending upon access
capabilities.
<page>
Issuer Marketing Program - We have created a turnkey marketing program
-------------------------
designed especially to help issuers promote Internet Self-Service to
their cardholders. The program is designed to increase adoption rates
in a cost-effective manner. The Company currently provides two
statement-insert designs that can be customized with the FI's name,
logo, and Web site address. These pieces provide an incentive to have
cardholders manage their credit card accounts online, potentially
reducing servicing expense and enhancing the impact of the issuer's
Web site.
Card Activation -- Self Service Module - Web-Enabled Card Activation
---------------
allows end-users to activate their new and reissued cards in a secure
environment.
Account Profile Change -- Self Service Module - Through InteliData,
----------------------
FI's can allow their cardholders to change their account information,
including address and phone numbers, on-line. InteliData enables FI's
to authenticate a cardholder's identity prior to making changes. If
FI's choose a manual processing method, change requests are sent to
the Customer Service Representative ("CSR") queue for processing. If
FI's choose an automated processing, change requests are completed on
the First Data Resources system via a non-monetary transaction.
EBPP Solutions
- --------------
InteliWorks(TM) CSP - The InteliWorks(TM) Consumer Services Provider
("CSP") solution, which is a new product still under substantial development,
has been designed from the ground up to meet the new, emerging, and unique
transaction processing and switching needs for consumer side bill presentment
and payment. These include the ability to:
o Interface with multiple EBPP networks, remittance processors, and
exchanges, such as Spectrum, RPPS, Princeton eCom, Metavante, and
CheckFree
o Manage settlement and dispute resolution across multiple networks
o Synchronize biller directories across multiple networks
o Manage consumer enrollment with billers across multiple networks
o Manage interaction with biller Web sites for detailed billing
information
o Aggregate summary level bills
o Integrate seamlessly to the bank's existing Web site
o Manage payment through multiple networks
o Consolidate payment on presented bills with "pay-any" bill payment
The platform behind the InteliData CSP is the Company's InteliWorks(TM)
online financial processing architecture. This architecture, based entirely on
the J2EE standard, is designed to meet the unique needs of large scale, online
financial messaging and transaction processing. InteliWorks is designed to
provide:
o 100% J2EE compliance
o Platform portability across multiple OS and database environments
o Industrial strength reliability to ensure accurate processing of
payment transactions
o Presentation User Interface independence, providing ease of
integration with bank-designed user interfaces for Web and wireless
delivery channels
o Scalability to handle large transaction volumes
o Flexible security architecture
o Network independence (internal, RPPS, Spectrum, and others)
o Native XML integration points with "adapters" for IFX, OFX and other
future messaging standards
Interpose(R) Payment Warehouse - The Interpose(R) Payment Warehouse
----------------------------------
provides a software solution to FI's that automates bill payment processing,
while giving FI's the benefit of tracking payment activity and integrating
delivery channels. The Interpose(R) Payment Warehouse gives FI's the option of
Least Cost Routing(TM). This enables FI's to outsource as much or as little of
the electronic payment volume as they choose. This permits FI's to:
<page>
o Process "on-us" internal payments at no additional cost
o Ensure "good funds" debits to reduce exception item costs
o Capitalize on Least Cost Routing(TM) of payments
o Create new revenue streams for electronic lockbox operations
The Interpose(R) Payment Processor is a comprehensive payment warehousing
and routing solution designed to give the FI's control of their electronic bill
payment program. Using Interpose(R), FI's can:
o Mix-and-match multiple payment options and processors
o Offer customers a variety of interface options--scheduling and
modifying payments from the PC, Internet, or telephone
o Warehouse bill payment information and mine customer data to expand
relationships
MARKETING AND DISTRIBUTION
The Company concentrates its marketing efforts on direct sales of principal
products and services to FI's in the United States, including bankcard issuers.
Currently, the Company is marketing to large FI's, generally with assets in
excess of $3 billion. In addition, the Company markets to bankcard issuers
through a processing arrangement with First Data Resources, a subsidiary of
First Data Corp. The Company is developing products and services to assist FI's
who want to provide their customers with the ability to access certain
information from their accounts and to complete transactions with those
institutions concerning bill payments, loan payments, online transfers and other
transactions from remote locations via personal computers or other devices.
The Company has established alliances with major service providers who are
providing services to our target FI's and who are marketing our services. The
Company currently has agreements in place with ALLTEL and First Data Resources
for their sales forces to market services using InteliData's systems. In
addition, the Company has a strategic relationship with Spectrum.
ALLTEL is a leading provider of core data processing software to large
banks. Forty-seven of the top fifty U.S. banks rely on ALLTEL software for loan
processing, mortgage processing, or deposit processing software and service.
ALLTEL has licensed InteliData's Interpose(R) Payment Warehouse and Interpose
Web Banking products and can offer outsourced bill payment services to its
customers. InteliData receives revenue for the use of the software in the ALLTEL
Data Center.
First Data Resources is a leading third-party transaction processor. Their
services include a comprehensive line of card portfolio management solutions,
products and services to more than 1,400 credit, debit, stored-value, smart
cards, commercial, private label and oil card issuers worldwide. Under a Joint
Marketing Agreement between the two companies, First Data markets InteliData's
Card Solutions(TM) to credit card issuers interested in utilizing Web based
tools and services that can help them expand their portfolio, increase market
share and improve profitability.
Spectrum EBP, L.L.C. is a bank-owned, payment systems company founded and
owned by J.P. Morgan Chase, Wachovia, and Wells Fargo. Spectrum provides a
real-time, ATM-like bill payment and bill presentment switch, allowing its
participating members to exchange payments and bills without the use of a third
party processor. In addition to the three owners, there are currently twenty-one
other FI's that either belong to the Spectrum network or have signed letters of
intent to participate, including Citibank, Fleet, First Tennessee, Hibernia, and
Union Bank of California. InteliData is currently the only certified
"off-the-shelf" provider of "Consumer Services Provider (CSP)" software, which
is the software a bank would use to allow consumers to view and pay bills
enabled through the Spectrum network.
COMPETITION
The Company's products and services face competition from several types of
competitors. Some FI's have elected to develop internally their own Internet
banking and EBPP solutions, instead of purchasing products and
<page>
services from the Company or other vendors. FI's may also obtain similar
products and services from other providers, including S-1 Corporation, Corillian
Corporation, Financial Fusion, Inc., CheckFree Corporation, Online Resources
Corporation, Digital Insight, Inc., Metavante Corporation, and Incurrent
Solutions, Inc.
The Company expects that competition in these areas will continue to
increase. The Company believes that a principal competitive factor in its
markets is the ability to offer an integrated system of various Internet banking
and EBPP products and services. Competition will be based upon price,
performance, customer service and the effectiveness of marketing and sales
efforts. The Company competes in its various markets on the basis of its
relationships with strategic partners, by developing many of the products
required for complete solutions, by leveraging market experience, and by
building reliable products and offering those products at reasonable prices.
PRODUCT DEVELOPMENT
The Company operates in industries that are rapidly growing and changing.
In an effort to improve the Company's position with respect to its competition,
the Company has focused its efforts in the area of product development. In 2001,
2000, and 1999, the Company's research and development expenditures were
$15,729,000 $14,512,000, and $4,115,000, respectively. At December 31, 2001 and
2000, approximately 97 and 103 employees were engaged in product development,
respectively. As of March 1, 2002, approximately 94 employees were engaged in
product development.
The Company's product development efforts are focused on software and
systems for Internet banking and EBPP. This industry is characterized by rapid
change. To keep pace with this change, the Company maintains an aggressive
program of new product development and dedicates considerable resources to
research and development to further enhance its existing products and to create
new products and technologies. The Company's ability to attract and retain
highly skilled research and development personnel is important to the Company's
continued success.
GOVERNMENT REGULATION
Although it has recently undergone significant deregulation, the financial
services market, which the Company has targeted for marketing, 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 rights of such parties.
EMPLOYEES
At December 31, 2000, the Company had approximately 136 employees. After
the acquisition of Home Account in January 2001, the Company had approximately
305 employees. At December 31, 2001, the Company had approximately 140
employees. The Company has no collective bargaining agreements with its
employees. At March 1, 2002, the Company had approximately 139 employees.
ITEM 2. PROPERTIES
- -------------------
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. In
March 2000, the Company leased 7,500 square feet of additional office space in
Reston, Virginia to provide additional facilities for product development close
to its already existing headquarters facility. This lease expired in December
2001. The Company also leases 11,000 square feet of office space for its product
development facilities in Toledo, Ohio. The Ohio lease expires in January 2004.
In January 2001, the Company acquired Home Account Holdings, 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 and the
Company is currently seeking a subtenant for the 7,200 square feet of space. The
Nebraska lease for 19,000 square feet of office space, used for product
development and customer service, will expire in March 2003. 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 leasing 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 of such
routine litigation will be likely to have a material adverse effect on the
Company's financial condition or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF STOCKHOLDERS
- --------------------------------------------------------
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
---- --- -------------
William F. Gorog 76 Chairman of the Board
Alfred S. Dominick, Jr. 56 President and Chief Executive Officer
Michael E. Jennings 56 Executive Vice President, Consumer Services
Steven P. Mullins 35 Vice President, Chief Financial Officer
and Treasurer
Albert N. Wergley 54 Vice President, General Counsel and Secretary
Charles A. White 43 Vice Chairman, Corporate Development
William F. Gorog has served as Chairman and Director of the Company since
November 1996. Mr. Gorog had served as Chairman of US Order from May 1990 to
November 1996. From October 1987 until founding US Order in May 1990, he served
as chairman of the board of Arbor International, an investment management firm.
From 1982 to 1987, he served as president and chief executive officer of the
Magazine Publishers of America, an association representing the principal
consumer publications in the United States. During the Ford Administration, Mr.
Gorog served as deputy assistant to the President for Economic Affairs and
Executive Director of the Council on
<page>
International Economic Policy. Prior to that time, he founded and served as
chief executive officer of DataCorp, which developed the Lexis and Nexis
information systems for legal and media research and which was subsequently sold
to the Mead Corporation.
Alfred S. Dominick, Jr. has served as the President and Chief Executive Officer
of the Company since August 1998. 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 Bank One
Texas, Mr. Dominick was a Senior Vice President with Fleet National Bank.
Michael E. Jennings has served as the Executive Vice President, Consumer
Services since joining InteliData in June 2000. He is in charge of overall
business planning and business development activities for electronic bill
presentment and payment, Internet banking, and outsourcing. 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.
Steven P. Mullins has served as Vice President, Chief Financial Officer, and
Treasurer of the Company since October 2000. From January 2000 to October 2000,
he served as the Vice President of Finance, Treasurer, and Controller. From
January 1999 to January 2000, he served as Controller and Director of Finance
and from June 1997 to January, 1999, he served as Director of Financial Planning
of the Company. From 1995 to 1997, he ran a financial consulting practice.
Previous to that he was an Administrator with the Fairfax County, Virginia
Government.
Albert N. Wergley has served as Vice President, General Counsel, and Secretary
of the Company since November 1996. From May 1995 to November 1996, he served as
Vice President and General Counsel of US Order. From 1986 to 1994, Mr. Wergley
was vice president and general counsel of Verdix Corporation (now Rational
Software Corporation), 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.
Charles A. White joined InteliData through the merger with Home Account. He was
President and CEO of Home Account from 1998 through the merger. From 1994 to
1998, Mr. White was at First Data Corporation, where he was President of
Electronic Commerce Payment Services. At First Data, Mr. White managed start-up
ventures in electronic bill presentment and Internet home banking. He led the
company's bill presentment concept and established the joint venture MSFDC,
later Transpoint, with Microsoft. Prior to First Data, Mr. White held executive
technology management positions at Visa International, where he was responsible
for the development and engineering of distributed, real-time, payment
processing solutions.
PART II
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:
Price Range of Common Stock
---------------------------
High Low
-------------- --------------
2001
Fourth Quarter $ 4.30 $ 2.70
Third Quarter 5.90 2.40
Second Quarter 6.36 2.55
First Quarter 6.03 2.25
2000
Fourth Quarter $ 6.38 $ 2.38
Third Quarter 10.75 3.81
Second Quarter 16.38 5.38
First Quarter 22.50 3.50
On March 8, 2002, the last reported sales price for the Company's common
stock was $2.05. The number of stockholders of record at March 8, 2002 was 676,
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.
In November and December 2001, the Company closed private placement sales
of an aggregate of 2,862,727 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 $7,872,500. The placement agent in the transaction,
Stonegate Securities, received approximately $472,350 in commissions and
warrants exercisable for the purchase of 286,273 shares of InteliData's common
stock, at an exercise price of $2.75 per share. The private placement was
conducted in accordance with Rule 506 of Regulation D under the Securities Act
of 1933. In December 2001, the Company filed a registration statement on Form
S-3 with the Securities and Exchange Commission to register the shares issued in
the private placement for resale. This registration statement became effective
in January 2002.
In January 2001, the Company issued 6,900,000 shares of its common stock in
connection with its acquisition of Home Account Holdings, Inc. ("Home Account")
and its operating subsidiary, Home Account Network, Inc. These shares of the
Company's common stock were issued in exchange for all of the outstanding
securities and indebtedness of Home Account, which were held largely by
institutions and members of key management of Home Account. These shares of the
Company's common stock were issued in a private placement under Section 4(2) of
the Securities Act of 1933. In April 2001, the Company filed a registration
statement on Form S-3 with the Securities and Exchange Commission to register
the shares issued in the acquisition of Home Account for resale. This
registration statement became effective in August 2001.
<page>
ITEM 6. SELECTED FINANCIAL DATA
- ---------------------------------
INTELIDATA TECHNOLOGIES CORPORATION
SELECTED FINANCIAL DATA
(in thousands, except per share data)
<table>
Years Ended December 31,
-------------------------------------------------------------------
RESULTS OF OPERATIONS: 2001 2000 1999 1998 1997
- ---------------------- ----------- ----------- ------------ ---------- ----------
Revenues $ 18,296 $ 5,101 $ 6,493 $ 4,683 $ 3,951
Cost of revenues 9,010 2,720 1,743 618 2,129
Operating expenses 39,624 27,699 12,800 11,861 18,108
----------- ----------- ---------- ---------- ----------
Operating loss (30,338) (25,318) (8,050) (7,796) (16,286)
Other income, net 137 49,726 350 874 1,271
Provision (benefit) for income taxes (160) 488 -- -- --
------------ ----------- ---------- ---------- ----------
Income (loss) from continuing operations (30,041) 23,920 (7,700) (6,922) (15,015)
Income (loss) from discontinued operations -- (262)(1) 5,805 (30,917) (75,079)(3)
----------- ------------ ---------- ---------- ----------
Net income (loss) (30,041) 23,658 (1,895) (37,839) (90,094)
Preferred stock dividend requirement -- -- (1,936)(2) -- --
----------- ----------- ---------- ---------- ----------
Net income (loss) attributable to
common stockholders $ (30,041) $ 23,658 $ (3,831) $ (37,839) $ (90,094)
============ =========== ========== ========== ==========
Basic earnings per common share
Income (loss) from continuing operations $ (0.65) $ 0.63 $ (0.29) $ (0.22) $ (0.47)
Income (loss) from discontinued operations 0.00 (0.01) 0.18 (0.98) (2.38)
----------- ----------- ---------- ---------- ----------
Net income (loss) $ (0.65) $ 0.62 $ (0.11) $ (1.20) $ (2.85)
============ =========== =========== ========== ==========
Diluted earnings per common share
Income (loss) from continuing operations $ (0.65) $ 0.59 $ (0.29) $ (0.22) $ (0.47)
Income (loss) from discontinued operations 0.00 (0.01) 0.18 (0.98) (2.38)
----------- ----------- ---------- ---------- ----------
Net income (loss) $ (0.65) $ 0.58 $ (0.11) $ (1.20) $ (2.85)
============ =========== ========== ========== ==========
Weighted-average common shares outstanding
Basic 45,897 38,237 33,367 31,450 31,574
=========== =========== ========== ========== ==========
Diluted 45,897 40,843 33,367 31,450 31,574
=========== =========== ========== ========== ==========
December 31,
-------------------------------------------------------------------
FINANCIAL POSITION: 2001 2000 1999 1998 1997
- ------------------- ----------- ------------ ---------- ---------- ----------
Cash and cash equivalents $ 12,026 $ 27,255 $ 8,496 $ 8,050 $ 11,359
Total assets 57,710 43,278 11,212 9,137 46,702
Long-term debt -- -- -- -- --
Stockholders' equity 44,475 33,570 7,087 331 37,069
</table>
(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.
(3) Discontinued operations results for 1997 include $65,200,000 of charges
related to impairment of assets, restructuring charges, and valuation
adjustments relating to inventories.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
- ---------------------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS
-----------------------------------
Overview
InteliData Technologies Corporation ("InteliData" or the "Company")
provides the real-time financial processing infrastructure to enable financial
institutions ("FI's") to provide services over the Internet. The Company
develops and markets software products and consulting services for the financial
services industry. InteliData also services the emerging electronic bill
presentment and payment ("EBPP") market with the development of its end-to-end,
biller-to-consumer EBPP solutions.
Our products and services are designed to assist consumers in accessing and
transacting business with their FI's electronically, and to assist FI's in
connecting to and transacting business with third party processors. The Company
also serves as an Application Service Provider ("ASP") by providing Internet
hosting and service bureau solutions to FI's, including bankcard issuers.
On January 11, 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 now a wholly owned subsidiary of InteliData. This acquisition was accounted
for as a purchase. As a result of the Company's acquisition of Home Account
Holdings, InteliData now offers a suite of UNIX-based Internet banking and
electronic bill presentment and payment products and services in an application
services provider environment.
The Company provides software products and implementation services to FI's
whose processes and systems are subject to regulatory approvals. Internet
banking and EBPP are developing marketplaces. FI's are gradually expanding their
Internet banking services to permit customers not only to access historical
account information from remote locations, but also to engage in transactions
such as receiving and/or paying bills and transferring funds. The Company's
future growth and profitability will depend, in part, upon consumer acceptance
of Internet banking and EBPP processes and the speed at which such acceptance
occurs.
The Company's business strategy is to develop products and services,
including software, to meet the needs of FI's and their customers in the
Internet banking markets. The Company strives to develop products with broad
appeal that are easy-to-use, practical and built around common industry
standards. The Company has four strategic product lines.
The Internet banking product line provides Internet access to account
information, transfer capability between accounts, and bill payment
functionality and is focused on banks with assets over $3 billion dollars. While
the market for these products is mature, and the number of new opportunities is
limited, the Company has a solid customer base, which provided approximately 67%
of total revenues in 2001, and represents an opportunity for future business
from both new products as well as organic growth of their user base.
The Interpose(R) OFX Gateway product line provides Quicken and Money users
access to their bank account information and other functionality. This product
line currently has four primary customers, CitiBank USA, First Union/Wachovia,
Bank of America, and USAA. In addition, both Fiserv and Princeton E-Com have
licensed this technology. This product line contributed approximately 17% of
total 2001 revenues.
The Company's Card Solutions(TM) product line provides card issuers with
the opportunity to offer their customers Internet access to credit card
information with the functionality to perform a variety of self-service
activities, apply for a credit card or a line increase, pay the bills, or
receive e-mail orders. The Company has a strategic relationship with First Data
Resources, which is marketing the Company's products to their customer base. In
2001, this product line contributed approximately 15% of total revenues.
Finally, in 2001, the Company completed the initial product offering of
InteliWorks(TM) for the Company's EBPP Solutions product line. This offering
provides a suite of products enabling a bank to connect to payment switches or
payment processors, to aggregate presented bills and to warehouse bill payments.
Spectrum also certified the Company's connection to their switch, and selected
the Company as a preferred partner. As a product
<page>
line that is still under development, revenue from this product line was less
than 1% of total 2001 revenues. The Company does not expect significant revenues
from this product line in 2002.
Critical Accounting Policies
We consider the following accounting policies to be the most important to
our financial position and results of operations or are policies that require
the exercise of significant judgment and/or estimates.
Revenue Recognition - We consider our revenue recognition policy as
--------------------
critical to an understanding our business operations and results of operations.
The Company supplies Internet banking and electronic bill presentment and
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.
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 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 service bureaus, 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 our
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 contracts and their related
revenue for license and professional services were recognized under the
percentage of completion method. In addition to our developing and delivering
the solution, the Company is entitled to transaction fees based on the number of
users and transactions. These transaction 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, requires that we make estimates and judgments as to anticipated
project scope, timing and costs to complete the projects. The completions 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 our 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 our business, operations
and financial condition.
<page>
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, 2001, the Company's top six customer comprised
approximately 52% 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 during the year, the Company
acquired certain accounts receivables that were outstanding as of the
acquisition date. The Company pursued collections efforts, but ultimately
determined that some of these accounts were uncollectible. Such doubtful
accounts related to these acquired assets cannot be adjusted as part of the
purchase price allocation, but the bad debt expense must be recognized as
current operations. During 2001, the Company recorded costs associated with
these particular sets of uncollectible accounts in the amount of $1,090,000 and
began to write off some accounts. Additionally, the Company wrote off some
previously reserved legacy InteliData accounts.
Valuation of Long-Lived Assets - We review long-lived assets such
-----------------------------------
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. 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 well as support the operations in serving our
customers. We record these assets that in management's opinion extend the useful
life of the underlying asset 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 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.
Adoption of New Accounting Standard - In June 2001, the Financial
---------------------------------------
Accounting Standards Board ("FASB") 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. 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 that 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
<page>
impact of reducing our amortization of the current goodwill and certain
intangibles commencing January 1, 2002 and reviews for impairment may result in
future periodic write-downs.
In August 2001, the FASB issued SFAS No. 144, Accounting for the Impairment
or Disposal of Long-Lived Assets, which is 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 No. 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 is not expected to have a material affect on
the Company's financial position, results of operations, or cash flows.
In June 1998, the FASB issued 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 and interest rate swaps, 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 holdings of the Sybase
warrants are defined as derivatives under this guidance. The Company's adoption
of this pronouncement, effective January 1, 2001, did not have a material effect
on the Company's financial statements as of the adoption date. For the year
ended December 31, 2001, InteliData recorded $866,000 of unrealized losses in
the statement of operations based on the fluctuation in the fair value of the
Sybase warrants.
Results of Operations - Years Ended December 31, 2001 and 2000
The following represents the results of operations for InteliData
Technologies Corporation. 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.
Revenues
The Company's revenues were $18,296,000 in 2001 compared to $5,101,000 in
2000, an increase of $13,195,000. The increase was a result of an increase in
software revenue of $1,117,000, an increase in consulting and services revenues
of $12,622,000, all including the addition of the Home Account operations
starting from January 11, 2001, and offset by the expected cessation of the
royalty arrangements relating to the sale of bill-payment software to VISA
Interactive. During 2001, the Company generated $1,790,000 from software sales
and $16,506,000 from consulting and services. During 2000, software revenues
contributed $673,000, consulting and services contributed $3,884,000 and royalty
arrangements contributed $544,000.
The increase in software revenue was due to several large systems sold in
the beginning of the year, while the systems sold in 2000 occurred in the latter
part of the year. As a result, the Company was able to perform on and earn the
revenue associated with the 2000 and 2001 sales during 2001. The increase in
consulting and services revenues from 2000 to 2001 was primarily due to the
addition of the Home Account operations and the increases in the Company's
recurring revenue from fees associated with its hosting and service bureau
operations. The following information represents the Company's revenues in the
various product lines for the years ended December 31 (in thousands):
2001 2000 1999
--------- --------- ---------
Internet Banking $ 12,333 $ 4,557 $ 4,144
Interpose(R)OFX Gateway 3,064 -- --
Card Solutions(TM) 2,738 -- --
EBPP Solutions 161 -- --
Royalties and other -- 544 2,349
--------- --------- ---------
Total revenues $ 18,296 $ 5,101 $ 6,493
========= ========= =========
<page>
As anticipated, the revenue from royalties was zero due to the cessation of
the royalty revenue stream from the sale of bill-payment software to VISA
Interactive. The difference of $544,000 for the year is due to the decline in
the revenue stream, as previously disclosed, and to the final cessation of the
royalty streams.
Cost of Revenues and Gross Profit
The Company's cost of revenues increased $6,290,000 to $9,010,000 in 2001
from $2,720,000 in 2000. The increase was primarily due to increased revenues,
including the addition of the Home Account results.
Overall gross profit margins increased to 51% for 2001 from 47% for 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 increased $3,610,000 to $10,065,000 in
2001 from $6,455,000 in 2000. The increase was primarily attributable to 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 $2,843,000 to $9,575,000 in 2001
from $6,732,000 in 2000. This was primarily attributable 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 increased $1,217,000 to $15,729,000 in 2001
from $14,512,000 in 2000. The increase was primarily attributable to the
additional expenses associated with the research and development staff of Home
Account, offset by InteliData's significant IWB development efforts in 2000. The
Company incurs research and development expenses primarily in writing and
developing the Interpose(R) Transaction Engine for the Open Financial Exchange
("OFX") standard and building the Interactive Financial Exchange ("IFX")-based
network electronic bill payment switch for our Interpose(R) and EBPP solutions.
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 is 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
<page>
from the escrow claims represent the $378,000 realized gains on sales of
investments. At December 31, 2001, the Company owned all 640,000 warrant units
described above.
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 sheets include $210,000 and
$494,000 of unrealized gain on investments (net of taxes), within stockholders'
equity as of December 31, 2001 and 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 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 $499,000
to $625,000 in 2001 from $1,124,000 in 2000. The decrease is associated with
decreased levels of cash and cash equivalents in 2001 as compared to 2000.
Income Taxes
The provision (benefit) income taxes were $(160,000) and $488,000 for the
years ended December 31, 2001 and 2000, respectively. The provision in 2000 was
related to the alternative minimum tax on the gain on the Sybase investment,
while the benefit in 2001 represented a refund related to the prior year. At
December 31, 2001, the Company had net operating loss carryforwards for federal
income tax purposes of approximately $193 million, which expire in 2008 through
2021, general business tax credits of approximately $489,000, which expire in
2005 through 2010, and an alternative minimum tax credit carryforward of
approximately $197,000, which may be carried forward indefinitely and used to
offset future regular taxable income. Annual use of the net operating loss
carryforwards of approximately $45 million, which was incurred by Home Account
prior to its acquisition by the Company, will be limited under the Internal
Revenue Code as a result of cumulative changes in ownership of more than 50% in
2001.
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. In 2001, the Company did not have any
activity in discontinued operations. In 2000, the Company experienced a loss of
$262,000 in discontinued operations, net of income taxes.
<page>
As of December 31, 2001 and 2000, the net liabilities of discontinued
operations of $504,000 and $755,000 relate to the telecommunications divisions,
respectively. This 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 December 31, 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 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 three to five 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, 2001 was 45,897,000, compared to a basic
weighted-average common shares outstanding of 38,237,000 and a diluted
weighted-average common shares outstanding of 40,843,000 for the year ended
December 31, 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, the issuance of 6,900,000 shares for the
acquisition of Home Account, and the issuance of the 2,863,000 shares for the
private placement during 2001.
Income (loss) from continuing operations were $(30,041,000) and $23,920,000
for the years ended December 31, 2001 and 2000, while the gain (loss) from
discontinued operations were $0 and $(262,000) for 2001 and 2000, respectively.
Net income (loss) were $(30,041,000) and $23,658,000 for 2001 and 2000,
respectively.
As a result of the foregoing, basic and diluted earnings per common share
for 2001 was a net loss of $(0.65). Basic earnings per common share for 2000
were income of $0.63 from continuing operations, loss of $(0.01) from
discontinued operations, and net income of $0.62. Diluted earnings per common
share for 2000 were income of $0.59 from continuing operations, loss of $(0.01)
from discontinued operations, and income of $0.58 for net income.
Results of Operations - Years Ended December 31, 2000 and 1999
As discussed in the previous section, the Company discontinued the Caller
ID leasing business in 2000. Accordingly, the results of operations from leasing
activities have been reported as discontinued operations and prior year results
have been appropriately reclassified.
Revenues
The Company's revenues were $5,101,000 in 2000 compared to $6,493,000 in
1999, a decrease of $1,392,000. The decrease was a result of a decrease in
software revenue of $1,479,000, an increase in consulting and services revenues
of $1,892,000, and an expected reduction from residual royalty arrangements
relating to the sale of bill-payment software to VISA Interactive. During 2000,
software revenues contributed $673,000, consulting and services contributed
$3,884,000 and royalty arrangements contributed $544,000. During 1999, the
Company earned $2,152,000 from software sales, $1,992,000 from consulting and
services, and $2,349,000 from royalty arrangements.
<page>
The decrease in software revenue was due to several large systems sold in
the beginning of 1999, while the systems sold in 2000 occurred in the latter
part of the year. As a result, the Company was able to perform on and earn the
revenue associated with the 1999 sales during 1999. Some revenue related to the
2000 sales was deferred and was recognized in 2001 as the systems deliveries
were completed and accounting criteria were met. Meanwhile, the increase in
consulting and services revenues from 1999 to 2000 was due to the increases in
the Company's recurring revenue from fees associated with its hosting and
service bureau operations.
During 2000, the Company continued to sell software that assists FI's in
connecting customers who bank via the Internet and to sell outsourced solutions
to FI's in the form of a service bureau and Internet hosting services.
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.
The leasing business segment was discontinued and, accordingly has been reported
as discontinued operations.
As anticipated, the revenue for 2000 was negatively affected by the decline
and the cessation of the royalty revenue stream from the sale of bill-payment
software to VISA Interactive. The expected cessation was a significant factor
when comparing 2000 period results with prior periods. In summary, the revenues
from royalties were $544,000 and $2,349,000 for the years ended December 31,
2000 and 1999, respectively. The difference of $1,805,000 for the year is due to
the decline in the revenue stream, as previously disclosed, and to the final
cessation of the royalty streams. The significant decrease from period to period
was also attributable to royalties from the sale of bill-payment software to
VISA Interactive that occurred in 1995 and that was amended by the 1997 sale of
VISA Interactive to Integrion. The $5,000,000 royalty pre-payment made in 1997
was fully recognized as revenue through the third quarter of 1999.
Cost of Revenues and Gross Profit
The Company's cost of revenues increased $977,000 to $2,720,000 in 2000
from $1,743,000 in 1999. The increase was primarily due to a change in product
mix, and an increase in cost of revenues for software and services.
Gross margin percentages will vary based upon the revenue mix between
software sales, service revenues and outsourced services, and based upon the
composition of services revenues earned during the period. As the Company
modifies its business model, cost of sales should increase based on the higher
costs associated with the operations of the service bureau and hosting
businesses.
General and Administrative
General and administrative expenses increased $253,000 to $6,455,000 in
2000 from $6,202,000 in 1999. The increase was primarily attributable to
additional facilities expenses and an increase in employees.
Selling and Marketing
Selling and marketing expenses increased $4,249,000 to $6,732,000 in 2000
from $2,483,000 in 1999. The increase was primarily attributed to increases in
personnel, participation in several trade shows, production of marketing
information, bid and proposal costs, costs associated with investor relations,
and travel.
Research and Development
Research and development costs increased $10,397,000 to $14,512,000 in 2000
from $4,115,000 in 1999. The increase was primarily attributed to the increase
of the number of research and development employees, travel, and
employee-related expenses. The Company primarily incurred research and
development expenses in writing the Interpose(R) Transaction Engine for the Open
Financial Exchange ("OFX") standard, the development of electronic bill
presentment and payment technology, the development of the Interpose(R) Web
Banking ("IWB") front-end, creating the infrastructure and systems for the
service bureau and hosting businesses, and developing upgrades of past software
products.
<page>
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.
InteliData recognized a gain of approximately $42,604,000 on this transaction
during the first quarter of 2000. During the year, the Company recognized an
additional $5,998,000 in realized gains on the sales of the Sybase investment.
Total realized gains for the year were $48,602,000.
Other Income
Other income decreased $774,000 to $1,124,000 in 2000 from $350,000 in
1999. The increase was associated with higher interest income due to the
increases in cash and cash equivalents as a result of the sale of the HFN
investment.
Income Taxes
Income taxes were $488,000 and $0 for the years ended December 31, 2000 and
1999, respectively. The provision in 2000 was related to the alternative minimum
tax on the gain on the Sybase investment.
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.
In 2000, the Company experienced a loss of $262,000 in discontinued
operations, while there was a gain of $5,805,000 in 1999. The loss in 2000 was
solely related to the Caller ID business and was primarily the result of the
Company's write-off of the remaining accounts receivable. The gain of $5,805,000
in 1999 is divided into $2,579,000 from the Caller ID leasing business and
$3,226,000 from the telecommunications and interactive services divisions. All
of the above results are net of income taxes.
During 1999, the gain of $3,226,000 related to the telecommunications and
interactive services divisions was attributable to specific events that occurred
during the year including: favorable settlements with former telecommunications
customers, the success of other settlements with vendors and negotiated expense
settlements, aggressive collection efforts, and experiencing lower than
anticipated shut-down costs such as warranty and customer service expenses
associated with closing down the discontinued operations.
As of December 31, 2000, the net liabilities of discontinued operations of
$755,000 relate to the telecommunications divisions. This 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 December 31, 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
<page>
$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 three to five 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 2000
were 38,237,000 and 40,843,000, respectively, compared to 33,367,000 for both
for the same period in 1999. The increase resulted primarily from the exercise
of stock options and warrants, stock purchases under the Employee Stock Purchase
Plan, and the granting of certain stock awards. Also, as of November 1999, all
convertible preferred stock, which had been issued in July 1999, was converted
into common stock.
Income (loss) from continuing operations were $23,920,000 and $(7,700,000)
for the years ended December 31, 2000 and 1999, while the gain (loss) from
discontinued operations were $(262,000) and $5,805,000 for 2000 and 1999,
respectively. Net income (loss) were $23,658,000 and $(3,831,000) for 2000 and
1999, respectively.
In accordance with generally accepted accounting principles, portions of
the proceeds from the sale of the Company's Series B Preferred Stock were
allocated to certain warrants and to the preferred stock's conversion feature.
On the Company's 1999 statement of operations, "Preferred stock dividend
requirement" in the amount of $1,936,000 is added to the net loss to arrive at
"Net loss attributable to common stockholders."
As a result of the foregoing, basic earnings per common share for 2000 were
income of $0.63 from continuing operations, loss of $(0.01) from discontinued
operations, and net income of $0.62. Diluted earnings per common share for 2000
were income of $0.59 from continuing operations, loss of $(0.01) from
discontinued operations, and income of $0.58 for net income.
For the same period in 1999, basic and diluted income (loss) per common
share were a loss of $(0.29) from continuing operations and income of $0.18 from
discontinued operations, resulting in a basic and diluted loss per common share
of $(0.11). In 1999, the Company's net loss attributable to common stockholders
was impacted by a charge of $1,936,000 related to the Series B Preferred Stock
dividends and the amortization of discounts arising from allocation of proceeds
to warrants and the beneficial conversion feature.
Liquidity and Capital Resources
During 2001, the Company's cash and cash equivalents decreased by
$15,229,000. At December 31, 2001, the Company had $12,026,000 in cash and cash
equivalents, $2,917,000 in investments, $8,662,000 of working capital with no
long-term debt, and $44,475,000 in stockholders' equity.
The Company's principal needs for cash in 2001 were for funding operating
losses and to fund working capital, primarily related to accounts receivable.
The Company funded an increase in accounts receivable of $2,192,000 and
decreases in accounts payable and accrued expenses of $2,588,000 and $771,000,
respectively, for the year ended December 31, 2001. The increase in accounts
receivable was attributable to the timing of receipts for services performed.
The Company's cash requirements for operating activities in 2001 were
financed primarily by cash and cash equivalents on hand and the proceeds from
sales of investments. Total cash proceeds from the sale of investments were
approximately $6,637,000.
<page>
Net cash provided by investing activities in 2001 was $4,127,000. This was
a result of the sales of investments as discussed above, offset by the purchases
of property and equipment of $921,000 and the cash paid for the purchase of Home
Account and the related acquisition costs of $320,000 and $1,805,000,
respectively.
Financing activities provided net cash of $7,370,000 in 2001 and consisted
of $7,720,000 from the issuance of the Company's common stock through a private
placement, stock option exercises, warrant exercises and the Employee Stock
Purchase Plan, offset by $350,000 related to payments made to acquire treasury
stock.
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, 2001. As of December 31, 2001, the Company had $504,000 in
remaining liabilities related to the discontinued operations. During 2000, the
Company sold the only remaining asset it had in the discontinued operations --
the building in New Milford, Connecticut. Liabilities remaining in the
discontinued operations represent the Company's estimated liability related to
potential environmental clean-up 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 agency, and to remediate the
damages. 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, 2001. 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 leases facilities and equipment under cancelable and
noncancelable operating lease agreements. Future minimum lease payments under
noncancelable operating leases with initial or remaining terms in excess of one
year at December 31, 2001, were as follows (in thousands):
Years Ending December 31,
-------------------------
2002 $ 1,157
2003 1,012
2004 808
2005 411
2006 330
2007 and thereafter --
------------
Total minimum lease payments $ 3,718
=============
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 of such
routine litigation will be likely to have a material adverse effect on the
Company's financial condition or results of operations.
The Company believes that it currently has the capital necessary to
continue funding its operations in 2002. During 2002, the Company expects its
operating losses to decline based on increases in recurring revenue due to
increases in the adoption rates and penetration rates of Internet banking,
credit card bill presentment, and electronic bill pay operations and based on
our periodic rationalization of headcount and other expenses in light of our
available capital and anticipated business forecast. In 2002, the Company
expects to focus most of its research and development efforts on the EBPP
Solutions. The Internet banking, Interpose(R) OFX Gateway, and Card
Solutions(TM) products are currently in operation at customer sites and
development efforts will be focused largely on product upgrades and product
maintenance. The initial phase of the InteliWorks(TM) CSP product was completed
in October 2001. The Company will continue funding research and development into
this product to expand the number of processor interfaces, build a more
comprehensive Customer Care tool, complete development of full "pay any"
capabilities and, most significantly, to create a Universal Directory Service.
New Accounting Pronouncements
Recent Accounting Pronouncements - In June 2001, the Financial Accounting
Standards Board ("FASB") issued Statement of Financial Accounting Standards No.
141, Business Combinations ("SFAS 141") and SFAS No.
<page>
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. 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 that 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 and certain intangibles commencing January 1, 2002 and reviews for
impairment may result in future periodic write-downs.
In August 2001, the FASB issued SFAS No. 144, Accounting for the Impairment
or Disposal of Long-Lived Assets, which is 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 No. 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 is not expected to have a material affect on
the Company's financial position, results of operations, or cash flows.
Adoption of Accounting Pronouncements - In June 1998, the FASB issued
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 and interest rate swaps, 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 holdings
of the Sybase warrants are defined as derivatives under this guidance. The
Company's adoption of this pronouncement, effective January 1, 2001, did not
have a material effect on the Company's financial statements as of the adoption
date. For the year ended December 31, 2001, InteliData recorded $866,000 of
unrealized losses in the statement of operations based on the fluctuation in the
fair value of the Sybase warrants.
Other Significant Accounting Pronouncements - In December 1999, the
Securities and Exchange Commission issued Staff Accounting Bulletin No. 101,
Revenue Recognition in Financial Statements, which provides guidance on the
recognition, presentation and disclosure of revenue in financial statements.
The Company's application of this pronouncement did not have a material effect
on the Company's financial statements.
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 for 2002 and beyond 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) 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:
<page>
o our ability to continue funding operating losses;
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 recurring revenues and profits through our
ASP business model;
o the impact of competitive products, pricing pressure, product demand
and market acceptance risks;
o the pace of consumer acceptance of home banking and reliance on our
bank clients to increase usage of Internet banking 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 by large software companies;
o the ability of FI's 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 Spectrum relationship into new business
opportunities in the EBPP market;
o the on-going viability of the mainframe marketplace and demand for
traditional mainframe products;
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," "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 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 expansion and development 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 delay or prevent the expansion of our business, which could cause our
business, operating results and financial condition to suffer.
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 so to control expenses and
manage our infrastructure could cause our business, operating results and
financial condition to suffer.
<page>
The acquisition costs associated with our purchase of Home Account Holdings
may exceed the benefits we ultimately realize, which could have an adverse
effect on our business, operations, financial condition, and stock price.
If the costs associated with the acquisition of Home Account Holdings
ultimately exceed the benefits realized, we may experience increased losses
which could cause a decline in the price of our common stock on the NASDAQ
National Market and which could have an adverse effect on our business,
operations and financial condition.
Rapidly changing technologies could make our products obsolete that may
adversely affect our business, operations and financial conditions.
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 FI's 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 relationship with Spectrum (a
consortium of banks aligned to invest in the development of an EBPP
solution) into new business opportunities in the EBPP market.
An inability to compete successfully in an increasingly competitive and
crowded marketplace could adversely affect our business, operations and
financial conditions.
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., Digital Insight, Inc., and Incurrent
Solutions, Inc., some 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;
<page>
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 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 FI's have recently 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. 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.
Future sales by existing shareholders may lower the price of our common
stock, which could result in losses to our shareholders.
Future sales of substantial amounts of our common stock in the public
market, or the possibility of such sales occurring, could adversely affect
prevailing market prices for our common stock or our future ability to raise
capital through an offering of equity securities. Substantially all of our
common stock is freely tradable in the public market without restriction under
the Securities Act, unless these shares are held by "affiliates" of our company,
as that term is defined in Rule 144 under the Securities Act. In particular:
o We have issued 2,862,727 shares of our common stock and warrants to
acquire up to 1,431,364 shares of our common stock to certain
investors in a private placement that closed in December 2001.
Additionally, we issued warrants to acquire up to 286,273 shares of
common stock to our placement agent in connection with the private
placement. The shares of common stock and the shares of common stock
issuable upon exercise of the warrants issued in the private placement
are being registered pursuant to this registration statement, and when
this registration statement becomes effective, such issued shares and
any shares issued upon exercise of the warrants shall become freely
tradable in the public market without restriction under the Securities
Act.
o We have issued 6,900,000 shares of our common stock pursuant to our
acquisition of Home Account Holdings. These shares have been
registered with the SEC and are freely tradable in the public market
subject to certain restrictions in the acquisition agreements.
o Of the 6,900,000 shares, 5,900,000 shares have been released to
certain individuals who held stock in Home Account before our
acquisition, in accordance with the transfer restriction provisions of
the acquisition agreements. Six hundred and ninety thousand shares
were released to certain of these individuals in August 2001. Another
1,035,000 shares were released to certain of these individuals in
November 2001. The remaining shares (other than 1,000,000 shares held
in escrow for possible indemnity claims) were released in March 2002.
Shares released from the indemnity escrow would be released not
earlier than March 31, 2002.
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 could have an adverse effect on 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.
<page>
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.
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.
Risk Factors Associated With Our Industry
The Internet banking and EBPP industries are relatively new and developing
markets, and our success depends on the acceptance and growing use of Internet
banking and electronic bill presentment and payment.
Internet banking and EBPP continue to be developing markets. Our future
financial success in the relatively new Internet banking and EBPP marketplace
depends, in part, upon:
o consumer acceptance of, and FI's support for, Internet banking and
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 FI's success in marketing the Internet banking and EBPP
products to their customers and the ability of these institutions to
implement applications in anticipated time frames or with anticipated
features and functionalities; and,
o the continued absence of 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.
<page>
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 FI's 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
FI's 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; and,
o the erosion of public and consumer confidence in the security and
privacy of Internet banking and EBPP.
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, or
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 are still being developed by government agencies, and we may incur
significant expenses to comply with any requirements that are ultimately
adopted. Our FI's 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.
As of December 31, 2001, the fair value of the Company's investment
portfolio was approximately $2,917,000, which consisted of $2,676,000 of
warrants to purchase Sybase common stock and $241,000 of fixed income
securities. Changes in the fair value of the 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 be recognized periodically in income. 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. A 10% fluctuation
in the stock price would result in an approximate effect of $268,000 in the fair
value of the Company's holdings of Sybase warrants.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
- -----------------------------------------------------
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
----
Consolidated Financial Statements
Consolidated Balance Sheets as of December 31, 2001 and 2000................31
Consolidated Statements of Operations for the Years Ended
December 31, 2001, 2000, and 1999.........................................32
Consolidated Statements of Changes in Stockholders' Equity for the Years Ended
December 31, 2001, 2000, and 1999.........................................33
Consolidated Statements of Cash Flows for the Years Ended
December 31, 2001, 2000 and 1999..........................................34
Notes to Consolidated Financial Statements for the Years Ended
December 31, 2001, 2000, and 1999.........................................35
Independent Auditors' Report..................................................50
INTELIDATA TECHNOLOGIES CORPORATION
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2001 AND 2000
(in thousands, except share data)
<table>
2001 2000
----------------------------
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 12,026 $ 27,255
Restricted cash -- 440
Investments 2,917 10,217
Accounts receivable, net 4,992 1,486
Other receivables 563 83
Prepaid expenses and other current assets 559 320
------------ ------------
Total current assets 21,057 39,801
NONCURRENT ASSETS
Property and equipment, net 3,720 3,282
Goodwill, net 22,038 --
Intangibles, net 10,700 --
Other assets 195 195
------------ ------------
TOTAL ASSETS $ 57,710 $ 43,278
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 3,346 $ 4,288
Accrued expenses 5,357 3,651
Deferred revenues 3,164 1,014
Other liabilities 324 --
Net liabilities of discontinued operations 204 455
------------ ------------
TOTAL CURRENT LIABILITIES 12,395 9,408
Net liabilities of discontinued operations 300 300
Other liabilities 540 --
------------ ------------
TOTAL LIABILITIES 13,235 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 49,723,603 shares in 2001 and 39,320,609 shares in 2000;
outstanding 48,917,259 shares in 2001 and 38,629,897 shares in 2000 50 39
Additional paid-in capital 303,141 261,552
Treasury stock, at cost: 806,344 shares in 2001 and 690,712 shares in 2000 (2,473) (2,123)
Deferred compensation (1,395) (1,375)
Accumulated other comprehensive income 210 494
Accumulated deficit (255,058) (225,017)
------------ ------------
TOTAL STOCKHOLDERS' EQUITY 44,475 33,570
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 57,710 $ 43,278
============ ============
</table>
See accompanying notes to consolidated financial statements.
INTELIDATA TECHNOLOGIES CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
(in thousands, except per share data)
<table>
2001 2000 1999
----------- ----------- -----------
Revenues
Software $ 1,790 $ 673 $ 2,152
Consulting and services 16,506 3,884 1,992
Royalties and other -- 544 2,349
----------- ----------- -----------
Total revenues 18,296 5,101 6,493
----------- ----------- -----------
Cost of revenues
Software 5 -- 460
Consulting and services 9,005 2,720 1,283
----------- ----------- -----------
Total cost of revenues 9,010 2,720 1,743
----------- ----------- -----------
Gross profit 9,286 2,381 4,750
Operating expenses
General and administrative 10,065 6,455 6,202
Selling and marketing 9,575 6,732 2,483
Research and development 15,729 14,512 4,115
Amortization of goodwill and intangibles 4,255 -- --
----------- ----------- -----------
Total operating expenses 39,624 27,699 12,800
----------- ----------- -----------
Operating loss (30,338) (25,318) (8,050)
Realized gain (loss) on sales of investments 378 48,602 --
Unrealized gain (loss) on Sybase warrants (866) -- --
Other income (expenses), net 625 1,124 350
----------- ----------- -----------
Income (loss) before income taxes (30,201) 24,408 (7,700)
Provision (benefit) for income taxes (160) 488 --
----------- ----------- -----------
Income (loss) from continuing operations (30,041) 23,920 (7,700)
Discontinued operations, net of income taxes
Gain (loss) on disposal of Telecommunication Division -- -- 3,226
Income (loss) from operations of Caller ID leasing -- (262) 2,579
----------- ----------- -----------
Total discontinued operations -- (262) 5,805
----------- ----------- -----------
Net income (loss) (30,041) 23,658 (1,895)
Preferred stock dividends and amortization of discounts arising from
allocation of proceeds to warrants and beneficial conversion feature -- -- (1,936)
----------- ----------- -----------
Net income (loss) attributable to common stockholders $ (30,041) $ 23,658 $ (3,831)
=========== =========== ===========
Basic earnings per common share
Income (loss) from continuing operations $ (0.65) $ 0.63 $ (0.29)
Income (loss) from discontinued operations 0.00 (0.01) 0.18
----------- ----------- -----------
Net income (loss) $ (0.65) $ 0.62 $ (0.11)
=========== =========== ===========
Diluted earnings per common share
Income (loss) from continuing operations $ (0.65) $ 0.59 $ (0.29)
Income (loss) from discontinued operations 0.00 (0.01) 0.18
----------- ----------- -----------
Net income (loss) $ (0.65) $ 0.58 $ (0.11)
=========== =========== ===========
Basic weighted-average common shares outstanding 45,897 38,237 33,367
=========== =========== ===========
Diluted weighted-average common shares outstanding 45,897 40,843 33,367
=========== =========== ===========
</table>
See accompanying notes to consolidated financial statements.
INTELIDATA TECHNOLOGIES CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 2001, 2000, AND 1999
(in thousands)
<table>
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, 1999 -- -- 32,293 32 247,359 (2,064) (152) --
Issuance of common stock:
Exercise of stock options -- -- 1,250 1 2,407 -- -- --
Employee stock purchase plan -- -- 23 -- 27 -- -- --
Issuance of preferred stock &
warrants 1 -- -- -- 5,670 -- -- --
Conversion of preferred stock (1) -- 4,793 5 (5) -- -- --
Amortization and accretion of
preferred dividend -- -- -- -- 1,936 -- -- --
Issuance of restricted stock -- -- 369 -- 670 -- (670) --
Cancellation of restricted stock -- -- (37) -- (72) -- 72 --
Issuance of warrants -- -- -- -- 141 -- (141) --
Amortization of deferred
compensation -- -- -- -- -- -- 546 --
Net loss -- -- -- -- -- -- -- --
Comprehensive loss
--- ----- ------ ------- --------- -------- ---------- -----------
Balance at December 31, 1999 -- -- 38,691 38 258,133 (2,064) (345) --
Issuance of common stock:
Exercise of stock options -- -- 258 1 591 -- -- --
Employee stock purchase plan -- -- 30 -- 75 -- -- --
Exercise of stock warrants -- -- 166 -- 228 -- -- --
Issuance of restricted stock -- -- 206 -- 1,401 -- (1,401) --
Cancellation of restricted stock -- -- (30) -- (152) -- 152 --
Issuance of stock warrants -- -- -- -- 419 -- (419) --
Capital contribution -- -- -- -- 857 -- -- --
Purchase of treasury stock -- -- -- -- -- (59) -- --
Unrealized gains on investments -- -- -- -- -- -- -- 494
Amortization of deferred
compensation -- -- -- -- -- -- 638 --
Net income -- -- -- -- -- -- -- --
Comprehensive income
--- ----- ------ ------- --------- --------- ---------- -----------
Balance at December 31, 2000 -- -- 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 -- -- -- -- -- (350) -- --
Realized gains on investments sold -- -- -- -- -- -- -- (284)
Amortization of deferred
compensation -- -- -- -- -- -- 1,903 --
Net loss -- -- -- -- -- -- -- --
Comprehensive income
--- ----- ------ ------- -------- -------- ---------- -----------
Balance at December 31, 2001 -- -- 49,725 $ 50 $303,141 $(2,473) $ (1,395) $ 210
=== ===== ====== ======= ========= ======== ========== ===========
<page>
Accumulated Comprehensive
Deficit Income (Loss) Total
---------- ----------- --------
Balance at January 1, 1999 (244,844) 331
Issuance of common stock:
Exercise of stock options -- 2,408
Employee stock purchase plan -- 27
Issuance of preferred stock &
warrants -- 5,670
Conversion of preferred stock -- --
Amortization and accretion of
preferred dividend (1,936) --
Issuance of restricted stock -- --
Cancellation of restricted stock -- --
Issuance of warrants -- --
Amortization of deferred
compensation -- 546
Net loss (1,895) $ (1,895) (1,895)
----------
Comprehensive loss $ (1,895)
---------- ========== --------
Balance at December 31, 1999 (248,675) 7,087
Issuance of common stock:
Exercise of stock options -- 592
Employee stock purchase plan -- 75
Exercise of stock warrants -- 228
Issuance of restricted stock -- --
Cancellation of restricted stock -- --
Issuance of stock warrants -- --
Capital contribution -- 857
Purchase of treasury stock -- (59)
Unrealized gains on investments -- $ 494 494
Amortization of deferred compensation -- 638
Net income 23,658 23,658 23,658
----------
Comprehensive income $ 24,152
---------- ========== --------
Balance at December 31, 2000 $(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 -- (350)
Realized gains on investments sold -- $ (284) (284)
Amortization of deferred compensation -- 1,903
Net loss (30,041) (30,041) (30,041)
----------
Comprehensive income $ (30,325)
--------- ========== --------
Balance at December 31, 2001 $(255,058) $44,475
========== ========
</table>
See accompanying notes to consolidated financial statements.
INTELIDATA TECHNOLOGIES CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2001, 2000, AND 1999
(in thousands)
<table>
2001 2000 1999
----------- ----------- -----------
Cash flows from operating activities
Income (loss) from continuing operations $ (30,041) $ 23,920 $ (7,700)
Adjustments to reconcile income (loss) from continuing operations
to net cash from operating activities of continuing operations:
Realized gain on sales of investments (378) (48,602) --
Unrealized loss on Sybase warrants 866 -- --
Amortization of goodwill and intangibles 4,255 -- --
Depreciation and amortization 2,061 579 233
Deferred income taxes -- 116 --
Deferred compensation expense 1,903 638 546
Net gain on disposal of property and equipment (60) -- --
Changes in operating assets and liabilities:
Accounts receivable (2,192) (588) (1,585)
Prepaid expenses and other current assets (501) (182) 5
Other assets -- (20) 82
Accounts payable (2,588) 1,945 999
Accrued expenses (771) 2,359 256
Deferred revenue 971 398 (1,527)
---------- ---------- ----------
Net cash used in operating activities of
continuing operations (26,475) (19,437) (8,691)
---------- ---------- ----------
Income (loss) from discontinued operations -- (262) 5,805
Change in net liabilities of discontinued operations (251) 1,629 (4,340)
---------- ---------- ----------
Net cash provided by (used in) operating activities
of discontinued operations (251) 1,367 1,465
---------- ---------- ----------
Net cash used in operating activities (26,726) (18,070) (7,226)
Cash flows from investing activities
Proceeds from sales of investments 6,637 38,700 --
Release of cash escrow 311 -- --
Proceeds from disposal of property and equipment 225 -- --
Purchases of property and equipment (921) (3,313) (433)
Payments on acquisition related costs (1,805) -- --
Cash paid for Home Account common stock (320) -- --
Purchase of investments -- (251) --
---------- ----------- ----------
Net cash provided by (used in) investing activities 4,127 35,136 (433)
---------- ---------- -----------
Cash flows from financing activities
Proceeds from the issuance of preferred stock -- -- 5,670
Proceeds from the issuance of common stock 7,720 895 2,435
Capital contribution -- 857 --
Payments to acquire treasury stock (350) (59) --
---------- ----------- ----------
Net cash provided by financing activities 7,370 1,693 8,105
---------- ---------- ----------
Increase (decrease) in cash and cash equivalents (15,229) 18,759 446
Cash and cash equivalents, beginning of year 27,255 8,496 8,050
---------- ---------- ----------
Cash and cash equivalents, end of year $ 12,026 $ 27,255 $ 8,496
========== ========== ==========
See accompanying notes to consolidated financial statements.
</table>
INTELIDATA TECHNOLOGIES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2001, 2000, AND 1999
(1) ORGANIZATION
InteliData Technologies Corporation ("InteliData" or the "Company")
provides the real-time financial processing infrastructure to enable financial
institutions ("FI's") to provide services over the Internet. The Company
develops and markets software products and consulting services for the financial
services industry. InteliData also services the emerging electronic bill
presentment and payment ("EBPP") market with the development of its end-to-end,
biller-to-consumer EBPP solutions.
Our products and services are designed to assist consumers in accessing and
transacting business with their FI's electronically, and to assist FI's in
connecting to and transacting business with third party processors. The Company
also serves as an Application Service Provider ("ASP") by providing Internet
hosting and service bureau solutions to FI's, including bankcard issuers.
On January 11, 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 now a wholly owned subsidiary of InteliData. This acquisition was accounted
for as a purchase. As a result of the Company's acquisition of Home Account
Holdings, InteliData now offers a suite of UNIX-based Internet banking and
electronic bill presentment and payment products and services in an application
services provider environment.
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 2001 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, an allowance for doubtful accounts, a provision for forward loss and
project plans for the completion and delivery of certain solutions. Actual
results could differ from those estimates.
(c) Revenue Recognition - The Company supplies Internet banking and electronic
bill presentment and 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.
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, 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
<page>
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.
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 our
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 contracts and their related
revenue for license and professional services were recognized under the
percentage of completion method. In addition to our developing and delivering
the solution, the Company is entitled to transaction fees based on the number of
users and transactions. These transaction 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 - The Company reports 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.
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. Effective January 1, 2001, the
Company's investment in the Sybase warrants was accounted for in accordance with
SFAS 133.
(f) Property and Equipment - Property and equipment is stated at cost.
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 three to seven years.
(g) Net Liabilities of Discontinued Operations - Under various disposal
plans adopted in 1997, 1998, and 2000, the Company has completed the divestiture
of all of its telecommunications, interactive services businesses and the Caller
ID adjunct leasing activities, respectively.
(h) 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.
(i) 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
<page>
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.
(j) Accounting for Stock-Based Compensation - The Company accounts for employee
stock options in accordance with Accounting Principles Board Opinion No. 25
("APB 25"), Accounting for Stock Issued to Employees. 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 Statement of Financial Accounting Standards No. 123 ("SFAS
123"), Accounting for Stock-Based Compensation.
SFAS 123 prescribes the recognition of compensation expense based on the
fair value to 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.
(k) Net Income (Loss) Attributable to Common Stockholders per share - Basic
earnings (loss) per common share ("EPS") is computed by dividing net income
(loss), after deducting preferred stock dividend requirements and amortization
of the discounts on the preferred stock that was issued in 1999, 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
2001 and 1999 because they would have been anti-dilutive.
(l) Fair Value of Financial Instruments - The carrying values of the Company's
financial instruments such as cash and cash equivalents, investments in common
stock, warrants, and bonds, accounts receivable, and accounts payable
approximate their fair values.
(m) New 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. 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 that 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 and certain intangibles commencing January
1, 2002 and reviews for impairment may result in future periodic write-downs.
In August 2001, the FASB issued SFAS No. 144, Accounting for the Impairment
or Disposal of Long-Lived Assets, which is 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 No. 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 is not expected to have a material affect on
the Company's financial position, results of operations, or cash flows.
<page>
(n) 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, 2001, the Company's top six customer comprised approximately 52% of the net
accounts receivable balance.
(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. 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.
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.
Additionally, the Company acquired approximately $251,000 of marketable
securities during 2000. The Company considers all of its investments 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, and as such, included within stockholders' equity as of December 31,
2001 is $10,000 of unrealized loss on investments (net of taxes), which
represents the decrease in the fair market value of the investment holdings from
the acquisition price to December 31, 2001.
As of December 31, 2001, the Company has classified all investments, other
than the Sybase warrants, as available-for-sale. All fixed income securities are
due after five years. The amortized cost, gross unrealized holding gains, gross
unrealized holding losses and fair value of the securities were as follows (in
thousands):
Cost or Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---------- ---------- ---------- --------
Fixed income securities $ 251 $ - $ (10) $ 241
========== ========== ========== ========
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
<page>
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. As discussed in Note 1,
effective January 1, 2001, the Company's investment in the Sybase warrants were
accounted for in accordance with SFAS 133. The Company's adoption of this
pronouncement, effective January 1, 2001, did not have a material effect on the
Company's financial statements as of the adoption date. 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 $866,000 for the year ended December 31, 2001.
In accordance with SFAS 115, the balance sheets include $210,000 and
$494,000 of unrealized gain on investments (net of taxes), within stockholders'
equity as of December 31, 2001 and 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 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).
As of December 31, 2001, the warrants to purchase Sybase common stock had
an estimated fair value of approximately $2,676,000. The fair value of the
warrants described above was estimated on December 31, 2001 using the
Black-Scholes model using the following: no dividend yield, expected volatility
of 60%, life of 18 months, and a risk free interest rate of 6.10% per annum.
(4) PROPERTY AND EQUIPMENT
Property and equipment consists of the following at December 31 (in
thousands):
2001 2000
---------- ----------
Building improvements $ 165 $ 45
Office equipment 6,546 4,269
Furniture and fixtures 619 610
---------- ----------
7,330 4,924
Accumulated depreciation (3,610) (1,642)
----------- ----------
$ 3,720 $ 3,282
========== ==========
(5) ACCRUED EXPENSES AND OTHER LIABILITIES
Accrued expenses and other liabilities consists of the following at
December 31 (in thousands):
2001 2000
---------- ----------
Accrued compensation $ 2,563 $ 1,645
Provision for forward loss 549 370
Accrued professional fees 200 291
Accrued insurance 338 209
Deferred taxes 292 193
Other liabilities 1,415 943
---------- ----------
$ 5,357 $ 3,651
========== ==========
The provision for forward loss represents the future anticipated loss based
on the excess of the current estimates at completion of the total contract costs
over total contract revenues.
(6) DISCONTINUED OPERATIONS
As of December 31, 2001, the net liabilities of discontinued operations of
$504,000 relate to the telecommunications divisions. This 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,
<page>
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 December 31, 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 and other costs to be approximately $504,000 and has recorded a liability
for that amount.
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 three to five 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.
The Company leased Caller ID adjunct units under an agreement with US West,
whereby the Company leased Caller ID units directly to US West customers. The
leasing program enabled subscribers to pay a monthly fee for the equipment. In
1996, US West ceased leasing new Caller ID adjunct units under the program.
Notwithstanding the termination of this program, previously existing leases
remained in effect. The number of active records in the Company's installed
lease base historically decreased at a rate of approximately 30% per year.
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 second quarter of 1998, the Company adopted a plan to dispose of
its various telecommunications divisions through sale and liquidation. The
Company's Caller ID adjunct inventory was sold in May 1998. The Company's Plexus
inventory was sold in December 1998. The Company's IPS and Landmark inventory
was sold in February 1999.
Discontinued operations consisted of results from the telecommunications
division and the Caller ID leasing business for the years ended December 31 (in
thousands):
<table>
2001 2000 1999
------ ------ ------
Discontinued Operations of the Caller ID Business
- --------------------------------------------------
Income (loss) from operations, net of income taxes $ - $ (262) $ 2,579
Gain (loss) on disposal, net of income taxes - - -
------ ------ -------
Total discontinued operations - (262) 2,579
------ ------ -------
Discontinued Operations of the Telecommunications Division
- ------------------------------------------------------------
Income (loss) from operations, net of income taxes - - -
Gain (loss) on disposal, net of income taxes - - 3,226
------ ------ -------
Total discontinued operations - - 3,226
------ ------ -------
Total Discontinued Operations
- -------------------------------
Income (loss) from operations, net of income taxes - (262) 2,579
Gain (loss) on disposal, net of income taxes - - 3,226
------ ------ -------
Total discontinued operations $ - $ (262) $ 5,805
====== ======= =======
The net revenues and loss from discontinued operations for the years ended
December 31, are as follows (in thousands):
<table>
2001 2000 1999
------ ------ ------
Discontinued Operations of the Caller ID Business
----------------------------------------------------------
Net revenues $ - $ 1,531 $ 3,923
Cost of revenues - 730 1,322
Operating expenses - 1,068 22
------ -------- --------
Income (loss) from operations - (267) 2,579
Provision (benefit) for income taxes - (5) -
------ -------- --------
Income (loss) from discontinued operations - (262) 2,579
====== ======== ========
Discontinued Operations of the Telecommunications Division
----------------------------------------------------------
Net revenues $ - $ - $ -
Cost of revenues - - -
Operating expenses - - (3,226)
------ -------- --------
Income (loss) from operations - - 3,226
Provision (benefit) for income taxes - - -
------ -------- --------
Income (loss) from discontinued operations - - 3,226
====== ======== ========
Total Discontinued Operations
- -----------------------------------------------------------
Net revenues $ - $ 1,531 $ 3,923
Cost of revenues - 730 1,322
Operating expenses - 1,068 (3,204)
------ -------- --------
Income (loss) from operations - (267) 5,805
Provision (benefit) for income taxes - (5) -
------ -------- --------
Income (loss) from discontinued operations - (262) 5,805
====== ======== ========
</table>
The net liabilities of discontinued operations as of December 31, are as
follows (in thousands):
2001 2000
------ ------
Other current liabilities $ 204 $ 455
Other noncurrent liabilities 300 300
------ ------
Total $ 504 $ 755
====== ======
Summary of Discontinued Operations
In 2000, the Company experienced a loss of $262,000 in discontinued
operations of the Caller ID business, while there was a gain of $2,579,000 in
1999. The loss in 2000 was primarily the result of the Company's write-off of
the remaining accounts receivable.
The gain on disposal of the telecommunications and interactive services
divisions was $3,226,000 in 1999, which represented adjustments to provisions
made in 1998 for items that were a direct result of the decision to dispose of
the segment including: favorable settlements with former telecommunications
customers, the success of other settlements with vendors and negotiated expense
settlements, aggressive collection efforts, and lower than anticipated costs for
warranty and customer service expenses attributable to closing down the
discontinued operations.
The 1998 loss on disposal of telecommunications and interactive service
divisions of $16,174,000 consisted of provisions for items that were a direct
result of the decision to dispose of the segment including: $2,696,000 in
<page>
expected sales returns, $3,539,000 in property adjustments, $3,010,000 in
provisions for customer allowances, and $6,929,000 in actual and expected losses
from operations from the measurement date through the date of disposal.
All of the above results are net of applicable income taxes. There was no
tax effect in 2000 and 1999 because of the Company's overall net losses and the
Company's carryforward net operating losses from prior periods from both
continuing and discontinued operations.
(7) STOCKHOLDERS' EQUITY
(a) Issuance and Subsequent Conversion of Preferred Stock and Warrants - On
July 22, 1999, the Company issued 600 shares of 4% Convertible Preferred Stock,
for net proceeds of $5,670,000. A portion of the proceeds was allocated to
warrants to purchase 120,000 shares of InteliData common stock and to the
beneficial conversion feature of such preferred stock, with the resulting
discount on the preferred stock being amortized as dividends. Each holder of the
preferred stock was entitled to convert up to 20% of the preferred stock issued
to the holder during each of the four months from and after August 1999. The
conversion price for each share of preferred stock was the lesser of $5.09 or
85% of the average of the three lowest closing sales prices per share of
InteliData common stock during the 22 trading days preceding the conversion date
of the share of preferred stock. In the fourth quarter of 1999, all of the
preferred stock was converted to common shares.
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, 2001 and
2000, 101,500 and 104,000 warrants respectively remained outstanding.
(b) Stock Options and Awards - The Company sponsors several stock option
and award plans that cover substantially all employees and 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 2001, 2000, and 1999, the
Company recorded $1,484,000, $578,000, and $405,000 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
Description Minimum Maximum of Options
----------- ------- -------
January 1, 1999 $0.63 $20.38 2,981,263
Granted $1.22 $4.91 2,584,850
Exercised $1.38 $6.44 (1,250,000)
Canceled $0.63 $7.13 (1,143,018)
-----------------
December 31, 1999 $0.69 $20.38 3,173,095
Granted $2.59 $19.44 805,700
Exercised $0.81 $14.75 (258,011)
Canceled $0.97 $12.75 (117,009)
-----------------
December 31, 2000 $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
=================
<page>
The Company applies the intrinsic value method of Accounting Principles
Board Opinion No. 25 and related interpretations in accounting for its stock
plans. Had compensation cost been determined based on the fair value method of
Statement of Financial Accounting Standards No. 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:
2001 2000 1999
--------- -------- ---------
Net income (loss) $(35,346) $ 18,836 $ (7,679)
Basic earnings (loss) per common share $ (0.77) $ 0.49 $ (0.23)
Diluted earnings (loss) per common share $ (0.77) $ 0.46 $ (0.23)
The weighted average fair value of options granted during 2001, 2000, and
1999 was $3.57, $6.85, and $1.53, per share, respectively. The fair value of
options granted was estimated on the date of grant using the Black-Scholes
option-pricing model. For 2001 year-end, the following weighted average
assumptions were used: no dividend yield, expected volatility of 92%, and a risk
free interest rate of 4.56% per annum. For 2000 year-end, the following weighted
average assumptions were used: no dividend yield, expected volatility of 134%,
and a risk free interest rate of 5.16% per annum. For 1999 year-end, the
following weighted average assumptions were used: no dividend yield, expected
volatility of 156%, and a risk free interest rate of 5.5% per annum.
The Company has options outstanding and exercisable in varying price
ranges. The schedule below details the Company's options by price range:
<table>
Options Outstanding Options Exercisable
---------------------------- -----------------------------
Weighted Weighted
Average Average
Range of Number Weighted Exercise Number of Exercise
Exercise Prices Of Options Average Life Price Options Price
--------------- ---------- ------------ ----------- ----------- ----------
$ 0.000 - 1.000 212,833 3.0 years $ 1.00 199,333 $ 1.00
1.001 - 1.500 1,805,085 6.1 years 1.22 1,298,035 1.21
1.501 - 2.000 65,000 5.7 years 1.94 64,000 1.95
2.001 - 2.500 39,125 5.2 years 2.27 33,875 2.27
2.501 - 3.000 263,145 6.4 years 2.98 112,025 2.98
3.001 - 5.000 921,475 7.0 years 4.23 74,558 3.76
5.001 -10.000 525,534 6.2 years 6.93 260,436 7.17
10.001 -21.375 25,930 5.1 years 14.96 18,450 15.62
----------------- ------------ ----------- ----------- ----------- ----------
3,858,127 2,060,712
============ ===========
</table>
(c) Employee Stock Purchase Plan - Under the Employee Stock Purchase Plan,
approved in 1996, the Company is authorized to issue up to 500,000 shares of
common stock to its full-time employees, nearly all of who 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, 2001, 2000, and 1999 the Company issued 28,822, 30,318, and
23,259, shares of stock under the Plan, respectively.
(d) Treasury Stock - In 2001 and 2000, the Company paid $41,000 and $59,000
to acquire an additional 15,632 and 9,212 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 to buy-back
100,000 shares of its common stock shortly after the events surrounding the
terrorist attacks in September 2001 for a total of $309,000. As of December 31,
2001 and 2000, the Company had a total of 806,344 and 690,712 common shares in
treasury at an aggregate cost of $2,473,000 and $2,123,000, 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
<page>
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 for InteliData's
service bureau offering. 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 a service bureau environment and
InteliData's capabilities. On June 30, 2000, InteliData issued five-year,
fully-vested warrants to purchase 50,000 share 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, 2001
and 2000, the expense charged related to these warrants were $80,000 and
$60,000, respectively. As of December 31, 2001, all of these warrants were still
outstanding.
(g) Private Placement and Warrants - In November and December 2001, the Company
closed private placement sales of an aggregate of 2,862,727 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 $7,872,500. The placement
agent in the transaction, Stonegate Securities, received approximately $472,350
in commissions and warrants exercisable for the purchase of 286,273 shares of
InteliData's common stock, at an exercise price of $2.75 per share.
(8) EMPLOYEE 401(k) SAVINGS 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 $153,000, $89,000, and $60,000
in 2001, 2000, and 1999, respectively. The Company also pays for administrative
expenses incurred by the Plan.
(9) INCOME TAXES
A reconciliation of 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):
<table>
2001 2000 1999
--------- --------- ---------
Income tax liability (benefit) computed at the statutory rate $ (10,570) $ 8,543 $ (1,792)
Other 1,264 85 61
Change in valuation allowance 9,146 (8,140) 1,731
--------- ---------- ---------
Income taxes $ (160) $ 488 $ --
========== ========= =========
<page>
The balance of $160,000 represents the current federal income tax
provision. The tax effects of temporary differences that give rise to
significant portions of the deferred tax assets and liabilities at December 31,
2001 and 2000, are as follows (in thousands):
2001 2000
--------- ---------
Net operating loss carryforwards $ 67,501 $ 36,140
Basis differences in investments (936) (3,466)
Basis differences in intangibles (3,549) --
Accounts receivable 365 252
Property and equipment (157) (64)
General business credit carryforward 489 489
Other 190 488
Alternative minimum tax credit carryforward 197 241
--------- ---------
Total gross deferred tax asset 64,100 34,080
Valuation allowance (64,100) (34,080)
--------- ---------
Net deferred tax assets $ -- $ --
========= =========
The net changes in the total valuation allowance for the years ended
December 31, 2001, 2000, and 1999 were an increase (decrease) of $30,020,000,
$(8,140,000), and $602,000, respectively. A valuation allowance was established
for deferred tax assets as of December 31, 2001 and 2000 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, 2001, the Company had net operating loss carryforwards for
federal income tax purposes of approximately $193 million, which expire in 2008
through 2021, general business tax credits of approximately $489,000, which
expire in 2005 through 2010, and an alternative minimum tax credit carryforward
of approximately $197,000, which may be carried forward indefinitely and used to
offset future regular taxable income. Annual use of net operating loss
carryforwards of approximately $45 million, which was incurred by Home Account
prior to its acquisition by the Company, will be limited under the Internal
Revenue Code as a result of cumulative changes in ownership of more than 50% in
2001.
(10) COMMITMENTS AND CONTINGENCIES
(a) Leases - The Company leases facilities and equipment under cancelable and
noncancelable operating lease agreements. The facility leases are for terms from
one to five years. Rent expense was $1,436,000, $735,000, and $483,000 for the
years ended December 31, 2001, 2000, and 1999, respectively.
Future minimum lease payments under noncancelable operating leases with
initial or remaining terms in excess of one year at December 31, 2001, were as
follows (in thousands):
Years Ending December 31,
-------------------------
2002 $ 1,157
2003 1,012
2004 808
2005 411
2006 330
2007 and thereafter --
------------
Total minimum lease payments $ 3,718
=============
(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 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 rights
of such parties.
(c) Litigation - 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
<page>
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, 2000 and 1999 were as
follows (in thousands):
Balance, January 1, 1999 $ 442
Recoveries --
Charged to costs and expenses 276
Write-offs --
------------
Balance, December 31, 2000 718
Recoveries 150
Charged to costs and expenses 1,090
Write-offs (914)
------------
Balance, December 31, 2001 $ 1,044
============
As part of the Home Account acquisition during the year, the Company
acquired certain accounts receivables that were outstanding as of the
acquisition date. The Company pursued collections efforts, but ultimately
determined that some of these accounts were uncollectible. Such doubtful
accounts related to these acquired assets cannot be adjusted as part of the
purchase price allocation, but the bad debt expense must be recognized as
current operations. During 2001, the Company recorded costs associated with
these particular sets of uncollectible accounts in the amount of $1,090,000 and
began to write off some accounts. Additionally, the Company wrote off some
previously reserved legacy InteliData accounts.
(12) 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. This acquisition was accounted
for as a purchase. Following the Company's acquisition of Home Account,
InteliData 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
purchase price of approximately $31,186,000 consisted of the following (in
thousands):
Consideration and acquisition costs:
Value of shares issued $ 29,011
Cash consideration 320
Acquisition costs 1,855
-----------
$ 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 has
obtained independent professional services for the purchase price allocation to
the fair values of
<page>
the acquired property, plant and equipment, and identified intangible assets,
and their remaining useful lives and has completed its review and determination
of the fair values of the other assets acquired and liabilities assumed. A
summary of the assets acquired and liabilities assumed in the acquisition
follows (in thousands):
Allocation of purchase price:
Current assets $ 1,562
Property, plant and equipment 1,743
Intangibles (straight-line amortization, 8 to 10 years) 11,400
Liabilities assumed and other (4,344)
Liabilities associated with Home Account Incentive Plan (2,946)
Acquisition integration liabilities (1,822)
Goodwill (straight-line amortization, 8 years) 25,593
----------
$ 31,186
==========
Intangible assets consist of $4,200,000 for assembled workforce (which has
an estimated useful life of eight years) and $7,200,000 for
contracts/relationships (which has an estimated useful life of ten years).
Assembled workforce was determined based on the number of Home Account
employees, function, compensation, fringe benefits, recruiting costs, training,
and other factors. 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.
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 $1,822,000 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. As of December 31, 2001, the Company had a remaining liability of
$777,000 associated with such lease costs, of which $237,000 is current and
$540,000 is noncurrent.
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 December 31, 2001, 87 positions have
been terminated and approximately $822,000 had been paid.
The following pro forma 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, 1999. The pro forma condensed combined financial information set
forth 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 for the years ended December 31,
2001, 2000, and 1999, 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 (in thousands, except for per share data):
2001 2000 1999
--------- --------- ---------
Revenue $ 18,296 $ 13,551 $ 10,678
Net (loss) income (33,683) 1,345 (23,182)
Basic net (loss) income per share (0.73) 0.03 (0.58)
Diluted net (loss) income per share (0.73) 0.03 (0.58)
Pro forma basic net income (loss) per share was 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.
<page>
(13) 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 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 are 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 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 $349,000 based on $2.83 (the closing price of the
Company's common stock at December 31, 2001) and is charged to expense over the
vesting period. For the year ended December 31, 2001, the Company recorded
compensation expense of approximately $339,000.
(14) EARNINGS PER SHARE
Basic earnings (loss) per share ("EPS") are calculated using the
weighted-average number of shares of common stock outstanding during each
period. Diluted EPS reflect the dilutive effect of stock options and 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>
2001 2000 1999
------ ------ ------
Basic EPS
Income (loss) from continuing operations $ (30,041) $ 23,920 $ (9,636)
Weighted-average common shares outstanding 45,897 38,237 33,367
--------- -------- --------
Basic earnings (loss) per share from continuing operations $ (0.65) $ 0.63 $ (0.29)
========= ======== ========
Diluted EPS
Income (loss) from continuing operations $ (30,041) $ 23,920 $ (9,636)
--------- -------- --------
Weighted-average common shares outstanding 45,897 38,237 33,367
Effect of dilutive securities:
Stock options and awards - 2,551 -
Stock warrants - 55 -
--------- -------- --------
Weighted-average dilutive common shares outstanding 45,897 40,483 33,367
--------- -------- --------
Diluted earnings (loss) per common share $ (0.65) $ 0.59 $ (0.29)
from continuing operations ========= ======== ========
</table>
Options to purchase 869,000 shares of common stock at a range of $4.25 to
$19.44 were outstanding during 2000, but were not included in the computation of
diluted earnings per share, because the options' exercise prices were greater
than the average market price of the common share.
(15) UNAUDITED QUARTERLY FINANCIAL DATA
The results of the Company's quarterly operations for the years ended
December 31, 2001 and 2000 are set forth in the following table (in thousands,
except per share data).
<table>
First Second Third Fourth Year
------------ ----------- ------------ ----------- ----------
2001
- ----
Revenues $ 3,151 $ 4,355 $ 5,307 $ 5,483 $ 18,296
Cost of revenues 1,902 2,117 2,421 2,570 9,010
Operating expenses 11,048 10,908 10,366 7,302 39,624
----------- ------------ ---------- ---------- ----------
Operating loss (9,799) (8,670) (7,480) (4,389) (30,338)
Other income (expense) 522 375 (1,475) 715 137
Provision (benefit) for income taxes - - (160) - (160)
----------- ----------- ---------- -- ----------
Income (loss) from continuing operations (9,277) (8,295) (8,795) (3,674) (30,041)
Income (loss) from discontinued operations - - - - -
----------- ----------- ---------- ---------- ----------
Net income (loss) $ (9,277) $ (8,295) $ (8,795) $ (3,674) $ (30,041)
============ ============ ========== ========== ===========
Basic earnings per common share
Income (loss) from continuing operations $ (0.21) $ (0.18) $ (0.19) $ (0.08) $ (0.65)
Income (loss) from discontinued operations 0.00 0.00 0.00 0.00 0.00
----------- ----------- ---------- ---------- ----------
Net income (loss) $ (0.21) $ (0.18) $ (0.19) $ (0.08) $ (0.65)
============ =========== ========== ========== ==========
Diluted earnings per common share
Income (loss) from continuing operations $ (0.21) $ (0.18) $ (0.19) $ (0.08) $ (0.65)
Income (loss) from discontinued operations 0.00 0.00 0.00 0.00 0.00
----------- ----------- ---------- ---------- ----------
Net income (loss) $ (0.21) $ (0.18) $ (0.19) $ (0.08) $ (0.65)
============ =========== ========== ========== ==========
Weighted-average common shares outstanding
Basic 44,580 45,249 45,521 46,866 45,987
=========== =========== ========== ========== ==========
Diluted 44,580 45,249 45,521 46,866 45,987
=========== =========== ========== ========== ==========
2000
- ----
Revenues $ 1,784 $ 1,199 $ 1,516 $ 602 $ 5,101
Cost of revenues 574 933 850 363 2,720
Operating expenses 4,902 6,715 7,103 8,979 27,699
----------- ------------ ---------- ---------- ----------
Operating loss (3,692) (6,449) (6,437) (8,740) (25,318)
Other income (expense) 42,756 1,555 4,170 1,245 49,726
Provision (benefit) for income taxes 790 (100) (57) (145) 488
----------- ------------ ---------- ---------- ----------
Income (loss) from continuing operations 38,274 (4,794) (2,210) (7,350) 23,920
Income (loss) from discontinued operations 417 (51) (633) 5 (262)
----------- ------------ ---------- ---------- ----------
Net income (loss) $ 38,691 $ (4,845) $ (2,843) $ (7,345) $ 23,658
=========== ============ ========== ========== ==========
Basic earnings per common share
Income (loss) from continuing operations $ 1.00 $ (0.13) $ (0.05) $ (0.19) $ 0.63
Income (loss) from discontinued operations 0.01 0.00 (0.02) 0.00 (0.01)
----------- ----------- ----------- ---------- ----------
Net income (loss) $ 1.01 $ (0.13) $ (0.07) $ (0.19) $ 0.62
=========== =========== =========== ========== ==========
Diluted earnings per common share
Income (loss) from continuing operations $ 0.93 $ (0.13) $ (0.05) $ (0.19) $ 0.59
Income (loss) from discontinued operations 0.01 0.00 (0.02) 0.00 (0.01)
----------- ----------- ----------- ---------- ----------
Net income (loss) $ 0.94 $ (0.13) $ (0.07) $ (0.19) $ 0.58
=========== =========== =========== ========== ==========
Weighted-average common shares outstanding
Basic 38,147 38,173 38,265 38,349 38,237
=========== =========== ========== ========== ==========
Diluted 40,955 38,173 38,265 38,349 40,843
=========== =========== ========== ========== ==========
* * * * * *
</table>
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,
2001 and 2000, 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, 2001. 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 InteliData Technologies
Corporation and subsidiaries as of December 31, 2001 and 2000, and the results
of their operations and their cash flows for each of the three years in the
period ended December 31, 2001, in conformity with accounting principles
generally accepted in the United States of America.
/s/ Deloitte & Touche LLP
- -------------------------
McLean, Virginia
February 20, 2002
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
- --------------------------------------------------------------
ACCOUNTING AND FINANCIAL DISCLOSURE
-----------------------------------
None.
PART III
========
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
- -------------------------------------------------------------
The Company incorporates herein by reference the information concerning
directors contained in its Proxy Statement for its 2002 Stockholders' Meeting to
be filed within 120 days after the end of the Company's fiscal year (the "2002
Proxy Statement").
Beneficial Ownership Reporting - The Company incorporates herein by
reference the information required by Item 405 of Regulation S-K contained in
its 2002 Proxy Statement.
ITEM 11. EXECUTIVE COMPENSATION
- -------------------------------
The Company incorporates herein by reference the information concerning
executive compensation contained in the 2002 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
2002 Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
- -------------------------------------------------------
The Company incorporates herein by reference the information concerning
certain relationships and related transactions contained in the 2002 Proxy
Statement.
PART IV
=======
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) 1. FINANCIAL STATEMENTS - See Item 8 of this Report
2. FINANCIAL STATEMENT SCHEDULES - None
3. EXHIBITS
Exhibit No. Description
----------- ---------------
2.1 Agreement and Plan of Merger, dated January 11, 2001, by and among
InteliData Technologies Corporation, InteliData Merger Sub, Inc., Home
Account Holdings, Inc., and Edward F. Glassmeyer and Ronald Terry,
each in his capacity as representative of the stockholders of Home
Account. (Incorporated herein by reference to the Current Report on
Form 8-K filed with the Commission on January 26, 2001).
3.1 Certificate of Incorporation of InteliData Technologies Corporation.
(Incorporated herein by reference to Appendix IV 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).
3.1.1 Amendment to the Certificate of Incorporation. (Incorporated herein
by reference to the Company's Registration Statement on Form S-8, File
Number 333-93227).
<page>
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 Registration Rights Agreement, dated January 11, 2001, by and among
InteliData Technologies Corporation and the holders of common stock
listed on Exhibit A attached thereto. (Incorporated herein by
reference to the Current Report on Form 8-K filed with the Commission
on January 26, 2001).
4.3 Form of Subscription Agreement, by and among the Company and the
selling stockholders, including as Appendix I thereto, a Registration
Rights Agreement. (Incorporated herein by reference to the Company's
Registration Statement on Form S-3, File Number 333-75146).
4.4 Form of Warrant Certificate. (Incorporated herein by reference to the
Company's Registration Statement on Form S-3, File Number 333-75146).
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).
10.6 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).
<page>
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).
10.7 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).
10.8 Employment and Non-Competition Agreement between InteliData
Technologies Corporation and William F. Gorog, dated November 1, 2000
(Incorporated herein by reference to Exhibit 10 to the Company's
Report on Form 10-Q for the quarter ended September 30, 2000).
10.9 Employment and Non-Competition Agreement between InteliData
Technologies Corporation and Steven P. Mullins, dated November 1, 2000
(Incorporated herein by reference to Exhibit 10 to the Company's
Report on Form 10-Q for the quarter ended September 30, 2000).
10.10 Employment and Non-Competition Agreement between InteliData
Technologies Corporation and Charles A. White, dated January 11, 2001
(Incorporated herein by reference to Exhibit 10 to the Company's
Report on Form 10-Q for the quarter ended June 30, 2001).
10.11 Merger Consideration Escrow Agreement, dated January 11, 2001, by and
among InteliData Technologies Corporation, Home Account Holdings,
Inc., Edward Glassmeyer and Ronald Terry, each in his capacity as
representative of the stockholders of Home Account, and SunTrust Bank,
Richmond, Virginia, as Escrow Agent. (Incorporated herein by reference
to the Current Report on Form 8-K filed with the Commission on January
26, 2001).
10.12 Indemnity Escrow Agreement, dated January 11, 2001, by and among
InteliData Technologies Corporation, Home Account Holdings, Inc.,
Edward Glassmeyer and Ronald Terry, each in his capacity as
representative of the stockholders of Home Account, and SunTrust Bank,
Richmond, Virginia, as Escrow Agent. (Incorporated herein by reference
to the Current Report on Form 8-K filed with the Commission on January
26, 2001).
10.13 Note and Fee Exchange Agreement, dated January 11, 2001, by and among
InteliData Technologies Corporation, Home Account Holdings, Inc., U.S.
Bancorp Piper Jaffray and the persons listed on Exhibit A thereto.
(Incorporated herein by reference to the Current Report on Form 8-K
filed with the Commission on January 26, 2001).
* 21.1 InteliData Technologies Corporation List of Significant Subsidiaries.
* 23.1 Consent of Deloitte & Touche LLP.
- -------------
* filed herewith
(b) REPORTS ON FORM 8-K
The Company filed a Current Report on Form 8-K with the Securities and
Exchange Commission on November 28, as amended on December 6, 2001, relating to
InteliData's private placement sale of an aggregate of 2,862,727 shares of its
common stock for a price of $2.75 per share, and warrants exercisable for the
purchase of 1,431,350 shares of its common stock, at an exercise price of $2.75
per share, resulting in gross proceeds of approximately $7,872,500. The
placement agent in the transaction received approximately $472,350 in
commissions and warrants exercisable for the purchase of 286,273 shares of
InteliData's common stock, at an exercise price of $2.75 per share.
* * * * * *
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.
President 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. President, Chief Executive March 27, 2002
- ---------------------------- Officer, and Director
Alfred S. Dominick, Jr.
/s/ William F. Gorog Chairman of the Board March 27, 2002
- ------------------------------- and Director
William F. Gorog
/s/ Steven P. Mullins Vice President, Chief March 27, 2002
- ------------------------------- Financial Officer, and
Steven P. Mullins Treasurer (Principal Financial
and Accounting Officer)
/s/ Neal F. Finnegan Director March 27, 2002
- -------------------------------
Neal F. Finnegan
/s/ Patrick F. Graham Director March 27, 2002
- -------------------------------
Patrick F. Graham
/s/ John J. McDonnell, Jr. Director March 27, 2002
- -------------------------------
John J. McDonnell, Jr.
/s/ L. William Seidman Director March 27, 2002
- -------------------------------
L. William Seidman
/s/ Norman J. Tice Director March 27, 2002
- -------------------------------
Norman J. Tice
/s/ Charles A. White Director March 27, 2002
- -------------------------------
Charles A. White