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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------------
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
------------------------------------------------
For the Quarter ended: September 30, 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)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
------- -------
The number of shares of the registrant's Common Stock outstanding on September
30, 1998 was 31,636,916.
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<PAGE>
INTELIDATA TECHNOLOGIES CORPORATION
QUARTERLY REPORT ON FORM 10-Q
TABLE OF CONTENTS
Page
----
PART I - FINANCIAL INFORMATION
Item 1. Unaudited Condensed Consolidated Financial Statements
Condensed Consolidated Balance Sheets
September 30, 1998 and December 31, 1997 ................. 3
Condensed Consolidated Statements of Operations
Three Months and Nine Months Ended September 30,
1998 and 1997 ............................................ 4
Condensed Consolidated Statement of Changes in Stockholders'
Equity
Nine Months Ended September 30, 1998...................... 5
Condensed Consolidated Statements of Cash Flows
Nine Months Ended September 30, 1998 and 1997............. 6
Notes to Condensed Consolidated Financial Statements ..... 7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations ................................ 9
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.......................... 18
SIGNATURES .......................................................... 19
<PAGE>
PART I: FINANCIAL INFORMATION
- ------------------------------
ITEM 1: FINANCIAL STATEMENTS
- -----------------------------
INTELIDATA TECHNOLOGIES CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 1998 AND DECEMBER 31, 1997
(in thousands, except share data)
<TABLE>
1998 1997
(unaudited)
------------ ------------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 6,625 $ 2,055
Short-term investments -- 9,304
Accounts receivable, net of allowances of $296
in 1998 and $461 in 1997 1,332 1,309
Inventories 29 7
Net assets of discontinued operations 4,494 32,618
Prepaid expenses and other current assets 106 158
------------ ------------
Total current assets 12,586 45,451
NONCURRENT ASSETS
Property and equipment, net 442 923
Other assets 259 328
------------ ------------
TOTAL ASSETS $ 13,287 $ 46,702
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 882 $ 756
Accrued expenses and other liabilities 2,899 4,231
Deferred revenues 3,074 3,396
------------ ------------
Total current liabilities 6,855 8,383
NONCURRENT LIABILITIES
Deferred revenues -- 1,250
------------ ------------
TOTAL LIABILITIES 6,855 9,633
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Preferred stock, $0.001 par value; authorized 5,000,000 shares;
no shares issued and outstanding -- --
Common stock, $0.001 par value; authorized 60,000,000 shares;
issued 32,318,416 shares in 1998 and 31,862,449 shares in 1997;
outstanding 31,636,916 shares in 1998 and 31,180,949 in 1997 32 32
Additional paid-in capital 246,907 245,699
Treasury stock, at cost (2,064) (2,064)
Deferred compensation (261) (18)
Accumulated other comprehensive income -- 425
Accumulated deficit (238,182) (207,005)
------------ ------------
TOTAL STOCKHOLDERS' EQUITY 6,432 37,069
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 13,287 $ 46,702
============ ============
</TABLE>
See accompanying notes to condensed consolidated financial statements.
<PAGE>
INTELIDATA TECHNOLOGIES CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
(in thousands, except per share data; unaudited)
<TABLE>
Three months ended Nine months ended
September 30, September 30,
---------------------------- ----------------------------
1998 1997 1998 1997
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
REVENUES
Software $ 416 $ 274 $ 416 $ 775
Consulting and services 415 314 626 973
Leasing and other 1,894 2,223 6,305 8,295
----------- ----------- ----------- -----------
Total revenues 2,725 2,811 7,347 10,043
----------- ----------- ----------- -----------
COST OF REVENUES
Software -- -- -- 223
Consulting and services 162 270 196 860
Leasing and other 400 1,484 1,629 4,839
----------- ----------- ----------- ----------
Total cost of revenues 562 1,754 1,825 5,922
----------- ----------- ----------- -----------
GROSS PROFIT 2,163 1,057 5,522 4,121
OPERATING EXPENSES
General and administrative 1,586 2,727 4,861 6,221
Selling and marketing 714 564 2,001 1,216
Research and development 656 1,141 2,013 3,423
----------- ----------- ----------- -----------
Total operating expenses 2,956 4,432 8,875 10,860
----------- ----------- ----------- -----------
OPERATING LOSS (793) (3,375) (3,353) (6,739)
----------- ----------- ----------- -----------
OTHER INCOME 32 299 718 1,155
----------- ----------- ----------- -----------
LOSS BEFORE INCOME TAXES (761) (3,076) (2,635) (5,584)
INCOME TAXES -- -- -- --
----------- ----------- ----------- -----------
LOSS FROM CONTINUING OPERATIONS (761) (3,076) (2,635) (5,584)
DISCONTINUED OPERATIONS
Loss from operation of telecommunications and
interactive service divisions (net of income taxes) (1,325) (76,102) (18,049) (76,266)
Loss on disposal of telecommunications and
interactive service divisions (1,500) -- (10,493) --
----------- ----------- ----------- -----------
Total discontinued operations (2,825) (76,102) (28,542) (76,266)
----------- ----------- ----------- -----------
NET LOSS $ (3,586) $ (79,178) $ (31,177) $ (81,850)
=========== =========== =========== ===========
Basic and diluted loss from continuing operations
per common share $ (0.02) $ (0.10) $ (0.08) $ (0.18)
=========== =========== =========== ===========
Basic and diluted loss per common share $ (0.11) $ (2.51) $ (0.99) $ (2.58)
=========== =========== =========== ===========
Basic and diluted weighted average outstanding shares 31,644 31,497 31,397 31,711
=========== =========== =========== ===========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
<PAGE>
INTELIDATA TECHNOLOGIES CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
NINE MONTHS ENDED SEPTEMBER 30, 1998
(in thousands; unaudited)
<TABLE>
Accumulated
Common Stock Additional Other
--------------- paid-in Treasury Comprehensive Deferred Accumulated
Shares Amount capital Stock Income Compensation Deficit Total
------ ------ ---------- -------- ------------- ------------ ----------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1997 31,181 $ 32 $ 245,699 $ (2,064) $ 425 $ (18) $ (207,005) $ 37,069
Cancellation of common stock (33) -- (68) -- -- 68 -- --
Issuance of restricted common stock 153 -- 459 -- -- (459) -- --
Cancellation of accrued stock options -- -- 494 -- -- -- -- 494
Exercise of stock options 300 -- 294 -- -- -- -- 294
Employee stock purchase plan 35 -- 29 -- -- -- -- 29
Recognized gain on investments -- -- -- -- (425) -- -- (425)
Compensation expense -- -- -- -- -- 148 -- 148
Net loss -- -- -- -- -- -- (31,177) (31,177)
------ ------- ---------- ---------- -------- ------- ----------- ---------
Balance at September 30, 1998 31,636 $ 32 $ 246,907 $ (2,064) $ -- $ (261) $ (238,182) $ 6,432
====== ======= ========== ========== ======== ======= =========== =========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
<PAGE>
INTELIDATA TECHNOLOGIES CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
(in thousands; unaudited)
<TABLE>
1998 1997
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES OF CONTINUING OPERATIONS
Loss from continuing operations $ (2,635) $ (5,584)
Adjustments to reconcile loss from continuing operations
to net cash used in operating activities for continuing operations:
Depreciation and amortization 488 2,375
Deferred compensation and other noncash items 148 87
Changes in certain assets and liabilities:
Accounts receivable (23) 211
Inventories (22) --
Prepaid expenses and other current assets 52 894
Other assets 69 (303)
Accounts payable 126 (204)
Accrued expenses and other liabilities (1,332) 138
Deferred revenues (1,572) (286)
----------- -----------
Net cash used in operating activities for continuing operations (4,701) (2,672)
----------- -----------
CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES OF
DISCONTINUED OPERATIONS 1,151 (21,700)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from the sale of short-term investments 9,304 1,648
Purchases of property and equipment-continuing operations (7) (82)
Purchases of property and equipment-discontinued operations -- (869)
----------- -----------
Net cash provided by investing activities 9,297 697
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Payment of short-term borrowings-discontinued operations (1,500) (700)
Payments to acquire treasury stock -- (2,064)
Proceeds from the issuance of common stock 323 100
----------- -----------
Net cash used in financing activities (1,177) (2,664)
----------- -----------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 4,570 (26,339)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD FOR
CONTINUING AND DISCONTINUED OPERATIONS 2,055 26,644
----------- -----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD FOR CONTINUING
AND DISCONTINUED OPERATIONS $ 6,625 $ 305
========== ==========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
<PAGE>
INTELIDATA TECHNOLOGIES CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
(Unaudited)
(1) Basis of Presentation
The condensed consolidated balance sheet of InteliData
Technologies Corporation ("InteliData" or "Company") as of September
30, 1998, and the related condensed consolidated statements of
operations for the three and nine month periods ended September 30,
1998 and 1997, condensed consolidated statements of cash flows for the
nine month periods ended September 30, 1998 and 1997 and condensed
consolidated statement of changes in stockholder's equity for the nine
month period ended September 30, 1998 presented in this Form 10-Q are
unaudited. In the opinion of management, all adjustments necessary for
a fair presentation of such financial statements have been included.
Such adjustments consist only of normal recurring items. Interim
results are not necessarily indicative of results for a full year.
Certain amounts have been reclassified to conform to the current year
presentation. During the second quarter of 1998, the Company adopted a
plan to dispose of the telecommunications division through a sale or
liquidation. As a result, certain financial information previously
issued has been restated to give effect to the classification of this
business as discontinued operations.
The condensed consolidated financial statements and notes are
presented as required by Form 10-Q, and do not contain certain
information included in the Company's annual audited financial
statements and notes. These financial statements should be read in
conjunction with the annual audited financial statements of the Company
and the notes thereto, together with management's discussion and
analysis of financial condition and results of operations, contained in
the Form 10-K for the fiscal year ended December 31, 1997.
(2) Discontinued Operations
During the second quarter of 1998, the Company adopted a plan
to dispose of its various telecommunications divisions through a sale
or liquidation. The Company's Caller ID adjunct inventory was sold in
May 1998. Negotiations for the sale of some or all of the remaining
telecommunications assets are being conducted with various parties. At
September 30, 1998, the net assets of discontinued operations,
consisting primarily of inventories, trade receivables, equipment,
warehouse facilities, and liabilities expected to be assumed by others,
have been reclassified as current assets at their estimated net
realizable value.
Revenues from discontinued operations were $5,404,000 and
$8,897,000 for the three months ended September 30, 1998 and 1997,
respectively. Revenues from discontinued operations were $25,067,000
and $40,092,000 for the nine months ended September 30, 1998 and 1997,
respectively. Included within the loss on disposal was a loss for
discontinued operations aggregating $5,081,000 for the period from the
measurement date, June 1, 1998, to September 30, 1998. Also included in
the loss on
<PAGE>
disposal is a pretax provision of $5,412,000 for estimated operating
losses during the phase-out period, which is expected to be from June
1, 1998 through March 31, 1999. Loss from discontinued operations is
net of income tax benefits associated with the operations of the
telecommunications divisions of $1,422,000. Noncash activities in the
loss from discontinued operations for the nine month period ended
September 30, 1998 include $15,283,000 for the write-down of
inventories and provision for sales returns; and $751,000 for
depreciation and amortization. Noncash activities in the loss on
disposal of discontinued operations for the nine months ended
September 30, 1998 include $3,538,000 for the write-down of property,
plant and equipment. Noncash activities associated with discontinued
operations for the nine month period ended September 30, 1997 include
$1,905,000 for depreciation and amortization.
(3) Stockholders' Equity
On February 24, 1998, the Company's Board of Directors
approved the issuance of up to 200,000 restricted shares of the
Company's common stock under the Company's 1996 Incentive Plan to
employees of the home banking division. Since April 1, 1998, 130,500 of
such shares have been issued to employees, net of forfeitures. Under
the terms of the stock award, the shares may not be sold or transferred
for a period of eighteen months from the date of grant and the shares
are forfeitable should the employee's employment with the Company
terminate prior to the end of the holding period.
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 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 President and
Chief Executive Officer, but offered this opportunity to employees as
an incentive to encourage employee retention. Approximately 944,235
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 will become
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.
<PAGE>
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
- ----------------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS
-----------------------------------
Results of Operations
- ---------------------
The following represents the results of operations for InteliData Technologies
Corporation for the three and nine months ended September 30, 1998 and 1997.
Such information should be read in conjunction with the interim financial
statements and the notes thereto in Part I, Item 1 of this Quarterly Report.
THREE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
Revenues
The Company's third quarter revenues were $2,725,000 in 1998 compared
to $2,811,000 in 1997, a decrease of 3% or $86,000. Revenues were relatively
constant from the same period in the prior year, however, there were significant
changes in the Company's product mix, primarily related to the decline in lease
revenues, offset in part by the increase attributed to Visa royalties, and
increased revenues from software sales and consulting services. The Company sold
home banking related software aggregating $416,000 during the third quarter of
1998 compared to $274,000 in software revenues in the same period in 1997.
Consulting and services revenues aggregated $415,000 in the third quarter of
1998 for services associated with installations, special projects and
feasibility studies for potential financial institution and banking clients.
During the same period in 1997, the Company aggregated $314,000 in customer
support revenues, which were remarketed by Visa InterActive to Visa member
banks. Leasing and other revenues aggregated $1,894,000 in the third quarter of
1998 compared to $2,223,000 in the third quarter of 1997. During the third
quarter of 1998, revenues from leasing and other operations consisted of
$1,158,000 from customers within its lease base, $111,000 in revenues from
maintenance contracts related to the sale of software, and $625,000 from
deferred royalty revenues related to an agreement whereby the Company was
prepaid for certain royalties in the fourth quarter of 1997. During the same
period in 1997, the Company recognized $1,987,000 from customers within its
lease base and $236,000 from monthly service fees for bill pay operations. The
number of active records in the Company's installed lease base historically
decreases at a rate of approximately 30% per year. The Company expects this
trend to continue and expects leasing to become a less significant portion of
revenues as its software products gain market share.
Cost of Revenues
The Company's third quarter cost of revenues were $562,000 in 1998
compared to $1,754,000 in 1997, a decrease of 68% or $1,192,000. The Company did
not recognize any cost of sales associated with its software revenues during the
third quarter of 1998 and 1997 because costs associated with software revenues
were expensed to operations during the period of development. Consulting and
services cost of revenues aggregated $162,000 in the third quarter of 1998 for
services associated with installations, special projects and feasibility studies
for potential clients. During the same period in 1997, the Company aggregated
$270,000 in cost of revenues for customer support revenues, which were
remarketed by Visa InterActive to Visa
<PAGE>
member banks. Cost of revenues associated with leasing and other operations
aggregated $400,000 in the third quarter of 1998 compared to $1,484,000 in the
third quarter of 1997. During the third quarter of 1998, the Company recognized
cost of revenues aggregating $400,000 for its lease base. During the third
quarter of 1997, the Company recognized cost of revenues aggregating $1,254,000
from customers within its lease base and $230,000 from monthly service fees for
bill pay operations. The decrease in cost of revenues for the Company's lease
base from the third quarter of 1997 to the third quarter of 1998 was attributed
to the lease base becoming fully depreciated in the first quarter of 1998 and a
decrease in the number of active lease customers.
Overall gross profit margins increased to 79% for the third quarter of
1998 from 38% for the third quarter of 1997. The large increase in gross profit
margins was attributed primarily to a shift in the source of revenues for the
Company and the full depreciation of the Company's lease base. The Company
anticipates that gross profit margins may fluctuate in the future due to changes
in product mix, competitive pricing pressure, the introduction of new products
and changes in the volume and terms of leasing activity.
General and Administrative
General and administrative expenses were $1,586,000 for the third
quarter of 1998 as compared to $2,727,000 in the third quarter of 1997. The
decrease of $1,141,000 was attributed primarily to unusual and nonrecurring
charges for bad debts of $541,000, facilities expenses of $83,000, staff
reductions of $78,000, and estimated legal expenses of $68,000 recorded as part
of the Company's overhead in the third quarter of 1997. Exclusive of these
charges, general and administrative expenses decreased $371,000 from the same
period in the prior year. This decrease is primarily attributed to a reduction
in headcount and other comprehensive cost reduction measures implemented by the
Company as well as the reduction of goodwill amortization expense resulting from
a valuation adjustment in the third quarter of 1997. Throughout the year, the
Company expects to control general and administrative expenses and plans to
continually assess its operations in managing the continued development of
infrastructure to handle anticipated business levels.
Selling and Marketing
Selling and marketing expenses increased to $714,000 for the third
quarter of 1998 from $564,000 for the same period last year. The Company is
continually expanding its marketing efforts in promoting and developing its
products. The increase of 27% or $150,000 from the same period last year is
attributed primarily to increased direct selling costs related to the
introduction of new products to financial institutions.
Research and Development
Research and development costs were $656,000 in the third quarter of
1998 compared to $1,141,000 for the same period in 1997. The decrease of
$485,000 was largely attributable to cost saving measures relating to personnel
costs and more focused research and development efforts.
<PAGE>
Other Income
Other income, primarily investment income, was $32,000 for the third
quarter of 1998 compared to $299,000 for the same period in the prior year. The
decrease of $267,000 was attributed to the liquidation of the Company's
investment portfolio and maintaining cash and equivalents in risk-free
investments during the third quarter of 1998 compared to the same period last
year.
Discontinued Operations
During the second quarter of 1998, the Company adopted a plan to
dispose of its various telecommunications divisions through a sale or
liquidation. The Company's Caller ID adjunct inventory was sold in May 1998.
Negotiations for the sale of some or all of the remaining telecommunications
assets are being conducted with various parties. At September 30, 1998, the net
assets of discontinued operations, consisting primarily of inventories, trade
receivables, equipment, warehouse facilities and liabilities expected to be
assumed by others, have been reclassified as current assets at their estimated
net realizable value.
Revenues from discontinued operations were $5,404,000 and $8,897,000
for the three months ended September 30, 1998 and 1997, respectively. Included
within the loss on disposal was a loss associated with a particular product line
for $2,825,000 relating to inventory write-downs and additional sales returns.
Weighted Average Outstanding Shares and Basic and Diluted Loss Per Common Share
The basic and diluted weighted average shares increased to 31,644,000
for the third quarter of 1998 compared to 31,497,000 for the third quarter of
1997. The increase resulted primarily from shares issued to certain employees
during the second quarter of 1998 in accordance with the Company's 1996
Incentive Plan. As a result of the foregoing, basic and diluted loss per common
share from continuing operations was $(0.02) for the third quarter of 1998
compared to $(0.10) for the third quarter of 1997; basic and diluted loss per
common share was $(0.11) for the third quarter of 1998 compared to $(2.51) for
the third quarter of 1997.
NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
Revenues
The Company's revenues for the first nine months of 1998 were
$7,347,000 compared to $10,043,000 in 1997, a decrease of 27% or $2,696,000. The
decrease is attributed primarily to a significant change in the product mix, and
the decline in software, consulting and lease revenues, offset in part by the
increase attributed to Visa royalties. The Company sold $416,000 in home banking
related software during the first nine months of 1998 compared to $775,000 in
software revenues in the same period in 1997. Consulting and services revenues
aggregated $626,000 in the first nine months of 1998 for services associated
with installations, special projects and feasibility studies for potential
financial institution and banking clients. During the same period in 1997, the
Company aggregated $973,000 in customer support revenues, which were remarketed
by Visa InterActive to Visa member banks. Leasing and other revenues aggregated
<PAGE>
$6,305,000 in the first nine months of 1998 compared to $8,295,000 in the first
nine months of 1997. During the first nine months of 1998, revenues from leasing
and other operations consisted of $4,241,000 from customers within its lease
base, $189,000 in revenues from maintenance contracts related to the sale of
software, and $1,875,000 from deferred royalty revenues related to an agreement
whereby the Company was prepaid certain royalties in the fourth quarter of 1997.
During the same period in 1997, the Company recognized $7,008,000 from customers
within its lease base and $1,287,000 from monthly service fees for bill pay
operations. The number of active records in the Company's installed lease base
historically decreases at a rate of approximately 30% per year. The Company
expects this trend to continue and expects leasing to become a less significant
portion of revenues as its software products gain market share.
Cost of Revenues
The Company's cost of revenues for the first nine months of 1998 were
$1,825,000 compared to $5,922,000 in 1997, a decrease of 69% or $4,097,000. The
Company did not recognize any cost of sales associated with the sale of software
during the first nine months of 1998 compared to $223,000 in costs associated
with software sales in the same period in 1997. The Company did not recognize
any cost of sales associated with the sale of software during the first nine
months of 1998 because costs associated with software revenues were expensed to
operations during the period of development. Consulting and services cost of
revenues aggregated $196,000 in the first nine months of 1998 for services
associated with installations, special projects and feasibility studies for
potential clients. During the same period in 1997, the Company aggregated
$860,000 in cost of revenues for customer support revenues, which were
remarketed by Visa InterActive to Visa member banks. Cost of revenues associated
with leasing and other operations aggregated $1,629,000 in the first nine months
of 1998 compared to $4,839,000 in the same period of 1997. During the first nine
months of 1998, the Company recognized cost of revenues aggregating $1,629,000
for its lease base. During the same period in 1997, the Company recognized cost
of revenues aggregating $3,920,000 from customers within its lease base and
$919,000 from monthly service fees for bill pay operations. The decrease in cost
of revenues for the Company's lease base from the first nine months of 1997 to
the first nine months of 1998 was attributed primarily to the lease base
becoming fully depreciated in the first quarter of 1998 and a decrease in the
number of active lease customers.
Overall gross profit margins increased to 75% for the first nine months
of 1998 from 41% for the same period in 1997. The large increase in gross profit
margins was attributed primarily to a shift in the source of revenues for the
Company and the full depreciation of the Company's lease base. The Company
anticipates that gross profit margins may fluctuate in the future due to changes
in product mix, competitive pricing pressure, the introduction of new products
and changes in the volume and terms of leasing activity.
General and Administrative
General and administrative expenses were $4,861,000 for the first nine
months of 1998 as compared to $6,221,000 in the first nine months of 1997. The
decrease of $1,360,000 was attributed primarily to unusual and nonrecurring
charges for bad debts of $541,000, facilities expenses of $83,000, staff
reductions of $78,000 and, estimated legal expenses of $68,000 recorded as part
of the Company's overhead in the third quarter of 1997. Exclusive of these
<PAGE>
charges, general and administrative expenses decreased $590,000 from the same
period in the prior year. The decrease was attributed to a reduction in
headcount and other comprehensive cost reduction measures implemented by the
Company. Throughout the year, the Company expects to control general and
administrative expenses and plans to continually assess its operations in
managing the continued development of infrastructure to handle anticipated
business levels.
Selling and Marketing
Selling and marketing expenses increased to $2,001,000 for the first
nine months of 1998 from $1,216,000 for the same period last year. The large
increase is primarily attributed to unusually low selling and marketing expenses
in the first quarter of 1997. Considering the change in the Company's strategic
direction in the third quarter of 1997, the Company began investing in selling
and marketing programs. The Company is continually expanding its marketing
efforts in promoting its products. The increase of 65% or $785,000 from the same
period last year is attributed primarily to the change in strategic direction in
the third quarter of 1997 and increased direct selling costs related to the
introduction of new products to financial institutions.
Research and Development
Research and development costs were $2,013,000 in the first nine months
of 1998 compared to $3,423,000 for the same period in 1997. The decrease of
$1,410,000 was largely attributable to cost saving measures relating to
personnel costs and more focused research and development efforts.
Other Income
Other income, primarily investment income, was $718,000 for the first
nine months of 1998 compared to $1,155,000 for the same period in the prior
year. The decrease of $437,000 was attributed to decreased cash, equivalents and
short-term investment balances for the first nine months of 1998 compared to the
first nine months of 1997. The decrease in cash, equivalents and short-term
investment balances were related to the funding of the Company's working capital
and operations.
Discontinued Operations
During the second quarter of 1998, the Company adopted a plan to
dispose of its various telecommunications divisions through a sale or
liquidation. The Company's Caller ID adjunct inventory was sold in May 1998.
Negotiations for the sale of some or all of the remaining telecommunications
assets are being conducted with various parties. At September 30, 1998, the net
assets of discontinued operations, consisting primarily of inventories, trade
receivables, equipment, warehouse facilities and liabilities expected to be
assumed by others have been reclassified as current assets at the estimated net
realizable value.
Revenues from discontinued operations were $25,067,000 and $40,092,000
for the nine months ended September 30, 1998 and 1997, respectively. Included
within the loss on disposal was a loss for discontinued operations aggregating
$5,081,000 for the period from the
<PAGE>
measurement date, June 1, 1998, to September 30, 1998. Also included in the loss
on disposal is a pretax provision of $5,412,000 for estimated operating losses
during the phase-out period, which is expected to be from June 1, 1998 through
March 31, 1999. Loss from discontinued operations is net of income tax benefits
associated with the operations of the telecommunications divisions of
$1,422,000.
Weighted Average Outstanding Shares and Basic and Diluted Loss Per Common Share
The basic and diluted weighted average shares decreased to 31,397,000
for the first nine months of 1998 compared to 31,711,000 for the first nine
months of 1997. The decrease resulted primarily from the purchase of treasury
shares during the third quarter of 1997 and the cancellation of certain shares
of common stock in the first quarter of 1998; partially offset by an increase in
shares issued in accordance with the 1996 Incentive Plan. As a result of the
foregoing, basic and diluted loss per common share from continuing operations
was $(0.08) for the first nine months of 1998 compared to $(0.18) for the first
nine months of 1997; basic and diluted loss per common share was $(0.99) for the
first nine months of 1998 compared to $(2.58) for the first nine months of 1997.
LIQUIDITY AND CAPITAL RESOURCES
During the first nine months of 1998, the Company's cash, equivalents
and short-term investments increased by $4,570,000 resulting from the sale of
short-term investments offset by the payment of outstanding liabilities at
year-end, including short-term borrowings and the financing of certain
operations. At September 30, 1998, the Company had $6,625,000 in cash and cash
equivalents. At September 30, 1998, the Company had working capital of
$5,731,000 with no long-term debt. The Company's total assets exceeded total
liabilities by $6,432,000.
During the first nine months of 1998, cash used in operating activities
from continuing operations was $4,701,000 compared to $2,672,000 in the same
period in 1997. Cash flows from operating activities of continuing operations
during the first nine months of 1998 include certain fixed costs in operating
expenses, payment of certain liabilities and recognition of income related to
deferred revenues. Cash flows from operations during the first nine months of
1998 were primarily related to an increase in inventories of $22,000 and funding
payments from accrued expenses of $1,332,000, and recognition of income from
deferred revenues of $1,572,000; offset in part by decreases in prepaid expenses
and other assets aggregating $121,000 and increases in accounts payable of
$126,000. Cash flows from operating activities of discontinued operations during
the first nine months of 1998 were $1,151,000 compared to $21,700,000 used in
the same period in 1997. The change related primarily to the funding of accounts
receivable and inventory purchases in the prior year.
Investing activities provided $9,297,000 during the first nine months
of 1998 compared to providing $697,000 during the same period in 1997. Cash
provided by investing activities was primarily contributed by the sale of
short-term investments offset in part by the purchase of certain property and
equipment, primarily to support an upgrade for the Company's internal networks.
<PAGE>
Financing activities used $1,177,000 in the first nine months of 1998
compared to using $2,664,000 in the same period in 1997. Financing activities
consist primarily of the payment to acquire treasury stock and the payment of
short-term borrowings, offset in part by cash received from the exercise of
stock options.
The Company's primary needs for cash in the future are for investments
in product development, working capital, the financing of operations, capital
expenditures and the upgrade of the Company's systems and operations. In
addition, the Company may use cash for investments in strategic ventures,
potential acquisitions, and potential stock repurchases. In order to meet the
Company's needs for cash throughout the year, the Company will utilize cash
on-hand, cash generated through the future sale of certain assets associated
with discontinued operations, and may utilize, to the extent available, funds
generated from operations.
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
<PAGE>
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 and early 2000.
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 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
<PAGE>
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 above information includes forward-looking statements, the
realization of which may be impacted by the factors discussed below. The
forward-looking statements are made pursuant to the safe harbor provisions of
the Private Securities Litigation Reform Act of 1995 (the "Act"). This report
contains forward looking statements that are subject to risks and uncertainties,
including, but not limited to, the impact of competitive products, pricing
pressure, product demand and market acceptance risks, year 2000 compliance
issues, pace of consumer acceptance of home banking, bank mergers and
acquisitions, evolution of standards including Open Financial Exchange (OFX) and
the GOLD standard, risk of integration of the Company's technology by large
software companies, reliance on key strategic alliances and newly emerging
technologies, reliance on resellers, the on-going viability of the mainframe
marketplace and demand for traditional mainframe products, the ability to
attract and retain key employees, the availability of cash for growth, product
obsolescence, ability to reduce product costs, fluctuations in operating
results, ability to continue funding operating losses, delays in development of
highly complex products and other risks detailed from time to time in InteliData
filings with the Securities and Exchange Commission, including the risk factors
disclosed in the Company's Form 10-K for the fiscal year ended December 31,
1997. These risks could cause the Company's actual results for 1998 and beyond
to differ materially from those expressed in any forward looking statements made
by, or on behalf of, the Company. The foregoing list of factors should not be
construed as exhaustive or as any admission regarding the adequacy of
disclosures made by the Company prior to the date hereof or the effectiveness of
said Act.
<PAGE>
PART II: OTHER INFORMATION
- ---------------------------
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K
- ------------------------------------------
(a) Exhibits
--------
None
(b) Reports on Form 8-K
-------------------
None
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
INTELIDATA TECHNOLOGIES CORPORATION
By: /s/ Alfred S. Dominick, Jr.
------------------------------------------
Alfred S. Dominick, Jr.
President and Chief Executive Officer
By: /s/ E. Philip Hanlon
------------------------------------------
E. Philip Hanlon
Vice President and Chief Financial Officer
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