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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
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For the fiscal year ended: December 31, 1998 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)
13100 Worldgate Drive, Suite 600, Herndon, VA 20170
(Address of Principal Executive Offices)
(703) 834-8500
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class Name of Each Exchange on Which Registered
- ------------------- -----------------------------------------
NONE
Securities registered pursuant to Section 12(g) of the Act:
Common Stock par value $.001 per share
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
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State by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K [ X ].
The aggregate market value of the Common Stock held by non-affiliates of the
registrant on March 1, 1999, was approximately $37,526,000. In determining this
figure, the Registrant has assumed that all of its directors and executive
officers are affiliates. Such assumptions should not be deemed to be conclusive
for any other purpose.
The number of shares of the registrant's Common Stock outstanding on March 1,
1999 was 31,774,005.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of InteliData Technologies Corporation's Proxy Statement for its 1999
Annual Stockholder Meeting, to be filed within 120 days after the end of the
registrant's fiscal year, are incorporated into Part III of this Report.
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INTELIDATA TECHNOLOGIES CORPORATION
1998 ANNUAL REPORT ON FORM 10-K
TABLE OF CONTENTS
Page
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PART I
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Item 1. Business............................................................3
Item 2. Properties..........................................................7
Item 3. Legal Proceedings...................................................8
Item 4. Submission of Matters to a Vote of Stockholders.....................8
PART II
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Item 5. Market for Registrant's Common Stock and Related
Stockholder Matters.................................................9
Item 6. Selected Financial Data............................................10
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations..............................................11
Item 8. Financial Statements and Supplementary Data........................27
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure...........................................52
PART III
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Item 10. Directors and Executive Officers of the Registrant.................53
Item 11. Executive Compensation.............................................54
Item 12. Security Ownership of Certain Beneficial Owners and Management.....54
Item 13. Certain Relationships and Related Transactions.....................54
PART IV
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Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K....55
PART I
ITEM 1. BUSINESS
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GENERAL
InteliData Technologies Corporation ("InteliData" or the "Company")
develops and markets software products and consulting services for the financial
services industry. The Company supplies Internet Banking and bill payment
software to financial institutions that want to provide their own remote banking
services. The Company also provides maintenance contracts on customer
installations and leases Caller ID adjunct units to customers in US West
Communications, Inc. ("US West") territory.
The Company develops and markets software products and implementation
services to assist financial institutions in their Internet Banking and
electronic bill payment initiatives. The products are designed to assist
consumers in accessing and transacting business with their financial
institutions electronically, and to assist financial institutions in connecting
to and transacting business with third party processors. The services focus on
consulting and maintenance agreements that support the Company's products.
Additionally, during the fourth quarter of 1997, the Company received $5 million
relating to royalties due to the Company from Visa. The cash payment was
recorded as deferred revenue and is being recognized into revenues over a
two-year period in accordance with the terms of the agreement.
BACKGROUND
The Company was incorporated on August 23, 1996 under the Delaware
General Corporation Law in order to effect the mergers ("Mergers") of US Order,
Inc. ("US Order") and Colonial Data Technologies Corp. ("Colonial Data"). The
Mergers were announced on August 5, 1996, when US Order and Colonial Data
entered into an Agreement and Plan of Merger ("Merger Agreement"). On November
7, 1996, the Mergers were consummated with each share of outstanding US Order
and Colonial Data common stock being exchanged for one share of InteliData
common stock. Accounting for the Mergers was treated as a purchase of Colonial
Data by US Order.
Effective September 30, 1996, US Order acquired the business of Braun,
Simmons & Co., an Ohio corporation ("Braun Simmons"), for approximately $7
million, including US Order transaction costs, consisting of cash and US Order
common stock pursuant to the merger of Braun Simmons into US Order (the "Braun
Simmons Acquisition"). Braun Simmons was an information engineering firm
specializing in the development of Internet Banking solutions for financial
institutions. The acquisition expanded the Company's product line for both large
and small financial institutions.
As a result of the Mergers and Braun Simmons Acquisition, the Company
operated its business in three operating segments: Internet Banking (formerly
electronic commerce); telecommunications; and interactive services.
During the fourth quarter of 1997, the Company announced its intentions
to sell the interactive services division. The division was established to
provide interactive applications for use on smart telephones and other small
screen devices, such as alpha-numeric pagers, Personal Communication Systems
("PCS") devices and personal digital assistants ("PDAs"). Certain portions of
the interactive services division were sold in the first quarter of 1998 for a
nominal sum.
During the second quarter of 1998, the Company announced its intentions
to discontinue the telecommunications business, other than the leasing of Caller
ID adjuncts, formerly transacted by Colonial Data. The division designed,
developed and marketed telecommunications products including Caller ID adjunct
units, smart telephones and small business telecommunications systems that
supported intelligent network services developed and implemented by the regional
Bell operating companies and other telephone companies.
Accordingly, the Company has reclassified prior year financial
statements to account for the discontinued operations.
The Company's principal executive offices are located at 13100
Worldgate Drive, Suite 600, Herndon, Virginia 20170 and its telephone number
is (703) 834-8500.
INDUSTRY BACKGROUND
The Company provides software products and implementation services to
financial institutions whose processes and systems are subject to regulatory
approvals. Internet Banking is a developing marketplace. Financial institutions
are gradually expanding their Internet Banking services to permit customers not
only to access historical account information from remote locations, but also to
engage in transactions such as paying bills and transferring funds. The
Company's future growth and profitability will depend, in part, upon consumer
acceptance of Internet Banking, and bill presentment processes and the speed
upon which such acceptance is received.
PRODUCTS AND SERVICES
The Company's business strategy is to develop products and services,
including software, to meet the needs of financial institutions and their
customers in the Internet Banking markets. The Company strives to develop
products with broad appeal that are easy-to-use, practical and built around
common industry standards.
The Company's strategy is to support financial institutions by
providing products and services that help them deploy Internet Banking to their
customers. The Company's products and services are designed to provide financial
institutions with the capability to process banking transactions from multiple
channels including personal computers, internet or telephone. The following
represent the Company's products and services:
Internet Banking
Interpose (TM) Transaction Engine
- ---------------------------------
The Interpose Transaction Engine is the heart of the Company's Internet
Banking software system. It runs on the financial institution's host computer
system, providing real-time connectivity to remote delivery channels. Along with
this critical host connection, the Interpose Transaction Engine provides robust
customer profiling and control over system security. Its Advanced Financial
Message Set gives financial institutions the functionality to offer a complete
range of online financial services.
Interpose (TM) OFX Gateway
- --------------------------
The Interpose OFX Gateway allows a financial institution to take
advantage of the Open Financial Exchange ("OFX") standard to directly support
customers who use Intuit Quicken(R), Microsoft Money(R), Home Financial
Network's Home ATM(TM), and other OFX compliant client software. It supports
synchronized information across all delivery channels, including personal
computers, the internet and telephones.
Interpose (TM) Payment Warehouse
- --------------------------------
The Interpose Payment Warehouse provides a software solution to
financial institutions that automates bill payment processing while giving the
financial institution the benefit of tracking payment activity and integrating
delivery channels.
Consulting Services
- -------------------
The Company offers its clients consulting services to assist in
implementation, training and customization on a time and materials basis and
provides maintenance and support services and software upgrades pursuant to
agreements which are typically renewable on an annual basis. Additionally, the
Company offers consulting services regarding the application and feasibility of
implementing Internet Banking products within the bank's mainframe computer
system.
Leasing Activities
The Company leases Caller ID adjunct units in accordance with an
agreement with US West, whereby the Company leases Caller ID units directly to
US West customers. The leasing program enables subscribers to pay a monthly fee
for the equipment and provides the Company with a stream of recurring revenues.
The Company has been notified by US West that it has terminated leasing new
units under the program. Notwithstanding the termination of this program,
previously existing leases remain in effect. Although the Company is not able to
estimate the effect on future operations of this terminated leasing program, the
number of active records in the Company's installed lease base has historically
decreased at a rate of approximately 30% per year.
MARKETING AND DISTRIBUTION
The Company sells its principal products and services to financial
institutions in the United States. Additionally, the Company leases Caller ID
adjunct units in the US West territory. Revenues from the US West lease base and
royalties from the Visa Bill-Pay system represented 53% and 26%, respectively of
total revenues for the year ended December 31, 1998. The Company does not market
its Caller ID lease business to new customers.
The Company concentrates its marketing efforts on direct sales to
financial institutions. Currently, the Company is marketing to financial
institutions that operate large IBM mainframe processors in the United States.
The Company is developing products and services to assist financial institutions
who want to provide their customers with the ability to access certain
information from their accounts and complete transactions with those
institutions concerning bill payments, loan payments, online transfers and other
transactions from remote locations via personal computers.
COMPETITION
The Company's products and services face competition from several types
of competitors. Some financial institutions have elected to develop internally
their own Internet Banking solutions instead of purchasing products and services
from the Company or third parties. Financial institutions may also contract with
service bureaus, such as Checkfree Corp., Security First Network Bank or Online
Resources, Inc., to obtain Internet Banking services. Finally, a number of other
software companies, including Edify Corp., Corillian Corporation and Destiny
Software Corporation, offer products and services that compete with those of the
Company.
The Company expects that competition in all of these areas will
increase in the near future. The Company believes that a principal competitive
factor in its markets is the ability to offer an integrated system of various
Internet Banking products and services. Competition will be based upon price,
performance, customer service and the effectiveness of marketing and sales
efforts. The Company competes in its various markets on the basis of its
relationships with strategic partners, by developing many of the products
required for complete solutions, by leveraging market experience, and by
building reliable products and offering those products at reasonable prices.
PRODUCT DEVELOPMENT
The Company operates in industries that are rapidly growing and
changing. In an effort to improve the Company's position with respect to its
competition, the Company has focused management efforts in the area of product
development. In 1998, 1997 and 1996, the Company's research and development
expenditures, exclusive of nonrecurring in-process research and development
expenses were $2,652,000, $4,347,000 and $2,270,000, respectively. At December
31, 1998, 24 employees were engaged in product development.
The Company's product development efforts are focused on software and
systems for electronic banking. In particular, the Company applies its research
and development expenditures to data transaction processing and messaging
software. The Internet Banking industry is characterized by rapid change. To
keep pace with this change, the Company maintains an aggressive program of new
product development and dedicates considerable resources to research and
development to further enhance its existing products and to create new products
and technologies. The Company's ability to attract and retain highly skilled
research and development personnel is important to the Company's continued
success.
GOVERNMENT REGULATION
The banking market which the Company has targeted for marketing is
highly regulated. The banking industry, although it has recently undergone
significant deregulation, remains quite regulated at both the federal and state
levels. Interpretation, implementation or revision of banking regulations can
accelerate or hinder the ultimate success of the Company and its products.
PATENTS, PROPRIETARY RIGHTS AND LICENSES
The Company holds limited registered intellectual property rights with
respect to its products. The Company relies on trade secret laws and licensing
agreements to establish and maintain its proprietary rights to its products.
Although the Company has obtained confidentiality agreements from its key
executives and engineers in its product development group, there can be no
assurance that third parties will not independently develop the same or similar
alternative technology, obtain unauthorized access to the Company's proprietary
technology or misuse the technology to which the Company has granted access.
The Company does not believe that its products and services infringe on
the rights of third parties. From time to time, third parties assert
infringement claims against the Company. There can be no assurance that any such
assertion will not result in costly litigation or require the Company to cease
using, or obtain a license to use, intellectual property rights of such parties.
EMPLOYEES
At December 31, 1998, the Company had approximately 75 employees, of
whom 13 were associated with discontinued operations. The Company has no
collective bargaining agreements with its employees and believes that it has a
positive relationship with its employees.
ITEM 2. PROPERTIES
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The Company is headquartered in Herndon, Virginia, where it leases
15,000 square feet of office space from an unaffiliated party. The Company
intends to move its headquarters to Reston, Virginia, in the second quarter of
1999. The Company will lease approximately 17,000
square feet of office space from an unaffiliated party. The new lease expires in
January 2004. The Company leases 11,000 square feet of office space from an
unaffiliated party for its product development facilities in Toledo, Ohio. The
Ohio lease expires in January 2004. The Company also leases other, less
significant sales facilities.
The Company also owns a 63,000 square foot manufacturing and
distribution facility in New Milford, Connecticut which is listed for sale.
The Company believes that its facilities are suitable and adequate for
the current and foreseeable future business of the Company, however, the Company
will continue to assess its office space needs.
ITEM 3. LEGAL PROCEEDINGS
- --------------------------
The Company is not currently a party to any material litigation. From
time to time, the Company is a party to routine litigation incidental to its
business. Management does not believe that the resolution of any or all of such
routine litigation will be likely to have a material adverse effect on the
Company's financial condition or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF STOCKHOLDERS
- --------------------------------------------------------
None.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED
- ---------------------------------------------------------
STOCKHOLDER MATTERS
-------------------
The Company's common stock is traded on the Nasdaq National Market
under the symbol INTD. The table below sets forth the high and low quarterly
sales prices for the common stock of the Company as reported in published
financial sources for each quarter during the last two years:
Price Range of Common Stock
--------------------------------
High Low
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1998
Fourth Quarter $ 1 7/8 $ 5/8
Third Quarter 1 1/2 9/16
Second Quarter 3 15/16
First Quarter 3 13/16 1 7/8
1997
Fourth Quarter $ 3 15/16 $ 1 1/4
Third Quarter 5 3/8 2 3/4
Second Quarter 6 1/4 4 1/8
First Quarter 8 5/8 4 7/8
The Company has never declared or paid any cash dividends on its common
stock. The Company currently intends to retain its future earnings, if any, to
fund the development and growth of its business and, therefore, does not
anticipate paying any cash dividends in the foreseeable future. Any future
decision concerning the payment of dividends on the Company's common stock will
depend upon the results of operations, financial condition and capital
expenditure plans of the Company, as well as such other factors as the Board of
Directors, in its sole discretion, may consider relevant.
The number of stockholders of record at March 1, 1999 was 629, and does
not include those stockholders who hold shares in street name accounts.
ITEM 6. SELECTED FINANCIAL DATA
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INTELIDATA TECHNOLOGIES CORPORATION
Selected Financial Data
(in thousands, except per share data)
Year Ended December 31,
---------------------------------------------------------------------------
1998 1997 1996 1995 1994
----------- ---------- ---------- ----------- -----------
RESULTS OF OPERATIONS:
- ----------------------
Revenues $ 10,027 $ 12,521 $ 4,795 $ 4,186 $ 1,432
Cost of revenues 2,656 6,847 2,762 2,470 1,013
Operating expenses 11,861 18,108 16,236 6,877 10,584
----------- ---------- ---------- ----------- -----------
Operating loss (4,490) (12,434) (14,203) (5,161) (10,165)
Other income (expense) 874 1,271 (2,391) 443 13,878
----------- ---------- ---------- ----------- -----------
(Loss) income from continuing operations (3,616) (11,163) (16,594) (4,718) 3,713
Discontinued operations (34,223) (78,931) (79,133) -- --
----------- ---------- ---------- ----------- -----------
Net (loss) income (37,839) (90,094) (95,727) (4,718) 3,713
Preferred dividend requirement -- -- -- 681 1,895
----------- ---------- ---------- ----------- -----------
Net (loss) income applicable to common
shareholders $ (37,839) $ (90,094) $ (95,727) $ (5,399) $ 1,818
=========== ========== ========== =========== ===========
Basic (loss) income from continuing
operations per common share $ (0.11) $ (0.35) $ (0.90) $ (0.50) $ 0.36
=========== ========== ========== =========== ===========
Diluted (loss) income from continuing
operations per common share $ (0.11) $ (0.35) $ (0.90) $ (0.50) $ 0.12
=========== ========== ========== =========== ===========
Basic (loss) income from discontinued
operations per common share $ (1.09) $ (2.50) $ (4.31) $ 0.00 $ 0.00
=========== ========== ========== =========== ===========
Diluted (loss) income from discontinued
operations per common share $ (1.09) $ (2.50) $ (4.31) $ 0.00 $ 0.00
=========== ========== ========== =========== ===========
Basic (loss) income per common share $ (1.20) $ (2.85) $ (5.21) $ (0.50) $ 0.36
=========== ========== ========== =========== ===========
Diluted (loss) income per common share $ (1.20) $ (2.85) $ (5.21) $ (0.50) $ 0.12
=========== ========== ========== =========== ===========
Basic weighted average shares outstanding 31,450 31,574 18,370 10,772 5,000
=========== ========== ========== =========== ===========
Diluted weighted average shares outstanding 31,450 31,574 18,370 10,772 14,906
=========== ========== ========== =========== ===========
FINANCIAL POSITION (as of December 31):
- ---------------------------------------
Cash, cash equivalents and
short-term investments $ 8,050 $ 11,359 $ 39,062 $ 25,120 $ 2,568
Total assets 10,911 46,702 130,038 40,252 4,637
Long-term debt -- -- -- -- 4,833
Stockholders' equity (deficit) 331 37,069 124,289 37,733 (6,466)
Includes gain of approximately $14.5 million on the sale of certain of
the Company's electronic banking and bill pay operations to Visa on August
1, 1994.
Discontinued operations results for 1997 include $65,200,000 of unusual
charges related to impairment of assets, restructuring charges, and
valuation adjustment relating to inventories. Discontinued operations
results for 1996 include $72,300,000 of nonrecurring in-process research
and development expenses related to the Mergers.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
- ----------------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS
-----------------------------------
Overview
InteliData Technologies Corporation ("InteliData" or the "Company")
develops and markets software products and consulting services for the financial
services industry. The Company supplies Internet Banking and bill payment
software to financial institutions that want to provide their own remote banking
services. The Company also provides maintenance contracts on customer
installations and leases Caller ID adjunct units to customers in US West
Communications, Inc. ("US West") territory.
The Company develops and markets software products and implementation
services to assist financial institutions in their Internet Banking and
electronic bill payment initiatives. The products are designed to assist
consumers in accessing and transacting business with their financial
institutions electronically, and to assist financial institutions in connecting
to and transacting business with third party processors. The services focus on
consulting and maintenance agreements that support the Company's products.
Additionally, during the fourth quarter of 1997, the Company received $5 million
relating to royalties due to the Company from Visa. The cash payment was
recorded as deferred revenue and is being recognized into revenues over a
two-year period in accordance with the terms of the agreement.
Background
The Company was incorporated on August 23, 1996 under the Delaware
General Corporation Law in order to effect the mergers ("Mergers") of US Order,
Inc. ("US Order") and Colonial Data Technologies Corp. ("Colonial Data"). The
Mergers were announced on August 5, 1996, when US Order and Colonial Data
entered into an Agreement and Plan of Merger ("Merger Agreement"). On November
7, 1996, the Mergers were consummated with each share of outstanding US Order
and Colonial Data common stock being exchanged for one share of InteliData
common stock. Accounting for the Mergers was treated as a purchase of Colonial
Data by US Order.
Effective September 30, 1996, US Order acquired the business of Braun,
Simmons & Co., an Ohio corporation ("Braun Simmons"), for approximately $7
million, including US Order transaction costs, consisting of cash and US Order
common stock pursuant to the merger of Braun Simmons into US Order (the "Braun
Simmons Acquisition"). Braun Simmons was an information engineering firm
specializing in the development of Internet Banking solutions for financial
institutions. The acquisition expanded the Company's product line for both large
and small financial institutions.
As a result of the Mergers and Braun Simmons Acquisition, the Company
operated its business in three operating segments: Internet Banking (formerly
electronic commerce); telecommunications; and interactive services.
During the fourth quarter of 1997, the Company announced its intentions
to sell the interactive services division. The division was established to
provide interactive applications for use on smart telephones and other small
screen devices, such as alpha-numeric pagers, Personal Communication Systems
("PCS") devices and personal digital assistants ("PDAs"). Certain portions of
the interactive services division were sold in the first quarter of 1998 for a
nominal sum.
During the second quarter of 1998, the Company announced its intentions
to discontinue the telecommunications business, other than the leasing of Caller
ID adjuncts, formerly transacted by Colonial Data. The division designed,
developed and marketed telecommunications products including Caller ID adjunct
units, smart telephones and small business telecommunications systems that
supported intelligent network services developed and implemented by the regional
Bell operating companies and other telephone companies.
Accordingly, the Company has reclassified prior year financial
statements to account for the discontinued operations.
RESULTS OF OPERATIONS - YEARS ENDED DECEMBER 31, 1998 AND 1997
Revenues
The Company's revenues were $10,027,000 in 1998 compared to $12,521,000
in 1997, a decrease of $2,494,000. The primary reason for the decrease was due
to the expected reduction in billable Caller ID leases and was partially offset
by increased royalty revenues. During 1998, software revenues contributed
$812,000, consulting and services contributed $1,138,000 and other revenues
contributed $8,077,000. Other revenues consisted of $5,344,000 from leasing
activities, $2,620,000 from royalties relating to the Visa Bill-Pay System, and
$113,000 from monthly service fees.
During 1997, the Company earned $1,040,000 from software sales and
installations, $1,229,000 from consulting and services, and $10,252,000 from
other revenues. Other revenues consisted of $8,570,000 from leasing activities,
$625,000 from royalty arrangements, $697,000 from customer consulting services
and $360,000 from monthly service fees.
During 1998, the Company continued to transition from providing
primarily back-end processing support to financial institutions to selling
software that assists financial institutions in connecting customers who bank
from remote locations, either from a personal computer or telephone. The Company
expects that revenues generated in 1999 will be a direct result of software
sales and installations and the related consulting business. Additionally,
during 1999, the Company expects to recognize a decrease in the Caller ID
leasing business. The number of active records in the Company's installed lease
base has historically decreased at a rate of approximately 30% per year.
Cost of Revenues and Gross Profit
The Company's cost of revenues decreased by $4,191,000 to $2,656,000
for 1998
compared to $6,847,000 in 1997. The decrease is primarily related to the change
in the product mix and decreased costs on the Caller ID adjunct lease base,
which earned 62% gross profit margins in 1998 compared to 45% gross profit
margins in 1997. The increased margins on the Caller ID leasing activities are
attributed primarily to the Caller ID adjunct units becoming fully depreciated
in the first quarter of 1998.
The Company expects its gross margin percentages to vary in future
periods based upon the revenue mix between software sales, service revenues and
other revenues and based upon the composition of services revenues earned during
the period.
General and Administrative
General and administrative expenses decreased $1,236,000 to $6,240,000
in 1998 from $7,476,000 in 1997. The decrease was primarily attributable to cost
saving measures implemented in reducing staff employment and facilities
expenses. In the future, the Company expects that aggregate recurring general
and administrative expenses will decrease as the Company continues to pursue
options to reduce fixed overhead costs.
Selling and Marketing
Selling and marketing expenses decreased $1,281,000 to $2,969,000 in
1998 from $4,250,000 in 1997. The decrease is primarily attributed to the
inclusion of $2,456,000 in advertising credits that were charged to operations
in 1997. The Company adjusted the carrying value of a receivable from the sale
of stock associated with advertising credits based on the Company's expected use
of the credits. Exclusive of this transaction, selling and marketing expenses
actually increased $1,175,000. This increase in recurring selling and marketing
expenses was primarily related to increases in the Company's labor force, travel
and professional services, advertising, sales promotion, and trade shows.
Management expects to continue investing in selling and marketing expenses in
1999 to promote the Company's brand name.
Research and Development
Research and development costs decreased $1,695,000 to $2,652,000 in
1998 compared to $4,347,000 in 1997. The decrease is primarily attributed to the
reduction of the workforce and elimination of certain departments within the
research and development group. The Company primarily invested research and
development expenses in writing the Interpose Transaction Engine for the Open
Financial Exchange ("OFX") standard, the majority of such work was performed in
1997.
Unusual Charges
For the year ended December 31, 1997, the Company incurred a charge to
operations of $2,035,000 for the remaining unamortized costs of intangible
assets associated with the Braun Simmons Acquisition due to impairment. The
impairment was measured based on the excess of the net carrying value of the
asset over the asset's fair value. The fair value of the asset was determined
based on estimates of future discounted cash flows to be generated by the asset.
Other Income, Net
Other income net decreased $397,000 to $874,000 in 1998 compared to
$1,271,000 in 1997. The decrease is largely associated with the use of cash and
cash equivalents and short-term investments during the year.
Income Taxes
Income taxes were zero for the years ended December 31, 1998 and 1997.
At December 31, 1998, the Company had net operating loss carryforwards for
federal income tax purposes of approximately $63 million which expire by 2013.
However, use of these net operating losses in future years may be limited under
applicable tax laws and regulations as a result of the Mergers and the Braun
Simmons Acquisition.
Discontinued Operations
The loss from operations of telecommunications and interactive services
divisions (net of income taxes) was $18,049,000 and $78,931,000 for the years
ended December 31, 1998 and 1997, respectively. The loss on disposal of
telecommunications and interactive services divisions was $16,174,000 for the
year ended December 31, 1998.
During 1998, the loss from operations of telecommunications and
interactive services divisions (net of income taxes) included $13,784,000 in
inventory adjustments. The loss on disposal of telecommunications and
interactive service divisions consisted of $2,696,000 in expected sales returns,
$3,539,000 in property adjustments, $3,010,000 in provisions for customer
accounts, and $6,929,000 in actual and expected losses from operations from the
measurement date through the date of disposal.
The Company recorded a provision for corporate restructuring during the
third quarter of 1997 of $1,003,000. This amount consisted of $771,000 in
employee reduction and related matters, $190,000 in obsolete equipment, and
$42,000 in facilities closings. As of December 31, 1997, the Company incurred
employee reductions and relocation expenses aggregating $177,000 and write-down
for obsolete equipment of $190,000. As of December 31, 1997, the Company had
$636,000 in remaining restructuring accruals recorded on its books. The Company
incurred these costs in 1998. Additional accruals were posted for closing
operations during the second and fourth quarters of 1998.
During the third quarter of 1997 the Company announced a strategic
repositioning of the Company's telecommunications division based on recent
events in its marketplace. In connection with this repositioning and the
aforementioned corporate restructuring, the Company's management evaluated its
financial position and determined that it would be appropriate to charge to
operations the remaining unamortized costs of intangible assets due to
impairment, adjust inventory carrying amounts to market value, and reflect
certain additional restructuring charges, including charges for separation
agreements with employees and charges associated with the termination of a joint
venture agreement. Such third quarter 1997 unusual charges
aggregated $49,246,000 for the impairment of intangible assets; $11,333,000 for
inventories and commitments; $1,003,000 for restructuring charges (see above);
$1,434,000 for separation agreements; and $3,653,000 for assets relating to a
joint venture. The impairment was based on the excess of the carrying value of
the assets over the assets' fair values. The fair value of the assets were
generally determined as the estimates of future discounted cash flows generated
by those assets.
Loss from Continuing Operations, Net Loss and Weighted Average Shares
As a result of the foregoing factors, loss from continuing operations
was $3,616,000 and $11,163,000 for the years ended December 31, 1998 and 1997,
respectively. Basic and diluted loss from continuing operations per common share
was $0.11 and $0.35 for the years ended December 31, 1998 and 1997,
respectively. Net loss was $37,839,000 and $90,094,000 for the years ended
December 31, 1998 and 1997, respectively. Basic and diluted loss per common
share was $1.20 and $2.85 for the years ended December 31, 1998 and 1997. The
weighted average shares decreased to 31,450,000 in 1998 from 31,574,000 in 1997.
The decrease in weighted average shares resulted primarily from the repurchase
of treasury stock in late 1997.
RESULTS OF OPERATIONS - YEARS ENDED DECEMBER 31, 1997 AND 1996
The consummation of the Mergers on November 7, 1996 and the required
accounting presentation of the historical financial statements had a significant
impact on the results of operations for 1996. Consolidated total revenues and
all categories of expenses were significantly greater in 1997 than 1996 because
1996 results only included approximately two months of Colonial Data's US West
leasing operations and three months of Braun Simmons' operations.
Revenues
The Company's revenues increased by $7,726,000 to $12,521,000 in 1997
from $4,795,000 in 1996. The increase was primarily attributed to the results of
the leasing operations in 1997 compared to 1996. The Company recorded revenues
of $8,570,000 and $1,838,000 from US West leasing operations during the years
ended December 31, 1997 and 1996, respectively, an increase of $6,732,000.
Additionally, the Company recorded $1,040,000 in software revenues for the year
ended December 31, 1997 compared to no software revenues for the year ended
December 31, 1996.
Cost of Revenues and Gross Profit
The Company's cost of revenues increased by $4,085,000 to $6,847,000
for 1997 compared to $2,762,000 in 1996. The increase was primarily attributed
to higher revenues. Gross margins improved approximately 3% led by improved
margins from the Company's leasing activities. The combined operations resulted
in an increase in the Company's overall gross margin to 45% in 1997 from 42% in
1996.
General and Administrative
General and administrative expenses increased $1,156,000 to $7,476,000
in 1997 from $6,320,000 during the comparable period in 1996. The increase was
primarily attributable to the increased efforts associated with managing the
growing revenues. The general and administrative expenses grew 18% compared to
the revenue growth of 161%.
Selling and Marketing
Selling and marketing expenses increased $2,375,000 to $4,250,000 in
1997 from $1,875,000 in 1996. The increase was attributed primarily to an
adjustment of $2,456,000, to the carrying value of a receivable from the sale of
stock for an advertising credit based on the Company's expected use of the
credit. The remaining fluctuation was not considered to be material.
Research and Development
Research and development costs increased $2,077,000 to $4,347,000 in
1997 from $2,270,000 in 1996. Research and development related expenses for 1997
were largely attributable to the writing of the Interpose Transaction Engine for
the OFX standard.
Unusual Charges
For the year ended December 31, 1997, the Company incurred a charge to
operations of $2,035,000 for the remaining unamortized costs of intangible
assets due to impairment. The impairment was measured based on the excess of the
net carrying value of the assets over the assets' fair values. The fair value of
the assets were generally determined based on estimates of future discounted
cash flows to be generated by the assets.
The Company recorded unusual charges aggregating $5,771,000 for the
year ended December 31, 1996. Unusual charges were associated with facilities
consolidations and charges associated with in-process research and development
from the Braun Simmons Acquisition. The Company recorded a provision for
facilities consolidations during the fourth quarter of 1996 of $857,000. During
1997, the Company incurred $301,000 in facilities consolidation costs in the
second quarter when it closed its customer service location in Virginia. The
remaining accrual for facilities consolidations was not utilized because of cost
savings associated with employee severance and closing costs. Accordingly, these
expenses were reversed back into income during the second quarter of 1997. In
connection with the Braun Simmons Acquisition in September 1996, the Company
charged in-process research and development expenses for purchased in-process
technology that had not reached technological feasibility as of the date of the
Braun Simmons Acquisition and did not have alternative future uses. Amounts
charged to in-process research and development were based on an independent
appraisal and totaled $4,914,000.
Other Income, Net
Other income (expense) increased $3,662,000 to $1,271,000 in 1997 from
($2,391,000) in 1996. The increase is largely associated with the 1996
recognition of the Company's proportionate share of losses of Home Financial
Network, Inc. ("HFN") and the amortization of the excess of the purchase price
over the Company's share of the equity in net assets of HFN.
Income Taxes
Income taxes were zero for the years ended December 31, 1997 and 1996.
At December 31, 1997, the Company had net operating loss carryforwards for
federal income tax purposes of approximately $50 million which expire by 2012.
However, use of these net operating losses in future years may be limited under
applicable tax laws and regulations as a result of the Mergers and the Braun
Simmons Acquisition.
Discontinued Operations
The loss from operations of telecommunications and interactive services
divisions (net of income taxes) was $78,931,000 and $79,133,000 for the years
ended December 31, 1997 and 1996, respectively. A significant portion of the
losses was attributed to unusual charges in each of the comparative periods.
The loss from operations for the year ended December 31, 1996 included
a provision for corporate restructuring during the fourth quarter of 1996 of
$711,000. This amount consisted of $466,000 in facilities consolidations,
$175,000 in relocation expenses for certain employees, and $70,000 for the
write-down of duplicative processing equipment.
During 1997, the Company incurred $90,000 in relocation costs for
certain employees during the first and second quarter, and incurred $70,000 for
the write-down of duplicative processing equipment in the first quarter. The
remaining $551,000 of the accrual for corporate restructuring costs was
associated with other facilities consolidations that did not occur because the
Company recognized the need to retain such facilities for product development
during 1997 and accordingly, these expenses were reversed back into income
during the second quarter of 1997.
The Company recorded a provision for corporate restructuring during the
third quarter of 1997 of $1,003,000. This amount consisted of $771,000 in
employee reduction and related matters, $190,000 in obsolete equipment, and
$42,000 in facilities closings. As of December 31, 1997, the Company had
incurred employee reductions and relocation expenses aggregating $177,000 and
write-down for obsolete equipment of $190,000. As of December 31, 1997, the
Company had $636,000 in remaining restructuring accruals recorded on its books.
The Company incurred these costs in 1998. Additional accruals were posted for
discontinuing operations during the second and fourth quarters of 1998.
During the third quarter of 1997 the Company announced a strategic
repositioning of the Company's telecommunications division based on recent
events in its marketplace. In connection
with this repositioning and the aforementioned corporate restructuring, the
Company's management evaluated its financial position and determined that it
would be appropriate to charge to operations the remaining unamortized costs of
intangible assets due to impairment, adjust inventory carrying amounts to the
market value, and reflect certain additional restructuring charges, including
charges for separation agreements with employees and charges associated with the
termination of a joint venture agreement. Such third quarter 1997 unusual
charges aggregated $49,246,000 for the impairment of intangible assets;
$11,333,000 for inventories and commitments; $1,003,000 for restructuring
charges (see above); $1,434,000 for separation agreements; and $3,653,000 for
assets relating to a joint venture. The impairment was based on the excess of
the carrying value of the assets over the assets' fair values. The fair value of
the assets were generally determined as the estimates of future discounted cash
flows generated by those assets.
Loss from Continuing Operations, Net Loss and Weighted Average Shares
As a result of the foregoing factors, loss from continuing operations
was $11,163,000 and $16,594,000 for the years ended December 31, 1997 and 1996,
respectively. Basic and diluted loss from continuing operations per common share
was $0.35 and $0.90 for the years ended December 31, 1997 and 1996,
respectively. Net loss was $90,094,000 and $95,727,000 for the years ended
December 31, 1997 and 1996. Basic and diluted loss per common share was $2.85
and $5.21 for the years ended December 31, 1997 and 1996. The weighted average
shares increased to 31,574,000 in 1997 from 18,370,000 in 1996. The increase in
weighted average shares resulted primarily from the shares issued in connection
with the Mergers.
LIQUIDITY AND CAPITAL RESOURCES
During 1998, the Company's cash, cash equivalents and short-term
investments decreased by $3,309,000 resulting from funding operating losses. At
December 31, 1998, the Company had $8,050,000 in cash and cash equivalents,
negative working capital of $274,000 and no long-term debt.
The Company's cash requirements for operating, investing and financing
activities in 1998 were financed primarily by $5,000,000 from royalties
associated with the Visa Bill-Pay system, which was received in the fourth
quarter of 1997 and cash provided by discontinued operations of $4,268,000.
The Company's principal needs for cash in 1998 were for funding
operating losses, investments in property and equipment and to fund working
capital, primarily related to accrued expenses, deferred revenues and accounts
receivable. The Company funded an increase in accounts receivable of $825,000
for the year ended December 31, 1998. The increase in accounts receivable is
attributed to the timing of receipts for services performed. The Company's cash
position benefited from an increase in accounts payable of $588,000.
Net cash provided by investing activities aggregated $9,209,000 during
1998, primarily from the sale of short-term investments in the amount of
$9,304,000, offset in part by the purchase of capital equipment in the amount of
$95,000.
Net cash used in financing activities aggregated $1,139,000 during
1998, primarily from the payment of short-term borrowings of $1,500,000, offset
in part by proceeds from the issuance of common stock in the amount of $361,000.
The decision by the Company to divest itself from the
telecommunications business segment created certain financial obligations and
uncertainties for the future. The Company is required to satisfy certain
obligations of the telecommunications business which will carry on beyond
December 31, 1998. Such obligations include settlement of trade payables,
satisfaction of product royalties and license fees, satisfaction of commission
and other selling expenses, providing product warranty service, customer support
and technical service, satisfying employee severance agreements, arranging the
destruction of inventory and shutdown of warehouse facilities, and final
closedown of all operating activities and compliance with all federal and state
regulatory requirements. At December 31, 1998 the Company estimated the net
liability for the final shutdown at $5.3 million which is recorded on the
Company's balance sheet at year-end.
At December 31, 1998, including discontinued operations, the Company
had $274,000 in negative working capital and $331,000 in shareholders' equity.
In order for the Company to build up its core Internet Banking business it will
be necessary to obtain additional sources of working capital either through the
issuance of debt, equity or some combination thereof. Without adequate working
capital to fund the business the Company will find it difficult to attract new
customers, retain key employees, and provide financial resources to meet
customer product requirements.
The Company's continuation as a going concern is dependent upon its
ability to generate sufficient cash flow to meet its obligations on a timely
basis, to obtain additional financing, and ultimately to attain profitability.
To that extent, management has retained an investment banking firm to assist in
investigating additional financing sources.
In addition, the Company's accuracy in predicting revenues and cash
flow is limited in that the sale of the Company's core product is reliant on the
banking industry's willingness to invest in a new market, internet banking. This
market segment is slowly evolving and is subject to a number of variables in
1999 that will determine the timing and quantity of new sales that the Company
is able to achieve. Such variables include: (1) the effect of consolidations in
the banking industry; (2) financial institutions' progress on Year 2000
compliance; and (3) the banking customers' willingness to invest freely in an
untested customer channel. These reasons further require that the Company raise
additional working capital in order to have adequate funds in 1999 to remain
competitive as the product demand evolves.
INFLATION
The Company believes that inflation has not had a material effect on
the Company's sales and revenue during the past three years.
YEAR 2000 UPDATE
General
- -------
The inability of computers, software and other equipment utilizing
microprocessors to recognize and properly process data fields containing a 2
digit year is commonly referred to as the Year 2000 Compliance issue. As the
year 2000 approaches, such systems may be unable to accurately process certain
date-based information.
The Company believes it has identified all significant applications
that will require modification to ensure Year 2000 Compliance. Internal and
external resources are being used to make the required modifications and test
Year 2000 Compliance.
Project
- -------
The Company's Year 2000 Project ("Project") is generally proceeding on
schedule. In 1996, the Company began a significant re-engineering of its
business processes across the Company including improved access to business
information through common, integrated computing systems. As a result, the
Company replaced its business systems with systems from J.D. Edwards & Company,
IBM Corporation and Microsoft Corporation, which are designed to be Year 2000
Compliant. The Company became fully operational on these systems in 1998.
The Company has a Project team, with certain sub teams. The Project
includes four major areas - corporate business systems, local software systems,
third party suppliers of goods and services, and Interpose software systems. The
general phases of the Project are: (1) inventorying date-aware items; (2)
determining criticality and assigning priorities to identified items; (3)
assessing the Year 2000 compliance of items determined to be material to the
Company; (4) repairing, replacing or identifying workarounds for material items
that are determined not to be Year 2000 Compliant; (5) testing material items;
(6) identifying critical third parties; and (7) designing contingency plans.
At September 30, 1998, the inventory, priority assessment and
compliance assessment phases of each area of the Project were essentially
complete. Material items are those believed by the Company to have a risk
involving the welfare of our customers or substantially affect revenues.
Corporate business systems on schedule at September 30, 1998 include
hardware and systems software, networks and telecommunications. All corporate
systems activities are expected to be complete by mid-1999.
Local software systems include process control and instrumentation
systems and building systems. Operational improvement projects already underway
address some of the Year 2000 concerns. Some manufacturer replacements or
upgrades are behind schedule; however, the Company estimates necessary
replacements or upgrades will be completed by mid-1999.
The third party suppliers phase includes the process of identifying and
prioritizing critical suppliers of goods and services, and communicating with
them about their plans and progress in addressing the Year 2000 concerns. The
Company has recently initiated the identification phase which will be followed
by an evaluation of the most critical third parties. These evaluations will be
followed by the development of contingency plans as necessary, including plans
to use alternative third party vendors, if necessary. This Project phase is
scheduled for completion by mid-1999, with monitoring planned through the
remainder of 1999.
The Company has contingency plans for some mission-critical
applications and is working on plans for others. For example, contingency plans
for the payroll system have been in place since the second quarter of 1998,
while detailed plans for other business processes will be completed by mid-year
1999. A steering committee is closely monitoring the progress of business
process contingency plans involving, among other actions, manual workarounds and
additional staffing.
The Interpose software phase included actions to address the issue of
Year 2000 Compliance as it relates to the Company's customer software. The
Company believes that its current version of the Interpose software is Year 2000
Compliant. Actions taken to address previous releases of the software were, with
minor exceptions, programming changes to replace a non-compliant date conversion
routine with one that was already Year 2000 compliant. Any customer whose
product was not already compliant was notified of any source code changes and/or
release updates made to the product. The Company has issued letters to its
customers that assure that any changes pertinent to the correcting Year 2000
concerns were addressed by the third quarter of 1997 and that all future
releases of Interpose will be fully year 2000 compliant.
Costs
- -----
The estimated total cost associated with required modifications to
become Year 2000 compliant has not been and is not anticipated to be material to
the Company's financial position or results of operations in any given year. The
estimated total cost of the Project is or will be expensed and includes
allowances for some items for which a fix or workaround is still being
determined.
Risks
- -----
The failure to correct a material Year 2000 problem could result in an
interruption in, or failure of certain normal business activities or operations,
which could materially and adversely affect the Company's results of operations,
liquidity and financial condition. Due to the general uncertainty inherent in
the Year 2000 problem, resulting in part from the uncertainty of the Year 2000
readiness of third-party suppliers and customers, the Company is unable to
determine at this time whether the consequences of Year 2000 problems will have
a material impact on the Company's results of operations, liquidity or financial
condition. The Project is expected to reduce significantly the Company's level
of uncertainty about the Year 2000 problem and, in particular, about the Year
2000 compliance and readiness of its material third-party suppliers. The Company
believes that with the previously accomplished implementation of global business
systems and completion of the Project as scheduled, the possibility of material
interruptions of normal operations should be reduced significantly.
CAUTIONARY STATEMENT FOR PURPOSES OF THE "SAFE HARBOR" PROVISIONS OF THE PRIVATE
SECURITIES LITIGATION REFORM ACT OF 1995
The Company desires to take advantage of the "safe harbor" provisions
of the Private Securities Litigation Reform Act of 1995. The Company wishes to
caution readers that the following important factors, among others, in some
cases have affected the Company's actual results, and could cause the Company's
actual results for 1999 and beyond, to differ materially from those expressed in
any forward-looking statements made by, or on behalf of, the Company.
Successful Implementation of Business Strategy
During 1998, as the market for telecommunications products and services
changed, the Company discontinued its telecommunications business in an effort
to streamline its operations and focus its business on its Internet Banking
business, selling software to financial institutions. There can be no assurances
that the Company will be able to successfully implement this business strategy
or effectively fund and grow this line of business.
Liquidity and Capital Resources
The decision by the Company to divest itself from the
telecommunications business segment created certain financial obligations and
uncertainties for the future. The Company is required to satisfy certain
obligations of the telecommunications business which will carry on beyond
December 31, 1998. Such obligations include settlement of trade payables,
satisfaction of product royalties and license fees, satisfaction of commission
and other selling expenses, providing product warranty service, customer support
and technical service, satisfying employee severance agreements, arranging the
destruction of inventory and shutdown of warehouse facilities, and final
closedown of all operating activities and compliance with all federal and state
regulatory requirements. At December 31, 1998 the Company estimated the net
liability for the final shutdown at $5.3 million which is recorded on the
Company's balance sheet at year-end.
At December 31, 1998, including discontinued operations, the Company
had $274,000 in negative working capital and $331,000 in shareholders' equity.
In order for the Company to build up its core Internet Banking business it will
be necessary to obtain additional sources of working capital either through the
issuance of debt, equity or some combination thereof. Without adequate working
capital to fund the business the Company will find it difficult to attract new
customers, retain key employees, and provide financial resources to meet
customer product requirements.
The Company's continuation as a going concern is dependent upon its
ability to generate sufficient cash flow to meet its obligations on a timely
basis, to obtain additional financing, and ultimately to attain profitability.
To that extent, management has retained an investment banking firm to assist in
investigating additional financing sources.
In addition, the Company's accuracy in predicting revenues and cash
flow is limited in that the sale of the Company's core product is reliant on the
banking industry's willingness to invest in a new market, home banking. This
market segment is slowly evolving and is subject to a number of variables in
1999 that will determine the timing and quantity of new sales that the Company
is able to achieve. Such variables include: (1) the effect of consolidations in
the banking industry; (2) financial institutions' progress on Year 2000
compliance; and (3) the banking customers' willingness to invest freely in an
untested customer channel. These reasons further require that the Company raise
additional working capital in order to have adequate funds in 1999 to remain
competitive as the product demand evolves. The Company's continuation as a going
concern is dependent upon its ability to generate sufficient cash flow to meet
its obligations on a timely basis, to obtain additional financing, and
ultimately to attain profitability.
Developing Marketplace
Internet Banking is a developing market. The Company's future growth
and profitability will depend, in part, upon consumer acceptance of Internet
Banking technologies. Even if this market experiences substantial growth, there
can be no assurance that the Company's products and services will be
commercially successful or benefit from such growth. Much of the Company's
success in the Internet Banking market depends on the financial institutions'
success in marketing to the consumer. Consumer acceptance of Internet Banking
will depend to a large degree on the ability of the Company's financial
institution customers to implement applications in anticipated time frames or
with anticipated features and functionality. Therefore, there can be no
assurance of the timing of, introduction of, necessary regulatory approvals for,
or market acceptance of the Company's products and services.
Fluctuations in Operating Results
The Company may experience fluctuations in quarterly operating results
due to a variety of factors, some of which are beyond the Company's control.
These include the size and timing of customer orders, changes in the Company's
pricing policies or those of its competitors, new product introductions or
enhancements by competitors, delays in the introduction of new products or
product enhancements by the Company or by its competitors, customer order
deferrals in anticipation of upgrades and new products, market acceptance of new
products, the timing and nature of sales, marketing, and research and
development expenses by the Company and its competitors, other changes in
operating expenses, personnel changes and general economic conditions.
Additionally, certain financial institutions have recently merged and the
Company is unable to assess the future effect on the Company of these mergers
and of other possible consolidations in the banking industry. Furthermore,
customer purchasing decisions may be delayed by their devoting attention and
resources to Year 2000 compliance issues. No assurance can be given that such
quarterly variations will not occur in the future and, accordingly, the results
of any one quarter may not be indicative of the operating results for future
quarters.
Reliance on Caller ID Leasing Revenues
A majority of the Company's revenues are derived from the leasing of
Caller ID products. The Company leases Caller ID adjunct units in accordance
with an agreement with US West, whereby the Company leases Caller ID units
directly to US West customers. The leasing program enables subscribers to pay a
monthly fee for the equipment and provides the Company with a stream of
recurring revenues. In 1996, the Company was notified by US West that it would
terminate leasing new Caller ID adjunct units under the program. Notwithstanding
the termination of this program, previously existing leases remain in effect.
Although the Company is not able to estimate the effect on future operations of
this discontinued leasing program, the number of active records in the Company's
installed lease base has historically decreased at a rate of approximately 30%
per year. There can be no assurance that this trend or the realized gross
margins on these revenues will continue.
InteliData Common Stock Owned by WorldCorp and World Airways
As of December 31, 1998, WorldCorp and World Airways, collectively
owned approximately 29% of the outstanding common stock of the Company. On
February 12, 1999, WorldCorp announced that it had reached an agreement with it
creditors to restructure the company. Pursuant to the restructuring, WorldCorp
filed a voluntary petition under Chapter 11 of the U.S. Bankruptcy Code.
Under the proposed restructuring plan, most of the InteliData shares
that were held by WorldCorp, as well as those that were held as collateral by
World Airways, will be sold to WorldCorp Acquisition Corp., a standalone
subsidiary of WorldCorp.
Sale of such shares of the Company's common stock by WorldCorp from
time to time, or the threat of such sales, could have a material adverse effect
on the market price for the Company's common stock. In addition, the Company's
Board of Directors has six members, two of whom also serve on the Board of
Directors of WorldCorp and one on the Board of Directors of World Airways. As a
result of membership on the Company's Board and stock ownership, WorldCorp and
World Airways, collectively may have a significant influence on the decisions
made by the Company.
Technological Considerations
The Company's business activities are concentrated in fields
characterized by rapid and significant technological advances. There can be no
assurance that the Company will remain competitive technologically or that the
Company's products, processes or services will continue to be reflective of such
advances. Failure to introduce new products or product enhancements that achieve
market acceptance on a timely basis could materially and adversely affect the
Company's business, operating results and financial condition. There can be no
assurance that the Company will not encounter unanticipated technical, marketing
or other problems or delays relating to new products, features or services which
the Company has recently introduced or which it may introduce in the future.
Moreover, there can be no assurance that the Company's new products, features or
services will be successful, that the introduction of new products,
features or services by the Company's competitors will not materially and
adversely affect the sales of the Company's existing products or that the
Company will be able to adapt to future changes in the Internet Banking
industry. Most of the Company's competitors and potential competitors have
significantly greater financial, technological and research and development
resources than the Company.
Competition
The market for Internet Banking products and services is highly
competitive and subject to rapid innovation and technological change, shifting
consumer preferences and frequent new product introductions. The Company's
Internet Banking products and services compete with services offered by a number
of competitors and competition may intensify as a result of new market entrants.
Financial institutions have developed Internet Banking products for their own
customers and, in the future, may offer these services to other financial
institutions. Other third parties also may develop Internet Banking products to
offer to financial institutions. Computer software and data processing companies
also offer Internet Banking services. The Company expects that competition in
these areas will increase in the near future.
Dependence on Key Employees
The Company is highly dependent on certain key executive officers and
technical employees to manage the operations and business of the Company as well
as to implement the business plans of the Company on an ongoing basis. The loss
of any such key employees could have an adverse impact on the future operations
of the Company.
Volatility of Stock Price
The market price of the Company's stock has experienced significant
volatility. The stock market has experienced volatility that has particularly
affected the market prices of equity securities of many high technology and
development stage companies and that has often been unrelated to the operating
performance of such companies. Factors such as announcements of the introduction
of new products or services by the Company or its competitors, market conditions
in the banking and other emerging growth company sectors and rumors relating to
the Company or its competitors may have a significant impact on the market price
of the Company's stock.
Limited Proprietary Protection
The Company possesses limited patent or registered intellectual
property rights with respect to its technology. The Company depends in part upon
its proprietary technology and know-how to differentiate its products from those
of its competitors and works independently and from time to time with third
parties with respect to the design and engineering of its own products. The
Company also relies on a combination of contractual rights and trade secret laws
to protect its proprietary technology. There can be no assurance, however, that
the Company will be able to protect its technology or successfully develop new
technology or gain access to such technology or that third parties will not be
able to develop similar technology independently or
that competitors will not obtain unauthorized access to the Company's
proprietary technology, that third parties will not misuse the technology to
which the Company has granted access, or that the Company's contractual or legal
remedies will be sufficient to protect the Company's interests in its
proprietary technology.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
- ----------------------------------------------------
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
----
Consolidated Financial Statements
Consolidated Balance Sheets as of December 31, 1998 and 1997............28
Consolidated Statements of Operations for the Years Ended
December 31, 1998, 1997 and 1996......................................29
Consolidated Statements of Stockholders' Equity for the Years Ended
December 31, 1998, 1997 and 1996......................................30
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1998, 1997 and 1996......................................31
Notes to Consolidated Financial Statements for the Years Ended
December 31, 1998, 1997 and 1996......................................32
Independent Auditors' Report..................................................51
INTELIDATA TECHNOLOGIES CORPORATION
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1998 AND 1997
(in thousands, except share data)
1998 1997
------------ ------------
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 8,050 $ 2,055
Short-term investments -- 9,304
Accounts receivable, net of allowances of $592
in 1998 and $1,702 in 1997 (Notes 14 and 16) 2,113 1,309
Net current assets of discontinued operations (Note 5) -- 27,289
Prepaid expenses and other current assets 143 165
------------ ------------
Total current assets 10,306 40,122
NONCURRENT ASSETS
Property and equipment, net (Note 7) 348 1,820
Noncurrent assets of discontinued operations (Note 5) -- 4,432
Other assets 257 328
------------ ------------
TOTAL ASSETS $ 10,911 $ 46,702
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 1,344 $ 756
Accrued expenses and other liabilities (Note 8) 910 4,231
Deferred revenues (Note 2) 3,056 2,771
Net liabilities of discontinued operations (Note 5) 5,270 --
------------ ------------
Total current liabilities 10,580 7,758
NONCURRENT LIABILITIES
Deferred revenues (Note 2) -- 1,875
------------ ------------
TOTAL LIABILITIES 10,580 9,633
COMMITMENTS AND CONTINGENCIES (Note 15)
STOCKHOLDERS' EQUITY (Note 10)
Preferred stock, $0.001 par value; authorized 5,000,000 shares;
no shares issued and outstanding -- --
Common stock, $0.001 par value; authorized 60,000,000 shares; issued
32,293,005 shares in 1998 and 31,862,449 shares in 1997; outstanding
31,611,505 shares in 1998 and 31,180,949 shares in 1997 32 32
Additional paid-in capital 247,359 245,699
Treasury stock, at cost (2,064) (2,064)
Deferred compensation (152) (18)
Accumulated other comprehensive income -- 425
Accumulated deficit (244,844) (207,005)
------------ ------------
TOTAL STOCKHOLDERS' EQUITY 331 37,069
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 10,911 $ 46,702
============ ============
See accompanying notes to consolidated financial statements.
INTELIDATA TECHNOLOGIES CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
(in thousands, except per share data)
1998 1997 1996
----------- ----------- -----------
Revenues
Software $ 812 $ 1,040 $ --
Consulting and services 1,138 1,229 2,396
Leasing and other 8,077 10,252 2,399
----------- ----------- -----------
Total revenues 10,027 12,521 4,795
----------- ----------- -----------
Cost of revenues
Software 109 223 --
Consulting and services 509 987 1,583
Leasing and other 2,038 5,637 1,179
----------- ----------- -----------
Total cost of revenues 2,656 6,847 2,762
----------- ----------- -----------
Gross profit 7,371 5,674 2,033
Operating expenses
General and administrative 6,240 7,476 6,320
Selling and marketing 2,969 4,250 1,875
Research and development 2,652 4,347 2,270
Unusual charges (Note 11) -- 2,035 5,771
----------- ----------- -----------
Total operating expenses 11,861 18,108 16,236
----------- ----------- -----------
Operating loss (4,490) (12,434) (14,203)
----------- ----------- -----------
Other income (expense)
Interest, net 874 1,271 1,445
Other, net -- -- (3,836)
----------- ----------- -----------
Total other income (expense) 874 1,271 (2,391)
----------- ----------- -----------
Loss before income taxes (3,616) (11,163) (16,594)
Income taxes (Note 13) -- -- --
----------- ----------- -----------
Loss from continuing operations (3,616) (11,163) (16,594)
Discontinued operations (Note 5):
Loss from operation of telecommunications and
Interactive service divisions (net of income taxes) (18,049) (78,931) (79,133)
Loss on disposal of telecommunications and
Interactive service divisions (net of income taxes) (16,174) -- --
----------- ----------- -----------
Total discontinued operations (34,223) (78,931) (79,133)
----------- ----------- -----------
Net loss $ (37,839) $ (90,094) $ (95,727)
=========== =========== ===========
Basic and diluted loss from continuing operations per common share $ (0.11) $ (0.35) $ (0.90)
=========== =========== ===========
Basic and diluted loss from discontinued operations per common share $ (1.09) $ (2.50) $ (4.31)
=========== =========== ===========
Basic and diluted loss per common share $ (1.20) $ (2.85) $ (5.21)
=========== =========== ===========
Basic and diluted weighted average shares 31,450 31,574 18,370
=========== =========== ===========
See accompanying notes to consolidated financial statements.
INTELIDATA TECHNOLOGIES CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
(in thousands)
Accumu-
lated
Other
Addi- Compre- Compre-
Common stock tional Receivable Deferred hensive Accumu- hensive
------------- Paid-in Treasury from Sale Compen- Income lated (Loss)
Shares Amount Capital Stock of Stock sation (Loss) Deficit Income Total
------ ------ -------- -------- ---------- -------- ------- --------- -------- ----------
Balance at December 31, 1995 15,530 $ 16 $ 61,650 $ -- $ (2,488) $ (261) $ -- $ (21,184) $ -- $ 37,733
Issuance of common stock:
Braun Simmons Acquisition 375 -- 4,170 -- -- -- -- -- -- 4,170
Merger with Colonial Data 15,406 15 179,103 -- -- -- -- -- -- 179,118
Exercise of options
and warrants 730 1 2,176 -- -- -- -- -- -- 2,177
Employee stock
purchase plan 6 -- 50 -- -- -- -- -- -- 50
Retirement of common stock
for long-term investment (230) -- (3,392) -- -- -- -- -- -- (3,392)
Use of advertising credits -- -- -- -- 32 -- -- -- -- 32
Compensation expense -- -- -- -- -- 128 -- -- -- 128
Net loss -- -- -- -- -- -- -- (95,727) (95,727) (95,727)
--------
Comprehensive loss (95,727)
------ ------ -------- -------- --------- -------- -------- --------- -------- ----------
Balance at December 31, 1996 31,817 32 243,757 -- (2,456) (133) -- (116,911) 124,289
Issuance of common stock:
Employee stock purchase plan 45 -- 128 -- -- -- -- -- -- 128
Exercise of options 1 -- 5 -- -- -- -- -- -- 5
Cancellation of accrued
stock options -- -- 1,809 -- -- -- -- -- -- 1,809
Purchase of treasury stock (682) -- -- (2,064) -- -- -- -- -- (2,064)
Charge-off of advertising credits -- -- -- -- 2,456 -- -- -- -- 2,456
Compensation expense -- -- -- -- -- 115 -- -- -- 115
Unrealized gains on investments -- -- -- -- -- -- 425 -- 425 425
Net loss -- -- -- -- -- -- -- (90,094) (90,094) (90,094)
--------
Comprehensive loss (89,699)
------ ------ -------- -------- --------- -------- -------- --------- -------- ----------
Balance at December 31, 1997 31,181 32 245,699 (2,064) -- (18) 425 (207,005) 37,069
Issuance of common stock:
Employee stock purchase plan 68 -- 67 -- -- -- -- -- -- 67
Exercise of options 300 -- 294 -- -- -- -- -- -- 294
Issuance of restricted stock 156 -- 462 -- -- (462) -- -- -- --
Cancellation of restricted stock (53) -- (159) -- -- 159 -- -- -- --
Cancellation of common stock (40) -- -- -- -- -- -- -- -- --
Cancellation of accrued stock options -- -- 996 -- -- -- -- -- -- 996
Compensation expense -- -- -- -- -- 169 -- -- -- 169
Recognized gain on investments -- -- -- -- -- -- (425) -- (425) (425)
Net loss -- -- -- -- -- -- -- (37,839) (37,839) (37,839)
--------
Comprehensive loss $(38,264)
------ ------ -------- -------- --------- -------- -------- --------- -------- ----------
Balance at December 31, 1998 31,612 $ 32 $247,359 $(2,064) $ -- $ (152) $ -- $(244,844) $ 331
====== ====== ======== ======== ========= ======== ======== ========= ==========
See accompanying notes to consolidated financial statements.
INTELIDATA TECHNOLOGIES CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
(in thousands)
1998 1997 1996
----------- ----------- -----------
Cash flows from operating activities
Net loss $ (37,839) $ (90,094) $ (95,727)
Adjustments to reconcile net loss to net cash used in
operating activities:
Loss from discontinued operations 18,049 78,931 79,133
Loss on disposal of discontinued operations 16,174 -- --
Impairment of advertising credits -- 2,456 --
In-process research and development -- -- 4,914
Depreciation and amortization 1,567 3,331 2,103
Provision for losses on accounts receivable 21 -- --
Equity in loss of long-term investments -- -- 2,801
Deferred compensation expense 169 115 128
Other non-cash activities (425) 425 (101)
Changes in certain assets and liabilities, net of effects
of non-cash transactions including acquisitions:
Accounts receivable (825) 998 (1,261)
Prepaid expenses and other current assets 22 884 (147)
Other assets 71 1,833 3,391
Accounts payable 588 (200) (739)
Accrued expenses (2,325) (169) 3,581
Deferred revenue (1,590) 4,253 388
----------- ----------- -----------
Net cash (used in) provided by operating activities (6,343) 2,763 (1,536)
----------- ----------- -----------
Cash provided by (used in) operating activities of
discontinued operations 4,268 (26,612) (7,301)
----------- ----------- -----------
Cash flows from investing activities
Purchase of short-term investments -- -- (12,418)
Purchases of property and equipment-continuing operations (95) (516) (2,194)
Purchases of property and equipment-discontinued operations -- (907) (110)
Change in restricted cash -- -- 3,309
Proceeds from sale of other assets, net -- -- 231
Sale of short-term investments 9,304 3,114 --
Acquisitions, net of cash acquired -- -- 17,578
----------- ----------- -----------
Net cash provided by investing activities 9,209 1,691 6,396
----------- ----------- -----------
Cash flows from financing activities
Proceeds (payments) related to borrowings-discontinued operations (1,500) (500) 2,000
Proceeds from issuances of common stock, net of discount 361 133 2,177
Payments to acquire treasury stock -- (2,064) --
Other financing activities -- -- (212)
----------- ----------- -----------
Net cash (used in) provided by financing activities (1,139) (2,431) 3,965
----------- ----------- -----------
Increase (decrease) in cash and cash equivalents 5,995 (24,589) 1,524
Cash and cash equivalents, beginning of year 2,055 26,644 25,120
----------- ----------- -----------
Cash and cash equivalents, end of year $ 8,050 $ 2,055 $ 26,644
=========== =========== ===========
See accompanying notes to consolidated financial statements.
INTELIDATA TECHNOLOGIES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
(1) ORGANIZATION
InteliData Technologies Corporation ("InteliData" or the "Company"), is
engaged in developing software products and services for financial institutions
to assist in Internet Banking and electronic bill payment initiatives. The
Company is registered in the State of Delaware and operates primarily from its
corporate headquarters in Herndon, Virginia.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Consolidation - The consolidated financial statements include the accounts
of the Company after elimination of all intercompany balances and transactions.
Certain items from the 1997 and 1996 financial statements have been reclassified
to conform to the 1998 financial statement presentation.
(b) Accounting Estimates - The preparation of financial statements in conformity
with generally accepted accounting principles 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. Actual results could differ from those estimates. The Company
considers the impairment of long-lived assets based on an assessment of the
asset's ability to contribute to the profitability of the Company using
estimates of expected future undiscounted cash flows. The Company records
inventory reserves based on current market conditions.
(c) Revenue Recognition - Revenue for off-the-shelf product is recorded when
products are shipped and title passes to the customer. Lease revenue is recorded
based on the units in service at the end of the prior month since these leases
are cancelable at any time. Revenue from consulting and maintenance contracts
are recognized as services are provided. Beginning in 1998, the Company sold
integrated solutions that bundle software products with customization,
installation and training services. These arrangements are recognized using the
percentage of completion method of accounting. Losses on uncompleted contracts
are recorded when such amounts become determinable.
(d) Cash and Cash Equivalents - The Company considers all non-restricted highly
liquid investments with original maturities of three months or less to be cash
equivalents. Cash and cash equivalents are stated at cost, which approximates
market.
(e) Short-term Investments - The Company reports its short-term investments in
marketable securities as available-for-sale with any unrealized gains (losses)
reflected, net of tax, as other comprehensive income (loss). Realized gains or
losses are determined on the first-in, first-out
method and are reflected in net income. Short-term investments are reported at
cost which approximates fair value.
(f) Property and Equipment - Property and equipment is stated at cost.
Depreciation of property and equipment is calculated using the straight-line
method over the estimated useful lives of the assets. Office equipment and
furniture and fixtures are depreciated over 3 to 7 years.
(g) Net (Liabilities) Assets of Discontinued Operations - Under various disposal
plans adopted in 1997 and 1998, the Company has either completed or planned the
divestiture of all of its telecommunications and interactive services
businesses, excluding Caller ID adjunct leasing activities. See Note 5 to the
financial statements. These businesses were reclassified as Discontinued
Operations in 1998. As a result, certain financial information previously issued
has been reclassified to give effect to the classification of these businesses
as discontinued operations in accordance with Accounting Principles Board (APB)
Opinion No. 30, "Reporting the Results of Operations-Reporting the Effects of
Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently
Occurring Events and Transactions."
(h) Deferred Revenues - The Company received $5 million from Visa in the fourth
quarter of 1997, as a result of an agreement whereby the Company surrendered the
right to certain future royalty payments. The cash payment was recorded in
deferred revenue and is being recognized in other revenues over the two year
period of the arrangement. Other deferred revenues represents cash received for
services to be provided. Revenue is recognized based on the terms of the
contract.
(i) Income Taxes - Income taxes are accounted for in accordance with the asset
and liability method. Deferred tax assets and liabilities are recognized for the
future tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases. Deferred tax assets and liabilities are measured using
enacted tax rates expected to apply to taxable income in the years in which
those temporary differences are expected to be recovered or settled. The effect
on deferred tax assets and liabilities of a change in tax rates is recognized in
income in the period that includes the enactment date. A valuation allowance is
established against deferred tax assets when it is deemed, based on available
evidence, that it is more likely than not that some portion or all of the
deferred tax asset will not be realized.
(j) Accounting for Stock-Based Compensation - The Company applies APB Opinion
No. 25 and related interpretations in accounting for its plans. Statement of
Financial Accounting Standards No. 123 "Accounting for Stock-Based Compensation"
("SFAS 123") was issued by the Financial Accounting Standards Board in 1995 and,
if fully adopted, changes the methods for recognition of cost on plans similar
to those of the Company. The Company has elected to continue to apply the
provisions of APB Opinion No. 25 and provide the pro forma disclosure provisions
of SFAS 123.
(k) Loss per Common Share - Basic loss per common share is computed by dividing
net loss, after deducting preferred stock dividend requirements, by the basic
weighted average number of shares of common stock outstanding during the year.
Dilutive stock options that were not
included in the loss per share computation because they would have been
antidilutive for 1998, 1997 and 1996 were approximately 3,000,000; 3,250,000 and
3,000,000, respectively.
(3) BUSINESS OPERATIONS
The accompanying financial statements have been prepared on a going
concern basis, which contemplates the realization of assets and the satisfaction
of liabilities in the normal course of business. As shown in the financial
statements during the years ended December 31, 1998, 1997 and 1996, the Company
incurred losses from continuing operations of $3,616,000, $11,163,000 and
$16,594,000, respectively. Additionally, the Company's revenues have been highly
dependent on Caller ID leasing revenues and Visa Bill-Pay system royalty
revenues. For the year ended December 31, 1998, leasing revenues and royalty
revenues aggregated 79% of the total revenues.
As of December 31, 1998, the Company reported cash and cash equivalents
of $8,050,000 and negative working capital of $274,000.
The financial statements do not include any adjustments relating to the
recoverability and classification of recorded asset amounts or the amounts and
classification of liabilities that might be necessary should the Company be
unable to continue as a going concern.
The Company's continuation as a going concern is dependent upon its
ability to generate sufficient cash flow to meet its obligations on a timely
basis, to obtain additional financing, and ultimately to attain profitability.
To that extent, management has retained an investment banking firm to assist in
investigating additional financing sources.
(4) ACQUISITIONS
On November 7, 1996 US Order, Inc. ("US Order") and Colonial Data were
merged with and into InteliData Technologies Corporation, a newly formed
corporation, through an exchange of stock ("Mergers"). Upon consummation of the
Mergers, each outstanding share of US Order common stock was converted into one
share of InteliData common stock and each outstanding share of Colonial Data
common stock was converted into one share of InteliData common stock. The
transaction was accounted for as a purchase of Colonial Data by US Order.
During the second quarter of 1998, the Company announced its intentions
to discontinue the telecommunications business, other than the leasing of Caller
ID adjuncts, formerly transacted by Colonial Data.
Effective September 30, 1996 Braun, Simmons & Co. ("Braun Simmons"), a
firm specializing in the development of Internet Banking solutions for financial
institutions, was merged into US Order (the "Braun Simmons Acquisition"). This
merger was accounted for as a purchase of Braun Simmons by US Order. US Order
acquired all of the outstanding stock of Braun Simmons for $2 million and
375,000 shares of the Company's common stock.
(a) Unaudited Pro Forma Condensed Consolidated Financial Information
The unaudited pro forma condensed consolidated statement of operations
for the year ended December 31, 1996 gives effect to the Mergers and the Braun
Simmons Acquisition as if each was completed as of January 1, 1996 and combines
US Order's, Braun Simmons' and Colonial Data's statements of operations for that
year. Such statements of operations do not include the combined effect of the
$77 million nonrecurring charges for in-process research and development.
However, such statements do reflect adjustments for the elimination of
historical transactions between US Order, Braun Simmons and Colonial Data,
amortization of goodwill and related income tax effects.
The unaudited pro forma condensed consolidated financial information is
provided for illustrative purposes only and is not necessarily indicative of the
consolidated financial information that would have been reported had the mergers
occurred on the dates indicated, nor do they represent a forecast of the
consolidated financial information for any future period. The unaudited pro
forma condensed consolidated financial information should be read in conjunction
with the historical financial statements and accompanying notes of the Company.
Shown below is the unaudited pro forma condensed consolidated
statements of operations for the combined businesses of US Order, Braun Simmons
and Colonial Data (in thousands, except per share amounts).
Year Ended December 31, 1996:
Pro Forma Pro Forma
---------------------------------------- ----------
US Order Braun Simmons Colonial Data Adjustments Reference InteliData
-------- ------------- ------------- ----------- --------- ----------
Revenues.................................... $ 4,227 $ 3,653 $ 63,987 $ (1,894) (1) $ 69,973
Cost of revenues............................ 3,832 2,272 43,490 101 (1)(2) 49,695
Gross profit................................ 395 1,381 20,497 (1,995) (2) 20,278
Operating expenses.......................... 19,911 1,284 18,312 2,285 (3) 41,792
Operating (loss) income..................... (19,516) 97 2,185 (4,280) (2)(3) (21,514)
Net (loss) income........................... (19,349) 67 688 4,011 (2)(3)(4) (14,583)
Basic and diluted (loss) income per share... $ (1.20) $ 0.04 $ (0.46)
Pro Forma Adjustments
The following pro forma adjustments have been made to the unaudited pro
forma condensed consolidated financial information:
(1) Reflects the elimination of intercorporate transactions.
(2) Reflects the amortization associated with an allocation of the purchase
price of Colonial Data for its lease base of $1.9 million to recognize the
excess of the estimated fair market value over the carrying amount and its
amortization on a straight-line basis over five years.
(3) Reflects the allocation of purchase price to developed technology and
goodwill. Such developed technology is amortized on a straight-line basis over
two years; goodwill is amortized on a straight-line basis over 7 years for Braun
Simmons and 15 years for Colonial Data.
(4) Reflects the effect of the combination of Braun Simmons', US Order's and
Colonial Data's operations and the above adjustments on income taxes. A
valuation allowance has been recognized for the pro forma net deferred tax
assets of InteliData, relating primarily to operating loss carryforwards
generated by US Order prior to the Mergers and the Braun Simmons Acquisition,
based on an assessment of the likelihood of recoverability of such amounts. As a
result of the Mergers and the Braun Simmons Acquisition, the use of US Order's
operating loss carryforwards may be limited in future years.
(b) Purchase Accounting (in thousands)
The purchase amount of Braun Simmons was:
Fair value of common stock issued $4,170
Cash consideration 2,000
US Order transaction costs 913
------
Total $7,083
======
The purchase amount was allocated for Braun Simmons as follows:
Current assets $ 700
Equipment and other 286
In-process research and development 4,914
Goodwill 1,898
Liabilities assumed (715)
------
Total $7,083
======
The purchase amount of Colonial Data was:
Fair value of common stock issued $179,118
Fair value of employee stock options and warrants 2,805
Cost of previous investment in Colonial Data 3,393
US Order transaction costs 1,309
--------
Total $186,625
========
The purchase amount was allocated for Colonial Data as follows:
Current assets $ 60,488
Lease base 3,747
Equipment and other 5,754
In-process research and development 72,300
Developed technology 1,418
Goodwill 49,483
Liabilities assumed (6,565)
--------
Total $186,625
========
The allocation of the purchase amounts to both Braun Simmons and
Colonial Data tangible and identifiable intangible assets was based on
independent appraisals of the estimated fair value of certain of those assets.
Such appraisals indicated approximately $5 million and $72 million, for
purchased in-process research and development for Braun Simmons and Colonial
Data, respectively, which was expensed by the Company upon each closing, as the
technologies
had not reached technological feasibility and did not have alternative future
uses. The unaudited pro forma condensed consolidated statements of operations do
not include this one-time charge for purchased in-process technology as it
represents a material nonrecurring charge.
(c) (Loss) Income Per Share
The weighted average shares used in the computations of pro forma basic
and diluted (loss) income per share assumes that the shares issued in the
acquisition of Braun Simmons and the total number of shares exchanged in the
Mergers and the Braun Simmons Acquisition, net of canceled intercorporate
investment shares, were outstanding for all periods presented. The impact of
outstanding stock options and warrants of the Company has been considered using
the treasury stock method.
(5) DISCONTINUED OPERATIONS
During the second quarter of 1998, the Company adopted a plan to
dispose of its various telecommunications divisions through sale and
liquidation. The Company's Caller ID adjunct inventory was sold in May 1998. The
Company's Plexus inventory was sold in December 1998. Negotiations for the sale
of some or all of the remaining telecommunications assets are being conducted
with various parties. At December 31, 1998, the net liabilities of discontinued
operations, consisting primarily of trade receivables, warehouse facilities, and
liabilities associated with operations, have been classified as current
liabilities at their estimated net realizable value.
Net revenues and loss from discontinued operations are as follows:
Years Ended December 31,
---------------------------------------------
(in thousands) 1998 1997 1996
- --------------------------------------------------------------------------------
Net revenues $ 23,567 $ 47,788 $ 9,104
Cost of revenues 29,054 48,000 7,686
Operating expenses 32,803 78,658 83,327
Loss from operations (38,290) (78,870) (81,909)
Income (benefit) taxes (3,628) 61 25
Loss from discontinued operations (34,223) (78,931) (79,133)
- --------------------------------------------------------------------------------
Net (liabilities) assets of discontinued operations are as follows:
December 31,
--------------------------------------
(in thousands) 1998 1997
- --------------------------------------------------------------------------------
Trade receivables, net $ 864 $11,779
Inventories and other current assets 945 23,212
Property, plant and equipment, net 1,000 4,429
Trade payables (539) (2,903)
Other current liabilities (7,540) (4,796)
--------------------------
Net (liabilities) assets of discontinued operations $(5,270) $ 31,721
- --------------------------------------------------------------------------------
Included within the loss on disposal was a loss for discontinued
operations aggregating $4,332,000 for the period from the measurement dates,
January 1, 1998 for interactive services division and June 1, 1998 for the
telecommunications division, to December 31, 1998. Also included in the loss on
disposal is a pretax provision of $3,301,000 for estimated operating losses from
January 1, 1999 through June 1, 1999.
Summary of Noncash Activities
(in thousands) 1998 1997 1996
- --------------------------------------------------------------------------------
Loss from discontinued operations:
Reserve for inventories $ 13,784 $ 11,333 $ --
Provision for bad debt 3,010 3,891 --
Depreciation and amortization 751 4,004 622
-----------------------------------
17,545 19,228 622
Loss on disposal of discontinued operations:
Write-off of property, plant and equipment 3,539 -- --
Provision for sales returns 2,696 -- --
-----------------------------------
6,235 -- --
-----------------------------------
Total noncash activities for
discontinued operations $ 23,780 $ 19,228 $ 622
- --------------------------------------------------------------------------------
Summary of Discontinued Operations
The loss from operations of telecommunications and interactive
services divisions (net of income taxes) was $18,049,000 and $78,931,000 for the
years ended December 31, 1998 and 1997, respectively. The loss on disposal of
telecommunications and interactive services divisions was $16,174,000 for the
year ended December 31, 1998.
During 1998, the loss from operations of telecommunications and
interactive services divisions (net of income taxes) included $13,784,000 in
inventory adjustments. The loss on disposal of telecommunications and
interactive service divisions consisted of $2,696,000 in expected sales returns,
$3,539,000 in property adjustments, $3,010,000 in provisions for customer
accounts and $6,929,000 in actual and expected losses from operations from the
measurement date through the date of disposal.
The Company recorded a provision for corporate restructuring during the
third quarter of 1997 of $1,003,000. This amount consists of $771,000 in
employee reduction and related matters, $190,000 in obsolete equipment, and
$42,000 in facilities closings. As of December 31, 1997, the Company incurred
employee reductions and relocation expenses aggregating $177,000 and write-down
for obsolete equipment of $190,000. As of December 31, 1997, the Company has
$636,000 in remaining restructuring accruals recorded on its books. The Company
incurred these costs in 1998. Additional accruals were posted for closing
operations during the second and fourth quarters of 1998.
During the third quarter of 1997 the Company announced a strategic
repositioning of the Company's telecommunications division based on recent
events in its marketplace. In connection with this repositioning and the
aforementioned corporate restructuring, the
Company's management evaluated its financial position and determined that it
would be appropriate to charge to operations the remaining unamortized costs of
intangible assets due to impairment, adjust inventory carrying amounts to the
lower of cost or market, and reflect certain additional restructuring charges,
including charges for separation agreements with employees and charges
associated with the termination of a joint venture agreement. Such third quarter
1997 unusual charges aggregated $49,246,000 for the impairment of intangible
assets; $11,333,000 for inventories and commitments; $1,003,000 for
restructuring charges (see above); $1,434,000 for separation agreements; and
$3,653,000 for assets relating to the joint venture. The impairment was based on
the excess of the carrying value of the assets over the assets' fair values. The
fair value of the assets were generally determined as the estimates of future
discounted cash flows generated by the assets.
(6) SEGMENT REPORTING
The Company maintains operations in two primary operating segments:
Internet Banking and leasing. The basis for determining the Company's operating
segments is the manner in which financial information is used by the Company in
its operations. Management operates and organizes itself according to business
units which comprise unique products and services. Intersegment sales do not
exist. Operating (loss) income in these two market divisions represents total
revenues less operating expenses, and excludes other income and expense and
income taxes. Identifiable assets are those assets employed by each segment's
operation. Segment financial information is as follows (in thousands):
Internet
Banking Leasing Consolidated
- --------------------------------------------------------------------------------
1998
Revenues $ 4,683 $ 5,344 $ 10,027
Operating (loss) income (7,796) 3,306 (4,490)
Identifiable assets 10,050 861 10,911
Depreciation and amortization 1,361 206 1,567
Capital expenditures 95 -- 95
1997
Revenues $ 3,951 $ 8,570 $ 12,521
Operating (loss) income (16,286) 3,852 (12,434)
Identifiable assets (1) 13,466 1,515 14,981
Depreciation and amortization 1,345 1,986 3,331
Capital expenditures 516 -- 516
1996
Revenues $ 2,957 $ 1,838 $ 4,795
Operating (loss) income (14,936) 733 (14,203)
Identifiable assets 46,052 3,054 49,106
Depreciation and amortization 1,241 862 2,103
Capital expenditures 2,194 -- 2,194
- --------------------------------------------------------------------------------
(1) Identifiable assets do not include net current assets of discontinued
operations of $27,289,000 and noncurrent assets of discontinued operations
of $4,432,000. Total assets of the consolidated Company equal $46,702,000.
(7) PROPERTY AND EQUIPMENT
Property and equipment consists of the following at December 31 (in
thousands):
1998 1997
------ -------
Leased product $ 2,182 $ 3,053
Office equipment 1,040 2,678
Furniture and fixtures 139 397
------- -------
3,361 6,128
Accumulated depreciation (3,013) (4,308)
------- -------
$ 348 $ 1,820
======= =======
(8) ACCRUED EXPENSES AND OTHER LIABILITIES
Accrued expenses and other liabilities consists of the following at
December 31 (in thousands):
1998 1997
------- -------
Accrued compensation $ 293 $ 1,069
Accrued professional fees 181 1,014
Accrued stock options -- 996
Accrued tax liabilities 276 399
Accrued selling expenses -- 350
Accrued insurance 142 308
Other liabilities 18 95
------- -------
$ 910 $ 4,231
======= =======
(9) RELATED-PARTY TRANSACTIONS
(a) Strategic Business Partner
In August 1994, the Company sold its electronic banking and bill pay
operations (the "Visa Bill-Pay System") to Visa. As part of the Visa
transaction, the Company's president was appointed to, and the Company's
chairman was named an advisor to, the board of directors of Visa InterActive.
Included in service fee revenues are $751,000 and $1,219,000 in 1997 and 1996,
respectively, related to services provided by the Company to Visa InterActive
and Visa banks/members. In August 1997, Visa InterActive was sold to an
unrelated party and the Company's officers resigned from their Visa InterActive
board positions.
(b) Primary Investor
The chairman of the board of directors of the Company is a director of
WorldCorp, Inc. ("WorldCorp"), the Company's primary investor. One other
director of the Company is also the chief executive officer and a director of
WorldCorp. WorldCorp owned approximately 29% of the Company's outstanding voting
stock as of December 31, 1996. During 1996, WorldCorp paid certain of the
Company's personnel costs including salary, benefits, business and other related
costs for which the Company was billed on a cost-reimbursed basis. In November
1996, the Company terminated this relationship with WorldCorp. During the year
ended December 31,
1996, the Company paid WorldCorp approximately $439,000 related to these
arrangements. At December 31, 1998 and 1997, the Company was not indebted to
WorldCorp.
(c) Long-term Investments
On October 18, 1995, the Company acquired an equity interest in Home
Financial Network, Inc. ("HFN"), a newly formed, development stage personal
computer software company that planned to develop and deliver electronic
financial products and services to consumers. In 1996, the Company recorded
losses in its investment in HFN of $2,801,000. The Company believes its
investment was impaired based on the history of losses of HFN, and as a result,
the Company's investment in HFN is carried at zero.
(10) STOCKHOLDERS' EQUITY
(a) Stock Options
The Company sponsors the following stock option plans which cover
substantially all employees and certain directors: the US Order 1991 Stock
Option Plan ("1991 Plan"), the Colonial Data 1994 Long-Term Incentive Plan
("Colonial Data Plan"), the US Order 1995 Incentive Plan ("1995 Plan"), the US
Order 1995 Non-Employee Directors' Stock Option Plan ("1995 Directors' Plan"),
the InteliData 1996 Incentive Plan ("1996 Plan"), the InteliData 1996
Non-Employee Directors' Stock Option Plan ("1996 Non-Employee Directors' Plan"),
the InteliData 1997 Executive Plan, and Additional Plans.
1991 Plan
---------
The Company had reserved 3,000,000 shares of common stock for the
exercise of options under this plan. Options are granted for purchases of the
same number of shares of the Company's common stock. For the 1991 Plan, options
typically vest monthly over a period of three to five years and expire after
eight years. However, no vesting occurs until after the employee has completed
one year of service with the Company. The 1991 Plan was terminated in May 1995.
As of December 31, 1998, there were 852,194 shares vested and exercisable under
the 1991 Plan.
Colonial Data Plan
------------------
Colonial Data's board of directors authorized the issuance of options
for purchase of common stock for key employees. The options entitle the holder
to purchase the Company's common stock at the fair market value at the date of
grant. Colonial Data's board of directors as part of its 1994 Long-Term
Incentive Plan authorized 500,000 shares of stock to be available for grants.
The options vest periodically through 2000 and expire in 2006 and expire after
10 years from the date of grant. The Colonial Data Plan was terminated in
November 1996. As of December 31, 1998, there were 48,331 shares vested and
exercisable under the Colonial Data Plan.
1995 Plan
---------
The Company had reserved 1,000,000 shares of common stock for the
exercise of options under this plan. Options are granted for purchases of the
same number of shares of the Company's common stock. For the 1995 Plan, options
typically vest monthly over a period of three to five years and expire after
eight years from the date of grant. However, no vesting occurs until after the
employee has completed one year of service with the Company. The 1995 Plan was
terminated in November 1996. As of December 31, 1998, there were 89,206 shares
vested and exercisable under the 1995 Plan.
1995 Directors' Plan
--------------------
The Company had reserved 250,000 shares of common stock for the
exercise of options under this plan. Options were granted for purchases of the
same number of shares of the Company's common stock. For the 1995 Directors'
Plan, options vest monthly over a three year period beginning on the date of
grant and expire ten years subsequent to the date of grant. The grant price for
the plan was based on the average of the closing Nasdaq market price of the
Company's stock on the thirty trading days preceding the date of the grant. The
1995 Directors' Plan was terminated in November 1996. As of December 31, 1998,
there were 6,458 shares vested and exercisable under the 1995 Directors' Plan.
1996 Plan
---------
The Company had reserved 1,500,000 shares of common stock for the
exercise of options under this plan. Options are granted for purchases of the
same number of shares of the Company's common stock. The exercise price of each
option shall not be less than eighty-five percent (85%) of the fair market value
of the Company's common stock on the date the option is granted and an option's
maximum term is 10 years. Options for existing employees are granted by the
board of directors and typically vest ratably over four years. Options granted
to new hires are awarded at the discretion of the Company's management in
accordance with guidelines approved by the board of directors. However,
typically, no vesting occurs until after the employee has completed one year of
service with the Company. As of December 31, 1998, there were 55,666 shares
vested and exercisable under the 1996 Plan.
1996 Non-Employee Directors' Plan
---------------------------------
The Company reserved 200,000 shares of common stock for the exercise of
options under this plan. Options are granted for each non-employee director who
qualifies for participation under the plan. The exercise price of each option
shall be the fair market value as defined in the plan of the Company's common
stock and an option's maximum term is 10 years. For the 1996 Non-Employee
Directors' Plan, options vest monthly over a period of one year. As of December
31, 1998, there were 30,000 shares vested and exercisable under the 1996
Non-Employee Directors' Plan.
1997 Executive Plan
-------------------
The Company's Compensation Committee approved the reservation of
1,425,000 shares of common stock for the exercise of options in connection with
a newly hired officer's agreeing to be employed by the Company under this plan
subject to the approval of the board of directors. The board of directors
approved this plan in February 1998. Options were granted by the board of
directors and vested according to different schedules: 925,000 options were
vested in equal annual increments over three years; 500,000 options vested at
the end of eight years but may have been accelerated with certain performance
milestones. During 1998, the Company terminated and canceled all options in the
Plan. As of December 31, 1998, there were no shares vested and exercisable under
the 1997 Executive Plan.
Additional Plans
----------------
In addition to options issued in 1995 under both the 1991 and 1995
Plans, the Company issued 15,000 options to three of its five non-affiliate
directors and 25,000 options to a non-affiliate who helped in arranging a
placement of Series C preferred stock. Each of these grants has a $7.13 exercise
price. The 45,000 options issued to non-affiliate directors vest monthly over a
three-year period, and the 25,000 options granted to the non-affiliate vested
immediately. As of December 31, 1998, of these 70,000 options, 55,000 options
have been canceled, and 15,000 options, associated with a non-affiliate
director, are vested and exercisable under the plan.
Stock Option Repricing
----------------------
In order to motivate and retain employees, on June 9, 1998, the Company
offered employees participating in the Company's Stock Option Plans the
opportunity to cancel the exercisable and unexercisable portions of their stock
options as of June 9, 1998, previously a portion of which were repriced in May
1997, and replace them with an equal number of options at an exercise price of
$1.00, which was the closing market price on such date. The Company did not
offer this opportunity to the then President and Chief Executive Officer, but
offered this opportunity to employees as an incentive to encourage employee
retention. Approximately 945,235 stock options with exercise prices ranging from
$1.25 to $23.75 were replaced. The replacement options vest as follows: the
number of previously granted options exercisable on June 9, 1998 became
exercisable on December 9, 1998; and the number of previously granted options
unexercisable as of June 9, 1998 will become exercisable over three years from
June 9, 1998 in equal annual increments. As part of the process for the
Company's recruitment of a senior executive officer in December 1997, the
Company's then President and Chief Executive Officer agreed to cancel 425,000
options with an exercise price of $3.00 previously granted to him. In
consideration of this cancellation of options, the Compensation Committee of the
board of directors repriced 850,000 options previously granted to the executive
(of which 750,000 were vested) from an exercise price of $7.13 to an exercise
price of $1.80. The vesting schedule for the repriced options was also changed
to provide that 425,000 options are vested and the remaining 425,000 options
will vest in 2002, but will accelerate upon certain stock performance
milestones. The Compensation Committee approved the repricing in February 1998.
A summary of the changes in stock options for each of the Company's
stock option plans is as follows:
Exercise Prices
------------------ Number
Description Minimum Maximum of Options
----------- ------- ------- -------------
December 31, 1995 $0.98 $23.75 2,441,705
Acquired in Mergers $0.21 $20.38 474,800
Granted $7.00 $23.50 756,530
Exercised $0.98 $18.75 (353,182)
Canceled $0.98 $23.13 (195,294)
-------------
December 31, 1996 $0.21 $23.75 3,124,559
Granted $1.63 $6.00 2,916,450
Exercised $4.50 $4.50 (1,000)
Canceled $0.21 $23.75 (1,305,796)
-------------
December 31, 1997 $0.21 $23.75 4,734,213
Granted $0.63 $1.78 893,650
Exercised $0.98 $0.98 (300,000)
Canceled $1.00 $20.38 (2,346,600)
-------------
December 31, 1998 $0.63 $18.86 2,981,263
=============
During 1998, 1997 and 1996, the Company recognized $18,000, $115,000
and $128,000 of compensation expense, respectively, in connection with options
granted prior to 1996, at exercise prices below the estimated fair market value
of the Company's common stock at the date of grant.
(b) Stock Compensation Plans
At December 31, 1998, the Company had seven stock-based compensation
plans. The Company applies Accounting Principles Board Opinion No. 25 and
related Interpretations in accounting for stock options granted under the stock
compensation plans. Had compensation cost for the Company's stock compensation
plans been determined based on the fair value at the grant dates for the 1998,
1997 and 1996 awards under those plans, the Company's net loss and basic loss
per share for the years ended December 31, 1998, 1997 and 1996 would have been
$38,437,000 and $1.22 per share; $95,180,000 and $3.01 per share; and
$99,341,000 and $5.41 per share, respectively.
The weighted average fair value of options granted during 1998, 1997
and 1996 was $1.15, $2.57 and $16.69 per share, respectively. The fair value of
options granted was estimated on the date of grant using the Black-Scholes
option pricing model with the following weighted average assumptions: no
dividend yield, expected volatility of 136%, and a risk free interest rate of
5.28% per annum.
Options Outstanding Options Exercisable
--------------------------------- ----------------------
Weighted Weighted
Weighted Average Average
Range of Number Average Exercise Number of Exercise
Plan Description Exercise Prices Of Options Life Price Options Price
- ----------------------- --------------- ---------- -------- -------- --------- --------
1991 Plan $0.98 - $7.13 1,307,535 4.5 years $2.52 852,194 $2.93
Colonial Data Plan $1.00 - $8.50 79,000 7.4 years $1.84 48,331 $2.44
1995 Plan $1.00 - $18.00 167,912 5.9 years $4.00 89,206 $6.36
1995 Directors' Plan $18.86 - $18.86 7,500 9.8 years $18.86 6,458 $18.86
1996 Plan $0.63 - $3.00 1,365,316 7.7 years $1.28 55,666 $1.01
1996 Non-Employee
Directors' Plan $1.78 - $5.03 39,000 10.0 years $3.45 30,000 $3.95
Additional Plans $7.13 - $7.13 15,000 7.0 years $7.13 15,000 $7.13
The Company has options outstanding and exercisable in varying price
ranges. The schedule below details the Company's options by price range:
Options Outstanding Options Exercisable
----------------------------------------- --------------------
Weighted Weighted
Weighted Average Average
Range of Number Average Exercise Number of Exercise
Exercise Prices of Options Life Price Options Price
--------------- ---------- --------- -------- --------- --------
$0.62 - $0.99 198,235 4.0 years $0.90 100,435 $0.98
$1.00 - $1.50 1,381,950 6.8 years $1.02 216,677 $1.00
$1.51 - $2.00 872,500 5.6 years $1.80 435,875 $1.80
$2.01 - $18.86 528,578 5.2 years $5.80 343,868 $7.18
(c) Employee Stock Purchase Plan
Under the Employee Stock Purchase Plan, approved in 1996, the Company
is authorized to issue up to 500,000 shares of common stock to its full-time
employees, nearly all of whom are eligible to participate. Under the terms of
the Plan, employees can choose each period to have up to twenty percent of their
annual base earnings withheld to purchase the Company's common stock. The
purchase price of the stock is 85 percent of the lower of its
beginning-of-period or end-of-period market price. The Employee Stock Purchase
Plan's first period began January 2, 1997. During the year ended December 31,
1998, the Company issued 68,056 shares of stock under the plan. During the year
ended December 31, 1997, the Company issued 44,307 shares of stock under the
plan. The Company had an employee stock purchase plan in existence during 1996,
however, there was not a significant number of shares of stock sold under the
Plan in 1996.
(d) Treasury Stock
On August 12, 1997, the Company announced that its board of directors
authorized a stock repurchase program whereby the Company is authorized to
repurchase from time to time up to two million shares of the Company's common
stock from the open market. As of December 31, 1997, the Company had paid
$2,064,000 to repurchase 681,500 shares of its common stock. The Company did not
repurchase any shares in 1998.
(e) Stockholder Rights Plan
In January 1998, the Company announced that its Board of Directors
adopted a Stockholder Rights Plan. The rights are designed to assure that all
the Company's stockholders receive fair and equal treatment in the event of any
proposed takeover of the Company and to guard against partial tender offers,
open market accumulations and other tactics to gain control of the Company
without paying all stockholders a control premium.
Terms of the Stockholder Rights Plan provide for a dividend
distribution of one right for each share of common stock to holders of record at
the close of business on February 6, 1998. Shareholders will be able to exercise
the rights only in the event, with certain exceptions, an acquiring party
accumulates 20 percent or more of the Company's voting stock, or if a party (an
acquiring person) announces an offer to acquire 20 percent or more without prior
approval of the Company's Board of Directors. The rights will expire on January
21, 2008. Each right initially will entitle the holder to buy one one-thousandth
of a share of a new series of preferred stock at a price of $13.
In addition, upon the occurrence of certain events, holders of the
rights will be entitled to purchase either the Company's common stock or shares
in an acquiring person at half of market value. Further, at any time after a
person or group acquires 20 percent or more of the Company's outstanding voting
stock, the board of directors may, at its option, exchange part or all of the
rights (other than rights held by the acquiring person, which will become void)
for shares of the Company's common stock on a one-for-one basis. The rights will
therefore cause substantial dilution to a person or group that acquires 20
percent or more of the Company's common stock on terms not approved by the
board.
(11) UNUSUAL CHARGES
During the third quarter of 1997, the Company assessed and adjusted the
carrying value of goodwill associated with its acquisition of Braun Simmons. The
charge aggregated $2,035,000 for the impairment of intangible assets. The
impairment was based on the excess of the carrying value of the assets over the
assets' fair values. The fair value of the assets were generally determined as
the estimates of future discounted cash flows generated by the assets.
The Company recorded unusual charges aggregating $5,771,000 for the
year ended December 31, 1996. Unusual charges were associated with facilities
consolidations and charges associated with in-process research and development
from the Braun Simmons Acquisition. The Company recorded a provision for
facilities consolidations during the fourth quarter of 1996 of $857,000. During
1997, the Company incurred $301,000 in facilities consolidation costs in the
second quarter when it closed its customer service location in Virginia. The
remaining accrual for facilities consolidations did not occur because of cost
savings associated with employee severance and closing costs. Accordingly, these
expenses were reversed back into income during the second quarter of 1997. In
connection with the Braun Simmons Acquisition in September 1996, the Company
charged in-process research and development expenses for purchased in-process
technology that had not reached technological feasibility as of the date of the
Braun
Simmons Acquisition and did not have alternative future uses. Amounts charged to
in-process research and development were based on an independent appraisal and
totaled $4,914,000.
(12) EMPLOYEE 401(k) SAVINGS PLAN
The Company adopted a defined contribution plan ("Plan") that qualifies
for preferential tax treatment under Section 401(a) of the Internal Revenue
Code. Participation in the Plan is available to employees who are at least
twenty-one years of age and have three months of service. Company contributions
to the Plan are based on a percentage of employee contributions and were not
significant. Administrative expenses for the Plan were paid by the Company.
(13) INCOME TAXES
A reconciliation of taxes computed at the statutory federal tax rate on
loss before income taxes to the actual income tax expense is as follows (in
thousands):
Years ended December 31,
-------------------------------------------
1998 1997 1996
--------- --------- ---------
Income tax benefit computed at the statutory rate $ (13,244) $ (31,512) $ (33,496)
Book expenses not deductible for tax purposes 12,547 27,190 28,378
Generation of net operating loss carryforwards 697 4,322 5,118
State income tax net of federal benefit -- 61 25
Income taxes related to discontinued operations -- (61) (25)
--------- --------- ---------
Income taxes $ -- $ -- $ --
========= ========= =========
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and liabilities at December 31, 1998 and
1997, are as follows (in thousands):
1998 1997
-------- --------
Deferred tax assets:
Net operating loss carryforwards $ 62,758 $ 20,469
Accounts receivable and inventory revaluation 6,730 9,811
Equipment, property and intangible assets 15,268 122
General business credit carryforward 489 489
Alternative minimum tax carryforward 60 60
-------- --------
Total gross deferred tax asset 85,305 30,951
Valuation allowance (85,305) (30,951)
-------- --------
Net deferred tax assets -- --
Deferred tax liability:
Accounts payable and accrued liabilities -- --
-------- --------
Net deferred taxes $ -- $ --
======== ========
The net changes in the total valuation allowance for the years ended
December 31, 1998 and 1997 were an increase of $52,689,000 and $8,741,000
respectively. A valuation allowance was established for deferred tax assets for
the years ended December 31, 1998 and 1997 because it was deemed, based on
available evidence, that it is more likely than not that all of the deferred tax
asset will not be realized.
At December 31, 1998, the Company had net operating loss carryforwards
for federal income tax purposes of approximately $63 million, which expire in
2007 through 2013, general business tax credits of approximately $489,000, which
expire in 2005 through 2010, and an alternative minimum tax credit carryforward
of approximately $60,000, which may be carried forward indefinitely and used to
offset future regular taxable income. Included in the Company's net operating
loss carryforward is approximately $3,521,000, related to exercises of employee
stock options, which, if utilized in the future to reduce taxable income, will
be credited directly to additional paid-in capital. Cash paid for income taxes
was not significant in 1998, 1997 and 1996.
(14) MAJOR CUSTOMERS AND CONCENTRATION OF CREDIT RISK
Financial instruments that potentially subject the Company to credit
risk consist principally of trade receivables. The Company sells its products
primarily to financial institutions in the United States and leases to
individual consumers. The Company believes that the concentration of credit risk
in its trade receivables is substantially mitigated by the Company's ongoing
credit evaluation process. 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. Historically, the Company has not incurred any
significant credit related losses.
Revenues from US West lease customers and the Visa Bill-Pay System
royalties represented 53% and 26% of total revenues for the year ended December
31, 1998, respectively. Revenues from US West lease customers represented 68% of
total revenues for the year ended December 31, 1997. Revenues from US West lease
customers and Visa InterActive were 38% and 26% of total revenues for the year
ended December 31, 1996.
Accounts receivable from US West lease customers, Branch Bank & Trust
Co., and Summit Services Corp. represented 41%, 15% and 12% of the total
accounts receivable as of December 31, 1998, respectively. Accounts receivable
from US West lease customers represented 94% of the total accounts receivable at
December 31, 1997.
(15) COMMITMENTS AND CONTINGENCIES
(a) Leases
The Company leases facilities and equipment under cancelable and
noncancellable operating lease agreements. The facility leases are for terms
from one to five years. Rent expense was $877,000, $1,054,000 and $907,000 for
the years ended December 31, 1998, 1997 and 1996, respectively.
Future minimum lease payments under noncancellable operating leases
with initial or remaining terms in excess of one year at December 31, 1998, were
as follows (in thousands):
Year ending December 31,
------------------------
1999 $ 687
2000 551
2001 519
2002 156
2003 156
2004 13
------------
Total minimum lease payments $ 2,082
============
(b) Patent Matters
The Company does not believe that its products and services infringe on
the rights of third parties. From time to time, third parties assert
infringement claims against InteliData. There can be no assurance that any such
assertion will not result in costly litigation or require the Company to cease
using, or obtain a license to use, intellectual property rights of such parties.
(c) Litigation
The Company is not currently a party to any material litigation. From
time to time, the Company is a party to routine litigation incidental to its
business. Management does not believe that the resolution of any or all of such
routine litigation will be likely to have a material adverse effect on the
Company's financial condition or results of operations.
(16) VALUATION AND QUALIFYING ACCOUNTS
The components of significant valuation and qualifying accounts
associated with accounts receivable for the years ended December 31, 1998 and
1997 were as follows (in thousands):
Balance, December 31, 1996 $ 1,788
Write-offs (86)
--------
Balance, December 31, 1997 1,702
Recoveries (361)
Charged to costs and expenses 21
Write-offs (770)
--------
Balance, December 31, 1998 $ 592
========
(17) UNAUDITED QUARTERLY FINANCIAL DATA
The results of the Company's quarterly operations for the years ended
December 31, 1998 and 1997 were (in thousands, except per share amounts):
First Second Third Fourth Total
---------- ---------- ---------- ---------- ---------
1998
Revenues $ 2,471 $ 2,151 $ 2,725 $ 2,680 $ 10,027
Operating loss (961) (1,599) (793) (1,137) (4,490)
Loss before income taxes (825) (1,049) (761) (981) (3,616)
Discontinued operations (3,997) (21,720) (2,825) (5,681) (34,223)
Net loss (4,822) (22,769) (3,586) (6,662) (37,839)
Basic and diluted loss from continuing
operations per common share $ (0.03) $ (0.03) $ (0.02) $ (0.03) $ (0.11)
Basic and diluted loss from discontinued
operations per common share $ (0.12) $ (0.70) $ (0.09) $ (0.18) $ (1.09)
Basic and diluted net loss per
common share $ (0.15) $ (0.73) $ (0.11) $ (0.21) $ (1.20)
1997
Revenues $ 3,966 $ 3,266 $ 2,811 $ 2,478 $ 12,521
Operating loss (841) (1,929) (7,675) (1,989) (12,434)
Loss before income taxes (403) 384 (7,976) (3,168) (11,163)
Discontinued operations 568 (3,221) (71,202) (5,076) (78,931)
Net income (loss) 165 (2,837) (79,178) (8,244) (90,094)
Basic (loss) income from continuing
operations per common share $ (0.01) $ 0.01 $ (0.25) $ (0.10) $ (0.35)
Diluted (loss) income from continuing
operations per common share $ (0.01) $ 0.00 $ (0.25) $ (0.10) $ (0.35)
Basic income (loss) from discontinued
operations per common share $ 0.02 $ (0.10) $ (2.26) $ (0.16) $ (2.50)
Diluted income (loss) from discontinued
operations per common share $ 0.01 $ (0.09) $ (2.26) $ (0.16) $ (2.50)
Basic income (loss) per
common share $ 0.01 $ (0.09) $ (2.51) $ (0.26) $ (2.85)
Diluted income (loss) per
common share $ 0.00 $ (0.09) $ (2.51) $ (0.26) $ (2.85)
During the third quarter of 1997, the Company announced a strategic
repositioning and determined that it would be appropriate to charge
to operations the remaining unamortized costs of intangible assets
due to impairment, and inventory carrying amounts to the lower of
cost or market, and to reflect certain restructuring charges. Such
transactions resulted in aggregate charges of $2,035,000 to
continuing operations and $65,200,000 to discontinued operations.
During the second quarter of 1998, the Company announced that it
intended to discontinue its telecommunications division. The loss
from the operation of discontinued operations, net of income taxes,
was $13,487,000 during the second quarter of 1998. The loss on
disposal of the discontinued operations was $8,233,000 for the
second quarter of 1998.
Loss per share number are not necessarily additive due to current
year activities and rounding differences.
INDEPENDENT AUDITORS' REPORT
Board of Directors and Stockholders
InteliData Technologies Corporation
Herndon, Virginia
We have audited the accompanying consolidated balance sheets of InteliData
Technologies Corporation and subsidiaries (the "Company") as of December 31,
1998 and 1997, and the related consolidated statements of operations,
stockholders' equity, and cash flows for each of the three years in the period
ended December 31, 1998. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of InteliData Technologies Corporation
and subsidiaries as of December 31, 1998 and 1997, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1998, in conformity with generally accepted accounting principles.
The accompanying consolidated financial statements for the year ended December
31, 1998 have been prepared assuming that the Company will continue as a going
concern. As discussed in Note 3 to the financial statements, the Company has
recurring losses from operations and has negative working capital, which raises
substantial doubt about its ability to continue as a going concern. Management's
plans concerning these matters are also described in Note 3. The financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.
/s/ DELOITTE & TOUCHE LLP
McLean, Virginia
February 26, 1999
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
- ---------------------------------------------------------
ACCOUNTING AND FINANCIAL DISCLOSURE
-----------------------------------
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
- -------------------------------------------------------------
Directors
The Company incorporates herein by reference the information concerning
directors contained in its Proxy Statement for its 1999 Stockholder's Meeting to
be filed within 120 days after the end of the Company's fiscal year (the "1999
Proxy Statement").
Executive Officers
The following table sets forth the names and ages of all executive
officers of the Company and all positions and offices within the Company
presently held by such executive officers:
Name Age Position Held
- ---- --- -------------
William F. Gorog 73 Chairman of the Board
Alfred S. Dominick, Jr. 53 President and Chief Executive Officer
E. Philip Hanlon 50 Vice President and Chief Financial Officer
Thomas R. Oxendine 50 Vice President, Engineering and Implementation
Services
Albert N. Wergley 51 Vice President, General Counsel and Secretary
William F. Gorog has served as Chairman and director of the Company since
November 1996. Mr. Gorog had served as Chairman of US Order from May 1990 to
November 1996. From October 1987 until founding US Order in May 1990, he served
as chairman of the board of Arbor International, an investment management firm.
From 1982 to 1987, he served as president and chief executive officer of the
Magazine Publishers of America, an association representing the principal
consumer publications in the United States. During the Ford Administration, Mr.
Gorog served as deputy assistant to the President for Economic Affairs and
Executive Director of the Council on International Economic Policy. Prior to
that time, he founded and served as chief executive officer of DataCorp., which
developed the Lexis and Nexis information systems for legal and media research
and which was subsequently sold to the Mead Corporation. He currently serves as
a director of WorldCorp.
Alfred S. Dominick, Jr. has served as the President and Chief Executive Officer
of the Company since August 1998. Prior to joining InteliData, Mr. Dominick had
served as president of the Retail Products Delivery Group at M&I Data Services.
Prior to joining M&I Data Services in July 1995, he was Executive Vice President
of Retail Banking and a member of the Executive Committee for Boatmen's
Bancshares Corporation for three years. Prior to that Mr. Dominick was an
Executive Vice President with Bank One Texas, since 1985. Prior to Bank One
Texas, Mr. Dominick was a Senior Vice President with Fleet National Bank. Mr.
Dominick currently serves as a director at Home Financial Network, Inc.
E. Philip Hanlon has served as Vice President and Chief Financial Officer of the
Company since November 1998. From 1992 to 1998, he was Chief Financial Officer
of Waverly, Inc.,
an international publisher of medical print and electronic media. From 1985 to
1992, he held other management positions at Waverly, including Vice President,
Finance, Vice President, Marketing-Book Division, and Controller. Previously,
Mr. Hanlon held various financial management positions with Transcontinental
Energy and Nabors Drilling, Limited. Mr. Hanlon is a Certified Public
Accountant.
Thomas R. Oxendine has served as Vice President, Engineering and Implementation
Services, of the Company since June 1998. From 1994 to 1998, he was Executive
Vice President, Banking Systems, for Olivetti North America. From 1991 to 1994,
he served as Vice President, Systems Division, and from 1988 to 1991, he was
Regional Manager, Implementation and Support, for Olivetti North America.
Previously he held various management positions with Ericsson Information
Systems, ISC Systems Corp., and Durango Systems.
Albert N. Wergley has served as Vice President and General Counsel of the
Company since November 1996. From May 1995 to November 1996, he served as Vice
President and General Counsel of US Order. From 1986 to 1994, Mr. Wergley was
vice president and general counsel of Verdix Corporation (now Rational Software
Corporation), a manufacturer of software development tools. Previous to that he
was associated with the McLean, Virginia office of the law firm of Reed Smith
Shaw & McClay and with the law firm of Howrey & Simon in Washington, D.C.
Beneficial Ownership Reporting
The Company incorporates herein by reference the information required
by Item 405 of Regulation S-K contained in its 1999 Proxy Statement.
ITEM 11. EXECUTIVE COMPENSATION
- -------------------------------
The Company incorporates herein by reference the information concerning
executive compensation contained in the 1999 Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
- -----------------------------------------------------------------------
The Company incorporates herein by reference the information concerning
security ownership of certain beneficial owners and management contained in the
1999 Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
- -------------------------------------------------------
The Company incorporates herein by reference the information concerning
certain relationships and related transactions contained in the 1999 Proxy
Statement.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
- -------------------------------------------------------------------------
(a) 1. FINANCIAL STATEMENTS
See Item 8 of this Report
2. FINANCIAL STATEMENT SCHEDULES
See Item 8 of this Report
3. EXHIBITS (* denotes filed herewith)
Status of Prior Documents
InteliData's Annual Report on Form 10-K for the year ended
December 31, 1998, at the time of filing with the Securities and
Exchange Commission, shall modify and supersede all prior
documents filed pursuant to Sections 13, 14, and 15(d) of the
Securities Exchange Act of 1934 for purposes of any offers or
sales of any securities after the date of such filing pursuant to
any Registration Statement or Prospectus filed pursuant to the
Securities Act of 1933, as amended, which incorporates by
reference such Annual Report on Form 10-K.
3.1 Certificate of Incorporation of InteliData Technologies
Corporation. (Incorporated herein by reference to the
Company's Registration Statement on Form S-4, File Number
333-11081).
3.2 Bylaws of InteliData Technologies Corporation.
(Incorporated herein by reference to the Company's
Registration Statement on Form S-4, File Number
333-11081).
10.1 US Order, Inc. 1991 Stock Option Plan. (Incorporated
herein by reference to the US Order Registration Statement
on Form S-1, File Number 33-90978).
10.2 US Order, Inc. 1995 Incentive Plan. (Incorporated herein
by reference to the US Order Registration Statement on
Form S-1, File Number 33-90978).
10.3 US Order, Inc. Non-Employee Directors' and Directors'
Stock Option Plans. (Incorporated herein by reference to
the US Order Registration Statements on Form S-8, File
Numbers 333-2348 and 333-2346).
10.4 InteliData Technologies Corporation 1996 Incentive Plan.
(Incorporated herein by reference to the Company's
Registration Statement on Form S-8, File Number
333-16115).
10.5 InteliData Technologies Corporation Non-Employee
Directors' Stock Option Plan. (Incorporated herein by
reference to the Company's Registration Statement on Form
S-8, File Number 333-16117).
10.6 InteliData Technologies Corporation Employee Stock
Purchase Plan. (Incorporated herein by reference to the
Company's Registration Statement on Form S-8, File Number
333-16121).
10.7 Employment Agreement dated August 11, 1997 between
InteliData Technologies Corporation and John C. Backus,
Jr. (Incorporated herein by reference to Exhibit 10 to
Registrant's Report on Form 10-Q of the quarter ended
September 30, 1997, File Number 000-21685).
10.8 Employment and Non-Competition Agreement dated December
17, 1997 between InteliData Technologies Corporation and
Mark L. Baird.
10.9 Employment and Non-Competition Agreement dated December
17, 1997 between InteliData Technologies Corporation and
Albert N. Wergley.
* 10.10 Employment and Non-Competition Agreement dated November
3, 1998 between InteliData Technologies Corporation and
Thomas R. Oxendine.
* 10.11 Stock Option Agreement for the 1991 Stock Option Plan
dated February 24, 1998 between InteliData Technologies
Corporation and John C. Backus, Jr.
* 10.12 Stock Option Agreement for the 1991 Stock Option Plan
dated February 24, 1998 between InteliData Technologies
Corporation and John C. Backus, Jr. Irrevocable Trust
dated April 21, 1995, John Carlton Backus, Trustee
* 10.13 Stock Option Agreement for the 1996 Incentive Plan dated
February 24, 1998 between InteliData Technologies
Corporation and John C. Backus, Jr.
21.1 InteliData Technologies Corporation List of Significant
Subsidiaries.
23.1 Consent of Deloitte & Touche LLP.
27.1 Financial Data Schedule, December 31, 1998.
(b) REPORTS ON FORM 8-K
None.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
INTELIDATA TECHNOLOGIES CORPORATION
By /s/ Alfred S. Dominick, Jr.
-------------------------------------
Alfred S. Dominick, Jr.
President and Chief Executive Officer
(Principal Executive Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.
Signature Title Date
- --------- ----- ----
/s/ Alfred S. Dominick, Jr. President and Chief Executive Officer March 31, 1999
- --------------------------- and Director
Alfred S. Dominick, Jr.
/s/ William F. Gorog Chairman of the Board and Director March 31, 1999
- --------------------
William F. Gorog
/s/ E. Philip Hanlon Vice President and Chief Financial March 31, 1999
- -------------------- Officer
E. Philip Hanlon
/s/ John C. Backus, Jr. Director March 31, 1999
- -----------------------
John C. Backus, Jr.
/s/ Patrick F. Graham Director March 31, 1999
- ---------------------
Patrick F. Graham
/s/ John J. McDonnell, Jr. Director March 31, 1999
- --------------------------
John J. McDonnell, Jr.
/s/ L. William Seidman Director March 31, 1999
- ----------------------
L. William Seidman