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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
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For the fiscal year ended: December 31, 2002 Commission File Number 000-21685
INTELIDATA TECHNOLOGIES CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 54-1820617
(State of incorporation) (I.R.S. Employer Identification Number)
11600 Sunrise Valley Drive, Suite 100, Reston, VA 20191
(Address of Principal Executive Offices)
(703) 259-3000
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class Name of Each Exchange on Which Registered
- -------------------- -----------------------------------------
NONE
Securities registered pursuant to Section 12(g) of the Act:
Common Stock par value $0.001 per share
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K [ X ].
The aggregate market value of the Common Stock held by non-affiliates of the
registrant on February 26, 2003, was approximately $80,467,000. In determining
this figure, the Registrant has assumed that all of its directors and executive
officers are affiliates. Such assumptions should not be deemed to be conclusive
for any other purpose.
The number of shares of the registrant's Common Stock outstanding on February
26, 2003 was 48,986,252.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of InteliData Technologies Corporation's Proxy Statement for its 2003
Annual Stockholder Meeting are incorporated by reference into Part III of this
Report.
INTELIDATA TECHNOLOGIES CORPORATION
2002 ANNUAL REPORT ON FORM 10-K
TABLE OF CONTENTS
Page
----
PART I
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Item 1. Business..............................................................3
Item 2. Properties............................................................9
Item 3. Legal Proceedings.....................................................9
Item 4. Submission of Matters to a Vote of Stockholders.......................9
PART II
Item 5. Market for Registrant's Common Stock and Related Stockholder
Matters..............................................................10
Item 6. Selected Financial Data..............................................11
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations................................................12
Item 7a. Quantitative and Qualitative Disclosures about Market Risk...........28
Item 8. Financial Statements and Supplementary Data..........................29
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.............................................51
PART III
Item 10. Directors and Executive Officers of the Registrant...................51
Item 11. Executive Compensation...............................................51
Item 12. Security Ownership of Certain Beneficial Owners and Management.......51
Item 13. Certain Relationships and Related Transactions.......................52
Item 14. Controls and Procedures .............................................52
Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.....52
SIGNATURES ...................................................................55
CERTIFICATIONS ...............................................................56
PART I
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ITEM 1. BUSINESS
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GENERAL
InteliData Technologies Corporation ("InteliData" or the "Company")
provides the real-time financial processing infrastructure to enable financial
institutions ("FI's") to provide services over the Internet. The Company
develops and markets software products and consulting services for the financial
services industry. InteliData also services the emerging electronic bill
presentment and payment ("EBPP") market with the development of its end-to-end,
biller-to-consumer EBPP solutions.
Our products and services are designed to assist consumers in accessing and
transacting business with their FI's electronically, and to assist FI's in
connecting to and transacting business with third party processors. The Company
also serves as an Application Service Provider ("ASP") by providing Internet
hosting and service bureau solutions to FI's, including bankcard issuers.
On January 11, 2001, InteliData acquired Home Account Holdings, Inc. and
its operating subsidiary, Home Account Network, Inc., by means of the merger of
one of the Company's wholly owned subsidiaries with and into Home Account
Holdings, with Home Account Holdings surviving the merger. Home Account Holdings
is now a wholly owned subsidiary of InteliData. This acquisition was accounted
for as a purchase. As a result of the Company's acquisition of Home Account
Holdings, InteliData now offers a suite of UNIX-based Internet banking and
electronic bill presentment and payment products and services in an application
services provider environment.
The Company's principal executive offices are located at 11600 Sunrise
Valley Drive, Suite 100, Reston, Virginia 20191, and its telephone number is
(703) 259-3000.
INDUSTRY BACKGROUND
The Company provides software products and implementation services to FI's
whose processes and systems are subject to regulatory approvals. Internet
banking and EBPP are developing marketplaces. FI's are gradually expanding their
Internet banking services to permit customers not only to access historical
account information from remote locations, but also to engage in transactions
such as receiving and/or paying bills and transferring funds. The Company's
future growth and profitability will depend, in part, upon consumer acceptance
of Internet banking and EBPP processes and the speed at which such acceptance
occurs.
EBPP has been in existence for over a decade but has not enjoyed
significant consumer adoption due to cost, service quality and service
availability factors. Adoption has been gaining momentum as consumers have
gravitated to the Internet. Historically, banks have outsourced their bill
payment services to third party payment processors to execute bill payment
transactions initiated by consumers on behalf of the bank.
Banks who implement our system are able to use our Least Cost Routing(TM)
capabilities to save a potentially significant amount on remittance expense.
Transactions routed by our Least Cost Routing(TM) software to multiple payment
processors, such as Metavante, Princeton eCom, Online Resources, or MasterCard
RPPS, should result in substantial savings compared to what the market currently
charges for such transactions through other service providers. To achieve these
savings, the FI's must utilize a Payment Warehouse, a biller directory and a
Least Cost Routing(TM) gateway, all of which InteliData offers through a license
arrangement or on an ASP environment.
PRODUCTS AND SERVICES
The Company's business strategy is to develop products and services,
including software, to meet the needs of FI's and their customers in the
Internet banking and EBPP markets. The Company strives to develop products with
broad appeal that are easy-to-use, practical and built around common industry
standards. In addition, the products and services the Company develops are
designed to support not only Internet access, but also other access methods that
are newly developing. The Company currently supports Wireless access and the new
InteliWorks(TM) architecture has been designed to accommodate requests from
customers to add additional channels of access such as a Personal Digital
Assistant ("PDA").
The Company offers its clients consulting services to assist in
implementation, training and customization on a time and materials basis, and
provides maintenance and support services and software upgrades pursuant to
agreements that are typically renewable on an annual basis. Additionally, the
Company offers consulting services regarding the application and feasibility of
implementing Internet banking products within the FI's computer environment.
InteliData also serves as an ASP solution to meet the anticipated growth and
demands of providing Internet banking and EBPP outsourcing services to its
customers.
The Company currently offers products and services in four major areas:
Internet Banking, Interpose(R) OFX Gateway, Card Solutions(TM), and EBPP
Solutions.
Internet Banking
- ----------------
InteliData has two Internet banking platforms: Interpose(R) and Canopy(TM).
Interpose(R) is the Company's Internet banking solution for large banks, while
Canopy(TM) banking serves the community banking market. InteliData acquired the
Canopy(TM) banking platform and customer base as part of the Home Account
acquisition. The Canopy(TM) banking business was a significant revenue and
margin contributor in 2001 and 2002. However, because the Company's focus and
development resources going forward are expected to be on the large bank and
EBPP markets, the Company expects the Canopy(TM) Banking's contribution to be
less significant during 2003.
The Interpose(R) Transaction Engine ("ITE") and Interpose(R) Web Banking
("IWB") are the heart of the Company's Internet banking software system. ITE
runs on the FI's host computer system, providing real-time connectivity to
remote delivery channels. Along with this host connection, ITE provides customer
profiling and control over system security. Its Advanced Financial Message Set
gives FI's the functionality to offer a wide range of online financial services.
IWB runs on a Windows NT Server environment and interfaces to the FI's host
computer systems through ITE. It provides the FI's end users access to all of
their financial transactions that are available under the Internet banking
product. InteliData's products and services provide for:
Control - Internet banking and bill payment is becoming a critical touch
point for retail and commercial customers. InteliData provides a system
that puts FI's in control of their delivery channels, customer data, and
payment systems.
Flexibility - With rapid evolution of technology and market requirements,
the FI's can have an online banking solution that allows them to adapt
quickly to new technology, new products, and new service providers.
InteliData's solution is designed to provide the necessary room for such
growth.
Reliability - InteliData provides a solid solution that is designed to run
in today's high-availability environments.
Scalability - As the demand for online banking and bill payment grows,
transaction volume and complexity will grow. The InteliData solution is
designed to allow the addition of capacity without increasing complexity.
Interpose(R) OFX Gateway
- ------------------------
The Interpose(R) OFX Gateway allows FI's to support applications and
devices that conform to the Open Financial Exchange ("OFX") message standards.
The Interpose(R) OFX Gateway delivers comprehensive support for the OFX
specification including direct support for customers who use Intuit Quicken(R),
Microsoft Money(R), and other OFX compliant client software.
The flexible and high performance architecture of the Interpose(R) OFX
Gateway provides an Enterprise Gateway for the delivery of bill payment, bill
presentment, investment, and banking transactions across a variety of delivery
channels including the Internet, Personal Financial Manager desktop
applications, and Wireless devices. Furthermore, the Interpose(R) OFX Gateway
synchronizes information across these delivery channels to give end-users
real-time, consistent information.
Currently in use at some of the nation's largest FI's, the Interpose(R) OFX
Gateway delivers a proven, reliable, and highly scalable solution for managing
the delivery of financial transaction information across a variety of consumer
channels.
Card Solutions(TM)
- ------------------
InteliData Card Solutions(TM) provides online credit card solutions for many of
the leading issuers in the credit card industry. The Card Solutions(TM) products
offer bankcard issuers the ability to acquire new credit card accounts using the
Company's Internet account acquisition product, to provide self-service
functionalities to current cardholders with the Internet Account Management
product, and to market the self-service functionalities to the cardholder base
using the issuer marketing program. The modular approach of the Card
Solutions(TM) platform provides a base offering that enables card issuers to
manage their customer relationships online. Optional components, which are
designed to work with InteliData's basic account management platform or with an
issuer's existing technology, focus on increasing customer penetration and
improving portfolio revenue. The Company's Card Solutions(TM) products offer
several modules and programs:
Internet Account Acquisition - The InteliData Card Solutions(TM) Internet
Account Acquisition enables our customers to acquire new credit card
accounts utilizing the Internet by providing a secured platform for hosting
customized application and response pages. Through a relationship with
First Data Resources, Internet Account Acquisition utilizes enhanced fraud
screening, decisions applications, provides an applicable response, and
books approved applicants on the First Data Resources system all within
sixty seconds, depending upon access capabilities.
Internet Account Management - The InteliData Card Solutions(TM) Internet
Account Management is a cost-effective offering that may potentially reduce
call center expense by providing the same functionality as a call center
through a less expensive Internet delivery channel. Internet Self-Service
is designed in a modular approach for our customers to choose the
functionality they want to provide to the end-users.
The base module contains real-time enrollment, ensuring a secure
experience. Once a cardholder has successfully enrolled, this module
provides the cardholder the ability to view their credit card account
information, such as balance, payment status, next payment due date, and
cycle-to-date transactions. Additional modules contain the functionality
for cardholders to view previous months statement activity and download the
data to a Personal Finance Manager (PFM), pay their credit card bills,
utilize a secure messaging process for submitting customer service
inquiries, request a credit line increase, update address information and
much more.
e-Statements - The InteliData e-Statements module provides the ability for
cardholders to access an electronic version of their credit card statement,
as well as the ability to suppress paper statement printing from within the
InteliData hosted Web site. The e-Statements module provides issuers a
cost-effective and fully compliant offering. It also provides issuers the
necessary administrative tools to manage bounced email notifications,
manage Statement Messages, and turn a cardholder's paper back on, in the
event an email notification cannot be delivered.
Balance Transfer - The InteliData Balance Transfer module offers
cardholders the ability of transferring balances from other lenders to the
credit card account issued by our client. Online Balance Transfer also
provides issuers with decisioning tools that can present a cardholder with
specific rate offers and other promotional activities based on an issuer's
customized and desired criteria.
e-Alerts - The InteliData e-Alerts module provides issuers the ability to
increase cardholder loyalty by providing notification of additional
services, which results in active cardholders. InteliData offers the
following e-Alerts to cardholders:
o Account Events:
|X| Welcome alert upon registration
|X| Announcement of new feature alerts
|X| Payment is due in a specified number of days
|X| Current statement is available
|X| Credit limit is reached or exceeded
|X| Available credit drops below a specified amount
|X| Balance exceeds or drops below a specified number of days
|X| Inactive user alert
|X| Special occasion events (i.e., birthday or anniversary or a
car payment.)
o Transaction Events:
|X| Payment or credit item posted to the account
|X| A debit item exceeding a specified amount was posted to the
account
|X| A specified number of transactions in one day has been
exceeded
|X| The daily dollar amount of transactions exceeds a specified
amount
Online Activation - Web-based Card Activation allows cardholders to
activate their new and reissued cards in a secure environment.
Issuer Marketing Program - InteliData has created a turnkey marketing
program designed especially to help issuers promote Internet Account
Management to their cardholders. The program is designed to increase
adoption rates in a cost-effective manner. The Company currently provides
two statement-insert designs that can be customized with the FI's name,
logo, and Web site address. These pieces provide an incentive to have
cardholders manage their credit card accounts online, potentially reducing
servicing expense and enhancing the impact of the issuer's Web site.
Account Profile Change -- Account Management Module - Through InteliData,
card issuers can allow their cardholders to change their account
information online, including address and phone numbers. InteliData enables
card issuers to authenticate a cardholder's identity prior to making
changes. If the card issuer chooses a manual processing method, change
requests are sent to the Customer Service Representative ("CSR") queue for
processing. If the card issuer chooses an automated processing method,
change requests are completed real-time at the system of record.
EBPP Solutions
- --------------
InteliData's Electronic Bill Presentment and Payment Products ("EBPP
Solutions" marketed after the brand name InteliWorks(TM)) have been designed to
meet the near term and emerging opportunities in online payments. The Company's
EBPP products offer a broad set of solutions for "pay-anyone" online bill
payment, as well as the expanding range of online payments, including payment of
electronically presented bills and inter-bank transfers. The Company's bill
payment solutions give control of payment warehousing and routing to the FI,
making bill payment similar to other forms of electronic payments (such as ACH
and ATM transactions), while reducing the expense of bill payment.
InteliWorks(TM) CSP - The InteliWorks(TM) Consumer Services Provider
("CSP") solution, which is presently under development, has been designed from
the ground up to meet the new, emerging, and unique transaction processing and
switching needs for consumer side bill presentment and payment. These include
the ability to:
o Interface with multiple EBPP networks, remittance processors, and
exchanges, such as RPPS, Princeton eCom, Metavante, Online Resources
and CheckFree
o Manage settlement and dispute resolution across multiple networks
o Synchronize biller directories across multiple networks
o Manage consumer enrollment with billers across multiple networks
o Manage interaction with biller Web sites for detailed billing
information
o Aggregate summary level bills
o Integrate seamlessly to the bank's existing Web site
o Manage payment through multiple networks
o Consolidate payment on presented bills with "pay-any" bill payment
o Provide payment from external accounts and process transfers between
accounts at two different FI's
The platform behind the InteliData CSP is the Company's InteliWorks(TM)
online financial processing architecture. This architecture, based entirely on
the J2EE standard, is designed to meet the unique needs of large scale, online
financial messaging and transaction processing. InteliWorks is designed to
provide:
o 100% J2EE compliance
o Platform portability across multiple OS and database environments
o Industrial strength reliability to ensure accurate processing of
payment transactions
o Presentation User Interface independence, providing ease of
integration with bank-designed user interfaces for Web and wireless
delivery channels
o Scalability to handle large transaction volumes
o Flexible security architecture
o Network independence (internal, RPPS, and others)
o Native XML integration points with "adapters" for IFX, OFX and other
future messaging standards
Interpose(R) Payment Warehouse - The Interpose(R) Payment Warehouse
provides a software solution to FI's that automates bill payment processing,
while giving FI's the benefit of tracking payment activity and integrating
delivery channels. The Interpose(R) Payment Warehouse gives FI's the option of
Least Cost Routing(TM). This enables FI's to outsource as much or as little of
the electronic payment volume as they choose. This permits FI's to:
o Process "on-us" internal payments at no additional cost
o Ensure "good funds" debits to reduce exception item costs
o Capitalize on Least Cost Routing(TM) of payments
o Create new revenue streams for electronic lockbox operations
The Interpose(R) Payment Processor is a comprehensive payment warehousing
and routing solution designed to give the FI's control of their electronic bill
payment program. Using Interpose(R), FI's can:
o Mix-and-match multiple payment options and processors
o Offer customers a variety of interface options--scheduling and
modifying payments from the PC, Internet, or telephone
o Warehouse bill payment information and mine customer data to expand
relationships
MARKETING AND DISTRIBUTION
The Company concentrates its marketing efforts on direct sales of principal
products and services to FI's in the United States, including bankcard issuers.
Currently, the Company is marketing to large FI's, generally with assets in
excess of $3 billion. In addition, the Company markets to bankcard issuers
through a processing arrangement with First Data Resources, a subsidiary of
First Data Corp. The Company is developing products and services to assist FI's
who want to provide their customers with the ability to access certain
information from their accounts and to complete transactions with those
institutions concerning bill payments, loan payments, online transfers and other
transactions from remote locations via personal computers or other devices.
The Company has established alliances with major service providers who are
providing services to our target FI's and who are marketing our services. The
Company currently has agreements in place with ALLTEL and First Data Resources
for the sales forces of those companies to market services using InteliData's
systems.
ALLTEL is a leading provider of core data processing software to large
banks. Forty-seven of the top fifty U.S. banks rely on ALLTEL software for loan
processing, mortgage processing, or deposit processing software and service.
ALLTEL has licensed InteliData's Interpose(R) Payment Warehouse and Interpose
Web Banking products and can offer outsourced bill payment services to its
customers. InteliData receives revenue for the use of the software in the ALLTEL
Data Center.
First Data Resources is a leading third-party transaction processor. Its
services include a comprehensive line of card portfolio management solutions,
products and services to more than 1,400 credit, debit, stored-value, smart
cards, commercial, private label and oil card issuers worldwide. Under a Joint
Marketing Agreement between the two companies, First Data markets InteliData's
Card Solutions(TM) to credit card issuers interested in utilizing Web based
tools and services that can help them expand their portfolio, increase market
share and improve profitability.
COMPETITION
The Company's products and services face competition from several types of
competitors. Some FI's have elected to develop internally their own Internet
banking and EBPP solutions, instead of purchasing products and services from the
Company or other vendors. FI's may also obtain similar products and services
from other providers, including S-1 Corporation, Corillian Corporation,
Financial Fusion, Inc., CheckFree Corporation, Online Resources Corporation,
Digital Insight, Inc., Metavante Corporation, and Incurrent Solutions, Inc.
The Company expects that competition in these areas will continue to
increase. The Company believes that a principal competitive factor in its
markets is the ability to offer an integrated system of various Internet banking
and EBPP products and services. Competition will be based upon price,
performance, customer service and the effectiveness of marketing and sales
efforts. The Company competes in its various markets on the basis of its
relationships with strategic partners, by developing many of the products
required for complete solutions, by leveraging market experience, and by
building reliable products and offering those products at competitive prices.
PRODUCT DEVELOPMENT
The Company operates in industries that are rapidly growing and changing.
In an effort to improve the Company's position with respect to its competition,
the Company has focused its efforts in the area of product development. In 2002,
2001, and 2000, the Company's research and development expenditures were
$8,807,000, $15,729,000, and $14,512,000, respectively. At December 31, 2002 and
2001, approximately 57 and 97 employees were engaged in product development,
respectively.
The Company's product development efforts are focused on software and
systems for Internet banking and EBPP. This industry is characterized by rapid
change. To keep pace with this change, the Company maintains an aggressive
program of new product development and dedicates considerable resources to
research and development to further enhance its existing products and to create
new products and technologies. The Company's ability to attract and retain
highly skilled research and development personnel is important to the Company's
continued success.
GOVERNMENT REGULATION
The financial services market, which the Company has targeted for
marketing, is highly regulated at both the federal and state levels.
Interpretation, implementation or revision of banking regulations can accelerate
or hinder the ultimate success of the Company and its products.
PATENTS, PROPRIETARY RIGHTS AND LICENSES
The Company holds limited registered intellectual property rights with
respect to its products. The Company relies on trade secret laws and licensing
agreements to establish and maintain its proprietary rights to its products.
Although the Company has obtained confidentiality agreements from its key
executives and engineers in its product development group, there can be no
assurance that third parties will not independently develop the same or similar
alternative technology, obtain unauthorized access to the Company's proprietary
technology or misuse the technology to which the Company has granted access.
The Company does not believe that its products and services infringe on the
rights of third parties. It is possible that third parties could assert
infringement claims against the Company. There can be no assurance that any such
assertion will not result in costly litigation or require the Company to cease
using, or obtain a license to use, intellectual property of such parties.
EMPLOYEES
At December 31, 2002 and 2001, the Company had approximately 89 and 140
employees, respectively. The Company has no collective bargaining agreements
with its employees.
AVAILABLE INFORMATION
The Company files annual, quarterly, and current reports, proxy statements,
and other documents with the Securities and Exchange Commission (the "SEC")
under the Securities Exchange Act. The public may read and copy any materials
that the Company files with the SEC at the SEC's Public Reference Room at 450
Fifth Street, NW, Washington, DC 20549. The public may obtain information on the
operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330.
Also, the SEC maintains an Internet website that contains reports, proxy and
information statements, and other information regarding issuers, including the
Company, that file electronically with the SEC. The public can obtain any
documents that the Company files with the SEC at http://www.sec.gov.
The Company also makes available free of charge on or through our Internet
website (http://www.intelidata.com) our Annual Report on Form 10-K, Quarterly
Reports on Form 10-Q, Current Reports on
Form 8-K, and, if applicable, amendments to those reports filed or furnished
pursuant to Section 13(a) of the Securities Exchange Act as soon as reasonably
practicable after the Company electronically files such material with, or
furnishes it to, the SEC.
ITEM 2. PROPERTIES
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The Company's headquarters are located in Reston, Virginia, where it leases
25,200 square feet of office space; this lease expires in December 2006. The
Company also leases 11,000 square feet of office space for its product
development facilities in Toledo, Ohio. The Ohio lease expires in January 2004.
In January 2001, the Company acquired Home Account Holdings, which had
leased facilities in Emeryville, California, Omaha, Nebraska, and Charleston,
South Carolina. In February 2001, the facility in California, which served as
the headquarters for the pre-merger Home Account Holdings, was shut down and the
Company has subleased the 7,200 square feet of space as of August 2002. The
Nebraska lease for 19,000 square feet of office space, used for product
development and customer service, expires in March 2003 and is expected to be
renewed at current market rates. The South Carolina lease for 5,300 square feet
of office space, used for product development and customer service, will
terminate in April 2006.
All of the leasing arrangements were made with unaffiliated parties. The
Company believes that its leased properties are sufficient for its current
operations and for the foreseeable future.
ITEM 3. LEGAL PROCEEDINGS
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The Company is not currently a party to any material litigation. From time
to time, the Company is a party to routine litigation incidental to its
business. Management does not believe that the resolution of any or all of such
routine litigation will be likely to have a material adverse effect on the
Company's financial condition or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF STOCKHOLDERS
- --------------------------------------------------------
None.
EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth the names and ages of all executive officers
of the Company and all positions and offices within the Company presently held
by such executive officers:
Name Age Position Held
- ---- --- --------------
Alfred S. Dominick, Jr. 57 Chairman, President and Chief Executive Officer
Michael E. Jennings 57 Executive Vice President, Consumer Services
John R. Polchin 39 Vice President, Chief Financial Officer
and Treasurer
Albert N. Wergley 55 Vice President, General Counsel and Secretary
Alfred S. Dominick, Jr. has served as the President and Chief Executive Officer
of the Company since August 1998 and Chairman of the Board of Directors since
August 2002. Prior to joining InteliData, Mr. Dominick served as president of
the Retail Products Delivery Group at M&I Data Services. Prior to joining M&I
Data Services in July 1995, he was Executive Vice President of Retail Banking
and a member of the Executive Committee for Boatmen's Bancshares Corporation for
three years. Prior to that Mr. Dominick was an Executive Vice President with
Bank One Texas, since 1989. Prior to his employment with Bank One Texas, Mr.
Dominick was a Senior Vice President with Fleet National Bank.
Michael E. Jennings has served as the Executive Vice President, Consumer
Services since joining InteliData in June 2000. He is in charge of overall
business planning and business development activities for electronic bill
presentment and payment, Internet banking, and operations. Prior to joining
InteliData, Mr. Jennings served at Bank of America as a Senior Vice President of
Self Service Delivery. During the eight years prior to joining InteliData, he
worked on alternative delivery strategies and managing several different areas
of electronic Banking including: Debit Cards, ATMs, ATM/POS Operations, PC and
Internet Banking, and EFT switches. Mr. Jennings is a former director of CIRRUS,
Money Transfer Systems, Credit Systems Inc., and was chairman of the American
Banking Association's Retail Payment Systems Committee.
John R. Polchin has served as Vice President, Chief Financial Officer and
Treasurer since April 2002. Prior to joining InteliData, Mr. Polchin served as
Vice President and Chief Financial Officer of Orblynx, Incorporated, a global
Internet infrastructure firm. Prior to that, Mr. Polchin held the positions of
Vice President and Treasurer and Senior Vice President, Chief Financial Officer
for e.spire Communications, a publicly traded CLEC. Additionally, he has served
as Vice President of Finance and Controller for Appworx Corporation, a West
Coast-based enterprise software concern. From 1987 to 1994, he held various
financial positions within UNC Incorporated (acquired by General Electric). Mr.
Polchin began his career at NCNB Corporation, now Bank of America.
Albert N. Wergley has served as Vice President, General Counsel, and Secretary
of the Company since November 1996. From May 1995 to November 1996, he served as
Vice President and General Counsel of US Order. From 1986 to 1994, Mr. Wergley
was vice president and general counsel of Verdix Corporation (now Rational
Software Corporation), a manufacturer of software development tools. Previous to
that he was associated with the McLean, Virginia office of the law firm of Reed
Smith Shaw & McClay and with the law firm of Howrey & Simon in Washington, D.C.
PART II
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ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED
- ---------------------------------------------------------------
STOCKHOLDER MATTERS
-------------------
The Company's common stock is traded on the Nasdaq National Market under
the symbol INTD. The table below sets forth the high and low quarterly sales
prices for the common stock of the Company as reported in published financial
sources for each quarter during the last two years:
High Low
------- -------
2002 Fourth Quarter $ 1.03 $ 0.57
Third Quarter 1.50 0.66
Second Quarter 2.74 1.13
First Quarter 3.00 1.50
2001 Fourth Quarter $ 4.30 $ 2.70
Third Quarter 5.90 2.40
Second Quarter 6.36 2.55
First Quarter 6.03 2.25
On February 26, 2003, the last reported sales price for the Company's
common stock was $1.66. The number of stockholders of record at February 26,
2003 was 685, and does not include those stockholders who hold shares in street
name accounts.
The Company has never declared or paid any cash dividends on its common
stock. The Company currently intends to retain its future earnings, if any, to
fund the development and growth of its business and, therefore, does not
anticipate paying any cash dividends in the foreseeable future. Any future
decision concerning the payment of dividends on the Company's common stock will
depend upon the results of operations, financial condition and capital
expenditure plans of the Company, as well as such other factors as the Board of
Directors, in its sole discretion, may consider relevant.
ITEM 6. SELECTED FINANCIAL DATA (in thousands, except per share data)
- -----------------------------------------------------------------------
Years Ended December 31,
RESULTS OF OPERATIONS: 2002 2001 2000 1999 1998
- ---------------------- ----------- ----------- ------------ ----------- ----------
Revenues $ 21,495 $ 18,296 $ 5,101 $ 6,493 $ 4,683
Cost of revenues 8,474 9,010 2,720 1,743 618
Operating expenses 21,103 39,624 27,699 12,800 11,861
----------- ----------- ---------- ----------- -----------
Operating loss (8,082) (30,338) (25,318) (8,050) (7,796)
Other income, net (649) 137 49,726 350 874
Provision (benefit) for income taxes (137) (160) 488 -- --
------------- ------------ ----------- ----------- -----------
Income (loss) from continuing operations (8,594) (30,041) 23,920 (7,700) (6,922)
Income (loss) from discontinued operations -- -- (262)(1) 5,805 (30,917)
----------- ----------- ----------- ----------- -----------
Net income (loss) (8,594) (30,041) 23,658 (1,895) (37,839)
Preferred stock dividend requirement -- -- -- (1,936)(2) --
----------- ----------- ---------- ----------- -----------
Net income (loss) attributable to
common stockholders $ (8,594) $ (30,041) $ 23,658 $ (3,831) $ (37,839)
============ ============ =========== =========== ===========
Basic earnings per common share
Income (loss) from continuing operations $ (0.18) $ (0.65) $ 0.63 $ (0.29) $ (0.22)
Income (loss) from discontinued operations 0.00 0.00 (0.01) 0.18 (0.98)
----------- ---------- ----------- ----------- -----------
Net income (loss) $ (0.18) $ (0.65) $ 0.62 $ (0.11) $ (1.20)
============ =========== ========== =========== ===========
Diluted earnings per common share
Income (loss) from continuing operations $ (0.18) $ (0.65) $ 0.59 $ (0.29) $ (0.22)
Income (loss) from discontinued operations 0.00 0.00 (0.01) 0.18 (0.98)
----------- ---------- ----------- ----------- -----------
Net income (loss) $ (0.18) $ (0.65) $ 0.58 $ (0.11) $ (1.20)
============ =========== =========== =========== ===========
Weighted-average common shares outstanding
Basic 48,869 45,897 38,237 33,367 31,450
=========== =========== =========== ========== ===========
Diluted 48,869 45,897 40,843 33,367 31,450
=========== =========== =========== ========== ===========
December 31,
FINANCIAL POSITION: 2002 2001 2000 1999 1998
- ------------------- ----------- ----------- ------------ ----------- ---------
Cash and cash equivalents $ 5,674 $ 12,026 $ 27,255 $ 8,496 $ 8,050
Total assets 44,506 57,710 43,278 11,212 9,137
Long-term debt -- -- -- -- --
Stockholders' equity 36,454 44,475 33,570 7,087 331
(1) During the fiscal year ended December 31, 2000, the leasing business
segment was discontinued, and accordingly, has been reported as
discontinued operations.
(2) Preferred stock dividends for 1999 include the effects of accretion of
discounts arising from the allocation of proceeds from issuance of
preferred stock to warrants and a beneficial conversion feature. Such
preferred stock was converted to common stock in late 1999.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
- -----------------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS
-----------------------------------
Overview
InteliData provides the real-time financial processing infrastructure to
enable FI's to provide services to their customers over the Internet. The
Company develops and markets software products and consulting services for the
financial services industry. InteliData also services the EBPP market with the
development of its end-to-end, biller-to-consumer EBPP solutions.
Our products and services are designed to assist consumers in accessing and
transacting business with their FI's electronically, and to assist FI's in
connecting to and transacting business with third party processors. The Company
also serves as an ASP by providing Internet hosting and service bureau solutions
to FI's, including bankcard issuers.
On January 11, 2001, InteliData acquired Home Account Holdings, Inc. and
its operating subsidiary, Home Account Network, Inc., by means of the merger of
one of the Company's wholly owned subsidiaries with and into Home Account
Holdings, with Home Account Holdings surviving the merger. Home Account Holdings
is now a wholly owned subsidiary of InteliData. This acquisition was accounted
for as a purchase. As a result of the Company's acquisition of Home Account
Holdings, InteliData now offers a suite of UNIX-based Internet banking and
electronic bill presentment and payment products and services in an application
services provider environment.
The Company provides software products and implementation services to FI's
whose processes and systems are subject to regulatory approvals. Internet
banking and EBPP are developing marketplaces. FI's are gradually expanding their
Internet banking services to permit customers not only to access historical
account information from remote locations, but also to engage in transactions
such as receiving and/or paying bills and transferring funds. The Company's
future growth and profitability will depend, in part, upon consumer acceptance
of Internet banking and EBPP processes and the speed at which such acceptance
occurs.
The Company's business strategy is to develop products and services,
including software, to meet the needs of FI's and their customers in the
Internet banking markets. The Company strives to develop products with broad
appeal that are easy-to-use, practical and built around common industry
standards. The Company has four strategic product lines.
The Internet banking product line provides Internet access to account
information, transfer capability between accounts, and bill payment
functionality and is focused on large banks, typically with assets over $3
billion dollars. While the market for these products is mature, and the number
of new opportunities is limited, the Company has a customer base, which provided
approximately 67% of total revenues in 2002, and represents an opportunity for
future business from both new products as well as organic growth of their user
base.
The Interpose(R) OFX Gateway product line provides Quicken and Microsoft
Money users access to their bank account information and other functionality.
This product line currently has four primary customers, CitiBank USA, First
Union/Wachovia, Bank of America, and USAA. In addition, Fiserv has licensed this
technology. This product line contributed approximately 14% of total 2002
revenues.
The Company's Card Solutions(TM) product line provides card issuers with
the opportunity to offer their customers Internet access to credit card
information with the functionality to perform a variety of self-service
activities, apply for a credit card or a line increase, pay the bills, or
receive e-mail orders. The Company has a strategic relationship with First Data
Resources, which is marketing the Company's products to their customer base. In
2002, this product line contributed approximately 18% of total revenues.
The Company's EBPP Solutions product line, InteliWorks(TM), provides a
suite of products enabling a bank to connect to payment switches, such as
MasterCard RPPS, or payment processors, to aggregate presented bills and to
warehouse bill payments. As a product line that is still under development,
revenue from this product line was less than 1% of total 2002 revenues. The
Company does expect revenues for this product line to increase in 2003,
beginning primarily in the second half of the year.
Critical Accounting Policies
We consider the following accounting policies to be the most important to
our financial position and results of operations or are policies that require
the exercise of significant judgment and/or estimates.
Revenue Recognition - We consider our revenue recognition policy critical
to the understanding of our business operations and results of operations. The
Company supplies Internet banking and electronic bill presentment and payment
software to FI's. The Company's revenues associated with integrated solutions
that bundle software products with customization, installation and training
services are recognized using the percentage of completion method of accounting.
The Company's bill payment technology software does not require significant
customization. Upon delivery, the Company either recognizes revenue ratably over
the contract period for contracts where vendor specific objective evidence
(VSOE) of fair value for post contract customer support (PCS) does not exist or
recognizes revenue in full where VSOE of fair value for PCS does exist.
The Company enters into multiple element arrangements. Elements typically
include software, consulting, implementation and PCS. PCS contracts generally
require the Company to provide technical support and unspecified readily
available software updates and upgrades to customers. Revenue for these multiple
element arrangements is recognized when there is persuasive evidence of an
arrangement and delivery to the customer has occurred, the fee is fixed and
determinable, and collectibility is considered probable. Advance payments are
recorded as deferred revenue until the products are shipped, services are
delivered and all obligations are met. Currently, the Company does not have VSOE
of fair value for some of the elements within its multiple element arrangements.
Therefore, all revenue under such arrangements is being recognized ratably over
the term of the PCS contract. Revenue from transactional services, which
includes hosting and 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 our
software in an ASP environment. The customer may not take possession of the
software without incurring significant transition and infrastructure costs, as
well as potential payments of fees to the Company for the termination of such
arrangements. In cases where the customer has not licensed software from
InteliData, the customer must also purchase a license prior to having the right
to use the software in its own operating environment, in addition to the
aforementioned fees. In these situations, the Company applies the guidance under
EITF 00-3 and the Staff Accounting Bulletin No. 101, Revenue Recognition in
Financial Statements, and recognizes the revenue associated with the license
and/or implementation fees ratably over the initial term of the contract.
Additionally, based on the EITF 00-3 guidance, the Company concluded that
SOP 97-2 should not be applied to certain of its contracts and their related
revenue for license and professional services were recognized under the
percentage of completion method. In addition to our developing and delivering
the solution, the Company is entitled to transaction fees based on the number of
users and transactions. These transaction fees are earned based on the monthly
user counts and as transactions are processed.
Estimates at Completion - Revenues related to some of the Company's
contracts are recognized using the percentage of completion method of
accounting, which requires that we make estimates and judgments as to
anticipated project scope, timing and costs to complete the projects. The
completion of certain development efforts are critical for the Company to
perform on certain contracts. Delays in product implementation or new product
development at customer locations and product defects or errors could affect our
estimates and judgments. Additionally, we may experience delays when
implementing our products at customer locations, and customers may be unable to
implement our products in the time frames and with the functionalities that they
expect or require. The accuracy of these estimates and judgments could affect
our business, operations and financial condition.
Allowance for Doubtful Accounts - Determination of our allowance for
doubtful accounts requires significant estimates. Financial instruments that
potentially subject the Company to credit risk consist principally of trade
receivables. The Company sells its products primarily to FI's in the United
States. The Company believes that the concentration of credit risk in its trade
receivables is substantially mitigated by the Company's on-going credit
evaluation process and the financial position of the FI's that are highly
regulated. The Company does not generally require collateral from customers. The
Company establishes an allowance for doubtful accounts based upon factors
surrounding the credit risk of specific customers, historical trends and other
information. As of December 31, 2002, the Company's top eight customers
comprised approximately 54% of the net accounts receivable balance.
A number of factors are considered in establishing the allowance, including
historical collection experience, the macro-economic environment, estimates of
forecasted write-offs, the aging of the accounts receivable portfolio, and
others. If the financial condition of our accounts receivable portfolio
deteriorates, additional allowances would be required.
As part of the Home Account acquisition in 2001, the Company acquired
certain accounts receivables that were outstanding as of the acquisition date.
The Company pursued collection efforts, but ultimately determined that some of
these accounts were uncollectible. Such doubtful accounts related to these
acquired assets cannot be adjusted as part of the purchase price allocation, so
the bad debt expense was recognized in operations in 2001. During 2001, the
Company recorded costs associated with these particular sets of uncollectible
accounts in the amount of $1,090,000 and began to write off certain accounts.
Additionally in 2002 and 2001, the Company wrote off some previously reserved
legacy InteliData accounts. During 2002, the Company experienced improved cash
collections on some previously reserved accounts and an account that had
previously been written off. As a result of these collection efforts and the
resulting cash receipts, the Company reduced its bad debt expense in 2002 by
approximately $340,000 to reflect the positive developments.
Valuation of Long-Lived Assets - On an annual basis, we review long-lived
assets such as identifiable intangibles and goodwill for impairment whenever
events or changes in circumstances indicate that the carrying amount may not be
recoverable. This review requires us to make estimates of our undiscounted
future cash flows in order to determine if our long-lived assets are impaired.
If the total of the expected undiscounted future cash flows is less than the
carrying amount of the assets, we are required to make estimates of our
discounted future cash flows in order to calculate a loss for the difference
between the fair value and carrying value of the assets. We make significant
assumptions and estimates in this process regarding matters that are inherently
uncertain, such as calculating remaining useful lives and assuming discount
rates. The resulting cash flows are computed over an extended period of time,
which subjects those assumptions and estimates to an even larger degree of
uncertainty. When known and available, we also use comparable values of similar
businesses in corroborating the results from the discounted cash flows approach.
This process involves making estimates about matters that are inherently
uncertain. 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 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 that in management's opinion, extend the useful life of
the underlying asset, at cost and depreciate the assets over their estimated
useful lives. We periodically reassess the economic life of these elements and
make adjustments to these 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 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 2002, the Financial
Accounting Standards Board ("FASB") issued Statement of Financial Accounting
Standard ("SFAS") No. 148, Accounting for Stock-Based Compensation-Transition
and Disclosure-an amendment of FAS 123 ("SFAS 148"). SFAS 148 amends SFAS 123,
Accounting for Stock-Based Compensation, to provide alternative methods of
transition for an entity that voluntarily changes to the fair value based method
of accounting for stock-based employee compensation. It also amends the
disclosure provisions of SFAS 123 to require prominent disclosure about the
effects on reported net income of an entity's accounting policy decisions with
respect to stock-based employee compensation. SFAS 148 also amends APB Opinion
No. 28, Interim Financial Reporting, to require disclosure about those effects
in interim financial information. SFAS 148 is effective for annual and interim
periods beginning after December 15, 2002. As the Company has elected not to
change to the fair value based method of accounting for stock-based employee
compensation, SFAS 148 will not have any impact on our financial position,
results of operations or cash flows.
In June 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated
with Exit or Disposal Activities (including Certain Costs Incurred in a
Restructuring) ("SFAS 146"), which supersedes Emerging Issues Task Force Issue
No. 94-3, Liability Recognition for Certain Employee Termination Benefits and
Other Costs to Exit an Activity ("EITF 94-3"). SFAS 146 requires recognition of
a liability for costs associated with an exit or disposal activity when the
liability is incurred, rather than when the entity commits to an exit plan under
EITF 94-3. The provisions of SFAS 146 are effective for exit or disposal
activities that are initiated after September 30, 2002. The implementation of
these provisions did not have a material impact on the financial position or
results of operations.
Results of Operations - Years Ended December 31, 2002 and 2001
The following represents the results of operations for InteliData. Such
information should be read in conjunction with the financial statements and the
notes thereto in Part II, Item 8 of this Annual Report on Form 10-K, as well as
the cautionary statements and risk factors in this section.
Revenues
The Company's revenues were $21,495,000 in 2002 compared to $18,296,000 in
2001, an increase of $3,199,000. The increase was a result of an increase in
consulting and services revenues of $3,690,000, offset by a decrease in software
revenue of $491,000. During 2002, software revenues were $1,299,000 and
consulting, services, and termination fees were $20,196,000. During 2001, the
Company generated revenues of $1,790,000 from software sales and $16,506,000
from consulting, services, and termination fees.
The decrease in software revenues was primarily due to the timing of system
deliveries and fewer software license sales. The increase in consulting,
services, and termination fees from 2001 to 2002 was primarily due to increases
in the Company's recurring revenue from fees associated with its application
services provider ("ASP") operations. The following information represents the
Company's revenues in the various product lines for the years ended December 31
(in thousands):
2002 2001 2000
--------- --------- ---------
Internet Banking $ 14,475 $ 12,333 $ 4,557
Interpose(R)OFX Gateway 3,039 3,064 --
Card Solutions(TM) 3,948 2,738 --
EBPP Solutions 33 161 --
Royalties and other -- -- 544
--------- --------- ---------
Total revenues $ 21,495 $ 18,296 $ 5,101
========= ========= =========
As anticipated, the revenue from royalties in 2002 and 2001 were zero after
the discontinuance of the Company's royalty payments from VISA Interactive.
Cost of Revenues and Gross Profit
The Company's cost of revenues decreased $536,000 to $8,474,000 in 2002
from $9,010,000 in 2001. The decrease was due to the offsetting of approximately
$254,000 of costs against a forward loss accrual that was expensed in previous
periods, a decrease in professional services costs and a decrease in service
provider costs due to contract renegotiations.
Overall gross profit margins increased to 61% for 2002 from 51% for 2001.
The increase in gross profit margins was attributable to an increase in
recurring revenue coupled with the decrease in cost of revenues as discussed
above. The Company anticipates that gross profit margins may fluctuate in the
future due to changes in product mix and distribution, outsourcing activities
associated with an ASP business model, competitive pricing pressure, and the
introduction of new products and changes in volume.
General and Administrative
General and administrative expenses decreased $1,436,000 to $8,629,000 in
2002 from $10,065,000 in 2001. The decrease was primarily attributable to the
Company's reduction of corporate and administrative expenses that resulted from
continued evaluation of on-going cost structures and synergies achieved from the
purchase of Home Account. The Company plans to continually assess its operations
to manage its expenses and infrastructures in light of anticipated business
levels.
Selling and Marketing
Selling and marketing expenses decreased $6,628,000 to $2,947,000 in 2002
from $9,575,000 in 2001. This was primarily attributable to decreases in the
number of selling and marketing employees and travel and outside professional
consulting expenses related to both continued evaluation of on-going cost
structure and synergies achieved from the purchase of Home Account. The Company
plans to continually assess its operations to manage its expenses and
infrastructures in light of anticipated business levels.
Research and Development
Research and development costs decreased $6,922,000 to $8,807,000 in 2002
from $15,729,000 in 2001. The decrease was primarily attributable to the
Company's expense reduction efforts and the reduction of employees after
combining the operations of InteliData and Home Account and finding efficiencies
and synergies. The Company incurs research and development expenses primarily in
developing the next generation, open standards-based InteliWorks(TM) Enterprise
Payment Solution. The Company plans to continually assess its operations to
manage its expenses and infrastructures in light of anticipated business levels.
In 2003, the Company expects to focus most of its research and development
efforts on its EBPP Solutions product line. The Company plans to continue
funding research and development into this product to expand the number of
processor interfaces, build a more comprehensive Customer Care tool, expand "pay
any" capabilities, complete development of external payments, and create a
Universal Directory Service. The Internet banking, Interpose(R) OFX Gateway, and
Card Solutions(TM) products are currently in operation at customer sites and
development efforts will likely be focused primarily on product upgrades and
product maintenance.
Amortization of Goodwill and Intangibles
Statement of Financial Accounting Standards No. 142, Goodwill and Other
Intangible Assets ("SFAS 142"), requires the Company to not amortize goodwill
and certain intangibles into results of operations, but instead the Company
would review these assets for impairment. The assets would be written down and
impairment losses would be charged to results of operations only in the periods
in which the recorded values are determined to be more than their fair values.
The adoption of this accounting standard, as of January 1, 2002, reduced the
amortization expense associated with goodwill by $3,555,000 to $0 in 2002 from
$3,555,000 in 2001. The amortization of certain intangibles continued at an
annualized rate of $720,000. As of January 1, 2002, in accordance with SFAS 142,
the Company ceased recognizing amortization expense on goodwill and the
assembled workforce intangible asset, and the assembled workforce intangible
asset was combined with goodwill for financial accounting and reporting.
In accordance with SFAS 142, the Company had six months from adoption (up
until June 30, 2002) to complete the initial test for impairment as of January
1, 2002, the adoption date of SFAS 142. In accordance with the transition
provisions of SFAS No. 142, the Company conducted the first step of the
impairment tests. The Company assessed the fair value of its only reporting unit
by considering its projected cash flows, comparable company valuations, and
recent purchase prices paid for entities within our industry. Given
consideration of these factors, the Company concluded that the fair value of the
reporting unit exceeded the carrying amount of its net assets. The Company is
required to perform reviews for impairment in future periods, at least annually,
that may result in future periodic write-downs. Tests for impairment between
annual tests may be required if events occur or circumstances change that would
more likely than not reduce the fair value of the net carrying amount. As of
December 31, 2002, the Company is not aware of such events or circumstances that
could indicate potential impairment.
Realized Gains on Sales of Investments
On January 20, 2000, Home Financial Network, Inc. ("HFN"), a company in
which InteliData held approximately a 25% ownership interest, merged with
Sybase, Inc. ("Sybase"). InteliData accounted for its investment in HFN using
the equity method. As of the merger date, such investment's carrying value was
zero. In exchange for its portion of ownership in HFN, InteliData received
approximately $5,867,000 in cash and approximately 1,770,000 shares of Sybase
stock. The Company also held warrants to purchase HFN common stock. As part of
the merger agreement, such warrants were converted into warrants to purchase
Sybase common stock. The Company received 640,000 "warrant units" with an
exercise price of $2.60 per warrant unit. Upon exercise of each warrant unit,
the Company was entitled to receive $1.153448 in cash and 0.34794 share of
Sybase common stock.
As part of this merger transaction, an escrow account was established to
provide Sybase indemnity protection against possible claims that might arise
against HFN. Approximately 133,000 shares of Sybase common stock owned by
InteliData were put in escrow, along with approximately $440,000 of cash. In
March 2001, the Company received the escrow payments less approximately $129,000
for miscellaneous claims under the escrow provision. During 2000, InteliData
recognized a gain of approximately $42,604,000 on this transaction and a gain of
$5,998,000 on the subsequent disposition of some of the Sybase common stock. The
remaining holdings of Sybase common stock were sold during 2001 for a net gain
of $507,000. This net gain combined with the loss of $129,000 from the escrow
claims represent the $378,000 realized gains on sales of investments for the
year ended December 31, 2001. At December 31, 2001, the Company owned all
640,000 warrant units described above. During June 2002, the Company exercised
all of its 640,000 warrants units to purchase Sybase common stock and sold the
resulting 223,000 shares of Sybase common stock. The Company received net
proceeds of approximately $1,718,000 and recognized a realized loss from sales
of investments of approximately $748,000.
Prior to January 1, 2001, the Company considered its investment in Sybase
common stock and warrants to purchase Sybase common stock to be
available-for-sale under the provisions of Statement of Financial Accounting
Standards No. 115, Accounting for Certain Investments in Debt and Equity
Securities ("SFAS 115"). Effective January 1, 2001, the Company adopted
Statement of Financial Accounting Standards No. 133, Accounting for Derivative
Instruments and Hedging Activities ("SFAS 133"), which establishes accounting
and reporting standards for derivative instruments and for hedging activities by
requiring that all derivatives be recognized in the balance sheet and measured
at fair value.
In accordance with SFAS 115, the balance sheet included $210,000 of
unrealized gain on investments (net of taxes), within stockholders' equity as of
December 31, 2001. As of December 31, 2001, the accumulated other comprehensive
loss balance represents the changes in the fair market value of the Sybase
common stock. In accordance with SFAS 133, the change in the fair market value
of the Sybase warrants was recorded in the statement of operations (see below).
SFAS 133 requires that all derivative financial instruments, such as
forward currency exchange contracts, interest rate swaps and the Company's
warrants to purchase Sybase stock, be recognized in the financial statements and
measured at fair value regardless of the purpose or intent for holding them.
Changes in the fair value of derivative financial instruments are either
recognized periodically in income or shareholders' equity (as a component of
comprehensive income), depending on whether the derivative is being used to
hedge changes in fair value or cash flows. The Company's adoption of this
pronouncement, effective January 1, 2001, did not result in an adjustment for
the cumulative effect of an accounting change, because the carrying value
reflected the fair value under the previous accounting guidance. In accordance
with SFAS 133, the Company recorded an unrealized loss on investment of $866,000
in the statement of operations for the year ended December 31, 2001.
Other Income
Other income, primarily investment and interest income, decreased $526,000
to $99,000 in 2002 from $625,000 in 2001. The decrease is associated with
decreased levels of cash and cash equivalents in 2002 as compared to 2001.
Income Taxes
The provisions (benefit) for income taxes were $(137,000) and $(160,000)
for the years ended December 31, 2002 and 2001, respectively. The benefit in
2002 represents a refund of taxes paid in 2000 as a result of tax legislation
enacted during 2002. The benefit in 2001 also represented a refund related to
2000. At December 31, 2002, the Company had net operating loss carryforwards for
federal income tax purposes of approximately $200 million, which expire in 2008
through 2022, general business tax credits of approximately $489,000, which
expire in 2005 through 2010, and an alternative minimum tax credit carryforward
of approximately $60,000, which may be carried forward indefinitely and used to
offset future regular taxable income. Approximately $45 million of the net
operating losses were incurred by Home Account prior to its acquisition by the
Company and are subject to annual limitation pursuant to Internal Revenue Code
Section 382 as a result of cumulative changes in ownership of more than 50% in
2001.
Discontinued Operations
In 2002 and 2001, the Company did not have any income statement activity in
discontinued operations.
As of December 31, 2002 and 2001, the net liabilities of discontinued
operations of $251,000 and $504,000 relate to the telecommunications divisions,
respectively. This relates to the potential environmental clean up associated
with InteliData's former New Milford, Connecticut property. In January 2000,
InteliData sold the New Milford, Connecticut building, its only remaining asset
in discontinued operations of the telecommunications division. In the context of
this sale, InteliData agreed to undertake limited remediation of the site in
accordance with applicable state law. The subject site is not a federal or state
Superfund site and InteliData has not been named a "potentially responsible
party" at the site. The remediation plan agreed to with the purchaser allows
InteliData to use engineering and institutional controls (e.g., deed
restrictions) to minimize the extent and costs of the remediation. Further, at
the time of the sale of the facility, InteliData established a $200,000 escrow
account for certain investigation/remediation costs. As of December 31, 2002 and
2001, this escrow account balance remained at $200,000. Moreover, InteliData has
obtained environmental insurance to pay for remediation costs up to $6,600,000
in excess of a retained exposure limit of $600,000. InteliData has recorded its
estimated liability related to this matter and other costs related to the
discontinued operations.
The Company has engaged a legal firm and an environmental specialist firm
to represent InteliData regarding this matter. The timing of the ultimate
resolution of this matter is estimated to be from three to five years under the
Company's proposed compliance plan, which involves a natural attenuation and
periodic compliance monitoring approach. Management does not believe that the
resolution of this matter will be likely to have a material adverse effect on
the Company's financial condition or results of operations.
Income (Loss) from Continuing and Discontinued Operations, Weighted-Average
Common Shares Outstanding and Basic and Diluted Income (Loss) Per Common Share
The basic and diluted weighted-average common shares outstanding for the
year ended December 31, 2002 was 48,869,000, compared to a basic and diluted
weighted-average common shares outstanding of 45,897,000 for the year ended
December 31, 2001. The increase resulted primarily from the exercise of stock
options, stock purchases under the Employee Stock Purchase Plan, and the
issuance of 2,863,000 shares for the private placements of the Company's common
stock that closed in November and December of 2001.
Losses from continuing operations were $(8,594,000) and $(30,041,000) for
the years ended December 31, 2002 and 2001, respectively, while there was no
gain or loss from discontinued operations in either period. Net losses were
$(8,594,000) and $(30,041,000) for 2002 and 2001, respectively. As a result of
the foregoing, basic and diluted net loss per common share was ($0.18) for the
year ended December 31, 2002 compared to a basic and diluted net loss per common
share of ($0.65) for the year ended December 31, 2001.
Results of Operations - Years Ended December 31, 2001 and 2000
The following represents the results of operations for InteliData. Such
information should be read in conjunction with the financial statements and the
notes thereto in Part II, Item 8 of this Annual Report on Form 10-K, as well as
the cautionary statements and risk factors in this section.
Revenues
The Company's revenues were $18,296,000 in 2001 compared to $5,101,000 in
2000, an increase of $13,195,000. The increase was a result of an increase in
software revenue of $1,117,000, an increase in consulting, services, and
termination fees of $12,622,000, all including the addition of the Home Account
operations starting from January 11, 2001, and offset by the expected cessation
of the royalty arrangements relating to the sale of bill-payment software to
VISA Interactive. During 2001, the Company generated $1,790,000 from software
sales and $16,506,000 from consulting, services, and termination fees. During
2000, software revenues were $673,000, consulting, services, and termination
fees were $3,884,000 and royalty arrangements contributed $544,000.
The increase in software revenue was due to several large systems sold in
the beginning of the year, while the systems sold in 2000 occurred in the latter
part of the year. As a result, the Company was able to perform on and earn the
revenue associated with the 2000 and 2001 sales during 2001. The increase in
consulting, services, and termination fees from 2000 to 2001 was primarily due
to the addition of the Home Account operations and the increases in the
Company's recurring revenue from fees associated with its hosting and ASP
operations.
As anticipated, the revenue from royalties was zero due to the cessation of
the royalty revenue stream from the sale of bill-payment software to VISA
Interactive. The difference of $544,000 for the year is due to the decline in
the revenue stream, as previously disclosed, and to the final cessation of the
royalty streams.
Cost of Revenues and Gross Profit
The Company's cost of revenues increased $6,290,000 to $9,010,000 in 2001
from $2,720,000 in 2000. The increase was primarily due to increased revenues,
including the addition of the Home Account results.
Overall gross profit margins increased to 51% for 2001 from 47% for 2000.
The increase in gross profit margins was attributable to an increase in software
and recurring revenue, including the addition of Home Account customers. Gross
profit margins may fluctuate in the future due to changes in product mix and
distribution, outsourcing activities associated with an ASP business model,
competitive pricing pressure, and the introduction of new products and changes
in volume.
General and Administrative
General and administrative expenses increased $3,610,000 to $10,065,000 in
2001 from $6,455,000 in 2000. The increase was primarily attributable to the
result of additional corporate and administrative expenses associated with the
purchase of Home Account, including an increase in facilities expense and in bad
debt expense associated with the Home Account receivables assumed in connection
with the acquisition.
Selling and Marketing
Selling and marketing expenses increased $2,843,000 to $9,575,000 in 2001
from $6,732,000 in 2000. This was primarily attributable to increases in the
number of selling and marketing employees, travel and outside professional
services, and the additional expenses associated with the sales and marketing
efforts of Home Account.
Research and Development
Research and development costs increased $1,217,000 to $15,729,000 in 2001
from $14,512,000 in 2000. The increase was primarily attributable to the
additional expenses associated with the research and development staff of Home
Account, offset by InteliData's significant IWB development efforts in 2000.
Realized Gains on Sales of Investments
On January 20, 2000, Home Financial Network, Inc. ("HFN"), a company in
which InteliData held approximately a 25% ownership interest, merged with
Sybase, Inc. ("Sybase"). InteliData accounted for its investment in HFN using
the equity method. As of the merger date, such investment's carrying value was
zero. In exchange for its portion of ownership in HFN, InteliData received
approximately $5,867,000 in cash and approximately 1,770,000 shares of Sybase
stock. The Company also held warrants to purchase HFN common stock. As part of
the merger agreement, such warrants were converted into warrants to purchase
Sybase common stock. The Company received 640,000 "warrant units" with an
exercise price of $2.60 per warrant unit. Upon exercise of each warrant unit,
the Company is entitled to receive $1.153448 in cash and 0.34794 share of Sybase
common stock.
As part of this merger transaction, an escrow account was established to
provide Sybase indemnity protection against possible claims that might arise
against HFN. Approximately 133,000 shares of Sybase common stock owned by
InteliData were put in escrow, along with approximately $440,000 of cash. In
March 2001, the Company received the escrow payments less approximately $129,000
for miscellaneous claims under the escrow provision. During 2000, InteliData
recognized a gain of approximately $42,604,000 on this transaction and a gain of
$5,998,000 on the subsequent disposition of some of the Sybase common stock. The
remaining holdings of Sybase common stock were sold during 2001 for a net gain
of $507,000. This net gain combined with the loss of $129,000 from the escrow
claims represent the $378,000 realized gains on sales of investments. At
December 31, 2001, the Company owned all 640,000 warrant units described above.
Prior to January 1, 2001, the Company considered its investment in Sybase
common stock and warrants to purchase Sybase common stock to be
available-for-sale under the provisions of Statement of Financial Accounting
Standards No. 115, Accounting for Certain Investments in Debt and Equity
Securities ("SFAS 115"). Effective January 1, 2001, the Company adopted
Statement of Financial Accounting Standards No. 133, Accounting for Derivative
Instruments and Hedging Activities ("SFAS 133"), which establishes accounting
and reporting standards for derivative instruments and for hedging activities by
requiring that all derivatives be recognized in the balance sheet and measured
at fair value.
In accordance with SFAS 115, the balance sheets include $210,000 and
$494,000 of unrealized gain on investments (net of taxes), within stockholders'
equity as of December 31, 2001 and 2000, respectively. As of December 31, 2000,
the unrealized gain on investments balance represented the increase in the fair
market value of the Sybase holdings from the January 20, 2000 merger transaction
date to the respective balance sheet date. As of December 31, 2001, the
accumulated other comprehensive loss balance represents the changes in the fair
market value of the Sybase common stock. In accordance with SFAS 133, the change
in the fair market value of the Sybase warrants was recorded in the statement of
operations (see below).
SFAS 133 requires that all derivative financial instruments, such as
forward currency exchange contracts, interest rate swaps and the Company's
warrants to purchase Sybase stock, be recognized in the financial statements and
measured at fair value regardless of the purpose or intent for holding them.
Changes in the fair value of derivative financial instruments are either
recognized periodically in income or shareholders' equity (as a component of
comprehensive income), depending on whether the derivative is being used to
hedge changes in fair value or cash flows. The Company's adoption of this
pronouncement, effective January 1, 2001, did not result in an adjustment for
the cumulative effect of an accounting change, because the carrying value
reflected the fair value under the previous accounting guidance. In accordance
with SFAS 133, the Company recorded an unrealized loss on investment of $866,000
in the statement of operations for the year ended December 31, 2001.
Other Income
Other income, primarily investment and interest income, decreased $499,000
to $625,000 in 2001 from $1,124,000 in 2000. The decrease is associated with
decreased levels of cash and cash equivalents in 2001 as compared to 2000.
Income Taxes
The provision (benefit) income taxes were $(160,000) and $488,000 for the
years ended December 31, 2001 and 2000, respectively. The provision in 2000 was
related to the alternative minimum tax on the gain on the
Sybase investment, while the benefit in 2001 represented a refund related to the
prior year. At December 31, 2001, the Company had net operating loss
carryforwards for federal income tax purposes of approximately $193 million,
which expire in 2008 through 2021, general business tax credits of approximately
$489,000, which expire in 2005 through 2010, and an alternative minimum tax
credit carryforward of approximately $197,000, which may be carried forward
indefinitely and used to offset future regular taxable income. Annual use of the
net operating loss carryforwards of approximately $45 million, which was
incurred by Home Account prior to its acquisition by the Company, will be
limited under the Internal Revenue Code as a result of cumulative changes in
ownership of more than 50% in 2001.
Discontinued Operations
During 2000, US West notified the Company that US West would no longer
permit InteliData to include the lease billing on the US West telephone bills.
As such, InteliData has discontinued billing its legacy customers for Caller ID
adjunct unit leases in the US West telephone service territory, because the cost
of individually billing and pursuing collections for the leases would have made
it impractical and uneconomical for the Company to continue the lease program.
Accordingly, the results of operations from leasing activities have been
reported as discontinued operations. In 2001, the Company did not have any
activity in discontinued operations. In 2000, the Company experienced a loss of
$262,000 in discontinued operations, net of income taxes.
As of December 31, 2001 and 2000, the net liabilities of discontinued
operations of $504,000 and $755,000 relate to the telecommunications divisions,
respectively. This relates to the potential environmental clean up associated
with InteliData's former New Milford, Connecticut property. In January 2000,
InteliData sold the New Milford, Connecticut building, its only remaining asset
in discontinued operations of the telecommunications division. In the context of
this sale, InteliData agreed to undertake limited remediation of the site in
accordance with applicable state law. The subject site is not a federal or state
Superfund site and InteliData has not been named a "potentially responsible
party" at the site. The remediation plan agreed to with the purchaser allows
InteliData to use engineering and institutional controls (e.g., deed
restrictions) to minimize the extent and costs of the remediation. Further, at
the time of the sale of the facility, InteliData established a $200,000 escrow
account for certain investigation/remediation costs. As of December 31, 2001,
this escrow account balance remained at $200,000. Moreover, InteliData has
obtained environmental insurance to pay for remediation costs up to $6,600,000
in excess of a retained exposure limit of $600,000. InteliData has recorded its
estimated liability related to this matter and other costs related to the
discontinued operations.
The Company has engaged a legal firm and an environmental specialist firm
to represent InteliData regarding this matter. The timing of the ultimate
resolution of this matter is estimated to be from three to five years under the
Company's proposed compliance plan, which involves a natural attenuation and
periodic compliance monitoring approach. Management does not believe that the
resolution of this matter will be likely to have a material adverse effect on
the Company's financial condition or results of operations.
Income (Loss) from Continuing and Discontinued Operations, Weighted-Average
Common Shares Outstanding and Basic and Diluted Income (Loss) Per Common Share
The basic and diluted weighted-average common shares outstanding for the
year ended December 31, 2001 was 45,897,000, compared to a basic
weighted-average common shares outstanding of 38,237,000 and a diluted
weighted-average common shares outstanding of 40,843,000 for the year ended
December 31, 2000. The increase resulted primarily from the exercise of stock
options and warrants, stock purchases under the Employee Stock Purchase Plan,
the granting of certain stock awards, the issuance of 6,900,000 shares for the
acquisition of Home Account, and the issuance of the 2,863,000 shares for the
private placement during 2001.
Income (loss) from continuing operations were $(30,041,000) and $23,920,000
for the years ended December 31, 2001 and 2000, while the gain (loss) from
discontinued operations were $0 and $(262,000) for 2001 and 2000, respectively.
Net income (loss) were $(30,041,000) and $23,658,000 for 2001 and 2000,
respectively.
As a result of the foregoing, basic and diluted earnings per common share
for 2001 was a net loss of $(0.65). Basic earnings per common share for 2000
were income of $0.63 from continuing operations, loss of $(0.01) from
discontinued operations, and net income of $0.62. Diluted earnings per common
share for 2000 were
income of $0.59 from continuing operations, loss of $(0.01) from discontinued
operations, and income of $0.58 for net income.
Liquidity and Capital Resources
During 2002, the Company's cash and cash equivalents decreased by
$6,352,000. At December 31, 2002, the Company had $5,674,000 in cash and cash
equivalents, $2,244,000 of working capital with no long-term debt, and
$36,454,000 in stockholders' equity.
The Company's principal needs for cash in 2002 were for funding operating
losses. The Company funded decreases in accounts payable of $1,215,000, accrued
expenses of $2,183,000, and deferred revenue of $1,491,000 for the year ended
December 31, 2002, which was partially offset by a decrease in accounts
receivable of $2,018,000.
The Company's cash requirements for operating activities in 2002 were
financed primarily by cash and cash equivalents on hand and the proceeds from
sales of investments. Total cash proceeds from the sale of investments were
approximately $1,968,000.
Net cash provided by investing activities in 2002 was $1,529,000. This was
a result of the sales of investments as discussed above, offset by the purchases
of property and equipment of $389,000 and the cash paid for the purchase of Home
Account and the related acquisition costs of $50,000.
Financing activities provided net cash of $45,000 in 2002 from the issuance
of the Company's common stock through stock option exercises and sales of stock
to employees pursuant to the Employee Stock Purchase Plan.
Contractual Obligations - The decision by the Company to divest itself of
its telecommunications business segment created certain financial obligations
and uncertainties for the future. The Company is required to satisfy certain
obligations of the telecommunications business that will carry on beyond
December 31, 2002. As of December 31, 2002, the Company had $251,000 in
remaining liabilities related to the discontinued operations. During 2000, the
Company sold the only remaining asset it had in the discontinued operations --
the building in New Milford, Connecticut. Liabilities remaining in the
discontinued operations represent the Company's estimated liability related to
potential environmental clean-up at the New Milford location and other costs.
The Company is working with its professional advisors and insurer to manage its
exposure to liability for the potential environmental clean up. The Company has
hired an environmental specialist firm to perform a study of the damages, to
prepare a project plan, to work with the state agency, and to remediate the
damages. Additionally, the Company has acquired insurance to cap the potential
costs and losses at a reasonable amount. Such amounts and insurance costs have
been accrued for as of December 31, 2002. Management believes that the
combination of the project plan and the insurance arrangements will cause the
resolution of this matter to not have a material adverse effect on the Company's
financial condition or results of operations.
The Company leases facilities and equipment under cancelable and
noncancelable operating lease agreements. Future minimum lease payments under
noncancelable operating leases with initial or remaining terms in excess of one
year at December 31, 2002, were as follows (in thousands):
Years Ending December 31,
2003 $ 973
2004 809
2005 411
2006 330
2007 and thereafter --
------------
Total minimum lease payments $ 2,523
=============
The Company is not currently a party to any material litigation. From time
to time, the Company is a party to routine litigation incidental to its
business. Management does not believe that the resolution of any or all of such
routine litigation will be likely to have a material adverse effect on the
Company's financial condition or results of operations.
The Company believes that it currently has the capital necessary to
continue funding its operations in 2003. Continuing into 2003, the Company
expects its operating losses to continue declining based on increases in
revenues due to increases in the adoption rates and penetration rates of
Internet banking, Card Solutions(TM) and EBPP Solutions, and based on our
periodic rationalization of headcount and other expenses in light of our
available capital and anticipated business projections. Based on the Company's
current capital levels and its assumptions about future operating results, the
Company believes that it will have sufficient resources to fund existing
operating plans. However, if actual results differ materially from current
assumptions, the Company may not have sufficient capital resources and may have
to modify operating plans and/or seek additional capital resources. 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.
Cautionary Statement for Purposes of the "Safe Harbor" Provisions of the Private
Securities Litigation Reform Act of 1995
This Form 10-K filing and the documents incorporated by reference herein
contain forward-looking statements within the meaning of Section 27A of the
Securities Act of 1933, as amended (the "Securities Act") and Section 21E of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), the
realization of which may be impacted by the factors discussed below. These
forward-looking statements are made pursuant to the safe harbor provisions of
the Private Securities Litigation Reform Act of 1995 (the "Act"). The Company
cautions readers that the following important factors, among others, in some
cases have affected the Company's actual results, and could cause the Company's
actual results for 2003 and beyond to differ materially from those expressed in
any forward-looking statements made by, or on behalf of, the Company. The
following list of factors should not be construed as exhaustive or as any
admission regarding the adequacy of disclosures made by the Company prior to the
date hereof or the effectiveness of said Act. Additionally, the Company is not
under any obligation (and expressly disclaims an obligation to) update or alter
its forward-looking statements, whether as a result of new information or
otherwise. We wish to caution you that such risks and uncertainties include, but
are not limited to:
o our ability to continue funding operating losses;
o our ability to manage our expenses in line with anticipated business
levels;
o our ability to complete product implementations in required time
frames;
o our ability to increase our recurring revenues and profits through our
ASP business model;
o the impact of competitive products, pricing pressure, product demand
and market acceptance risks;
o the pace of consumer acceptance of home banking and reliance on our
bank clients to increase usage of Internet banking by their customers;
o the effect of general economic conditions on the financial services
industries;
o mergers and acquisitions;
o the risk of integration of our technology;
o the ability of our FI 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;
o the on-going viability of the mainframe marketplace and demand for
traditional mainframe products;
o our ability to attract and retain key employees;
o the availability of cash for long-term growth;
o product obsolescence;
o our ability to reduce product costs;
o fluctuations in our operating results;
o delays in development of highly complex products; and
o other risks detailed from time to time in our filings with the
Securities and Exchange Commission.
In some cases, you can identify forward-looking statements by terms such as
"may," "will," "should," "could," "would," "expects," "intends," "plans,"
"anticipates," "believes," "estimates," "projects," "predicts," "potential," and
similar expressions intended to identify forward-looking statements. These
statements reflect our current views with respect to future events and are based
on assumptions and subject to risks and uncertainties. Given these
uncertainties, you should not place undue reliance on these forward-looking
statements. We discuss many of these risks in this prospectus in greater detail
under the heading "Risk Factors." In connection with
forward-looking statements that appear in these disclosures, readers hereby
should carefully consider the factors set forth under "Risk Factors."
RISK FACTORS
Risk Factors Particular to Our Company
We may require additional capital, which we may not be able to obtain, to
be able to fund future operating losses, working capital needs and capital
expenditures.
The expansion and development of our business may require additional
capital in the future to fund our operating losses, working capital needs and
capital expenditures. The capital markets are very volatile and we may not be
able to obtain future equity or debt financing in the future on satisfactory
terms or at all. Our failure to generate sufficient cash flows from sales of
products and services or to raise sufficient funds may require us to delay or
abandon some or all of our development and expansion plans or otherwise forego
market opportunities. Our inability to obtain additional capital on satisfactory
terms may delay or prevent the expansion of our business, which could cause our
business, operating results and financial condition to suffer.
We may not be able to manage our expenses in line with anticipated business
levels.
We continually seek to control our general and administrative expenses and
assess our operations in managing the continued development of infrastructure to
handle anticipated business levels. Our inability so to control expenses and
manage our infrastructure could cause our business, operating results and
financial condition to suffer.
Rapidly changing technologies could make our products obsolete, which may
adversely affect our business, operations and financial condition.
Our business activities are concentrated in fields characterized by rapid
and significant technological advances. It is possible that our products and
services will not remain competitive technologically or that our products,
processes or services will not continue to be reflective of such advances. The
following, among other factors, may adversely affect our ability to be
technologically competitive:
o our competitors may develop other technologies that could render our
products and services noncompetitive or obsolete;
o we may be unable to locate, hire and retain management and other key
personnel with the skills and abilities required to further advance
and develop our software products and services and to maintain our
technological competitiveness;
o we may be unable to introduce new products or product enhancements
that achieve timely market acceptance and meet financial institutions'
or Internet banking or EBPP customers' needs;
o we may encounter unanticipated technical, marketing or other problems
or delays relating to new products, features or services that we
recently introduced or that we may introduce in the future;
o we may be unable to keep pace with our competitors' spending on
research and development of new products because most of our
competitors and potential competitors have significantly greater
financial, technological and research and development resources than
we have;
o we may be unable to develop, produce and market new products as
cheaply as our competitors and we may not be able to offer new
products to customers at a competitive price; and,
o we may be unable to leverage our relationships with third parties.
An inability to compete successfully in an increasingly competitive and
crowded marketplace could adversely affect our business, operations and
financial condition.
The market for Internet banking and other interactive financial products
and services is highly competitive and subject to rapid innovation and
technological change, shifting consumer preferences and frequent new product
introductions. A number of corporations, including S-1 Corporation, Corillian
Corporation, Financial Fusion, Inc., CheckFree Corporation, Online Resources
Corporation, Digital Insight, Inc., Metavante Corporation, and Incurrent
Solutions, Inc., some of which have greater resources than us, offer products
and services that compete directly with the products and services we offer. We
expect the number of competitors in the Internet banking and EBPP products
and services industry to expand greatly as a result of the popularity of the
Internet and widespread ownership of personal computers. We foresee our future
competitors as including:
o banks that have already developed (or plan to develop) Internet
banking and EBPP products for their own customers, with the
possibility of offering the products to other banks and other banks'
customers;
o non-banks that may develop Internet banking and EBPP products to offer
to banks; and,
o computer software and data processing companies that currently offer,
or will offer Internet banking and EBPP services through the use of
their broad distribution channels that may be used to bundle competing
products directly to end-users or purchasers.
Our operating results fluctuate, which could have an adverse effect on our
business, operations and financial condition.
Our quarterly operating results have varied significantly in the past, and
it is likely that they will vary greatly in the future. Some of the factors that
will likely cause our operating results to fluctuate are:
o the size and timing of customer orders;
o changes in our pricing policies or those of our competitors;
o new product introductions or enhancements by our competitors or by us;
o delays in the introduction of new products or product enhancements by
our competitors or by us;
o customer order deferrals by our customers in anticipation of upgrades
and new products;
o market acceptance of new products;
o the timing and nature of sales, marketing, and research and
development expenses by our competitors or by us; and,
o other changes in operating expenses, personnel changes and general
economic conditions.
Additionally, certain banks and other financial institutions recently have
combined or are proposing to combine, and we are unable to assess the future
effect that those combinations and other possible consolidations in the banking
industry will have upon us. No assurance can be given that quarterly variations
in our operating results will not occur in the future, and accordingly, the
results of any one quarter may not be indicative of the operating results for
future quarters.
Our stock price fluctuates significantly and could adversely affect our
business, operations and financial condition.
It is likely that in the future our common stock will continue to
experience the significant volatility it has experienced in the past. Our common
stock is traded on the Nasdaq National Market. The stock market, particularly in
recent years, has experienced volatility that has been especially acute with
respect to high technology-based stocks such as ours. The volatility of
technology-based and development stage stocks has often been unrelated to the
operating performance of the companies represented by the stock. Factors such as
announcements of the introduction of new products or services by our competitors
or by us, market conditions in the banking and other emerging growth company
sectors and rumors relating to our competitors or us have had a significant
impact on the market price of our common stock in the past.
We possess limited patent or registered intellectual property rights with
respect to our technology and any loss or infringement of those rights could
cause us to lose a valuable competitive advantage or incur costly litigation
expenses that adversely affect our business, operations and financial condition.
We possess limited patent or registered intellectual property rights
with respect to our technology. We depend, in part, upon our proprietary
technology and know-how to differentiate our products from those of our
competitors and work independently and from time to time with third parties with
respect to the design and engineering of our own products. We also rely on a
combination of contractual provisions, trademarks, and trade secret laws to
protect our proprietary technology. There can be no assurance, however, that we
will be able to protect our technology or successfully develop new technology or
gain access to such technology, that third parties will not be able to develop
similar technology independently or design around our intellectual property
rights, that competitors will not obtain unauthorized access to our proprietary
technology, that third parties will not misuse the technology to which we have
granted them access, or that our contractual or legal remedies will be
sufficient to protect our interests in our proprietary technology. Enforcing or
defending our intellectual property rights could be very expensive. If we cannot
preserve our intellectual property rights, we may be at a competitive
disadvantage.
Claims against us for infringement of another party's intellectual property
rights could cause us to incur costly litigation expenses or impact our ability
to offer products or services to our market.
The Internet banking software and services industry has become an area of
substantial litigation concerning intellectual property rights. Claims of
infringement by third parties could have a significant adverse impact on our
business. The expenses associated with defending claims, even if successful, are
often significant. In the event that we were found to infringe a third party's
rights, we would be required to enter into a royalty arrangement to continue to
offer the infringing products and services. If we were unable to obtain
acceptable royalty terms, we would be forced to discontinue offering the
infringing products and services or modify the products and services to become
non-infringing. This could result in the significant loss of revenues or
considerable additional expense.
Delays in the development of new products or in the implementation of new
or existing products at customer locations and defects or errors in the products
we sell could adversely affect our business, operations and financial condition.
We may experience delays in the development of the software and computing
systems underlying our products and services. Additionally, we may experience
delays when implementing our products at customer locations, and customers may
be unable to implement our products in the time frames and with the
functionalities that they expect or require. There can be no assurance that,
despite our testing, errors will not be found in the underlying software, or
that we will not experience development delays, resulting in delays in the
shipment of our products, the commercial release of our products or in the
market acceptance of our products, each of which could have a material adverse
effect on our business, operations and financial condition.
We are dependent on key personnel, the loss of whom could adversely affect
our business, operations and financial condition. Additionally, we will need to
locate, hire and retain additional qualified personnel to continue to grow our
business.
Our performance is substantially dependent on the performance of our
executive officers and key employees. We depend on our ability to retain and
motivate high quality personnel, especially management and skilled development
teams. The loss of services of any of our executive officers or other key
employees could have a material adverse effect on our business, operations or
financial condition.
Our future success also depends on our continuing ability to identify,
hire, train and retain other highly qualified technical and managerial
personnel. Competition for such personnel is intense, and there can be no
assurance that we will be able to attract, assimilate or retain other highly
qualified technical and managerial personnel in the future. The inability to
attract and retain the necessary technical and managerial personnel could have a
material adverse effect upon our business, operations or financial condition.
Certain provisions of Delaware law, our certificate of incorporation and
bylaws make a takeover by a third-party difficult.
Certain provisions of Delaware law and of our certificate of incorporation
and bylaws could have the effect of making it more difficult for a third party
to acquire, or of discouraging a third party from attempting to acquire, control
of us. These provisions include:
o a provision allowing us to issue preferred stock with rights senior to
those of the common stock without any further vote or action by the
holders of common stock. The issuance of preferred stock could
decrease the amount of earnings and assets available for distribution
to the holders of common stock or could adversely affect the rights
and powers, including voting rights, of the holders of the common
stock. In certain circumstances, such issuance could have the effect
of decreasing the market price of the common stock;
o the existence of a stock rights plan that results in the dilution of
the value of common stock held by a potential acquirer;
o the existence of a staggered board of directors in which there are
three classes of directors serving staggered three-year terms, and
thereby expanding the time required to change the composition of a
majority of directors and perhaps discouraging someone from making an
acquisition proposal for us;
o the bylaws' requirement that stockholders provide advance notice when
nominating our directors;
o the inability of stockholders to convene a stockholders' meeting
without the meeting first being called by the chairman of the board of
directors or the secretary at the request of a majority of the
directors; and,
o the application of Delaware law prohibiting us from entering into a
business combination with the beneficial owner of 15% or more of our
outstanding voting stock for a period of three years after the 15% or
greater owner first reached that level of stock ownership, unless
certain criteria are met.
Risk Factors Associated With Our Industry
The Internet banking and EBPP industries are relatively new and developing
markets, and our success depends on the acceptance and growing use of Internet
banking and electronic bill presentment and payment.
Internet banking and EBPP continue to be developing markets. Our future
financial success in the relatively new Internet banking and EBPP marketplace
depends, in part, upon:
o consumer acceptance of, and financial institutions' support for,
Internet banking and EBPP technologies;
o continued growth in personal computer sales and the number of personal
computers with Internet access and continued reductions in the cost of
personal computers and Internet access;
o the degree of financial institutions' success in marketing the
Internet banking and EBPP products to their customers and the ability
of these institutions to implement applications in anticipated time
frames or with anticipated features and functionalities; and,
o the continued absence of regulatory controls and oversight of the
Internet and electronic commerce.
Even if this market experiences substantial growth, there can be no
assurance that our products and services will be commercially successful or that
we will benefit from such growth. Therefore, there can be no assurance as to the
timing, introduction, or market acceptance of, or necessary regulatory approvals
for, our products and services.
Concerns related to system security and consumer protections could prevent
the widespread acceptance of Internet banking and EBPP and could adversely
affect our business, operations and financial condition.
The willingness of consumers and financial institutions to use personal
computer and Internet-based banking, bill payment and other financial services
will depend, in part, upon the following factors:
o our ability to protect consumer information relating to personal
computer and Internet-based banking and other financial services
against the risk of fraud, counterfeit and technology failure;
o the frequency of interruptions, delays and cessation in service to
financial institutions and individuals resulting from computer
viruses, break-ins or other problems;
o the increase in the cost of our services and products, as well as the
cost to up-grade the services and products to keep pace with rapidly
changing computer and Internet technologies, may be increased by
expenditures of capital and resources to reduce security breaches,
break-ins and computer viruses; and,
o the erosion of public and consumer confidence in the security and
privacy of Internet banking and EBPP.
The threat of increased government regulation of the Internet and the
continuing legal uncertainty and potential liabilities associated with sharing
personal and financial information on the Internet could adversely affect our
business, operations and financial condition.
Our products rely on the cost-effectiveness of, and ease of access to, the
Internet. There are currently few laws or regulations directly applicable to, or
commerce or other communications on, the Internet. However, due to the
increasing popularity and use of the Internet, it is possible that new laws and
regulations may be adopted with respect to the Internet, covering issues such as
user privacy, the collection or processing of personal information, copyright
infringement and the pricing, characteristics and quality of products and
services. Consumers' concerns relating to privacy, security and increasing
regulation could hinder the use of the Internet and the growth of our business.
The adoption of restrictive laws or regulations may increase the cost of doing
business over the Internet. The application to the Internet of existing laws and
regulations governing such issues as property ownership and personal privacy is
subject to substantial uncertainty. Mandatory privacy and security standards and
protocols still
are being developed by government agencies, and we may incur significant
expenses to comply with any requirements that are ultimately adopted. Our
financial institution customers require that our products and services will
permit them to operate in compliance with all applicable laws and regulations.
We may become subject to direct regulation as the market for our products and
services evolves. Additionally, current or new government laws and regulations,
or the application of existing laws and regulations, may expose us to
significant liabilities or otherwise impair our ability to achieve our strategic
objectives through increased operating costs or reduced market acceptance. If
Internet use does not grow as a result of privacy or security concerns,
increasing regulation or for other reasons, the sale of Internet banking and
electronic bill presentment and payment products would be hindered and our
business, operations and financial condition would be adversely affected.
ITEM 7a. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
- ------------------------------------------------------------------------
The Company currently has no long-term debt and is not currently engaged in
any transactions that involve foreign currency. The Company does not engage in
hedging activities.
As of December 31, 2001, the fair value of the Company's investment
portfolio was approximately $2,917,000, which consisted of $2,676,000 of
warrants to purchase Sybase common stock and $241,000 of fixed income
securities. Changes in the fair value of the fixed income securities will
continue to be recognized in shareholders' equity (as a component of
comprehensive income). SFAS 133, which the Company adopted effective January 1,
2001, requires that changes in the fair value of the warrants to purchase Sybase
common stock be recognized periodically in income. During 2002, all of the
investments in the warrants to purchase Sybase common stock were exercised and
the resulting shares were sold. Additionally, the Company's investments in fixed
income securities were sold. As of December 31, 2002, the Company did not hold
any investments.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
- -----------------------------------------------------
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
----
Consolidated Financial Statements
Consolidated Balance Sheets as of December 31, 2002 and 2001................30
Consolidated Statements of Operations for the Years Ended
December 31, 2002, 2001, and 2000.........................................31
Consolidated Statements of Changes in Stockholders' Equity for the Years Ended
December 31, 2002, 2001, and 2000.........................................32
Consolidated Statements of Cash Flows for the Years Ended
December 31, 2002, 2001 and 2000..........................................33
Notes to Consolidated Financial Statements for the Years Ended
December 31, 2002, 2001, and 2000.........................................34
Independent Auditors' Report..................................................50
INTELIDATA TECHNOLOGIES CORPORATION
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2002 AND 2001
(in thousands, except share data)
2002 2001
------------ -------------
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 5,674 $ 12,026
Investments -- 2,917
Accounts receivable, net 2,974 4,992
Other receivables 309 563
Prepaid expenses and other current assets 802 559
------------ ------------
Total current assets 9,759 21,057
NONCURRENT ASSETS
Property and equipment, net 2,554 3,720
Goodwill, net 26,238 22,549
Intangibles, net 5,780 10,189
Other assets 175 195
------------ ------------
TOTAL ASSETS $ 44,506 $ 57,710
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 2,081 $ 3,346
Accrued expenses 3,458 5,357
Deferred revenues 1,673 3,164
Other liabilities 252 324
Net liabilities of discontinued operations 51 204
------------ ------------
TOTAL CURRENT LIABILITIES 7,515 12,395
Net liabilities of discontinued operations 200 300
Other liabilities 337 540
------------ ------------
TOTAL LIABILITIES 8,052 13,235
------------ ------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Preferred stock, $0.001 par value; authorized 5,000,000 shares;
no shares issued and outstanding -- --
Common stock, $0.001 par value; authorized 60,000,000 shares;
issued 49,797,000 shares in 2002 and 49,725,000 shares in 2001;
outstanding 48,991,000 shares in 2002 and 48,919,000 shares in 2001 50 50
Additional paid-in capital 302,833 303,141
Treasury stock, at cost: 806,000 shares in 2002 and 2001 (2,473) (2,473)
Deferred compensation (304) (1,395)
Accumulated other comprehensive income -- 210
Accumulated deficit (263,652) (255,058)
------------ ------------
TOTAL STOCKHOLDERS' EQUITY 36,454 44,475
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 44,506 $ 57,710
============ ============
See accompanying notes to consolidated financial statements.
INTELIDATA TECHNOLOGIES CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
(in thousands, except per share data)
2002 2001 2000
----------- ----------- -----------
Revenues
Software $ 1,289 $ 1,790 $ 673
Consulting, services, and termination fees 20,206 16,506 3,884
Royalties and other -- -- 544
----------- ----------- -----------
Total revenues 21,495 18,296 5,101
----------- ----------- -----------
Cost of revenues
Software -- 5 --
Consulting and services 8,474 9,005 2,720
----------- ----------- -----------
Total cost of revenues 8,474 9,010 2,720
----------- ----------- -----------
Gross profit 13,021 9,286 2,381
Operating expenses
General and administrative 8,629 10,065 6,455
Selling and marketing 2,947 9,575 6,732
Research and development 8,807 15,729 14,512
Amortization of goodwill and intangibles 720 4,255 --
----------- ----------- -----------
Total operating expenses 21,103 39,624 27,699
----------- ----------- -----------
Operating loss (8,082) (30,338) (25,318)
Realized gain (loss) on sales of investments (748) 378 48,602
Unrealized gain (loss) on Sybase warrants -- (866) --
Other income (expenses), net 99 625 1,124
----------- ----------- -----------
Income (loss) before income taxes (8,731) (30,201) 24,408
Provision (benefit) for income taxes (137) (160) 488
----------- ----------- -----------
Income (loss) from continuing operations (8,594) (30,041) 23,920
Discontinued operations, net of income taxes
Gain (loss) on disposal of Telecommunication Division -- -- --
Income (loss) from operations of Caller ID leasing -- -- (262)
----------- ----------- -----------
Total discontinued operations -- -- (262)
----------- ----------- -----------
Net income (loss) attributable to common stockholders $ (8,594) $(30,041) $ 23,658
=========== =========== ===========
Basic earnings per common share
Income (loss) from continuing operations $ (0.18) $ (0.65) $ 0.63
Income (loss) from discontinued operations 0.00 0.00 (0.01)
----------- ----------- -----------
Net income (loss) $ (0.18) $ (0.65) $ 0.62
=========== =========== ===========
Diluted earnings per common share
Income (loss) from continuing operations $ (0.18) $ (0.65) $ 0.59
Income (loss) from discontinued operations 0.00 0.00 (0.01)
----------- ----------- -----------
Net income (loss) $ (0.18) $ (0.65) $ 0.58
=========== =========== ===========
Basic weighted-average common shares outstanding 48,869 45,897 38,237
=========== =========== ===========
Diluted weighted-average common shares outstanding 48,869 45,897 40,843
=========== =========== ===========
See accompanying notes to consolidated financial statements.
INTELIDATA TECHNOLOGIES CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 2002, 2001, AND 2000
(in thousand)
Accumulated
Additional Other
Preferred Stock Common stock Paid-in Treasury Deferred Comprehensive
Shares Amount Shares Amount Capital Stock Compensation Income (Loss)
------ ------ ------- --------- ---------- --------- ------------ -------------
Balance at January 1, 2000 -- $ -- 38,691 $ 38 $ 258,133 $ (2,064) $ (345) $ --
Issuance of common stock:
Exercise of stock options -- -- 258 1 591 -- -- --
Employee stock purchase plan -- -- 30 -- 75 -- -- --
Exercise of stock warrants -- -- 166 -- 228 -- -- --
Issuance of restricted stock -- -- 206 -- 1,401 -- (1,401) --
Cancellation of restricted stock -- -- (30) -- (152) -- 152 --
Issuance of stock warrants -- -- -- -- 419 -- (419) --
Capital contribution -- -- -- -- 857 -- -- --
Purchase of treasury stock -- -- -- -- -- (59) -- --
Unrealized gains on investments -- -- -- -- -- -- -- 494
Amortization of deferred
compensation -- -- -- -- -- -- 638 --
Net income -- -- -- -- -- -- -- --
Comprehensive income
--- ----- --------- ------- --------- --------- --------- -----------
Balance at December 31, 2000 -- -- 39,321 $ 39 $ 261,552 $ (2,123) $ (1,375) $ 494
Issuance of common stock:
Acquisition of Home Account -- -- 6,900 7 31,950 -- -- --
Private placement -- -- 2,863 3 7,228 -- -- --
Exercise of stock options -- -- 220 -- 412 -- -- --
Employee stock purchase plan -- -- 29 -- 66 -- -- --
Exercise of stock warrants -- -- 3 -- 11 -- -- --
Issuance of restricted stock -- -- 481 1 2,082 -- (2,083) --
Cancellation of restricted stock -- -- (92) -- (509) -- 509 --
2000 Home Account Incentive Plan -- -- -- -- 349 -- (349) --
Purchase of treasury stock -- -- -- -- -- (350) -- --
Realized gains on investments
sold -- -- -- -- -- -- -- (284)
Amortization of deferred
compensation -- -- -- -- -- -- 1,903 --
Net loss -- -- -- -- -- -- -- --
Comprehensive loss --- ----- --------- ------- --------- --------- --------- -----------
Balance at December 31, 2001 -- -- 49,725 $ 50 $ 303,141 $ (2,473) $ (1,395) $ 210
=== ===== ========= ======= ========= ========= ========= ===========
Issuance of common stock:
Exercise of stock options -- -- 11 -- 15 -- -- --
Employee stock purchase plan -- -- 30 -- 30 -- -- --
Issuance of restricted stock -- -- 139 -- 247 -- (247) --
Cancellation of restricted stock -- -- (108) -- (406) -- 406 --
2000 Home Account Incentive Plan -- -- -- -- (194) -- 194 --
Realized gains on investments
sold -- -- -- -- -- -- -- (210)
Amortization of deferred
compensation -- -- -- -- -- -- 738 --
Net loss -- -- -- -- -- -- -- --
Comprehensive loss
--- ----- --------- ------- --------- --------- --------- -----------
Balance at December 31, 2002 -- $ -- 49,797 $ 50 $ 302,833 $ (2,473) $ (304) $ --
=== ===== ========= ======= ========= ========= ========= ===========
Accumulated Comprehensive
Deficit Income (Loss) Total
----------- ------------- -------
Balance at January 1, 2000 $(248,675) $ 7,087
Issuance of common stock:
Exercise of stock options -- $ 592
Employee stock purchase plan -- 75
Exercise of stock warrants -- 228
Issuance of restricted stock -- --
Cancellation of restricted stock -- --
Issuance of stock warrants -- --
Capital contribution -- 857
Purchase of treasury stock -- (59)
Unrealized gains on investments -- $ 494 494
Amortization of deferred
compensation -- 638
Net income 23,658 23,658 23,658
--------
Comprehensive income $ 24,152
--------- ========= ---------
Balance at December 31, 2000 $(225,017) $ 33,570
Issuance of common stock:
Acquisition of Home Account -- 31,957
Private placement -- 7,231
Exercise of stock options -- 412
Employee stock purchase plan -- 66
Exercise of stock warrants -- 11
Issuance of restricted stock -- --
Cancellation of restricted stock -- --
2000 Home Account Incentive Plan -- --
Purchase of treasury stock -- (350)
Realized gains on investments
sold -- $ (284) (284)
Amortization of deferred
compensation -- 1,903
Net loss (30,041) (30,041) (30,041)
---------
Comprehensive loss $ (30,325)
--------- ========= ---------
Balance at December 31, 2001 $(255,058) $ 44,475
========= =========
Issuance of common stock:
Exercise of stock options -- 15
Employee stock purchase plan -- 30
Issuance of restricted stock -- --
Cancellation of restricted stock -- --
2000 Home Account Incentive Plan -- --
Realized gains on investments
sold -- $ (210) (210)
Amortization of deferred
compensation -- 738
Net loss (8,594) (8,594) (8,594)
---------
Comprehensive loss $ (8,804)
--------- ========= ----------
Balance at December 31, 2002 $(263,652) $ 36,454
========= ==========
See accompanying notes to consolidated financial statements.
INTELIDATA TECHNOLOGIES CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2002, 2001, AND 2000
(in thousands)
2002 2001 2000
----------- ----------- -----------
Cash flows from operating activities
Income (loss) from continuing operations $ (8,594) $ (30,041) $ 23,920
Adjustments to reconcile income (loss) from continuing operations
to net cash from operating activities of continuing operations:
Realized loss (gain) on sales of investments 748 (378) (48,602)
Unrealized loss on Sybase warrants -- 866 --
Amortization of goodwill and intangibles 720 4,255 --
Depreciation and amortization 1,532 2,061 579
Deferred income taxes -- -- 116
Deferred compensation expense 738 1,903 638
Net loss (gain) on disposal of property and equipment 23 (60) --
Changes in operating assets and liabilities:
Accounts receivable 2,018 (2,192) (588)
Prepaid expenses and other current assets 254 (501) (182)
Other assets (223) -- (20)
Accounts payable (1,215) (2,588) 1,945
Accrued expenses (2,183) (771) 2,359
Deferred revenue (1,491) 971 398
----------- ---------- ----------
Net cash used in operating activities of
continuing operations (7,673) (26,475) (19,437)
---------- ---------- ----------
Income (loss) from discontinued operations -- -- (262)
Change in net liabilities of discontinued operations (253) (251) 1,629
---------- ---------- ----------
Net cash provided by (used in) operating activities
of discontinued operations (253) (251) 1,367
---------- ---------- ----------
Net cash used in operating activities (7,926) (26,726) (18,070)
----------- ----------- -----------
Cash flows from investing activities
Proceeds from sales of investments 1,968 6,637 38,700
Release of cash escrow -- 311 --
Proceeds from disposal of property and equipment -- 225 --
Purchases of property and equipment (389) (921) (3,313)
Payments on acquisition related costs (50) (1,805) --
Cash paid for Home Account common stock -- (320) --
Purchase of investments -- -- (251)
---------- ---------- -----------
Net cash provided by investing activities 1,529 4,127 35,136
---------- ---------- ----------
Cash flows from financing activities
Proceeds from the issuance of common stock 45 7,720 895
Capital contribution -- -- 857
Payments to acquire treasury stock -- (350) (59)
---------- ---------- -----------
Net cash provided by financing activities 45 7,370 1,693
---------- ---------- ----------
Increase (decrease) in cash and cash equivalents (6,352) (15,229) 18,759
Cash and cash equivalents, beginning of year 12,026 27,255 8,496
---------- ---------- ----------
Cash and cash equivalents, end of year $ 5,674 $ 12,026 $ 27,255
========== ========== ==========
See accompanying notes to consolidated financial statements.
INTELIDATA TECHNOLOGIES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2002, 2001, AND 2000
(1) ORGANIZATION
InteliData Technologies Corporation ("InteliData" or the "Company")
provides the real-time financial processing infrastructure to enable financial
institutions ("FI's") to provide services over the Internet. The Company
develops and markets software products and consulting services for the financial
services industry. InteliData also services the emerging electronic bill
presentment and payment ("EBPP") market with the development of its end-to-end,
biller-to-consumer EBPP solutions.
Our products and services are designed to assist consumers in accessing and
transacting business with their FI's electronically, and to assist FI's in
connecting to and transacting business with third party processors. The Company
also serves as an Application Service Provider ("ASP") by providing Internet
hosting and service bureau solutions to FI's, including bankcard issuers.
On January 11, 2001, InteliData acquired Home Account Holdings, Inc. and
its operating subsidiary, Home Account Network, Inc., by means of the merger of
one of the Company's wholly owned subsidiaries with and into Home Account
Holdings, with Home Account Holdings surviving the merger. Home Account Holdings
is now a wholly owned subsidiary of InteliData. This acquisition was accounted
for as a purchase. As a result of the Company's acquisition of Home Account
Holdings, InteliData now offers a suite of UNIX-based Internet banking and
electronic bill presentment and payment products and services in an application
services provider environment.
The Company is incorporated in the State of Delaware and has its corporate
headquarters in Reston, Virginia. There are operating facilities in Charleston,
South Carolina, Omaha, Nebraska, and Toledo, Ohio.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Principles of Consolidation - The consolidated financial statements
include the accounts of the Company and its wholly owned subsidiaries after
elimination of all material inter-company balances and transactions. Certain
reclassifications have been made to the prior year financial statements to
conform to the 2002 financial statement presentation.
(b) Accounting Estimates - The preparation of financial statements in
conformity with accounting principles generally accepted in the United States of
America requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements and the reported amounts
of revenues and expenses during the period. Estimates include, but are not
limited to, an allowance for doubtful accounts, a provision for forward loss and
project plans for the completion and delivery of certain solutions. Actual
results could differ from those estimates.
(c) Revenue Recognition - The Company supplies Internet banking and electronic
bill presentment and payment software to FI's. The Company's revenues associated
with integrated solutions that bundle software products with customization,
installation and training services are recognized using the percentage of
completion method of accounting based on cost incurred as compared to estimated
costs at completion.
The Company enters into contracts for its bill payment technology software.
This software does not require significant customization. Upon delivery, the
Company either recognizes revenue ratably over the contract period for contracts
where vendor specific objective evidence (VSOE) of fair value for post contract
customer support (PCS) does not exist or recognizes revenue in full where VSOE
of fair value for PCS does exist.
The Company 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 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 our
software in an ASP environment. The customer may not take possession of the
software without incurring significant transition and infrastructure costs, as
well as potential payments of fees to the Company for the termination of such
arrangements. In cases where the customer has not licensed software from
InteliData, the customer must also purchase a license prior to having the right
to use the software in its own operating environment, in addition to the
aforementioned fees. In these situations, the Company applies the guidance under
EITF 00-3 and the Staff Accounting Bulletin No. 101, Revenue Recognition in
Financial Statements, and recognizes the revenue associated with the license
and/or implementation fees ratably over the initial term of the contract.
Additionally, based on the EITF 00-3 guidance, the Company concluded that
SOP 97-2 should not be applied to certain of its contracts and their related
revenue for license and professional services were recognized under the
percentage of completion method. In addition to our developing and delivering
the solution, the Company is entitled to transaction fees based on the number of
users and transactions. These transaction fees are earned based on the monthly
user counts and as transactions are processed.
(d) Cash and Cash Equivalents - The Company considers all non-restricted,
highly liquid investments with original maturities of three months or less to be
cash equivalents. Cash and cash equivalents are stated at cost, which
approximates their fair market value.
(e) Investments - The Company reports its investments in marketable securities
as available-for-sale with any unrealized holding gains and losses, net of the
related income tax effect, excluded from earnings and reported as a separate
component of stockholders' equity until such gains or losses are realized.
Dividends and interest income are recognized when earned. Realized gains or
losses are included in earnings and are derived using the first-in, first-out
method for determining cost of securities sold.
(f) Recent Accounting Pronouncements - In December 2002, the Financial
Accounting Standards Board ("FASB") issued Statement of Financial Accounting
Standard ("SFAS") No. 148, Accounting for Stock-Based Compensation-Transition
and Disclosure-an amendment of FAS 123 ("SFAS 148"). SFAS 148 amends SFAS 123,
Accounting for Stock-Based Compensation, to provide alternative methods of
transition for an entity that voluntarily changes to the fair value based method
of accounting for stock-based employee compensation. It also amends the
disclosure provisions of SFAS 123 to require prominent disclosure about the
effects on reported net income of an entity's accounting policy decisions with
respect to stock-based employee compensation. SFAS 148 also amends APB Opinion
No. 28, Interim Financial Reporting, to require disclosure about those effects
in interim financial information. SFAS 148 is effective for annual and interim
periods beginning after December 15, 2002. As the Company has elected not to
change to the fair value based method of accounting for stock-based employee
compensation, SFAS 148 will not have any impact on our financial position,
results of operations or cash flows.
In June 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated
with Exit or Disposal Activities (including Certain Costs Incurred in a
Restructuring) ("SFAS 146"), which supersedes Emerging Issues Task Force Issue
No. 94-3, Liability Recognition for Certain Employee Termination Benefits and
Other Costs to Exit an Activity ("EITF 94-3"). SFAS 146 requires recognition of
a liability for costs associated with an exit or disposal activity when the
liability is incurred, rather than when the entity commits to an exit plan under
EITF 94-3. The provisions of SFAS 146 are effective for exit or disposal
activities that are initiated after September 30, 2002. The implementation of
these provisions did not have a material impact on the financial position or
results of operations.
In August 2001, the FASB issued SFAS No. 144, Accounting for the Impairment
or Disposal of Long-Lived Assets ("SFAS 144"), which became effective January 1,
2002. This statement replaces SFAS No. 121,
Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of, and some provisions of Accounting Principles Board Opinion No.
30, Reporting the Effects of Disposal of a Segment of a Business and
Extraordinary, Unusual and Infrequently Occurring Events and Transactions. SFAS
144 requires that one accounting model be used for long-lived assets to be
disposed of by sale, whether previously held and used or newly acquired. It also
broadens the presentation of discontinued operations to include more disposal
transactions. The Company's adoption of this pronouncement on January 1, 2002
did not have a material affect on the Company's financial position, results of
operations, or cash flows.
In June 2001, the FASB issued SFAS No. 141, Business Combinations ("SFAS
141"), and SFAS No. 142, Goodwill and Other Intangible Assets ("SFAS 142"). SFAS
141 requires business combinations initiated after June 30, 2001 to be accounted
for using the purchase method of accounting, and broadens the criteria for
recording intangible assets separate from goodwill. SFAS 142 requires the use of
an amortization and non-amortization approach to account for purchased goodwill
and certain intangibles. Under a non-amortization approach, goodwill and certain
intangibles are not to be amortized into results of operations, but instead
would be reviewed for impairment and written down and charged to results of
operations only in the periods in which the recorded value of goodwill and
certain intangibles is more than its fair value. The amortization and
non-amortization provisions of SFAS 142 are to be applied to all goodwill and
intangible assets acquired after June 30, 2001. The provisions of each statement
that apply to goodwill and intangible assets acquired prior to June 30, 2001 was
adopted by the Company on January 1, 2002.
Prior to January 1, 2001, the Company considered its investment in warrants
to purchase common stock of Sybase, Inc. ("Sybase") to be available-for-sale
under the provisions of SFAS No. 115, Accounting for Certain Investments in Debt
and Equity Securities ("SFAS 115"). Effective January 1, 2001, the Company
adopted SFAS No. 133, Accounting for Derivative Instruments and Hedging
Activities ("SFAS 133"), which establishes accounting and reporting standards
for derivative instruments and for hedging activities by requiring that all
derivatives be recognized in the balance sheet and measured at fair value.
Effective January 1, 2001, the Company's investment in the Sybase warrants was
accounted for in accordance with SFAS 133.
(g) Property and Equipment - Property and equipment is stated at cost.
Depreciation of property and equipment is calculated using the straight-line
method over the estimated useful lives of the assets, which are generally in the
range of three to seven years.
(h) Net Liabilities of Discontinued Operations - Under various disposal plans
adopted in 1997, 1998, and 2000, the Company has completed the divestiture of
all of its telecommunications, interactive services businesses and the Caller ID
adjunct leasing activities, respectively.
(i) Deferred Revenues - Deferred revenues represent unearned revenues for
services that have not yet been provided or where certain accounting revenue
recognition criteria have not yet been met.
(j) Income Taxes - Income taxes are accounted for in accordance with the asset
and liability method. Deferred tax assets and liabilities are recognized for the
future tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases. Deferred tax assets and liabilities are measured using
enacted tax rates expected to apply to taxable income in the years in which
those temporary differences are expected to be recovered or settled. The effect
on deferred tax assets and liabilities of a change in tax rates is recognized in
income in the period that includes the enactment date. Valuation allowances are
established against deferred tax assets when it is deemed, based on available
evidence, that it is more likely than not that some portion or all of the
deferred tax asset will not be realized.
(k) Accounting for Stock-Based Compensation - The Company accounts for
employee stock options in accordance with Accounting Principles Board Opinion
No. 25 ("APB 25"), Accounting for Stock Issued to Employees. Under APB 25, the
Company recognizes no compensation expense related to employee stock options, as
no options are granted at a price below the market price on the day of grant.
The Company accounts for stock options issued to non-employees in accordance
with the provisions of SFAS No. 123 ("SFAS 123"), Accounting for Stock-Based
Compensation.
SFAS 123 prescribes the recognition of compensation expense based on the
fair value of options on the grant date and allows companies to continue
applying APB 25 if certain pro forma disclosures are made assuming hypothetical
fair value method application. The Company has elected to continue to apply the
provisions of APB 25 for options granted to employees and provide the pro forma
disclosures pursuant to SFAS 123.
(l) Net Income (Loss) Attributable to Common Stockholders per share - Basic
earnings (loss) per common share ("EPS") is computed by dividing net income
(loss) by the basic weighted-average common shares outstanding during the year.
Diluted EPS reflects the dilutive effect of stock options and stock awards
granted to employees under stock-based compensation plans, as well as stock
warrants. The effects of stock options and warrants were not included in the
loss per share computations in 2002 and 2001, because they would have been
anti-dilutive.
(m) Fair Value of Financial Instruments - The carrying values of the Company's
financial instruments such as cash and cash equivalents, investments in common
stock, warrants, and bonds, accounts receivable, and accounts payable
approximate their fair values.
(n) Concentration of Credit Risk - Financial instruments that potentially
subject the Company to credit risk consist principally of trade receivables. The
Company sells its products primarily to FI's in the United States. The Company
believes that the concentration of credit risk in its trade receivables is
substantially mitigated by the Company's on-going credit evaluation process and
the financial position of the FI's that are highly regulated. The Company does
not generally require collateral from customers. The Company establishes an
allowance for doubtful accounts based upon factors surrounding the credit risk
of specific customers, historical trends and other information. As of December
31, 2002, the Company's top eight customers comprised approximately 54% of the
net accounts receivable balance.
(3) INVESTMENTS
On January 20, 2000, Home Financial Network, Inc. ("HFN"), a company in
which InteliData held approximately a 25% ownership interest, merged with
Sybase, Inc. ("Sybase"). InteliData accounted for its investment in HFN using
the equity method. As of the merger date, such investment's carrying value was
zero. In exchange for its portion of ownership in HFN, InteliData received
approximately $5,867,000 in cash and approximately 1,770,000 shares of Sybase
stock. The Company also held warrants to purchase HFN common stock. As part of
the merger agreement, such warrants were converted into warrants to purchase
Sybase common stock. The Company received 640,000 "warrant units" with an
exercise price of $2.60 per warrant unit. Upon exercise of each warrant unit,
the Company was entitled to receive $1.153448 in cash and 0.34794 share of
Sybase common stock.
As part of this merger transaction, an escrow account was established to
provide Sybase indemnity protection against possible claims that might arise
against HFN. Approximately 133,000 shares of Sybase common stock owned by
InteliData were put in escrow, along with approximately $440,000 of cash. In
March 2001, the Company received the escrow payments less approximately $129,000
for miscellaneous claims under the escrow provision. During 2000, InteliData
recognized a gain of approximately $42,604,000 on this transaction and a gain of
$5,998,000 on the subsequent disposition of some of the Sybase common stock. The
remaining holdings of Sybase common stock were sold during 2001 for a net gain
of $507,000. During June 2002, the Company exercised all of its 640,000 warrants
units to purchase Sybase common stock and sold the resulting 223,000 shares of
Sybase common stock. The Company received net proceeds of approximately
$1,718,000 and recognized a realized loss from sales of investments of
approximately $748,000.
Additionally, the Company acquired approximately $251,000 of marketable
securities during 2000. The Company considers all of its investments to be
available-for-sale under the provisions of Statement of Financial Accounting
Standards No. 115, Accounting for Certain Investments in Debt and Equity
Securities, and as such, included within stockholders' equity as of December 31,
2001 is $10,000 of unrealized loss on investments (net of taxes), which
represents the decrease in the fair market value of the investment holdings from
the acquisition price to December 31, 2001. As of December 31, 2001, the Company
has sold all of these investments.
Prior to January 1, 2001, the Company considered its investment in warrants
to purchase common stock of Sybase, Inc. ("Sybase") to be available-for-sale
under the provisions of SFAS 115. Effective January 1, 2001, the
Company adopted SFAS 133, which establishes accounting and reporting standards
for derivative instruments and for hedging activities by requiring that all
derivatives be recognized in the balance sheet and measured at fair value.
SFAS 133 requires that all derivative financial instruments, such as
forward currency exchange contracts, interest rate swaps and the Company's
warrants to purchase Sybase stock, be recognized in the financial statements and
measured at fair value regardless of the purpose or intent for holding them.
Changes in the fair value of derivative financial instruments are either
recognized periodically in income or stockholders' equity (as a component of
comprehensive income), depending on whether the derivative is being used to
hedge changes in fair value or cash flows. The Company's holdings of the Sybase
warrants are defined as derivatives under this guidance. As discussed in Note 1,
effective January 1, 2001, the Company's investment in the Sybase warrants were
accounted for in accordance with SFAS 133. The Company's adoption of this
pronouncement, effective January 1, 2001, did not have a material effect on the
Company's financial statements as of the adoption date. The Company's adoption
of this pronouncement, effective January 1, 2001, did not result in an
adjustment for the cumulative effect of an accounting change, because the
carrying value reflected fair value under the previous accounting guidance. In
accordance with SFAS 133, the Company recorded an unrealized loss on investment
of $866,000 for the year ended December 31, 2001.
In accordance with SFAS 115, the balance sheets include $0 and $210,000 of
unrealized gain on investments (net of taxes), within stockholders' equity as of
December 31, 2002 and 2001, respectively. As of December 31, 2001, the
unrealized gain on investments balance represented the increase in the fair
market value of the Sybase holdings from the January 20, 2000 merger transaction
date to the respective balance sheet date. As of December 31, 2001, the
accumulated other comprehensive loss balance represents the changes in the fair
market value of the Sybase common stock. In accordance with SFAS 133, the change
in the fair market value of the Sybase warrants was recorded in the statement of
operations.
As of December 31, 2001, the warrants to purchase Sybase common stock had
an estimated fair value of approximately $2,676,000. The fair value of the
warrants described above was estimated on December 31, 2001 using the
Black-Scholes model using the following: no dividend yield, expected volatility
of 60%, life of 18 months, and a risk free interest rate of 6.10% per annum.
(4) PROPERTY AND EQUIPMENT
Property and equipment consists of the following at December 31 (in
thousands):
2002 2001
---------- ----------
Building improvements $ 457 $ 452
Office equipment 6,408 6,113
Furniture and fixtures 765 765
---------- ----------
7,630 7,330
Accumulated depreciation (5,076) (3,610)
----------- ----------
$ 2,554 $ 3,720
========== ==========
(5) ACCRUED EXPENSES AND OTHER LIABILITIES
Accrued expenses and other liabilities consists of the following at
December 31 (in thousands):
2002 2001
----------- ----------
Accrued compensation $ 1,772 $ 2,563
Provision for forward loss 120 549
Accrued professional fees 635 600
Accrued insurance 250 338
Deferred taxes 288 292
Other liabilities 393 1,015
----------- ----------
$ 3,458 $ 5,357
=========== ==========
The provision for forward loss represents the future anticipated loss based
on the excess of the current estimates at completion of the total contract costs
over total contract revenues.
(6) DISCONTINUED OPERATIONS
As of December 31, 2002, the net liabilities of discontinued operations of
$251,000 relate to the telecommunications divisions. This relates to the
potential environmental clean up associated with InteliData's former New
Milford, Connecticut property. In January 2000, InteliData sold the New Milford,
Connecticut building, its only remaining asset in discontinued operations of the
telecommunications division. In the context of this sale, InteliData agreed to
undertake limited remediation of the site in accordance with applicable state
law. The subject site is not a federal or state Superfund site and InteliData
has not been named a "potentially responsible party" at the site. The
remediation plan agreed to with the purchaser allows InteliData to use
engineering and institutional controls (e.g., deed restrictions) to minimize the
extent and costs of the remediation. Further, at the time of the sale of the
facility, InteliData established a $200,000 escrow account for certain
investigation/remediation costs. As of December 31, 2002, this escrow account
balance remained at $200,000. Moreover, InteliData has obtained environmental
insurance to pay for remediation costs up to $6,600,000 in excess of a retained
exposure limit of $600,000. InteliData estimates its liability related to this
matter and other costs to be approximately $251,000 and has recorded a liability
for that amount.
The Company has engaged a legal firm and an environmental specialist firm
to represent InteliData regarding this matter. The timing of the ultimate
resolution of this matter is estimated to be from three to five years under the
Company's proposed compliance plan, which involves a natural attenuation and
periodic compliance monitoring approach. Management does not believe that the
resolution of this matter will be likely to have a material adverse effect on
the Company's financial condition or results of operations.
The Company leased Caller ID adjunct units under an agreement with US West,
whereby the Company leased Caller ID units directly to US West customers. The
leasing program enabled subscribers to pay a monthly fee for the equipment. In
1996, US West ceased leasing new Caller ID adjunct units under the program.
Notwithstanding the termination of this program, previously existing leases
remained in effect. The number of active records in the Company's installed
lease base historically decreased at a rate of approximately 30% per year.
During 2000, US West notified the Company that US West would no longer permit
InteliData to include the lease billing on the US West telephone bills. As such,
InteliData has discontinued billing its legacy customers for Caller ID adjunct
unit leases in the US West telephone service territory, because the cost of
individually billing and pursuing collections for the leases would have made it
impractical and uneconomical for the Company to continue the lease program.
Accordingly, the results of operations from leasing activities have been
reported as discontinued operations.
During 2002 and 2001, the Company had no statement of operations activity
from the discontinued operations of the telecommunications division (which was
discontinued in 1998) and the Caller ID leasing business. Discontinued
operations for the year ended December 31, 2000 consisted of the following (in
thousands):
2000
-------
Discontinued Operations of the Caller ID Business
-------------------------------------------------
Income (loss) from operations, net of income taxes $ (262)
Gain (loss) on disposal, net of income taxes -
-------
Total discontinued operations (262)
-------
Discontinued Operations of the Telecommunications Division
----------------------------------------------------------
Income (loss) from operations, net of income taxes -
Gain (loss) on disposal, net of income taxes -
-------
Total discontinued operations -
-------
Total Discontinued Operations
-----------------------------
Income (loss) from operations, net of income taxes (262)
Gain (loss) on disposal, net of income taxes -
-------
Total discontinued operations $ (262)
=======
The net revenues and loss from discontinued operations for the year ended
December 31, 2000 are as follows (in thousands):
2000
-------
Discontinued Operations of the Caller ID Business
-------------------------------------------------
Net revenues $ 1,531
Cost of revenues 730
Operating expenses 1,068
-------
Income (loss) from operations (267)
Provision (benefit) for income taxes (5)
-------
Income (loss) from discontinued operations (262)
=======
Discontinued Operations of the Telecommunications Division
----------------------------------------------------------
Net revenues $ -
Cost of revenues -
Operating expenses -
-------
Income (loss) from operations -
Provision (benefit) for income taxes -
-------
Income (loss) from discontinued operations -
=======
Total Discontinued Operations
-----------------------------
Net revenues $ 1,531
Cost of revenues 730
Operating expenses 1,068
-------
Income (loss) from operations (267)
Provision (benefit) for income taxes (5)
-------
Income (loss) from discontinued operations (262)
=======
The net liabilities of discontinued operations as of December 31, are as
follows (in thousands):
2002 2001
---- ----
Other current liabilities $ 51 $ 204
Other noncurrent liabilities 200 300
----- -----
Total $ 251 $ 504
===== =====
Summary of Discontinued Operations
In 2000, the Company experienced a loss of $262,000 in discontinued
operations of the Caller ID business, which was primarily the result of the
Company's write-off of the remaining accounts receivable. All of the above
results are net of applicable income taxes.
(7) STOCKHOLDERS' EQUITY
(a) Issuance and Subsequent Conversion of Preferred Stock and Warrants - On
July 22, 1999, the Company issued 600 shares of 4% Convertible Preferred Stock
and warrants to purchase 120,000 shares of InteliData common stock. As of
December 31, 1999, all of the preferred stock was converted into common stock.
The fair value of these 120,000 warrants, which expire five years from the
issuance date and have an exercise price of $4.53, was estimated as of the grant
date using the Black-Scholes model. The following assumptions were used: no
dividend yield, expected volatility of 129%, life of 5 years, and a risk free
interest rate of 4.00% per annum. Accordingly, the Company allocated
approximately $369,000 to these warrants and the charge
was amortized over the period that the preferred stock was outstanding. As of
December 31, 2002 and 2001, 101,500 warrants remained outstanding.
(b) Stock Options and Awards - The Company sponsors several stock option and
award plans that cover substantially all employees and members of the board of
directors. Options and awards granted under such plans typically vest over
periods ranging from one to five years and generally expire in eight and ten
years, although some grants provide for vesting in annual increments or allow
for accelerated vesting based upon reaching performance milestones.
The Company amortizes the fair value of the stock awards (based on the fair
value of common stock on the grant dates multiplied by the number of shares
granted) over the respective vesting periods. In 2002, 2001, and 2000, the
Company recorded $841,000, $1,484,000, and $578,000, respectively, of
compensation expense related to these awards.
Options granted under the plans allow the purchase of stock at the fair
value of such common stock at the respective grant dates. Because options are
issued with exercise prices equal to the fair value of the common stock on the
grant dates, the Company does not record any compensation expense for these
options.
A summary of stock option activity for each of the Company's stock option
plans is as follows:
Exercise Prices
---------------
Number
Description Minimum Maximum of Options
----------- ------- ------- ------------------
January 1, 2000 $0.69 $20.38 3,173,095
Granted $2.59 $19.44 805,700
Exercised $0.81 $14.75 (258,011)
Canceled $0.97 $12.75 (117,009)
-------------------
December 31, 2000 $0.69 $19.44 3,603,775
Granted $1.00 $5.90 1,139,834
Exercised $0.68 $4.91 (220,000)
Canceled $0.81 $18.94 (665,482)
-------------------
December 31, 2001 $0.69 $19.44 3,858,127
Granted $0.60 $2.35 1,302,000
Exercised $1.00 $2.31 (11,825)
Canceled $0.80 $10.31 (914,505)
-------------------
December 31, 2002 $0.60 $19.44 4,233,797
===================
The Company applies the intrinsic value method of Accounting Principles
Board Opinion No. 25 and related interpretations in accounting for its stock
plans. Had compensation cost been determined based on the fair value method of
Statement of Financial Accounting Standards No. 123, the Company's results of
operation would have been as follows (in thousands, except for per share data)
for the years ended December 31:
2002 2001 2000
----------- ---------- -------
Net income (loss) $ (11,858) $ (35,346) $ 18,836
Basic earnings (loss) per common share $ (0.24) $ (0.77) $ 0.49
Diluted earnings (loss) per common share $ (0.24) $ (0.77) $ 0.46
The weighted average fair value of options granted during 2002, 2001, and
2000 was $0.95, $3.57, and $6.85, per share, respectively. The fair value of
options granted was estimated on the date of grant using the Black-Scholes
option-pricing model. For 2002, the following weighted average assumptions were
used: no dividend yield, expected volatility of 105%, and a risk free interest
rate of 3.82% per annum. For 2001, the following weighted average assumptions
were used: no dividend yield, expected volatility of 92%, and a risk free
interest rate of 4.56% per annum. For 2000, the following weighted average
assumptions were used: no dividend yield, expected volatility of 134%, and a
risk free interest rate of 5.16% per annum.
The Company has options outstanding and exercisable in varying price
ranges. The schedule below details the Company's options by price range:
Options Outstanding Options Exercisable
-------------------------- --------------------------
Weighted Weighted
Weighted Average Average
Range of Number Average Exercise Number of Exercise
Exercise Prices Of Options Life Price Options Price
--------------- ---------- ------------ ----------- --------- ----------
$ 0.000 - 1.000 819,249 6.5 years $ 0.78 197,249 $ 1.00
1.001 - 1.500 1,989,085 5.4 years 1.22 1,290,085 1.21
1.501 - 2.000 369,000 6.9 years 1.79 81,995 1.93
2.001 - 2.500 44,000 5.3 years 2.29 33,750 2.27
2.501 - 3.000 175,558 5.4 years 2.98 151,470 2.97
3.001 - 5.000 481,675 6.3 years 4.19 305,940 4.14
5.001 -10.000 333,300 5.4 years 7.16 276,044 7.25
10.001 -21.375 21,930 4.2 years 15.80 21,383 15.80
----------------- ------------ ----------- ----------- ----------- ------------
4,233,797 2,357,916
============ ===========
(c) Employee Stock Purchase Plan - Under the Employee Stock Purchase Plan
(approved by the Company's stockholders in 1996), the Company is authorized to
issue up to 500,000 shares of common stock to its full-time employees, nearly
all of who are eligible to participate. Under the terms of the Plan, employees
can choose each period to have up to twenty percent of their annual base
earnings withheld to purchase the Company's common stock. The purchase price of
the stock is 85 percent of the lower of its beginning-of-period or end-of-period
market price. During the years ended December 31, 2002, 2001, and 2000 the
Company issued 29,868, 28,822, and 30,318, shares of stock under the Plan,
respectively.
(d) Treasury Stock - In 2001 and 2000, the Company paid $41,000 and $59,000 to
acquire an additional 15,632 and 9,212 shares of its own common stock,
respectively. These shares were surrendered by employees of the Company to
satisfy tax-withholding obligations associated with the vesting of certain
restricted stock awards. Additionally, the Company participated in a program
permitted by the Securities and Exchange Commission and Nasdaq to buy-back
100,000 shares of its common stock shortly after the events surrounding the
terrorist attacks on September 11, 2001 for a total of $309,000. As of December
31, 2002 and 2001, the Company had a total of 806,344 common shares in treasury
at an aggregate cost of $2,473,000.
(e) Stockholder Rights Plan - In January 1998, the Company's Board of Directors
adopted a Stockholder Rights Plan. This plan was amended on May 24, 2000. The
rights are designed to assure that all the Company's stockholders receive fair
and equal treatment in the event of any proposed takeover of the Company and to
guard against partial tender offers, open market accumulations and other tactics
to gain control of the Company without paying all stockholders a control
premium.
Terms of the Stockholder Rights Plan provide for a dividend distribution of
one right for each share of common stock to holders of record at the close of
business on February 6, 1998. Shareholders will be able to exercise the rights
only in the event, with certain exceptions, an acquiring party accumulates 20
percent or more of the Company's voting stock, or if a party (an acquiring
person) announces an offer to acquire 20 percent or more without prior approval
of the Company's Board of Directors. The rights will expire on January 21, 2008.
Each right initially will entitle the holder to buy one one-thousandth of a
share of a new series of preferred stock at a price of $42.50.
In addition, upon the occurrence of certain events, holders of the rights
will be entitled to purchase either the Company's common stock or shares in an
acquiring person at half of market value. Further, at any time after a person or
group acquires 20 percent or more of the Company's outstanding voting stock, the
board of directors may, at its option, exchange part or all of the rights (other
than rights held by the acquiring person, which will become void) for shares of
the Company's common stock on a one-for-one basis. The rights will therefore
cause substantial dilution to a person or group that acquires 20 percent or more
of the Company's common stock on terms not approved by the board.
(f) Stock Warrants - In 2000, the Company entered into a five-year agreement
with an unrelated party, whereby the Company issued warrants to this entity in
exchange for the entity's becoming a premier reference site
for InteliData's application services provider ("ASP") offering. As a premier
reference site, the entity would make its facility and personnel reasonably
accessible for InteliData, InteliData's potential clients, analysts, and
industry publication reporters, in order to demonstrate or answer questions
regarding an ASP environment and InteliData's capabilities. On June 30, 2000,
InteliData issued five-year, fully-vested warrants to purchase 50,000 share of
InteliData common stock at an exercise price of $4.75 per share. The fair value
of these warrants was estimated as of the grant date using the Black-Scholes
model. The following assumptions were used: no dividend yield, expected
volatility of 143%, life of 2 years, and a risk free interest rate of 6.44% per
annum. Accordingly, the Company recorded approximately $419,000 of deferred
compensation that is being amortized over the term of this agreement. For the
years ended December 31, 2002 and 2001, the expenses charged related to these
warrants were $80,000. As of December 31, 2002, all of these warrants were still
outstanding.
(g) Private Placement and Warrants - In November and December 2001, the Company
closed private placement sales of an aggregate of 2,862,727 shares of its common
stock for a price of $2.75 per share, and warrants exercisable for the purchase
of 1,431,364 shares of its common stock, at an exercise price of $2.75 per
share, resulting in a gross proceeds of approximately $7,872,500. The placement
agent in the transaction, Stonegate Securities, received approximately $472,350
in commissions and warrants exercisable for the purchase of 286,273 shares of
InteliData's common stock, at an exercise price of $2.75 per share. As of
December 31, 2002, all of these warrants were still outstanding.
(8) EMPLOYEE 401(k) PLAN
The Company sponsors a defined contribution plan ("Plan") that qualifies
for tax treatment under Section 401(a) of the Internal Revenue Code.
Participation in the Plan is available to employees who are at least twenty-one
years of age. Company contributions to the Plan are based on a percentage of
employee contributions. The Company contributed $118,000, $153,000, and $89,000
in 2002, 2001, and 2000, respectively. The Company also pays for administrative
expenses incurred by the Plan.
(9) INCOME TAXES
A reconciliation of income taxes computed at the statutory federal tax rate
on earnings (loss) before income taxes (from continuing operations) to actual
income taxes for the years ended December 31, is as follows (in thousands):
2002 2001 2000
--------- --------- ---------
Income tax liability (benefit) computed
at the statutory rate $ (3,056) $ (10,570) $ 8,543
Other (1,207) 1,264 85
Change in valuation allowance 4,126 9,146 (8,140)
--------- --------- ---------
Income taxes $ (137) $ (160) $ 488
========= ========= =========
The current federal income tax benefit of $137,000 represents a refund of
taxes paid in 2002 as a result of tax legislation enacted during 2002. The tax
effects of temporary differences that give rise to significant portions of the
deferred tax assets and liabilities at December 31, 2002 and 2001, are as
follows (in thousands):
2002 2001
---- --------
Net operating loss carryforwards $ 70,153 $ 67,501
Basis differences in investments -- (936)
Basis differences in intangibles (3,399) (3,549)
Accounts receivable 112 365
Property and equipment 44 (157)
General business credit carryforward 489 489
Other 767 190
Alternative minimum tax credit carryforward 60 197
--------- ---------
Total gross deferred tax asset 68,226 64,100
Valuation allowance (68,226) (64,100)
--------- ---------
Net deferred tax assets $ -- $ --
========= =========
The net changes in the total valuation allowance for the years ended
December 31, 2002, 2001, and 2000, were an increase (decrease) of $4,126,000,
$30,020,000, and $(8,140,000), respectively. A valuation allowance was
established for deferred tax assets as of December 31, 2002 and 2001 because it
was deemed, based on available evidence, that it is more likely than not that
all of the deferred tax asset will not be realized.
At December 31, 2002, the Company had net operating loss carryforwards for
federal income tax purposes of approximately $200 million, which expire in 2008
through 2022, general business tax credits of approximately $489,000, which
expire in 2005 through 2010, and an alternative minimum tax credit carryforward
of approximately $60,000, which may be carried forward indefinitely and used to
offset future regular taxable income. Approximately $45 million of the net
operating loss were incurred by Home Account prior to its acquisition by the
Company and are subject to an annual limitation pursuant to Internal Revenue
Code Section 382 as a result of cumulative changes in ownership of more than 50%
in 2001.
(10) COMMITMENTS AND CONTINGENCIES
(a) Leases - The Company leases facilities and equipment under cancelable and
noncancelable operating lease agreements. The facility leases are for terms from
one to four years. Rent expense was $1,369,000, $1,436,000, and $735,000 for the
years ended December 31, 2002, 2001, and 2000, respectively.
Future minimum lease payments under noncancelable operating leases with
initial or remaining terms in excess of one year at December 31, 2002, were as
follows (in thousands):
Years Ending December 31,
2003 $ 973
2004 809
2005 411
2006 330
2007 and thereafter --
------------
Total minimum lease payments $ 2,523
=============
(b) Patent Matters - The Company does not believe that its products and
services infringe on the rights of third parties. From time to time, third
parties assert infringement claims against InteliData. There can be no assurance
that any such assertion will not result in costly litigation or require the
Company to cease using, or obtain a license to use, intellectual property of
such parties.
(c) Litigation - The Company is not currently a party to any material
litigation. From time to time, the Company is a party to routine litigation
incidental to its business. Management does not believe that the resolution of
any or all of such routine litigation will be likely to have a material adverse
effect on the Company's financial condition or results of operations.
(11) VALUATION AND QUALIFYING ACCOUNTS
The components of significant valuation and qualifying accounts associated
with accounts receivable for the years ended December 31, 2002 and 2001 were as
follows (in thousands):
Balance, January 1, 2001 $ 718
Recoveries 150
Charged to costs and expenses 1,090
Write-offs (914)
-------------
Balance, December 31, 2001 1,044
Recoveries 252
Charged to costs and expenses (340)
Write-offs (635)
-------------
Balance, December 31, 2002 $ 321
=============
As part of the Home Account acquisition in 2001, the Company acquired
certain accounts receivables that were outstanding as of the acquisition date.
The Company pursued collection efforts, but ultimately determined that some of
these accounts were uncollectible. Such doubtful accounts related to these
acquired assets cannot be
adjusted as part of the purchase price allocation, so the bad debt expense has
been recognized in operations in 2001. During 2001, the Company recorded costs
associated with these particular sets of uncollectible accounts in the amount of
$1,090,000 and began to write off some accounts. Additionally in 2002 and 2001,
the Company wrote off some previously reserved legacy InteliData accounts.
During 2002, the Company experienced improved cash collection on some previously
reserved accounts and an account that had been written off. As a result of these
collection efforts and the resulting cash receipts, the Company reduced its bad
debt expense in 2002 by approximately $340,000 to reflect the positive
developments.
(12) GOODWILL AND OTHER INTANGIBLES
In June 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 141, Business Combinations ("SFAS 141"), and
SFAS No. 142, Goodwill and Other Intangible Assets ("SFAS 142"). SFAS 141
requires business combinations initiated after June 30, 2001 to be accounted for
using the purchase method of accounting, and broadens the criteria for recording
intangible assets separate from goodwill. SFAS 142 requires the use of an
amortization and non-amortization approach to account for purchased goodwill and
certain intangibles. Under a non-amortization approach, goodwill and certain
intangibles are not to be amortized into results of operations, but instead
would be reviewed for impairment and written down and charged to results of
operations only in the periods in which the recorded value of goodwill and
certain intangibles is more than its fair value. The amortization and
non-amortization provisions of SFAS 142 are to be applied to all goodwill and
intangible assets acquired after June 30, 2001. The provisions of each statement
that apply to goodwill and intangible assets acquired prior to June 30, 2001 was
adopted by the Company on January 1, 2002.
As of January 1, 2002, in accordance with SFAS 142, the Company ceased
recognizing amortization expense on goodwill and the assembled workforce
intangible asset, and the assembled workforce intangible asset was combined with
goodwill for financial accounting and reporting. Accordingly, the goodwill and
intangible asset consist of the following components (in thousands):
As of December 31, 2002: Goodwill Intangible Total
-------- ---------- -----
Gross carrying amount $ 29,793 $ 7,200 $ 36,993
Accumulated amortization (3,555) (1,420) (4,975)
----------- ----------- ---------
Net $ 26,238 $ 5,780 $ 32,018
========== ========== ========
As of December 31, 2001: Goodwill Intangible Total
-------- ---------- -----
Gross carrying amount $ 25,593 $ 11,400 $ 36,993
Accumulated amortization (3,044) (1,211) (4,255)
----------- ---------- --------
Net $ 22,549 $ 10,189 $ 32,738
========== ========== ========
The estimated aggregate amortization expense related to the
contracts/relationships intangible asset for each of the next five years is as
follows (in thousands):
Year ending December 31: Expense
--------
2003 $ 720
2004 720
2005 720
2006 720
2007 720
In accordance with SFAS 142, the Company had six months from adoption (up
until June 30, 2002) to complete the initial test for impairment as of January
1, 2002, the adoption date of SFAS 142. In accordance with the transition
provisions of SFAS No. 142, the Company conducted the first step of the
impairment tests as described above. The Company assessed the fair value of its
only reporting unit by considering its projected cash flows, comparable company
valuations, and recent purchase prices paid for entities within our industry.
Given consideration of these factors, the Company concluded that the fair value
of the reporting unit exceeded the carrying amount of its net assets. The
Company is required to perform reviews for impairment in future periods, at
least annually, that may result in future periodic write-downs. Tests for
impairment between annual tests may be required if events occur or circumstances
change that would more likely than not reduce the fair value of the net carrying
amount. As of December 31, 2002, the Company is not aware of such events or
circumstances that could indicate potential impairment.
The adoption of this accounting standard reduced the amortization expense
associated with goodwill by $3,555,000 to $0 in 2002 from $3,555,000 in 2001.
The amortization of certain intangibles continues at an annualized rate of
$720,000 for 2002 and 2001. The following sets forth a reconciliation of loss
from continuing operations and earnings per share information for the year ended
December 31, 2002 and 2001, as adjusted for the non-amortization provisions of
SFAS 142 (in thousands, except per share data):
2002 2001
----------- -----------
Reported loss from continuing operations $ (8,594) $ (30,041)
Add: Goodwill amortization, net of taxes -- 3,555
----------- -----------
Adjusted loss from continuing operations (8,594) (26,486)
Reported income (loss) discontinued operations -- --
----------- -----------
Adjusted net loss $ (8,594) $ (26,486)
=========== ===========
Basic and diluted loss per common share
Adjusted loss from continuing operations $ (0.18) $ (0.58)
Income (loss) from discontinued operations 0.00 0.00
----------- -----------
Adjusted net loss $ (0.18) $ (0.58)
=========== ===========
Basic and diluted weighted-average common shares outstanding 48,869 45,897
=========== ===========
(13) ACQUISITION OF HOME ACCOUNT
On January 11, 2001, the Company acquired Home Account Holdings, Inc.
("Home Account") and its operating subsidiary, Home Account Network, Inc.,
pursuant to an agreement and plan of merger whereby a wholly-owned subsidiary of
the Company merged with and into Home Account, with Home Account surviving the
merger as the Company's wholly-owned subsidiary. This acquisition was accounted
for as a purchase. Following the Company's acquisition of Home Account,
InteliData provides a suite of UNIX-based electronic banking and electronic bill
presentment and payment ("EBPP") products and services in an application
services provider ("ASP") environment.
Pursuant to the merger agreement, the Company purchased Home Account for
approximately $320,000 in cash and 6,900,000 shares of Company common stock and
the merger was accounted for as a purchase. The purchase price was the result of
an arm's-length negotiation between the Company and Home Account, based on the
Company's evaluation of the fair market value of Home Account's business,
including its revenues. The value of the shares issued as part of the purchase
consideration of approximately $29,011,000 was measured based on the average of
the market price of the issued common stock a few days before and after January
11, 2001 - the date that the merger transaction was agreed to and announced.
This amount coupled with the liability associated with the Home Account
Incentive Plan of $2,946,000 (see below) resulted in an increase of $31,957,000
in the accompanying statement of changes in stockholders' equity. The total
purchase price of approximately $31,186,000 consisted of the following (in
thousands):
Consideration and acquisition costs:
Value of shares issued $ 29,011
Cash consideration 320
Acquisition costs 1,855
-----------
$ 31,186
The assets acquired and liabilities assumed were recorded at estimated fair
values as determined by the Company's management based on information currently
available and on current assumptions as to future operations. The Company has
obtained independent professional services for the purchase price allocation to
the fair values of the acquired property, plant and equipment, and identified
intangible assets, and their remaining useful lives and has
completed its review and determination of the fair values of the other assets
acquired and liabilities assumed. A summary of the assets acquired and
liabilities assumed in the acquisition follows (in thousands):
Allocation of purchase price:
Current assets $ 1,562
Property, plant and equipment 1,743
Intangibles (straight-line amortization, 8 to 10 years) 11,400
Liabilities assumed and other (4,344)
Liabilities associated with Home Account Incentive Plan (2,946)
Acquisition integration liabilities (1,822)
Goodwill (straight-line amortization, 8 years) 25,593
------------
$ 31,186
------------
Intangible assets consist of $4,200,000 for assembled workforce (which has
an estimated useful life of eight years) and $7,200,000 for
contracts/relationships (which has an estimated useful life of ten years).
Assembled workforce was determined based on the number of Home Account
employees, function, compensation, fringe benefits, recruiting costs, training,
and other factors. Contracts/relationships was determined based on the history
of low attrition, the high cost of switching, market prices, forecasted
revenues, evaluation of competitors, and other factors.
As a result of the acquisition of Home Account, InteliData incurred
acquisition expenses for costs to exit certain activities at Home Account
locations and to involuntarily terminate employees of the acquired company.
Generally accepted accounting principles require that these acquisition
integration expenses, which are not associated with the generation of future
revenues, have no future economic benefit and which meet certain other criteria,
be reflected as assumed liabilities in the allocation of the purchase price to
the net assets acquired. The components of the acquisition integration
liabilities balance of $1,822,000 included in the purchase price allocation are
approximately $1,010,000 for lease costs for the now vacated Home Account
headquarters in Emeryville, California, and $822,000 related to workforce
reduction. As of December 31, 2002, the Company had a remaining liability of
$589,000 associated with such lease costs, of which $252,000 is current and
$337,000 is noncurrent.
The workforce reductions focused on three key areas: 1) streamlining
development efforts, 2) eliminating redundant administrative overhead and
support activities, and 3) restructuring and repositioning of the
sales/marketing and research and development organizations to eliminate
redundancies in these activities. As of December 31, 2001, 87 positions had been
terminated and approximately $822,000 had been paid. No additional changes
occurred during the year ended December 31, 2002 and the Company does not expect
future adjustments related to this purchase price allocation.
The following pro forma financial information presents the combined results
of operations of InteliData Technologies Corporation and Home Account Holdings,
Inc. and gives effect to the acquisition of Home Account as if it occurred on
January 1, 2000. The pro forma condensed combined financial information set
forth below reflects certain adjustments, including among others, adjustments to
reflect the amortization of the goodwill associated with the acquisition.
However, pro forma results do not include any anticipated cost savings. The pro
forma condensed combined financial information for the years ended December 31,
2001 and 2000, set forth below, neither purports to represent what the
consolidated results of operations or financial condition of InteliData would
actually have been if the Home Account acquisition had in fact occurred on such
date nor projects the future consolidated results of operations or financial
condition of InteliData (in thousands, except for per share data):
2001 2000
--------- ---------
Revenue $ 18,296 $ 13,551
Net (loss) income (33,683) 1,345
Basic net (loss) income per share (0.73) 0.03
Diluted net (loss) income per share (0.73) 0.03
Pro forma basic net income (loss) per share was computed using the
weighted-average number of shares of common stock outstanding after the issuance
of InteliData's common stock to acquire the outstanding shares of Home Account.
Pro forma diluted net income (loss) per share also gives effect to any dilutive
options. Options and warrants are excluded from the computation during loss
periods, as their effect is anti-dilutive.
(14) HOME ACCOUNT INCENTIVE PLAN
In 2000, Home Account approved the 2000 Incentive Plan to encourage the
retention of certain officers of Home Account through a change of control
transaction, and after such a transaction to the extent, up to one year, as
desired by the acquirer. Upon acquisition of Home Account by an acquirer, the
2000 Incentive Plan provided for the granting to plan participants of an
aggregate of 15% of the net amount of the merger consideration allocable to Home
Account's preferred stockholders after payment of the debt preference and other
expenses associated with a transaction. Under the InteliData and Home Account
merger transaction, this incentive plan is payable in the form of InteliData
common stock and such payments are to be made by the group of former Home
Account preferred stockholders (who are collectively considered a "principal
stockholder"). Two-thirds of the 2000 Incentive Plan allocation vested on the
transaction closing date and represent a pre-acquisition expense to Home
Account. In connection with the merger transaction, the Company agreed to
advance the participants funds to pay for their tax withholding obligations
associated with the two-thirds portion. The original principal amount of this
receivable balance was approximately $1,116,000. The shares allocable to the
participants were placed in an escrow account and are released to the Home
Account Stockholders' Representative in accordance with the Merger Consideration
Escrow Agreement. As of December 31, 2001, the remaining outstanding receivable
balance, including interest, was approximately $466,000 and is reflected in the
"Other receivable" balance. On February 4, 2002, the remaining outstanding
balance plus additional interest accrued was paid in full.
The remaining one-third of the participants' allocation vested on January
11, 2002 (one year from the transaction closing date). All forfeited shares
reverted to the former preferred stockholders of Home Account. In connection
with the 2000 Incentive Plan allocation, the deferred compensation for the
one-third portion became fixed and measurable on April 1, 2002 at $155,000 based
on $1.20 (the closing price of the Company's common stock at April 1, 2002). The
difference between this amount and the recognized expense in the prior periods
was recorded as a $183,000 reduction of expense during 2002. For the year ended
December 31, 2001, the Company recorded compensation expense of approximately
$339,000.
(15) EARNINGS PER SHARE
Basic earnings (loss) per share ("EPS") are calculated using the
weighted-average number of shares of common stock outstanding during each
period. Diluted EPS reflect the dilutive effect of stock options and stock
awards granted to employees under stock-based compensation plans, as well as
stock warrants. Basic and diluted earnings per share are calculated as follows
(in thousands, except per share data):
Years Ended December 31,
-------------------------------------
2002 2001 2000
---------- ---------- --------
Basic EPS
Income (loss) from continuing operations $ (8,594) $ (30,041) $ 23,920
Weighted-average common shares outstanding 48,869 45,897 38,237
---------- ---------- --------
Basic earnings (loss) per share from continuing operations $ (0.18) $ (0.65) $ 0.63
========== ========== ========
Diluted EPS
Income (loss) from continuing operations $ (8,594) $ (30,041) $ 23,920
---------- ---------- --------
Weighted-average common shares outstanding 48,869 45,897 38,237
Effect of dilutive securities:
Stock options and awards - - 2,551
Stock warrants - - 55
---------- ---------- --------
Weighted-average dilutive common shares outstanding 48,869 45,897 40,483
---------- ---------- --------
Diluted earnings (loss) per common share
from continuing operations $ (0.18) $ (0.65) $ 0.59
========== ========== ========
Options to purchase 869,000 shares of common stock at a range of $4.25 to
$19.44 were outstanding during 2000, but were not included in the computation of
diluted earnings per share, because the options' exercise prices were greater
than the average market price of the common share.
(16) UNAUDITED QUARTERLY FINANCIAL DATA
The results of the Company's quarterly operations for the years ended
December 31, 2002 and 2001 are set forth in the following table (in thousands,
except per share data):
First Second Third Fourth Year
----------- ----------- ------------ ----------- ----------
2002
- ----
Revenues $ 4,708 $ 5,461 $ 6,010 $ 5,316 $ 21,495
Cost of revenues 1,959 2,079 2,376 2,060 8,474
Operating expenses 6,066 6,151 5,281 3,605 21,103
----------- ------------ ---------- ---------- ----------
Operating loss (3,317) (2,769) (1,647) (349) (8,082)
Other income (expense) 391 (1,084) 32 12 (649)
Provision (benefit) for income taxes - - - (137) (137)
----------- ----------- ---------- ----------- ---------
Income (loss) from continuing operations (2,926) (3,853) (1,615) (200) (8,594)
Income (loss) from discontinued operations - - - - -
----------- ----------- ---------- ----------- ---------
Net income (loss) $ (2,926) $ (3,853) $ (1,615) $ (200) $ (8,594)
============ ============ ========== =========== =========
Basic and diluted earnings per common share
Income (loss) from continuing operations $ (0.06) $ (0.08) $ (0.03) $ (0.00) $ (0.18)
Income (loss) from discontinued operations 0.00 0.00 0.00 0.00 0.00
----------- ----------- ---------- ---------- ---------
Net income (loss) $ (0.06) $ (0.08) $ (0.03) $ (0.00) $ (0.18)
============ =========== =========== =========== =========
Weighted-average common shares outstanding
Basic and diluted 48,494 48,501 48,815 48,840 48,869
=========== =========== ========== ========== ==========
2001
Revenues $ 3,151 $ 4,355 $ 5,307 $ 5,483 $ 18,296
Cost of revenues 1,902 2,117 2,421 2,570 9,010
Operating expenses 11,048 10,908 10,366 7,302 39,624
----------- ------------ ---------- ---------- ----------
Operating loss (9,799) (8,670) (7,480) (4,389) (30,338)
Other income (expense) 522 375 (1,475) 715 137
Provision (benefit) for income taxes - - (160) - (160)
----------- ----------- ----------- ---------- ----------
Income (loss) from continuing operations (9,277) (8,295) (8,795) (3,674) (30,041)
Income (loss) from discontinued operations - - - - -
----------- ----------- ----------- ---------- ----------
Net income (loss) $ (9,277) $ (8,295) $ (8,795) $ (3,674) $ (30,041)
============ ============ =========== ========== ==========
Basic and diluted earnings per common share
Income (loss) from continuing operations $ (0.21) $ (0.18) $ (0.19) $ (0.08) $ (0.65)
Income (loss) from discontinued operations 0.00 0.00 0.00 0.00 0.00
----------- ----------- ---------- ---------- ----------
Net income (loss) $ (0.21) $ (0.18) $ (0.19) $ (0.08) $ (0.65)
============ =========== =========== ========== ==========
Weighted-average common shares outstanding
Basic and diluted 44,580 45,249 45,521 46,866 45,987
=========== =========== ========== ========== ==========
* * * * * *
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
InteliData Technologies Corporation
Reston, Virginia
We have audited the accompanying consolidated balance sheets of InteliData
Technologies Corporation and subsidiaries (the "Company") as of December 31,
2002 and 2001, and the related consolidated statements of operations, changes in
stockholders' equity, and cash flows for each of the three years in the period
ended December 31, 2002. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of InteliData Technologies
Corporation and subsidiaries as of December 31, 2002 and 2001, and the results
of their operations and their cash flows for each of the three years in the
period ended December 31, 2002, in conformity with accounting principles
generally accepted in the United States of America.
As discussed in Note 2 to the consolidated financial statements, the
Company adopted Statement of Financial Accounting Standards No. 142, Goodwill
and Other Intangible Assets, effective January 1, 2002.
/s/ Deloitte & Touche LLP
McLean, Virginia
February 21, 2003
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
- --------------------------------------------------------------
ACCOUNTING AND FINANCIAL DISCLOSURE
-----------------------------------
None.
PART III
========
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
- -------------------------------------------------------------
The Company incorporates herein by reference the information concerning
directors contained in its Proxy Statement for its 2003 Stockholders' Meeting to
be filed within 120 days after the end of the Company's fiscal year (the "2003
Proxy Statement").
Beneficial Ownership Reporting - The Company incorporates herein by
reference the information required by Item 405 of Regulation S-K contained in
its 2003 Proxy Statement.
ITEM 11. EXECUTIVE COMPENSATION
- -------------------------------
The Company incorporates herein by reference the information concerning
executive compensation contained in the 2003 Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
- -----------------------------------------------------------------------
The Company incorporates herein by reference the information concerning
security ownership of certain beneficial owners and management contained in the
2003 Proxy Statement.
SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS
Number of securities Weighted average
issued upon exercise exercise price of Number of securities
be of outstanding options outstanding options remaining available
warrants and rights warrants and rights forfuture issuance
----------------------- -------------------- ------------------------
Equity compensation plans
approved by stockholders 3,033,797 $ 2.51 604,995
Equity compensation plans not
approved by stockhold 3,069,137 $ 2.24 -
----------------------- -------------------- ------------------------
Total 6,102,934 $ 2.38 604,995
======================= ==================== ========================
The equity compensation plans not approved by stockholders consists of
three groups of warrants that are described in Note 7 to the consolidated
financial statements included in this Annual Report on Form 10-K and the 1998
Chief Executive Officer's Plan.
The 1998 Chief Executive Officer's Plan (the "Plan") was adopted to induce
Alfred S. Dominick, Jr. to become the Company's Chief Executive Officer in
August 1998. The Plan provided for the grant of an option to purchase 1,200,000
shares of the Company's common stock at an exercise price of $1.22. Of the
option grant, 200,000 vested in one-third increments over a three-year period
from August 1998 to August 2001. Another 500,000 vested based on the achievement
of specified trading prices for the Company's common stock. The remaining
500,000 will vest subject to Mr. Dominick's continued employment and upon the
earlier of i) the Company's common stock trading above $25.00 per share for
sixty consecutive days, or ii) April 15, 2008.
Additionally, the Company has no i) individual options, rights or warrants
assumed in any merger, acquisition or consolidation transaction; ii) securities
available for future issuance under a compensation plan other
than upon exercise of options, rights or warrants; and iii) equity compensation
plan that contains a formula for calculating the number of securities available
for issuance under the plan.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
- -------------------------------------------------------
The Company incorporates herein by reference the information concerning
certain relationships and related transactions contained in the 2003 Proxy
Statement.
ITEM 14. CONTROLS AND PROCEDURES
- --------------------------------
(a) EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
The Company's chief executive officer and chief financial officer, after
evaluating the effectiveness of the Company's "disclosure controls and
procedures" (as defined in the Securities Exchange Act of 1934 Rules 13a-14(c)
and 15-d-14(c)) as of a date ("Evaluation Date") within 90 days before the
filing of this annual report on Form 10-K, have concluded that as of the
Evaluation Date, the Company's disclosure controls and procedures were adequate
and designed to ensure that material information relating to the Company and its
consolidated subsidiaries would be made known to them by others within those
entities.
(b) CHANGE IN INTERNAL CONTROLS
There were no significant changes in our internal controls or, to our
knowledge, in other factors that could significantly affect our disclosure
controls and procedures subsequent to the Evaluation Date.
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
- -------------------------------------------------------------------------
(a) DOCUMENTS FILED AS PART OF THIS REPORT
1. FINANCIAL STATEMENTS - See Item 8 of this Report
2. FINANCIAL STATEMENT SCHEDULES - None
3. EXHIBITS
(b) REPORTS ON FORM 8-K
The Company filed a Current Report on Form 8-K with the Securities and
Exchange Commission on January 23, 2003, relating to the receipt of a notice
from Nasdaq dated January 22, 2003, that indicated the Company regained
compliance with Marketplace Rule 4450(a)(5), which requires listed companies to
maintain a minimum bid price of $1.00 per share or greater.
The Company filed a Current Report on Form 8-K with the Securities and
Exchange Commission on October 30, 2002, relating to the receipt of a notice
from Nasdaq dated October 29, 2002, that indicated the Company was not in
compliance with Nasdaq's Marketplace Rule 4450(a)(5), because the Company's
common stock had failed to maintain the minimum bid price of $1.00 during the
past 30 consecutive trading days. The Company was granted until January 27, 2003
to regain compliance with Marketplace Rule 4450(a)(5). Compliance with the rule
is determined by the Nasdaq staff, but generally requires that the closing bid
price of the Company's common stock be at least $1.00 for a minimum of ten
consecutive trading days.
(c) EXHIBITS
Exhibit No. Description
- ----------- -----------
3.1 Amended and Restated Certificate of Incorporation, dated June 14, 2002
(Incorporated herein by reference to Exhibit 3.1 to the Company's
Report on Form 10-Q for the quarter ended June 30, 2002).
3.2 Bylaws of InteliData Technologies Corporation. (Incorporated herein by
reference to Appendix V to the Joint Proxy Statement /Prospectus
included in the Registration Statement on Form S-4 filed with the
Commission on August 29, 1996, as amended, File Number 333-11081).
4.1 Rights Agreement, dated as of January 21, 1998, by and between the
Company and American Stock Transfer & Trust Company, as Rights Agent.
(Incorporated herein by reference to the Registration Statement on
Form 8-A filed with the Commission on January 26, 1998).
4.1.1 Amendment No. 1 dated May 24, 2000 to the Rights Agreement, dated as
of January 21, 1998, by and between the Company and American Stock
Transfer & Trust Company, as Rights Agent. (Incorporated herein by
reference to the Current Report on Form 8-A/A filed with the
Commission on July 6, 2000).
4.2 Form of Subscription Agreement, by and among the Company and the
selling stockholders, including as Appendix I thereto, a Registration
Rights Agreement. (Incorporated herein by reference to the Company's
Registration Statement on Form S-3, File Number 333-75146).
4.3 Form of Warrant Certificate. (Incorporated herein by reference to the
Company's Registration Statement on Form S-3, File Number 333-75146).
10.1 Description of InteliData Technologies Corporation Merger Stock
Compensation Plan. (Incorporated herein by reference to the Company's
Registration Statement on Form S-8, File Number 333-76631).
10.2 InteliData Technologies Corporation 1996 Incentive Plan. (Incorporated
herein by reference to the Company's Registration Statement on Form
S-8, File Number 333-16115).
10.2.1 Description of Amendment to the 1996 Incentive Plan. (Incorporated
herein by reference to the Company's Proxy Statement filed with the
Commission on August 6, 1999).
10.2.2 Description of Amendment to the 1996 Incentive Plan. (Incorporated
herein by reference to the Company's Proxy Statement filed with the
Commission on April 24, 2000).
10.2.3 Description of Amendment to the 1996 Incentive Plan. (Incorporated
herein by reference to the Company's Proxy Statement filed with the
Commission on April 20, 2001).
10.3 InteliData Technologies Corporation Non-Employee Directors' Stock
Option Plan. (Incorporated herein by reference to the Company's
Registration Statement on Form S-8, File Number 333-16117).
10.4 InteliData Technologies Corporation Employee Stock Purchase Plan.
(Incorporated herein by reference to the Company's Registration
Statement on Form S-8, File Number 333-16121).
10.5 Employment Agreement dated April 5, 1999 between InteliData
Technologies Corporation and Alfred S. Dominick, Jr. (Incorporated
herein by reference to the Company's Report on Form 10-Q for the
quarter ended March 31, 1999).
10.5.1 InteliData Technologies Corporation 1998 Chief Executive Officer's
Plan. (Incorporated herein by reference to Exhibit 10 to the Company's
Report on Form 10-K for the year ended December 31, 1999).
10.5.2 First Amendment to Employment Agreement between InteliData
Technologies Corporation and Alfred S. Dominick, Jr., dated April 5,
2002 (Incorporated herein by reference to Exhibit 10.5.2 to the
Company's Report on Form 10-Q for the quarter ended June 30, 2002).
* 10.5.3 Second Amendment to Employment Agreement between InteliData
Technologies Corporation and Alfred S. Dominick, Jr., dated January
14, 2003.
10.6 Employment and Non-Competition Agreement dated December 17, 1997
between InteliData Technologies Corporation and Albert N. Wergley.
(Incorporated herein by reference to Exhibit 10 to the Company's
Report on Form 10-K for the year ended December 31, 1997).
10.6.1 Amendment to the Employment and Non-Competition Agreement between
InteliData Technologies Corporation and Albert N. Wergley, dated June
14, 1999. (Incorporated herein by reference to Exhibit 10 to the
Company's Report on Form 10-K for the year ended December 31, 1999).
10.7 Employment and Non-Competition Agreement between InteliData
Technologies Corporation and Michael E. Jennings, dated June 14, 2000
(Incorporated herein by reference to Exhibit 10 to the Company's
Report on Form 10-Q for the quarter ended September 30, 2000).
10.8 Employment and Non-Competition Agreement between InteliData
Technologies Corporation and William F. Gorog, dated November 1, 2000
(Incorporated herein by reference to Exhibit 10 to the Company's
Report on Form 10-Q for the quarter ended September 30, 2000).
10.9 Employment and Non-Competition Agreement between InteliData
Technologies Corporation and John R. Polchin, dated April 8, 2002
(Incorporated herein by reference to Exhibit 3.1 to the Company's
Report on Form 10-Q for the quarter ended June 30, 2002).
10.10 Employment and Non-Competition Agreement between InteliData
Technologies Corporation and Charles A. White, dated January 11, 2001
(Incorporated herein by reference to Exhibit 10 to the Company's
Report on Form 10-Q for the quarter ended June 30, 2001).
* 21.1 InteliData Technologies Corporation List of Significant Subsidiaries.
* 23.1 Consent of Deloitte & Touche LLP.
- -------------
* filed herewith
* * * * * *
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
INTELIDATA TECHNOLOGIES CORPORATION
By: /s/ Alfred S. Dominick, Jr.
-----------------------------------
Alfred S. Dominick, Jr.
Chairman, President, and Chief Executive Officer
(Principal Executive Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Signature Title Date
- --------- ----- ----
/s/ Alfred S. Dominick, Jr. Chairman, President, and Chief Executive Officer, March 3, 2003
- --------------------------------
Alfred S. Dominick, Jr.
/s/ John R. Polchin Vice President, Chief Financial Officer, March 3, 2003
- -------------------------------
John R. Polchin and Treasurer (Principal Financial and
Accounting Officer)
/s/ Neal F. Finnegan Director March 3, 2003
- -------------------------------
Neal F. Finnegan
/s/ Patrick F. Graham Director March 3, 2003
- -------------------------------
Patrick F. Graham
/s/ John J. McDonnell, Jr. Director March 3, 2003
- -------------------------------
John J. McDonnell, Jr.
/s/ L. William Seidman Director March 3, 2003
- -------------------------------
L. William Seidman
/s/ Norman J. Tice Director March 3, 2003
- -------------------------------
Norman J. Tice
CERTIFICATION PURSUANT TO
RULE 13A-14 OF THE SECURITIES EXCHANGE ACT OF 1934,
AS ADOPTED PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Alfred S. Dominick, Jr., Chairman, President, and Chief Executive Officer of
the registrant, certify that:
1. I have reviewed this annual report on Form 10-K of InteliData Technologies
Corporation (the "registrant");
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual report
is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit committee
of registrant's board of directors (or persons performing the equivalent
functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether there were significant changes in internal controls or in
other factors that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: March 3, 2003 By: /s/ Alfred S. Dominick, Jr.
---------------------------
Alfred S. Dominick, Jr.
Chairman, President, and
Chief Executive Officer
CERTIFICATION PURSUANT TO
RULE 13A-14 OF THE SECURITIES EXCHANGE ACT OF 1934,
AS ADOPTED PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, John R. Polchin, Vice-President, Chief Financial Officer and Treasurer of the
registrant, certify that:
1. I have reviewed this annual report on Form 10-K of InteliData Technologies
Corporation (the "registrant");
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officer and I are responsible
for establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual report
is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit committee
of registrant's board of directors (or persons performing the equivalent
functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether there were significant changes in internal controls or in
other factors that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: March 3, 2003 By: /s/ John R. Polchin
-------------------
John R. Polchin
Vice President, Chief Financial Officer
and Treasurer