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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
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For the Quarter Ended: March 31, 2003 Commission File Number 000-21685
INTELIDATA TECHNOLOGIES CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 54-1820617
(State of Incorporation) (I.R.S. Employer Identification Number)
11600 Sunrise Valley Drive, Suite 100, Reston, VA 20191
(Address of Principal Executive Offices)
(703) 259-3000
(Registrant's Telephone Number)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
--------- ---
The number of shares of the registrant's Common Stock outstanding on March 31,
2003 was approximately 48,996,000.
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INTELIDATA TECHNOLOGIES CORPORATION
QUARTERLY REPORT ON FORM 10-Q
TABLE OF CONTENTS
Page
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PART I - FINANCIAL INFORMATION
Item 1. Unaudited Condensed Consolidated Financial Statements
Condensed Consolidated Balance Sheets
March 31, 2003 and December 31, 2002 ..............................3
Condensed Consolidated Statements of Operations
Three Months Ended March 31, 2003 and 2002 ........................4
Condensed Consolidated Statement of Changes in Stockholders' Equity
Three Months Ended March 31, 2003..................................5
Condensed Consolidated Statements of Cash Flows
Three Months Ended March 31, 2003 and 2002 ....................... 6
Notes to Condensed Consolidated Financial Statements ............. 7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations ........................................11
Item 3. Quantitative and Qualitative Disclosures About Market Risk .......16
Item 4. Evaluation of Disclosure Controls and Procedures .................16
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K .................................17
SIGNATURES ...........................................................17
CERTIFICATIONS ...........................................................18
PART I: FINANCIAL INFORMATION
- -----------------------------------
ITEM 1. FINANCIAL STATEMENTS
- ----------------------------------
INTELIDATA TECHNOLOGIES CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
MARCH 31, 2003 AND DECEMBER 31, 2002
(in thousands, except share data; unaudited)
2003 2002
-------------- ------------
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 5,463 $ 5,674
Accounts receivable, net 3,703 2,974
Other receivables 279 309
Prepaid expenses and other current assets 836 802
------------ ------------
Total current assets 10,281 9,759
NONCURRENT ASSETS
Property and equipment, net 2,052 2,554
Goodwill, net 26,238 26,238
Intangibles, net 5,600 5,780
Other assets 175 175
------------ ------------
TOTAL ASSETS $ 44,346 $ 44,506
============= ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 2,435 $ 2,081
Accrued expenses 2,681 3,458
Deferred revenues 1,464 1,673
Other liabilities 254 252
Net liabilities of discontinued operations 48 51
------------ ------------
TOTAL CURRENT LIABILITIES 6,882 7,515
Net liabilities of discontinued operations 175 200
Other liabilities 929 337
------------ ------------
TOTAL LIABILITIES 7,986 8,052
------------ ------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Preferred stock, $0.001 par value; authorized 5,000,000 shares;
no shares issued and outstanding -- --
Common stock, $0.001 par value; authorized 100,000,000 shares;
issued 49,802,000 shares in 2003 and 49,797,000 shares in 2002;
outstanding 48,996,000 shares in 2003 and 48,991,000 shares in 2002 50 50
Additional paid-in capital 302,833 302,833
Treasury stock, at cost: 806,000 shares in 2003 and 2002 (2,473) (2,473)
Deferred compensation (251) (304)
Accumulated deficit (263,799) (263,652)
------------- ------------
TOTAL STOCKHOLDERS' EQUITY 36,360 36,454
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 44,346 $ 44,506
============ ============
See accompanying notes to condensed consolidated financial statements.
INTELIDATA TECHNOLOGIES CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 2003 AND 2002
(in thousands, except per share data; unaudited)
2003 2002
------------- --------------
Revenues
Software $ 343 $ 128
Professional services, recurring and termination fees 5,282 4,580
------------- --------------
Total revenues 5,625 4,708
------------- --------------
Cost of revenues
Software -- --
Professional services and recurring 1,934 1,959
------------- --------------
Total cost of revenues 1,934 1,959
------------- --------------
Gross profit 3,691 2,749
------------- --------------
Operating expenses
General and administrative 2,089 2,494
Sales and marketing 393 850
Research and development 1,147 2,542
Amortization of goodwill and intangibles 180 180
------------- --------------
Total operating expenses 3,809 6,066
------------- --------------
Operating loss (118) (3,317)
Unrealized gain on Sybase warrants -- 377
Other income (expenses), net (29) 14
-------------- --------------
Loss before income taxes (147) (2,926)
Provision for income taxes -- --
------------- --------------
Loss from continuing operations (147) (2,926)
Discontinued operations, net of income taxes -- --
------------- --------------
Net loss $ (147) $ (2,926)
============= ==============
Basic loss per common share
Loss from continuing operations $ (0.00) $ (0.06)
Income (loss) from discontinued operations 0.00 0.00
------------- --------------
Net loss $ (0.00) $ (0.06)
============= ==============
Diluted loss per common share
Loss from continuing operations $ (0.00) $ (0.06)
Income (loss) from discontinued operations 0.00 0.00
------------- --------------
Net loss $ (0.00) $ (0.06)
============== ==============
Basic weighted-average common shares outstanding 48,853 48,494
============== ==============
Diluted weighted-average common shares outstanding 48,853 48,494
============= ==============
See accompanying notes to condensed consolidated financial statements.
INTELIDATA TECHNOLOGIES CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
THREE MONTHS ENDED MARCH 31, 2003
(in thousands; unaudited)
Common Stock Additional Deferred Compre-
----------------------- Paid-in Treasury Compen- Accumulated hensive
Shares Amount Capital Stock sation Deficit Loss Total
----------- ----------- ------------ ----------- ----------- ------------ ---------- ----------
Balance at January 1, 2003 49,797 $ 50 $ 302,833 $ (2,473) $ (304) $ (263,652) $ 36,454
Issuances of common stock:
Issuances of restricted stock 10 - 13 - (13) - -
Cancellations of restricted stock (5) - (13) - 13 - -
Amortization of deferred compensation - - - - 53 - 53
Net loss - - - - - (147) (147) (147)
---------
Comprehensive loss $ (147)
=========
----------- ----------- ------------ ----------- ----------- ------------ ----------
Balance at March 31, 2003 49,802 $ 50 $ 302,833 $ (2,473) $ (251) $ (263,799) $ 36,360
=========== =========== ============ =========== =========== ============ ==========
See accompanying notes to condensed consolidated financial statements.
INTELIDATA TECHNOLOGIES CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED MARCH 31, 2003 AND 2002
(in thousands; unaudited)
2003 2002
-------------- -----------
Cash flows from operating activities
Loss from continuing operations $ (147) $ (2,926)
Adjustments to reconcile loss from continuing operations
to net cash used in operating activities of continuing operations:
Unrealized loss (gain) on Sybase warrants 9 (377)
Amortization of intangibles 180 180
Depreciation and amortization 389 360
Deferred compensation expense 53 225
Loss on disposal of property and equipment 137 2
Changes in certain assets and liabilities:
Accounts receivable (729) 1,776
Other receivables 30 304
Prepaid expenses and other current assets (34) 93
Accounts payable 354 (597)
Accrued expenses (192) (1,509)
Deferred revenues (209) (269)
----------- ----------
Net cash used in operating activities of
continuing operations (159) (2,738)
----------- ----------
Loss from discontinued operations -- --
Change in net liabilities of discontinued operations (28) (167)
----------- ----------
Net cash used in operating activities of
discontinued operations (28) (167)
----------- ----------
Net cash used in operating activities (187) (2,905)
----------- ----------
Cash flows from investing activities
Purchases of property and equipment (24) (149)
Payments for acquisition costs for Home Account -- (50)
----------- ----------
Net cash used in investing activities (24) (199)
----------- ----------
Cash flows from financing activities
Proceeds from issuance of common stock -- 5
----------- ----------
Net cash provided by financing activities -- 5
----------- ----------
Decrease in cash and cash equivalents (211) (3,099)
Cash and cash equivalents, beginning of period 5,674 12,026
----------- ----------
Cash and cash equivalents, end of period $ 5,463 $ 8,927
=========== ==========
See accompanying notes to condensed consolidated financial statements.
INTELIDATA TECHNOLOGIES CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED MARCH 31, 2003 AND 2002
(Unaudited)
(1) Basis of Presentation
The condensed consolidated balance sheet of InteliData Technologies
Corporation ("InteliData" or the "Company") as of March 31, 2003, the related
condensed consolidated statements of operations and cash flows for the three
month periods ended March 31, 2003 and 2002, and the related condensed
consolidated statement of changes in stockholders' equity for the three-month
period ended March 31, 2003 presented in this Form 10-Q are unaudited. In the
opinion of management, all adjustments necessary for a fair presentation of such
financial statements have been included. Such adjustments consist only of normal
recurring items. The condensed consolidated balance sheet as of December 31,
2002 was derived from the Company's audited December 31, 2002 balance sheet.
Interim results are not necessarily indicative of results for a full year.
Certain amounts in the prior periods have been reclassified to conform to the
current period presentation.
The condensed consolidated financial statements and notes are presented as
required by Form 10-Q, and do not contain certain information included in the
Company's annual audited financial statements and notes. These financial
statements should be read in conjunction with the annual audited financial
statements of the Company and the notes thereto, together with management's
discussion and analysis of financial condition and results of operations,
contained in the Form 10-K for the fiscal year ended December 31, 2002.
(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 intercompany balances and transactions. Certain
reclassifications have been made to the prior year financial statements to
conform to the 2003 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, an estimated fair value of net
sublease rent, 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 financial institutions ("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 application services provider ("ASP") services, is
recognized as transactions are processed.
Emerging Issues Task Force Abstract Issue No. 00-3, Application of AICPA
Statement of Position 97-2 to Arrangements that Include the Right to Use
Software Stored on Another Entity's Hardware ("EITF 00-3"), provides guidance in
determining whether or not the provisions of Statement of Position No. 97-2,
Software Revenue Recognition ("SOP 97-2"), should be applied to hosting
arrangements. The Company has some contracts where the customers operate 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
revenues 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) 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 does not have any impact on our financial position,
results of operations or cash flows.
In June 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated
with Exit or Disposal Activities (including Certain Costs Incurred in a
Restructuring) ("SFAS 146"), which supersedes Emerging Issues Task Force Issue
No. 94-3, Liability Recognition for Certain Employee Termination Benefits and
Other Costs to Exit an Activity ("EITF 94-3"). SFAS 146 requires recognition of
a liability for costs associated with an exit or disposal activity when the
liability is incurred, rather than when the entity commits to an exit plan under
EITF 94-3. The provisions of SFAS 146 are effective for exit or disposal
activities that are initiated after September 30, 2002. As of March 31, 2003,
the Company ceased use of certain office space in its corporate offices in
Reston, Virginia. The remaining obligation on this lease was approximately
$1,090,000 through December 31, 2006. In accordance with SFAS 146, the Company
estimated the fair value of net sublease rent to be approximately $465,000 over
the remaining term. Accordingly, the Company recorded an expense of $625,000 and
a corresponding liability as of March 31, 2003. As of May 1, 2003, the Company
has a subtenant for this space for the majority of the remaining lease term and
the actual results of net sublease rent could differ from the above estimates.
(e) Goodwill and Other Intangible Assets - Statement of Financial Accounting
Standards ("SFAS") No. 141, Business Combinations ("SFAS 141") requires business
combinations initiated after June 30, 2001 to be accounted for using the
purchase method of accounting, and broadens the criteria for recording
intangible assets separate from goodwill. SFAS No. 142, Goodwill and Other
Intangible Assets ("SFAS 142") requires the use of an amortization and
non-amortization approach to account for 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.
The goodwill and intangible assets consisted of the following components (in
thousands):
As of March 31, 2003: Goodwill Intangible Total
-------- ---------- -----
Gross carrying amount $ 29,793 $ 7,200 $ 36,993
Accumulated amortization (3,555) (1,600) (5,155)
----------- ----------- ---------
Net $ 26,238 $ 5,600 $ 31,838
=========== =========== =========
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
=========== =========== =========
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 March 31, 2003, the Company is not aware of such events or
circumstances that could indicate potential impairment. The amortization of
certain intangibles continued at an annualized rate of $720,000 for the
three-month periods ended March 31, 2003 and 2002.
(3) Discontinued Operations
As of March 31, 2003, the net liabilities of discontinued operations of
$223,000 relate to the telecommunications divisions. This relates to the
potential environmental clean up associated with InteliData's former New
Milford, Connecticut property. In January 2000, InteliData sold the New Milford,
Connecticut building, its only remaining asset in discontinued operations of the
telecommunications division. In the context of this sale, InteliData agreed to
undertake limited remediation of the site in accordance with applicable state
law. The subject site is not a federal or state Superfund site and InteliData
has not been named a "potentially responsible party" at the site. The
remediation plan agreed to with the purchaser allows InteliData to use
engineering and institutional controls (e.g., deed restrictions) to minimize the
extent and costs of the remediation. Further, at the time of the sale of the
facility, InteliData established a $200,000 escrow account for certain
investigation/remediation costs. As of March 31, 2003, this escrow account
balance remained at $200,000. Moreover, InteliData has obtained environmental
insurance to pay for remediation costs up to $6,600,000 in excess
of a retained exposure limit of $600,000. InteliData estimates its remaining
liability related to this matter and other costs to be approximately $223,000
and has recorded a liability for this amount.
The Company has engaged a legal firm and an environmental specialist firm
to represent InteliData regarding this matter. The timing of the ultimate
resolution of this matter is estimated to be from three to five years under the
Company's proposed compliance plan, which involves a natural attenuation and
periodic compliance monitoring approach. Management does not believe that the
resolution of this matter will likely have a material adverse effect on the
Company's financial condition or results of operations.
* * * * * *
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
- ----------------------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS
-----------------------------------
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 application services provider ("ASP") services, is
recognized as transactions are processed.
Emerging Issues Task Force Abstract Issue No. 00-3, Application of AICPA
Statement of Position 97-2 to Arrangements that Include the Right to Use
Software Stored on Another Entity's Hardware ("EITF 00-3"), provides guidance in
determining whether or not the provisions of Statement of Position No. 97-2,
Software Revenue Recognition ("SOP 97-2"), should be applied to hosting
arrangements. The Company has some contracts where the customers operate 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.
A number of factors are considered in establishing the allowance, including
historical collection experience, the macro-economic environment, estimates of
forecasted write-offs, the aging of the accounts receivable portfolio, and
others. If the financial condition of our accounts receivable portfolio
deteriorates, additional allowances would be required.
Valuation of 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 does not have any impact on our financial position,
results of operations or cash flows.
In June 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated
with Exit or Disposal Activities (including Certain Costs Incurred in a
Restructuring) ("SFAS 146"), which supersedes Emerging Issues Task Force Issue
No. 94-3, Liability Recognition for Certain Employee Termination Benefits and
Other Costs to Exit an Activity ("EITF 94-3"). SFAS 146 requires recognition of
a liability for costs associated with an exit or disposal activity when the
liability is incurred, rather than when the entity commits to an exit plan under
EITF 94-3. The provisions of SFAS 146 are effective for exit or disposal
activities that are initiated after September 30, 2002. As of March 31, 2003,
the Company ceased use of certain office space in its corporate offices in
Reston, Virginia. The remaining obligation on this lease was approximately
$1,090,000 through December 31, 2006. In accordance with SFAS 146, the Company
estimated the fair value of net sublease rent to be approximately $465,000 over
the remaining term. Accordingly, the Company recorded an expense of $625,000 and
a corresponding liability as of March 31, 2003. As of May 1, 2003, the Company
has a subtenant for this space for the majority of the remaining lease term and
the actual results of net sublease rent could differ from the above estimates.
Results of Operations for the Three Months Ended March 31, 2003 and 2002
The following represents the results of operations for InteliData
Technologies Corporation for the three months ended March 31, 2003 and 2002.
Such information should be read in conjunction with the interim financial
statements and the notes thereto in Part I, Item 1 of this Quarterly Report.
Revenues
The Company's first quarter revenues were $5,625,000 in 2003 compared to
$4,708,000 in 2002, an increase of $917,000. The increase was a result of an
increase in professional services, recurring and termination fees of $702,000
and an increase in software revenues of $215,000. During the first quarter of
2003, the Company generated $343,000 of software revenues and $5,282,000 of
professional services, recurring and termination fees. During the first quarter
of 2002, software revenues were $128,000 and professional services, recurring
and termination fees were $4,580,000.
The increase in professional services, recurring and termination fees
from the first quarter of 2002 to the first quarter of 2003 was primarily due to
increases in the Company's recurring revenue from fees associated with its
application services provider ("ASP") operations and increases in the
professional services rates. The increase in software revenues from the first
quarter of 2002 to the first quarter of 2003 was primarily due to the timing of
system deliveries and an increase in software license sales.
Cost of Revenues and Gross Profit
The Company's cost of revenues decreased $25,000 to $1,934,000 in the first
quarter of 2003 from $1,959,000 in the first quarter in 2002. The decrease was
due to a decrease in service provider costs resulting from contract
renegotiations.
Overall gross profit margins increased to 66% for the first quarter of 2003
from 58% for the first quarter of 2002. The increase in gross profit margin was
attributable to increases in recurring revenue, software revenues, and
professional services revenue from legacy clients 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, the introduction of new products, and changes in
volume.
General and Administrative
General and administrative expenses decreased $405,000 to $2,089,000 in the
first quarter of 2003 from $2,494,000 in the first quarter of 2002. The decrease
was primarily attributable to the Company's reduction of corporate and
administrative expenses that resulted from the continued evaluation of on-going
cost structures. The Company plans to continually assess its operations to
manage its expenses and infrastructures in light of anticipated business levels.
Sales and Marketing
Sales and marketing expenses decreased $457,000 to $393,000 in the first
quarter of 2003 from $850,000 in the first quarter of 2002. This was primarily
attributable to decreases in the number of selling and marketing employees, and
travel and outside professional consulting expenses that resulted from the
continued evaluation of on-going cost structures. The Company plans to
continually assess its operations to manage its expenses and infrastructures in
light of anticipated business levels.
Research and Development
Research and development costs decreased $1,395,000 to $1,147,000 in the
first quarter of 2003 from $2,542,000 in the first quarter of 2002. The decrease
was primarily attributable to the Company's reduction of research and
development expenses that resulted from the continued evaluation of on-going
cost structures. 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.
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.
As of January 1, 2002, in accordance with SFAS 142, the Company ceased
recognizing amortization expense on goodwill. The amortization of certain
intangibles continues at an annualized rate of $720,000 for 2003 and 2002.
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
March 31, 2003, the Company is not aware of such events or circumstances that
could indicate potential impairment.
Unrealized Gains on Investments
As part of the January 20, 2000 merger between Home Financial Network, Inc.
("HFN") and Sybase, Inc. ("Sybase"), InteliData received certain consideration
in exchange for its approximate 25% ownership interest in HFN. As part of this
consideration, 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.
Statement of Financial Accounting Standards No. 133, Accounting for
Derivative Instruments and Hedging Activities ("SFAS 133"), establishes
accounting and reporting standards for derivative instruments and for hedging
activities by requiring that derivatives be recognized in the balance sheet and
measured at fair value. The Company accounted for its investment in the warrants
to purchase Sybase common stock under SFAS 133.
SFAS 133 requires that derivative financial instruments, such as forward
currency exchange contracts, interest rate swaps and the Company's warrants to
purchase Sybase stock, be recognized in the financial statements and measured at
fair value regardless of the purpose or intent for holding them. Changes in the
fair value of
derivative financial instruments are either recognized periodically in income or
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. In accordance with SFAS 133, the Company recorded an unrealized gain on
investment of $0 and $377,000 in the statements of operations for the three
months ended March 31, 2003 and 2002, respectively. 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.
Other Income
Other income (expense), primarily interest income and other expenses
including state and local taxes, decreased $43,000 to ($29,000) in the first
quarter of 2003 from $14,000 in the first quarter of 2002. The decrease is
primarily associated with decreased levels of cash and cash equivalents in 2003,
as compared to 2002, which resulted in lower interest income.
Weighted-Average Common Shares Outstanding and Basic and Diluted Loss Per Common
Share
The basic and diluted weighted-average common shares increased to
48,853,000 for the first quarter of 2003 compared to 48,494,000 for the first
quarter of 2002. The increase resulted primarily from the issuance of stock
pursuant to the exercises of stock options, stock awards and stock purchases
under the Employee Stock Purchase Plan.
Losses from continuing operations were $147,000 and $2,926,000 for the
three-month periods ended March 31, 2003 and 2002, respectively, while there was
no gain or loss from discontinued operations in either period. Net losses were
$147,000 and $2,926,000 for 2003 and 2002, respectively. As a result of the
foregoing, basic and diluted net loss per common share was $0.00 for the first
quarter of 2003 compared to a basic and diluted net loss per common share of
$0.06 for the first quarter of 2002.
Liquidity and Capital Resources
During the first three months of 2003, the Company's cash and cash
equivalents decreased by $211,000. At March 31, 2003, the Company had $5,463,000
in cash and cash equivalents, $3,399,000 of working capital with no long-term
debt, and $36,360,000 in stockholders' equity. The Company's principal needs for
cash in the first three months of 2003 were for funding operating losses. The
Company funded increases in accounts receivable of $729,000 for the three months
ended March 31, 2003, which was partially offset by a increase in accounts
payable of $354,000 for the same period.
The Company's cash requirements for operating activities in the first three
months of 2003 were financed primarily by cash and cash equivalents on hand.
Net cash used in investing activities in the first three months of 2003 was
$24,000 for the purchases of property and equipment.
There were no financing activities in the first three months of 2003.
Through the remainder of 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
The information contained in this report includes forward-looking
statements, the realization of which may be impacted by the factors discussed
below. The forward-looking statements are made pursuant to the safe harbor
provisions of the Private Securities Litigation Reform Act of 1995 (the "Act").
This report contains forward looking statements that are subject to risks and
uncertainties, including, but not limited to, our ability to continue funding
operating losses, our ability to manage our expenses in line with anticipated
business levels, the ability of the Company to complete product implementations
in required time frames and the Company's ability to increase its recurring
revenues and profits through its ASP business model, the impact of competitive
products, pricing pressure, product demand and market acceptance risks, pace of
consumer acceptance of home banking and reliance on the Company's bank clients
to increase usage of Internet banking by their customers, the effect of general
economic conditions on the financial services industry, mergers and
acquisitions, risk of integration of the Company's technology by large software
companies, the ability of financial institution customers to implement
applications in the anticipated time frames or with the anticipated features,
functionality or benefits, reliance on key strategic alliances and newly
emerging technologies, the ability of the Company to leverage its relationships
with third parties, the on-going viability of the mainframe marketplace and
demand for traditional mainframe products, the ability to attract and retain key
employees, the availability of cash for long-term growth, product obsolescence,
ability to reduce product costs, fluctuations in operating results, delays in
development of highly complex products and other risks detailed from time to
time in InteliData filings with the Securities and Exchange Commission,
including the risk factors disclosed in the Company's Form 10-K for the fiscal
year ended December 31, 2002. These risks 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, InteliData. The foregoing
list of factors should not be construed as exhaustive or as any admission
regarding the adequacy of disclosures made by the Company prior to the date
hereof or the effectiveness of said Act. InteliData is not under any obligation
(and expressly disclaims an obligation) to update or alter its forward-looking
statements, whether as a result of new information or otherwise.
* * * * * *
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
- -------------------------------------------------------------------
The Company currently has no long-term debt and is not currently engaged in
any transactions that involve foreign currency. The Company does not engage in
hedging activities.
ITEM 4. EVALUATION OF DISCLOSURE 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 quarterly report, 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.
PART II: OTHER INFORMATION
- --------------------------
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
- -----------------------------------------
(a) EXHIBITS
10.5.4 Third Amendment to Employment Agreement between InteliData
Technologies Corporation and Alfred S. Dominick, Jr., dated April
2, 2003.
10.5.5 Change In Control Severance Agreement between InteliData
Technologies Corporation and Alfred S. Dominick, Jr., dated
February 3, 2003.
10.6.1 Change In Control Severance Agreement between InteliData
Technologies Corporation and Albert N. Wergley, dated February 3,
2003.
10.7.1 Change In Control Severance Agreement between InteliData
Technologies Corporation and Michael E. Jennings, dated February 3,
2003.
10.9.1 Change In Control Severance Agreement between InteliData
Technologies Corporation and John R. Polchin, dated February 3,
2003.
(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.
SIGNATURES
Pursuant to the requirements of the Securities Act of 1934, the registrant
has duly caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized on May 15, 2003.
INTELIDATA TECHNOLOGIES CORPORATION
By: /s/ Alfred S. Dominick, Jr.
-----------------------------------------
Alfred S. Dominick, Jr.
Chairman and Chief Executive Officer
/s/ John R. Polchin
-----------------------------------------
John R. Polchin
Vice President, Chief Financial Officer,
and Treasurer
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 and Chief Executive Officer of the Company,
certify that:
1. I have reviewed this quarterly report on Form 10-Q of InteliData
Technologies Corporation (the "registrant");
2. Based on my knowledge, this quarterly 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 quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly 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 quarterly 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 we 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 quarterly 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
quarterly report (the "Evaluation Date"); and
(c) presented in this quarterly 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
function):
(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 the
quarterly report whether or not 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: May 15, 2003 By: /s/ Alfred S. Dominick, Jr.
---------------------------
Alfred S. Dominick, Jr.
Chairman 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
Company, certify that:
1. I have reviewed this quarterly report on Form 10-Q of InteliData
Technologies Corporation (the "registrant");
2. Based on my knowledge, this quarterly 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 quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly 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 quarterly 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 we 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 quarterly 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
quarterly report (the "Evaluation Date"); and
(c) presented in this quarterly 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
function):
(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 the
quarterly report whether or not 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: May 15, 2003 By: /s/ John R. Polchin
-------------------
John R. Polchin
Vice President, Chief Financial
Officer and Treasurer