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UNITED STATES
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 Quarterly Period Ended: Commission File Number:
June 30, 2004 000-21685
INTELIDATA TECHNOLOGIES CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 54-1820617
(State of Incorporation) (I.R.S. Employer Identification Number)
11600 Sunrise Valley Drive, Suite 100, Reston, VA 20191
(Address of Principal Executive Offices)
(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
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Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes X No
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The number of shares of the registrant's Common Stock outstanding on June 30,
2004 was 51,344,349.
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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. Financial Statements (unaudited)
Condensed Consolidated Balance Sheets
June 30, 2004 and December 31, 2003 ............................... 3
Condensed Consolidated Statements of Operations
Three and Six Months Ended June 30, 2004 and 2003 ................. 4
Condensed Consolidated Statement of Changes in Stockholders' Equity
Six Months Ended June 30, 2004..................................... 5
Condensed Consolidated Statements of Cash Flows
Six Months Ended June 30, 2004 and 2003 ........................... 6
Notes to Condensed Consolidated Financial Statements .............. 7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations ......................................... 12
Item 3. Quantitative and Qualitative Disclosures About Market Risk ........ 23
Item 4. Controls and Procedures ........................................... 23
PART II - OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders................ 23
Item 6. Exhibits and Reports on Form 8-K .................................. 23
SIGNATURE .................................................................. 25
PART I: FINANCIAL INFORMATION
- -----------------------------------
ITEM 1. FINANCIAL STATEMENTS
- ----------------------------------
INTELIDATA TECHNOLOGIES CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
JUNE 30, 2004 AND DECEMBER 31, 2003
(in thousands, except share data; unaudited)
2004 2003
------------- ------------
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 5,377 $ 7,603
Accounts receivable, net 2,843 2,890
Other receivables 126 180
Prepaid expenses and other current assets 367 625
------------ ------------
Total current assets 8,713 11,298
NONCURRENT ASSETS
Property and equipment, net 1,227 1,529
Goodwill -- 26,238
Intangible asset, net 4,700 5,060
Other assets 211 211
------------ ------------
TOTAL ASSETS $ 14,851 $ 44,336
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 1,509 $ 1,531
Accrued expenses 1,408 1,599
Deferred revenues 1,373 1,351
Accrued rent 281 364
Net liabilities of discontinued operations 100 45
------------ ------------
TOTAL CURRENT LIABILITIES 4,671 4,890
Accrued rent 290 380
Net liabilities of discontinued operations 113 75
------------ ------------
TOTAL LIABILITIES 5,074 5,345
------------ ------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Preferred stock, $0.001 par value; authorized 5,000,000 shares;
no shares issued and outstanding -- --
Common stock, $0.001 par value; authorized 100,000,000 shares;
issued 52,180,000 shares in 2004 and 52,065,000 shares in 2003;
outstanding 51,344,000 shares in 2004 and 51,231,000 shares in 2003 52 52
Additional paid-in capital 307,032 306,963
Treasury stock, at cost: 835,000 shares in 2004 and 834,000 shares in 2003 (2,548) (2,546)
Deferred compensation (172) (228)
Accumulated deficit (294,587) (265,250)
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TOTAL STOCKHOLDERS' EQUITY 9,777 38,991
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 14,851 $ 44,336
============ ============
See accompanying notes to condensed consolidated financial statements.
INTELIDATA TECHNOLOGIES CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
THREE AND SIX MONTHS ENDED JUNE 30, 2004 AND 2003
(in thousands, except per share data; unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
---------------------------- ----------------------------
2004 2003 2004 2003
----------- ----------- ----------- -----------
Revenues
Software $ -- $ 295 $ -- $ 638
Consulting services, recurring and termination fees 3,746 5,656 7,338 10,938
----------- ----------- ----------- -----------
Total revenues 3,746 5,951 7,338 11,576
----------- ----------- ----------- -----------
Cost of revenues
Software -- -- -- --
Consulting services, recurring and termination fees 1,775 1,948 3,555 3,882
----------- ----------- ----------- -----------
Total cost of revenues 1,775 1,948 3,555 3,882
----------- ----------- ----------- -----------
Gross profit 1,971 4,003 3,783 7,694
Operating expenses
General and administrative 1,917 1,931 3,468 4,020
Sales and marketing 397 485 712 878
Research and development 1,120 1,430 2,426 2,577
Goodwill impairment charge 26,238 -- 26,238 --
Amortization of intangible asset 180 180 360 360
----------- ----------- ----------- -----------
Total operating expenses 29,852 4,026 33,204 7,835
----------- ----------- ----------- -----------
Operating loss (27,881) (23) (29,421) (141)
Other income (expenses), net 40 12 84 (17)
----------- ----------- ----------- -----------
Loss before income taxes (27,841) (11) (29,337) (158)
Provision for income taxes -- -- -- --
----------- ----------- ----------- -----------
Net loss $ (27,841) $ (11) $ (29,337) $ (158)
=========== =========== =========== ===========
Basic and diluted earnings (loss) per common shares $ (0.54) $ (0.00) $ (0.57) $ (0.00)
=========== =========== =========== ===========
Basic and diluted weighted-average
common shares outstanding 51,159 49,002 51,168 48,935
=========== =========== =========== ===========
See accompanying notes to condensed consolidated financial statements.
5
INTELIDATA TECHNOLOGIES CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
SIX MONTHS ENDED JUNE 30, 2004
(in thousands; unaudited)
Common Stock Additional
------------------------- Paid-in Treasury Deferred Accumulated
Shares Amount Capital Stock Compensation Deficit
------------ ------------ -------------- ----------- -------------- ----------------
Balance at January 1, 2004 52,065 $ 52 $ 306,963 $ (2,546) $ (228) $ (265,250)
Issuances of common stock:
Exercise of stock options 56 - 43 - - -
Employee Stock Purchase Plan 14 - 8 - - -
Issuances of restricted stock 95 - 98 - (98) -
Cancellations of restricted stock (50) - (80) - 80 -
Purchase of treasury stock, at cost - - - (2) - -
Amortization of deferred compensation - - - - 74 -
Net loss - - - - - (29,337)
Comprehensive loss
------------ ------------ -------------- ----------- -------------- ----------------
Balance at June 30, 2004 52,180 $ 52 $ 307,032 $ (2,548) $ (172) $ (294,587)
============ ============ ============== =========== ============== ================
Comprehensive
Loss Total
------------ ------------
Balance at January 1, 2004 $ 38,991
Issuances of common stock:
Exercise of stock options 43
Employee Stock Purchase Plan 8
Issuances of restricted stock -
Cancellations of restricted stock -
Purchase of treasury stock, at cost (2)
Amortization of deferred compensation 74
Net loss $ (29,337) (29,337)
---------
Comprehensive loss $ (29,337)
==========
------------
Balance at June 30, 2004 $ 9,777
============
See accompanying notes to condensed consolidated financial statements.
ITELIDATA TECHNOLOGIES CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, 2004 AND 2003
(in thousands; unaudited)
2004 2003
----------- ----------
Cash flows from operating activities
Net loss from continuing operations $ (29,337) $ (158)
Adjustments to reconcile net loss from continuing operations
to net cash from operating activities of continuing operations:
Goodwill impairment charge 26,238 --
Amortization of intangible asset 360 360
Depreciation and amortization 349 666
Deferred compensation expense 74 133
Net loss on disposal of property and equipment -- 137
Changes in certain assets and liabilities:
Accounts receivable 47 (298)
Prepaid expenses and other current assets 312 265
Accounts payable (22) 120
Accrued expenses and accrued rent (364) (549)
Deferred revenue 22 (516)
----------- ----------
Net cash (used in) provided by operating activities of
continuing operations (2,321) 160
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Cash released from escrow account 224 --
Payments on liabilities of discontinued operations (131) (67)
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Net cash provided by (used in) discontinued operations 93 (67)
----------- ----------
Net cash (used in) provided by operating activities (2,228) 93
----------- ----------
Cash flows from investing activities
Purchases of property and equipment (47) (82)
----------- ----------
Net cash used in investing activities (47) (82)
----------- ----------
Cash flows from financing activities
Proceeds from issuance of common stock 51 532
Payments to acquire treasury stock (2) (13)
----------- ----------
Net cash provided by financing activities 49 519
----------- ----------
(Decrease) increase in cash and cash equivalents (2,226) 530
Cash and cash equivalents, beginning of period 7,603 5,674
----------- ----------
Cash and cash equivalents, end of period $ 5,377 $ 6,204
=========== ==========
See accompanying notes to condensed consolidated financial statements.
INTELIDATA TECHNOLOGIES CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SIX MONTHS ENDED JUNE 30, 2004 AND 2003
(Unaudited)
(1) Basis of Presentation
The condensed consolidated balance sheet of InteliData Technologies
Corporation ("InteliData" or the "Company") as of June 30, 2004, the related
condensed consolidated statements of operations and cash flows for the six-month
periods ended June 30, 2004 and 2003, and the related condensed consolidated
statement of changes in stockholders' equity for the six-month period ended June
30, 2004 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, 2003 was
derived from the Company's audited December 31, 2003 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, 2003.
(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 2004 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, allowance for doubtful accounts, costs of environmental remediation for real
property previously sold, depreciation of fixed assets, valuation of intangible
assets which include goodwill, provision for discontinued operations, and
project plans for the completion and delivery of certain solutions. These
accounting estimates are based on information currently available. Actual
results could differ from those estimates and in some cases the actual results
could vary materially from the estimates.
(c) Revenue Recognition - The Company supplies online banking and bill payment
software to 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 where the delivered software may not
require significant customization. Upon delivery, the Company either recognizes
revenue ratably over the contract period for contracts where vendor specific
objective evidence ("VSOE") of fair value for post contract customer support
("PCS") does not exist or recognizes revenue 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 from these
multiple element arrangements is recognized when there is persuasive evidence of
an arrangement and delivery to the customer has occurred, the fee is fixed and
determinable, and collectibility is considered probable. Advance
payments are recorded as deferred revenue until the products are shipped,
services are delivered and all obligations are met. Currently, the Company does
not have VSOE of fair value for some of the elements within its multiple element
arrangements. Therefore, all revenue under such arrangements is recognized
ratably over the term of the PCS contract. Revenue from transactional services,
which includes hosting and application services provider ("ASP") services, is
recognized as transactions are processed.
Emerging Issues Task Force Abstract Issue No. 00-3, Application of AICPA
Statement of Position 97-2 to Arrangements that Include the Right to Use
Software Stored on Another Entity's Hardware ("EITF 00-3"), provides guidance in
determining whether or not the provisions of Statement of Position No. 97-2,
Software Revenue Recognition ("SOP 97-2"), should be applied to hosting
arrangements. The Company has some contracts where the customers operate
software in an ASP environment. The customer may not take possession of the
software without incurring significant transition and infrastructure costs, as
well as potential payments of fees to the Company for the termination of such
arrangements. In cases where the customer has not licensed software from
InteliData, the customer must also purchase a license prior to having the right
to use the software in its own operating environment, in addition to the
aforementioned fees. In these situations, the Company applies the guidance under
EITF 00-3 and the Staff Accounting Bulletin No. 101, Revenue Recognition in
Financial Statements, and recognizes the revenue associated with the license
and/or implementation fees ratably over the initial term of the contract.
Additionally, based on the EITF 00-3 guidance, the Company concluded that
SOP 97-2 should not be applied to certain of its software hosting contracts.
Accordingly, the related revenues for license and professional services were
recognized under the percentage of completion method. In addition to developing
and delivering the solution, the Company is entitled to use fees based on the
number of users and transactions. These use-based fees are earned based on the
monthly user counts and as transactions are processed.
(d) Recent Accounting Pronouncements - In May 2003, the Financial Accounting
Standards Board ("FASB") issued Statement of Financial Accounting Standards
("SFAS") No. 150, Accounting for Certain Financial Instruments with
Characteristics of both Liabilities and Equity ("SFAS 150"), which requires that
an issuer classify financial instruments that are within the scope of SFAS 150
as a liability. Under prior guidance, these same instruments would be classified
as equity. SFAS 150 is effective for all financial instruments entered into or
modified after May 31, 2003. Otherwise, it is effective on July 1, 2003. The
adoption of SFAS 150 did not have a material effect on our financial position,
results of operations, or cash flows.
In May 2003, the FASB issued SFAS No. 149, Amendment of Statement 133 on
Derivative Instruments and Hedging Activities ("SFAS 149"), which amends and
clarifies financial accounting and reporting for derivative instruments,
including certain derivative instruments embedded in other contracts
(collectively referred to as derivatives) and for hedging activities under SFAS
No. 133, Accounting for Derivative Instruments and Hedging Activities. SFAS 149
is effective for contracts entered into or modified after June 30, 2003, and for
hedging relationships designated after June 30, 2003. The adoption of SFAS 149
did not have a material impact on our financial position, results of operations,
or cash flows.
In December 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based
Compensation-Transition and Disclosure-an amendment of FAS 123 ("SFAS 148").
SFAS 148 amends SFAS No. 123, Accounting for Stock-Based Compensation ("SFAS
123"), to provide alternative methods of transition for an entity that
voluntarily changes to the fair value based method of accounting for stock-based
employee compensation. It also amends the disclosure provisions of SFAS 123 to
require prominent disclosure about the effects on reported net income of an
entity's accounting policy decisions with respect to stock-based employee
compensation. SFAS 148 also amends Accounting Principles Board 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 did not have any impact on our financial position,
results of operations, or cash flows.
In June 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated
with Exit or Disposal Activities (including Certain Costs Incurred in a
Restructuring) ("SFAS 146"), which supersedes Emerging Issues Task Force Issue
No. 94-3, Liability Recognition for Certain Employee Termination Benefits and
Other Costs to Exit an Activity ("EITF 94-3"). SFAS 146 requires recognition of
a liability for costs associated with an exit or
disposal activity when the liability is incurred, rather than when the entity
commits to an exit plan under EITF 94-3. The provisions of SFAS 146 are
effective for exit or disposal activities that are initiated after September 30,
2002. As of March 31, 2003, the Company ceased using one of its leased spaces at
its offices in Reston, Virginia. The remaining obligation on this lease was
approximately $1,080,000 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. As of June 30, 2004, the estimated remaining liability
was approximately $393,000.
(e) Valuation of Long-Lived Assets - The Company reviews its long-lived assets
such as property, plant and equipment and identifiable intangibles with finite
useful lives for impairment whenever events or changes in circumstances indicate
that the carrying amount may not be recoverable. If the total of the expected
undiscounted future cash flows is less than the carrying amount of the asset, a
loss, if any, is recognized for the difference between the fair value and
carrying value of the asset. Impairment analyses, when performed, are based on
the Company's current business and technology strategy, views of growth rates
for the business, anticipated future economic conditions, and expected
technological availability.
(f) Goodwill and Other Intangible Assets - 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 certain intangibles and purchased
goodwill. 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. These reviews are to be performed at
least annually and tests for impairment between annual tests may be required if
events occur or circumstances change that would more likely than not reduce the
fair value of the net carrying amount. The amortization and non-amortization
provisions of SFAS 142 are to be applied to all goodwill and intangible assets
acquired after June 30, 2001. The provisions of each statement that apply to
goodwill and intangible assets acquired prior to June 30, 2001 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 asset (which is subject to amortization) consisted of
the following components (in thousands) as of:
June 30, 2004 December 31, 2003
------------- -----------------
Goodwill $ - $ 26,238
============= =================
Intangible asset, gross carrying amount $ 7,200 $ 7,200
Accumulated amortization (2,500) (2,140)
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Net intangible asset $ 4,700 $ 5,060
============= =================
As the Company disclosed in the first quarter, the required annual
impairment testing date is as of June 30th. As of March 31, 2004, the Company
was not aware of events or circumstances that could indicate impairment of
goodwill and its market capitalization indicated a fair value substantially in
excess of the Company's carrying amount, including goodwill. During the second
quarter of 2004, the Company experienced unanticipated business challenges, as
customer decisions on acquiring InteliData's solutions were not completed for a
variety of reasons (e.g., merger and acquisition activities that shift
priorities, merger and acquisition activities that reduce the number of
prospects, and the timing of requests for proposals and decision making
processes). Additionally, competition in the marketplace increased pricing
pressures (e.g., a competitor lowered pricing for some customers to prevent
attrition). These marketplace challenges led the Company to reevaluate the
financial projections and related cash flows for the next three years and to
reconsider longer-term estimates. In addition, the Company noted a sharp
reduction in its market capitalization subsequent to the first quarter of 2004,
which reflected its marketplace challenges and corroborated its revised
financial projections discussed above.
As of June 30, 2004, the Company performed the required annual impairment
testing for goodwill in accordance with SFAS 142. These reviews utilized the
same approaches and similar considerations as previous tests. The goodwill
impairment test, performed at the reporting unit level, is a two-step analysis.
First, the fair value of the reporting unit was compared to its carrying amount,
including goodwill. Fair value was determined using generally accepted valuation
methodologies (i.e., discounted cash flow model, guideline company method, and
similar transactions method). That is, the Company assessed the fair value of
its only reporting unit by considering its projected cash flows, comparable
company valuations, and recent purchase prices paid for entities within its
industry. As the fair value of the reporting unit was less than its carrying
amount, the Company compared the implied fair value of reporting unit goodwill
with the carrying amount of that goodwill to measure the amount of impairment
loss. Accordingly, the Company performed a hypothetical purchase price
allocation based on the reporting unit's fair value to determine the fair value
of the reporting unit's goodwill in order to measure the goodwill impairment
charge. This hypothetical purchase price allocation required the evaluation of
the fair values of unrecorded assets, such developed technologies, customer
relationships and deferred tax assets, in addition to the fair values of
recorded net assets. The Company used accepted valuation methodologies to value
these assets, including but not limited to, the replacement cost approach and
relief from royalty approach (i.e., what the Company would have to pay for the
use of its technologies in a hypothetical licensing or royalty arrangement).
Consideration was given to the unrecorded net assets only for the purpose of
measuring the amount of goodwill impairment loss. Accordingly, the Company did
not record such net assets on the balance sheet.
Given consideration of these factors and the Company's declining market
capitalization, the Company recorded a goodwill impairment charge in the amount
of $26,238,000 in the second quarter. The analysis discussed above clearly
indicated that the goodwill balance was fully impaired. As discussed above, the
analysis required the Company to make estimates of projected cash flows in order
to determine if its assets are impaired. The Company made significant
assumptions and estimates in this process regarding matters that are inherently
uncertain, such as forecasting revenue and cost projections, calculating
remaining useful lives, assuming discount rates and costs of capital, among
others. Management believes that the judgments, estimates and assumptions used
are reasonable and supportable.
(3) Discontinued Operations
As of June 30, 2004, the net liabilities of discontinued operations of
$213,000 relate to the telecommunications divisions. These liabilities relate to
the environmental clean up associated with prior tenants' operations at
InteliData's former New Milford, Connecticut property. In January 2000,
InteliData sold the New Milford, Connecticut property and the building located
thereon, its only remaining asset in its discontinued operations of the
telecommunications division. In the context of this sale, InteliData agreed to
undertake limited remediation of the site in accordance with applicable state
and federal law. The subject site is not a listed federal or state Superfund
site and InteliData has not been named a "potentially responsible party" at the
site. The remediation plan agreed to with the purchaser allows InteliData to use
engineering and institutional controls (e.g., deed restrictions) to minimize the
extent and costs of the remediation. Further, at the time of the sale of the
facility, InteliData established a $200,000 escrow account from the proceeds of
the sale for certain investigation/remediation costs. This escrow account was
interest bearing and would be paid out to InteliData. In April 2004, the escrow
account balance of approximately $224,000 was released and paid to InteliData.
The net liability of discontinued operations was increased to reflect the cash
received by InteliData. Moreover, InteliData has obtained environmental
insurance to pay for remediation costs up to $6,600,000 in excess of a retained
exposure limit of $600,000. InteliData estimates its remaining liability at June
30, 2004 related to this matter, including the escrow amount received, and other
costs to be approximately $213,000. This amount is recorded as a liability on
the balance sheet.
The Company has engaged a legal firm and an environmental specialist firm
to represent it regarding this matter. The timing of the ultimate resolution of
this matter is estimated to be from two to four years under the Company's
proposed compliance plan, which involves a natural attenuation and periodic
compliance monitoring approach. Management does not believe that the resolution
of this matter will likely have a material adverse effect on the Company's
financial condition or results of operations.
(4) Stockholders' Equity
During July 2003, the Company issued 1,431,364 shares of its common stock
pursuant to the exercise of warrants, as amended, by institutional investors who
participated in the Company's private placement of common stock in November and
December, 2001. The warrant exercise resulted in gross proceeds of approximately
$3,335,000. All of the warrants that were issued as part of the 2001 private
placement have been exercised.
(5) Commitments and Contingencies
Purchase Obligations - The Company entered into multiple vendor agreements
for outsourced services as part of its ASP solution offering for certain Online
Banking and Payment Solutions clients. Some of these vendor agreements commit
the Company to specified minimum charges during the terms of the contracts.
These purchase obligations are disclosed below. During 2003, several of the
Company's clients migrated from this ASP environment to an in-house solution
utilizing InteliData's licensed software. As a result, a possibility exists for
future losses due to the decrease in estimated future revenue streams when
compared with the Company's current contractual cost structure for outsourced
services within this ASP environment.
In assessing potential future losses associated with the Company's ASP
business, the Company may include the possibility of new clients that would add
incremental revenue to this ASP environment. Additionally, the Company may have
the opportunity to restructure vendor contracts and decrease contractual charges
(e.g., renegotiate or extend the current contract with lower minimum charges or
migrate to different vendors). Management continues to assess both the potential
for new business prospects and the possibility of reducing the Company's costs
through renegotiation of existing agreements. In June 2004, the Company
restructured one such agreement and decreased its overall prospective ASP
operations costs. Entering the third quarter of 2004, the projected revenues are
estimated to exceed projected costs by approximately $85,000 on a monthly basis
based on the June 2004 results; this gap will fluctuate based on monthly
activity. In accordance with generally accepted accounting principles, the
Company is accounting for these contract costs as they are incurred.
Based on the restructured vendor contract, the updated future minimum
payments under purchase obligations for outsourced services are as follows (in
thousands):
Purchase
Years Ending December 31, Obligations
------------------------- -----------
2004 $ 2,410
2005 640
2006 --
2007 --
2008 and thereafter --
-----------
Total minimum payments $ 3,050
===========
(6) Income Taxes
At December 31, 2003, the Company had net operating loss carryforwards for
federal income tax purposes of approximately $205 million, which expire in 2008
through 2023. The net loss for the six-month period ended June 30, 2004 will
contribute to the increase of total net operating loss carrryforwards. The
Company continues to establish a full valuation allowance for deferred tax
assets, because it is deemed, based on available evidence, that it is more
likely than not that all of the deferred tax assets will not be realized.
* * * * * *
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
- ----------------------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS
-----------------------------------
Results of Operations
The following represents the results of operations for InteliData
Technologies Corporation. Such information should be read in conjunction with
the interim financial statements and the notes thereto in Part I, Item 1 of this
Quarterly Report.
The Company generates revenues from each of its three product offerings -
Payment Solutions, Card Services, and Online Banking. Within these product
offerings, the Company obtains revenues from various sources - software license
fees, consulting services fees, use-based fees, maintenance fees, and other
fees. Software license fees include revenues generated from license sales.
Consulting services fees include revenues generated from professional services
rendered. Use-based fees include revenues generated from user accounts,
transactions, remittances and other related activities. Maintenance fees include
revenues generated from maintenance agreements for support services for licensed
software. Other fees are termination charges levied for early termination of
contracts.
Within revenues generated from Payment Solutions, consulting services will
fluctuate with the demand of services based on client internal projects as well
as new system implementations. Use-based fees will fluctuate based on the
addition of new clients and user adoption rates that translate into additional
users and additional transactions. Additionally, use-based revenues may decline
with departures of clients for other solutions and/or clients' migrating the
InteliData solution in-house through a license arrangement that may eliminate
user fees.
Within revenues generated from Card Services, consulting services will
fluctuate with the demand of services based on client internal projects as well
as new client implementations. Use-based fees will fluctuate based on the
addition of new clients and user adoption rates that translate into additional
users and additional transactions. Additionally, use-based revenues may increase
due to added functionalities or may decline with departures of clients for other
solutions.
Within revenues generated from Online Banking, use-based revenues will
fluctuate based on the addition of new clients and user adoption rates that
translate into additional users and additional transactions. However, use-based
revenues may decline with departures of clients for other solutions and/or
clients' migrating the InteliData solution in-house through a license
arrangement that may eliminate user fees.
The following table sets forth the Company's sources of revenue for each of
the three-month and six-month periods ended June 30, 2004, and 2003:
Three Months Ended Six Months Ended
June 30, June 30,
--------------------- -------------------
2004 2003 2004 2003
------- -------- ------- -------
Payment Solutions
Software license $ - $ 295 $ - $ 455
Consulting services 359 844 625 1,485
Use-based 1,339 1,076 2,650 2,017
Maintenance 343 212 639 418
------- -------- ------- -------
Subtotal 2,041 2,427 3,914 4,375
------- -------- ------- -------
Card Services
Consulting services 33 100 126 188
Use-based 1,173 1,185 2,303 2,256
Other - - - 13
------- -------- ------- -------
Subtotal 1,206 1,285 2,429 2,457
------- -------- ------- -------
Online Banking
Software license - - - 183
Consulting services 55 490 112 879
Use-based 237 1,595 494 3,406
Maintenance 207 154 389 276
------- -------- ------- -------
Subtotal 499 2,239 995 4,744
------- -------- ------- -------
Total
Software license - 295 - 638
Consulting services 447 1,434 863 2,552
Use-based 2,749 3,856 5,447 7,679
Maintenance 550 366 1,028 694
Other - - - 13
------- -------- ------- -------
Total $ 3,746 $ 5,951 $ 7,338 $11,576
======= ======== ======= =======
Three Months Ended June 30, 2004 and 2003
Revenues
The Company's second quarter revenues were $3,746,000 in 2004 compared to
$5,951,000 in 2003, a decrease of $2,205,000.
The second quarter revenues from Payment Solutions were $2,041,000 in 2004
compared to $2,427,000 in 2003, a decrease of $386,000. These revenues included
items related to the Company's billpay warehouse, funds transfer and certain OFX
solutions, as well as the billpay portions of the ASP offerings. Consulting
services fees decreased $485,000, while use-based fees increased $263,000
quarter over quarter. The decrease in consulting services fees was primarily due
to the completion of projects in 2003 and limited new projects in 2004, while
the increase in use-based fees was due to the growth from existing clients.
Software license fees decreased $295,000 because there were no software license
sales in 2004.
The second quarter revenues from Card Services were $1,206,000 in 2004
compared to $1,285,000 in 2003, a decrease of $79,000. Consulting services fees
decreased $67,000 and use-based fees decreased $12,000, quarter over quarter.
The decrease in consulting services fees was due to the decrease in new
projects, while the decrease in use-based fees was due to the deconversion of
several clients, which was partially offset by growth in users and transactions
from continuing clients.
The second quarter revenues from Online Banking were $499,000 in 2004
compared to $2,239,000 in 2003, a decrease of $1,740,000. These revenues include
items related to the Company's Interpose(R) Web Banking, Interpose(R)
Transaction Engine, and certain OFX solutions, as well as the online banking
portions of the ASP offerings. The decrease was primarily attributable to the
$1,358,000 decrease in use-based fees. Three large customers who were operating
in the ASP environment during the first quarter of 2003 did not pay recurring
fees during 2004. In one instance, a bank that used the Company's online banking
platform based on older Home Account Canopy(TM) Banking technology, converted to
a competitor's product. Two other banks paid the Company a one-time license fee
in 2003 and moved the InteliData software in-house in 2003, which resulted in a
decrease to the Company's monthly fees for hosting the software in an ASP
arrangement. The resulting decrease was partially offset by growth in user fees
from existing clients. Additionally, consulting services fees decreased
$435,000. The decrease was primarily due to the completion of projects in 2003
and fewer new projects in 2004.
Cost of Revenues and Gross Profit
The Company's cost of revenues decreased $173,000 to $1,775,000 in the
second quarter of 2004 from $1,948,000 in the second quarter of 2003. The
decrease was primarily due to decreases in cost of revenues associated with
decreased professional services. The cost structures to generate the revenues
are bundled together and cannot be broken out in the same manner as the
revenues. Costs of revenues include vendors for outsourced services and
employees directly working to generate revenues.
Overall gross profit margins decreased to 53% for the second quarter of
2004 from 67% for the second quarter of 2003. The decrease in gross profit
margin was attributable to decreases in software licenses, consulting services,
and use-based revenues. The Company's cost of revenues did not fluctuate
proportionately in relation to revenues, as there are certain fixed costs to
maintain the current infrastructure. Accordingly, while revenues declined by
$2,205,000, cost of revenues declined by only $173,000. The Company anticipates
that gross profit margins may fluctuate in the future due to changes in product
mix and distribution, outsourcing activities associated with an ASP business
model, competitive pricing pressure, the introduction of new products, and
changes in volume.
The Company entered into multiple vendor agreements for outsourced services
as part of its ASP solution offering for certain Online Banking and Payment
Solutions clients. Some of these vendor agreements commit the Company to
specified minimum charges during the terms of the contracts. During 2003,
several of the Company's clients migrated from this ASP environment to an
in-house solution utilizing InteliData's licensed software. As a result, a
possibility exists for future losses due to the decrease in estimated future
revenue streams when compared with the Company's current contractual cost
structure for outsourced services within this ASP environment.
In assessing potential future losses associated with the Company's ASP
business, the Company may include the possibility of new clients that would add
incremental revenue to this ASP environment. Additionally, the Company may have
the opportunity to restructure vendor contracts and decrease contractual charges
(e.g., renegotiate or extend the current contract with lower minimum charges or
migrate to different vendors). Management continues to assess both the potential
for new business prospects and the possibility of reducing the Company's costs
through renegotiation of existing agreements. In June 2004, the Company
restructured one such agreement and decreased its overall prospective ASP
operations costs. Entering the third quarter of 2004, the projected revenues are
estimated to exceed projected costs by approximately $85,000 on a monthly basis
based on the June 2004 results; this gap will fluctuate based on monthly
activity. In accordance with generally accepted accounting principles, the
Company is accounting for these contract costs as they are incurred.
General and Administrative
General and administrative expenses decreased $14,000 to $1,917,000 in the
second quarter of 2004 from $1,931,000 in the second quarter of 2003. The
decrease was primarily attributable to the Company's reduction of corporate and
administrative expenses that resulted from employee-related actions and
aggressive expense controls. The Company plans to continually assess its
operations to review its expenses and infrastructures in light of anticipated
business levels.
Sales and Marketing
Sales and marketing expenses decreased $88,000 to $397,000 in the second
quarter of 2004 from $485,000 in the second quarter of 2003. This was primarily
attributable to employee-related actions, lower travel costs and a reduction in
tradeshow-related expenses. The Company plans to continually assess its
operations to review its expenses and infrastructures in light of anticipated
business levels.
Research and Development
Research and development costs decreased $310,000 to $1,120,000 in the
second quarter of 2004 from $1,430,000 in the second quarter of 2003. The
Company's primary research and development efforts are in Payment Solutions and
the Company did not decrease research and development investments in this
product line. Rather, the decrease is a result of certain employee-related
actions in other product lines achieved through non-replacement of attrition and
the re-assignment to Payment Solutions. The Company plans to continually assess
its operations to review its expenses and infrastructures in light of
anticipated business levels.
For the remainder of 2004, the Company expects to focus its research and
development efforts on its Payment Solutions product offerings. The development
efforts for Online Banking and Card Services products 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, at least annually, that may result in
future periodic write-downs. Tests for impairment between annual tests may be
required if events occur or circumstances change that would more likely than not
reduce the fair value of the net carrying amount. The assets would be written
down and impairment losses would be charged to results of operations only in the
periods in which the recorded values are determined to be more than their fair
values. The amortization of certain intangibles continued at an annualized rate
of $720,000. As of January 1, 2002, in accordance with SFAS 142, the Company
ceased recognizing amortization expense on goodwill.
As of June 30, 2004, the Company performed the required annual review in
accordance with SFAS 142. The Company assessed the fair value of its only
reporting unit by considering its projected cash flows, comparable company
valuations, and recent purchase prices paid for entities within its industry.
This review utilized the same approaches (i.e., discounted cash flow model,
guideline company method, and similar transactions method) and similar
considerations as the initial and previous tests. Given consideration of these
factors and the Company's declining market capitalization, the Company recorded
a goodwill impairment charge in the amount of $26,238,000. Other Income
Other income (expense), primarily rental receipts, interest income and
other expenses including state and local taxes, increased $28,000 to $40,000 in
the second quarter of 2004 from $12,000 in the second quarter of 2003. The
increase is primarily attributable to sub-lease rental receipts.
Weighted-Average Common Shares Outstanding and Basic and Diluted Loss Per Common
Share
The basic and diluted weighted-average common shares increased to
51,159,000 for the second quarter of 2004 compared to 49,002,000 for the second
quarter of 2003. The increase resulted primarily from stock awards to employees,
exercises of stock options, stock purchases under the Employee Stock Purchase
Plan, and exercises of warrants. During July 2003, the Company issued 1,431,364
shares of its common stock pursuant to the exercise of warrants, as amended, by
institutional investors who participated in the Company's private placement of
common stock in November and December, 2001.
Losses from continuing operations were $27,841,000 and $11,000 for the
three-month periods ended June 30, 2004 and 2003, respectively, while there was
no gain or loss from discontinued operations in either period. Net losses were
$27,841,000 and $11,000 for 2004 and 2003, respectively. As a result of the
foregoing, basic and diluted net loss per common share was $0.54 for the second
quarter of 2004 compared to a basic and diluted net loss per common share of
$0.00 for the second quarter of 2003.
Six Months Ended June 30, 2004 and 2003
Revenues
The Company's revenues for the first six months were $7,338,000 in 2004
compared to $11,576,000 in 2003, a decrease of $4,238,000.
The revenues for the first six months from Payment Solutions were
$3,914,000 in 2004 compared to $4,375,000 in 2003, a decrease of $461,000. These
revenues included items related to the Company's billpay warehouse, funds
transfer and certain OFX solutions, as well as the billpay portions of the ASP
offerings. Consulting services fees decreased $860,000, while use-based fees
increased $633,000 quarter over quarter. The decrease in consulting services
fees was primarily due to the completion of projects in 2003 and limited new
projects in 2004, while the increase in use-based fees was due to the growth
from existing clients. Software license fees decreased $455,000 because there
were no software license sales in 2004.
The revenues for the first six months from Card Services were $2,429,000 in
2004 compared to $2,457,000 in 2003, a decrease of $28,000. Consulting services
fees decreased $62,000, use-based fees increased $47,000, while other fees
decreased $13,000 quarter over quarter. The increase in use-based fees was due
to the growth in users and transactions from existing clients. The $13,000 in
other fees in the first six months of 2004 related to one-time early termination
fees.
The revenues for the first six months from Online Banking were $995,000 in
2004 compared to $4,744,000 in 2003, a decrease of $3,749,000. These revenues
include items related to the Company's Interpose(R) Web Banking, Interpose(R)
Transaction Engine, and certain OFX solutions, as well as the online banking
portions of the ASP offerings. The decrease was primarily attributable to the
$2,912,000 decrease in use-based fees. Three large customers who were operating
in the ASP environment during the first six months of 2003 did not pay recurring
fees during 2004. In one instance, a bank that used the Company's online banking
platform based on older Home Account Canopy(TM) Banking technology, converted to
a competitor's product. Two other banks paid the Company a one-time license fee
in 2003 and moved the InteliData software in-house in 2003, which resulted in a
decrease to the Company's monthly fees for hosting the software in an ASP
arrangement. The resulting decrease was partially offset by growth in user fees
from existing clients. Additionally, software license and consulting services
fees decreased $183,000 and $767,000, respectively. The decreases were primarily
due to the completion of projects in 2003 and fewer new projects in 2004.
Cost of Revenues and Gross Profit
The Company's cost of revenues decreased $327,000 to $3,555,000 for the
first six months of 2004 from $3,882,000 for the first six months of 2003. The
decrease was primarily due to decreases in cost of revenues associated with
decreased professional services. The cost structures to generate the revenues
are bundled together and cannot be broken out in the same manner as the
revenues. Costs of revenues include vendors for outsourced
services and employees directly working to generate revenues.
Overall gross profit margins decreased to 52% for the first six months of
2004 from 66% for the first six months of 2003. The decrease in gross profit
margin was attributable to decreases in software licenses, consulting services,
and use-based revenues. The Company's cost of revenues did not fluctuate
proportionately in relation to revenues, as there are certain fixed costs to
maintain the current infrastructure. Accordingly, while revenues declined by
$4,238,000, cost of revenues declined by only $327,000. The Company anticipates
that gross profit margins may fluctuate in the future due to changes in product
mix and distribution, outsourcing activities associated with an ASP business
model, competitive pricing pressure, the introduction of new products, and
changes in volume.
The Company entered into multiple vendor agreements for outsourced services
as part of its ASP solution offering for certain Online Banking and Payment
Solutions clients. Some of these vendor agreements commit the Company to
specified minimum charges during the terms of the contracts. During 2003,
several of the Company's clients migrated from this ASP environment to an
in-house solution utilizing InteliData's licensed software. As a result, a
possibility exists for future losses due to the decrease in estimated future
revenue streams when compared with the Company's current contractual cost
structure for outsourced services within this ASP environment.
In assessing potential future losses associated with the Company's ASP
business, the Company may include the possibility of new clients that would add
incremental revenue to this ASP environment. Additionally, the Company may have
the opportunity to restructure vendor contracts and decrease contractual charges
(e.g., renegotiate or extend the current contract with lower minimum charges or
migrate to different vendors). Management continues to assess both the potential
for new business prospects and the possibility of reducing the Company's costs
through renegotiation of existing agreements. In June 2004, the Company
restructured one such agreement and decreased its overall prospective ASP
operations costs. Entering the third quarter of 2004, the projected revenues are
estimated to exceed projected costs by approximately $85,000 on a monthly basis
based on the June 2004 results; this gap will fluctuate based on monthly
activity. In accordance with generally accepted accounting principles, the
Company is accounting for these contract costs as they are incurred.
General and Administrative
General and administrative expenses decreased $552,000 to $3,468,000 for
the first six months of 2004 from $4,020,000 for the first six months of 2003.
The decrease was primarily attributable to the Company's reduction of corporate
and administrative expenses that resulted from employee-related actions and
aggressive expense controls. The Company plans to continually assess its
operations to review its expenses and infrastructures in light of anticipated
business levels.
Sales and Marketing
Sales and marketing expenses decreased $166,000 to $712,000 for the first
six months of 2004 from $878,000 for the first six months of 2003. This was
primarily attributable to employee-related actions, lower travel costs and a
reduction in tradeshow-related expenses. The Company plans to continually assess
its operations to review its expenses and infrastructures in light of
anticipated business levels.
Research and Development
Research and development costs decreased $151,000 to $2,426,000 for the
first six months of 2004 from $2,577,000 for the first six months of 2003. The
Company's primary research and development efforts are in Payment Solutions and
the Company did not decrease research and development investments in this
product line. Rather, the decrease is a result of certain employee-related
actions in other product lines primarily achieved through non-replacement of
attrition and the re-assignment to Payment Solutions. The Company plans to
continually assess its operations to review its expenses and infrastructures in
light of anticipated business levels.
For the remainder of 2004, the Company expects to focus its research and
development efforts on its Payment Solutions product offerings. The development
efforts for Online Banking and Card Services products 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, at least annually, that may result in
future periodic write-downs. Tests for impairment between annual tests may be
required if events occur or circumstances change that would more likely than not
reduce the fair value of the net carrying amount. The assets would be written
down and impairment losses would be charged to results of operations only in the
periods in which the recorded values are determined to be more than their fair
values. The amortization of certain intangibles continued at an annualized rate
of $720,000. As of January 1, 2002, in accordance with SFAS 142, the Company
ceased recognizing amortization expense on goodwill.
As of June 30, 2004, the Company performed the required annual review in
accordance with SFAS 142. The Company assessed the fair value of its only
reporting unit by considering its projected cash flows, comparable company
valuations, and recent purchase prices paid for entities within its industry.
This review utilized the same approaches (i.e., discounted cash flow model,
guideline company method, and similar transactions method) and similar
considerations as the initial and previous tests. Given consideration of these
factors and the Company's declining market capitalization, the Company recorded
a goodwill impairment charge in the amount of $26,238,000. Other Income
Other income (expense), primarily rental receipts, interest income and
other expenses including state and local taxes, increased $101,000 to $84,000
for the first six months of 2004 from ($17,000) for the first six months of
2003. The increase is primarily attributable to sub-lease rental receipts and
the incurrence of state and local taxes.
Weighted-Average Common Shares Outstanding and Basic and Diluted Loss Per Common
Share
The basic and diluted weighted-average common shares increased to
51,168,000 for the first six months of 2004 compared to 48,935,000 for the first
six months of 2003. The increase resulted primarily from stock awards to
employees, exercises of stock options, stock purchases under the Employee Stock
Purchase Plan, and exercises of warrants. During July 2003, the Company issued
1,431,364 shares of its common stock pursuant to the exercise of warrants, as
amended, by institutional investors who participated in the Company's private
placement of common stock in November and December, 2001.
Losses from continuing operations were $29,337,000 and $158,000 for the
six-month periods ended June 30, 2004 and 2003, respectively, while there was no
gain or loss from discontinued operations in either period. Net losses were
$29,337,000 and $158,000 for 2004 and 2003, respectively. As a result of the
foregoing, basic and diluted net loss per common share was $0.57 for the first
six months of 2004 compared to a basic and diluted net loss per common share of
$0.00 for the first six months of 2003.
Liquidity and Capital Resources
During the first six months of 2004, the Company's cash and cash
equivalents decreased by $2,226,000. At June 30, 2004, the Company had
$5,377,000 in cash and cash equivalents, $4,042,000 of working capital with no
long-term debt, and $9,777,000 in stockholders' equity. The Company's principal
needs for cash in the first six months of 2004 were for funding operating losses
and changes in working capital. The Company had decreases in accounts receivable
of $47,000 and accounts payable of $22,000 for the six months ended June 30,
2004.
The Company's cash requirements for operating activities in the first six
months of 2004 were financed primarily by cash and cash equivalents on hand.
Net cash used in investing activities in the first six months of 2004 was
$47,000 for the purchases of property and equipment.
Net cash provided by financing activities in the first six months of 2004
was $49,000 and consisted of $51,000 from the issuance of the company's common
stock through stock option exercises and the Employee Stock Purchase Plan,
offset by $2,000 related to payments made to acquire treasury stock.
The Company entered into multiple vendor agreements for outsourced services
as part of its ASP solution offering for certain Online Banking and Payment
Solutions clients. Some of these vendor agreements commit the Company to
specified minimum charges during the terms of the contracts. These purchase
obligations are disclosed below. During 2003, several of the Company's clients
migrated from this ASP environment to an in-house solution utilizing
InteliData's licensed software. As a result, a possibility exists for future
losses due to the decrease in estimated future revenue streams when compared
with the Company's current contractual cost structure for outsourced services
within this ASP environment.
In assessing potential future losses associated with the Company's ASP
business, the Company may include the possibility of new clients that would add
incremental revenue to this ASP environment. Additionally, the Company may have
the opportunity to restructure vendor contracts and decrease contractual charges
(e.g., renegotiate or extend the current contract with lower minimum charges or
migrate to different vendors). Management continues to assess both the potential
for new business prospects and the possibility of reducing the Company's costs
through renegotiation of existing agreements. In June 2004, the Company
restructured one such agreement and decreased its overall prospective ASP
operations costs. Entering the third quarter of 2004, the projected revenues are
estimated to exceed projected costs by approximately $85,000 on a monthly basis;
this gap will fluctuate based on monthly activity. In accordance with generally
accepted accounting principles, the Company is accounting for these contract
costs as they are incurred. There can be no assurance that the Company will be
successful in mitigating these factors. In the event that new client revenues do
not materialize, growth rates do not meet expected projections and/or the
Company is not successful in its renegotiation efforts, the Company may
experience future period losses from the Company's ASP business, which could
have a material adverse impact on the Company's financial position or results of
operations.
Based on the restructured vendor contract, the updated future minimum
payments under purchase obligations for outsourced services are as follows (in
thousands) at January 1, 2004:
- -------------------------------------- -------------------------------------------------------------------------------
Payment due by period
- -------------------------------------- -------------------------------------------------------------------------------
- -------------------------------------- --------------- ----------------- --------------- --------------- -------------
Less than 1-3 3-5 More than
Total 1 year years years 5 years
- -------------------------------------- --------------- ----------------- --------------- --------------- -------------
- -------------------------------------- --------------- ----------------- --------------- --------------- -------------
Purchase Obligations $ 3,050 $ 2,410 $ 640 $ - $ -
- -------------------------------------- --------------- ----------------- --------------- --------------- -------------
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 for at least the next twelve months.
The Company's achievement of its operating plan remains predicated upon both
existing and prospective customer decisions to procure certain products and
services in a timeframe consistent with the operating plan assumptions.
Historically, these decisions have not evolved timely for varying reasons,
including slower than expected market demand, budgetary constraints, and
internal product development and resource initiatives. In the event of continued
future revenue delays, the Company would seek to adjust certain expense
structures to mitigate the potential impact that these delays would have on its
capital levels. These opportunities include additional reductions in selling,
general and administrative expenditures, the potential of consolidating certain
operational activities, the ability to negotiate more favorable terms associated
with existing service provider contracts and the elimination of certain
marketing costs. 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. Additionally, the
Company continues to assess a variety of strategic alternatives, which will be
focused on enhancing InteliData's position in the electronic banking marketplace
by exploring strategic opportunities intended to enhance stockholder value.
There can be no assurance that any transaction will result from this effort.
Critical Accounting Policies
The following accounting policies are either ones that the Company
considers to be the most important to its financial position and results of
operations or ones that require the exercise of significant judgment and/or
estimates.
Revenue Recognition - The Company considers its revenue recognition policy
critical to the understanding of its business operations and results of
operations. The Company supplies online banking and bill payment software to
financial institutions ("FI's"). The Company's revenues associated with
integrated solutions that bundle software products with customization,
installation and training services are recognized using the percentage of
completion method of accounting.
The Company enters into contracts where the delivered software may not
require significant customization. Upon delivery, the Company either recognizes
revenue ratably over the contract period for contracts where vendor specific
objective evidence ("VSOE") of fair value for post contract customer support
("PCS") does not exist or recognizes revenue 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 from these
multiple element arrangements is recognized when there is persuasive evidence of
an arrangement and delivery to the customer has occurred, the fee is fixed and
determinable, and collectibility is considered probable. Advance payments are
recorded as deferred revenue until the products are shipped, services are
delivered and all obligations are met. Currently, the Company does not have VSOE
of fair value for some of the elements within its multiple element arrangements.
Therefore, all revenue under such arrangements is recognized ratably over the
term of the PCS contract. Revenue from transactional services, which includes
hosting and application services provider ("ASP") services, is recognized as
transactions are processed.
Emerging Issues Task Force Abstract Issue No. 00-3, Application of AICPA
Statement of Position 97-2 to Arrangements that Include the Right to Use
Software Stored on Another Entity's Hardware ("EITF 00-3"), provides guidance in
determining whether or not the provisions of Statement of Position No. 97-2,
Software Revenue Recognition ("SOP 97-2"), should be applied to hosting
arrangements. The Company has some contracts where the customers operate
software in an ASP environment. The customer may not take possession of the
software without incurring significant transition and infrastructure costs, as
well as potential payments of fees to the Company for the termination of such
arrangements. In cases where the customer has not licensed software from
InteliData, the customer must also purchase a license prior to having the right
to use the software in its own operating environment, in addition to the
aforementioned fees. In these situations, the Company applies the guidance under
EITF 00-3 and the Staff Accounting Bulletin No. 101, Revenue Recognition in
Financial Statements, and recognizes the revenue associated with the license
and/or implementation fees ratably over the initial term of the contract.
Additionally, based on the EITF 00-3 guidance, the Company concluded that
SOP 97-2 should not be applied to certain of its software hosting contracts.
Accordingly, the related revenues for license and professional services were
recognized under the percentage of completion method. In addition to developing
and delivering the solution, the Company is entitled to use fees based on the
number of users and transactions. These use-based fees are earned based on the
monthly user counts and as transactions are processed.
Estimates at Completion - Revenues related to some of the Company's
contracts are recognized using the percentage of completion method of
accounting, which requires that we make estimates and judgments as to
anticipated project scope, timing and costs to complete the projects. The
completion of certain development efforts is critical for the Company to perform
on certain contracts. Delays in product implementation or new product
development at customer locations and product defects or errors could affect
estimates and judgments. Additionally, we may experience delays when
implementing our products at customer locations, and customers may be unable to
implement our products in the time frames and with the functionalities that they
expect or require. The accuracy of these estimates and judgments could affect
the Company's business, operations, cash flows and financial condition.
Allowance for Doubtful Accounts - Determination of our allowance for
doubtful accounts requires significant estimates. Financial instruments that
potentially subject the Company to credit risk consist principally of trade
receivables. The Company sells its products primarily to FI's in the United
States. The Company believes that the concentration of credit risk in its trade
receivables is substantially mitigated by the Company's on-going credit
evaluation process and the financial position of the FI's that are highly
regulated. The Company does not generally require collateral from customers. The
Company establishes an allowance for doubtful accounts based upon factors
surrounding the credit risk of specific customers, historical trends and other
information. As of June 30, 2004, the Company's top eight customers comprised
approximately 64% 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.
Valuation of Goodwill and Intangible Assets - On an annual basis (as of
June 30th), the Company conducts a review of goodwill for impairment. The
Company assesses the fair value of its only reporting unit for the purposes of
testing goodwill by considering its projected cash flows, comparable company
valuations, and recent purchase prices paid for entities within our industry.
Given consideration of these factors, we determine whether the fair value of the
reporting unit exceeds the carrying amount of our net assets. If the carrying
amount of our reporting unit exceeds its fair value, we compare the implied fair
value of reporting unit goodwill with the carrying amount of that goodwill.
Since the carrying amount of reporting unit goodwill exceeded the implied fair
value as of June 30, 2004, we recognized a $26,238,000 goodwill impairment
charge. See below for a detailed discussion regarding the significant
assumptions and estimates employed in this process and Note 2 to the Condensed
Consolidated Financial Statements for additional details.
We also review our amortizing intangible asset for impairment whenever
events or changes in circumstances indicate that the carrying amount may not be
recoverable. Accordingly, when appropriate, the Company reviews its long-lived
assets (including amortizing intangible assets) for impairment at the enterprise
level initially following an undiscounted cash flow approach following the
guidance in SFAS No. 144. If the sum of the expected future cash flows is less
than the carrying amount of the asset, the Company would recognize an impairment
loss equal to the difference between the fair value and the carrying value of
the asset. The fair value would be calculated following a discounted cash flow
approach.
These reviews require the Company to make estimates of projected cash flows
in order to determine if its assets are impaired. We make significant
assumptions and estimates in this process regarding matters that are inherently
uncertain, such as making revenue and cost projections, calculating remaining
useful lives, assuming discount rates and costs of capital, among others.
Reviews for impairment between annual reviews may be required if events occur or
circumstances change that would more likely than not reduce the fair value of
the net carrying amount. While we believe that our estimates are reasonable,
different assumptions regarding such cash flows (for example, either based on
varying costs of capital, changes in underlying economic assumptions, or any
resulting transaction from strategic initiatives) could materially affect our
valuation.
Depreciation of Fixed Assets - The Company's business requires our
investment in office and computer equipment to facilitate certain research and
development activities and to support the operations in serving our customers.
We record these assets at cost and depreciate the assets over their estimated
useful lives. We periodically reassess the economic life of these elements and
make adjustments to these useful lives using, among others, historical
experience, capacity requirements, and assessments of new product and market
demands. When these factors indicate certain elements may not be useful for as
long as anticipated, we depreciate the remaining book value over the remaining
useful life. Further, the timing and deployment of any new technologies could
affect the estimated lives of our assets, which could have significant impacts
on results of operations in the future.
Recent Accounting Pronouncements - In May 2003, the Financial Accounting
Standards Board ("FASB") issued Statement of Financial Accounting Standards
("SFAS") No. 150, Accounting for Certain Financial Instruments with
Characteristics of both Liabilities and Equity ("SFAS 150"), which requires that
an issuer classify financial instruments that are within the scope of SFAS 150
as a liability. Under prior guidance, these same instruments would be classified
as equity. SFAS 150 is effective for all financial instruments entered into or
modified after May 31, 2003. Otherwise, it is effective on July 1, 2003. The
adoption of SFAS 150 did not have a material effect on our financial position,
results of operations, or cash flows.
In May 2003, the FASB issued SFAS No. 149, Amendment of Statement 133 on
Derivative Instruments and Hedging Activities ("SFAS 149"), which amends and
clarifies financial accounting and reporting for derivative instruments,
including certain derivative instruments embedded in other contracts
(collectively referred to as derivatives) and for hedging activities under SFAS
No. 133, Accounting for Derivative Instruments and Hedging Activities. SFAS 149
is effective for contracts entered into or modified after June 30, 2003, and for
hedging relationships designated after June 30, 2003. The adoption of SFAS 149
did not have a material impact on our financial position, results of operations,
or cash flows.
Cautionary Statement for Purposes of the "Safe Harbor" Provisions of the Private
Securities Litigation Reform Act of 1995
The information contained in this report includes forward-looking
statements, the realization of which may be impacted by the factors discussed
below. The forward-looking statements are made pursuant to the safe harbor
provisions of the Private Securities Litigation Reform Act of 1995 (the "Act").
This report contains forward looking statements that are subject to risks and
uncertainties, including, but not limited to, the uncertainty as to whether the
Company will be successful in consummating any financial or strategic
transaction, our ability to continue funding operating losses, the impact of
declines in the Company's stock price and its ability to maintain minimum
listing standards of the NASDAQ stock markets, different assumptions regarding
cash flows (for example, either based on varying costs of capital, changes in
underlying economic assumptions, or any resulting financial or strategic
transactions) affecting valuation analyses, our ability to develop, sell,
deliver and implement our payment solution products and services, some of which
are largely unproven in a production environment, to financial institution
customers, 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 maintain customers and
increase its recurring revenues and/or reduce operating costs associated with
its ASP business in order to make this operation profitable, the Company's
ability to retain key customers and to increase revenues from existing
customers, the impact of customers deconverting from use of our products and
services to the use of competitive products or in-house solutions, the effect of
planned customer migrations from outsourced solutions to in-house solutions with
a resulting loss of recurring revenue, 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 third party
relationships into new business opportunities in the electronic bill payment and
presentment ("EBPP") market, the on-going viability of the mainframe marketplace
and demand for traditional mainframe products, the ability to attract and retain
key employees, the availability of cash for long-term growth, product
obsolescence, ability to reduce product costs, fluctuations in operating
results, delays in development of highly complex products, and other risks
detailed from time to time in InteliData filings with the Securities and
Exchange Commission, including the risk factors disclosed in the Company's Form
10-K for the fiscal year ended December 31, 2003. These risks could cause the
Company's actual results for 2004 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. CONTROLS AND PROCEDURES
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(a) EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
Pursuant to Rule 13a-15(b) under the Securities Exchange Act of 1934, the
Company carried out an evaluation, with the participation of the Company's
management, including the Company's Chief Executive Officer and Chief Financial
Officer, of the effectiveness of the Company's disclosure controls and
procedures (as defined under Rule 13a-15(e) under the Securities Exchange Act of
1934 as of the end of the period covered by this report. Based upon that
evaluation, the Company's Chief Executive Officer and Chief Financial Officer
concluded that the Company's disclosure controls and procedures are effective in
timely alerting them to material information relating to the Company (including
its consolidated subsidiaries) required to be included in the Company's periodic
SEC filings.
(b) CHANGE IN INTERNAL CONTROLS
There has been no change in the Company's internal control over financial
reporting during the quarter ended June 30, 2004 that has materially affected,
or is reasonably likely to materially affect, the Company's internal control
over financial reporting.
PART II: OTHER INFORMATION
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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- ------------------------------------------------------------
The Company's Annual Meeting of Stockholders was held on May 21, 2004.
Matters submitted at the meeting for vote by the Stockholders were the
following:
1) Election of Directors
The Stockholders elected one Class II member of the Board of Directors
with the following votes: Neal F. Finnegan with 44,229,108 votes for
and 511,910 votes withheld.
2) Ratification of Independent Auditors
The Stockholders ratified the selection of Deloitte & Touche LLP as
independent auditors for InteliData for the year ending December 31,
2004 with the following votes: 44,183,527 for, 454,708 against, and
102,783 abstain.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
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(a) EXHIBITS
31.1 Certification of Chief Executive Officer pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002.
31.2 Certification of Chief Financial Officer pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002.
32.1 Certification of Chief Executive Officer pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.
32.2 Certification of Chief Financial Officer pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.
(b) REPORTS ON FORM 8-K
The Company filed a Current Report on Form 8-K (Item 5) with the Securities
and Exchange Commission on June 18, 2004, relating to the receipt of a notice
from Nasdaq dated June 16, 2004, indicating the Company was not in compliance
with Nasdaq's Marketplace Rule 4450(a)(5), because the Company's common stock
failed to maintain the minimum bid price of $1.00 during the past thirty
consecutive trading days. The Company has been granted until December 13, 2004
to regain compliance with Marketplace Rule 4450(a)(5). Compliance with the rule
will be 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.
The Company furnished a Current Report on Form 8-K (Item 12) to the
Securities and Exchange Commission on May 5, 2004, to report that InteliData
issued a press release announcing results of operations and financial condition
for the quarter ended March 31, 2004 (not incorporated by reference).
* * * * * *
SIGNATURE
Pursuant to the requirements of the Securities Act of 1934, the registrant
has duly caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized on August 6, 2004.
INTELIDATA TECHNOLOGIES CORPORATION
By: /s/ Alfred S. Dominick, Jr.
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Alfred S. Dominick, Jr.
Chairman, Chief Executive Officer,
and Acting Chief Financial Officer