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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
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For the Quarter ended: March 31, 2002 Commission File Number 000-21685
INTELIDATA TECHNOLOGIES CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 54-1820617
(State of incorporation) (I.R.S. Employer Identification Number)
11600 Sunrise Valley Drive, Suite 100, Reston, VA 20191
(Address of Principal Executive Offices)
(703) 259-3000
(Registrant's telephone number)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
---- ---
The number of shares of the registrant's Common Stock outstanding on March 31,
2002 was approximately 49,002,000.
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INTELIDATA TECHNOLOGIES CORPORATION
QUARTERLY REPORT ON FORM 10-Q
TABLE OF CONTENTS
Page
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PART I - FINANCIAL INFORMATION
Item 1. Unaudited Condensed Consolidated Financial Statements
Condensed Consolidated Balance Sheets
March 31, 2002 and December 31, 2001 ............................ 3
Condensed Consolidated Statements of Operations
Three Months Ended March 31, 2002 and 2001 ...................... 4
Condensed Consolidated Statement of Changes in Stockholders' Equity
Three Months Ended March 31, 2002................................ 5
Condensed Consolidated Statements of Cash Flows
Three Months Ended March 31, 2002 and 2001....................... 6
Notes to Condensed Consolidated Financial Statements ............ 7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations ....................................... 12
Item 3. Quantitative and Qualitative Disclosures About Market Risk....... 15
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K................................. 15
SIGNATURES................................................................ 16
PART I: FINANCIAL INFORMATION
- ------- ---------------------
ITEM 1. FINANCIAL STATEMENTS
- ------- ---------------------
INTELIDATA TECHNOLOGIES CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
MARCH 31, 2002 AND DECEMBER 31, 2001
(in thousands, except share data)
<table>
2002 2001
------------ ------------
(unaudited) (audited)
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 8,927 $ 12,026
Investments 3,294 2,917
Accounts receivable, net 3,216 4,992
Other receivables 259 563
Prepaid expenses and other current assets 486 559
------------ ------------
Total current assets 16,182 21,057
NONCURRENT ASSETS
Property and equipment, net 3,507 3,720
Goodwill, net 26,238 22,549
Intangibles, net 6,320 10,189
Other assets 175 195
------------ ------------
TOTAL ASSETS $ 52,422 $ 57,710
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 2,699 $ 3,346
Accrued expenses 3,916 5,357
Deferred revenues 2,895 3,164
Other liabilities 317 324
Net liabilities of discontinued operations 137 204
------------ ------------
TOTAL CURRENT LIABILITIES 9,964 12,395
Net liabilities of discontinued operations 200 300
Other liabilities 479 540
------------ ------------
TOTAL LIABILITIES 10,643 13,235
------------ ------------
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 49,808,000 shares in 2002 and 49,724,000 shares in 2001;
outstanding 49,002,000 shares in 2002 and 48,917,000 shares in 2001 50 50
Additional paid-in capital 303,038 303,141
Treasury stock, at cost: 806,000 shares in 2002 and 2001 (2,473) (2,473)
Deferred compensation (1,062) (1,395)
Accumulated other comprehensive income 210 210
Accumulated deficit (257,984) (255,058)
------------- ------------
TOTAL STOCKHOLDERS' EQUITY 41,779 44,475
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 52,422 $ 57,710
============ ============
See accompanying notes to condensed consolidated financial statements.
</table>
INTELIDATA TECHNOLOGIES CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 2002 AND 2001
(in thousands, except per share data; unaudited)
2002 2001
--------- ---------
Revenues
Software $ 128 $ 169
Consulting and services 4,580 2,982
---------- ---------
Total revenues 4,708 3,151
---------- ---------
Cost of revenues
Software -- 5
Consulting and services 1,959 1,897
---------- ---------
Total cost of revenues 1,959 1,902
---------- ---------
Gross profit 2,749 1,249
---------- ---------
Operating expenses
General and administrative 2,494 2,823
Sales and marketing 850 2,519
Research and development 2,542 4,530
Amortization of goodwill and intangibles 180 1,176
---------- ---------
Total operating expenses 6,066 11,048
---------- ---------
Operating loss (3,317) (9,799)
Realized gain on sales of investments -- 1,130
Unrealized gain (loss) on Sybase warrants 377 (923)
Other income (expenses), net 14 315
---------- ---------
Loss before income taxes (2,926) (9,277)
Provision for income taxes -- --
---------- ---------
Loss from continuing operations (2,926) (9,277)
Discontinued operations, net of income taxes -- --
---------- ---------
Net loss (2,926) $ (9,277)
========== =========
Basic loss per common share
Loss from continuing operations $ (0.06) $ (0.21)
Income (loss) from discontinued operations 0.00 0.00
---------- ---------
Net loss $ (0.06) $ (0.21)
========== =========
Diluted loss per common share
Loss from continuing operations $ (0.06) $ (0.21)
Income (loss) from discontinued operations 0.00 0.00
---------- ---------
Net loss $ (0.06) $ (0.21)
========== =========
Basic weighted-average common shares outstanding 48,494 44,580
=========== =========
Diluted weighted-average common shares outstanding 48,494 44,580
=========== =========
See accompanying notes to condensed consolidated financial statements.
INTELIDATA TECHNOLOGIES CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
THREE MONTHS ENDED MARCH 31, 2002
(in thousands; unaudited)
<table>
Accumulated
Common Stock Additional Other
------------------------- Paid-in Treasury Deferred Comprehensive
Shares Amount Capital Stock Compensation Income
----------- ------------- ------------- ----------- --------------- ----------------
Balance at January 1, 2002 49,724 $ 50 $ 303,141 $ (2,473) $ (1,395) $ 210
Issuances of common stock:
Exercises of stock options 3 - 5 - - -
Issuances of restricted stock 114 - 216 - (216) -
Cancellations of restricted stock (33) - (130) - 130 -
Home Account 2000 incentive plan - - (194) - 194 -
Amortization of deferred compensation - - - - 225 -
Net loss - - - - - -
Comprehensive loss
----------- ------------- ------------- ----------- --------------- ----------------
Balance at March 31, 2002 49,808 $ 50 $ 303,038 $ (2,473) $ (1,062) $ 210
=========== ============= ============= =========== =============== ================
Accumulated Comprehensive
Deficit Loss Total
-------------- --------------- ------------
Balance at January 1, 2002 $ (255,058) $ 44,475
Issuances of common stock:
Exercises of stock options - 5
Issuances of restricted stock - -
Cancellations of restricted stock - -
Home Account 2000 incentive plan - -
Amortization of deferred compensation - 225
Net loss (2,926) (2,926) (2,926)
----------
Comprehensive loss $ (2,926)
-------------- ========== ------------
Balance at March 31, 2002 $ (257,984) $ 41,779
============== ============
</table>
See accompanying notes to condensed consolidated financial statements.
INTELIDATA TECHNOLOGIES CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED MARCH 31, 2002 AND 2001
(in thousands; unaudited)
<table>
2002 2001
------------- -----------
Cash flows from operating activities
Loss from continuing operations $ (2,926) $ (9,277)
Adjustments to reconcile loss from continuing operations
to net cash used in operating activities of continuing operations:
Realized gain on sales of investments -- (1,130)
Unrealized (gain) loss on Sybase warrants (377) 923
Amortization of goodwill and intangibles 180 1,176
Depreciation and amortization 360 341
Deferred compensation expense 225 365
Loss on disposal of property and equipment 2 --
Changes in certain assets and liabilities:
Accounts receivable 1,776 (2,021)
Other receivables 304 (1,161)
Prepaid expenses and other current assets 93 (212)
Accounts payable (597) (1,185)
Accrued expenses (1,509) (1,393)
Deferred revenues (269) 1,427
----------- ----------
Net cash used in operating activities of
continuing operations (2,738) (12,147)
----------- ----------
Loss from discontinued operations -- --
Change in net liabilities of discontinued operations (167) (41)
----------- ----------
Net cash used in operating activities of
discontinued operations (167) (41)
----------- ----------
Net cash used in operating activities (2,905) (12,188)
----------- ----------
Cash flows from investing activities
Proceeds from sales of investments -- 4,883
Release of cash from escrow -- 311
Purchases of property and equipment (149) (224)
Payments for acquisition costs for Home Account (50) (1,749)
Cash paid for Home Account common stock -- (253)
----------- ----------
Net cash (used in) provided by investing activities (199) 2,968
----------- ----------
Cash flows from financing activities
Proceeds from issuance of common stock 5 110
Payments to acquire treasury stock -- (40)
----------- ----------
Net cash provided by financing activities 5 70
----------- ----------
Decrease in cash and cash equivalents (3,099) (9,150)
Cash and cash equivalents, beginning of period 12,026 27,255
----------- ----------
Cash and cash equivalents, end of period $ 8,927 $ 18,105
=========== ==========
</table>
See accompanying notes to condensed consolidated financial statements.
INTELIDATA TECHNOLOGIES CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED MARCH 31, 2002 AND 2001
(Unaudited)
(1) Basis of Presentation
The condensed consolidated balance sheet of InteliData Technologies
Corporation ("InteliData" or the "Company") as of March 31, 2002, the related
condensed consolidated statements of operations and cash flows for the
three-month periods ended March 31, 2002 and 2001, and the related condensed
consolidated statement of changes in stockholders' equity for the three-month
period ended March 31, 2002 presented in this Form 10-Q are unaudited. In the
opinion of management, all adjustments necessary for a fair presentation of such
financial statements have been included. Such adjustments consist only of normal
recurring items. The condensed consolidated balance sheet as of December 31,
2001 was derived from the Company's audited December 31, 2001 balance sheet.
Interim results are not necessarily indicative of results for a full year.
Certain amounts in the prior periods have been reclassified to conform to the
current period presentation.
The condensed consolidated financial statements and notes are presented as
required by Form 10-Q, and do not contain certain information included in the
Company's annual audited financial statements and notes. These financial
statements should be read in conjunction with the annual audited financial
statements of the Company and the notes thereto, together with management's
discussion and analysis of financial condition and results of operations,
contained in the Form 10-K for the fiscal year ended December 31, 2001.
(2) Summary of Significant Accounting Policies
(a) Revenue Recognition - The Company supplies Internet banking and
electronic bill presentment and payment software to financial institutions. The
Company's revenues associated with integrated solutions that bundle software
products with customization, installation and training services are recognized
using the percentage of completion method of accounting.
The Company enters 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 its
software in an application services provider 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
<page>
licensed software from the Company, 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.
(b) Adoption of New Accounting Pronouncement - Prior to January 1, 2001,
the Company considered its investment in warrants to purchase common stock of
Sybase, Inc. ("Sybase") to be available-for-sale under the provisions of
Statement of Financial Accounting Standards No. 115, Accounting for Certain
Investments in Debt and Equity Securities. Effective January 1, 2001, the
Company adopted Statement of Financial Accounting Standards No. 133, Accounting
for Derivative Instruments and Hedging Activities ("SFAS 133"), which
establishes accounting and reporting standards for derivative instruments and
for hedging activities by requiring that 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.
SFAS 133 requires that derivative financial instruments, such as forward
currency exchange contracts, interest rate swaps and the Company's warrants to
purchase Sybase stock, be recognized in the financial statements and measured at
fair value regardless of the purpose or intent for holding them. Changes in the
fair value of derivative financial instruments are either recognized
periodically in income or stockholders' equity (as a component of comprehensive
income), depending on whether the derivative is being used to hedge changes in
fair value or cash flows. The Company's adoption of this pronouncement,
effective January 1, 2001, did not result in an adjustment for the cumulative
effect of an accounting change, because the carrying value reflected the fair
value under the previous accounting guidance. In accordance with SFAS 133, the
Company recorded an unrealized gain (loss) on investment of $377,000 and
$(923,000), for the three months ended March 31, 2002 and 2001, respectively.
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 are not to be amortized into results of operations, but instead
would be reviewed for impairment and written down and charged to results of
operations only in the periods in which the recorded value of goodwill and
certain intangibles is more than its fair value. The amortization and
non-amortization provisions of SFAS 142 are to be applied to all goodwill and
intangible assets acquired after June 30, 2001. The provisions of each statement
that apply to goodwill and intangible assets acquired prior to June 30, 2001 was
adopted by the Company on January 1, 2002.
The adoption of this accounting standard reduced the amortization expense
associated with goodwill and certain intangibles by $996,000 from $1,176,000 for
the three months ended March 31, 2001 to $180,000 for the same period in 2002.
As of January 1, 2002, in accordance with SFAS 142, the Company ceased
recognizing amortization expense on goodwill and the assembled workforce
intangible asset, and the assembled workforce intangible asset was combined with
goodwill for financial accounting and reporting. Accordingly, the goodwill and
intangible asset consist of the following components (in thousands):
As of March 31, 2002: Goodwill Intangible Total
-------- ---------- -----
Gross carrying amount $ 29,793 $ 7,200 $ 36,993
Accumulated amortization (3,555) (880) (4,435)
---------- ---------- --------
Net $ 26,238 $ 6,320 $ 32,558
========== ========== ========
<page>
As of December 31, 2001: Goodwill Intangible Total
-------- ---------- -----
Gross carrying amount $ 25,593 $ 11,400 $ 36,993
Accumulated amortization (3,044) (1,211) (4,255)
---------- ---------- --------
Net $ 22,549 $ 10,189 $ 32,738
========== ========== ========
The estimated aggregate amortization expense related to the
contracts/relationships intangible asset for each of the next five years is as
follows (in thousands):
Year ending December 31: Expense
-------
2002 $ 720
2003 720
2004 720
2005 720
2006 720
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Total $ 3,600
========
In accordance with SFAS 142, the Company has six months from adoption (up
until June 30, 2002) to complete the initial test for impairment under SFAS 142.
As of March 31, 2002, the Company has not yet completed this initial test. The
initial test for impairment will be as of January 1, 2002, the adoption date of
SFAS 142. In connection with this, the Company will present adjustments that
result from its initial application of SFAS 142, if any, as of the beginning of
this fiscal year. Additionally, the Company is required to perform reviews for
impairment in future periods that 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 ("SFAS 144"), 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 did not have a
material affect on the Company's financial position, results of operations, or
cash flows.
(3) Acquisition of Home Account
On January 11, 2001, the Company acquired Home Account Holdings, Inc.
("Home Account") and its operating subsidiary, Home Account Network, Inc.,
pursuant to an agreement and plan of merger whereby a wholly-owned subsidiary of
the Company merged with and into Home Account, with Home Account surviving the
merger as the Company's wholly-owned subsidiary. This acquisition was accounted
for as a purchase. Following the Company's acquisition of Home Account, the
Company 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 2000
Incentive Plan of $2,946,000 resulted in an increase of $31,957,000 in
stockholders' equity in fiscal year 2001. The total purchase price of
approximately $31,186,000 consisted of the following (in thousands):
<page>
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 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 11,400
Liabilities assumed and other (4,344)
Liabilities associated with Home Account Incentive Plan (2,946)
Acquisition integration liabilities (1,822)
Goodwill 25,593
-----------
$ 31,186
===========
Intangible assets consist of $4,200,000 for assembled workforce (which has
an estimated useful life of eight years prior to the adoption of SFAS 142) 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. Such allocations and
designations were completed in accordance with Accounting Principles Board
Opinion No. 16, Business Combination. Effective January 1, 2002, the Company
adopted SFAS 142 and the appropriate transitional accounting is discussed in
Note 2.
As a result of the acquisition of Home Account, the Company 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 $1,000,000 for lease costs for the now vacated Home Account
headquarters in Emeryville, California, and $822,000 related to workforce
reduction. As of March 31, 2002, the Company had a remaining liability of
$718,000 associated with such lease costs, of which $239,000 is current and
$479,000 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 had been
terminated and approximately $822,000 had been paid. No additional changes
occurred during the period ended March 31, 2002 and the Company does not expect
future adjustments.
Due to the fact that the acquisition was completed on January 11, 2001, no
pro forma quarterly financial information is presented to give effect to the
acquisition of Home Account as if it occurred on January 1, 2001. The Company
believes that the results of operations for the eleven-day period is not
material.
(4) Home Account 2000 Incentive Plan
In 2000, Home Account approved the 2000 Incentive Plan to encourage the
retention of certain officers and managers of Home Account through a change of
control transaction, and after such a transaction to the extent, up to one year,
as desired by the acquirer. Upon acquisition of Home Account by an acquirer, the
2000 Incentive Plan provided for the granting to plan participants of an
aggregate of 15% of the net amount of the merger consideration allocable to Home
Account's preferred stockholders after payment of the debt preference and other
expenses associated with a transaction. Under the InteliData and Home Account
merger transaction, this incentive plan was payable in the form of InteliData
common stock and such payments were to be made by the group of former Home
Account preferred stockholders (who were collectively considered as a "principal
stockholder" for the purpose of this 2000 Incentive Plan). Two-thirds of the
2000 Incentive Plan allocation vested on the transaction closing date and
represented a pre-acquisition expense to Home Account. In connection with the
merger transaction, the Company agreed to advance the participants funds to pay
for their tax withholding obligations associated with the two-thirds portion.
The original principal amount of this receivable balance was approximately
$1,116,000. The shares allocable to the participants were placed in an escrow
account and were released to the Home Account Stockholders' Representative in
accordance with the Merger Consideration Escrow Agreement. As of December 31,
2001, the remaining outstanding receivable balance, including interest, was
approximately $466,000 and was reflected in the "Other receivable" balance. On
February 4, 2002, the remaining outstanding balance plus additional interest
accrued was paid in full.
The remaining one-third of the participants' allocation vested on January
11, 2002 (one year from the transaction closing date). All forfeited shares
reverted to the former preferred stockholders of Home Account. In connection
with the 2000 Incentive Plan allocation, the deferred compensation for the
one-third portion became fixed and measurable on April 1, 2002 at $155,000 based
on $1.20 (the closing price of the Company's common stock at April 1, 2002). The
difference between this amount and the recognized expense in the prior periods
was recorded as an $183,000 reduction of expense for the three months ended
March 31, 2002.
(5) Discontinued Operations
As of March 31, 2002, the net liabilities of discontinued operations of
$337,000 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 March 31, 2002, 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 remaining liability related
to this matter and other costs to be approximately $337,000 and has recorded a
liability for this 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 likely have a material adverse effect on the
Company's financial condition or results of operations.
* * * * * *
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
- ----------------------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS
-----------------------------------
Results of Operations for the three months ended March 31, 2002 and 2001
The following represents the results of operations for InteliData
Technologies Corporation for the three months ended March 31, 2002 and 2001.
Such information should be read in conjunction with the interim financial
statements and the notes thereto in Part I, Item 1 of this Quarterly Report.
Revenues
The Company's first quarter revenues were $4,708,000 in 2002 compared to
$3,151,001 in 2001, an increase of $1,557,000. The increase was a result of an
increase in consulting and services revenues of $1,598,000 and offset by a
decrease in software revenues of $41,000. During the first quarter of 2002, the
Company generated $128,000 from software sales and $4,580,000 from consulting
and services. During the first quarter of 2001, software revenues contributed
$169,000 and consulting and services contributed $2,982,000.
The increase in consulting and services revenues from the first quarter of
2001 to the first quarter of 2002 was primarily due to increases in the
Company's recurring revenue from fees associated with its application services
provider ("ASP") operations.
Cost of Revenues and Gross Profit
The Company's cost of revenues increased $57,000 to $1,959,000 in the first
quarter 2002 from $1,902,000 in the first quarter in 2001. The increase was
primarily due to increased revenues.
Overall gross profit margins increased to 58% for the first quarter of 2002
from 40% for the first quarter of 2001. The increase in gross profit margins was
attributable to an increase in recurring revenue. The Company anticipates that
gross profit margins may fluctuate in the future due to changes in product mix
and distribution, outsourcing activities associated with an ASP business model,
competitive pricing pressure, the introduction of new products, and changes in
volume.
General and Administrative
General and administrative expenses decreased $329,000 to $2,494,000 in the
first quarter of 2002 from $2,823,000 in the first quarter of 2001. The decrease
was primarily attributable to the Company's reduction of redundant corporate and
administrative expenses that resulted from the purchase of Home Account, which
included the elimination of the former Home Account headquarters. The Company
plans to continually assess its operations to manage its expenses and
infrastructures in light of anticipated business levels.
Sales and Marketing
Sales and marketing expenses decreased $1,669,000 to $850,000 in the first
quarter of 2002 from $2,519,000 in the first quarter of 2001. This was primarily
attributable to decreases in the number of selling and marketing employees,
travel and outside professional services. The Company plans to continually
assess its operations to manage its expenses and infrastructures in light of
anticipated business levels.
Research and Development
Research and development costs decreased $1,988,000 to $2,542,000 in the
first quarter of 2002 from $4,530,000 in the first quarter of 2001. The decrease
was primarily attributable to the Company's expense reduction efforts in
combining the operations of InteliData and Home Account and finding efficiencies
and synergies while eliminating redundancies. 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
<page>
solutions. The Company plans to continually assess its operations to manage its
expenses and infrastructures in light of anticipated business levels.
Amortization of Goodwill and Intangibles
Statement of Financial Accounting Standards No. 142, Goodwill and Other
Intangible Assets ("SFAS 142") requires the Company to not amortize goodwill and
certain intangibles into results of operations, but instead the Company would
review these assets for impairment. The assets would be written down and
impairment losses would be charged to results of operations only in the periods
in which the recorded values are determined to be more than their fair values.
The adoption of this accounting standard, as of January 1, 2002, reduced the
amortization expense associated with goodwill and certain intangibles by
$996,000 from $1,176,000 for the three months ended March 31, 2001 to $180,000
for the same period in 2002. As of January 1, 2002, in accordance with SFAS 142,
the Company ceased recognizing amortization expense on goodwill and the
assembled workforce intangible asset, and the assembled workforce intangible
asset was combined with goodwill for financial accounting and reporting.
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. The Company recognized a gain of approximately $1,259,000 on this
transaction during the first quarter of 2001.
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 and the Company recorded a
loss on escrow in the first quarter of 2001 of $129,000. The remaining holdings
of Sybase common stock were sold during 2001. At March 31, 2002, 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 derivatives be recognized in the balance sheet and measured at
fair value.
In accordance with SFAS 115, the balance sheets include $210,000 of
unrealized gain on investments (net of taxes), within stockholders' equity as of
March 31, 2002 and December 31, 2001. As of March 31, 2002, the accumulated
other comprehensive income 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 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
<page>
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 gain (loss) on investment of
$377,000 and $(923,000) in the statements of operations for the three months
ended March 31, 2002 and 2001, respectively.
Other Income
Other income, primarily investment and interest income, decreased $301,000
to $14,000 in the first quarter of 2002 from $315,000 in the first quarter of
2001. The decrease is associated with decreased levels of cash and cash
equivalents in 2002 as compared to 2001, and the incurrence of other expenses in
2002.
Weighted-Average Common Shares Outstanding and Basic and Diluted Loss Per Common
Share
The basic and diluted weighted-average common shares increased to
48,494,000 for the first quarter of 2002 compared to 44,580,000 for the first
quarter of 2001. The increase resulted primarily from the exercise of stock
options and warrants, stock purchases under the Employee Stock Purchase Plan,
and the issuance of 2,863,000 shares for the private placements that closed in
November and December of 2001.
Losses from continuing operations were $2,926,000 and $9,277,000 for the
three-month periods ended March 31, 2002 and 2001, while there were no gain or
loss from discontinued operations in either period. Net losses were $2,926,000
and $9,277,000 for 2002 and 2001, respectively.
As a result of the foregoing, basic and diluted net loss per common share
was ($0.06) for the first quarter of 2002 compared to a basic and diluted net
loss per common share of ($0.21) for the first quarter of 2001.
Liquidity and Capital Resources
During the first quarter of 2002, the Company's cash and cash equivalents
decreased by $3,099,000. At March 31, 2002, the Company had $8,927,000 in cash
and cash equivalents, $3,294,000 in investments, $6,218,000 of working capital
with no long-term debt, and $41,779,000 in stockholders' equity. The Company's
principal needs for cash in the first quarter of 2002 were for funding operating
losses. The Company funded decreases in accounts payable and accrued expenses of
$597,000 and $1,509,000, respectively, for the three months ended March 31,
2002, which was offset by a decrease in accounts receivable of $1,776,000.
The Company's cash requirements for operating activities in the first three
months of 2002 were financed primarily by cash and cash equivalents on hand.
Net cash used in investing activities in the first quarter of 2002 was
$199,000. This was primarily related to the purchase of property and equipment
of $149,000 and cash paid for acquisition costs related to the purchase of Home
Account of $50,000.
Financing activities provided net cash of $5,000 in the first quarter of
2002 from the issuance of the Company's common stock for stock option exercises.
During 2002, the Company expects its operating losses to continue declining
based on increases in revenues due to increases in the adoption rates and
penetration rates of Internet Banking, Card Solutions(TM) and EBPP Solutions,
and based on our periodic rationalization of headcount and other expenses in
light of our available capital and anticipated business forecast. Based on the
Company's current capital levels and its assumptions about future operating
results, the Company believes that it will have sufficient resources to fund
existing operating plans. However, if actual results differ materially from
current assumptions, the Company may not have sufficient capital resources and
may have to modify operating plans and/or seek additional capital resources.
Cautionary Statement for Purposes of the "Safe Harbor" Provisions of the Private
Securities Litigation Reform Act of 1995
The information contained in this report includes forward-looking
statements, the realization of which may be impacted by the factors discussed
below. The forward-looking statements are made pursuant to the safe harbor
provisions of the Private Securities Litigation Reform Act of 1995 (the "Act").
This report contains forward looking statements that are subject to risks and
uncertainties, including, but not limited to, the Company's ability to continue
funding operating losses, the Company's ability to manage expenses in line with
anticipated business levels, the ability of the Company to complete product
implementations in required time frames and the Company's ability to increase
its recurring revenues and profits through its ASP business model, the impact of
competitive products, pricing pressure, product demand and market acceptance
risks, pace of consumer acceptance of home banking and reliance on the Company's
bank clients to increase usage of Internet banking by their customers, the
effects of general economic conditions on the financial services industries,
mergers and acquisitions, risk of integration of the Company's technology by
large software companies, the ability of financial institution customers to
implement applications in the anticipated time frames or with the anticipated
features, functionality or benefits, reliance on key strategic alliances and
newly emerging technologies, the ability of the Company to leverage its Spectrum
relationship into new business opportunities in the EBPP market, the on-going
viability of the mainframe marketplace and demand for traditional mainframe
products, the ability to attract and retain key employees, the availability of
cash for long-term growth, product obsolescence, ability to reduce product
costs, fluctuations in operating results, delays in development of highly
complex products and other risks detailed from time to time in InteliData
filings with the Securities and Exchange Commission, including the risk factors
disclosed in the Company's Form 10-K for the fiscal year ended December 31,
2001. These risks 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, InteliData. The foregoing list of factors should not be
construed as exhaustive or as any admission regarding the adequacy of
disclosures made by the Company prior to the date hereof or the effectiveness of
said Act. InteliData is not under any obligation (and expressly disclaims an
obligation) to update or alter its forward-looking statements, whether as a
result of new information or otherwise. * * * * * *
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
- --------------------------------------------------------------
MARKET RISK
-----------
The Company currently has no long-term debt and is not currently engaged in
any transactions that involve foreign currency. The Company does not engage in
hedging activities.
As of March 31, 2002, the fair value of the Company's investment portfolio
was approximately $3,294,000, which consisted of $3,053,000 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 gain
on investment of $377,000 in the statement of operations for the three months
ended March 31, 2002. A 10% fluctuation in the stock price would result in an
approximate effect of $305,000 in the fair value of the Company's holdings of
Sybase warrants.
PART II: OTHER INFORMATION
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
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(a) Exhibits
--------
None.
(b) Reports on Form 8-K
-------------------
None.
SIGNATURES
Pursuant to the requirements of the Securities Act of 1934, the registrant
has duly caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
INTELIDATA TECHNOLOGIES CORPORATION
By: /s/ Alfred S. Dominick, Jr.
-----------------------------------------
Alfred S. Dominick, Jr.
President, Chief Executive Officer,
and Director
/s/ John R. Polchin
-----------------------------------------
John R. Polchin
Vice President, Chief Financial Officer,
and Treasurer