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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
------------------------------------------------------------------
For the Quarterly Period Ended: Commission File Number
June 30, 2005 000-21685
INTELIDATA TECHNOLOGIES CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 54-1820617
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
11600 Sunrise Valley Drive, Suite 440, Reston, VA 20191
(Address of principal executive offices) (Zip Code)
(703) 259-3000
(Registrant's telephone number, including area code)
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 whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes X No
---------- --------
The number of shares of the registrant's Common Stock outstanding on July 31,
2005 was 51,128,492.
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INTELIDATA TECHNOLOGIES CORPORATION
QUARTERLY REPORT ON FORM 10-Q
TABLE OF CONTENTS
Page
----
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets
June 30, 2005 and December 31, 2004 ................................ 3
Condensed Consolidated Statements of Operations
Three and Six Months Ended June 30, 2005 and 2004 (as restated) .... 4
Condensed Consolidated Statement of Changes in Stockholders' Equity
Six Months Ended June 30, 2005...................................... 5
Condensed Consolidated Statements of Cash Flows
Six Months Ended June 30, 2005 and 2004 (as restated).............. 6
Notes to Condensed Consolidated Financial Statements .............. 7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations ......................................... 16
Item 3. Quantitative and Qualitative Disclosures About Market Risk ........ 30
Item 4. Controls and Procedures ........................................... 30
PART II - OTHER INFORMATION
Item 5. Other Information................................................. 31
Item 6. Exhibits.......................................................... 31
SIGNATURE ........................................................... 32
PART I: FINANCIAL INFORMATION
- ----------------------------------
ITEM 1. FINANCIAL STATEMENTS
- ---------------------------------
INTELIDATA TECHNOLOGIES CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
JUNE 30, 2005 AND DECEMBER 31, 2004
(in thousands, except share data; unaudited)
June 30, December 31,
2005 2004
------------- -------------
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 733 $ 3,223
Accounts receivable, net 2,114 1,437
Other receivables 11 16
Prepaid expenses and other current assets 235 545
------------ -------------
Total current assets 3,093 5,221
NONCURRENT ASSETS
Property and equipment, net 594 833
Intangible asset, net 3,980 4,340
Other assets 211 211
------------ -------------
TOTAL ASSETS $ 7,878 $ 10,605
============ =============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 2,443 $ 1,003
Accrued expenses 1,594 2,223
Deferred revenues 1,247 1,269
Liabilities of discontinued operations -- 40
------------- ------------
TOTAL CURRENT LIABILITIES 5,284 4,535
Accrued expenses 106 225
Deferred revenues 75 150
------------ -------------
TOTAL LIABILITIES 5,465 4,910
------------ -------------
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 52,164,000 shares in 2005 and 52,169,000 shares in 2004;
outstanding 51,129,000 shares in 2005 and 51,134,000 shares in 2004 52 52
Additional paid-in capital 307,017 307,020
Treasury stock, at cost: 1,035,000 shares in 2005 and 2004 (2,648) (2,648)
Deferred compensation (9) (23)
Accumulated deficit (301,999) (298,706)
------------ -------------
TOTAL STOCKHOLDERS' EQUITY 2,413 5,695
------------ -------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 7,878 $ 10,605
============ =============
See accompanying notes to condensed consolidated financial statements.
INTELIDATA TECHNOLOGIES CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
THREE AND SIX MONTHS ENDED JUNE 30, 2005 AND 2004
(in thousands, except per share data; unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
----------------------------- ----------------------------
2005 2004 2005 2004
----------- ----------- ----------- -----------
(as restated) (as restated)
(see Note 2(g)) (see Note 2(g))
Revenues
Software license $ 30 $ -- $ 228 $ --
Consulting services 353 447 709 863
Use-based 1,366 2,749 3,168 5,447
Maintenance 624 550 1,212 1,028
Other 18 -- 18 --
----------- ----------- ----------- -----------
Total revenues 2,391 3,746 5,335 7,338
----------- ----------- ----------- -----------
Cost of revenues
Consulting services, recurring and termination fees 955 1,775 2,212 3,555
----------- ----------- ----------- -----------
Total cost of revenues 955 1,775 2,212 3,555
----------- ----------- ----------- -----------
Gross profit 1,436 1,971 3,123 3,783
Operating expenses
General and administrative 1,634 1,888 3,756 3,458
Sales and marketing 53 377 112 672
Research and development 933 1,120 2,175 2,426
Amortization of intangible asset 180 180 360 360
Goodwill impairment charge -- 25,771 -- 25,771
----------- ----------- ----------- -----------
Total operating expenses 2,800 29,336 6,403 32,687
----------- ----------- ----------- -----------
Operating loss (1,364) (27,365) (3,280) (28,904)
Other income (expenses), net (9) 2 (13) 8
----------- ----------- ----------- -----------
Loss before income taxes (1,373) (27,363) (3,293) (28,896)
Provision for income taxes -- -- -- --
----------- ----------- ----------- -----------
Net loss $ (1,373) $ (27,363) $ (3,293) $ (28,896)
=========== =========== =========== ===========
Basic and diluted earnings (loss) per common share $ (0.03) $ (0.53) $ (0.06) $ (0.56)
=========== =========== =========== ===========
Basic and diluted weighted-average
common shares outstanding 51,083 51,159 51,084 51,168
=========== =========== =========== ===========
See accompanying notes to condensed consolidated financial statements.
INTELIDATA TECHNOLOGIES CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
SIX MONTHS ENDED JUNE 30, 2005
(in thousands; unaudited)
<table>
Common Stock Additional
-------------------- Paid-in Treasury Deferred Accumulated Comprehensive
Shares Amount Capital Stock Compensation Deficit Loss Total
---------------------------------------------------------------------------------------------
Balance at January 1, 2005 52,169 $ 52 $ 307,020 $ (2,648) $ (23) $ (298,706) $ 5,695
Cancellation of restricted stock (5) - (3) - 3 - -
Amortization of deferred compensation - - - - 11 - 11
Net loss - - - - - (3,293) $ (3,293) (3,293)
---------
Comprehensive loss $ (3,293)
------------------------------------------------------------------------- ========== -------
Balance at June 30, 2005 52,164 $ 52 $ 307,017 $ 2,648) $ (9) $ (301,999) $ 2,413
========================================================================= =======
</table>
See accompanying notes to condensed consolidated financial statements.
INTELIDATA TECHNOLOGIES CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, 2005 AND 2004
(in thousands; unaudited)
<table>
Six months ended June 30,
----------------------------------
2005 2004
----------- ----------
(as restated)
(see Note 2(g))
Cash flows from operating activities
Net loss $ (3,293) $ (28,896)
Adjustments to reconcile net loss to net cash used
in operating activities of continuing operations:
Goodwill impairment charge -- 25,771
Amortization of intangible asset 360 360
Depreciation and amortization 242 349
Deferred compensation expense 11 34
Net gain on disposal of property and equipment (19) --
Changes in certain assets and liabilities:
Accounts receivable (677) 47
Prepaid expenses and other current assets 315 312
Accounts payable 1,440 (8)
Accrued expenses and accrued rent (748) (298)
Deferred revenue (97) 22
----------- ----------
Net cash used in operating activities of
continuing operations (2,466) (2,307)
----------- ----------
Cash released from escrow account -- 224
Payments related to discontinued operations (40) (145)
----------- ----------
Net cash (used in) provided by discontinued operations (40) 79
----------- ----------
Net cash used in operating activities (2,506) (2,228)
----------- ----------
Cash flows from investing activities
Proceeds from sale of property and equipment 20 --
Purchases of property and equipment (4) (47)
----------- ----------
Net cash provided by (used in) investing activities 16 (47)
----------- ----------
Cash flows from financing activities
Proceeds from issuance of common stock -- 51
Payments to acquire treasury stock -- (2)
------------ ----------
Net cash provided by financing activities -- 49
------------ ----------
Decrease in cash and cash equivalents (2,490) (2,226)
Cash and cash equivalents, beginning of period 3,223 7,603
----------- ----------
Cash and cash equivalents, end of period $ 733 $ 5,377
=========== ==========
</Table>
See accompanying notes to condensed consolidated financial statements.
INTELIDATA TECHNOLOGIES CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SIX MONTHS ENDED JUNE 30, 2005 AND 2004 (AS RESTATED)
(Unaudited)
(1) Basis of Presentation
The condensed consolidated balance sheet of InteliData Technologies
Corporation ("InteliData" or the "Company") as of June 30, 2005, the related
condensed consolidated statements of operations and cash flows for the six-month
periods ended June 30, 2005 and 2004, and the related condensed consolidated
statement of changes in stockholders' equity for the six-month period ended June
30, 2005 presented in this Form 10-Q are unaudited. In the opinion of
management, all adjustments necessary for a fair presentation of such financial
statements have been included. Such adjustments consist only of normal recurring
items, except certain non-recurring adjustments discussed herein. The condensed
consolidated balance sheet as of December 31, 2004 was derived from the
Company's audited December 31, 2004 balance sheet. Interim results are not
necessarily indicative of results for a full year.
The condensed consolidated financial statements and notes are presented as
required by Form 10-Q, and do not contain certain information included in the
Company's annual audited financial statements and notes. These financial
statements should be read in conjunction with the annual audited financial
statements of the Company and the notes thereto, as contained in the Form 10-K,
as amended, for the fiscal year ended December 31, 2004.
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. In exchange for all the
outstanding shares of Company common stock, Corillian will issue approximately
4,918,000 shares of Corillian common stock and will pay approximately $4,330,000
in cash, 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 approximately 0.0956 shares of Corillian's common stock and $0.0841
in cash without interest. The closing of this transaction is subject to, among
other things, the approval of the Company's stockholders. The Company's
stockholders meeting is scheduled for August 18, 2005 and the closing of the
transaction is anticipated to occur shortly thereafter. However, there can be no
assurances that the acquisition will be completed or as to the timing thereof.
As part of this proposed transaction, Wachovia Securities, the Company's
investment banking advisor, issued a fairness opinion on March 31, 2005. In
accordance with the engagement letter between Wachovia and the Company, Wachovia
assessed the Company $250,000 for this opinion and the Company accrued for this
fee as of March 31, 2005. In addition, the Company incurred $292,000 in
additional legal and accounting expenses related to the proposed transaction and
other matters.
(2) Summary of Significant Accounting Policies
(a) Principles of Consolidation - The condensed consolidated financial
statements include the accounts of the Company and its wholly owned subsidiaries
after elimination of all inter-company balances and transactions.
(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, valuation of intangible assets which include goodwill, costs of
environmental remediation for real property previously sold, allowance for
doubtful accounts, depreciation of fixed assets, receivable/provision for
discontinued operations, legal matters 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 financial institutions ("FI's"). The Company's revenues
associated with integrated solutions that bundle software products
<page>
with customization, installation and training services are recognized using the
percentage of completion method of accounting based on costs 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) Recent Accounting Pronouncements - 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 annual reporting period that begins after June 15, 2005. The
Company has not calculated the financial impact of adopting this standard.
(e) Valuation of Long-Lived Assets -The Company reviews its long-lived assets
such as property, plant and equipment and identifiable intangibles with finite
useful lives for impairment whenever events or changes in circumstances indicate
that the carrying amount may not be recoverable. If the total of the expected
undiscounted future cash flows is less than the carrying amount of the asset, a
loss, if any, is recognized for the difference between the fair value and
carrying value of the asset. Impairment analyses, when performed, are based on
the Company's current business and technology strategy, views of growth rates
for the business, anticipated future economic conditions, expected technological
availability and potential sale transactions.
<page>
(f) Goodwill and Intangible Asset - 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,
(in thousands) as of:
June 30, 2005 December 31, 2004
------------- -----------------
Goodwill $ - $ -
============= =================
Intangible asset, gross carrying amount $ 7,200 $ 7,200
Accumulated amortization (3,220) (2,860)
------------- -----------------
Net intangible asset $ 3,980 $ 4,340
============= =================
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.
<page>
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.
(g) Restatement of Condensed Consolidated Financial Statements - Subsequent to
the issuance of the condensed consolidated financial statements for the
six-months ended June 30, 2004, the Company determined that the previous
condensed consolidated financial statements required restatement to correct
errors related to a lease restructuring, deferred rent liabilities, lease
purchase accounting and a warrant to issue Company stock 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. 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 have been accreted
over the lease term. The impact of these changes was to increase the operating
expenses by $2,000 and $4,000 for the three-month and six-month periods ended
June 30, 2004, respectively.
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"). Accordingly, 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
recordation of a deferred rent liability for all periods presented due to
scheduled rent increases in the leases. 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
increase the operating expenses by $10,000 and $16,000 for the three-month and
six-month periods ended June 30, 2004, respectively.
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 and reversed part of this liability, as adjusted, 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, Recognition of Liabilities in Connection with a Purchase Business
Combination ("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 reasonably assured.
The impact of these changes was to increase operating expenses (for rent
accretion expense) by $13,000 and $24,000 for the three-month and six-month
periods ended June 30, 2004, and to decrease other income by $38,000 and $76,000
for the three-month and six-month periods ended June 30, 2004, respectively.
Additionally, as discussed in Note 2(f), the goodwill impairment charge for
the second quarter of 2004 was $25,771,000. This represented a $467,000 change
from the previously reported impairment charge of $26,238,000.
<page>
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. 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, and other accounting literature.
The Company should have recognized the full value of the warrant in the
statement of operations on the grant date. 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 operating expenses by $20,000 and $40,000 for the three-month and
six-month periods ended June 30, 2004, respectively.
The combined effect of these changes resulted in a decrease to net loss of
$478,000 and $441,000 for the three-month and six-month periods ended June 30,
2004. The following is a summary of the significant effects of the restatement
on our consolidated statements of operations for the three-month and six-month
periods ended June 30, 2004.
<table>
Condensed Consolidated Statements of Operations Three Months Ended Six Months Ended
For the three-month and six-month periods June 30, 2004 June 30, 2004
-------------------------- -------------------------
ended June 30, 2004 As Previously As As Previously As
(in thousands) Reported Restated Reported Restated
------------- -------- ------------- --------
Operating expenses
General and administrative $ 1,917 $ 1,888 $ 3,468 $ 3,458
Selling and marketing 397 377 712 672
Goodwill impairment charge 26,238 25,771 26,238 25,771
Total operating expenses 29,852 29,336 33,204 32,687
Operating Loss (27,881) (27,365) (29,421) (28,904)
Other income (expense), net 40 2 84 8
Loss before income taxes (27,841) (27,363) (29,337) (28,896)
Benefit for income taxes - - - -
------------- -------- ------------- --------
Net loss $ (27,841) $(27,363) $ (29,337) $(28,896)
============= ======== ============= ========
</table>
(h) Going Concern Assumption - Our consolidated 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 consolidated 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 approval of the Company's stockholders. The Company's
stockholders meeting is scheduled for August 18, 2005 and the closing of the
transaction is anticipated to occur shortly thereafter. 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
<page>
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 in the Company's Form 10-K for the year
ended December 31, 2004 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 16 to 56 as
of June 30, 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 was given
an additional 180 calendar days, or
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until June 13, 2005, to regain compliance. If compliance with the criteria could
not 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.
On June 14, 2005, InteliData received a Nasdaq Staff determination,
indicating that InteliData failed to comply with Nasdaq's minimum $1.00 bid
price per share requirement for continued listing of InteliData common stock on
the Nasdaq SmallCap Market set forth in Marketplace Rule 4310(c)(4). As a
result, InteliData's common stock was subject to delisting from the Nasdaq
SmallCap Market on June 23, 2005.
On June 20, 2005, InteliData requested a hearing before the Listing
Qualifications Panel of the Nasdaq Stock Market (the "Panel"), in order to
request that the Panel grant an extension of time for InteliData's common stock
to continue to remain listed on the NASDAQ SmallCap Market, in order to permit
InteliData to complete its proposed merger with Corillian (the "Merger").
InteliData was granted a hearing date of July 21, 2005 and the hearing process
stayed the delisting of InteliData's common stock pending the Panel's decision.
The Panel has not issued its decision as of the date of this 10-Q filing.
The Merger requires the approval of a majority of the outstanding shares of
InteliData's common stock. The SEC declared effective the proxy
statement/prospectus as of July 7, 2005. InteliData therefore set a date of
August 18, 2005, for its stockholders meeting to adopt and approve the Merger.
Beginning on July 13, 2005, the proxy statement/prospectus was mailed to
InteliData's stockholders in order to solicit approval of the Merger at the
annual meeting of InteliData's stockholders on August 18, 2005. InteliData
expects that the Merger parties will consummate the Merger promptly following
approval of the Merger at the stockholders meeting.
If, at some future date, InteliData's common stock should cease to be
listed on the Nasdaq SmallCap Market, the common stock could publicly trade
over-the-counter. In such an event, an investor could find it more difficult to
dispose of, or to obtain accurate quotations as to the market value of,
InteliData's common stock. In addition, if InteliData's common stock were to be
delisted from trading on the Nasdaq SmallCap Market and the trading price of the
common stock were to remain below $5.00 per share, trading of InteliData's
common stock could also be subject to the requirements of certain rules
promulgated under the Securities Exchange Act of 1934, as amended, which require
additional disclosure by broker-dealers in connection with any trades involving
a stock defined as a "penny stock" (generally, any non-Nasdaq and non-national
exchange equity security that has a market price of less than $5.00 per share,
subject to certain exceptions). The additional burdens imposed upon
broker-dealers by such requirements could discourage broker-dealers from
effecting transactions in InteliData's common stock, which could severely limit
the market liquidity of InteliData's common stock and the ability of investors
to trade InteliData's common stock. Many brokerage firms are reluctant to
recommend lower price stocks for their clients, and the policies and practices
of a number of brokerage houses tend to discourage individual brokers within
those firms from dealing in lower price stocks. Also, the brokerage commission
on the purchase or sale of a stock with a relatively low per share price
generally tends to represent a higher percentage of the sales price than the
brokerage commission charged on a stock with a relatively higher per share
price, to the detriment of InteliData's stockholders and the market for
InteliData's common stock.
(i) Earnings Per Share - Basic and diluted earnings (loss) per common
share ("EPS") is computed by dividing net income (loss) by the basic and diluted
weighted-average common shares outstanding during the period. Approximately
2,906,000 and 3,467,000 shares of common stock issuable pursuant to outstanding
stock options and warrants were not included in the loss per share computations
for the three-month periods ended June 30, 2005 and 2004, respectively, because
they would have been anti-dilutive for the periods presented. Approximately
2,981,000 and 3,463,000 shares of common stock issuable pursuant to outstanding
stock options and warrants were not included in the loss per share computations
for the six-month periods ended June 30, 2005 and 2004, respectively, because
they would have been anti-dilutive for the periods presented.
(3) 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 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.
Moreover, InteliData has obtained environmental insurance to pay for remediation
costs up to $6,000,000 in excess of a retained exposure limit of $600,000. As of
June 30, 2005, the Company believes that it has satisfied the deductible under
the insurance policy and has paid an additional $21,000 that would be
recoverable under the insurance policy. Currently, our counsel (as the term is
defined below) estimates the remaining costs to be approximately $668,000 and
the Company, in consultation with our counsel, believes that such exposure will
be covered by the insurance policy. A claim was submitted to the insurance
company and is pending review. Management believes that it is probable that the
insurance recoveries will cover the projected remaining costs of remediation.
The Company has engaged a legal firm and an environmental specialist firm
(collectively, the "counsel") 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.
(4) Restructuring Charges
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 June 30, 2005, the
estimated remaining liability was approximately $219,000. See Note 6 for
developments subsequent to the balance sheet date.
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 June 30, 2005, the Company had not been successful
in securing a subtenant for this space and the estimated remaining liability was
approximately $21,000.
In March 2005, the Company terminated nine full-time equivalent personnel
in its Payments Solutions research and development staff. The Company paid
approximately $59,000 in severance to these individuals.
(5) Income Taxes
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. The net loss for the six-month period ended June 30, 2005 will
contribute to the increase of total net operating loss carrryforwards. The
Company continues to establish a full valuation allowance for deferred tax
assets, because it has deemed, based on available evidence, that it is more
likely than not that all of the deferred tax assets will not be realized.
(6) Subsequent Events
InteliData's headquarters are located in Reston, Virginia, where it leases
25,200 square feet of office space. This lease comprises of two suites and will
expire on December 31, 2006. During 2003, the Company ceased using 8,200 square
feet of the leased space ("Suite 440") and subleased Suite 440 to an unrelated
third party (the "Subtenant"), as discussed in Note 4. The Company continued to
occupy the remaining 17,000 square feet of the leased space ("Suite 100"). While
the Subtenant was outgrowing the space in Suite 440, the Company experienced
reductions in personnel and had excess capacity in Suite 100. In July 2005, the
Company entered into an arrangement with the Subtenant to swap office space,
whereby the Subtenant would now occupy Suite 440 and the Company would move into
Suite 100. InteliData terminated the existing sublease agreement for Suite 440
with the Subtenant and simultaneously entered into a new sublease agreement with
the Subtenant for Suite 100 the end of the master lease term.
In the event our merger with Corillian (as discussed in Note 1) is
successful, then the Company's stock options issued under InteliData stock
option plans will be terminated effective immediately prior to the merger.
Holders of InteliData stock options who exercise their options prior to the
effective time of the merger will receive a portion of the merger consideration
based upon the number of shares of InteliData common stock received upon
exercise of such stock options, just like other InteliData stockholders. Holders
of InteliData stock options with an exercise price greater than the value of the
per share cash and stock merger consideration are expected to surrender their
options to InteliData prior to consummation of the merger and InteliData will
pay them (i) $0.02 per share for each share of common stock underlying options
with an exercise price of $2.00 or less and/or (ii) $0.01 per share for each
share of common stock underlying options with an exercise price of greater than
$2.00, in cash, less applicable tax withholdings.
* * * * * *
ITEM 2: 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(g) 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 as discussed in the revenue section below, the Company elected to allow its
Fidelity Hosting agreement to expire in April 2005. 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 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. In exchange for all the
outstanding shares of Company common stock, Corillian will issue approximately
4,918,000 shares of Corillian common stock and will pay approximately $4,330,000
in cash, 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 approximately 0.0956 shares of Corillian's common stock and $0.0841
in cash without interest. The closing of this transaction is subject to, among
other things, the approval of the Company's stockholders. The Company's
stockholders meeting is scheduled for August 18, 2005 and the closing of the
transaction is anticipated to occur shortly thereafter. However, 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
Technologies Corporation for the three-month and six-month periods ended June
30, 2005 and 2004. Such information should be read in conjunction with the
interim financial statements and the notes thereto in Part I, Item 1 of this
Quarterly Report.
The Company generates revenues from each of its three product offerings -
Payment Solutions, Card Services, and Online Banking. Within these product
offerings, the Company obtains revenues from various sources - software license
fees, consulting services fees, use-based fees, maintenance fees, and other
fees. Software license fees include revenues generated from license sales.
Consulting services fees include revenues generated from professional services
rendered. Use-based fees include revenues generated from user accounts,
transactions, remittances and other related activities. Maintenance fees include
revenues generated from maintenance agreements for support services for licensed
software. Other fees are termination charges levied for early termination of
contracts.
Within revenues generated from Payment Solutions, consulting services will
fluctuate with the demand of services based on client internal projects as well
as new system implementations. Use-based fees will fluctuate based on the
addition of new clients and user adoption rates that translate into additional
users and additional transactions. Additionally, use-based revenues may decline
with departures of clients for other solutions and/or clients' migrating the
InteliData solution in-house through a license arrangement that may eliminate
user fees.
Within revenues generated from Card Services, consulting services will
fluctuate with the demand of services based on client internal projects as well
as new client implementations. Use-based fees will fluctuate based on the
addition of new clients and user adoption rates that translate into additional
users and additional transactions. Additionally, use-based revenues may increase
due to added functionalities or may decline with departures of clients for other
solutions.
Within revenues generated from Online Banking, use-based revenues will
fluctuate based on the addition of new clients and user adoption rates that
translate into additional users and additional transactions. However, use-based
revenues may decline with departures of clients for other solutions and/or
clients' migrating the InteliData solution in-house through a license
arrangement that may eliminate user fees.
The Company's second quarter revenues were $2,391,000 in 2005 compared to
$3,746,000 in 2004, a decrease of $1,355,000, while the revenues for the
six-month periods were $5,335,000 in 2005 compared to $7,338,000 in 2004, a
decrease of $2,003,000. The following table sets forth the Company's sources of
revenue for each of the three-month and six-month periods ended June 30, 2005,
and 2004:
Three Months Ended Six Months Ended
-------------------- ----------------------
June 30, June 30,
-------------------- ----------------------
2005 2004 2005 2004
--------- -------- --------- ---------
Payment Solutions
Software license $ 30 $ - $ 228 $ -
Consulting services 220 359 423 625
Use-based 746 1,339 1,920 2,650
Maintenance 426 343 816 639
--------- -------- --------- ---------
Subtotal 1,422 2,041 3,387 3,914
--------- -------- --------- ---------
Card Services
Consulting services 7 33 42 126
Use-based 474 1,173 916 2,303
Other 18 - 18 -
--------- -------- --------- ---------
Subtotal 499 1,206 976 2,429
--------- -------- --------- ---------
Online Banking
Software license - - - -
Consulting services 126 55 244 112
Use-based 146 237 332 494
Maintenance 198 207 396 389
--------- -------- --------- ---------
Subtotal 470 499 972 995
--------- -------- --------- ---------
Total
Software license 30 - 228 -
Consulting services 353 447 709 863
Use-based 1,366 2,749 3,168 5,447
Maintenance 624 550 1,212 1,028
Other 18 - 18 -
--------- -------- --------- ---------
Total $ 2,391 $ 3,746 $ 5,335 $ 7,338
========= ======== ========= =========
Three Months Ended June 30, 2005 and 2004
Revenues
The second quarter revenues from Payment Solutions were $1,422,000 in 2005
compared to $2,041,000 in 2004, a decrease of $619,000. 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 increased $30,000 and maintenance increased $83,000 while consulting
services decreased $139,000 and use-based fees decreased $593,000 quarter over
quarter. Software license fees increased due to the sale of a license relating
to the Company's interbank payment warehouse. The decrease in consulting
services was primarily due to the completion of two projects in 2004 and there
were limited services rendered in 2005. Additionally, an OFX client that was
represented by one of the two projects took the Company's solution in-house in
December 2004. The decrease in use-based fees was due to the departures of the
Canopy Banking community banking clients and their billpay transactions, the
departure of the same OFX client in December 2004 (as discussed above) and the
decrease in the ASP-related revenues that were terminated in April 2005.
Maintenance increased due to increases in use-based licenses, additional fees
from sales in 2004 and increases on renewed maintenance services. The Payment
Solutions revenues from the Fidelity ASP environment that were generated during
the second quarter of 2005 and 2004 were approximately $610,000 and $949,000,
respectively. For 2005, 25%, 58% and 17% of the $610,000 consisted of consulting
services, use-based and maintenance fees, respectively. The revenue stream from
the ASP offering ceased with the expiration of our Hosting agreement with
Fidelity in April 2005. Going forward, 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 second quarter revenues from Card Services were $499,000 in 2005
compared to $1,206,000 in 2004, a decrease of $707,000. Consulting services fees
decreased $26,000 and use-based fees decreased $699,000, while other fees
increased $18,000, quarter over quarter. 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 $18,000 in
other fees relate to one-time early termination fees.
The second quarter revenues from Online Banking were $470,000 in 2005
compared to $499,000 in 2004, a decrease of $29,000. 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. Consulting services increased $71,000, while
use-based fees decreased $91,000 and maintenance decreased $9,000, quarter over
quarter. The increase in consulting services was primarily due to some
additional projects in 2005 from existing clients. The decrease in use-based
fees was due to the departures of the Canopy Banking community banking clients,
which was partially offset by growth in user fees from existing clients. The
Online Banking revenues from the Fidelity ASP environment that were generated in
the second quarter of 2005 and 2004 were approximately $238,000 and $166,000,
respectively. For 2005, 47%, 45% and 8% of the $238,000 consisted of consulting
services, use-based and maintenance fees, respectively. The revenue stream from
the ASP offering ceased 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 $820,000 to $955,000 in the second
quarter of 2005 from $1,775,000 in the second quarter of 2004. The decrease was
partially due to decreases in ASP operations costs resulting from a
renegotiation with a provider in June 2004 and the subsequent termination of the
ASP operations in April 2005, along with 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 margins increased to 60% for the second quarter of
2005 from 53% for the second quarter of 2004. The increase in gross profit
margin was partially due to decreases in ASP operations costs resulting from a
renegotiation with a provider in June 2004 and the subsequent termination of the
ASP operations in
April 2005, as the related margin was low. Also, the Company's cost of revenues
does not necessarily fluctuate proportionately in relation to revenues since
there are certain fixed costs to maintain the current infrastructure.
Accordingly, while revenues declined by $1,355,000, or 36% quarter over quarter,
cost of revenues declined by $820,000, or 46% quarter over quarter. The Company
anticipates that gross profit margins may fluctuate in the future due to changes
in product mix and distribution, outsourcing activities associated with an ASP
business model, competitive pricing pressure, the introduction of new products,
and changes in volume.
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
continued 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. As a result of exploring all options, the Company 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 decreased $254,000 to $1,634,000 in the
second quarter of 2005 from $1,888,000 in the second quarter of 2004. The
decrease was attributable to several factors. The Company's employee-related
expenses were reduced by approximately $118,000, corporate and administrative
expenses were reduced by $54,000, and depreciation was reduced by approximately
$62,000. Included in the corporate and administrative expenses, the Company
accrued $180,000 of additional expenses related to its 2005 anticipated audit
fees. For 2005, the Company anticipates that it would incur approximately
$720,000 in Sarbanes-Oxley related expenses. Such cost estimates do not include
the significant dedicated internal resources required to manage the process and
the on-going activities. Additionally, the decrease was partially attributable
to a gain of $20,000 on sale of assets from the former Home Account headquarters
in Emeryville, California. The Company seeks to continually assess its
operations to manage its expenses and infrastructures in light of anticipated
business levels.
Sales and Marketing
Sales and marketing expenses decreased $324,000 to $53,000 in the second
quarter of 2005 from $377,000 in the second quarter of 2004. This was primarily
attributable to employee-related actions, lower travel costs and a reduction in
tradeshow-related expenses. The Company plans to continually assess its
operations to review its expenses and infrastructures in light of anticipated
business levels.
Research and Development
Research and development costs decreased $187,000 to $933,000 in the second
quarter of 2005 from $1,120,000 in the second quarter of 2004. In light of the
revenue levels, the Company reduced the Payment Solutions research and
development staffing by 11 full-time equivalent personnel during the first
quarter of 2005. Annualized costs savings, without overhead burden, were
estimated to be $1,025,000 beginning in the second quarter. 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
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determined to be more than their fair values. The amortization of certain
intangibles continued at an annualized rate of $720,000.
Other Income
Other income (expense), primarily rental receipts, interest income and
other expenses including state and local taxes, decreased $11,000 to $(9,000) in
the second quarter of 2005 from $2,000 in the second quarter of 2004. The
decrease is primarily attributable to decreased interest income resulting from
lower levels of average cash and cash equivalents in 2005, as compared to 2004.
Weighted-Average Common Shares Outstanding and Basic and Diluted Loss Per Common
Share
The basic and diluted weighted-average common shares decreased to
51,083,000 for the second quarter of 2005 compared to 51,159,000 for the second
quarter of 2004. The change resulted primarily from stock awards to employees,
exercises of stock options, and stock purchases under the Employee Stock
Purchase Plan, offset by the cancellation of unvested stock awards for
terminated employees and common stock that was acquired into the treasury. On
December 15, 2004, the Company received 200,000 shares of its common stock from
its Chief Executive Officer to satisfy $100,000 of a note receivable that was
outstanding at the time.
Losses from continuing operations were $1,373,000 and $27,363,000 for the
three-month periods ended June 30, 2005 and 2004, respectively, while there was
no gain or loss from discontinued operations in either period. Net losses were
$1,373,000 and $27,363,000 for the second quarters of 2005 and 2004,
respectively. As a result of the foregoing, basic and diluted net loss per
common share was $0.03 for the second quarter of 2005 compared to a basic and
diluted net loss per common share of $0.53 for the second quarter of 2004.
Six Months Ended June 30, 2005 and 2004
Revenues
The Company's revenues for the first six months were $5,335,000 in 2005
compared to $7,338,000 in 2004, a decrease of $2,003,000.
The revenues for the first six months from Payment Solutions were
$3,387,000 in 2005 compared to $3,914,000 in 2004, a decrease of $527,000. 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 increased $228,000 and maintenance increased
$177,000 while consulting services decreased $202,000 and use-based fees
decreased $730,000 quarter over quarter. Software license fees increased due to
the sale of a license for the Company's interbank payment warehouse. The
decrease in consulting services was primarily due to the completion of two
projects in 2004 and there were limited services rendered in 2005. Additionally,
an OFX client that was represented by one of the two projects took the Company's
solution in-house in December 2004. The decrease in use-based fees was due to
the departures of the Canopy Banking community banking clients and their billpay
transactions, the departure of the same OFX client in December 2004 (as
discussed above) and the decrease in the ASP-related revenues that were
terminated in April 2005. Maintenance increased due to increases in use-based
licenses, additional fees from sales in 2004 and increases on renewed
maintenance services. The Payment Solutions revenues from the Fidelity ASP
environment that were generated during the first six months of 2005 and 2004
were approximately $1,655,000 and $1,849,000, respectively. For 2005, 19%, 68%
and 13% of the $1,655,000 consisted of consulting services, use-based and
maintenance fees, respectively. The revenue stream from the ASP offering ceased
with the expiration of our Hosting agreement with Fidelity in April 2005. Going
forward, 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 for the first six months from Card Services were $976,000 in
2005 compared to $2,429,000 in 2004, a decrease of $1,453,000. Consulting
services fees decreased $84,000 and use-based fees decreased $1,387,000, while
other fees increased $18,000 quarter over quarter. In September 2004, the
Company discontinued providing services to two clients that represented
approximately $248,000 in monthly recurring
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revenues. One of the clients moved to an in-house solution, while the other
opted for another service provider. The $18,000 in other fees relate to one-time
early termination fees.
The revenues for the first six months from Online Banking were $972,000 in
2005 compared to $995,000 in 2004, a decrease of $23,000. 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. Consulting services increased $132,000 and
maintenance increased $7,000, while use-based fees decreased $162,000, quarter
over quarter. The increase in consulting services was primarily due to some
additional projects in 2005 from existing clients. The decrease in use-based
fees was due to the departures of the Canopy Banking community banking clients,
which was partially offset by growth in user fees from existing clients. The
Online Banking revenues from the Fidelity ASP environment that were generated
for the first six months of 2005 and 2004 were approximately $472,000 and
$323,000, respectively. For 2005, 42%, 50% and 8% of the $472,000 consisted of
consulting services, use-based and maintenance fees, respectively. The revenue
stream from the ASP offering ceased 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 $1,343,000 to $2,212,000 for the
first six months of 2005 from $3,555,000 for the first six months of 2004. The
decrease was partially due to decreases in ASP operations costs resulting from a
renegotiation with a provider in June 2004 and the subsequent termination of the
ASP operations in April 2005, along with 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 margins increased to 59% for the first six months of
2005 from 52% for the first six months of 2004. The increase in gross profit
margin was partially due to decreases in ASP operations costs resulting from a
renegotiation with a provider in June 2004 and the subsequent termination of the
ASP operations in April 2005, as the related margin was low. The Company's cost
of revenues does not necessarily fluctuate proportionately in relation to
revenues since there are certain fixed costs to maintain the current
infrastructure. Accordingly, while revenues declined by $2,003,000, or 27%
quarter over quarter, cost of revenues declined by $1,343,000, or 38% quarter
over quarter. The Company anticipates that gross profit margins may fluctuate in
the future due to changes in product mix and distribution, outsourcing
activities associated with an ASP business model, competitive pricing pressure,
the introduction of new products, and changes in volume.
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
continued 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. As a result of exploring all options, the Company 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 $298,000 to $3,756,000 for
the first six months of 2005 from $3,458,000 for the first six months of 2004.
The increase was attributable to several factors. The Company's employee-related
expenses were reduced by approximately $197,000, corporate and administrative
expenses increased by $620,000, and depreciation was reduced by approximately
$105,000. Included in the corporate and administrative expenses, the Company
incurred $292,000 in additional legal expenses related to the proposed merger
and other matters. Further, InteliData reversed $70,000 of estimated bonuses in
2005 that was accrued for as of December 31, 2004 because the Company has now
determined that such bonuses will not be paid. Moreover, the Company incurred
$200,000 in investment banking fees in the first six months of 2004, while there
was
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$279,000 in comparable costs for the six months of 2005. Finally, the Company
accrued $360,000 of additional expenses related to its 2005 anticipated audit
fees. For 2005, the Company anticipates that it would incur approximately
$720,000 in Sarbanes-Oxley related expenses. Such cost estimates do not include
the significant dedicated internal resources required to manage the process and
the on-going activities. Additionally, the increase was partially offset by a
gain of $20,000 on sale of assets from the former Home Account headquarters in
Emeryville, California. The Company seeks to continually assess its operations
to manage its expenses and infrastructures in light of anticipated business
levels.
Sales and Marketing
Sales and marketing expenses decreased $560,000 to $112,000 for the first
six months of 2005 from $672,000 for the first six months of 2004. This was
primarily attributable to employee-related actions, lower travel costs and a
reduction in tradeshow-related expenses. 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 $251,000 to $2,175,000 for the
first six months of 2005 from $2,426,000 for the first six months of 2004. In
light of the revenue levels, the Company reduced the Payment Solutions research
and development staffing by 11 full-time equivalent personnel during the first
quarter of 2005. Annualized costs savings, without overhead burden, were
estimated to be $1,025,000 beginning in the second quarter. 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.
Other Income
Other income (expense), primarily rental receipts, interest income and
other expenses including state and local taxes, decreased $21,000 to $(13,000)
for the first six months of 2005 from $8,000 for the first six months of 2004.
The decrease is primarily attributable to decreased interest income resulting
from lower levels of average cash and cash equivalents in 2005, as compared to
2004.
Weighted-Average Common Shares Outstanding and Basic and Diluted Loss Per Common
Share
The basic and diluted weighted-average common shares decreased to
51,084,000 for the first six months of 2005 compared to 51,168,000 for the first
six months of 2004. The change resulted primarily from stock awards to
employees, exercises of stock options, and stock purchases under the Employee
Stock Purchase Plan, offset by the cancellation of unvested stock awards for
terminated employees and common stock that was acquired into the treasury. On
December 15, 2004, the Company received 200,000 shares of its common stock from
its Chief Executive Officer to satisfy $100,000 of a note receivable that was
outstanding at the time.
Losses from continuing operations were $3,293,000 and $28,896,000 for the
six-month periods ended June 30, 2005 and 2004, respectively, while there was no
gain or loss from discontinued operations in either period. Net
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losses were $3,293,000 and $28,896,000 for the first six months of 2005 and
2004, respectively. As a result of the foregoing, basic and diluted net loss per
common share was $0.06 for the first six months of 2005 compared to a basic and
diluted net loss per common share of $0.56 for the first six months of 2004.
Liquidity and Capital Resources
At June 30, 2005, the Company had $733,000 in cash and cash equivalents, a
decrease of $2,490,000 over the balance at December 31, 2004. Net cash used in
operating activities was $2,486,000 during the first six months of 2005, or an
increase of $258,000 as compared to the net cash used during the first six
months of 2004. The primary driver of this increase in cash usage is the
significant decline in revenues of $2,003,000 from $7,338,000 for the first six
months of 2004 to $5,335,000 for the first six months of 2005, which resulted in
decreases in cash received from our clients. While the costs of revenues and
operating expenses decreased quarter over quarter, they did not decrease
proportionately to the revenue decline. Also, InteliData paid approximately
$632,000 during the first six months of 2005 for Sarbanes-Oxley related
services, whereas it did not make any such payments in the first six months of
2004. Additionally, the Company incurred $440,000 in legal and accounting
expenses during the first six months of 2005 related to the proposed merger and
other matters. For 2005, the Company anticipates that it would incur
approximately $720,000 in Sarbanes-Oxley related expenses. Such cost estimates
do not include the significant dedicated internal resources required to manage
the process and the on-going activities.
Net cash from investing activities provided $16,000 during the first six
months of 2005 as compared to net cash used of $47,000 during the first six
months of 2004. The change was partially attributable to a gain of $20,000 on
sale of assets from the former Home Account headquarters in Emeryville,
California. Additionally, the Company incurred less expenditures for the
purchases of property and equipment in light of the revenue developments.
Financing activities did not provide any net cash during the first six
months of 2005 as compared to the $49,000 of net cash provided during the first
six months of 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. In exchange for all the
outstanding shares of Company common stock, Corillian will issue approximately
4,918,000 shares of Corillian common stock and will pay approximately $4,330,000
in cash, 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 approximately 0.0956 shares of Corillian's common stock and $0.0841
in cash without interest. The closing of this transaction is subject to, among
other things, the approval of the Company's stockholders. The Company's
stockholders meeting is scheduled for August 18, 2005 and the closing of the
transaction is anticipated to occur shortly thereafter. However, 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
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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 in the
Company's Form 10-K for the year ended December 31, 2004 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 16 to 56 as
of June 30, 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 was being
given an additional 180 calendar days, or until June 13, 2005, to regain
compliance. If compliance with the criteria could not be demonstrated by that
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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.
On June 14, 2005, InteliData received a Nasdaq Staff determination,
indicating that InteliData failed to comply with Nasdaq's minimum $1.00 bid
price per share requirement for continued listing of InteliData common stock on
the Nasdaq SmallCap Market set forth in Marketplace Rule 4310(c)(4). As a
result, InteliData's common stock was subject to delisting from the Nasdaq
SmallCap Market on June 23, 2005.
On June 20, 2005, InteliData requested a hearing before the Listing
Qualifications Panel of the Nasdaq Stock Market (the "Panel"), in order to
request that the Panel grant an extension of time for InteliData's common stock
to continue to remain listed on the NASDAQ SmallCap Market, in order to permit
InteliData to complete its proposed merger with Corillian (the "Merger").
InteliData was granted a hearing date of July 21, 2005 and the scheduled hearing
stayed the delisting of InteliData's common stock pending the Panel's decision.
The Panel has not issued its decision as of the date of this Form 10-Q filing.
The Merger requires the approval of a majority of the outstanding shares of
InteliData's common stock. The SEC declared effective the proxy
statement/prospectus as of July 7, 2005. InteliData therefore set a date of
August 18, 2005, for its stockholders meeting to adopt and approve the Merger.
Beginning on July 13, 2005, the proxy statement/prospectus was mailed to
InteliData's stockholders in order to solicit approval of the Merger at the
annual meeting of InteliData's stockholders on August 18, 2005. InteliData
expects that the Merger parties will consummate the Merger promptly following
approval of the Merger at the stockholders meeting.
If, at some future date, InteliData's common stock should cease to be
listed on the Nasdaq SmallCap Market, the common stock could publicly trade
over-the-counter. In such an event, an investor could find it more difficult to
dispose of, or to obtain accurate quotations as to the market value of,
InteliData's common stock. In addition, if InteliData's common stock were to be
delisted from trading on the Nasdaq SmallCap Market and the trading price of the
common stock were to remain below $5.00 per share, trading of InteliData's
common stock could also be subject to the requirements of certain rules
promulgated under the Securities Exchange Act of 1934, as amended, which require
additional disclosure by broker-dealers in connection with any trades involving
a stock defined as a "penny stock" (generally, any non-Nasdaq and non-national
exchange equity security that has a market price of less than $5.00 per share,
subject to certain exceptions). The additional burdens imposed upon
broker-dealers by such requirements could discourage broker-dealers from
effecting transactions in InteliData's common stock, which could severely limit
the market liquidity of InteliData's common stock and the ability of investors
to trade InteliData's common stock. Many brokerage firms are reluctant to
recommend lower price stocks for their clients, and the policies and practices
of a number of brokerage houses tend to discourage individual brokers within
those firms from dealing in lower price stocks. Also, the brokerage commission
on the purchase or sale of a stock with a relatively low per share price
generally tends to represent a higher percentage of the sales price than the
brokerage commission charged on a stock with a relatively higher per share
price, to the detriment of InteliData's stockholders and the market for
InteliData's common stock.
Leases - InteliData's headquarters are located in Reston, Virginia, where
it leases 25,200 square feet of office space. This lease comprises of two suites
and will expire on December 31, 2006. During 2003, the Company ceased using
8,200 square feet of the leased space ("Suite 440") and subleased Suite 440 to
an unrelated third party (the "Subtenant"), as discussed in Note 4. The Company
continued to occupy the remaining 17,000 square feet of the leased space ("Suite
100"). While the Subtenant was outgrowing the space in Suite 440, the Company
experienced reductions in personnel and had excess capacity in Suite 100. In
July 2005, the Company entered into an arrangement with the Subtenant to swap
office space, whereby the Subtenant would now occupy Suite 440 and the Company
would move into Suite 100. InteliData terminated the existing sublease agreement
for Suite 440 with the Subtenant and simultaneously entered into a new sublease
agreement with the Subtenant for Suite 100 the end of the master lease term
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 from 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 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 is 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
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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 2(f) 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, among others, historical
experience, capacity requirements, and assessments of new product and market
demands. When these factors indicate certain elements may not be useful for as
long as anticipated, we depreciate the remaining
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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 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 annual reporting period that begins after June 15, 2005. The
Company has not calculated the financial impact of adopting this standard.
Cautionary Statement for Purposes of the "Safe Harbor" Provisions of the Private
Securities Litigation Reform Act of 1995
This report contains forward-looking statements within the meaning of the
Securities Act of 1933, 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 the Act. Additionally, the Company is not
under any obligation (and expressly disclaims an obligation) to update or alter
its forward-looking statements, whether as a result of new information or
otherwise. We wish to caution you that such risks and uncertainties include, but
are not limited to:
o the 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 relationships 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;
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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, including the risk factors
disclosed in our Annual Report on Form 10-K for the fiscal year ended
December 31, 2004.
These risks could cause the Company's actual results for 2005 and beyond to
differ materially from those expressed in any forward-looking statements made
by, or on behalf of, InteliData. The foregoing list of factors should not be
construed as exhaustive or as any admission regarding the adequacy of
disclosures made by the Company prior to the date hereof or the effectiveness of
said Act. InteliData is not under any obligation (and expressly disclaims an
obligation) to update or alter its forward-looking statements, whether as a
result of new information or otherwise.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
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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 4. CONTROLS AND PROCEDURES
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(a) EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
Pursuant to Rule 13a-15(b) under the Securities Exchange Act of 1934, the
Company carried out an evaluation, with the participation of the Company's
management, including the Company's Chief Executive Officer and Chief Financial
Officer, of the effectiveness of the Company's disclosure controls and
procedures (as defined under Rule 13a-15(e) under the Securities Exchange Act of
1934) as of the end of the period covered by this report.
Based upon its evaluation as of December 31, 2004, the Company's Chief
Executive Officer and Chief Financial Officer concluded that the Company's
disclosure controls and procedures were not effective because of six material
weaknesses in the Company's internal control over financial reporting, as
reported in Item 9A of the Annual Report on Form 10-K/A for the year ended
December 31, 2004.
Further, based upon management's review for the quarter ended June 30,
2005, the Chief Executive Officer and Chief Financial Officer has concluded
that, as of June 30, 2005, disclosure controls and procedures were still not
effective because of six material weaknesses in the Company's internal control
over financial reporting, as reported in Item 9A of the Annual Report on Form
10-K/A for the year ended December 31, 2004. To address these control
weaknesses, the Company performed additional analysis and other post-closing
procedures to ensure that the financial statements filed herewith fairly present
in all material respects the financial condition and results of operations of
the Company for the fiscal quarter presented.
(b) CHANGE IN INTERNAL CONTROLS
There has been no change in the Company's internal control over financial
reporting during the quarter ended June 30, 2005 that has materially affected,
or is reasonably likely to materially affect, the Company's internal control
over financial reporting. The Company had previously concluded that the Company
did not maintain effective internal control over financial reporting as of
December 31, 2004 as a result of the six material weaknesses in the Company's
internal control over financial reporting, as reported in Item 9A of the Annual
Report on Form 10-K/A for the year ended December 31, 2004.
Due to the pending merger with Corillian and devoting its limited resources
to consummating the merger, at this time InteliData has not devised a plan to
address its material weaknesses. InteliData and Corillian are currently
evaluating the material weaknesses as part of the merger integration activities.
If the merger with Corillian is not consummated, InteliData's management will
undertake to devise such plans and, if appropriate, report those plans in a
future filing.
PART II: OTHER INFORMATION
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ITEM 5. OTHER INFORMATION
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Not applicable.
ITEM 6. EXHIBITS
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2.1 Agreement and Plan of Merger, dated as of March 31, 2005, among
InteliData Technologies Corporation, Corillian Corporation and Wizard
Acquisition Corporation. (Incorporated herein by reference to Exhibit
2.1 to the Company's Report on Form 8-K, filed on April 1, 2005).
10.1 Form of Agreement to Facilitate Merger (Incorporated herein by
reference to Exhibit 10.1 to the Company's Report on Form 8-K, filed
on April 1, 2005).
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.
SIGNATURE
Pursuant to the requirements of the Securities Act of 1934, the registrant
has duly caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
Date: August 9, 2005
INTELIDATA TECHNOLOGIES CORPORATION
By: /s/ Alfred S. Dominick, Jr.
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Alfred S. Dominick, Jr.
Chairman, Chief Executive Officer,
and Acting Chief Financial Officer