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: Commission File Number:
December 31, 2004 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) (Zip Code)
(703) 259-3000
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class Name of Each Exchange on Which Registered
------------------- -----------------------------------------
None None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock par value $0.001 per share
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
-------- --------
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 [ ].
The aggregate market value of the Common Stock held by non-affiliates of the
registrant on June 30, 2004, was approximately $31,499,000 based on the last
sales price reported that date on the Nasdaq Stock Market of $0.66 per share. In
determining this figure, the Registrant has assumed that all of its directors
and executive officers and each person who owns 5% or more of the outstanding
common stock are affiliates. Such assumptions should not be deemed to be
conclusive for any other purpose.
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act):
Yes X No
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The number of shares of the registrant's Common Stock outstanding on March 28,
2005 was 51,133,492.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of InteliData Technologies Corporation's Proxy Statement for its 2005
Annual Stockholder Meeting are incorporated by reference into Part III of this
Report.
INTELIDATA TECHNOLOGIES CORPORATION
2004 ANNUAL REPORT ON FORM 10-K
TABLE OF CONTENTS
Page
PART I
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Item 1. Business..............................................................3
Item 2. Properties............................................................8
Item 3. Legal Proceedings.....................................................9
Item 4. Submission of Matters to a Vote of Security Holders...................9
PART II
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Item 5. Market for Registrant's Common Equity, Related Stockholder Matters...10
Item 6. Selected Financial Data..............................................11
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations................................................12
Item 7a. Quantitative and Qualitative Disclosures about Market Risk...........33
Item 8. Financial Statements and Supplementary Data..........................34
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.............................................59
Item 9A. Controls and Procedures..............................................59
Item 9B Other Information....................................................60
PART III
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Item 10. Directors and Executive Officers of the Registrant...................60
Item 11. Executive Compensation...............................................61
Item 12. Security Ownership of Certain Beneficial Owners and Management.......61
Item 13. Certain Relationships and Related Transactions.......................61
Item 14. Principal Accounting Fees and Services ..............................61
Item 15. Exhibits and Financial Statement Schedules...........................62
Signatures....................................................................65
<page>
PART I
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ITEM 1. BUSINESS
=================
COMPANY OVERVIEW
InteliData Technologies Corporation and subsidiaries ("InteliData" or the
"Company") provides electronic bill payment and presentment ("EBPP") and online
banking solutions to the financial services industry. The Company's products
provide financial institutions ("FI's") with the real-time financial processing
infrastructure needed to provide their customers with payment and presentment
services and online banking via the Internet and other online delivery channels.
The Company markets its products and services to banks, credit unions, brokerage
firms, financial institution processors and credit card issuers.
InteliData's product suite consists of three complementary product
offerings:
Payment and Presentment
-----------------------
o Payment Solutions - providing payment warehousing, payment matching,
biller directory management, and least cost routing functionality for
EBPP transactions;
o Card Services - providing Internet-based account activation, bill
presentment, balance consolidation, and e-Statement capabilities; and
Online Banking
--------------
o Online Banking - providing Internet-based access to real-time account
information, as well as interfaces to personal financial management
software such as Intuit's Quicken(R) and Microsoft Money(R).
The Company has invested in developing products and capabilities designed
to establish a leadership position in the online bill payment market. The
Company believes this market opportunity is significant based on the billions of
recurring bills that consumers and businesses pay each year, primarily via paper
checks. FI's should be able to realize significant cost and efficiency benefits
from initiating these payments online and processing them electronically.
Migrating to online electronic payments will require significant investment in
online bill payment infrastructure, which is where the Company's products are
focused.
In January 2001, InteliData acquired Home Account Holdings, Inc. and its
operating subsidiary, Home Account Network, Inc., by means of the merger of one
of the Company's wholly owned subsidiaries with and into Home Account Holdings,
with Home Account Holdings surviving the merger. Home Account Holdings is a
wholly owned subsidiary of InteliData. This acquisition was accounted for as a
purchase. Through this transaction, InteliData acquired the products and
customer base of Home Account Holdings, Inc., including i) the Card Services
sector, ii) the Online Banking platform, Canopy(TM) Banking, for commercial
banks, and iii) an Open Financial Exchange ("OFX") solution that provides
Payment Solutions capabilities.
On March 31, 2005, the Company entered into a definitive agreement to be
acquired by Corillian Corporation ("Corillian"), a publicly traded company
(Nasdaq: CORI) based in Hillsboro, Oregon, that provides solutions that enable
banks, brokers, financial portals and other financial service providers to
rapidly deploy Internet-based financial services. The purchase consideration for
the Company is approximately $19.5 million, subject to adjustment. Under the
terms of the agreement, each outstanding share of the Company's common stock
will be converted into the right to receive 0.0954 of a share of Corillian's
common stock and $0.0832 in cash without interest. The closing of this
transaction is subject to, among other things, the effectiveness of the
registration/proxy statement on Form S-4 to be filed with the Securities and
Exchange Commission and approval of the Company's stockholders. As a result,
there can be no assurances that the acquisition will be completed or as to the
timing thereof.
The Company was incorporated under the laws of the State of Delaware on
August 23, 1996. 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 overall market for online banking and bill payment solutions has grown
and matured considerably over the last few years. As Internet financial services
have become more mainstream, FI's have focused less on innovation and more on
improving the infrastructure that supports online services - adding
functionality, improving operating efficiencies, and migrating significant
portions of their online banking and bill payment operations in-house. Within
this overall market, the Company's three product offerings serve the online
infrastructure needs of three distinct, but related market sectors: Payment
Solutions, Card Services, and Online Banking.
The market for Payment Solutions continues to expand driven by growth in
consumer adoption. According to Celent Research, 29 percent of all consumer bill
payments in the United States will be paid over the Internet by 2007, up from 13
percent in 2004. This growth in consumer adoption and the associated increase in
processing costs is causing many FI's to re-evaluate their approach to bill
payment processing. Until recently, most large FI's elected to outsource their
bill payment processing to a third-party processor such as CheckFree or
Metavante. Increasingly however, FI's are migrating "front end" bill payment
processing and data warehousing to an in-house platform, offering the FI's
greater control, while also developing "least cost routing" strategies aimed at
reducing overall processing costs. The Company believes that banks will require
significant and ongoing investment in new software and services to achieve the
benefits of in-house warehousing and routing.
The market for Card Services is relatively new, but has matured
considerably in recent years. Most credit card issuers now have established an
online solution that they have either developed internally or use through an
outsourced service offering. Issuers are now looking to improve core
functionality, add incremental functionality such as e-Statements and bill
payment, and increase their subscriber base. The Company expects some new
opportunities in this market to upgrade or replace card issuers' first
generation systems, and also expects continued subscriber growth to drive
opportunity for outsourced providers such as InteliData.
The market for Online Banking has become relatively mature. Most financial
institutions have deployed 2nd or 3rd generation systems, and the functionality
supported has also matured considerably. Large banks have largely moved to
in-house systems developed internally or acquired from a third party vendor,
while smaller financial institutions have established relationships with service
providers that either specialize in online banking or offer online banking
services as part of a broader set of outsourced core processing services.
Consequently, most of the activity in this market involves adding incremental
functionality. InteliData has developed and maintains a customer base within
this market that is significant to our operations. The opportunity for
significant new business in this market has diminished. Therefore, the Company
expects to limit its future activities in the Online Banking market to providing
certain enhancements and upgrades for the Company's established customer base.
PRODUCTS AND SERVICES
InteliData's suite of software products and services provide our FI
customers with the infrastructure to implement and support online banking and
bill payment. The Company's products and services are designed to enable
consumers to transact with their FI's electronically and to assist FI's in
connecting to third-party processors to complete these transactions. The
Company's product suite consists of three complementary product offerings
serving the core infrastructure needs of three distinct, but related market
sectors: Payment Solutions, Card Services, and Online Banking.
The Company offers its solutions through several business models. A FI can
i) directly license the software and operate it in-house, ii) license the
software but have the software hosted in an outsourced environment (with the
opportunity to bring the software in-house in the future), or iii) use the
software in an outsourced environment through an application service provider
("ASP") arrangement with InteliData's processing partners. While InteliData
offered ASP solutions through Fidelity Information Services' ("Fidelity")
processing environment, the Company's Hosting agreement with Fidelity will
expire in April 2005. Thereafter, the Company will no longer offer its ASP
services in this environment. Each of these models gives the customer an
opportunity to make decisions based on the customer's individual economics and
marketing strategy. The Company also offers its customers software upgrades,
consulting expertise to assist with implementation, training and customization,
and maintenance and support services pursuant to contractual agreements that are
typically renewable on an annual basis.
Payment Solutions
- -----------------
InteliData's Payment Solutions have been designed to meet the current and
emerging online bill payment market opportunities. These solutions include a
broad set of capabilities to support "pay-anyone" online bill payment, as well
as an expanding range of online transfers and internal payments. In contrast to
current third-party outsourced solutions, the Company's bill payment solutions
are designed to give the FI more control over the bill payment warehousing and
routing functions, making bill payment processing more like other forms of
electronic payment processing (such as ACH and ATM transactions), while reducing
the overall expense of offering bill payment.
The Payment Solutions consist of several components to facilitate
deployment in a variety of operating environments and to allow the incremental
deployment of a subset of the overall capabilities.
Payment Warehouse - The central component of the Company's Payment
Solutions is the Payment Warehouse. Using the Payment Warehouse, FI's can
capture and warehouse all customer payment and payee information prior to
processing, giving them control of customer payment data and transaction routing
to various payment processors. This provides the FI greater control over service
quality of the increasingly important bill payment service. It also provides
FI's greater control of payment processing costs, which is becoming critical as
FI's have recognized that "free billpay" promotions drive customer and
transaction volumes. The warehouse also allows FI's to capture "on-us"
transactions, which are payments within an FI, and route these internally rather
than through a more costly third-party service.
Transfer Warehouse - The Transfer Warehouse is designed to extend the
payment capabilities of the InteliData Payment Solution offering to meet the
growing need for a broader range of online payment capabilities. Expanding
online payments beyond basic electronic bill payment allows FI's to become a
central "payment hub" for their consumers, with a resulting increase in customer
retention, cross-selling, and fees for the FI's. By using the Transfer
Warehouse, the FI's can add additional payment capabilities:
o Allow loan, credit card, and mortgage customers to make a payment from
another FI's checking account.
o Transfer funds on a scheduled and recurring basis between multiple
accounts inside the FI.
o Pay internal bills from multiple internal accounts.
o Transfer funds into the FI from another deposit account (e.g.,
brokerage account, credit union, and bank).
o Transfer funds to another FI into an account held by the customer.
Payment Matching and Routing - InteliData's Payment Decisioning Engine
permits FI's to manage and control "Least Cost Routing" of electronic bill
payments to multiple remittance processors, including MasterCard RPPS,
CheckFree, Metavante, Princeton eCom, Online Resources Corporation, and numerous
in-house systems.
Merchant Directory Management - The central feature of the InteliData
Payment Decisioning Engine is the Merchant Directory. The Merchant Directory
manages detailed information about merchants from multiple processors, including
information needed for electronic payment routing. Directory Management Tools
automate and support the management of the Merchant Directory and the management
of payee matching and payment routing.
Web Billpay Interface - InteliData's Web Billpay Interface is a turnkey Web
front-end, designed to let consumers and small business users manage online
transactions quickly and easily. This solution includes:
o Screens to support payment, funds transfer, and bill presentment.
o Flexible payment scheduling, including single, recurring, and express
transactions.
o Transaction search capability, allowing searches by date, status,
account, merchant, and other options.
o A set of branding and configuration options for controlling the look
and feel of the screens.
OFX Gateway - The OFX Interface provides direct connectivity between the FI
and users of Intuit Quicken(R) and Microsoft Money(R) client software through
the industry standard OFX protocol. It also provides synchronization with
Quicken(R) or Money(R).
<page>
Card Services
- -------------
InteliData's Card Services provide credit cardissuers with an end-to-end
solution for serving customers via the Internet. The solution, which is marketed
as an outsourced solution to card issuers, provides consumers with online
account access, customer self-service, and bill presentment capabilities. By
providing these online services, the credit card issuer benefits through reduced
customer service expenditures and lower billing costs. InteliData offers a
modular approach for Card Services, which enables an issuer to deploy a total
solution or to augment an existing online offering by deploying individual
components of the overall solution. Card Services offer several modular
components:
Account Management Module provides cardholders the ability to view their
credit card account information, such as balance, payment status, next payment
due date, and cycle-to-date transactions. Additional functions allow cardholders
to view previous months' statement activity and download the data to a Personal
Finance Manager (PFM), pay their credit card bills, utilize a secure messaging
process for submitting customer service inquiries, request a credit line
increase, and update address and other account information online.
Acquisition Module lets card issuers enroll and authorize new accounts
online. The Acquisition Module supports a wide range of deployment options. It
can perform fraud screening, provide application decisioning, provide an
applicable response, and book approved applicants.
Activation Module lets consumers activate new accounts online. This helps
issuers reduce costs and provides an opportunity to promote additional revenue
generating products and services such as balance transfers.
Balance Transfer Module gives consumers the ability to transfer credit card
balances from other credit cards online. This module provides online credit
approval, available balance decisioning, and movement of funds. When integrated
with a credit decision engine, this module enables issuers to utilize a lead
generation tool that can determine appropriate credit limits and percentage
rates, and effect balance transfers for new and existing customers.
e-Statement Module enables card issuers to realize savings by suppressing
the printing and mailing of paper credit card statements to customers. This
module allows either the cardholder or a customer service representative ("CSR")
to initiate e-Statement delivery, and allows the card issuers to eliminate the
paper statement. A number of Web-based CSR management tools are provided to the
card issuers to help manage the e-Statement process.
Online Banking
- --------------
InteliData's Online Banking solution provides FI's a highly scalable,
end-to-end solution for providing their consumers with real-time account
information online via the Web, Intuit Quicken(R) and Microsoft Money(R). The
solution allows consumers access to account information online, including the
ability to review transaction history, initiate funds transfers, and perform
various account management functions in real-time. InteliData's Online Banking
solution, which is licensed to financial institutions for in-house
implementation, consists of three complementary components:
Interpose(R) Transaction Engine - The Interpose(R) Transaction Engine
("ITE") is the core processing component of the InteliData Online Banking
solution. It provides transaction processing, logging, and warehousing for
online banking transactions. ITE provides real-time connectivity to the FI's
legacy data, and is designed to allow capacity to be added without increased
complexity.
Interpose(R) Web Banking - The Interpose(R) Web Banking ("IWB") interface
provides a Web user interface for the InteliData Online Banking solution. IWB
provides a range of Internet-accessible banking capabilities, including account
access, transfers, payments, and account management. IWB features a turnkey user
interface, but may also be customized to meet an FI's requirements.
OFX Gateway - The OFX Interface provides direct connectivity between the FI
and users of Intuit Quicken(R) and Microsoft Money(R) client software through
the industry standard Open Financial Exchange ("OFX") protocol. It also provides
synchronization with Quicken(R) or Money(R).
<page>
MARKETING AND DISTRIBUTION
The Company concentrates its marketing efforts through a direct sales model
targeting FI's in the United States, including banks, credit unions, brokerage
firms, financial institution processors and credit card issuers. The Company
markets its solutions primarily to large FI's, generally those with assets in
excess of $3 billion. In addition, the Company markets its Card Services to
credit card issuers through a processing arrangement with First Data Resources,
a subsidiary of First Data Corp. In 2004, the four top customers represented
approximately 13.6%, 8.9%, 8.3%, and 7.9% of our revenue, respectively.
The Company maintains alliance relationships with a number of processing
partners, including First Data Resources and Fidelity National Information
Systems ("Fidelity") for data center operations, and MasterCard RPPS, Princeton
eCom Corporation, and Online Resources Corporation for payment processing. The
Company also maintains a joint marketing and revenue sharing relationship with
Fidelity, although this relationship does not generate significant revenue for
the Company. The current joint marketing relationship concludes in April 2005,
although the companies will continue to operate the InteliData software in the
Fidelity data center as an outsourced service for existing and prospective FI's.
COMPETITION
The Company faces several different types of competition. Some FI's have
elected to develop internally their own online banking and payment solutions,
instead of purchasing products and services from the Company or other vendors,
making internal development a competitor to the Company. FI's may also obtain
similar technology products from other software providers, including S1
Corporation, Corillian Corporation, and Financial Fusion, Inc. FI's may obtain
similar services on an outsourced basis from CheckFree Corporation, Online
Resources Corporation, Princeton eCom Corporation, Digital Insight Corporation,
and Metavante Corporation. For Card Services, the Company's principal
competitors are Incurrent Solutions, Inc. (which was recently acquired by Online
Resources Corporation), First Data Resources, and internally developed in-house
solutions.
The Company expects that competition in these areas will continue to
increase. Most of our competitors have substantially greater resources than us,
which could impact our ability to compete. Competition will be based upon price,
performance, product functionality, customer service, and the effectiveness of
marketing and sales efforts. The Company competes in its target markets by
leveraging its market experience and current customer base to develop innovative
technology solutions and market them effectively.
PRODUCT DEVELOPMENT
The Company operates in industries that are evolving and characterized by
technology innovation. In an effort to improve the Company's position with
respect to its competition, the Company has continued its new product
development and focused its efforts in the area of product development primarily
for the Payment Solutions market. In 2004, 2003, and 2002, the Company's
research and development expenditures were $4,937,000, $5,020,000, and
$8,807,000, respectively. The decreasing costs reflect the completion of certain
core product development initiatives. At December 31, 2004 and 2003,
approximately 23 and 27 employees were engaged in product development,
respectively. The Company's ability to attract and retain highly skilled
research and development personnel is important to the Company's continued
success.
GOVERNMENT REGULATION
The Company markets its products and services to the financial services
market and others, which is highly regulated at both the federal and state
levels. Interpretation, implementation or revision of banking regulations can
accelerate or hinder the ultimate success of the Company and its products.
PATENTS, PROPRIETARY RIGHTS AND LICENSES
The Company holds limited registered intellectual property rights with
respect to its products. The Company relies on trade secret laws and licensing
agreements to establish and maintain its proprietary rights to its products.
Although the Company has obtained confidentiality agreements from its key
executives and engineers in its
<page>
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, the intellectual property of such parties.
EMPLOYEES
At December 31, 2004, the Company had approximately 64 employees. The
Company has no collective bargaining agreements with its employees.
AVAILABLE INFORMATION
The Company files annual, quarterly, and current reports, proxy statements,
and other documents with the Securities and Exchange Commission (the "SEC")
under the Securities Exchange Act. The public may read and copy any materials
that the Company files with the SEC at the SEC's Public Reference Room at 450
Fifth Street, NW, Washington, D.C. 20549. The public may obtain information on
the operation of the Public Reference Room by calling the SEC at (800) SEC-0330.
Also, the SEC maintains an Internet Website that contains reports, proxy and
information statements, and other information regarding issuers, including the
Company, that file electronically with the SEC. The public can obtain documents
that the Company files with the SEC at http://www.sec.gov.
The Company also makes available free of charge on or through our Internet
website (http://www.intelidata.com) our Annual Report on Form 10-K, Quarterly
-------------------------
Reports on Form 10-Q, Current Reports on Form 8-K, and, if applicable,
amendments to those reports filed or furnished pursuant to Section 13(a) of the
Securities Exchange Act, as well as Section 16 reports on Forms 3, 4 and 5, as
soon as reasonably practicable after the Company electronically files such
material with, or furnishes it to, the SEC.
ITEM 2. PROPERTIES
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The Company's headquarters are located in Reston, Virginia, where it leases
25,200 square feet of office space; this lease expires in December 2006. During
2003, the Company ceased using 8,200 square feet of the Reston, Virginia leased
space and subleased the office space to a third party. The Company also leases
8,800 square feet of office space for its product development and operations
facilities in Toledo, Ohio; this lease expires in April 2006. The Company also
leases 9,200 square feet of office space for its product development and
customer service in Omaha, Nebraska; this lease expires in March 2006.
In February 2001, the facility in California, which served as the
headquarters for the pre-merger Home Account Holdings, was shut down. In August
2002 the Company subleased the 7,200 square feet of space for the remainder of
the lease term, which ended in February 2005. The South Carolina lease for 5,300
square feet of office space, used for product development and customer service,
will terminate in April 2006. In July 2004, this facility was shutdown and
operations were moved to the Company's office in Reston, Virginia. The Company
has engaged a broker to sublease the space.
All of the lease and sublease arrangements were made with unaffiliated
parties. The Company believes that its leased properties are sufficient for its
current operations and for the foreseeable future.
ITEM 3. LEGAL PROCEEDINGS
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The Company is not currently a party to any material litigation. From time
to time, the Company is a party to routine litigation incidental to its
business. Management does not believe that the resolution of any or all such
routine litigation will be likely to have a material adverse effect on the
Company's financial condition, cash flows, or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- ------------------------------------------------------------
None.
EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth the names and ages of all executive officers
of the Company and all positions and offices within the Company presently held
by such executive officers:
Name Age Position Held
---- --- -------------
Alfred S. Dominick, Jr. 59 Chairman, Chief Executive Officer and
Acting Chief Financial Officer
Karen Kracher 49 President and Chief Sales and Marketing
Officer
Monique L. Marcus 48 Vice President, Finance and Treasurer
Alfred S. Dominick, Jr. has served as the Chief Executive Officer of the
Company since August 1998, Chairman of the Board of Directors since August 2002
and became the Acting Chief Financial Officer in April 2004. Mr. Dominick was
also the President of the Company from August 1998 to May 2003. Prior to joining
InteliData, Mr. Dominick served as President of the Retail Products Delivery
Group at M&I Data Services. Prior to joining M&I Data Services in July 1995, he
was Executive Vice President of Retail Banking and a member of the Executive
Committee for Boatmen's Bancshares Corporation for three years. Prior to that
Mr. Dominick was an Executive Vice President with Bank One Texas, since 1989.
Prior to his employment with Bank One Texas, Mr. Dominick was a Senior Vice
President with Fleet National Bank.
Karen Kracher was named President of InteliData in August 2004 and has
served as the Chief Sales and Marketing Officer since joining InteliData in
January 2004. In her role as President, she oversees product development
efforts, engineering, operations, ASP initiatives and customer care for the
InteliData bill pay product offerings. She also is in charge of overall business
planning and business development activities for electronic bill payment,
Internet Banking, and operations. Prior to joining InteliData, Ms. Kracher's
breadth of experience in the financial services industry included such positions
as: Corporate Officer for Deluxe Corporation (1978-1996), General Manager for
Travelers Express (now MoneyGram) (1996-1998), Senior Vice President of TCF
Financial (1998-1999), and President of Aveus, Inc. (1999-2001). Ms. Kracher is
also President of a non-profit organization - Young Audiences.
Monique L. Marcus has served as Vice President, Finance and Treasurer since
joining InteliData in October 2004 and was appointed Principal Accounting
Officer in November 2004. Prior to joining the Company, Ms. Marcus held
management positions in finance and accounting with several telecommunications
companies, including: Vice President and Controller for CityNet
Telecommunications, Inc. from June 2000 through October 2004; Vice President and
Controller for eLink Communications, Inc. from October 1999 through August 2000;
and Senior Director and Controller for WinStar Communications, Inc. from May
1996 through June 1999. Previously she was Controller for Snyder Communications,
Inc., a direct marketing and direct sales company and she also has held various
financial positions within Caterair International Corporation (a spin-off from
Marriott) and Marriott Corporation. Ms. Marcus is a C.P.A. and has four years
experience in Public Accounting after receiving her B.S. in accounting from
Georgetown University.
PART II
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ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED
- ---------------------------------------------------------------
STOCKHOLDER MATTERS
-------------------
The Company's common stock was transferred from the Nasdaq National Market
to the Nasdaq SmallCap Market effective as of the open of business on September
7, 2004, and is traded under the symbol INTD. The table below sets forth the
high and low quarterly sales prices for the common stock of the Company as
reported in published financial sources for each quarter during the last two
years:
High Low
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2004 Fourth Quarter $ 0.69 $ 0.30
Third Quarter 0.70 0.29
Second Quarter 1.46 0.60
First Quarter 2.11 1.09
2003 Fourth Quarter $ 2.62 $ 1.40
Third Quarter 3.60 2.15
Second Quarter 3.24 1.19
First Quarter 1.84 0.84
On March 28, 2005, the last reported sales price for the Company's common
stock was $0.30. The number of stockholders of record at March 28, 2005 was 614
and does not include those stockholders who hold shares in street name accounts.
The Company has never declared or paid any cash dividends on its common
stock. The Company currently intends to retain its future earnings, if any, to
fund the development and growth of its business and, therefore, does not
anticipate paying any cash dividends in the foreseeable future. Any future
decision concerning the payment of dividends on the Company's common stock will
depend upon the results of operations, financial condition and capital
expenditure plans of the Company, as well as such other factors as the Board of
Directors, in its sole discretion, may consider relevant.
Information regarding securities authorized for issuance under the
Company's equity compensation plans as of December 31, 2004 is set forth in Item
12, "Security Ownership of Certain Beneficial Owners and Management."
ITEM 6. SELECTED FINANCIAL DATA (in thousands, except per share data)
- -----------------------------------------------------------------------
The following selected financial data are derived from our consolidated
financial statements and have been restated to reflect adjustments that are
further discussed in Note 2(n) to the consolidated financial statements included
in Item 8, Financial Statements and Supplementary Data of this annual report on
Form 10-K.
Years Ended December 31,
-------------------------------------------------------------------
RESULTS OF OPERATIONS: 2004 2003 2002 2001(1) 2000
- ---------------------- ------------ --------- ---------- ---------- ----------
(as restated; see Note 2(n))
----------------------------------------------------
Revenues $ 13,742 $ 20,630 $ 21,495 $ 18,296 $ 4,836
Cost of revenues 6,318 7,549 8,474 9,010 2,875
Operating expenses 14,893 14,774 21,178 39,580 27,676
Goodwill impairment charge 25,771(3) -- -- -- --
---------- --------- ---------- ---------- ----------
Operating loss (33,240) (1,693) (8,157) (30,294) (25,715)
Other income (expenses), net 5 21 (626) 137 49,726(4)
Provision (benefit) for income taxes -- -- (137) (160) 200
---------- --------- ---------- ---------- ----------
Income (loss) from continuing operations (33,235) (1,672) (8,646) (29,997) 23,811
Income (loss) from discontinued operations -- -- -- -- (262)(2)
---------- --------- ---------- ---------- ----------
Net income (loss) $ (33,235) $ (1,672) $ (8,646) $ (29,997) $ 23,549
========== ========= ========== ========== ==========
Basic earnings per common share
Income (loss) from continuing operations $ (0.65) $ (0.03) $ (0.18) $ (0.65) $ 0.62
Income (loss) from discontinued operations -- -- -- -- (0.01)
---------- --------- ---------- ---------- ----------
Net income (loss) $ (0.65) $ (0.03) $ (0.18) $ (0.65) $ 0.61
========== ========= ========== ========== ==========
Diluted earnings per common share
Income (loss) from continuing operations $ (0.65) $ (0.03) $ (0.18) $ (0.65) $ 0.58
Income (loss) from discontinued operations -- -- -- -- (0.01)
---------- --------- ---------- ---------- ----------
Net income (loss) $ (0.65) $ (0.03) $ (0.18) $ (0.65) $ 0.57
========== ========= ========== ========== ==========
Weighted-average common shares outstanding
Basic 51,271 50,028 48,869 45,897 38,237
========== ========= ========== ========== ==========
Diluted 51,271 50,028 48,869 45,897 40,843
========== ========= ========== ========== ==========
December 31,
-------------------------------------------------------------------
FINANCIAL POSITION: 2004 2003 2002 2001 2000
- ---------------------- ---------- --------- ---------- ---------- ----------
(as restated; see Note 2(n))
----------------------------------------------------
Cash and cash equivalents $ 3,223 $ 7,603 $ 5,674 $ 12,026 $ 27,255
Total assets 10,605(3) 43,869 44,039 57,551 43,278
Long-term debt -- -- -- -- --
Stockholders' equity 5,695(3) 38,890 36,507 44,660 33,791
The tables above set forth selected consolidated financial data for the
periods or as of the dates indicated and should be read in conjunction with the
consolidated financial statements, related notes and other financial information
appearing in this annual report on Form 10-K. Highlighted below are certain
transactions and factors that may be significant to an understanding of the
financial condition and comparability of results of operations.
(1) The Company acquired Home Account Holdings, Inc. in January 2001.
(2) During the fiscal year ended December 31, 2000, the leasing business
segment was discontinued.
(3) During the fiscal year ended December 31, 2004, the Company recorded a
goodwill impairment charge of $25,771,000. See Note 12 to the
consolidated financial statements for additional detail.
(4) In January 2000, Home Financial Network, Inc., a company in which
InteliData held approximately a 25% ownership interest, merged with
Sybase, Inc.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
- ----------------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS
-----------------------------------
The accompanying Management's Discussion and Analysis of Financial
Condition and Results of Operations gives effect to the restatement disclosed in
Note 2(n) to the consolidated financial statements.
Overview
InteliData Technologies Corporation and subsidiaries ("InteliData" or the
"Company") provides electronic bill payment and presentment ("EBPP") and online
banking solutions to the financial services industry. The Company's products
provide financial institutions ("FI's") with the real-time financial processing
infrastructure needed to provide their customers with payment and presentment
services and online banking via the Internet and other online delivery channels.
The Company markets its products and services to banks, credit unions, brokerage
firms, financial institution processors and credit card issuers.
Products - InteliData's product suite consists of three complementary
product offerings:
Payment and Presentment
-----------------------
o Payment Solutions - providing payment warehousing, payment matching,
biller directory management, and least cost routing functionality for
EBPP transactions;
o Card Services - providing Internet-based account activation, bill
presentment, balance consolidation, and e-Statement capabilities; and
Online Banking
--------------
o Online Banking - providing Internet-based access to real-time account
information, as well as interfaces to personal financial management
software such as Intuit's Quicken(R) and Microsoft Money(R).
The overall market for online banking and bill payment infrastructure has
grown considerably over the last few years, and the Company believes that
significant growth opportunities remain. As Internet financial services have
become more mainstream, FI's have focused less on innovation and more on
broadening existing operations - adding functionality, improving operating
efficiencies, and migrating significant portions of their online banking and
bill payment operations in-house. Within this market, the Company's product
suite of three complementary product offerings serves the needs of three
distinct, but related market sectors: Payment Solutions, Card Services, and
Online Banking.
The market for Payment Solutions has been the primary focus of InteliData's
development and marketing efforts during the past three years. The Company views
this as the market sector with the greatest growth potential. The Company
believes that future growth opportunities in this market sector are significant
based on FI's increasing recognition of measurable financial benefits related to
the bill payment customer base, increasing consumer adoption rates, and the
increasing competitive pressure to provide "free bill payment" services to all
consumers. The resulting growth, both in number of users and number of
transactions, has caused larger FI's to rethink their approach to bill payment
processing. Until recently, most large FI's elected to outsource their bill
payment processing to a third-party processor such as CheckFree or Metavante.
Increasingly however, FI's are migrating "front end" bill payment processing and
data warehousing to an in-house platform, offering the FI's greater control
while also developing "least cost routing" strategies aimed at reducing overall
processing costs. The Company believes that large banks will require significant
and ongoing investment in new software and implementation services to achieve
the benefits of in-house warehousing and routing. Consequently, the Company is
concentrating its efforts on marketing and deploying in-house licensed solutions
and the Company will conclude its Joint-Marketing Agreement with Fidelity to
market outsourced online payment services. However, the Company will continue to
refer clients directly to Fidelity for outsourced services under the existing
revenue-sharing relationship. The Company's greatest challenges in this market
is the speed of bank decision-making and competition from larger suppliers,
although the Company believes that its products have superior capabilities in
comparison to the competition.
The market for Card Services has become relatively mature considerably in
recent years. Most of the Company's current and potential card issuer customers
have deployed an online solution and are now seeking to add
subscribers and incremental functionality. Consequently, InteliData expects
limited growth opportunities across this market sector. Because InteliData's
Card Services solution is an outsourced service, growth will be driven primarily
by anticipated subscriber increases from within the Company's current customer
base.
The market for Online Banking is the most mature of the markets served by
the Company. Most larger FI's are deploying second and third generation
solutions. The goal of these initiatives typically includes increasing
processing capacity and performance, adding incremental new user features,
improving overall user experience, improving back-office processes, reducing
processing costs, and migrating certain core components from outsourced
solutions to in-house solutions. While InteliData has developed and maintains a
customer base of in-house licensed clients within this market sector that is
significant to our operations, the opportunity for significant new business in
this market is limited. Therefore, the Company expects to limit its future
activities in the Online Banking market to providing certain enhancements and
upgrades for the Company's established customer base.
On March 31, 2005, the Company entered into a definitive agreement to be
acquired by Corillian Corporation ("Corillian"), a publicly traded company
(Nasdaq: CORI) based in Hillsboro, Oregon, that provides solutions that enable
banks, brokers, financial portals and other financial service providers to
rapidly deploy Internet-based financial services. The purchase consideration for
the Company is approximately $19.5 million, subject to adjustment. Under the
terms of the agreement, each outstanding share of the Company's common stock
will be converted into the right to receive 0.0954 of a share of Corillian's
common stock and $0.0832 in cash without interest. The closing of this
transaction is subject to, among other things, the effectiveness of the
registration/proxy statement on Form S-4 to be filed with the Securities and
Exchange Commission and approval of the Company's stockholders. As a result,
there can be no assurances that the acquisition will be completed or as to the
timing thereof.
Results of Operations
The following represents the results of operations for InteliData. Such
information should be read in conjunction with the financial statements and the
notes thereto in Part II, Item 8 of this Annual Report on Form 10-K, as well as
the cautionary statements and risk factors in this section.
The Company generates revenues from each of its three product offerings -
Payment Solutions, Card Services, and Online Banking. Within these product
offerings, the Company obtains revenues from various sources - software license
fees, consulting services fees, use-based fees, maintenance fees, and other
fees. Software license fees include revenues generated from license sales.
Consulting services fees include revenues generated from professional services
rendered. Use-based fees include revenues generated from user accounts,
transactions, remittances and other related activities. Maintenance fees include
revenues generated from maintenance agreements for support services for licensed
software. Other fees are termination charges levied for early termination of
contracts.
The Company's client invoicing and payment terms are negotiated and
governed by a contract, letter of intent or alternative form of agreement
between the Company and customer. Client invoicing and payment terms, which vary
by agreement, are generally in accordance with the following: Software license
fees are typically invoiced upon execution of an agreement between the client
and the Company, upon delivery of the licensed software, upon acceptance of the
final product, or some combination thereof; Consulting service fees and
use-based fees are typically invoiced as the services are rendered; Maintenance
fees are typically invoiced at the beginning of each maintenance term; Payment
is due thirty days from the date of invoice with allowances for the Company to
impose penalties for late and/or non-payment.
Within revenues generated from Payment Solutions, consulting services will
fluctuate with the demand of services based on client internal projects as well
as new system implementations. Use-based fees will fluctuate based on the
addition of new clients and user adoption rates that translate into additional
users and additional transactions. Additionally, use-based revenues may decline
with departures of clients for other solutions and/or clients' migrating the
InteliData solution in-house through a license arrangement that may eliminate
user fees.
Within revenues generated from Card Services, consulting services will
fluctuate with the demand of services based on client internal projects as well
as new client implementations. Use-based fees will fluctuate based on the
addition of new clients and user adoption rates that translate into additional
users and additional transactions.
Additionally, use-based revenues may increase due to added functionalities or
may decline with departures of clients for other solutions.
Within revenues generated from Online Banking, use-based revenues will
fluctuate based on the addition of new clients and user adoption rates that
translate into additional users and additional transactions. However, use-based
revenues may decline with departures of clients for other solutions and/or
clients' migrating the InteliData solution in-house through a license
arrangement that may eliminate user fees.
InteliData's Hosting agreement with Fidelity will expire in April 2005.
During the first quarter of 2005, the Company continued to either migrate
existing clients to InteliData's in-house solution or assist clients in
migrating to another outsourced solution. While the Company may generate
revenues in 2005 from these migration activities under the Payment Solution and
Online Banking offerings, InteliData will not earn the ASP revenues through the
Fidelity environment from these clients after the migration. However, InteliData
will continue to generate revenue through its revenue-sharing agreement with
Fidelity for the existing Fidelity clients and newly referred clients who
continue to use InteliData's solution as part of Fidelity's offering.
The following table sets forth the Company's sources of revenue for each of
the three fiscal years ended December 31, 2004, 2003 and 2002 (in thousands):
2004 2003 2002
--------- -------- --------
Payment Solutions
Software license $ 158 $ 759 $ 771
Consulting services 1,072 2,192 3,406
Use-based 5,147 4,179 3,151
Maintenance 1,274 892 796
-------- -------- --------
Subtotal 7,651 8,022 8,124
-------- -------- --------
Card Services
Consulting services 229 332 894
Use-based 3,920 4,595 3,054
Other - 13 -
-------- -------- --------
Subtotal 4,149 4,940 3,948
-------- -------- --------
Online Banking
Software license - 476 518
Consulting services 173 1,440 1,485
Use-based 990 5,100 6,697
Maintenance 779 652 470
Other - - 253
-------- -------- --------
Subtotal 1,942 7,668 9,423
-------- -------- --------
Total
Software license 158 1,235 1,289
Consulting services 1,474 3,964 5,785
Use-based 10,057 13,874 12,902
Maintenance 2,053 1,544 1,266
Other - 13 253
-------- -------- --------
Total $ 13,742 $ 20,630 $ 21,495
======== ======== ========
Years Ended December 31, 2004 and 2003
Revenues
The Company's total revenues were $13,742,000 in 2004 compared to
$20,630,000 in 2003, a decrease of $6,888,000.
The revenues from Payment Solutions were $7,651,000 in 2004 compared to
$8,022,000 in 2003, a decrease of $371,000. These revenues include items related
to the Company's billpay warehouse, funds transfer and certain OFX solutions, as
well as the billpay portions of the ASP offerings. Software licenses decreased
$601,000 and consulting services decreased $1,120,000 while use-based fees
increased $968,000 and maintenance increased $382,000 year over year. Software
license fees decreased because there were fewer software license sales in 2004.
The decrease in consulting services was primarily due to the completion of
projects in 2003 and limited new projects in 2004, while the increase in
use-based fees was due to the growth from existing clients. Maintenance
increased due to increases in use-based licenses, additional fees from sales in
2003 and increases on renewed maintenance services. The Payment Solutions
revenues from the Fidelity ASP environment that were generated in 2004 were
approximately $2,029,000. The revenue stream from the ASP offering will cease
with the expiration of our Hosting agreement with Fidelity in April 2005. To
replace this source of revenue, the Company expects recurring fees for providing
directory management services to its payment warehouse clients on a per
transaction or monthly subscription fee basis.
The revenues from Card Services were $4,149,000 in 2004 compared to
$4,940,000 in 2003, a decrease of $791,000. Consulting services decreased
$103,000, while use-based fees decreased $675,000 year over year. The decrease
in consulting services was primarily due to the completion of projects in 2003
and limited new projects in 2004, while the decrease in use-based fees was due
to the departure of certain clients offset by additional fees from existing
clients due to additional users and additional transactions. In September 2004,
the Company discontinued providing services to two clients that represented
approximately $248,000 in monthly recurring revenues. One of the clients moved
to an in-house solution, while the other opted for another service provider.
The revenues from Online Banking were $1,942,000 in 2004 compared to
$7,668,000 in 2003, a decrease of $5,726,000. These revenues include items
related to the Company's Interpose(R) Web Banking, Interpose(R) Transaction
Engine, and certain OFX solutions, as well as the online banking portions of the
ASP offerings. Software licenses decreased $476,000, consulting services
decreased $1,267,000, and use-based fees decreased $4,110,000 year over year.
The decrease was primarily attributable to the decrease in use-based fees. Three
large customers who were operating in the ASP environment during 2003 did not
pay recurring fees during 2004. In one instance, a bank that used the Company's
online banking platform based on older Home Account Canopy(TM) Banking
technology, converted to a competitor's product. Two other banks paid the
Company a one-time license fee in 2003 and moved the InteliData software
in-house in 2003, which resulted in a decrease to the Company's monthly fees for
hosting the software in an ASP arrangement. The resulting decrease was partially
offset by growth in user fees from existing clients. The decrease in consulting
services was primarily due to the completion of projects in 2003 and fewer new
projects in 2004. There were no software license sales in 2004. Maintenance
increased due to increases in use-based licenses, additional fees from sales in
2003 and increases on renewed maintenance services. The Online Banking revenues
from the Fidelity ASP environment that were generated in 2004 were approximately
$489,000. The revenue stream from the ASP offering will cease with the
expiration of our Hosting agreement with Fidelity in April 2005.
Cost of Revenues and Gross Profit
The Company's cost of revenues decreased $1,231,000 to $6,318,000 in 2004
from $7,549,000 in 2003. The decrease was primarily due to decreases in ASP
operations costs resulting from a renegotiation with a continuing provider and
decreases in cost of revenues associated with decreased professional services.
The cost structures to generate the revenues are bundled together and cannot be
broken out in the same manner as the revenues. Costs of revenues include vendors
for outsourced services and employees directly working to generate revenues.
Overall gross profit margin decreased to 54% for 2004 from 63% for 2003.
The decrease in gross profit margin was attributable to a greater decrease in
revenues as compared to the decrease in cost of revenues as discussed above. The
Company anticipates that gross profit margins may fluctuate in the future due to
changes in
product mix and distribution, outsourcing activities associated with an ASP
business model, competitive pricing pressure, and the introduction of new
products and changes in volume.
The Company entered into multiple vendor agreements for outsourced services
as part of its ASP solution offering for certain Online Banking and Payment
Solutions clients. Some of these vendor agreements commit the Company to
specified minimum charges during the terms of the contracts. Management
continues to assess the potential for new business prospects, the possibility of
reducing the Company's costs through renegotiation of existing agreements,
and/or exiting the ASP business by referring clients and prospects to a hosting
vendor and providing a license solution and support services. In June 2004, the
Company restructured a vendor agreement and decreased its overall prospective
ASP operations costs. Entering 2005, the projected revenues are estimated to
exceed projected costs by approximately $83,000 on a monthly basis based on the
December 2004 results; this gap will fluctuate based on monthly activity. In
accordance with generally accepted accounting principles, the Company is
accounting for the committed contract costs as they are incurred.
As a result of exploring all options, the Company has elected to allow its
Fidelity Hosting agreement to expire in April 2005; however, InteliData will
continue to participate in the Fidelity revenue-sharing agreement, which bears
no anticipated direct costs.
General and Administrative
General and administrative expenses increased $976,000 to $8,180,000 in
2004 from $7,204,000 in 2003. The increase was attributable to several factors.
The Company's corporate and administrative expenses were reduced by
approximately $815,000 through employee-related actions and decreased benefit
charges, including the Company's lower loss experience under its self-insured
medical plan. This reduction was offset by bonus expense in 2004 of
approximately $406,000 and there was a reversal in the first quarter of 2003 of
approximately $630,000 in estimated accrued bonuses that were not paid, but were
previously provided for during 2002. Moreover, the Company incurred
approximately $1,011,000 of expenses related to its efforts to comply with the
provisions of Section 404 of the Sarbanes-Oxley Act of 2002 requiring that
management perform an evaluation of its internal controls over financial
reporting and have its independent auditors attest to such evaluation. And, in
2003, the Company benefited from a one-time, favorable settlement of $325,000
related to 1996 tax payments. Additionally, during 2003, the Company ceased
using one of its leased spaces at its Reston, Virginia facility and recorded an
expense of $540,000, while it did not have a comparable charge in 2004. Finally,
the Company fully amortized certain fixed assets in 2003 and did not incur
depreciation and amortization expense of approximately $280,000 on those assets
in 2004. The Company seeks to continually assess its operations to manage its
expenses and infrastructures in light of anticipated business levels.
Selling and Marketing
Selling and marketing expenses decreased $774,000 to $1,056,000 in 2004
from $1,830,000 in 2003. This was primarily attributable to employee-related
actions, lower travel costs and a reduction in tradeshow-related expenses.
Additionally, the Chief Sales and Marketing Officer was promoted to President
during the third quarter of 2004. This had the effect of shifting costs from
sales and marketing to general and administrative. The Company seeks 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 $83,000 to $4,937,000 in 2004 from
$5,020,000 in 2003. The Company's primary research and development efforts are
in Payment Solutions. The development efforts for Online Banking and Card
Services products will likely be focused primarily on product upgrades and
product maintenance.
Amortization of Intangible Asset
Statement of Financial Accounting Standards No. 142, Goodwill and Other
Intangible Assets ("SFAS 142"), requires the Company to not amortize goodwill
and indefinite-lived intangibles into results of operations, but instead the
Company would review these assets for impairment, at least annually, that may
result in future periodic write-downs. Tests for impairment between annual tests
may be required if events occur or circumstances change
that would more likely than not reduce the fair value of the net carrying
amount. The assets would be written down and impairment losses would be charged
to results of operations only in the periods in which the recorded values are
determined to be more than their fair values. The amortization of certain
intangibles continued at an annualized rate of $720,000. As of January 1, 2002,
in accordance with SFAS 142, the Company ceased recognizing amortization expense
on goodwill.
During 2004, the Company performed the required annual review in accordance
with SFAS 142. The Company assessed the fair value of its only reporting unit by
considering its projected cash flows, comparable company valuations, and recent
purchase prices paid for entities within its industry. This review utilized the
same approaches (i.e., discounted cash flow model, guideline company method, and
similar transactions method) and similar considerations as the initial and
previous tests. Given consideration of these factors and the Company's declining
market capitalization, the Company recorded a goodwill impairment charge in 2004
in the amount of $25,771,000.
Other Income
Other income, primarily sublease rent receipts, interest income and other
expenses, including state and local taxes, decreased $16,000 to $5,000 in 2004
from $21,000 in 2003. The decrease is primarily due to the decreased interest
income resulting from lower levels of average cash and cash equivalents in 2004
as compared to 2003.
Income Taxes
The provisions (benefit) for income taxes were $0 for the years ended
December 31, 2004 and 2003. At December 31, 2004, the Company had net operating
loss carryforwards for federal income tax purposes of approximately $212
million, which expire in 2008 through 2024, general business tax credits of
approximately $489,000, which expire in 2005 through 2010, and an alternative
minimum tax credit carryforward of approximately $60,000, which may be carried
forward indefinitely and used to offset future regular taxable income.
Approximately $45 million of the net operating losses were incurred by Home
Account prior to its acquisition by the Company and are subject to annual
limitations pursuant to Internal Revenue Code Section 382 as a result of
cumulative changes in ownership of more than 50% in 2001. A valuation allowance
was established for deferred tax assets as of December 31, 2004 and 2003 because
it was deemed, based on available evidence, that it is more likely than not that
all of the deferred tax asset will not be realized.
Discontinued Operations
Under various disposal plans adopted in 1997, 1998, and 2000, the Company
completed the divestiture of all of its telecommunications, interactive services
businesses and the Caller ID adjunct leasing activities, respectively. In 2004
and 2003, the Company did not have any income statement activity in discontinued
operations.
As of December 31, 2004 and 2003, the net liabilities of discontinued
operations of $40,000 and $134,000, respectively, relate to the
telecommunications divisions. These liabilities relate to the environmental
clean up associated with prior tenants' operations at InteliData's former New
Milford, Connecticut property. In January 2000, InteliData sold the New Milford,
Connecticut property and the building located thereon, its only remaining asset
in its discontinued operations of the telecommunications division. In the
context of this sale, InteliData agreed to undertake limited remediation of the
site in accordance with applicable state and federal law. The subject site is
not a listed federal or state Superfund site and InteliData has not been named a
"potentially responsible party" at the site. The remediation plan agreed to with
the purchaser allows InteliData to use engineering and institutional controls
(e.g., deed restrictions) to minimize the extent and costs of the remediation.
Further, at the time of the sale of the facility, InteliData established a
$200,000 escrow account from the proceeds of the sale for certain
investigation/remediation costs. In April 2004, the escrow balance of
approximately $224,000 was released and paid to InteliData. Moreover, InteliData
has obtained environmental insurance to pay for remediation costs up to
$6,600,000 in excess of a retained exposure limit of $600,000. InteliData
estimates its remaining liability at December 31, 2004 related to this matter
and other costs to be approximately $40,000 and has recorded a liability for
this amount.
The Company has engaged a legal firm and an environmental specialist firm
to represent it regarding this matter. The timing of the ultimate resolution of
this matter is estimated to be from two to four years under the
Company's proposed compliance plan, which involves a natural attenuation and
periodic compliance monitoring approach. Management does not believe that the
resolution of this matter will likely have a material adverse effect on the
Company's financial condition or results of operations.
Income (Loss) from Continuing and Discontinued Operations, Weighted-Average
Common Shares Outstanding and Basic and Diluted Earnings (Loss) Per Common Share
The basic and diluted weighted-average common shares outstanding for the
year ended December 31, 2004 was 51,271,000, compared to a basic and diluted
weighted-average common shares outstanding of 50,028,000 for the year ended
December 31, 2003. The increase resulted primarily from the issuance of stock
awards to employees, issuance of stock pursuant to the exercises of stock
warrants and stock options, and stock purchases under the Employee Stock
Purchase Plan. During July 2003, the Company issued 1,431,364 shares of its
common stock pursuant to the exercise of warrants, as amended, by institutional
investors who participated in the Company's private placement of common stock in
November and December, 2001.
Losses from continuing operations were $33,235,000 and $1,672,000 for the
years ended December 31, 2004 and 2003, respectively, while there was no gain or
loss from discontinued operations in either period. Net losses were $33,235,000
and $1,672,000 for 2004 and 2003, respectively. As a result of the foregoing,
basic and diluted net loss per common share was $0.65 for the year ended
December 31, 2004 compared to a basic and diluted net loss per common share of
$0.03 for the year ended December 31, 2003. During 2004, the Company recorded a
non-cash goodwill impairment charge in the amount of $25,771,000, or $0.50 per
share, that contributed to the net loss.
Years Ended December 31, 2003 and 2002
Revenues
The Company's total revenues were $20,630,000 in 2003 compared to
$21,495,000 in 2002, a decrease of $865,000.
The revenues from Payment Solutions were $8,022,000 in 2003 compared to
$8,124,000 in 2002, a decrease of $102,000. These revenues include items related
to the Company's billpay warehouse, funds transfer and certain OFX solutions, as
well as the billpay portions of the ASP offerings. Consulting services decreased
$1,214,000, while use-based fees increased $1,028,000 year over year. The
decrease in consulting services was primarily due to the completion of projects
in 2002 that did not carryover to 2003 and limited new projects in 2003, while
the increase in use-based fees was due to the growth from existing clients.
The revenues from Card Services were $4,940,000 in 2003 compared to
$3,948,000 in 2002, an increase of $992,000. Consulting services decreased
$562,000, while use-based fees increased $1,541,000 year over year. The decrease
in consulting services was primarily due to the completion of projects in 2002
and limited new projects in 2003, while the increase in use-based fees was due
to the growth from existing clients.
The revenues from Online Banking were $7,668,000 in 2003 compared to
$9,423,000 in 2002, a decrease of $1,755,000. These revenues include items
related to the Company's Interpose(R) Web Banking, Interpose(R) Transaction
Engine, and certain OFX solutions, as well as the online banking portions of the
ASP offerings. The decrease was primarily attributable to the $1,597,000
decrease in use-based fees. Three large customers who were operating in the ASP
environment during 2002 and a part of 2003 ceased paying recurring fees during
2003. In one instance, a bank that used the Company's online banking platform
based on older Home Account Canopy(TM) Banking technology, converted to a
competitor's product. Two other banks paid the Company a one-time license fee in
2003 and moved the InteliData software in-house in 2003, which resulted in a
decrease to the Company's monthly fees for hosting the software in an ASP
arrangement. The resulting decrease was partially offset by growth in user fees
from existing clients.
Cost of Revenues and Gross Profit
The Company's cost of revenues decreased $925,000 to $7,549,000 in 2003
from $8,474,000 in 2002. The decrease was primarily due to decreases in cost of
revenues associated with decreased professional services. The
cost structures to generate the revenues are bundled together and cannot be
broken out in the same manner as the revenues. Costs of revenues include vendors
for outsourced services and employees directly working to generate revenues.
Overall gross profit margin increased to 63% for 2003 from 61% for 2002.
The increase in gross profit margin was attributable to a decrease in cost of
revenues as discussed above.
The Company entered into multiple vendor agreements for outsourced services
as part of its ASP solution offering for certain Online Banking and Payment
Solutions clients. Some of these vendor agreements commit the Company to
specified minimum charges during the terms of the contracts. During 2003,
several of the Company's clients migrated from this ASP environment to an
in-house solution utilizing InteliData's licensed software. As a result, a
possibility exists for future losses due to the decrease in estimated future
revenue streams when compared with the Company's current contractual cost
structure for outsourced services within this ASP environment. Entering 2004,
the projected costs are estimated to exceed projected revenues by approximately
$79,000 on a monthly basis; this gap will fluctuate based on monthly activity.
In assessing potential future losses associated with the Company's ASP
business, the Company may include the possibility of new clients that would add
incremental revenue to this ASP environment. Additionally, the Company may have
the opportunity to restructure vendor contracts and decrease contractual charges
(i.e., extend the current contract with lower minimum charges or migrate to
different vendors). Management continues to assess both the potential for new
business prospects and the possibility of reducing the Company's costs through
renegotiation of existing agreements. In accordance with generally accepted
accounting principles, the Company is accounting for these contract costs as
they are incurred.
General and Administrative
General and administrative expenses decreased $1,580,000 to $7,204,000 in
2003 from $8,784,000 in 2002. The decrease was primarily attributable to the
Company's reduction of corporate and administrative expenses that resulted from
employee-related actions and aggressive expense controls. This included the
reversal in the first quarter of approximately $630,000 in estimated accrued
bonuses that were not paid, but were previously provided for during 2002, and
the Company did not accrue for bonuses in fiscal year 2003 as none will be paid.
Additionally, during the year, the Company ceased using one of its leased spaces
at its Reston, Virginia facility and recorded an expense of $540,000 and
corresponding liability for the estimated remaining lease payments net of
estimated fair value of any sublease. This charge was offset by savings from
telecommunication expenses and a one-time, favorable settlement of a matter
related to tax payments made in 1996.
Selling and Marketing
Selling and marketing expenses decreased $1,037,000 to $1,830,000 in 2003
from $2,867,000 in 2002. This was primarily attributable to employee-related
actions, lower travel costs and a reduction in tradeshow-related expenses.
Research and Development
Research and development costs decreased $3,787,000 to $5,020,000 in 2003
from $8,807,000 in 2002. The decrease was primarily attributable to the
Company's reduction of research and development expenses that resulted from
employee-related actions and reductions in consultant expenses.
Amortization of Intangible Asset
Statement of Financial Accounting Standards No. 142, Goodwill and Other
Intangible Assets ("SFAS 142"), requires the Company to not amortize goodwill
and indefinite-lived intangibles into results of operations, but instead the
Company would review these assets for impairment. The assets would be written
down and impairment losses would be charged to results of operations only in the
periods in which the recorded values are determined to be more than their fair
values. The amortization of certain intangibles continued at an annualized rate
of $720,000. As of January 1, 2002, in accordance with SFAS 142, the Company
ceased recognizing amortization expense on
goodwill and the assembled workforce intangible asset, and the assembled
workforce intangible asset was combined with goodwill for financial accounting
and reporting.
In accordance with SFAS 142, the Company had six months from adoption (up
until June 30, 2002) to complete the initial test for impairment as of January
1, 2002, the adoption date of SFAS 142. In accordance with the transition
provisions of SFAS No. 142, the Company conducted the first step of the
impairment tests. The Company assessed the fair value of its only reporting unit
by considering its projected cash flows, comparable company valuations, and
recent purchase prices paid for entities within our industry. Given
consideration of these factors, the Company concluded that the fair value of the
reporting unit exceeded the carrying amount of its net assets. The Company is
required to perform reviews for impairment in future periods, at least annually,
that may result in future periodic write-downs. Tests for impairment between
annual tests may be required if events occur or circumstances change that would
more likely than not reduce the fair value of the net carrying amount. As of
June 30, 2003, the Company performed the required annual review for impairment
using the same approach and similar consideration as the initial test. As a
result, the Company concluded that the fair value of the reporting unit exceeds
the carrying amount of its net assets. As of December 31, 2003, the Company was
not aware of such events or circumstances that could indicate potential
impairment.
Realized Loss on Sale of Investment
At December 31, 2001, the Company owned 640,000 warrant units to purchase
Sybase, Inc. common stock. During June 2002, the Company exercised all of its
640,000 warrants units and sold the resulting 223,000 shares of Sybase common
stock. The Company received net proceeds of approximately $1,718,000 and
recognized a realized loss from sale of investment of approximately $748,000.
The Company had no such liquidating events in 2003.
Other Income
Other income, primarily sublease rent receipts, interest income and other
expenses, including state and local taxes, decreased $101,000 to $21,000 in 2003
from $122,000 in 2002. The decrease is primarily due to decreased interest
income resulting from lower levels of average cash and cash equivalents in 2003
as compared to 2002.
Income Taxes
The provisions (benefit) for income taxes were $0 and $(137,000) for the
years ended December 31, 2003 and 2002, respectively. The 2002 federal income
tax benefit of $137,000 represents the recovery of alternative minimum tax paid
in a prior year.
Discontinued Operations
Under various disposal plans adopted in 1997, 1998, and 2000, the Company
completed the divestiture of all of its telecommunications, interactive services
businesses and the Caller ID adjunct leasing activities, respectively. In 2003
and 2002, the Company did not have any income statement activity in discontinued
operations.
Income (Loss) from Continuing and Discontinued Operations, Weighted-Average
Common Shares Outstanding and Basic and Diluted Earnings (Loss) Per Common Share
The basic and diluted weighted-average common shares outstanding for the
year ended December 31, 2003 was 50,028,000, compared to a basic and diluted
weighted-average common shares outstanding of 48,869,000 for the year ended
December 31, 2002. The increase resulted primarily from the issuance of stock
awards to employees, issuance of stock pursuant to the exercises of stock
warrants and stock options, and stock purchases under the Employee Stock
Purchase Plan. During July 2003, the Company issued 1,431,364 shares of its
common stock pursuant to the exercise of warrants, as amended, by institutional
investors who participated in the Company's private placement of common stock in
November and December, 2001.
Losses from continuing operations were $1,672,000 and $8,646,000 for the
years ended December 31, 2003 and 2002, respectively, while there was no gain or
loss from discontinued operations in either period. Net losses were $1,672,000
and $8,646,000 for 2003 and 2002, respectively. As a result of the foregoing,
basic and diluted net
loss per common share was $0.03 for the year ended December 31, 2003 compared to
a basic and diluted net loss per common share of $0.18 for the year ended
December 31, 2002.
Liquidity and Capital Resources
At December 31, 2004, the Company had $3,223,000 in cash and cash
equivalents, a decrease of $4,380,000 over the balance at December 31, 2003. Net
cash used in operating activities was $4,385,000 in 2004, or an increase of
$2,586,000 as compared to the net cash used in 2003. The primary driver of this
increase in cash usage is the significant decline in revenues of $6,888,000 from
$20,630,000 in 2003 to $13,742,000, which resulted in decreases in cash received
from our clients. While the costs of revenues and operating expenses (excluding
the goodwill impairment charge) decrease year over year, they did not decrease
proportionately to the revenue decline.
Net cash used in investing activities in 2004 was $51,000, which was a
decline of $99,000 from the $150,000 used in 2003. The Company incurred less
expenditures for the purchases of property and equipment in light of the revenue
developments.
Financing activities provided net cash of $56,000 in 2004 as compared to
the $3,878,000 of net cash provided in 2003. In July 2003, institutional
investors who participated in the Company's private placement of common stock in
November and December 2001 exercised all related warrants and the Company issued
1,431,364 shares of its common stock pursuant to the exercise of warrants, as
amended. This warrant exercise resulted in net proceeds of approximately
$3,133,000. There was no such warrant exercised in 2004. Further, while the
Company generated cash of $817,000 from stock option exercises and the employee
stock purchase plan in 2003, it only generated $58,000 in 2004.
Capital Resources - Our financial statements have been prepared assuming
that the Company will continue as a going concern, which contemplates the
realization of assets and the satisfaction of liabilities in the normal course
of business. There are factors that raise substantial doubt about our ability to
continue as a going concern including the Company's financial position and
results of operations. The financial statements do not include any adjustments
that might result from the outcome of this uncertainty.
During 2004 and continuing into 2005, the Company assessed a variety of
strategic alternatives, which were focused on enhancing InteliData's position in
the electronic banking marketplace by exploring strategic opportunities intended
to enhance stockholder value. For example, we actively pursued strategic
alternatives including the possibility of selling assets, raising capital
through private placements, and merging the Company with another entity. There
can be no assurance that any transaction will result from these efforts.
On March 31, 2005, the Company entered into a definitive agreement to be
acquired by Corillian Corporation ("Corillian"), a publicly traded company
(Nasdaq: CORI) based in Hillsboro, Oregon, that provides solutions that enable
banks, brokers, financial portals and other financial service providers to
rapidly deploy Internet-based financial services. The purchase consideration for
the Company is approximately $19.5 million, subject to adjustment. Under the
terms of the agreement, each outstanding share of the Company's common stock
will be converted into the right to receive 0.0954 of a share of Corillian's
common stock and $0.0832 in cash without interest. The closing of this
transaction is subject to, among other things, the effectiveness of the
registration/proxy statement on Form S-4 to be filed with the Securities and
Exchange Commission and approval of the Company's stockholders. As a result,
there can be no assurances that the acquisition will be completed or as to the
timing thereof.
In the event our merger with Corillian is not successful, we may be
required to seek protection from our creditors, or we may need to sell assets
and/or raise additional capital through private placements. While we continue to
operate as a going concern, we have significant liquidity and capital resource
issues relative to our ability to generate cash flows and to raise additional
capital if needed. We may not be able to generate sufficient revenue to become
profitable on a sustained basis, or at all. We have incurred significant losses
and negative cash flows from operations for several years and our ability to
raise or generate enough cash to survive may be questionable. We expect that the
operating cash flow deficit will continue and absent further financing or
significant improvement in sales, potentially result in our inability to
continue operations. As a result of these and other factors, our independent
registered public accounting firm has included in its report on the 2004
consolidated financial statements an explanatory paragraph expressing that there
is substantial doubt about our ability to continue as a going concern.
If the Corillian transaction is not successful, the Company's achievement
of its operating plan remains predicated upon both existing and prospective
clients' decisions to procure certain products and services in a timeframe
consistent with the operating plan assumptions. Historically, these decisions
have not evolved timely for varying reasons, including slower than expected
market demand, budgetary constraints, and internal product development and
resource initiatives. Further, based on the Company's declining financial
condition, existing and prospective clients have expressed concerns regarding
the risks of acquiring software and services from InteliData. While some are
satisfied as long as the source code continues to be held in escrow, others are
employing a wait-and-see approach to InteliData's continuation as a going
concern.
The Company believes the key factors to its liquidity in 2005 will be its
ability to successfully execute on its plans to achieve sales levels, while
operating at reduced operating expense levels. With projected sales to existing
and prospective clients, management expects that the Company's cash and cash
equivalents and projected funds from operations (which are principally the
result of sales and collections of accounts receivable) will be sufficient to
meet its anticipated cash requirements for the next several months. This
expectation is based upon assumptions regarding cash flows and results of
operations over the next several months and is subject to substantial
uncertainty and risks that may be beyond our control. If these assumptions prove
incorrect, the duration of the time period during which the Company could
continue operations could be materially shorter. The occurrence of adverse
developments related to these risks and uncertainties could result in the
Company's incurring unforeseen expenses, being unable to generate projected
sales, to collect new and outstanding accounts receivable, or to control
expected expenses and overhead, and we would likely be unable to continue
operations.
In the event of continued future revenue delays, the Company would seek to
adjust certain expense structures to mitigate the potential impact that these
delays would have on its capital levels. These opportunities include additional
reductions in general and administrative expenditures, managing research and
development efforts consistent with existing and prospective client demands, and
the potential of consolidating certain operational activities. During 2004, the
Company reduced the full-time equivalent personnel by 14 to 72 as of December
31, 2004. Continuing into 2005, management reviewed the operating expenses in
light of our financial condition and current plan. Further steps were taken to
control costs and the full-time equivalent personnel was reduced by 15 to 57 as
of March 28, 2005.
Additional capital resources might be generated from activities that
include the Company's selling of assets, issuing equity securities through
private placements and/or merging the Company with another entity. If the
Company engages in efforts to obtain additional capital, it can make no
assurances that these efforts will be successful or that the terms of such
funding would be beneficial to the common stockholders. If we issue additional
equity securities to raise funds, the ownership percentage of our existing
stockholders would be reduced. New investors may demand rights, preferences or
privileges senior to those of existing holders of common stock. If we cannot
raise any needed funds, we might be forced to make further substantial
reductions in our operating expenses, which could adversely affect our ability
to implement our current business plan and ultimately our viability as a
company.
On September 7, 2004, InteliData transferred the listing of its common
stock from the Nasdaq National Market to the Nasdaq SmallCap Market due to our
inability to comply with the minimum $1.00 bid price requirement. The initial
grace period to regain compliance expired on December 13, 2004. On December 14,
2004, InteliData received a notice from Nasdaq that it had not regained
compliance with the minimum $1.00 bid price per share requirement set forth in
Marketplace Rule 4310(c)(4). Nasdaq also notified InteliData that, since it
meets the other initial inclusion criteria for the SmallCap Market, it is being
given an additional 180 calendar days, or until June 13, 2005, to regain
compliance. If compliance with the criteria cannot be demonstrated by that time,
InteliData's common stock would be delisted from the Nasdaq SmallCap Market. The
possibility of a Nasdaq delisting could make capital-raising, selling and other
activities more difficult.
Off-Balance Sheet Arrangements and Contractual Obligations - The decision
by the Company to divest itself of its telecommunications business segment
created certain financial obligations and uncertainties for the future. The
Company is required to satisfy certain obligations of the telecommunications
business that will carry on beyond December 31, 2004. As of December 31, 2004,
the Company had $40,000 in remaining liabilities related to the discontinued
operations. During 2000, the Company sold the only remaining asset it had in the
discontinued operations - the property and the building located thereon in New
Milford, Connecticut. Liabilities remaining in the
discontinued operations represent the Company's estimated liability related to
the environmental clean up associated with prior tenants' operations at the New
Milford location and other costs. The Company is working with its professional
advisors and insurer to manage its exposure to liability for the potential
environmental clean up. The Company has hired an environmental specialist firm
to perform a study of the damages, to prepare a project plan, to work with the
state and federal agencies, and to remediate the property. Additionally, the
Company has acquired insurance to cap the potential costs and losses at a
reasonable amount. Such amounts and insurance costs have been accrued for as of
December 31, 2004. Management believes that the combination of the project plan
and the insurance arrangements will cause the resolution of this matter to not
have a material adverse effect on the Company's financial condition or results
of operations.
The Company entered into multiple vendor agreements for outsourced services
as part of its ASP solution offering for certain Online Banking and Payment
Solutions clients. Some of these vendor agreements commit the Company to
specified minimum charges during the terms of the contracts. Management
continues to assess the potential for new business prospects, the possibility of
reducing the Company's costs through renegotiation of existing agreements,
and/or exiting the ASP business by referring clients and prospects to a hosting
vendor and providing a license solution and support services. There can be no
assurance that the Company will be successful in mitigating these factors. In
the event that new client revenues do not materialize, user growth rates from
existing clients do not meet expected projections and/or the Company is not
successful in its renegotiation efforts, the Company may experience future
period losses from the Company's ASP business, which could have a material
adverse impact on the Company's financial position, results of operations, and
cash flows. In June 2004, the Company restructured a vendor agreement and
decreased its overall prospective ASP operations costs. Entering 2005, the
projected revenues are estimated to exceed projected costs by approximately
$83,000 on a monthly basis based on the December 2004 results; this gap will
fluctuate based on monthly activity. In accordance with generally accepted
accounting principles, the Company is accounting for the committed contract
costs as they are incurred.
As a result of exploring available options, the Company has elected to
allow its Fidelity Hosting agreement to expire in April 2005; however,
InteliData will continue to participate in the Fidelity revenue-sharing
agreement, which bears no anticipated direct costs.
The Company leases facilities and equipment under cancelable and
noncancelable operating lease agreements. Future minimum lease payments under
noncancelable operating leases and future minimum payments under purchase
obligations for outsourced services were as follows (in thousands) at December
31, 2004:
Payment due by period
- ----------------------------------------------------------------------------------------------
Less than 1-3 3-5 More than
Contractual Obligations Total 1 year years years 5 years
- ----------------------------------------------------------------------------------------------
Operating Lease Obligations $ 1,984 $ 1,145 $ 839 $ - $ -
- ----------------------------------------------------------------------------------------------
Purchase Obligations 640 640 - - -
- ----------------------------------------------------------------------------------------------
Total $ 2,624 $ 1,785 $ 839 $ - $ -
- ----------------------------------------------------------------------------------------------
</Table>
The future minimum lease obligations do not include $223,000 of expected
receipts from subleases.
Litigation - The Company is not currently a party to any material
litigation. From time to time, the Company may be a party to routine litigation
incidental to its business. Management does not believe that the resolution of
any or all of such routine litigation will be likely to have a material adverse
effect on the Company's financial condition or results of operations.
Critical Accounting Policies
The following accounting policies are either ones that the Company
considers to be the most important to its financial position and results of
operations or ones that require the exercise of significant judgment and/or
estimates.
Revenue Recognition - The Company considers its revenue recognition policy
critical to the understanding of our business operations and results of
operations. The Company supplies online banking and bill payment software to
FI's. The Company's revenues associated with integrated solutions that bundle
software products with
customization, installation and training services are recognized using the
percentage of completion method of accounting based on cost incurred as compared
to estimated costs at completion.
The Company enters into contracts where the delivered software may not
require significant customization. Upon delivery, the Company either recognizes
revenue ratably over the contract period for contracts where vendor specific
objective evidence ("VSOE") of fair value for post contract customer support
("PCS") does not exist or recognizes revenue for the delivered element where
VSOE of fair value for PCS does exist (e.g., when the Company has substantive
renewal rates for PCS). The Company generally utilizes the shipping terms of
F.O.B. shipping point. Depending on the type of software and the terms of a
particular contract, the client's receipt of the software is either based on
F.O.B. shipping point or upon acceptance of the software, as defined by the
applicable contract. The warranty provision is generally ninety days from either
FOB shipping date or acceptance of the software.
The Company enters into multiple element arrangements. Elements typically
include software, consulting, implementation and PCS. PCS contracts generally
require the Company to provide technical support and unspecified readily
available software updates and upgrades to customers. Revenue for these multiple
element arrangements is recognized when there is persuasive evidence of an
arrangement and delivery to the customer has occurred, the fee is fixed and
determinable, and collectibility is considered probable. Advance payments are
recorded as deferred revenue until the products are shipped, services are
delivered and all obligations are met. Currently, the Company does not have VSOE
of fair value for some of the elements within its multiple element arrangements.
Therefore, all revenue under such arrangements is being recognized ratably over
the term of the PCS contract. Revenue from transactional services, which
includes hosting and application services provider ("ASP") services, is
recognized as transactions are processed.
Emerging Issues Task Force Abstract Issue No. 00-3, Application of AICPA
Statement of Position 97-2 to Arrangements that Include the Right to Use
Software Stored on Another Entity's Hardware ("EITF 00-3"), provides guidance in
determining whether or not the provisions of Statement of Position No. 97-2,
Software Revenue Recognition ("SOP 97-2"), should be applied to hosting
arrangements. The Company has some contracts where the customers operate
software in an ASP environment. The customer may not take possession of the
software without incurring significant transition and infrastructure costs, as
well as potential payments of fees to the Company for the termination of such
arrangements. In cases where the customer has not licensed software from
InteliData, the customer must also purchase a license prior to having the right
to use the software in its own operating environment, in addition to the
aforementioned fees. In these situations, the Company applies the guidance under
EITF 00-3 and the Staff Accounting Bulletin No. 101, Revenue Recognition in
Financial Statements, and recognizes the revenue associated with the license
and/or implementation fees ratably over the initial term of the contract.
Additionally, based on the EITF 00-3 guidance, the Company concluded that
SOP 97-2 should not be applied to certain of its software hosting contracts.
Accordingly, the related revenues for license and professional services were
recognized under the percentage of completion method. In addition to developing
and delivering the solution, the Company is entitled to use fees based on the
number of users and transactions. These use-based fees are earned based on the
monthly user counts and as transactions are processed.
Estimates at Completion - Revenues related to some of the Company's
contracts are recognized using the percentage of completion method of
accounting, which requires that we make estimates and judgments as to
anticipated project scope, timing and costs to complete the projects. The
completion of certain development efforts are critical for the Company to
perform on certain contracts. Delays in product implementation or new product
development at customer locations and product defects or errors could affect
estimates and judgments. Additionally, we may experience delays when
implementing our products at customer locations, and customers may be unable to
implement our products in the time frames and with the functionalities that they
expect or require. The accuracy of these estimates and judgments could affect
the Company's business, operations, cash flows and financial condition.
Allowance for Doubtful Accounts - Determination of our allowance for
doubtful accounts requires significant estimates. Financial instruments that
potentially subject the Company to credit risk consist principally of trade
receivables. The Company sells its products primarily to FI's in the United
States. The Company believes that the concentration of credit risk in its trade
receivables is substantially mitigated by the Company's on-going credit
evaluation process and the financial position of the FI's that are highly
regulated. The Company does not generally require collateral from customers. The
Company establishes an allowance for doubtful accounts based upon factors
surrounding the credit risk of specific customers, historical trends and other
information.
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.
Valuation of Goodwill and Intangible Assets - On an annual basis (as of
June 30th), the Company conducts a review of goodwill for impairment. The
Company assesses the fair value of its only reporting unit for the purposes of
testing goodwill by considering its projected cash flows, comparable company
valuations, and recent purchase prices paid for entities within our industry.
Given consideration of these factors, we determine whether the fair value of the
reporting unit exceeds the carrying amount of our net assets. If the carrying
amount of our reporting unit exceeds its fair value, we compare the implied fair
value of reporting unit goodwill with the carrying amount of that goodwill.
Since the carrying amount of reporting unit goodwill exceeded the implied fair
value as of June 30, 2004, we recognized a $25,771,000 goodwill impairment
charge in the second quarter of 2004. See below for a detailed discussion
regarding the significant assumptions and estimates employed in this process and
Note 12 to the Condensed Consolidated Financial Statements for additional
details.
We also review our amortizing intangible asset for impairment whenever
events or changes in circumstances indicate that the carrying amount may not be
recoverable. Accordingly, when appropriate, the Company reviews its long-lived
assets (including amortizing intangible assets) for impairment at the enterprise
level initially following an undiscounted cash flow approach following the
guidance in SFAS No. 144. In reviewing long-lived assets for impairment, the
Company evaluates the probability of certain reasonably possible scenarios as
appropriate, such as operating as a going concern and/or selling the business,
so long as the scenarios were actively considered by the Company as of the end
of the relevant period. If the sum of the expected future cash flows is less
than the carrying amount of the asset, the Company would recognize an impairment
loss equal to the difference between the fair value and the carrying value of
the asset. The fair value would be calculated following a discounted cash flow
approach.
These reviews require the Company to make estimates of projected cash flows
in order to determine if its assets are impaired. We make significant
assumptions and estimates in this process regarding matters that are inherently
uncertain, such as making revenue and cost projections, calculating remaining
useful lives, assuming discount rates and costs of capital, among others.
Reviews for impairment between annual reviews may be required if events occur or
circumstances change that would more likely than not reduce the fair value of
the net carrying amount. While we believe that our estimates are reasonable,
different assumptions regarding such cash flows (for example, either based on
varying costs of capital, changes in underlying economic assumptions, or any
resulting transaction from strategic initiatives) could materially affect our
valuation.
Depreciation of Fixed Assets - The Company's business requires our
investment in office and computer equipment to facilitate certain research and
development activities and to support the operations in serving our customers.
We record these assets at cost and depreciate the assets over their estimated
useful lives. We periodically reassess the economic life of these elements and
make adjustments to these useful lives using historical experience, capacity
requirements, and assessments of new product and market demands. When these
factors indicate certain elements may not be useful for as long as anticipated,
we depreciate the remaining book value over the remaining useful life. Further,
the timing and deployment of any new technologies could affect the estimated
lives of our assets, which could have significant impacts on results of
operations in the future.
Recent Accounting Pronouncements - In May 2003, the Financial Accounting
Standards Board ("FASB") issued Statement of Financial Accounting Standards
("SFAS") No. 150, Accounting for Certain Financial Instruments with
Characteristics of both Liabilities and Equity ("SFAS 150"), which requires that
an issuer classify financial instruments that are within scope of SFAS 150 as a
liability. Under prior guidance, these same instruments would be classified as
equity. SFAS 150 is effective for all financial instruments entered into or
modified after May 31, 2003. Otherwise, it is effective on July 1, 2003. The
adoption of SFAS 150 did not have a material effect on our financial position,
results of operations, or cash flows.
In May 2003, the FASB issued SFAS No. 149, Amendment of Statement 133 on
Derivative Instruments and Hedging Activities ("SFAS 149"), which amends and
clarifies financial accounting and reporting for derivative instruments,
including certain derivative instruments embedded in other contracts
(collectively referred to as derivatives) and for hedging activities under SFAS
No. 133, Accounting for Derivative Instruments and Hedging
Activities. SFAS 149 is effective for contracts entered into or modified after
June 30, 2003, and for hedging relationships designated after June 30, 2003. The
adoption of SFAS 149 did not have a material impact on our financial position,
results of operations, or cash flows.
In November 2002, the Emerging Issues Task Force issued a final consensus
on Issue No. 00-21, "Revenue Arrangements with Multiple Deliverables" ("EITF
00-21"). In an arrangement with multiple deliverables, EITF 00-21 provides
guidance on how the arrangement consideration should be measured, whether the
arrangement should be divided into separate units of accounting and how the
arrangement consideration should be allocated among the separate units of
accounting. To the extent that a multiple-deliverable arrangement or a
deliverable in a multiple-deliverable arrangement is within the scope of
higher-level authoritative literature, EITF 00-21 does not apply. The guidance
in this Issue is effective for revenue arrangements entered into in fiscal
periods beginning after June 15, 2003. The adoption of EITF 00-21 did not have a
significant effect on our operations, financial position, or cash flows.
In June 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated
with Exit or Disposal Activities (including Certain Costs Incurred in a
Restructuring) ("SFAS 146"), which supersedes Emerging Issues Task Force Issue
No. 94-3, Liability Recognition for Certain Employee Termination Benefits and
Other Costs to Exit an Activity ("EITF 94-3"). SFAS 146 requires recognition of
a liability for costs associated with an exit or disposal activity when the
liability is incurred, rather than when the entity commits to an exit plan under
EITF 94-3. The provisions of SFAS 146 are effective for exit or disposal
activities that are initiated after September 30, 2002. As of March 31, 2003,
the Company ceased using one of its leased spaces at its offices in Reston,
Virginia. The fair value of the remaining obligation on this lease, net of the
fair value of sublease rent, was approximately $540,000. Accordingly, the
Company recorded an expense of $540,000 and a corresponding liability as of
March 31, 2003. As of May 1, 2003, the Company has a subtenant for this space
for the majority of the remaining lease term and the actual results of net
sublease rent could differ from the above estimates. As of December 31, 2004,
the estimated remaining liability was approximately $264,000.
In July 2004, the Company determined that it would be more cost-effective
to relocate its South Carolina operations to its headquarters in Reston,
Virginia, based on the number of remaining employees and the existing operations
at the time. Accordingly, the Company relocated two employees, designated three
others as field employees and ceased using its leased office space in
Charleston, South Carolina. The fair value of the remaining obligation on this
lease, net of the fair value of sublease rent, was approximately $45,000.
Accordingly, the Company recorded an expense of $45,000 and a corresponding
liability in July. As of December 31, 2004, the Company had not been successful
in securing a subtenant for this space and the estimated remaining liability was
approximately $33,000.
Cautionary Statement for Purposes of the "Safe Harbor" Provisions of the Private
Securities Litigation Reform Act of 1995
This Form 10-K filing and the documents incorporated by reference herein
contain forward-looking statements within the meaning of Section 27A of the
Securities Act of 1933, as amended (the "Securities Act") and Section 21E of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), the
realization of which may be impacted by the factors discussed below. These
forward-looking statements are made pursuant to the safe harbor provisions of
the Private Securities Litigation Reform Act of 1995 (the "Act"). The Company
cautions readers that the following important factors, among others, in some
cases have affected the Company's actual results, and could cause the Company's
actual results to differ materially from those expressed in any forward-looking
statements made by, or on behalf of, the Company. The following list of factors
should not be construed as exhaustive or as any admission regarding the adequacy
of disclosures made by the Company prior to the date hereof or the effectiveness
of said Act. Additionally, the Company is not under any obligation (and
expressly disclaims an obligation to) to update or alter its forward-looking
statements, whether as a result of new information or otherwise. We wish to
caution you that such risks and uncertainties include, but are not limited to:
o stockholders of InteliData may fail to approve the merger with
Corillian or other conditions to closing of the merger may not be
satisfied;
o the operating costs, customer loss and business disruption following
the merger, including adverse effects on relationship with employees,
may be greater than expected;
o the businesses of Corillian and InteliData may not be combined
successfully, or such combination may take longer to accomplish than
expected;
o our ability to continue funding operating losses;
o the impact of declines in our stock price and our ability to maintain
minimum listing standards of the NASDAQ stock markets;
o different assumptions regarding cash flows (for example, either based
on varying costs of capital, changes in underlying economic
assumptions, or any resulting financial or strategic transactions)
affecting valuation analyses;
o our ability to develop, sell, deliver and implement our payment
solution products and services, some of which are largely unproven in
a production environment, to financial institution customers;
o our ability to manage our expenses in line with anticipated business
levels;
o our ability to complete product implementations in required time
frames;
o our ability to maintain customers and increase our recurring revenues
and/or reduce operating costs associated with our ASP business in
order to make this operation profitable or the impact of our
termination of our ASP operations;
o our ability to retain key customers and to increase revenues from
existing customers;
o the impact of customers deconverting from use of our products and
services to the use of competitive products or in-house solutions;
o the effect of planned customer migrations from outsourced solutions to
in-house solutions with a resulting loss of recurring revenue;
o the impact of competitive products, pricing pressure, product demand
and market acceptance risks;
o the pace of consumer acceptance of online 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
industry;
o mergers and acquisitions;
o the risks of integration of our technology;
o the ability of financial institution customers to implement
applications in the anticipated time frames or with the anticipated
features, functionality or benefits;
o our reliance on key strategic alliances and newly emerging
technologies;
o our ability to leverage our third-party relationships into new
business opportunities;
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;
o the ability to comply with, and incur the costs related to, the
provisions of Section 404 of the Sarbanes-Oxley Act of 2002 requiring
that management perform an evaluation of its internal controls over
financial reporting and have its independent auditors attest to such
evaluation; and
o other risks detailed from time to time in our filings with the
Securities and Exchange Commission.
In some cases, you can identify forward-looking statements by terms such as
"may," "will," "should," "could," "would," "expects," "intends," "plans,"
"anticipates," "believes," "estimates," "projects," "predicts," "potential," and
similar expressions intended to identify forward-looking statements. These
statements reflect our current views with respect to future events and are based
on assumptions and subject to risks and uncertainties. Given these
uncertainties, you should not place undue reliance on these forward-looking
statements. We discuss many of these risks in this prospectus in greater detail
under the heading "Risk Factors." In connection with forward-looking statements
that appear in these disclosures, readers hereby should carefully consider the
factors set forth under "Risk Factors."
RISK FACTORS
Risk Factors Particular to Our Company
We may require additional capital, which we may not be able to obtain, to
be able to fund future operating losses, working capital needs and capital
expenditures.
The continuation, development, and growth of our business may require
additional capital in the future to fund our operating losses, working capital
needs and capital expenditures. The capital markets are very volatile and we may
not be able to obtain future equity or debt financing in the future on
satisfactory terms or at all. Our failure to generate sufficient cash flows from
sales of products and services or to raise sufficient funds may require us to
delay or abandon some or all of our development and expansion plans or otherwise
forego market opportunities. Our inability to obtain additional capital on
satisfactory terms may impact our ability to continue our business at current
levels or expand our business in the future, which could cause our business,
operating results and financial condition to suffer.
We may not be successful in consummating any financial or strategic
transaction.
We have been exploring a variety of financial and strategic alternatives,
which may include the raising of additional capital, the sale or merger of the
Company or the sale of certain assets of the Company. The closing of the
proposed merger with Corillian is subject to, among other things, customary
closing conditions, the effectiveness of the registration/proxy statement on
Form S-4 to be filed with the Securities and Exchange Commission and stockholder
approval. As a result, there can be no assurances that the acquisition will be
completed or as to the timing thereof. If the proposed merger with Corillian is
not completed, whether due to the failure of stockholders to approve the
transaction or to the failure to satisfy closing conditions, we would seek to
sell some of our assets or attempt to raise capital. We cannot assure
stockholders that the assets could be sold at all. There is no assurance that
any financial or strategic alternatives will be available, or, if available,
will be on terms acceptable to us or our stockholders. If we are unable to
identify and consummate a financial or strategic transaction, we may be required
to substantially reduce or cease and windup our operations. As disclosed in this
annual report on Form 10-K, the Company has recurring losses from operations and
is experiencing difficulty in generating cash flow. These conditions, among
others, raise substantial doubt about our ability to continue as a going
concern.
The Company's future success is highly dependent on our ability to develop,
sell, implement and deliver Payment Solutions products and services, some of
which are new and unproven in a financial institution's production environment.
The Company has invested heavily in its Payment Solutions products for the
EBPP market and believes that the success of our offerings for this market is
critical to our long-term success. Because some of the Company's products for
this market are relatively new and have not been fully deployed either at a
customer's site or for a customer in an ASP environment, there can be no
assurance that the products will perform with the capabilities expected or that
the products will be competitive without further significant development
efforts.
We may not be able to manage our expenses in line with anticipated business
levels.
We continually seek to control our general and administrative expenses and
assess our operations in managing the continued development of infrastructure to
handle anticipated business levels. Our inability to control expenses and manage
our infrastructure could cause our business, operating results and financial
condition to suffer. The Company has imposed expense controls in an attempt to
conserve available cash. However, at our current revenue levels, it is unlikely
that the Company will be able to achieve profitability through expense controls
alone and expense controls may also impact our ability to increase revenues.
We may not be able to comply with, and incur the costs related to, the
provisions of Section 404 of the Sarbanes-Oxley Act of 2002 requiring that
management perform an evaluation of its internal controls over financial
reporting and have its independent auditors attest to such evaluation.
As an issuer with a smaller market capitalization, we have limited
financial staff and resources and are at an inherent compliance disadvantage.
The initial cost of compliance has been significantly higher than projected. The
Company may not be able to fund the on-going cost of compliance. Actual costs of
Section 404 of the Sarbanes-
Oxley Act are not one-time events and may be difficult to quantify and predict
and we anticipate they will continue to increase in the near future. Without
adequate resources, the Company may not be able to comply fully with the
Sarbanes-Oxley Act.
Rapidly changing technologies could make our products obsolete, which may
adversely affect our business, operations and financial condition.
Our business activities are concentrated in fields characterized by rapid
and significant technological advances. It is possible that our products and
services will not remain competitive technologically or that our products,
processes or services will not continue to be reflective of such advances. The
following, among other factors, may adversely affect our ability to be
technologically competitive:
o our competitors may develop other technologies that could render our
products and services noncompetitive or obsolete;
o we may be unable to locate, hire and retain management and other key
personnel with the skills and abilities required to further advance
and develop our software products and services and to maintain our
technological competitiveness;
o we may be unable to introduce new products or product enhancements
that achieve timely market acceptance and meet financial institutions'
or Internet banking or EBPP customers' needs;
o we may encounter unanticipated technical, marketing or other problems
or delays relating to new products, features or services that we
recently introduced or that we may introduce in the future;
o we may be unable to keep pace with our competitors' spending on
research and development of new products because most of our
competitors and potential competitors have significantly greater
financial, technological and research and development resources than
we have;
o we may be unable to develop, produce and market new products as
cheaply as our competitors and we may not be able to offer new
products to customers at a competitive price; and
o we may be unable to leverage our relationships with third parties.
An inability to compete successfully in an increasingly competitive and
crowded marketplace could adversely affect our business, operations and
financial condition.
The market for Internet banking and other interactive financial products
and services is highly competitive and subject to rapid innovation and
technological change, shifting consumer preferences and frequent new product
introductions. A number of corporations, including S-1 Corporation, Corillian
Corporation, Financial Fusion, Inc., CheckFree Corporation, Online Resources
Corporation, Digital Insight Corporation, Metavante Corporation, and Incurrent
Solutions, Inc., most of which have greater resources than us, offer products
and services that compete directly with the products and services we offer. We
expect the number of competitors in the Internet banking and EBPP products and
services industry to expand greatly as a result of the popularity of the
Internet and widespread ownership of personal computers. We foresee our future
competitors as including:
o banks that have already developed (or plan to develop) Internet
banking and EBPP products for their own customers, with the
possibility of offering the products to other banks and other banks'
customers;
o non-banks that may develop Internet banking and EBPP products to offer
to banks; and
o computer software and data processing companies that currently offer,
or will offer Internet banking and EBPP services through the use of
their broad distribution channels that may be used to bundle competing
products directly to end-users or purchasers.
Our operating results fluctuate, which could have an adverse effect on our
business, operations and financial condition.
Our quarterly operating results have varied significantly in the past, and
it is likely that they will vary greatly in the future. Some of the factors that
will likely cause our operating results to fluctuate are:
o the size and timing of customer orders;
o changes in our pricing policies or those of our competitors;
o new product introductions or enhancements by our competitors or by us;
o delays in the introduction of new products or product enhancements by
our competitors or by us;
o customer order deferrals by our customers in anticipation of upgrades
and new products;
o the loss of revenue from customers either converting to an in-house
solution or to a competitor's solution;
o the reduction in recurring revenue from a customer converting from an
outsourced solution to an in-house solution using our products after
paying a one-time license fee;
o the possibility of future losses due to the decrease in estimated
future ASP revenue streams when compared with our current contractual
costs for outsourced services in our ASP operations;
o market acceptance of new products;
o the timing and nature of sales, marketing, and research and
development expenses by our competitors or by us; and
o other changes in operating expenses, personnel changes and general
economic conditions.
Additionally, certain banks and other financial institutions recently have
combined or are proposing to combine, and we are unable to assess the future
effect that those combinations and other possible consolidations in the banking
industry will have upon us. Merger and acquisition activity almost always causes
delays in procurement decisions by banks and also reduces the number of
potential customers in our market. No assurance can be given that quarterly
variations in our operating results will not occur in the future, and
accordingly, the results of any one quarter may not be indicative of the
operating results for future quarters.
Our stock price fluctuates significantly and could adversely affect our
business, operations and financial condition.
It is likely that in the future our common stock will continue to
experience the significant volatility it has experienced in the past. Our common
stock is currently traded on the Nasdaq SmallCap Market. The stock market,
particularly in recent years, has experienced volatility that has been
especially acute with respect to high technology-based stocks such as ours. The
volatility of technology-based and development stage stocks has often been
unrelated to the operating performance of the companies represented by the
stock. Factors such as announcements of the introduction of new products or
services by our competitors or by us, market conditions in the banking and other
emerging growth company sectors and rumors relating to our competitors or us
have had a significant impact on the market price of our common stock in the
past.
The Company's stock could be delisted from Nasdaq SmallCap Market.
Our stock has closed at less than $1.00 per share since May 2004 and was
transferred to The Nasdaq SmallCap Market on September 7, 2004. The Company was
provided 180 calendar days, or until December 13, 2004, to regain compliance
with the $1.00 per share minimum closing bid requirements. The closing bid price
of the common stock did not exceed $1.00 per share during that 180-day period,
however, the Company was afforded an additional 180 calendar days, or until June
13, 2005, to regain compliance. If the Company does not regain compliance, it
will not be afforded an additional compliance period beyond that date on the
SmallCap Market. If compliance with the Rule cannot be demonstrated by June 13,
2005, the Company's securities will be delisted. The Company has the right to
appeal Nasdaq's determination to a Listing Qualifications Panel.
We possess limited patent or registered intellectual property rights with
respect to our technology and any loss or infringement of those rights could
cause us to lose a valuable competitive advantage or incur costly litigation
expenses that adversely affect our business, operations and financial condition.
We possess limited patent or registered intellectual property rights with
respect to our technology. We depend, in part, upon our proprietary technology
and know-how to differentiate our products from those of our competitors and
work independently and from time to time with third parties with respect to the
design and engineering of our own products. We also rely on a combination of
contractual provisions, trademarks, and trade secret laws to protect our
proprietary technology. There can be no assurance, however, that we will be able
to protect our technology or successfully develop new technology or gain access
to such technology, that third parties will not be able to develop similar
technology independently or design around our intellectual property rights, that
competitors will not obtain unauthorized access to our proprietary technology,
that third parties will not misuse the technology to which we have granted them
access, or that our contractual or legal remedies will be sufficient to protect
our interests in our proprietary technology. Enforcing or defending our
intellectual property rights could be very expensive. If we cannot preserve our
intellectual property rights, we may be at a competitive disadvantage.
Claims against us for infringement of another party's intellectual property
rights could cause us to incur costly litigation expenses or impact our ability
to offer products or services to our market.
The Internet banking software and services industry has become an area of
substantial litigation concerning intellectual property rights. Claims of
infringement by third parties could have a significant adverse impact on our
business. The expenses associated with defending claims, even if successful, are
often significant. In the event that we were found to infringe a third party's
rights, we would be required to enter into a royalty arrangement to continue to
offer the infringing products and services. If we were unable to obtain
acceptable royalty terms, we would be forced to discontinue offering the
infringing products and services or modify the products and services to become
non-infringing. This could result in the significant loss of revenues or
considerable additional expense.
Delays in the development of new products or in the implementation of new
or existing products at customer locations and defects or errors in the products
we sell could adversely affect our business, operations and financial condition.
Software development for our market is highly complex. We may experience
delays in the development of the software and computing systems underlying our
products and services. Additionally, we may experience delays when implementing
our products at customer locations, and customers may be unable to implement our
products in the time frames and with the functionalities that they expect or
require. There can be no assurance that, despite our testing, errors will not be
found in the underlying software, or that we will not experience development
delays, resulting in delays in the shipment of our products, the commercial
release of our products or in the market acceptance of our products, each of
which could have a material adverse effect on our business, operations and
financial condition.
We are dependent on key personnel, the loss of whom could adversely affect
our business, operations and financial condition. Additionally, we will need to
locate, hire and retain additional qualified personnel to continue to grow our
business.
Our performance is substantially dependent on the performance of our
executive officers and key employees. We depend on our ability to retain and
motivate high quality personnel, especially management and skilled development
teams. The loss of services of any of our executive officers or other key
employees could have a material adverse effect on our business, operations or
financial condition.
Our future success also depends on our continuing ability to identify,
hire, train and retain other highly qualified technical and managerial
personnel. Competition for such personnel is intense, and there can be no
assurance that we will be able to attract, assimilate or retain other highly
qualified technical and managerial personnel in the future. The inability to
attract and retain the necessary technical and managerial personnel could have a
material adverse effect upon our business, operations or financial condition.
Certain provisions of Delaware law, our certificate of incorporation and
bylaws make a takeover by a third-party difficult.
Certain provisions of Delaware law and of our certificate of incorporation
and bylaws could have the effect of making it more difficult for a third party
to acquire, or of discouraging a third party from attempting to acquire, control
of us. These provisions include:
o a provision allowing us to issue preferred stock with rights senior to
those of the common stock without any further vote or action by the
holders of common stock. The issuance of preferred stock could
decrease the amount of earnings and assets available for distribution
to the holders of common stock or could adversely affect the rights
and powers, including voting rights, of the holders of the common
stock. In certain circumstances, such issuance could have the effect
of decreasing the market price of the common stock;
o the existence of a stock rights plan that results in the dilution of
the value of common stock held by a potential acquirer;
o the existence of a staggered board of directors in which there are
three classes of directors serving staggered three-year terms, and
thereby expanding the time required to change the composition of a
majority of directors and perhaps discouraging someone from making an
acquisition proposal for us;
o the bylaws' requirement that stockholders provide advance notice when
nominating our directors;
o the inability of stockholders to convene a stockholders' meeting
without the meeting first being called by the chairman of the board of
directors or the secretary at the request of a majority of the
directors; and
o the application of Delaware law prohibiting us from entering into a
business combination with the beneficial owner of 15% or more of our
outstanding voting stock for a period of three years after the 15% or
greater owner first reached that level of stock ownership, unless
certain criteria are met.
Risk Factors Associated With Our Industry
Our Payment Solution products and services are targeted for the EBPP
industry, which is a relatively new and developing market, and our success
depends on the acceptance and growing use of electronic bill presentment and
payment.
EBPP continues to be a developing market. Our future financial success in
the relatively new EBPP marketplace depends, in part, upon:
o consumer acceptance of, and financial institutions' support for, EBPP
technologies;
o continued growth in personal computer sales and the number of personal
computers with Internet access and continued reductions in the cost of
personal computers and Internet access;
o the degree of financial institutions' success in marketing EBPP
products to their customers at little or no cost to the customer, and
the ability of these institutions to implement applications in
anticipated time frames or with anticipated features and
functionalities; and
o the impact of current and future regulatory controls and oversight of
the Internet and electronic commerce.
Even if this market experiences substantial growth, there can be no
assurance that our products and services will be commercially successful or that
we will benefit from such growth. Therefore, there can be no assurance as to the
timing, introduction, or market acceptance of, or necessary regulatory approvals
for, our products and services.
Concerns related to system security and consumer protections could prevent
the widespread acceptance of Internet banking and EBPP and could adversely
affect our business, operations and financial condition.
The willingness of consumers and financial institutions to use personal
computer and Internet-based banking, bill payment and other financial services
will depend, in part, upon the following factors:
o our ability to protect consumer information relating to personal
computer and Internet-based banking and other financial services
against the risk of fraud, counterfeit and technology failure;
o the frequency of interruptions, delays and cessation in service to
financial institutions and individuals resulting from computer
viruses, break-ins or other problems;
o the increase in the cost of our services and products, as well as the
cost to up-grade the services and products to keep pace with rapidly
changing computer and Internet technologies, may be increased by
expenditures of capital and resources to reduce security breaches,
break-ins and computer viruses;
o the erosion of public and consumer confidence in the security and
privacy of Internet banking and EBPP; and
o whether financial institutions are able to offer internal banking and
EBPP service to their customers at little or no cost.
The threat of increased government regulation of the Internet and the
continuing legal uncertainty and potential liabilities associated with sharing
personal and financial information on the Internet could adversely affect our
business, operations and financial condition.
Our products rely on the cost-effectiveness of, and ease of access to, the
Internet. There are currently few laws or regulations directly applicable to
commerce or other communications on the Internet. However, due to the increasing
popularity and use of the Internet, it is possible that new laws and regulations
may be adopted with respect to the Internet, covering issues such as user
privacy, the collection or processing of personal information, copyright
infringement and the pricing, characteristics and quality of products and
services. Consumers' concerns relating to privacy, security and increasing
regulation could hinder the use of the Internet and the growth of our business.
The adoption of restrictive laws or regulations may increase the cost of doing
business over the Internet. The application
to the Internet of existing laws and regulations governing such issues as
property ownership and personal privacy is subject to substantial uncertainty.
Mandatory privacy and security standards and protocols still are being developed
by government agencies, and we may incur significant expenses to comply with any
requirements that are ultimately adopted. Our financial institution customers
require that our products and services will permit them to operate in compliance
with all applicable laws and regulations. We may become subject to direct
regulation as the market for our products and services evolves. Additionally,
current or new government laws and regulations, or the application of existing
laws and regulations, may expose us to significant liabilities or otherwise
impair our ability to achieve our strategic objectives through increased
operating costs or reduced market acceptance. If Internet use does not grow as a
result of privacy or security concerns, increasing regulation or for other
reasons, the sale of Internet banking and electronic bill presentment and
payment products would be hindered and our business, operations and financial
condition would be adversely affected.
ITEM 7a. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
- ------------------------------------------------------------------------
The Company currently has no long-term debt and is not currently engaged in
any transactions that involve foreign currency. The Company does not engage in
hedging activities.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
- -----------------------------------------------------
INDEX TO THE CONSOLIDATED FINANCIAL STATEMENTS
Page
----
Consolidated Financial Statements
Consolidated Balance Sheets as of December 31, 2004 and 2003, as restated...35
Consolidated Statements of Operations for the Years Ended
December 31, 2004, 2003, and 2002, as restated............................36
Consolidated Statements of Changes in Stockholders' Equity for the Years Ended
December 31, 2004, 2003, and 2002, as restated............................37
Consolidated Statements of Cash Flows for the Years Ended
December 31, 2004, 2003, and 2002, as restated............................38
Notes to the Consolidated Financial Statements for the Years Ended
December 31, 2004, 2003, and 2002, as restated............................39
Report of Independent Registered Public Accounting Firm.......................58
INTELIDATA TECHNOLOGIES CORPORATION
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2004 AND 2003
(in thousands, except share data)
2004 2003
------------ ------------
(as restated)
(see Note 2(n))
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 3,223 $ 7,603
Accounts receivable, net 1,437 2,890
Other receivables 16 180
Prepaid expenses and other current assets 545 625
------------ ------------
Total current assets 5,221 11,298
NONCURRENT ASSETS
Property and equipment, net 833 1,529
Goodwill -- 25,771
Intangible asset, net 4,340 5,060
Other assets 211 211
------------ ------------
TOTAL ASSETS $ 10,605 $ 43,869
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 1,003 $ 1,517
Accrued expenses 2,223 1,635
Deferred revenues 1,269 1,051
Liabilities of discontinued operations 40 59
------------ ------------
TOTAL CURRENT LIABILITIES 4,535 4,262
Accrued expenses 225 342
Deferred revenues 150 300
Liabilities of discontinued operations -- 75
------------ ------------
TOTAL LIABILITIES 4,910 4,979
------------ ------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Preferred stock, $0.001 par value; authorized 5,000,000 shares;
no shares issued and outstanding -- --
Common stock, $0.001 par value; authorized 100,000,000 shares;
issued 52,169,000 shares in 2004 and 52,065,000 shares in 2003;
outstanding 51,134,000 shares in 2004 and 51,231,000 shares in 2003 52 52
Additional paid-in capital 307,020 306,963
Treasury stock, at cost: 1,035,000 shares in 2004 and 834,000 shares in 2003 (2,648) (2,546)
Deferred compensation (23) (108)
Accumulated deficit (298,706) (265,471)
------------ ------------
TOTAL STOCKHOLDERS' EQUITY 5,695 38,890
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 10,605 $ 43,869
============ ============
See accompanying notes to the consolidated financial statements.
INTELIDATA TECHNOLOGIES CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002
(in thousands, except per share data)
2004 2003 2002
--------- -------- ---------
(as restated) (as restated)
(see Note 2(n)) (see Note 2(n))
Revenues
Software license $ 158 $ 1,235 $ 1,289
Consulting services 1,474 3,964 5,785
Use-based 10,057 13,874 12,902
Maintenance 2,053 1,544 1,266
Other -- 13 253
--------- -------- ---------
Total revenues 13,742 20,630 21,495
--------- -------- ---------
Cost of revenues
Consulting services, recurring and termination fees 6,318 7,549 8,474
--------- -------- ---------
Total cost of revenues 6,318 7,549 8,474
--------- -------- ---------
Gross profit 7,424 13,081 13,021
Operating expenses
General and administrative 8,180 7,204 8,784
Selling and marketing 1,056 1,830 2,867
Research and development 4,937 5,020 8,807
Amortization of intangible asset 720 720 720
Goodwill impairment charge 25,771 -- --
--------- -------- ---------
Total operating expenses 40,664 14,774 21,178
--------- -------- ---------
Operating loss (33,240) (1,693) (8,157)
Realized loss on sale of investment -- -- (748)
Other income (expenses), net 5 21 122
--------- -------- ---------
Loss before income taxes (33,235) (1,672) (8,783)
Benefit for income taxes -- -- (137)
--------- -------- ---------
Net loss $ (33,235) $ (1,672) $ (8,646)
========== ======== =========
Basic and diluted earnings (loss) per common share $ (0.65) $ (0.03) $ (0.18)
========== ======== =========
Basic and diluted weighted-average common shares outstanding 51,271 50,028 48,869
========== ======== =========
See accompanying notes to the consolidated financial statements.
INTELIDATA TECHNOLOGIES CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 2004, 2003, AND 2002
(in thousands)
Additional
Preferred Stock Common stock Paid-in Treasury Deferred
Shares Amount Shares Amount Capital Stock Compensation
------ ------ ------ ------ ------- ----- ------------
Balance at January 1, 2002,
(as previously reported) -- $ -- 49,725 $ 50 $ 303,141 $ (2,473) $ (1,395)
Adjustment (see Note 2(n)) -- -- -- -- -- -- 280
------ ------ ------ ------ --------- --------- ------------
Balance at January 1, 2002,
(as restated; see Note 2(n)) -- $ -- 49,725 $ 50 $ 303,141 $ (2,473) $ (1,115)
Issuance of common stock:
Exercise of stock options -- -- 11 -- 15 -- --
Employee stock purchase plan -- -- 30 -- 30 -- --
Issuance of restricted stock -- -- 139 -- 247 -- (247)
Cancellation of restricted stock -- -- (108) -- (406) -- 406
2000 Home Account Incentive Plan -- -- -- -- (194) -- 194
Realized gains on investments sold -- -- -- -- -- -- --
Amortization of deferred compensation
(as restated; see Note 2(n)) -- -- -- -- -- -- 658
Net loss (as restated; see Note 2(n)) -- -- -- -- -- -- --
Comprehensive loss
(as restated; see Note 2(n))
------ ------ ------ ------ --------- --------- ------------
Balance at December 31, 2002,
(as restated; see Note 2(n)) -- $ -- 49,797 $ 50 $ 302,833 $ (2,473) $ (104)
------ ------ ------ ------ --------- --------- ------------
Issuance of common stock:
Exercise of stock options -- -- 669 1 802 -- --
Employee stock purchase plan -- -- 16 -- 15 -- --
Exercise of stock warrants -- -- 1,454 1 3,132 -- --
Issuance of restricted stock -- -- 155 -- 226 -- (226)
Cancellation of restricted stock -- -- (26) -- (45) -- 45
Purchase of treasury stock, at cost -- -- -- -- -- (73) --
Amortization of deferred compensation
(as restated; see Note 2(n)) -- -- -- -- -- -- 177
Net loss (as restated; see Note 2(n)) -- -- -- -- -- -- --
Comprehensive loss
(as restated; see Note 2(n))
------ ------ ------ ------ --------- --------- ------------
Balance at December 31, 2003,
(as restated; see Note 2(n)) -- $ -- 52,065 $ 52 $ 306,963 $ (2,546) $ (108)
Issuance of common stock:
Exercise of stock options -- -- 56 -- 42 -- --
Employee stock purchase plan -- -- 28 -- 16 -- --
Issuance of restricted stock -- -- 95 -- 99 -- (99)
Cancellation of restricted stock -- -- (75) -- (100) -- 100
Purchase or receipt of
treasury stock, at cost -- -- -- -- -- (102) --
Amortization of deferred compensation -- -- -- -- -- -- 84
Net loss -- -- -- -- -- -- --
Comprehensive loss
------ ------ ------ ------ --------- --------- ------------
Balance at December 31, 2004 -- $ -- 52,169 $ 52 $ 307,020 $ (2,648) $ (23)
------ ------ ------ ------ --------- --------- ------------
Accumulated
Other
Comprehensive Accumulated Comprehensive
Income (Loss) Deficit Loss Total
------------- ------- -------- -------
Balance at January 1, 2002,
(as previously reported) $ 210 $(255,058) $ 44,475
Adjustment (see Note 2(n)) -- (95) 185
------------- ------- -------- --------
Balance at January 1, 2002,
(as restated; see Note 2(n)) $ 210 $(255,153) $ 44,660
Issuance of common stock:
Exercise of stock options -- -- 15
Employee stock purchase plan -- -- 30
Issuance of restricted stock -- -- --
Cancellation of restricted stock -- -- --
2000 Home Account Incentive Plan -- -- --
Realized gains on investments sold (210) -- $ (210) (210)
Amortization of deferred compensation
(as restated; see Note 2(n)) -- -- 658
Net loss (as restated; see Note 2(n)) -- (8,646) (8,646) (8,646)
Comprehensive loss
(as restated; see Note 2(n)) $ (8,856)
------------- ------- -------- ---------
Balance at December 31, 2002,
(as restated; see Note 2(n)) $ -- $(263,799) $ 36,507
------------- ------- -------- ---------
Issuance of common stock:
Exercise of stock options -- -- 803
Employee stock purchase plan -- -- 15
Exercise of stock warrants -- -- 3,133
Issuance of restricted stock -- -- --
Cancellation of restricted stock -- -- --
Purchase of treasury stock, at cost -- -- (73)
Amortization of deferred compensation
(as restated; see Note 2(n)) -- -- 177
Net loss (as restated; see Note 2(n)) -- (1,672) $ (1,672) (1,672)
Comprehensive loss
(as restated; see Note 2(n)) $ (1,672)
------------- ------- -------- --------
Balance at December 31, 2003,
(as restated; see Note 2(n)) $ -- $(265,471) $ 38,890
Issuance of common stock:
Exercise of stock options -- -- 42
Employee stock purchase plan -- -- 16
Issuance of restricted stock -- -- --
Cancellation of restricted stock -- -- --
Purchase or receipt of
treasury stock, at cost -- -- (102)
Amortization of deferred compensation -- -- 84
Net loss -- (33,235) $(33,235) (33,235)
Comprehensive loss $(33,235)
------------- ------- -------- --------
Balance at December 31, 2004 $ -- $ (298,706) $ 5,695
------------- ------- -------- --------
See accompanying notes to the consolidated financial statements.
INTELIDATA TECHNOLOGIES CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2004, 2003, AND 2002
(in thousands)
2004 2003 2002
----------- ------------ -----------
(as restated) (as restated)
(see Note 2(n)) (see Note 2(n))
Cash flows from operating activities
Net loss $ (33,235) $ (1,672) $ (8,646)
Adjustments to reconcile net loss
to net cash used in operating activities of continuing operations:
Realized loss on sales of investments -- -- 748
Goodwill impairment charge 25,771 -- --
Amortization of intangible asset 720 720 720
Depreciation and amortization 739 1,037 1,532
Deferred compensation expense 84 177 658
Net loss on disposal of property and equipment 8 138 23
Changes in operating assets and liabilities:
Accounts receivable 1,453 84 2,018
Prepaid expenses and other current assets 144 270 31
Accounts payable (514) (564) (1,215)
Accrued expenses and accrued rent 471 (1,550) (2,051)
Deferred revenue 68 (322) (1,491)
----------- ------------ -----------
Net cash used in operating activities of
continuing operations (4,291) (1,682) (7,673)
Cash released from escrow account 224 -- --
Payments of liabilities of discontinued operations (318) (117) (253)
----------- ------------ -----------
Net cash used in discontinued operations (94) (117) (253)
----------- ------------ -----------
Net cash used in operating activities (4,385) (1,799) (7,926)
Cash flows from investing activities
Proceeds from sales of investments -- -- 1,968
Purchases of property and equipment (51) (150) (389)
Payments on acquisition related costs -- -- (50)
----------- ------------ -----------
Net cash (used in) provided by investing activities (51) (150) 1,529
----------- ------------ -----------
Cash flows from financing activities
Proceeds from the issuance of common stock 58 3,951 45
Payments to acquire treasury stock (2) (73) --
Net cash provided by financing activities 56 3,878 45
----------- ------------ -----------
(Decrease) increase in cash and cash equivalents (4,380) 1,929 (6,352)
Cash and cash equivalents, beginning of year 7,603 5,674 12,026
----------- ------------ -----------
Cash and cash equivalents, end of year $ 3,223 $ 7,603 $ 5,674
=========== ============ ===========
See accompanying notes to the consolidated financial statements.
INTELIDATA TECHNOLOGIES CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2004, 2003, AND 2002 (AS RESTATED)
(1) ORGANIZATION
InteliData Technologies Corporation and subsidiaries ("InteliData" or the
"Company") provides electronic bill payment and presentment ("EBPP") and online
banking solutions to the financial services industry. The Company's products
provide financial institutions ("FI's") with the real-time financial processing
infrastructure needed to provide their customers with payment and presentment
services and online banking via the Internet and other online delivery channels.
The Company markets its products and services to banks, credit unions, brokerage
firms, financial institution processors and credit card issuers.
InteliData's product suite consists of three complementary product
offerings:
Payment and Presentment
-----------------------
o Payment Solutions - providing payment warehousing, payment
matching, biller directory management, and least cost routing
functionality for EBPP transactions;
o Card Services - providing Internet-based account activation, bill
presentment, balance consolidation, and e-Statement capabilities;
and
Online Banking
--------------
o Online Banking - providing Internet-based access to real-time
account information, as well as interfaces to personal financial
management software such as Intuit's Quicken(R) and Microsoft
Money(R).
The Company has invested in developing products and capabilities designed
to establish a leadership position in the online bill payment market. The
Company believes this market opportunity is significant based on the billions of
recurring bills that consumers and businesses pay each year, primarily via paper
checks. FI's should be able to realize significant cost and efficiency benefits
from initiating these payments online and processing them electronically.
Migrating to online electronic payments will require significant investment in
online bill payment infrastructure, which is where the Company's products are
focused.
On March 31, 2005, the Company entered into a definitive agreement to be
acquired by Corillian Corporation ("Corillian"), a publicly traded company
(Nasdaq: CORI) based in Hillsboro, Oregon, that provides solutions that enable
banks, brokers, financial portals and other financial service providers to
rapidly deploy Internet-based financial services. The purchase consideration for
the Company is approximately $19.5 million, subject to adjustment. Under the
terms of the agreement, each outstanding share of the Company's common stock
will be converted into the right to receive 0.0954 of a share of Corillian's
common stock and $0.0832 in cash without interest. The closing of this
transaction is subject to, among other things, the effectiveness of the
registration/proxy statement on Form S-4 to be filed with the Securities and
Exchange Commission and approval of the Company's stockholders. As a result,
there can be no assurances that the acquisition will be completed or as to the
timing thereof.
The Company is incorporated in the State of Delaware and has its corporate
headquarters in Reston, Virginia. There are operating facilities in 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 inter-company balances and transactions. Certain reclassifications have
been made to the prior year financial statements to conform to the 2004
financial statement presentation.
<page>
(b) Accounting Estimates- The preparation of financial statements in conformity
with accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the period. Estimates include, but are not limited
to, allowance for doubtful accounts, costs of environmental remediation for real
property previously sold, depreciation of fixed assets, valuation of intangible
assets which include goodwill, provision for discontinued operations, and
project plans for the completion and delivery of certain solutions. These
accounting estimates are based on information currently available. Actual
results could differ from those estimates and in some cases the actual results
could vary materially from the estimates.
(c) Revenue Recognition - The Company supplies online banking and bill payment
software to FI's. The Company's revenues associated with integrated solutions
that bundle software products with customization, installation and training
services are recognized using the percentage of completion method of accounting
based on cost incurred as compared to estimated costs at completion.
The Company enters into contracts where the delivered software may not
require significant customization. Upon delivery, the Company either recognizes
revenue ratably over the contract period for contracts where vendor specific
objective evidence ("VSOE") of fair value for post contract customer support
("PCS") does not exist or recognizes revenue for the delivered element where
VSOE of fair value for PCS does exist (e.g., when the Company has substantive
renewal rates for PCS). The Company generally utilizes the shipping terms of
F.O.B. shipping point. Depending on the type of software and the terms of a
particular contract, the client's receipt of the software is either based on
F.O.B. shipping point or upon acceptance of the software, as defined by the
applicable contract. The warranty provision is generally ninety days from either
FOB shipping date or acceptance of the software.
The Company also enters into multiple element arrangements. Elements
typically include software, consulting, implementation and PCS. PCS contracts
generally require the Company to provide technical support and unspecified,
readily available software updates and upgrades to customers. Revenue for these
multiple element arrangements is recognized when there is persuasive evidence of
an arrangement and delivery to the customer has occurred, the fee is fixed and
determinable, and collectibility is considered probable. Advance payments are
recorded as deferred revenue until the products are shipped, services are
delivered and all obligations are met. Currently, the Company does not have VSOE
of fair value for some of the elements within its multiple element arrangements.
Therefore, all revenue under such arrangements is being recognized ratably over
the term of the PCS contract. Revenue from transactional services, which
includes hosting and application services provider ("ASP") services, is
recognized as transactions are processed.
Emerging Issues Task Force Abstract Issue No. 00-3, Application of AICPA
Statement of Position 97-2 to Arrangements that Include the Right to Use
Software Stored on Another Entity's Hardware ("EITF 00-3"), provides guidance in
determining whether or not the provisions of Statement of Position No. 97-2,
Software Revenue Recognition ("SOP 97-2"), should be applied to hosting
arrangements. The Company has some contracts where the customers operate
software in an ASP environment. The customer may not take possession of the
software without incurring significant transition and infrastructure costs, as
well as potential payments of fees to the Company for the termination of such
arrangements. In cases where the customer has not licensed software from
InteliData, the customer must also purchase a license prior to having the right
to use the software in its own operating environment, in addition to the
aforementioned fees. In these situations, the Company applies the guidance under
EITF 00-3 and the Staff Accounting Bulletin No. 101, Revenue Recognition in
Financial Statements, and recognizes the revenue associated with the license
and/or implementation fees ratably over the initial term of the contract.
Additionally, based on the EITF 00-3 guidance, the Company concluded that
SOP 97-2 should not be applied to certain of its software hosting contracts.
Accordingly, the related revenues for license and professional services were
recognized under the percentage of completion method. In addition to developing
and delivering the solution, the Company is entitled to use fees based on the
number of users and transactions. These use-based fees are earned based on the
monthly user counts and as transactions are processed.
(d) Cash and Cash Equivalents - The Company considers all non-restricted,
highly liquid investments with original maturities of three months or less to be
cash equivalents. Cash and cash equivalents are stated at cost, which
approximates their fair market value.
<page>
(e) Investments - The Company accounted for its investments in the warrants to
acquire Sybase, Inc. common stock under Statement of Financial Accounting
Standard ("SFAS") No. 133, Accounting for Derivative Instruments and Hedging
Activities ("SFAS 133"), which establishes accounting and reporting standards
for derivative instruments and for hedging activities by requiring that all
derivatives be recognized in the balance sheet and measured at fair value. SFAS
No. 149, Amendment of Statement 133 on Derivative Instruments and Hedging
Activities ("SFAS 149"), was issued in April 2003 to amend and clarify the
financial accounting and reporting guidance for derivative instruments and
hedging activities. The adoption of SFAS 149 did not have a material effect on
our financial position, results of operations, or cash flows.
The Company reported its investments in marketable securities as
available-for-sale with any unrealized holding gains and losses, net of the
related income tax effect, excluded from earnings and reported as a separate
component of stockholders' equity until such gains or losses are realized.
Dividends and interest income are recognized when earned. Realized gains or
losses are included in earnings and are derived using the first-in, first-out
method for determining cost of securities sold.
(f) Property and Equipment - Property and equipment is stated at cost, net of
any accumulated depreciation. Depreciation of property and equipment is
calculated using the straight-line method over the estimated useful lives of the
assets, which are generally in the range of two to seven years.
(g) Deferred Revenues - Deferred revenues represent unearned revenues for
services that have not yet been provided or where certain accounting revenue
recognition criteria have not yet been met.
(h) Income Taxes - Income taxes are accounted for in accordance with the asset
and liability method. Deferred tax assets and liabilities are recognized for the
future tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases. Deferred tax assets and liabilities are measured using
enacted tax rates expected to apply to taxable income in the years in which
those temporary differences are expected to be recovered or settled. The effect
on deferred tax assets and liabilities of a change in tax rates is recognized in
income in the period that includes the enactment date. Valuation allowances are
established against deferred tax assets when it is deemed, based on available
evidence, that it is more likely than not that some portion or all of the
deferred tax asset will not be realized.
(i) Accounting for Stock-Based Compensation - The Company accounts for employee
stock options in accordance with Accounting Principles Board Opinion No. 25,
Accounting for Stock Issued to Employees ("APB 25"). Under APB 25, the Company
recognizes no compensation expense related to employee stock options, as no
options are granted at a price below the market price on the day of grant. The
Company accounts for stock options issued to non-employees in accordance with
the provisions of SFAS No. 123, Accounting for Stock-Based Compensation ("SFAS
123").
SFAS 123 prescribes the recognition of compensation expense based on the
fair value of options on the grant date and allows companies to continue
applying APB 25 if certain pro forma disclosures are made assuming hypothetical
fair value method application. The Company has elected to continue to apply the
provisions of APB 25 for options granted to employees and provide the pro forma
disclosures pursuant to SFAS 123. Pro forma information regarding the Company's
net loss has been determined as if the Company had accounted for its employee
stock options under the fair value method of SFAS 123. Under the fair value
method, compensation costs are measured at the grant date based on the fair
value of the award and are recognized over the service period. The
weighted-average fair values of options granted during 2004, 2003, and 2002 were
$0.26, $1.70, and $0.95, per share, respectively. The fair value is determined
by using the Black-Scholes option-pricing model with the following assumptions:
2004 2003 2002
----- ----- -----
Risk free interest rate 3.43% 2.97% 3.82%
Dividend yield 0% 0% 0%
Volality 107% 81% 105%
Expected life of options (years) 6 6 6
<page>
Had compensation cost been determined based on the fair value method of
SFAS 123, the Company's results of operations would have been as follows (in
thousands, except for per share data) for the years ended December 31:
2004 2003 2002
--------- -------- ---------
Net loss, as reported $ (33,235) $ (1,672) $ (8,646)
Stock-based employee compensation expense (271) (1,327) (3,264)
--------- -------- ----------
Pro forma net loss $ (33,506) $ (2,999) $ (11,910)
========== ======= ==========
Basic and diluted loss per common share $ (0.65) $ (0.06) $ (0.24)
========== ======== ==========
In December 2004, the FASB published SFAS No. 123 (revised 2004),
Share-Based Payment ("SFAS 123(R)"), which replaces SFAS 123 and supersedes APB
25. SFAS 123(R) requires that the compensation cost relating to share-based
payment transactions be recognized in the financial statements. That cost will
be measured based on the fair value of the equity or liability instruments
issued. The Company will be required to apply SFAS 123(R) as of the first
interim or annual reporting period that begins after June 15, 2005. The Company
has not calculated the financial impact of adopting this standard.
(j) Earnings (Loss) Per Common Share - Basic earnings (loss) per common share
("EPS") is computed by dividing net income (loss) by the basic weighted-average
common shares outstanding during the year. Diluted EPS reflects the dilutive
effect of stock options and stock awards granted to employees under stock-based
compensation plans, as well as stock warrants. The effects of stock options and
warrants were not included in the loss per share computations in 2004, 2003 and
2002, because they would have been anti-dilutive.
(k) Fair Value of Financial Instruments - The carrying values of the Company's
financial instruments such as cash and cash equivalents, accounts receivable,
accounts payable and accrued expenses, approximate their fair values.
(l) Concentration of Credit Risk - Financial instruments that potentially
subject the Company to credit risk consist principally of trade receivables. The
Company sells its products primarily to FI's in the United States. The Company
believes that the concentration of credit risk in its trade receivables and cash
and cash equivalents is substantially mitigated by 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, 2004, the Company's
top eight customers comprised approximately 73% of the accounts receivable
balance.
(m) Recent Accounting Pronouncements - In May 2003, the Financial Accounting
Standards Board ("FASB") issued SFAS No. 150, Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity ("SFAS 150"),
which requires that an issuer classify financial instruments that are within the
scope of SFAS 150 as a liability. Under prior guidance, these same instruments
would be classified as equity. SFAS 150 is effective for all financial
instruments entered into or modified after May 31, 2003. Otherwise, it is
effective on July 1, 2003. The adoption of SFAS 150 did not have a material
effect on our financial position, results of operations, or cash flows.
In December 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based
Compensation-Transition and Disclosure-an amendment of FAS 123 ("SFAS 148").
SFAS 148 amends SFAS No. 123, Accounting for Stock-Based Compensation ("SFAS
123"), to provide alternative methods of transition for an entity that
voluntarily changes to the fair value based method of accounting for stock-based
employee compensation. It also amends the disclosure provisions of SFAS 123 to
require prominent disclosure about the effects on reported net income of an
entity's accounting policy decisions with respect to stock-based employee
compensation as noted in note 2(i). SFAS 148 also amends APB Opinion No. 28,
Interim Financial Reporting, to require disclosure about those effects in
interim financial information. SFAS 148 is effective for annual and interim
periods beginning after December 15, 2002. As the Company has elected not to
change to the fair value based method of accounting for stock-based
<page>
employee compensation, SFAS 148 did not have any impact on our financial
position, results of operations, or cash flows.
In June 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated
with Exit or Disposal Activities (including Certain Costs Incurred in a
Restructuring) ("SFAS 146"), which supersedes Emerging Issues Task Force Issue
No. 94-3, Liability Recognition for Certain Employee Termination Benefits and
Other Costs to Exit an Activity ("EITF 94-3"). SFAS 146 requires recognition of
a liability for costs associated with an exit or disposal activity when the
liability is incurred, rather than when the entity commits to an exit plan under
EITF 94-3. The provisions of SFAS 146 are effective for exit or disposal
activities that are initiated after September 30, 2002. As of March 31, 2003,
the Company ceased using one of its leased spaces at its offices in Reston,
Virginia. The fair value of the remaining obligation on this lease, net of the
fair value of sublease rent, was approximately $540,000. Accordingly, the
Company recorded an expense of $540,000 and a corresponding liability as of
March 31, 2003. As of May 1, 2003, the Company has a subtenant for this space
for the majority of the remaining lease term and the actual results of net
sublease rent could differ from the above estimates. As of December 31, 2004,
the estimated remaining liability was approximately $264,000.
In July 2004, the Company determined that it would be more cost-effective
to relocate its South Carolina operations to its headquarters in Reston,
Virginia, based on the number of remaining employees and the existing operations
at the time. Accordingly, the Company relocated two employees, designated three
others as field employees and ceased using its leased office space in
Charleston, South Carolina. The fair value of the remaining obligation on this
lease, net of the fair value of sublease rent, was approximately $45,000.
Accordingly, the Company recorded an expense of $45,000 and a corresponding
liability in July 2004. As of December 31, 2004, the Company had not been
successful in securing a subtenant for this space and the estimated remaining
liability was approximately $33,000.
(n) Restatement of Consolidated Financial Statements - Subsequent to the
issuance of the consolidated financial statements for the year ended December
31, 2003, the Company determined that the previous consolidated financial
statements require restatement to correct errors related to a lease
restructuring, deferred rent liabilities, lease purchase accounting, warrant to
issue Company stock and an income tax contingency as discussed below.
Lease Restructuring - As of March 31, 2003, the Company ceased using one of
-------------------
its leased spaces at its offices in Reston, Virginia. Accordingly, the Company
recorded an expense and a corresponding liability of $625,000 which equaled the
net of the undiscounted remaining obligation on the lease of approximately
$1,080,000 through December 31, 2006, and the discounted estimated net sublease
rent of $455,000. The initial estimate of sublease rent in the first quarter of
2003 did not extend through December 31, 2006 and also did not include the
latest information we had available when we filed our Form 10-Q for the quarter.
As the liability was not fully discounted, the recorded liability was not
accreted. We have concluded that there was an error in the application of the
concepts of SFAS No. 146, Accounting for Costs Associated with Exit or Disposal
Activities (including Certain Costs Incurred in a Restructuring) ("SFAS 146"),
with respect to this lease. Under the provisions of SFAS 146, the Company should
have determined the fair value of the liability at the cease-use date by taking
the remaining lease obligation (adjusted for the effects of any prepaid or
deferred items recognized under the lease, see Deferred Rent Liabilities section
below for additional detail), reduced by estimated sublease rentals that could
be reasonably obtained for the property for all periods covered by the lease,
and discounting the resulting net liability using a credit-adjusted risk-free
rate appropriate for the first quarter of 2003. The discounted liability should
be accreted over the lease term. The impact of these changes was to decrease the
lease restructuring liability by $74,000 as of December 31, 2003.
Deferred Rent Liabilities - Prior to the fourth quarter of 2003, the
---------------------------
Company had not previously recognized rent expense on operating leases on a
straight-line basis as required by FASB Technical Bulletin 85-3, Accounting for
Operating Leases with Scheduled Rent Increases ("FTB 85-3"). As of December 31,
2003, the Company recorded a current deferred rent liability of $171,000 and
expensed the related cumulative additional lease expense during the fourth
quarter. The entire liability was classified as short-term as of December 31,
2003, even though certain leases extended beyond twelve months. In addition, the
$171,000 recorded liability included approximately $121,000 of deferred rent
liability related to the operating lease that was accounted for under SFAS 146
during the first quarter of 2003 (see Lease Restructuring discussion above). We
have concluded that there was an error in the application of the concepts of FTB
85-3 with respect to our operating leases. This accounting results in the
<page>
recordation of a deferred rent liability for all periods presented due to
scheduled rent increases in the leases. Other guidance relating to the
classification of liabilities requires the non-current portion of the deferred
rent liability to be presented as a long-term liability on the balance sheet.
Further, as mentioned above, SFAS 146 requires consideration of the deferred
rent liability when recording the fair value of the net liability otherwise the
liability (and related expense) recognized in 2003 is double counted. The impact
of these changes was to decrease the deferred rent liability to $50,000,
decrease the current deferred rent liability by $169,000, and increase the
long-term deferred rent liability by $48,000 as of December 31, 2003.
Lease Purchase Accounting - The Company recorded a lease liability of
---------------------------
approximately $1 million in purchase accounting when it acquired Home Account in
the first quarter of 2001 as the Company met the criteria for recognition of the
liability under EITF 95-3, Recognition of Liabilities in Connection with a
Purchase Business Combination ("EITF 95-3"). The liability recorded represented
the undiscounted amount of the remaining lease payments through early 2005 under
the operating lease for the former Home Account headquarters, which was closed.
As the liability was not discounted, the liability was not accreted over the
lease term. At that time, the liability was appropriately not reduced for
anticipated sublease income due to the significant downturn in the local real
estate market. In the third quarter of 2002, the Company subleased the space to
a tenant for approximately $12,000 per month or a total of approximately
$363,000 from that point until the end of the lease in early 2005. As the
Company received sublease rent payments in 2002, 2003, and 2004, it increased
the related lease liability. The Company reversed these cumulative increases to
the liability to income in the fourth quarter of 2003. We have concluded that
there was an error in the application of the concepts of APB 16, Business
Combinations ("APB 16"), EITF 95-3, and other relevant accounting literature
with respect to this lease. APB 16 requires the lease liability recorded in
purchase accounting to be recorded at a discounted amount and for such amount to
be accreted over the lease term. EITF 95-3 requires that a lease liability
recorded in purchase accounting be reversed against goodwill rather than as a
credit in the statement of operations when the liability requires a downward
adjustment. Other accounting literature requires the Company to revise the lease
liability for sublease rentals when those rentals are considered to be
reasonable assured. The impact of these changes was to decrease the recorded
liability by $238,000 as of December 31, 2003, to increase rent accretion
expense by approximately $40,000 and $29,000 for the years ended December 31,
2003 and 2002, respectively, and to decrease othere income by approximately
$158,000 for the year ended December 31, 2003.
Warrant - In the second quarter of 2000, InteliData granted a warrant to
-------
purchase common stock to a client in exchange for the client's becoming a
premier reference site for the Company. The warrant was granted in anticipation
of the installation of software delivered as part of an agreement with the
client signed in 1999. The warrant agreement is in effect through June 30, 2005.
The warrant was fully vested, nonforfeitable, and exercisable on the date of
grant. InteliData appropriately measured the fair value of the warrant on the
date of grant as approximately $419,000 and recorded the amount on the balance
sheet. The Company amortized the warrants to expense over the five-year term of
the agreement at approximately $20,000 of expense per quarter or approximately
$80,000 per year. We have concluded that there was an error in the application
of the concepts of EITF 96-18, Accounting for Equity Instruments That Are Issued
to Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or
Services. The Company should have recognized the full value of the warrant in
the statement of operations on the grant date. Further, the charge to the
statement of operations should have been recorded as a contra revenue item in
2000 following the guidance in EITF 01-09, Accounting for Consideration Given by
a Vendor to a Customer (Including a Reseller of the Vendor's Products), to the
extent there was cumulative revenue on the associated contract. Accordingly, the
Company offset approximately $265,000 against revenue and recorded the balance
of approximately $154,000 as costs of revenues during 2000. The impact of this
change was to decrease deferred compensation (a contra-equity account) by
$120,000 as of December 31, 2003.
Income Tax Contingency - InteliData reversed a $288,000 tax liability and
------------------------
recorded the related tax benefit in the statement of operations in 2003. The
original alternative minimum tax liability recorded in 2000 was incorrectly
calculated by $288,000. We have concluded that there was an error in the
application of the concepts of SFAS No. 5, Accounting for Contingencies, in 2000
with respect to this accrual. This change increased the net loss by $288,000 for
the year ended December 31, 2003, however, it did not have any impact to the
accumulated deficit as of December 31, 2003.
The combined effect of these changes resulted in an increase to accumulated
deficit of $221,000 and $147,000 as of December 31, 2003 and 2002, respectively,
and an increase to accumulated deficit of $95,000 as of January 1, 2002. The
following is a summary of the effects of the restatement on our consolidated
balance sheet as
<page>
of December 31, 2003 and consolidated statements of operations for the years
ended December 31, 2003 and 2002. Further, Note 14 to the consolidated financial
statements contain restated unaudited quarterly financial data for the years
ended December 31, 2004 and 2003, reflecting these adjustments in the
appropriate periods.
Consolidated Balance Sheet as of December 31, 2003 As Previously As
(in thousands) Reported Restated
- --------------------------------------------------------------------------------
Goodwill $ 26,238 $ 25,771
TOTAL ASSETS 44,336 43,869
Accounts payable 1,531 1,517
Accrued expenses 1,963 1,635
Deferred revenues 1,351 1,051
Net liabilities of discontinued operations 45 59
TOTAL CURRENT LIABILITIES 4,890 4,262
Accrued rent 380 342
Deferred revenues - 300
TOTAL LIABILITIES 5,345 4,979
Deferred compensation (228) (108)
Accumulated deficit (265,250) (265,471)
TOTAL STOCKHOLDERS' EQUITY 38,991 38,890
<page>
Consolidated Statements of Operations As Previously As
(in thousands, except per share data) Reported Restated
- --------------------------------------------------- --------------- ----------
For the year ended December 31, 2003
Operating expenses
General and administrative $ 7,496 $ 7,204
Selling and marketing 1,910 1,830
Total operating expenses 15,146 14,774
Operating Loss (2,065) (1,693)
Other income (expense), net 179 21
Loss before income taxes (1,886) (1,672)
Benefit for income taxes (288) -
-------- ---------
Net loss $ (1,598) $ (1,672)
======== =========
For the year ended December 31, 2002
Operating expenses
General and administrative 8,629 8,784
Selling and marketing 2,947 2,867
Total operating expenses 21,103 21,178
Operating Loss (8,082) (8,157)
Other income (expense), net 99 122
Loss before income taxes (8,731) (8,783)
Benefit for income taxes (137) (137)
-------- ---------
Net loss $ (8,594) $ (8,646)
======== =========
(o) Going Concern Assumption - Our financial statements have been prepared
assuming that the Company will continue as a going concern, which contemplates
the realization of assets and the satisfaction of liabilities in the normal
course of business. There are factors that raise substantial doubt about our
ability to continue as a going concern including the Company's financial
position and results of operations. The financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
During 2004 and continuing into 2005, the Company assessed a variety of
strategic alternatives, which were focused on enhancing InteliData's position in
the electronic banking marketplace by exploring strategic opportunities intended
to enhance stockholder value. For example, we actively pursued strategic
alternatives including the possibility of selling assets, raising capital
through private placements, and merging the Company with another entity. There
can be no assurance that any transaction will result from this effort.
As stated in Note 1, the Company entered into a definitive agreement to be
acquired by Corillian. The closing of this transaction is subject to, among
other things, the effectiveness of the registration/proxy statement on Form S-4
to be filed with the Securities and Exchange Commission and approval of the
Company's stockholders. As a result, there can be no assurances that the
acquisition will be completed or as to the timing thereof. In the event our
merger with Corillian is not successful, we may be required to seek protection
from our creditors, or we may need to sell assets and/or raise additional
capital through private placements. While we continue to operate as a going
<page>
concern, we have significant liquidity and capital resource issues relative to
our ability to generate cash flows and to raise additional capital if needed. We
may not be able to generate sufficient revenue to become profitable on a
sustained basis, or at all. We have incurred significant losses and negative
cash flows from operations for several years and our ability to raise or
generate enough cash to survive may be questionable. We expect that the
operating cash flow deficit will continue and absent further financing or
significant improvement in sales, potentially result in our inability to
continue operations. As a result of these and other factors, our independent
registered public accounting firm has included in its report on the 2004
consolidated financial statement an explanatory paragraph expressing that there
is substantial doubt about our ability to continue as a going concern.
If the Corillian transaction is not successful, the Company's achievement
of its operating plan remains predicated upon both existing and prospective
clients' decisions to procure certain products and services in a timeframe
consistent with the operating plan assumptions. Historically, these decisions
have not evolved timely for varying reasons, including slower than expected
market demand, budgetary constraints, and internal product development and
resource initiatives. Further, based on the Company's declining financial
condition, existing and prospective clients could express concerns regarding the
risks of acquiring software and services from InteliData. While some may be
satisfied as long as the source code continues to be held in escrow, others
could employ a wait-and-see approach to InteliData's continuation as a going
concern.
The Company believes the key factors to its liquidity in 2005 will be its
ability to successfully execute on its plans to achieve sales levels, while
operating at reduced operating expense levels. With projected sales to existing
and prospective clients, management expects that the Company's cash and cash
equivalents and projected funds from operations (which are principally the
result of sales and collections of accounts receivable) will be sufficient to
meet its anticipated cash requirements for the next several months. This
expectation is based upon assumptions regarding cash flows and results of
operations over the next several months and is subject to substantial
uncertainty and risks that may be beyond our control. If these assumptions prove
incorrect, the duration of the time period during which the Company could
continue operations could be materially shorter. The occurrence of adverse
developments related to these risks and uncertainties could result in the
Company's incurring unforeseen expenses, being unable to generate projected
sales, to collect new and outstanding accounts receivable, or to control
expected expenses and overhead, and we would likely be unable to continue
operations.
In the event of continued future revenue delays, the Company would seek to
adjust certain expense structures to mitigate the potential impact that these
delays would have on its capital levels. These opportunities include additional
reductions in general and administrative expenditures, managing research and
development efforts consistent with existing and prospective client demands, and
the potential of consolidating certain operational activities. During 2004, the
Company reduced the full-time equivalent personnel by 14 to 72 as of December
31, 2004. Continuing into 2005, management reviewed the operating expenses in
light of our financial condition and current plan. Further steps were taken to
control costs and the full-time equivalent personnel was reduced by 15 to 57 as
of March 28, 2005.
Additional capital resources might be generated from activities that
include the Company's selling of assets, issuing equity securities through
private placements and/or merging the Company with another entity. If the
Company engages in efforts to obtain additional capital, it can make no
assurances that these efforts will be successful or that the terms of such
funding would be beneficial to the common stockholders. If we issue additional
equity securities to raise funds, the ownership percentage of our existing
stockholders would be reduced. New investors may demand rights, preferences or
privileges senior to those of existing holders of common stock. If we cannot
raise any needed funds, we might be forced to make further substantial
reductions in our operating expenses, which could adversely affect our ability
to implement our current business plan and ultimately our viability as a
company.
On September 7, 2004, InteliData transferred the listing of its common
stock from the Nasdaq National Market to the Nasdaq SmallCap Market due to our
inability to comply with the minimum $1.00 bid price requirement. The initial
grace period to regain compliance expired on December 13, 2004. On December 14,
2004, InteliData received a notice from Nasdaq that it had not regained
compliance with the minimum $1.00 bid price per share requirement set forth in
Marketplace Rule 4310(c)(4). Nasdaq also notified InteliData that, since it
meets the other initial inclusion criteria for the SmallCap Market, it is being
given an additional 180 calendar days, or until June 13, 2005, to regain
compliance. If compliance with the criteria cannot be demonstrated by that time,
InteliData's
<page>
common stock would be delisted from the Nasdaq SmallCap Market. The possibility
of a Nasdaq delisting could make capital-raising, selling and other activities
more difficult.
(3) INVESTMENTS
In January 2000, Home Financial Network, Inc. ("HFN"), a company in which
InteliData held approximately a 25% ownership interest, merged with Sybase, Inc.
("Sybase"). As part of the merger agreement, the Company received 640,000
"warrant units" with an exercise price of $2.60 per warrant unit. Upon exercise
of each warrant unit, the Company was entitled to receive $1.153448 in cash and
0.34794 share of Sybase common stock. Prior to January 1, 2001, the Company
considered its investment in warrants to purchase common stock of Sybase to be
available-for-sale under the provisions of SFAS 115. Effective January 1, 2001,
the Company adopted SFAS 133, which establishes accounting and reporting
standards for derivative instruments and for hedging activities by requiring
that all derivatives be recognized in the balance sheet and measured at fair
value.
SFAS 133 requires that all derivative financial instruments, such as
forward currency exchange contracts, interest rate swaps and the Company's
warrants to purchase Sybase stock, be recognized in the financial statements and
measured at fair value regardless of the purpose or intent for holding them.
Changes in the fair value of derivative financial instruments are either
recognized periodically in income or stockholders' equity (as a component of
comprehensive income), depending on whether the derivative is being used to
hedge changes in fair value or cash flows. The Company's holdings of the Sybase
warrants are defined as derivatives under this guidance. The Company's adoption
of SFAS 133, effective January 1, 2001, did not have a material effect on the
Company's financial statements as of the adoption date and did not result in an
adjustment for the cumulative effect of an accounting change, because the
carrying value reflected fair value under the previous accounting guidance.
During June 2002, the Company exercised all of its 640,000 warrants units to
purchase Sybase common stock and sold the resulting 223,000 shares of Sybase
common stock. The Company received net proceeds of approximately $1,718,000 and
recognized a realized loss from sales of investments of approximately $748,000.
As of January 1, 2002, the accumulated other comprehensive loss balance of
$210,000 represented the changes in the fair market value of the Sybase common
stock recorded as unrealized gains on investments under SFAS 115. This amount
was realized with the Company's disposition of the remaining Sybase investments
in June 2002.
(4) PROPERTY AND EQUIPMENT
Property and equipment consists of the following at December 31 (in
thousands):
2004 2003
------- -------
Building improvements $ 195 $ 194
Office equipment 4,808 4,844
Furniture and fixtures 765 765
------- -------
5,768 5,803
Accumulated depreciation (4,935) (4,274)
------- -------
Total $ 833 $ 1,529
======= =======
<page>
(5) ACCRUED EXPENSES AND OTHER LIABILITIES
Accrued expenses and other liabilities consist of the following at
December 31 (in thousands):
2004 2003
------- -------
Accrued compensation $ 449 $ 773
Accrued professional fees 1,242 215
Accrued insurance 205 257
Other liabilities 327 390
Total current accrued expenses and other liabilities 2,223 1,635
----- -----
Other liabilities 225 342
Total noncurrent accrued expenses and other liabilities 225 342
------ ----
Total accrued expenses and other liabilities $ 2,448 $ 1,977
(6) DISCONTINUED OPERATIONS
Under various disposal plans adopted in 1997, 1998, and 2000, the Company
completed the divestiture of all of its telecommunications, interactive services
businesses and the Caller ID adjunct leasing activities, respectively.
As of December 31, 2004, the liabilities of discontinued operations of
$40,000 relate to the telecommunications divisions. These liabilities relate to
the environmental clean up associated with prior tenants' operations at
InteliData's former New Milford, Connecticut property. In January 2000,
InteliData sold the New Milford, Connecticut property and the building located
thereon, its only remaining asset in its discontinued operations of the
telecommunications division. In the context of this sale, InteliData agreed to
undertake limited remediation of the site in accordance with applicable state
and federal law. The subject site is not a listed federal or state Superfund
site and InteliData has not been named a "potentially responsible party" at the
site. The remediation plan agreed to with the purchaser allows InteliData to use
engineering and institutional controls (e.g., deed restrictions) to minimize the
extent and costs of the remediation. Further, at the time of the sale of the
facility, InteliData established a $200,000 escrow account from the proceeds of
the sale for certain investigation/remediation costs. In April 2004, the escrow
balance of approximately $224,000 was released and paid to InteliData. Moreover,
InteliData has obtained environmental insurance to pay for remediation costs up
to $6,600,000 in excess of a retained exposure limit of $600,000. InteliData
estimates its remaining liability at December 31, 2004 related to this matter
and other costs to be approximately $40,000 and has a liability recorded for
this amount.
The Company has engaged a legal firm and an environmental specialist firm
to represent it regarding this matter. The timing of the ultimate resolution of
this matter is estimated to be from two to four years under the Company's
proposed compliance plan, which involves a natural attenuation and periodic
compliance monitoring approach. Management does not believe that the resolution
of this matter will likely have a material adverse effect on the Company's
financial condition or results of operations. The liabilities of discontinued
operations as of December 31, are as follows (in thousands):
2004 2003
----- -----
Other current liabilities $ 40 $ 59
Other noncurrent liabilities - 75
----- -----
Total $ 40 $ 134
===== =====
<page>
(7) STOCKHOLDERS' EQUITY
(a) Issuance and Subsequent Conversion of Preferred Stock and Warrants - In
July 1999, the Company issued 600 shares of 4% Convertible Preferred Stock and
warrants to purchase 120,000 shares of InteliData common stock. As of December
31, 1999, all of the preferred stock was converted into common stock.
The fair value of these 120,000 warrants, which expire five years from the
issuance date and have an exercise price of $4.53, was estimated as of the grant
date using the Black-Scholes model. The following assumptions were used: no
dividend yield, expected volatility of 129%, life of 5 years, and a risk free
interest rate of 4.00% per annum. Accordingly, the Company allocated
approximately $369,000 to these warrants and the charge was amortized over the
period that the preferred stock was outstanding. As of December 31, 2003,
101,500 warrants were outstanding. These warrants expired in July 2004.
(b) Stock Options and Awards - The Company sponsors several stock option and
award plans that cover substantially all employees and members of the board of
directors. Options and awards granted under such plans typically vest over
periods ranging from one to five years and generally expire in eight and ten
years, although some grants provide for vesting in annual increments or allow
for accelerated vesting based upon reaching performance milestones.
The Company amortizes the fair value of the stock awards (based on the fair
value of common stock on the grant dates multiplied by the number of shares
granted) over the respective vesting periods. In 2004, 2003, and 2002, the
Company recorded $84,000, $178,000, and $841,000, respectively, of compensation
expense related to these awards.
Options granted under the plans allow the purchase of stock at the fair
value of such common stock at the respective grant dates. Because options are
issued with exercise prices equal to the fair value of the common stock on the
grant dates, the Company does not record any compensation expense for these
options.
A summary of stock option activity for each of the Company's stock option
plans is as follows:
Exercise Prices
------------------------- Number
Minimum Maximum Of Options
------- ------- -----------
January 1, 2002 $ 0.69 $ 19.44 3,858,127
Granted $ 0.60 $ 2.35 1,302,000
Exercised $ 1.00 $ 2.31 (11,825)
Canceled $ 0.80 $ 10.31 (914,505)
-----------
-----------
December 31, 2002 $ 0.60 $ 19.44 4,233,797
Granted $ 1.50 $ 3.02 111,000
Exercised $ 0.60 $ 1.83 (668,645)
Canceled $ 0.60 $ 7.56 (225,423)
-----------
-----------
December 31, 2003 $ 0.60 $ 19.44 3,450,729
Granted $ 0.31 $ 2.00 545,000
Exercised $ 0.60 $ 1.70 (55,613)
Canceled $ 0.31 $ 12.75 (908,219)
-----------
-----------
December 31, 2004 $ 0.31 $ 19.44 3,031,897
===========
The Company has options outstanding and exercisable in varying price
ranges. The schedule below details the Company's options by price range:
Options Outstanding Options Exercisable
------------------- -------------------
Weighted Weighted
Weighted Average Average
Range of Number Average Life Exercise Price Number of Exercise
Exercise Prices Of Options Options Price
--------------- ---------- ------------ -------------- --------- --------
$ 0.00 - 0.50 406,000 7.8 years $ 0.32 -- $ 0.00
0.51 - 0.75 186,853 6.0 years 0.60 120,469 0.60
0.76 - 1.00 177,810 6.0 years 0.84 122,272 0.84
1.01 - 2.00 1,561,178 3.9 years 1.29 979,772 1.30
2.01 - 5.00 487,556 4.6 years 3.71 471,496 3.74
5.01 - 10.00 195,000 3.8 years 6.74 195,000 6.74
10.01 - 19.44 17,500 2.4 years 16.62 17,500 16.62
---------------- --------- ---------- -------- --------- --------
3,031,897 1,906,509
========= =========
(c) Employee Stock Purchase Plan - Under the Employee Stock Purchase Plan
(approved by the Company's stockholders in 1996), the Company is authorized to
issue up to 500,000 shares of common stock to its full-time employees, nearly
all of whom are eligible to participate. Under the terms of the Plan, employees
can choose each period to have up to twenty percent of their annual base
earnings withheld to purchase the Company's common stock. The purchase price of
the stock is 85 percent of the lower of its beginning-of-period or end-of-period
market price. During the years ended December 31, 2004, 2003, and 2002, the
Company issued 28,080, 15,640, and 29,868, shares of stock under the Plan,
respectively.
(d) Treasury Stock - In 2004 and 2003, the Company paid $2,000 and $73,000 to
acquire an additional 1,130 and 27,310 shares of its own common stock,
respectively. These shares were surrendered by employees of the Company to
satisfy an outstanding note receivable or tax-withholding obligations associated
with the vesting of certain restricted stock awards. On December 15, 2004, the
Company received 200,000 shares of its common stock priced at $0.50 per share
(based on the closing price) from its Chief Executive Officer to satisfy
$100,000 of a note receivable that was outstanding at the time. As of December
31, 2004 and 2003, the Company had a total of 1,035,000 and 834,000 common
shares in treasury at an aggregate cost of $2,648,000 and $2,546,000,
respectively.
(e) Stockholder Rights Plan - In January 1998, the Company's Board of Directors
adopted a Stockholder Rights Plan. This plan was amended on May 24, 2000. The
rights are designed to assure that all the Company's stockholders receive fair
and equal treatment in the event of any proposed takeover of the Company and to
guard against partial tender offers, open market accumulations and other tactics
to gain control of the Company without paying all stockholders a control
premium.
Terms of the Stockholder Rights Plan provide for a dividend distribution of
one right for each share of common stock to holders of record at the close of
business on February 6, 1998. Shareholders will be able to exercise the rights
only in the event, with certain exceptions, an acquiring party accumulates 20
percent or more of the Company's voting stock, or if a party (an acquiring
person) announces an offer to acquire 20 percent or more without prior approval
of the Company's Board of Directors. The rights will expire on January 21, 2008.
Each right initially will entitle the holder to buy one one-thousandth of a
share of a new series of preferred stock at a price of $42.50.
In addition, upon the occurrence of certain events, holders of the rights
will be entitled to purchase either the Company's common stock or shares in an
acquiring person at half of market value. Further, at any time after a person or
group acquires 20 percent or more of the Company's outstanding voting stock, the
board of directors may, at its option, exchange part or all of the rights (other
than rights held by the acquiring person, which will become void) for shares of
the Company's common stock on a one-for-one basis. The rights will therefore
cause substantial dilution to a person or group that acquires 20 percent or more
of the Company's common stock on terms not approved by the board.
(f) Stock arrants - In 2000, the Company entered into a five-year agreement
with an unrelated party, whereby the Company issued warrants to this entity in
exchange for the entity's becoming a premier reference site. As a premier
reference site, the entity would make its facility and personnel reasonably
accessible for InteliData,
<page>
InteliData's potential clients, analysts, and industry publication reporters, in
order to demonstrate or answer questions regarding InteliData's solution and its
capabilities. On June 30, 2000, InteliData issued five-year, fully-vested
warrants to purchase 50,000 shares of InteliData common stock at an exercise
price of $4.75 per share. The fair value of these warrants was recorded to the
statement of operations as of the grant date using the Black-Scholes model. As
of December 31, 2004, all of these warrants were still outstanding. These
warrants expire on June 30, 2005.
(g) Private Placement and Warrants - In November and December 2001, the Company
closed private placement sales of an aggregate of 2,863,000 shares of its common
stock for a price of $2.75 per share, and warrants exercisable for the purchase
of 1,431,364 shares of its common stock, at an exercise price of $2.75 per
share.
During July 2003, the Company issued 1,431,000 shares of its common stock
pursuant to the exercise of warrants, as amended. The warrant exercise resulted
in gross proceeds of approximately $3,335,000. The placement agent in the
transaction received approximately $200,000 in commissions, and exercised the
net issuance provision within their 286,000 warrants and received 23,000 shares
of the Company's common stock. All of the warrants that were issued as part of
the 2001 private placement were exercised fully in 2003.
(8) EMPLOYEE 401(k) PLAN
The Company sponsors a defined contribution plan ("Plan") that qualifies
for tax treatment under Section 401(a) of the Internal Revenue Code.
Participation in the Plan is available to employees who are at least twenty-one
years of age. Company contributions to the Plan are based on a percentage of
employee contributions. The Company contributed $84,000, $86,000, and $118,000
in 2004, 2003, and 2002, respectively. The Company also pays for administrative
expenses incurred by the Plan.
(9) INCOME TAXES
A reconciliation of income taxes computed at the statutory federal tax rate
on loss before income taxes to actual income taxes for the years ended December
31, 2004, 2003 and 2002 is as follows (in thousands):
2004 2003 2002
-------- ------- --------
Income tax benefit computed at the statutory rate $(12,616) $ (635) $ (3,334)
Write-off of goodwill 7,116 - -
Other (71) (408) (1,309)
Change in valuation allowance 5,571 1,043 4,506
-------- ------- --------
Income tax benefit $ -- $ -- $ (137)
======== ======= ========
The 2002 federal income tax benefit of $137,000 represents the recovery
of alternative minimum tax paid in a prior year. The tax effects of temporary
differences that give rise to significant portions of the deferred tax assets
and liabilities at December 31, 2004 and 2003 are as follows (in thousands):
2004 2003
--------- ----------
Net operating loss carryforwards $ 80,413 $ 77,628
Basis differences in intangibles (674) (3,515)
Accounts receivable 81 42
Property and equipment (4) (12)
General business credit carryforward 489 489
Other 354 456
Alternative minimum tax credit carryforward 60 60
--------- ----------
Total gross deferred tax asset 80,719 75,148
Valuation allowance (80,719) (75,148)
--------- ----------
Net deferred tax assets $ -- $ --
========= ==========
The net changes in the total valuation allowance for the years ended
December 31, 2004, 2003, and 2002, were an increase of $5,571,000, $1,043,000,
and $4,506,000, respectively. A valuation allowance was established
<page>
for deferred tax assets as of December 31, 2004 and 2003 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.
As of December 31, 2004, the Company had net operating loss carryforwards
for federal income tax purposes of approximately $212 million, which expire in
2008 through 2024, general business tax credits of approximately $489,000, which
expire in 2005 through 2010, and an alternative minimum tax credit carryforward
of approximately $60,000, which may be carried forward indefinitely and used to
offset future regular taxable income. Approximately $45 million of the net
operating loss were incurred by Home Account prior to its acquisition by the
Company and are subject to an annual limitation pursuant to Internal Revenue
Code Section 382 as a result of cumulative changes in ownership of more than 50%
in 2001.
(10) COMMITMENTS AND CONTINGENCIES
(a) Purchase Obligations - The Company entered into multiple vendor
agreements for outsourced services as part of its ASP solution offering for
certain Online Banking and Payment Solutions clients. Some of these vendor
agreements commit the Company to specified minimum charges during the terms of
the contracts. Management continues to assess the potential for new business
prospects, the possibility of reducing the Company's costs through renegotiation
of existing agreements, and/or exiting the ASP business by referring clients and
prospects to a hosting vendor and providing a license solution and support
services. There can be no assurance that the Company will be successful in
mitigating these factors. In the event that new client revenues do not
materialize, user growth rates from existing clients do not meet expected
projections and/or the Company is not successful in its renegotiation efforts,
the Company may experience future period losses from the Company's ASP business,
which could have a material adverse impact on the Company's financial position,
results of operations, and cash flows. In June 2004, the Company restructured a
vendor agreement and decreased its overall prospective ASP operations costs.
Entering 2005, the projected revenues are estimated to exceed projected costs by
approximately $83,000 on a monthly basis based on the December 2004 results;
this gap will fluctuate based on monthly activity. In accordance with generally
accepted accounting principles, the Company is accounting for the committed
contract costs as they are incurred. Expenses were $2,205,000, $3,158,000, and
$2,832,000 for the years ended December 31, 2004, 2003, and 2002, respectively.
Leases - The Company leases facilities and equipment under cancelable and
noncancelable operating lease agreements. The facility leases have remaining
terms from two to three years. Rent expense was $903,000, $765,000, and
$1,492,000 for the years ended December 31, 2004, 2003, and 2002, respectively.
Future minimum lease payments under noncancelable operating leases with
initial or remaining terms in excess of one year at December 31, 2004, and
future minimum payments under purchase obligations for outsourced services were
as follows (in thousands):
Lease Purchase
Years Ending December 31, Obligations Obligations Total
------------------------- ----------- ----------- ---------
2005 $ 1,145 $ 640 $ 1,785
2006 839 -- 839
2007 -- -- --
2008 -- -- --
2009 and thereafter -- -- --
----------- ----------- ---------
Total minimum lease payments $ 1,984 $ 640 $ 2,624
=========== =========== =========
The future minimum lease obligations do not include $223,000 of expected
receipts from subleases. See Note 2(m) for additional information on the
subleased space.
(b) Patent Matters - The Company does not believe that its products and
services infringe on the rights of third parties. From time to time, third
parties may assert infringement claims against InteliData. There can be no
assurance that any such assertion will not result in costly litigation or
require the Company to cease using, or obtain a license to use, intellectual
property of such parties.
(c) Litigation - The Company is not currently a party to any material
litigation. From time to time, the Company may be a party to routine litigation
incidental to its business. Management does not believe that the
<page>
resolution of any or all of such routine litigation will be likely to have a
material adverse effect on the Company's financial condition or results of
operations.
(11) VALUATION AND QUALIFYING ACCOUNTS
The components of significant valuation and qualifying accounts associated
with accounts receivable for the years ended December 31, 2004 and 2003 were as
follows (in thousands):
Balance, January 1, 2003 $ 321
Recovery (70)
Write-offs (141)
------------
Balance, December 31, 2003 110
Charged to costs and expenses 147
Write-offs (43)
------------
Balance, December 31, 2004 $ 214
============
(12) GOODWILL AND OTHER INTANGIBLES
SFAS No. 141, Business Combinations ("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 No. 142, Goodwill and Other
Intangible Assets ("SFAS 142") requires the use of an amortization and
non-amortization approach to account for intangibles and purchased goodwill.
Under a non-amortization approach, goodwill and indefinite-lived 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 these intangibles is more
than its fair value. These reviews are to be performed at least annually and
tests for impairment between annual tests may be required if events occur or
circumstances change that would more likely than not reduce the fair value of
the net carrying amount. 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 were adopted by the Company on
January 1, 2002. As of January 1, 2002, in accordance with SFAS 142, the Company
ceased recognizing amortization expense on goodwill. The goodwill and intangible
asset (which is subject to amortization) consisted of the following components
as of December 31, (in thousands):
2004 2003
-------- --------
Goodwill $ - $ 25,771
-------- --------
Intangible asset, gross carrying amount $ 7,200 $ 7,200
Accumulated amortization (2,860) (2,140)
-------- --------
Net intangible asset $ 4,340 $ 5,060
======== ========
The Company's intangible asset consists of $7,200,000 related to
contracts/relationships, which has an estimated useful life of ten years.
Contracts/relationships was determined based on the history of low attrition,
the high cost of switching, market prices, forecasted revenues, evaluation of
competitors, and other factors. The estimated aggregate amortization expense
related to the contracts/relationships intangible asset for each of the next
five years is as follows (in thousands):
Year ending December 31: Expense
---------
2005 $ 720
2006 720
2007 720
2008 720
2009 720
<page>
As the Company disclosed in the first quarter of 2004, the annual
impairment testing date is as of June 30th. As of March 31, 2004, the Company
was not aware of events or circumstances that could indicate impairment of
goodwill and its market capitalization indicated a fair value substantially in
excess of the Company's carrying amount, including goodwill. During the second
quarter of 2004, the Company experienced unanticipated business challenges, as
customer decisions on acquiring InteliData's products and services were not
completed for a variety of reasons (e.g., merger and acquisition activities that
shift priorities, merger and acquisition activities that reduce the number of
prospects, and the timing of requests for proposals and decision making
processes). Additionally, competition in the marketplace increased pricing
pressures (e.g., a competitor lowered pricing for some customers to prevent
attrition). These marketplace challenges led the Company to reevaluate the
financial projections and related cash flows for the next three years and to
reconsider longer-term estimates. In addition, the Company noted a sharp
reduction in its market capitalization subsequent to the first quarter of 2004,
which reflected its marketplace challenges and corroborated its revised
financial projections discussed above.
As of June 30, 2004, the Company performed the required annual impairment
testing for goodwill in accordance with SFAS 142. These reviews utilized the
same approaches and similar considerations as previous tests. The goodwill
impairment test, performed at the reporting unit level, is a two-step analysis.
First, the fair value of the reporting unit was compared to its carrying amount,
including goodwill. Fair value was determined using generally accepted valuation
methodologies (i.e., discounted cash flow model, guideline company method, and
similar transactions method). That is, the Company assessed the fair value of
its only reporting unit by considering its projected cash flows, comparable
company valuations, and recent purchase prices paid for entities within its
industry. As the fair value of the reporting unit was less than its carrying
amount, the Company compared the implied fair value of reporting unit goodwill
with the carrying amount of that goodwill to measure the amount of impairment
loss. Accordingly, the Company performed a hypothetical purchase price
allocation based on the reporting unit's fair value to determine the fair value
of the reporting unit's goodwill in order to measure the goodwill impairment
charge. This hypothetical purchase price allocation required the evaluation of
the fair values of unrecorded assets, such developed technologies, customer
relationships and deferred tax assets, in addition to the fair values of
recorded net assets. The Company used accepted valuation methodologies to value
these assets, including but not limited to, the replacement cost approach and
relief from royalty approach (i.e., what the Company would have to pay for the
use of its technologies in a hypothetical licensing or royalty arrangement).
Consideration was given to the unrecorded net assets only for the purpose of
measuring the amount of goodwill impairment loss. Accordingly, the Company did
not record such net assets on the balance sheet.
Given consideration of these factors and the Company's declining market
capitalization, the Company recorded a goodwill impairment charge in the amount
of $25,771,000 in the second quarter of 2004. The analysis discussed above
clearly indicated that the goodwill balance was fully impaired. As discussed
above, the analysis required the Company to make estimates of projected cash
flows in order to determine if its assets are impaired. The Company made
significant assumptions and estimates in this process regarding matters that are
inherently uncertain, such as forecasting revenue and cost projections,
calculating remaining useful lives, assuming discount rates and costs of
capital, among others. Management believes that the judgments, estimates and
assumptions used are reasonable and supportable.
(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 was payable in the form of InteliData
common stock and such payments were made by the group of former Home Account
preferred stockholders (who are collectively considered one "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. 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
<page>
difference between this amount and the recognized expense in the prior periods
was recorded as an $183,000 reduction of expense during 2002.
(14) UNAUDITED QUARTERLY FINANCIAL DATA
The unaudited quarterly financial data includes restated quarterly
financial information for the years ended December 31, 2004 and 2003, which were
restated to correct errors related to the accounting for certain transactions as
discussed in Note 2(n) to the consolidated financial statements. The results of
the Company's quarterly operations for the years ended December 31, 2004 and
2003 are set forth in the following table (in thousands, except per share data):
First Second Third Fourth Year
----------
Fiscal Year 2004 (as restated)
Revenues $ 3,592 $ 3,746 $ 3,604 $ 2,800 $ 13,742
Cost of revenues 1,780 1,775 1,439 1,324 6,318
Operating expenses 3,351 3,565 3,573 4,404 14,893
Goodwill impairment charge -- 25,771 (C) -- -- 25,771
Operating loss (1,539) (27,365) (1,408) (2,928) (33,240)
Other income (expense), net 6 2 (12) 9 5
Provision (benefit) for income taxes - - - - -
Net loss $ (1,533) $ (27,363) $ (1,420) $ (2,919) $ (33,235)
Basic and diluted earnings (loss)
per common share $ (0.03) $ (0.53) $ (0.03) $ (0.06) $ (0.65)
Basic and diluted weighted-average
common shares outstanding 51,127 51,159 51,179 51,237 51,271
Fiscal Year 2004 (as previously reported)
Revenues $ 3,592 $ 3,746 $ 3,604
Cost of revenues 1,780 1,775 1,439
Operating expenses 3,352 3,614 3,578
Goodwill impairment charge -- 26,238 (C) --
Operating loss (1,540) (27,881) (1,413)
Other income (expense), net 44 40 25
Provision (benefit) for income taxes - - -
Net loss $ (1,496) $ (27,841) $ (1,388)
Basic and diluted earnings (loss)
per common share $ (0.03) $ (0.54) $ 0.03)
Basic and diluted weighted-average
common shares outstanding 51,127 51,159 51,179
First Second Third Fourth Year
Fiscal Year 2003 (as restated)
Revenues $ 5,625 $ 5,951 $ 4,692 $ 4,362 $ 20,630
Cost of revenues 1,934 1,948 1,858 1,809 7,549
Operating expenses 3,630(A) 4,010 3,397 3,737 14,774(B)
Operating loss 61 (7) (563) (1,184) (1,693)
Other income (expense), net (29) 12 16 22 21
Provision (benefit) for income taxes - - - - -
Net income (loss) $ 32 $ 5 $ (547) $ (1,162) $
(1,672)
Basic and diluted earnings (loss)
per common share $ 0.00 $ 0.00 $ (0.01) $ (0.02) $
(0.03)
Basic and diluted weighted-average
common shares outstanding 48,853 49,002 50,864 51,078 50,028
Fiscal Year 2003 (as previously reported)
Revenues $ 5,625 $ 5,951 $ 4,692 $ 4,362 $ 20,630
Cost of revenues 1,934 1,948 1,858 1,809 7,549
Operating expenses 3,809(A) 4,026 3,417 3,894 15,146(B)
Operating loss (118) (23) (583) (1,341) (2,065)
Other income (expense), net (29) 12 16 180 179
Provision (benefit) for income taxes - - - (288) (288)
Net loss $ (147) $ (11) $ (567) $ (873) $ (1,598)
Basic and diluted earnings (loss)
per common share $ (0.00) $ (0.00) $ (0.01) $ (0.02) (0.03)
Basic and diluted weighted-average
common shares outstanding 48,853 49,002 50,864 51,078 50,028
(A) Operating expenses reflect a reversal of approximately $630,000 in
estimated bonus accruals that were not paid, but were previously
provided for in 2002.
(B) The Company did not accrue for bonuses in fiscal year 2003 as none was
paid.
(C) During the fiscal year ended December 31, 2004, the Company recorded a
goodwill impairment charge. See Note 2 and 12 to the consolidated
financial statements for more details.
* * * * * *
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
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, 2004 and 2003, 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, 2004. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on the financial statements based on our
audits.
We conducted our audits in accordance with the standards of the Public
Company Accounting Oversight Board (United States). 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, 2004 and 2003, and the results
of their operations and their cash flows for each of the three years in the
period ended December 31, 2004, in conformity with accounting principles
generally accepted in the United States of America.
The accompanying consolidated financial statements for the year ended
December 31, 2004 have been prepared assuming that the Company will continue as
a going concern. As discussed in Note 2(o) to the consolidated financial
statements, the Company has recurring losses from operations and is experiencing
difficulty in generating cash flow to meet its obligations and sustain its
operations which raises substantial doubt about its ability to continue as a
going concern. Management's plans concerning these matters are also described in
Note 2(o). The consolidated financial statements do not include any adjustments
that might result from the outcome of this uncertainty.
As discussed in Note 2(n), the accompanying 2003 and 2002 consolidated
financial statements have been restated.
/s/ Deloitte & Touche LLP
McLean, Virginia
March 31, 2005
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
(a) EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
The Company maintains a set of disclosure controls and procedures, as
defined under Rule 13a-15(e) under the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), that are designed to ensure that information
required to be disclosed by the Company in the reports that the Company files or
submits under the Exchange Act is recorded, processed, summarized and reported,
within the time periods specified in the SEC's rules and forms, and that such
information is accumulated and communicated to the Company's management,
including the Company's Chief Executive Officer and Chief Financial Officer, as
appropriate, to allow timely decisions regarding required disclosure. Pursuant
to Exchange Act Rule 13a-15(b), the Company carried out an evaluation, under the
supervision and with the participation of the Company's management, including
the Company's Chief Executive Officer and Chief Financial Officer, of the
effectiveness of the design and operation of the Company's disclosure controls
and procedures as of December 31, 2004, the end of the period covered by this
report. Based upon that evaluation, the Company's Chief Executive Officer and
Chief Financial Officer concluded that the Company's disclosure controls and
procedures were not effective as of December 31, 2004 for the reasons discussed
below related to the material weaknesses in the Company's internal control over
financial reporting. To address the control weaknesses described below, the
Company performed additional analysis and other post-closing procedures to
ensure that the accompanying financial statements fairly present in all material
respects the financial condition and results of operations of the Company for
the fiscal years presented in this Annual Report on Form 10-K.
(b) MANAGEMENT'S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Management is responsible for establishing and maintaining adequate
internal control over financial reporting, as defined in Exchange Act Rule
13a-15(f). Under the supervision and with the participation of the Company's
management, the Company is assessing the effectiveness of its internal control
over financial reporting as of December 31, 2004, based on the framework in the
"Internal Control - Integrated Framework" issued by the Committee of Sponsoring
Organizations of the Treadway Commission; however, such evaluation has not yet
been completed. The SEC's exemptive order, dated November 30, 2004 (SEC Release
No. 34-50754) provides up to 45 additional days beyond the due date of the
Annual Report on Form 10-K to complete the assessment of the effectiveness of
internal control over financial reporting and to file management's report on
internal control over financial reporting required by Item 308(a) of Regulation
S-K and the related attestation report of the independent registered public
accounting firm, as required by Item 308(b) of Regulation S-K. The Company
believes that management's report on internal control over financial reporting
as of December 31, 2004, will be filed in the time period permitted by the SEC's
exemptive order. The Company has dedicated internal resources, engaged outside
consultants and adopted a detailed work plan so that it may complete its
internal control over financial reporting assessment to include this information
in its Annual Report on Form 10-K within the timeframe specified by the SEC's
exemptive order. As a result of the material weaknesses discussed below,
however, the Company expects that such report when filed will conclude that the
Company's internal control over financial reporting was not effective as of
December 31, 2004.
Under Public Company Accounting Oversight Board ("PCAOB") Auditing
Standard No. 2, a material weakness in internal control over financial reporting
is a control deficiency, or combination of control deficiencies, that results in
there being more than a remote likelihood that a material misstatement of the
annual or interim financial statements will not be prevented or detected. PCAOB
Auditing Standard No. 2 identifies a number of circumstances that, because of
their likely significant negative effect on internal control over financial
reporting, are to be regarded as at least significant deficiencies as well as
strong indicators that a material weakness exists; including the restatement of
previously issued financial statements to reflect the correction of a
misstatement. Management has concluded, based on PCAOB Auditing Standard No. 2,
that the following material weaknesses exist as of December 31, 2004:
o insufficient controls over the determination and application of
generally accepted accounting principles with respect to the
accounting for lease transactions and warrants issued to purchase
the Company's common stock;
o insufficient personnel resources and technical accounting
expertise within the accounting function to resolve non-routine or
complex accounting matters; and
o insufficient controls over and review of the quarterly and
year-end financial statements close and reporting process.
These material weaknesses affected several financial statement accounts
and resulted in a restatement of previously issued financial statements as
discussed in Note 2(n) to the consolidated financial statements and Item 6 -
Selected Financial Data.
As noted above, the Company is currently undergoing a comprehensive
effort to complete its assessment for compliance with Section 404 of the
Sarbanes-Oxley Act of 2002. There can be no assurance that as a result of the
ongoing evaluation of internal control over financial reporting, additional
material weaknesses will not be identified or that any significant deficiencies
or deficiencies identified, either alone or in combination with others, will not
be considered a material weakness.
Deloitte & Touche LLP, the Company's independent registered public
accounting firm, has not yet completed its audit of the effectiveness of
internal control over financial reporting. As a result of the material
weaknesses discussed above, the Company expects that Deloitte & Touche LLP will
issue an adverse opinion with respect to the effectiveness of the Company's
internal control over financial reporting as of December 31, 2004.
(c) CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING
During the most recent fiscal quarter, except for the changes discussed
above, there has been no change in the Company's internal control over financial
reporting (as defined in Rule 13a-15(f) under the Exchange Act) that has
materially affected, or is reasonably likely to materially affect, its internal
control over financial reporting. As described in (b) above, the Company has
restated its consolidated financial statements for the years ended December 31,
2003 and 2002 and intends to address any significant deficiencies or material
weaknesses identified as a result of its ongoing assessment.
ITEM 9B. OTHER INFORMATION
As noted in Item 9A of this Annual Report on Form 10-K, in connection
with the Company's assessment of its internal controls over financial reporting,
management reviewed, among other things, the Company's accounting practices for
a lease restructuring, deferred rent liabilities, lease purchase accounting,
warrant to issue Company stock, and an income tax contingency. Based on this
assessment, the Company has restated its consolidated financial statements for
the years ended December 31, 2003 and 2002 to adjust the accounting for these
items. For more information regarding the restatement, see "Management's
Discussion and Analysis of Financial Condition and Results of Operations --
Restatement of Consolidated Financial Statements" and in Note 2(n) and Note 14
to the consolidated financial statements.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Directors and Executive Officers - The Company incorporates herein by
reference the information concerning directors and executive officers contained
in its Proxy Statement for its 2005 Stockholders' Meeting to be filed within 120
days after the end of the Company's fiscal year (the "2005 Proxy Statement").
Section 16(a) Beneficial Ownership Reporting Compliance - The Company
incorporates herein by reference the information concerning Section 16(a)
beneficial ownership reporting compliance contained in its 2005 Proxy Statement.
Code of Ethics - The Company incorporates herein by reference the
information concerning its code of ethics contained in its 2005 Proxy Statement.
ITEM 11. EXECUTIVE COMPENSATION
The Company incorporates herein by reference the information concerning
executive officer and director compensation contained in the 2005 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
2005 Proxy Statement.
SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS
Number of Weighted Number of
Securities to average securities
be issued upon exercise remaining
exercise of price of available
outstanding outstanding for future
options options, issuance
warrants and warrants and
rights rights
Equity compensation plans
approved by stockholders 1,882,000 $ 2.32 888,762
Equity compensation plans
not approved by stockhold 1,250,000 $ 1.36 -
Total 3,132,000 $ 1.93 888,762
66
The equity compensation plans not approved by stockholders consists of
warrants that are described in Note 7 to the consolidated financial statements
included in this Annual Report on Form 10-K and the 1998 Chief Executive
Officer's Plan.
The 1998 Chief Executive Officer's Plan (the "Plan") was adopted to
induce Alfred S. Dominick, Jr. to become the Company's Chief Executive Officer
in August 1998. The Plan provided for the grant of an option to purchase
1,200,000 shares of the Company's common stock at an exercise price of $1.22. Of
the option grant, 200,000 vested in one-third increments over a three-year
period from August 1998 to August 2001. Another 500,000 vested based on the
achievement of specified trading prices for the Company's common stock. The
remaining 500,000 will vest subject to Mr. Dominick's continued employment and
upon the earlier of i) the Company's common stock trading above $25.00 per share
for sixty consecutive days, or ii) April 15, 2008.
Additionally, the Company has no i) individual options, rights or
warrants assumed in any merger, acquisition or consolidation transaction; ii)
securities available for future issuance under a compensation plan other than
upon exercise of options, rights or warrants; and iii) equity compensation plan
that contains a formula for calculating the number of securities available for
issuance under the plan.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Company incorporates herein by reference the information concerning
certain relationships and related transactions contained in the 2005 Proxy
Statement.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
The Company incorporates herein by reference the information concerning
principal accounting fees and services and the audit committee's pre-approval
policies and procedures contained in the 2005 Proxy Statement.
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) DOCUMENTS FILED AS PART OF THIS REPORT
1. FINANCIAL STATEMENTS - See Item 8 of this Report
2. FINANCIAL STATEMENT SCHEDULES - None
3. EXHIBITS
(b) EXHIBITS
Exhibit No. Description
3.1 Amended and Restated Certificate of Incorporation, dated June
14, 2002 (Incorporated herein by reference to Exhibit 3.1 to
the Company's Report on Form 10-Q for the quarter ended June
30, 2002).
3.2 Bylaws of InteliData Technologies Corporation. (Incorporated
herein by reference to Appendix V to the Joint Proxy Statement
/Prospectus included in the Registration Statement on Form S-4
filed with the Commission on August 29, 1996, as amended, File
Number 333-11081).
4.1 Rights Agreement, dated as of January 21, 1998, by and between
the Company and American Stock Transfer & Trust Company, as
Rights Agent. (Incorporated herein by reference to the
Registration Statement on Form 8-A filed with the Commission on
January 26, 1998).
4.1.1 Amendment No. 1 dated May 24, 2000 to the Rights Agreement,
dated as of January 21, 1998, by and between the Company and
American Stock Transfer & Trust Company, as Rights Agent.
(Incorporated herein by reference to the Current Report on Form
8-A/A filed with the Commission on July 6, 2000).
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
fficer's Plan. (Incorporated herein by reference to Exhibit
10 to the Company's Report on Form 10-K for the year ended
December 31, 1999).
10.5.2 First Amendment to Employment Agreement between InteliData
Technologies Corporation and Alfred S. Dominick, Jr., dated April
5, 2002 (Incorporated herein by reference to Exhibit 10.5.2 to
the Company's Report on Form 10-Q for the quarter ended June 30,
2002).
10.5.3 Second Amendment to Employment Agreement between InteliData
Technologies Corporation and Alfred S. Dominick, Jr., dated
January 14, 2003 (Incorporated herein by reference to Exhibit
10.5.3 to the Company's Report on Form 10-K for the year ended
December 31, 2002).
10.5.4 Third Amendment to Employment Agreement between InteliData
Technologies Corporation and Alfred S. Dominick, Jr., dated April
2, 2003. (Incorporated herein by reference to Exhibit 10.5.4 to
the Company's Report on Form 10-Q for the quarter ended March 31,
2003).
10.5.5 Amended and Restated Change In Control Severance Agreement
between InteliData Technologies Corporation and Alfred S.
Dominick, Jr., dated February 3, 2003. (Incorporated herein by
reference to Exhibit 10.5.5 to the Company's Report on Form 10-K
for the year ended December 31, 2003).
10.5.6 Fourth Amendment to Employment Agreement between InteliData
Technologies Corporation and Alfred S. Dominick, Jr., dated
January 5, 2004. (Incorporated herein by reference to Exhibit
10.5.5 to the Company's Report on Form 10-Q for the quarter ended
March 31, 2004).
* 10.5.7 Fifth Amendment to Employment Agreement between InteliData
Technologies Corporation and Alfred S. Dominick, Jr., dated March
10, 2005.
10.6 Employment and Non-Competition Agreement dated December 17, 1997
between InteliData Technologies Corporation and Albert N.
Wergley. (Incorporated herein by reference to Exhibit 10 to the
Company's Report on Form 10-K for the year ended December 31,
1997).
10.6.1 Amendment to the Employment and Non-Competition Agreement
between InteliData Technologies Corporation and Albert N.
Wergley, dated June 14, 1999. (Incorporated herein by reference
to Exhibit 10 to the Company's Report on Form 10-K for the year
ended December 31, 1999).
10.6.2 Amended and Restated Change In Control Severance Agreement
between InteliData Technologies Corporation and Albert N.
Wergley, dated February 3, 2003. (Incorporated herein by
reference to Exhibit 10.6.2 to the Company's Report on Form 10-K
for the year ended December 31, 2003).
* 10.6.3 Separation Agreement and General Release between
InteliData Technologies Corporation and Albert N. Wergley, dated
November 2, 2004.
10.7 Employment and Non-Competition Agreement between InteliData
Technologies Corporation and Michael E. Jennings, dated June 14,
2000. (Incorporated herein by reference to Exhibit 10 to the
Company's Report on Form 10-Q for the quarter ended September 30,
2000).
10.7.1 Amended and Restated Change In Control Severance Agreement
between InteliData Technologies Corporation and Michael E.
Jennings, dated February 3, 2003. (Incorporated herein by
reference to Exhibit 10.7.1 to the Company's Report on Form 10-K
for the year ended December 31, 2003).
10.7.2 Separation Agreement between InteliData Technologies
Corporation and Michael E. Jennings, dated August 16, 2004.
(Incorporated herein by reference to Exhibit 10.1 to the
Company's Report on Form 10-Q for the quarter ended September 30,
2004).
10.7.3 Consultant Agreement between InteliData Technologies
Corporation and Michael E. Jennings, dated August 16, 2004.
(Incorporated herein by reference to Exhibit 10.2 to the
Company's Report on Form 10-Q for the quarter ended September 30,
2004).
10.8 Employment and Non-Competition Agreement between InteliData
Technologies Corporation and John R. Polchin, dated April 8,
2002. (Incorporated herein by reference to Exhibit 3.1 to the
Company's Report on Form 10-Q for the quarter ended June 30,
2002).
10.8.1 Amended and Restated Change In Control Severance Agreement
between InteliData Technologies Corporation and John R. Polchin,
dated February 3, 2003. (Incorporated herein by reference to
Exhibit 10.8.1 to the Company's Report on Form 10-K for the year
ended December 31, 2003).
10.9 Employment and Non-Competition Agreement between InteliData
Technologies Corporation and Karen Kracher, dated August 16,
2004. (Incorporated herein by reference to Exhibit 10.3 to the
Company's Report on Form 10-Q for the quarter ended September 30,
2004).
* 10.10 Letter of Employment Offer from InteliData Technologies
Corporation to Monique Marcus dated September 24, 2004, as
amended.
*10.10.1 2004 Change of Control Agreement between InteliData
Technologies Corporation and Monique L. Marcus, dated December
15, 2004.
*10.10.2 2005 Change of Control Agreement between InteliData
Technologies Corporation and Monique L. Marcus, dated January 3,
2005.
* 10.11 Director Compensation Arrangements.
* 21.1 InteliData Technologies Corporation List of Significant
Subsidiaries.
* 23.1 Consent of Independent Registered Public Accounting Firm.
* 31 Certification of Principal Executive Officer and Principal
Financial Officer pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.
* 32 Certification of Principal Executive Officer and Principal
Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
------------- * Filed herewith.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
INTELIDATA TECHNOLOGIES CORPORATION
By: /s/ Alfred S. Dominick, Jr.
Alfred S. Dominick, Jr.
Chairman, Chief Executive Officer, and
Acting Chief Financial Officer
(Principal Executive Officer and Principal
Financial Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Signature Title Date
/s/ Alfred S. Dominick, Jr. Chairman, Chief Executive Officer, March 31, 2005
Alfred S. Dominick, Jr. and Acting Chief Financial Officer
/s/ Karen Kracher President and Chief Sales and March 31, 2005
Karen Kracher Marketing Officer
/s/ Monique L. Marcus Vice President, Finance and Treasurer March 31, 2005
Monique L. Marcus (Principal Accounting Officer)
/s/ Neal F. Finnegan Director March 31, 2005
Neal F. Finnegan
/s/ Patrick F. Graham Director March 31, 2005
Patrick F. Graham
/s/ Michael E. Jennings Director March 31, 2005
Michael E. Jennings
/s/ L. William Seidman Director March 31, 2005
L. William Seidman
/s/ Norman J. Tice Director March 31, 2005
Norman J. Tice