10-K 1 final10kmarch05.txt 2004 FILING SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 -------------- FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 -------------- For the fiscal year ended: Commission File Number: December 31, 2004 000-21685 INTELIDATA TECHNOLOGIES CORPORATION (Exact name of registrant as specified in its charter) DELAWARE 54-1820617 (State of incorporation) (I.R.S. Employer Identification Number) 11600 Sunrise Valley Drive, Suite 100, Reston, VA 20191 (Address of Principal Executive Offices) (Zip Code) (703) 259-3000 (Registrant's telephone number, including area code) Securities registered pursuant to Section 12(b) of the Act: Title of Each Class Name of Each Exchange on Which Registered ------------------- ----------------------------------------- None None Securities registered pursuant to Section 12(g) of the Act: Common Stock par value $0.001 per share Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No -------- -------- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K [ ]. The aggregate market value of the Common Stock held by non-affiliates of the registrant on June 30, 2004, was approximately $31,499,000 based on the last sales price reported that date on the Nasdaq Stock Market of $0.66 per share. In determining this figure, the Registrant has assumed that all of its directors and executive officers and each person who owns 5% or more of the outstanding common stock are affiliates. Such assumptions should not be deemed to be conclusive for any other purpose. Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act): Yes X No -------- -------- The number of shares of the registrant's Common Stock outstanding on March 28, 2005 was 51,133,492. DOCUMENTS INCORPORATED BY REFERENCE Portions of InteliData Technologies Corporation's Proxy Statement for its 2005 Annual Stockholder Meeting are incorporated by reference into Part III of this Report. INTELIDATA TECHNOLOGIES CORPORATION 2004 ANNUAL REPORT ON FORM 10-K TABLE OF CONTENTS Page PART I ------ Item 1. Business..............................................................3 Item 2. Properties............................................................8 Item 3. Legal Proceedings.....................................................9 Item 4. Submission of Matters to a Vote of Security Holders...................9 PART II ------- Item 5. Market for Registrant's Common Equity, Related Stockholder Matters...10 Item 6. Selected Financial Data..............................................11 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations................................................12 Item 7a. Quantitative and Qualitative Disclosures about Market Risk...........33 Item 8. Financial Statements and Supplementary Data..........................34 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.............................................59 Item 9A. Controls and Procedures..............................................59 Item 9B Other Information....................................................60 PART III -------- Item 10. Directors and Executive Officers of the Registrant...................60 Item 11. Executive Compensation...............................................61 Item 12. Security Ownership of Certain Beneficial Owners and Management.......61 Item 13. Certain Relationships and Related Transactions.......................61 Item 14. Principal Accounting Fees and Services ..............................61 Item 15. Exhibits and Financial Statement Schedules...........................62 Signatures....................................................................65 PART I ====== ITEM 1. BUSINESS ================= COMPANY OVERVIEW InteliData Technologies Corporation and subsidiaries ("InteliData" or the "Company") provides electronic bill payment and presentment ("EBPP") and online banking solutions to the financial services industry. The Company's products provide financial institutions ("FI's") with the real-time financial processing infrastructure needed to provide their customers with payment and presentment services and online banking via the Internet and other online delivery channels. The Company markets its products and services to banks, credit unions, brokerage firms, financial institution processors and credit card issuers. InteliData's product suite consists of three complementary product offerings: Payment and Presentment ----------------------- o Payment Solutions - providing payment warehousing, payment matching, biller directory management, and least cost routing functionality for EBPP transactions; o Card Services - providing Internet-based account activation, bill presentment, balance consolidation, and e-Statement capabilities; and Online Banking -------------- o Online Banking - providing Internet-based access to real-time account information, as well as interfaces to personal financial management software such as Intuit's Quicken(R) and Microsoft Money(R). The Company has invested in developing products and capabilities designed to establish a leadership position in the online bill payment market. The Company believes this market opportunity is significant based on the billions of recurring bills that consumers and businesses pay each year, primarily via paper checks. FI's should be able to realize significant cost and efficiency benefits from initiating these payments online and processing them electronically. Migrating to online electronic payments will require significant investment in online bill payment infrastructure, which is where the Company's products are focused. In January 2001, InteliData acquired Home Account Holdings, Inc. and its operating subsidiary, Home Account Network, Inc., by means of the merger of one of the Company's wholly owned subsidiaries with and into Home Account Holdings, with Home Account Holdings surviving the merger. Home Account Holdings is a wholly owned subsidiary of InteliData. This acquisition was accounted for as a purchase. Through this transaction, InteliData acquired the products and customer base of Home Account Holdings, Inc., including i) the Card Services sector, ii) the Online Banking platform, Canopy(TM) Banking, for commercial banks, and iii) an Open Financial Exchange ("OFX") solution that provides Payment Solutions capabilities. On March 31, 2005, the Company entered into a definitive agreement to be acquired by Corillian Corporation ("Corillian"), a publicly traded company (Nasdaq: CORI) based in Hillsboro, Oregon, that provides solutions that enable banks, brokers, financial portals and other financial service providers to rapidly deploy Internet-based financial services. The purchase consideration for the Company is approximately $19.5 million, subject to adjustment. Under the terms of the agreement, each outstanding share of the Company's common stock will be converted into the right to receive 0.0954 of a share of Corillian's common stock and $0.0832 in cash without interest. The closing of this transaction is subject to, among other things, the effectiveness of the registration/proxy statement on Form S-4 to be filed with the Securities and Exchange Commission and approval of the Company's stockholders. As a result, there can be no assurances that the acquisition will be completed or as to the timing thereof. The Company was incorporated under the laws of the State of Delaware on August 23, 1996. The Company's principal executive offices are located at 11600 Sunrise Valley Drive, Suite 100, Reston, Virginia 20191, and its telephone number is (703) 259-3000. INDUSTRY BACKGROUND The overall market for online banking and bill payment solutions has grown and matured considerably over the last few years. As Internet financial services have become more mainstream, FI's have focused less on innovation and more on improving the infrastructure that supports online services - adding functionality, improving operating efficiencies, and migrating significant portions of their online banking and bill payment operations in-house. Within this overall market, the Company's three product offerings serve the online infrastructure needs of three distinct, but related market sectors: Payment Solutions, Card Services, and Online Banking. The market for Payment Solutions continues to expand driven by growth in consumer adoption. According to Celent Research, 29 percent of all consumer bill payments in the United States will be paid over the Internet by 2007, up from 13 percent in 2004. This growth in consumer adoption and the associated increase in processing costs is causing many FI's to re-evaluate their approach to bill payment processing. Until recently, most large FI's elected to outsource their bill payment processing to a third-party processor such as CheckFree or Metavante. Increasingly however, FI's are migrating "front end" bill payment processing and data warehousing to an in-house platform, offering the FI's greater control, while also developing "least cost routing" strategies aimed at reducing overall processing costs. The Company believes that banks will require significant and ongoing investment in new software and services to achieve the benefits of in-house warehousing and routing. The market for Card Services is relatively new, but has matured considerably in recent years. Most credit card issuers now have established an online solution that they have either developed internally or use through an outsourced service offering. Issuers are now looking to improve core functionality, add incremental functionality such as e-Statements and bill payment, and increase their subscriber base. The Company expects some new opportunities in this market to upgrade or replace card issuers' first generation systems, and also expects continued subscriber growth to drive opportunity for outsourced providers such as InteliData. The market for Online Banking has become relatively mature. Most financial institutions have deployed 2nd or 3rd generation systems, and the functionality supported has also matured considerably. Large banks have largely moved to in-house systems developed internally or acquired from a third party vendor, while smaller financial institutions have established relationships with service providers that either specialize in online banking or offer online banking services as part of a broader set of outsourced core processing services. Consequently, most of the activity in this market involves adding incremental functionality. InteliData has developed and maintains a customer base within this market that is significant to our operations. The opportunity for significant new business in this market has diminished. Therefore, the Company expects to limit its future activities in the Online Banking market to providing certain enhancements and upgrades for the Company's established customer base. PRODUCTS AND SERVICES InteliData's suite of software products and services provide our FI customers with the infrastructure to implement and support online banking and bill payment. The Company's products and services are designed to enable consumers to transact with their FI's electronically and to assist FI's in connecting to third-party processors to complete these transactions. The Company's product suite consists of three complementary product offerings serving the core infrastructure needs of three distinct, but related market sectors: Payment Solutions, Card Services, and Online Banking. The Company offers its solutions through several business models. A FI can i) directly license the software and operate it in-house, ii) license the software but have the software hosted in an outsourced environment (with the opportunity to bring the software in-house in the future), or iii) use the software in an outsourced environment through an application service provider ("ASP") arrangement with InteliData's processing partners. While InteliData offered ASP solutions through Fidelity Information Services' ("Fidelity") processing environment, the Company's Hosting agreement with Fidelity will expire in April 2005. Thereafter, the Company will no longer offer its ASP services in this environment. Each of these models gives the customer an opportunity to make decisions based on the customer's individual economics and marketing strategy. The Company also offers its customers software upgrades, consulting expertise to assist with implementation, training and customization, and maintenance and support services pursuant to contractual agreements that are typically renewable on an annual basis. Payment Solutions ----------------- InteliData's Payment Solutions have been designed to meet the current and emerging online bill payment market opportunities. These solutions include a broad set of capabilities to support "pay-anyone" online bill payment, as well as an expanding range of online transfers and internal payments. In contrast to current third-party outsourced solutions, the Company's bill payment solutions are designed to give the FI more control over the bill payment warehousing and routing functions, making bill payment processing more like other forms of electronic payment processing (such as ACH and ATM transactions), while reducing the overall expense of offering bill payment. The Payment Solutions consist of several components to facilitate deployment in a variety of operating environments and to allow the incremental deployment of a subset of the overall capabilities. Payment Warehouse - The central component of the Company's Payment Solutions is the Payment Warehouse. Using the Payment Warehouse, FI's can capture and warehouse all customer payment and payee information prior to processing, giving them control of customer payment data and transaction routing to various payment processors. This provides the FI greater control over service quality of the increasingly important bill payment service. It also provides FI's greater control of payment processing costs, which is becoming critical as FI's have recognized that "free billpay" promotions drive customer and transaction volumes. The warehouse also allows FI's to capture "on-us" transactions, which are payments within an FI, and route these internally rather than through a more costly third-party service. Transfer Warehouse - The Transfer Warehouse is designed to extend the payment capabilities of the InteliData Payment Solution offering to meet the growing need for a broader range of online payment capabilities. Expanding online payments beyond basic electronic bill payment allows FI's to become a central "payment hub" for their consumers, with a resulting increase in customer retention, cross-selling, and fees for the FI's. By using the Transfer Warehouse, the FI's can add additional payment capabilities: o Allow loan, credit card, and mortgage customers to make a payment from another FI's checking account. o Transfer funds on a scheduled and recurring basis between multiple accounts inside the FI. o Pay internal bills from multiple internal accounts. o Transfer funds into the FI from another deposit account (e.g., brokerage account, credit union, and bank). o Transfer funds to another FI into an account held by the customer. Payment Matching and Routing - InteliData's Payment Decisioning Engine permits FI's to manage and control "Least Cost Routing" of electronic bill payments to multiple remittance processors, including MasterCard RPPS, CheckFree, Metavante, Princeton eCom, Online Resources Corporation, and numerous in-house systems. Merchant Directory Management - The central feature of the InteliData Payment Decisioning Engine is the Merchant Directory. The Merchant Directory manages detailed information about merchants from multiple processors, including information needed for electronic payment routing. Directory Management Tools automate and support the management of the Merchant Directory and the management of payee matching and payment routing. Web Billpay Interface - InteliData's Web Billpay Interface is a turnkey Web front-end, designed to let consumers and small business users manage online transactions quickly and easily. This solution includes: o Screens to support payment, funds transfer, and bill presentment. o Flexible payment scheduling, including single, recurring, and express transactions. o Transaction search capability, allowing searches by date, status, account, merchant, and other options. o A set of branding and configuration options for controlling the look and feel of the screens. OFX Gateway - The OFX Interface provides direct connectivity between the FI and users of Intuit Quicken(R) and Microsoft Money(R) client software through the industry standard OFX protocol. It also provides synchronization with Quicken(R) or Money(R). Card Services ------------- InteliData's Card Services provide credit cardissuers with an end-to-end solution for serving customers via the Internet. The solution, which is marketed as an outsourced solution to card issuers, provides consumers with online account access, customer self-service, and bill presentment capabilities. By providing these online services, the credit card issuer benefits through reduced customer service expenditures and lower billing costs. InteliData offers a modular approach for Card Services, which enables an issuer to deploy a total solution or to augment an existing online offering by deploying individual components of the overall solution. Card Services offer several modular components: Account Management Module provides cardholders the ability to view their credit card account information, such as balance, payment status, next payment due date, and cycle-to-date transactions. Additional functions allow cardholders to view previous months' statement activity and download the data to a Personal Finance Manager (PFM), pay their credit card bills, utilize a secure messaging process for submitting customer service inquiries, request a credit line increase, and update address and other account information online. Acquisition Module lets card issuers enroll and authorize new accounts online. The Acquisition Module supports a wide range of deployment options. It can perform fraud screening, provide application decisioning, provide an applicable response, and book approved applicants. Activation Module lets consumers activate new accounts online. This helps issuers reduce costs and provides an opportunity to promote additional revenue generating products and services such as balance transfers. Balance Transfer Module gives consumers the ability to transfer credit card balances from other credit cards online. This module provides online credit approval, available balance decisioning, and movement of funds. When integrated with a credit decision engine, this module enables issuers to utilize a lead generation tool that can determine appropriate credit limits and percentage rates, and effect balance transfers for new and existing customers. e-Statement Module enables card issuers to realize savings by suppressing the printing and mailing of paper credit card statements to customers. This module allows either the cardholder or a customer service representative ("CSR") to initiate e-Statement delivery, and allows the card issuers to eliminate the paper statement. A number of Web-based CSR management tools are provided to the card issuers to help manage the e-Statement process. Online Banking -------------- InteliData's Online Banking solution provides FI's a highly scalable, end-to-end solution for providing their consumers with real-time account information online via the Web, Intuit Quicken(R) and Microsoft Money(R). The solution allows consumers access to account information online, including the ability to review transaction history, initiate funds transfers, and perform various account management functions in real-time. InteliData's Online Banking solution, which is licensed to financial institutions for in-house implementation, consists of three complementary components: Interpose(R) Transaction Engine - The Interpose(R) Transaction Engine ("ITE") is the core processing component of the InteliData Online Banking solution. It provides transaction processing, logging, and warehousing for online banking transactions. ITE provides real-time connectivity to the FI's legacy data, and is designed to allow capacity to be added without increased complexity. Interpose(R) Web Banking - The Interpose(R) Web Banking ("IWB") interface provides a Web user interface for the InteliData Online Banking solution. IWB provides a range of Internet-accessible banking capabilities, including account access, transfers, payments, and account management. IWB features a turnkey user interface, but may also be customized to meet an FI's requirements. OFX Gateway - The OFX Interface provides direct connectivity between the FI and users of Intuit Quicken(R) and Microsoft Money(R) client software through the industry standard Open Financial Exchange ("OFX") protocol. It also provides synchronization with Quicken(R) or Money(R). MARKETING AND DISTRIBUTION The Company concentrates its marketing efforts through a direct sales model targeting FI's in the United States, including banks, credit unions, brokerage firms, financial institution processors and credit card issuers. The Company markets its solutions primarily to large FI's, generally those with assets in excess of $3 billion. In addition, the Company markets its Card Services to credit card issuers through a processing arrangement with First Data Resources, a subsidiary of First Data Corp. In 2004, the four top customers represented approximately 13.6%, 8.9%, 8.3%, and 7.9% of our revenue, respectively. The Company maintains alliance relationships with a number of processing partners, including First Data Resources and Fidelity National Information Systems ("Fidelity") for data center operations, and MasterCard RPPS, Princeton eCom Corporation, and Online Resources Corporation for payment processing. The Company also maintains a joint marketing and revenue sharing relationship with Fidelity, although this relationship does not generate significant revenue for the Company. The current joint marketing relationship concludes in April 2005, although the companies will continue to operate the InteliData software in the Fidelity data center as an outsourced service for existing and prospective FI's. COMPETITION The Company faces several different types of competition. Some FI's have elected to develop internally their own online banking and payment solutions, instead of purchasing products and services from the Company or other vendors, making internal development a competitor to the Company. FI's may also obtain similar technology products from other software providers, including S1 Corporation, Corillian Corporation, and Financial Fusion, Inc. FI's may obtain similar services on an outsourced basis from CheckFree Corporation, Online Resources Corporation, Princeton eCom Corporation, Digital Insight Corporation, and Metavante Corporation. For Card Services, the Company's principal competitors are Incurrent Solutions, Inc. (which was recently acquired by Online Resources Corporation), First Data Resources, and internally developed in-house solutions. The Company expects that competition in these areas will continue to increase. Most of our competitors have substantially greater resources than us, which could impact our ability to compete. Competition will be based upon price, performance, product functionality, customer service, and the effectiveness of marketing and sales efforts. The Company competes in its target markets by leveraging its market experience and current customer base to develop innovative technology solutions and market them effectively. PRODUCT DEVELOPMENT The Company operates in industries that are evolving and characterized by technology innovation. In an effort to improve the Company's position with respect to its competition, the Company has continued its new product development and focused its efforts in the area of product development primarily for the Payment Solutions market. In 2004, 2003, and 2002, the Company's research and development expenditures were $4,937,000, $5,020,000, and $8,807,000, respectively. The decreasing costs reflect the completion of certain core product development initiatives. At December 31, 2004 and 2003, approximately 23 and 27 employees were engaged in product development, respectively. 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 Company markets its products and services to the financial services market and others, which is highly regulated at both the federal and state levels. Interpretation, implementation or revision of banking regulations can accelerate or hinder the ultimate success of the Company and its products. PATENTS, PROPRIETARY RIGHTS AND LICENSES The Company holds limited registered intellectual property rights with respect to its products. The Company relies on trade secret laws and licensing agreements to establish and maintain its proprietary rights to its products. Although the Company has obtained confidentiality agreements from its key executives and engineers in its product development group, there can be no assurance that third parties will not independently develop the same or similar alternative technology, obtain unauthorized access to the Company's proprietary technology or misuse the technology to which the Company has granted access. The Company does not believe that its products and services infringe on the rights of third parties. It is possible that third parties could assert infringement claims against the Company. There can be no assurance that any such assertion will not result in costly litigation or require the Company to cease using, or obtain a license to use, the intellectual property of such parties. EMPLOYEES At December 31, 2004, the Company had approximately 64 employees. The Company has no collective bargaining agreements with its employees. AVAILABLE INFORMATION The Company files annual, quarterly, and current reports, proxy statements, and other documents with the Securities and Exchange Commission (the "SEC") under the Securities Exchange Act. The public may read and copy any materials that the Company files with the SEC at the SEC's Public Reference Room at 450 Fifth Street, NW, Washington, D.C. 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at (800) SEC-0330. Also, the SEC maintains an Internet Website that contains reports, proxy and information statements, and other information regarding issuers, including the Company, that file electronically with the SEC. The public can obtain documents that the Company files with the SEC at http://www.sec.gov. The Company also makes available free of charge on or through our Internet website (http://www.intelidata.com) our Annual Report on Form 10-K, Quarterly ------------------------- Reports on Form 10-Q, Current Reports on Form 8-K, and, if applicable, amendments to those reports filed or furnished pursuant to Section 13(a) of the Securities Exchange Act, as well as Section 16 reports on Forms 3, 4 and 5, as soon as reasonably practicable after the Company electronically files such material with, or furnishes it to, the SEC. ITEM 2. PROPERTIES ------------------- The Company's headquarters are located in Reston, Virginia, where it leases 25,200 square feet of office space; this lease expires in December 2006. During 2003, the Company ceased using 8,200 square feet of the Reston, Virginia leased space and subleased the office space to a third party. The Company also leases 8,800 square feet of office space for its product development and operations facilities in Toledo, Ohio; this lease expires in April 2006. The Company also leases 9,200 square feet of office space for its product development and customer service in Omaha, Nebraska; this lease expires in March 2006. In February 2001, the facility in California, which served as the headquarters for the pre-merger Home Account Holdings, was shut down. In August 2002 the Company subleased the 7,200 square feet of space for the remainder of the lease term, which ended in February 2005. The South Carolina lease for 5,300 square feet of office space, used for product development and customer service, will terminate in April 2006. In July 2004, this facility was shutdown and operations were moved to the Company's office in Reston, Virginia. The Company has engaged a broker to sublease the space. All of the lease and sublease arrangements were made with unaffiliated parties. The Company believes that its leased properties are sufficient for its current operations and for the foreseeable future. ITEM 3. LEGAL PROCEEDINGS -------------------------- 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 such routine litigation will be likely to have a material adverse effect on the Company's financial condition, cash flows, or results of operations. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS ------------------------------------------------------------ None. EXECUTIVE OFFICERS OF THE REGISTRANT The following table sets forth the names and ages of all executive officers of the Company and all positions and offices within the Company presently held by such executive officers: Name Age Position Held ---- --- ------------- Alfred S. Dominick, Jr. 59 Chairman, Chief Executive Officer and Acting Chief Financial Officer Karen Kracher 49 President and Chief Sales and Marketing Officer Monique L. Marcus 48 Vice President, Finance and Treasurer Alfred S. Dominick, Jr. has served as the Chief Executive Officer of the Company since August 1998, Chairman of the Board of Directors since August 2002 and became the Acting Chief Financial Officer in April 2004. Mr. Dominick was also the President of the Company from August 1998 to May 2003. Prior to joining InteliData, Mr. Dominick served as President of the Retail Products Delivery Group at M&I Data Services. Prior to joining M&I Data Services in July 1995, he was Executive Vice President of Retail Banking and a member of the Executive Committee for Boatmen's Bancshares Corporation for three years. Prior to that Mr. Dominick was an Executive Vice President with Bank One Texas, since 1989. Prior to his employment with Bank One Texas, Mr. Dominick was a Senior Vice President with Fleet National Bank. Karen Kracher was named President of InteliData in August 2004 and has served as the Chief Sales and Marketing Officer since joining InteliData in January 2004. In her role as President, she oversees product development efforts, engineering, operations, ASP initiatives and customer care for the InteliData bill pay product offerings. She also is in charge of overall business planning and business development activities for electronic bill payment, Internet Banking, and operations. Prior to joining InteliData, Ms. Kracher's breadth of experience in the financial services industry included such positions as: Corporate Officer for Deluxe Corporation (1978-1996), General Manager for Travelers Express (now MoneyGram) (1996-1998), Senior Vice President of TCF Financial (1998-1999), and President of Aveus, Inc. (1999-2001). Ms. Kracher is also President of a non-profit organization - Young Audiences. Monique L. Marcus has served as Vice President, Finance and Treasurer since joining InteliData in October 2004 and was appointed Principal Accounting Officer in November 2004. Prior to joining the Company, Ms. Marcus held management positions in finance and accounting with several telecommunications companies, including: Vice President and Controller for CityNet Telecommunications, Inc. from June 2000 through October 2004; Vice President and Controller for eLink Communications, Inc. from October 1999 through August 2000; and Senior Director and Controller for WinStar Communications, Inc. from May 1996 through June 1999. Previously she was Controller for Snyder Communications, Inc., a direct marketing and direct sales company and she also has held various financial positions within Caterair International Corporation (a spin-off from Marriott) and Marriott Corporation. Ms. Marcus is a C.P.A. and has four years experience in Public Accounting after receiving her B.S. in accounting from Georgetown University. PART II ======= ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED --------------------------------------------------------------- STOCKHOLDER MATTERS ------------------- The Company's common stock was transferred from the Nasdaq National Market to the Nasdaq SmallCap Market effective as of the open of business on September 7, 2004, and is traded under the symbol INTD. The table below sets forth the high and low quarterly sales prices for the common stock of the Company as reported in published financial sources for each quarter during the last two years: High Low ------- -------- 2004 Fourth Quarter $ 0.69 $ 0.30 Third Quarter 0.70 0.29 Second Quarter 1.46 0.60 First Quarter 2.11 1.09 2003 Fourth Quarter $ 2.62 $ 1.40 Third Quarter 3.60 2.15 Second Quarter 3.24 1.19 First Quarter 1.84 0.84 On March 28, 2005, the last reported sales price for the Company's common stock was $0.30. The number of stockholders of record at March 28, 2005 was 614 and does not include those stockholders who hold shares in street name accounts. The Company has never declared or paid any cash dividends on its common stock. The Company currently intends to retain its future earnings, if any, to fund the development and growth of its business and, therefore, does not anticipate paying any cash dividends in the foreseeable future. Any future decision concerning the payment of dividends on the Company's common stock will depend upon the results of operations, financial condition and capital expenditure plans of the Company, as well as such other factors as the Board of Directors, in its sole discretion, may consider relevant. Information regarding securities authorized for issuance under the Company's equity compensation plans as of December 31, 2004 is set forth in Item 12, "Security Ownership of Certain Beneficial Owners and Management." ITEM 6. SELECTED FINANCIAL DATA (in thousands, except per share data) ----------------------------------------------------------------------- The following selected financial data are derived from our consolidated financial statements and have been restated to reflect adjustments that are further discussed in Note 2(n) to the consolidated financial statements included in Item 8, Financial Statements and Supplementary Data of this annual report on Form 10-K. Years Ended December 31, ------------------------------------------------------------------- RESULTS OF OPERATIONS: 2004 2003 2002 2001(1) 2000 ---------------------- ------------ --------- ---------- ---------- ---------- (as restated; see Note 2(n)) ---------------------------------------------------- Revenues $ 13,742 $ 20,630 $ 21,495 $ 18,296 $ 4,836 Cost of revenues 6,318 7,549 8,474 9,010 2,875 Operating expenses 14,893 14,774 21,178 39,580 27,676 Goodwill impairment charge 25,771(3) -- -- -- -- ---------- --------- ---------- ---------- ---------- Operating loss (33,240) (1,693) (8,157) (30,294) (25,715) Other income (expenses), net 5 21 (626) 137 49,726(4) Provision (benefit) for income taxes -- -- (137) (160) 200 ---------- --------- ---------- ---------- ---------- Income (loss) from continuing operations (33,235) (1,672) (8,646) (29,997) 23,811 Income (loss) from discontinued operations -- -- -- -- (262)(2) ---------- --------- ---------- ---------- ---------- Net income (loss) $ (33,235) $ (1,672) $ (8,646) $ (29,997) $ 23,549 ========== ========= ========== ========== ========== Basic earnings per common share Income (loss) from continuing operations $ (0.65) $ (0.03) $ (0.18) $ (0.65) $ 0.62 Income (loss) from discontinued operations -- -- -- -- (0.01) ---------- --------- ---------- ---------- ---------- Net income (loss) $ (0.65) $ (0.03) $ (0.18) $ (0.65) $ 0.61 ========== ========= ========== ========== ========== Diluted earnings per common share Income (loss) from continuing operations $ (0.65) $ (0.03) $ (0.18) $ (0.65) $ 0.58 Income (loss) from discontinued operations -- -- -- -- (0.01) ---------- --------- ---------- ---------- ---------- Net income (loss) $ (0.65) $ (0.03) $ (0.18) $ (0.65) $ 0.57 ========== ========= ========== ========== ========== Weighted-average common shares outstanding Basic 51,271 50,028 48,869 45,897 38,237 ========== ========= ========== ========== ========== Diluted 51,271 50,028 48,869 45,897 40,843 ========== ========= ========== ========== ========== December 31, ------------------------------------------------------------------- FINANCIAL POSITION: 2004 2003 2002 2001 2000 ---------------------- ---------- --------- ---------- ---------- ---------- (as restated; see Note 2(n)) ---------------------------------------------------- Cash and cash equivalents $ 3,223 $ 7,603 $ 5,674 $ 12,026 $ 27,255 Total assets 10,605(3) 43,869 44,039 57,551 43,278 Long-term debt -- -- -- -- -- Stockholders' equity 5,695(3) 38,890 36,507 44,660 33,791

The tables above set forth selected consolidated financial data for the periods or as of the dates indicated and should be read in conjunction with the consolidated financial statements, related notes and other financial information appearing in this annual report on Form 10-K. Highlighted below are certain transactions and factors that may be significant to an understanding of the financial condition and comparability of results of operations. (1) The Company acquired Home Account Holdings, Inc. in January 2001. (2) During the fiscal year ended December 31, 2000, the leasing business segment was discontinued. (3) During the fiscal year ended December 31, 2004, the Company recorded a goodwill impairment charge of $25,771,000. See Note 12 to the consolidated financial statements for additional detail. (4) In January 2000, Home Financial Network, Inc., a company in which InteliData held approximately a 25% ownership interest, merged with Sybase, Inc. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL ---------------------------------------------------------- CONDITION AND RESULTS OF OPERATIONS ----------------------------------- The accompanying Management's Discussion and Analysis of Financial Condition and Results of Operations gives effect to the restatement disclosed in Note 2(n) to the consolidated financial statements. Overview InteliData Technologies Corporation and subsidiaries ("InteliData" or the "Company") provides electronic bill payment and presentment ("EBPP") and online banking solutions to the financial services industry. The Company's products provide financial institutions ("FI's") with the real-time financial processing infrastructure needed to provide their customers with payment and presentment services and online banking via the Internet and other online delivery channels. The Company markets its products and services to banks, credit unions, brokerage firms, financial institution processors and credit card issuers. Products - InteliData's product suite consists of three complementary product offerings: Payment and Presentment ----------------------- o Payment Solutions - providing payment warehousing, payment matching, biller directory management, and least cost routing functionality for EBPP transactions; o Card Services - providing Internet-based account activation, bill presentment, balance consolidation, and e-Statement capabilities; and Online Banking -------------- o Online Banking - providing Internet-based access to real-time account information, as well as interfaces to personal financial management software such as Intuit's Quicken(R) and Microsoft Money(R). The overall market for online banking and bill payment infrastructure has grown considerably over the last few years, and the Company believes that significant growth opportunities remain. As Internet financial services have become more mainstream, FI's have focused less on innovation and more on broadening existing operations - adding functionality, improving operating efficiencies, and migrating significant portions of their online banking and bill payment operations in-house. Within this market, the Company's product suite of three complementary product offerings serves the needs of three distinct, but related market sectors: Payment Solutions, Card Services, and Online Banking. The market for Payment Solutions has been the primary focus of InteliData's development and marketing efforts during the past three years. The Company views this as the market sector with the greatest growth potential. The Company believes that future growth opportunities in this market sector are significant based on FI's increasing recognition of measurable financial benefits related to the bill payment customer base, increasing consumer adoption rates, and the increasing competitive pressure to provide "free bill payment" services to all consumers. The resulting growth, both in number of users and number of transactions, has caused larger FI's to rethink their approach to bill payment processing. Until recently, most large FI's elected to outsource their bill payment processing to a third-party processor such as CheckFree or Metavante. Increasingly however, FI's are migrating "front end" bill payment processing and data warehousing to an in-house platform, offering the FI's greater control while also developing "least cost routing" strategies aimed at reducing overall processing costs. The Company believes that large banks will require significant and ongoing investment in new software and implementation services to achieve the benefits of in-house warehousing and routing. Consequently, the Company is concentrating its efforts on marketing and deploying in-house licensed solutions and the Company will conclude its Joint-Marketing Agreement with Fidelity to market outsourced online payment services. However, the Company will continue to refer clients directly to Fidelity for outsourced services under the existing revenue-sharing relationship. The Company's greatest challenges in this market is the speed of bank decision-making and competition from larger suppliers, although the Company believes that its products have superior capabilities in comparison to the competition. The market for Card Services has become relatively mature considerably in recent years. Most of the Company's current and potential card issuer customers have deployed an online solution and are now seeking to add subscribers and incremental functionality. Consequently, InteliData expects limited growth opportunities across this market sector. Because InteliData's Card Services solution is an outsourced service, growth will be driven primarily by anticipated subscriber increases from within the Company's current customer base. The market for Online Banking is the most mature of the markets served by the Company. Most larger FI's are deploying second and third generation solutions. The goal of these initiatives typically includes increasing processing capacity and performance, adding incremental new user features, improving overall user experience, improving back-office processes, reducing processing costs, and migrating certain core components from outsourced solutions to in-house solutions. While InteliData has developed and maintains a customer base of in-house licensed clients within this market sector that is significant to our operations, the opportunity for significant new business in this market is limited. Therefore, the Company expects to limit its future activities in the Online Banking market to providing certain enhancements and upgrades for the Company's established customer base. On March 31, 2005, the Company entered into a definitive agreement to be acquired by Corillian Corporation ("Corillian"), a publicly traded company (Nasdaq: CORI) based in Hillsboro, Oregon, that provides solutions that enable banks, brokers, financial portals and other financial service providers to rapidly deploy Internet-based financial services. The purchase consideration for the Company is approximately $19.5 million, subject to adjustment. Under the terms of the agreement, each outstanding share of the Company's common stock will be converted into the right to receive 0.0954 of a share of Corillian's common stock and $0.0832 in cash without interest. The closing of this transaction is subject to, among other things, the effectiveness of the registration/proxy statement on Form S-4 to be filed with the Securities and Exchange Commission and approval of the Company's stockholders. As a result, there can be no assurances that the acquisition will be completed or as to the timing thereof. Results of Operations The following represents the results of operations for InteliData. Such information should be read in conjunction with the financial statements and the notes thereto in Part II, Item 8 of this Annual Report on Form 10-K, as well as the cautionary statements and risk factors in this section. The Company generates revenues from each of its three product offerings - Payment Solutions, Card Services, and Online Banking. Within these product offerings, the Company obtains revenues from various sources - software license fees, consulting services fees, use-based fees, maintenance fees, and other fees. Software license fees include revenues generated from license sales. Consulting services fees include revenues generated from professional services rendered. Use-based fees include revenues generated from user accounts, transactions, remittances and other related activities. Maintenance fees include revenues generated from maintenance agreements for support services for licensed software. Other fees are termination charges levied for early termination of contracts. The Company's client invoicing and payment terms are negotiated and governed by a contract, letter of intent or alternative form of agreement between the Company and customer. Client invoicing and payment terms, which vary by agreement, are generally in accordance with the following: Software license fees are typically invoiced upon execution of an agreement between the client and the Company, upon delivery of the licensed software, upon acceptance of the final product, or some combination thereof; Consulting service fees and use-based fees are typically invoiced as the services are rendered; Maintenance fees are typically invoiced at the beginning of each maintenance term; Payment is due thirty days from the date of invoice with allowances for the Company to impose penalties for late and/or non-payment. Within revenues generated from Payment Solutions, consulting services will fluctuate with the demand of services based on client internal projects as well as new system implementations. Use-based fees will fluctuate based on the addition of new clients and user adoption rates that translate into additional users and additional transactions. Additionally, use-based revenues may decline with departures of clients for other solutions and/or clients' migrating the InteliData solution in-house through a license arrangement that may eliminate user fees. Within revenues generated from Card Services, consulting services will fluctuate with the demand of services based on client internal projects as well as new client implementations. Use-based fees will fluctuate based on the addition of new clients and user adoption rates that translate into additional users and additional transactions. Additionally, use-based revenues may increase due to added functionalities or may decline with departures of clients for other solutions. Within revenues generated from Online Banking, use-based revenues will fluctuate based on the addition of new clients and user adoption rates that translate into additional users and additional transactions. However, use-based revenues may decline with departures of clients for other solutions and/or clients' migrating the InteliData solution in-house through a license arrangement that may eliminate user fees. InteliData's Hosting agreement with Fidelity will expire in April 2005. During the first quarter of 2005, the Company continued to either migrate existing clients to InteliData's in-house solution or assist clients in migrating to another outsourced solution. While the Company may generate revenues in 2005 from these migration activities under the Payment Solution and Online Banking offerings, InteliData will not earn the ASP revenues through the Fidelity environment from these clients after the migration. However, InteliData will continue to generate revenue through its revenue-sharing agreement with Fidelity for the existing Fidelity clients and newly referred clients who continue to use InteliData's solution as part of Fidelity's offering. The following table sets forth the Company's sources of revenue for each of the three fiscal years ended December 31, 2004, 2003 and 2002 (in thousands): 2004 2003 2002 --------- -------- -------- Payment Solutions Software license $ 158 $ 759 $ 771 Consulting services 1,072 2,192 3,406 Use-based 5,147 4,179 3,151 Maintenance 1,274 892 796 -------- -------- -------- Subtotal 7,651 8,022 8,124 -------- -------- -------- Card Services Consulting services 229 332 894 Use-based 3,920 4,595 3,054 Other - 13 - -------- -------- -------- Subtotal 4,149 4,940 3,948 -------- -------- -------- Online Banking Software license - 476 518 Consulting services 173 1,440 1,485 Use-based 990 5,100 6,697 Maintenance 779 652 470 Other - - 253 -------- -------- -------- Subtotal 1,942 7,668 9,423 -------- -------- -------- Total Software license 158 1,235 1,289 Consulting services 1,474 3,964 5,785 Use-based 10,057 13,874 12,902 Maintenance 2,053 1,544 1,266 Other - 13 253 -------- -------- -------- Total $ 13,742 $ 20,630 $ 21,495 ======== ======== ======== Years Ended December 31, 2004 and 2003 Revenues The Company's total revenues were $13,742,000 in 2004 compared to $20,630,000 in 2003, a decrease of $6,888,000. The revenues from Payment Solutions were $7,651,000 in 2004 compared to $8,022,000 in 2003, a decrease of $371,000. These revenues include items related to the Company's billpay warehouse, funds transfer and certain OFX solutions, as well as the billpay portions of the ASP offerings. Software licenses decreased $601,000 and consulting services decreased $1,120,000 while use-based fees increased $968,000 and maintenance increased $382,000 year over year. Software license fees decreased because there were fewer software license sales in 2004. The decrease in consulting services was primarily due to the completion of projects in 2003 and limited new projects in 2004, while the increase in use-based fees was due to the growth from existing clients. Maintenance increased due to increases in use-based licenses, additional fees from sales in 2003 and increases on renewed maintenance services. The Payment Solutions revenues from the Fidelity ASP environment that were generated in 2004 were approximately $2,029,000. The revenue stream from the ASP offering will cease with the expiration of our Hosting agreement with Fidelity in April 2005. To replace this source of revenue, the Company expects recurring fees for providing directory management services to its payment warehouse clients on a per transaction or monthly subscription fee basis. The revenues from Card Services were $4,149,000 in 2004 compared to $4,940,000 in 2003, a decrease of $791,000. Consulting services decreased $103,000, while use-based fees decreased $675,000 year over year. The decrease in consulting services was primarily due to the completion of projects in 2003 and limited new projects in 2004, while the decrease in use-based fees was due to the departure of certain clients offset by additional fees from existing clients due to additional users and additional transactions. In September 2004, the Company discontinued providing services to two clients that represented approximately $248,000 in monthly recurring revenues. One of the clients moved to an in-house solution, while the other opted for another service provider. The revenues from Online Banking were $1,942,000 in 2004 compared to $7,668,000 in 2003, a decrease of $5,726,000. These revenues include items related to the Company's Interpose(R) Web Banking, Interpose(R) Transaction Engine, and certain OFX solutions, as well as the online banking portions of the ASP offerings. Software licenses decreased $476,000, consulting services decreased $1,267,000, and use-based fees decreased $4,110,000 year over year. The decrease was primarily attributable to the decrease in use-based fees. Three large customers who were operating in the ASP environment during 2003 did not pay recurring fees during 2004. In one instance, a bank that used the Company's online banking platform based on older Home Account Canopy(TM) Banking technology, converted to a competitor's product. Two other banks paid the Company a one-time license fee in 2003 and moved the InteliData software in-house in 2003, which resulted in a decrease to the Company's monthly fees for hosting the software in an ASP arrangement. The resulting decrease was partially offset by growth in user fees from existing clients. The decrease in consulting services was primarily due to the completion of projects in 2003 and fewer new projects in 2004. There were no software license sales in 2004. Maintenance increased due to increases in use-based licenses, additional fees from sales in 2003 and increases on renewed maintenance services. The Online Banking revenues from the Fidelity ASP environment that were generated in 2004 were approximately $489,000. The revenue stream from the ASP offering will cease with the expiration of our Hosting agreement with Fidelity in April 2005. Cost of Revenues and Gross Profit The Company's cost of revenues decreased $1,231,000 to $6,318,000 in 2004 from $7,549,000 in 2003. The decrease was primarily due to decreases in ASP operations costs resulting from a renegotiation with a continuing provider and decreases in cost of revenues associated with decreased professional services. The cost structures to generate the revenues are bundled together and cannot be broken out in the same manner as the revenues. Costs of revenues include vendors for outsourced services and employees directly working to generate revenues. Overall gross profit margin decreased to 54% for 2004 from 63% for 2003. The decrease in gross profit margin was attributable to a greater decrease in revenues as compared to the decrease in cost of revenues as discussed above. The Company anticipates that gross profit margins may fluctuate in the future due to changes in product mix and distribution, outsourcing activities associated with an ASP business model, competitive pricing pressure, and the introduction of new products and changes in volume. The Company entered into multiple vendor agreements for outsourced services as part of its ASP solution offering for certain Online Banking and Payment Solutions clients. Some of these vendor agreements commit the Company to specified minimum charges during the terms of the contracts. Management continues to assess the potential for new business prospects, the possibility of reducing the Company's costs through renegotiation of existing agreements, and/or exiting the ASP business by referring clients and prospects to a hosting vendor and providing a license solution and support services. In June 2004, the Company restructured a vendor agreement and decreased its overall prospective ASP operations costs. Entering 2005, the projected revenues are estimated to exceed projected costs by approximately $83,000 on a monthly basis based on the December 2004 results; this gap will fluctuate based on monthly activity. In accordance with generally accepted accounting principles, the Company is accounting for the committed contract costs as they are incurred. As a result of exploring all options, the Company has elected to allow its Fidelity Hosting agreement to expire in April 2005; however, InteliData will continue to participate in the Fidelity revenue-sharing agreement, which bears no anticipated direct costs. General and Administrative General and administrative expenses increased $976,000 to $8,180,000 in 2004 from $7,204,000 in 2003. The increase was attributable to several factors. The Company's corporate and administrative expenses were reduced by approximately $815,000 through employee-related actions and decreased benefit charges, including the Company's lower loss experience under its self-insured medical plan. This reduction was offset by bonus expense in 2004 of approximately $406,000 and there was a reversal in the first quarter of 2003 of approximately $630,000 in estimated accrued bonuses that were not paid, but were previously provided for during 2002. Moreover, the Company incurred approximately $1,011,000 of expenses related to its efforts to comply with the provisions of Section 404 of the Sarbanes-Oxley Act of 2002 requiring that management perform an evaluation of its internal controls over financial reporting and have its independent auditors attest to such evaluation. And, in 2003, the Company benefited from a one-time, favorable settlement of $325,000 related to 1996 tax payments. Additionally, during 2003, the Company ceased using one of its leased spaces at its Reston, Virginia facility and recorded an expense of $540,000, while it did not have a comparable charge in 2004. Finally, the Company fully amortized certain fixed assets in 2003 and did not incur depreciation and amortization expense of approximately $280,000 on those assets in 2004. The Company seeks to continually assess its operations to manage its expenses and infrastructures in light of anticipated business levels. Selling and Marketing Selling and marketing expenses decreased $774,000 to $1,056,000 in 2004 from $1,830,000 in 2003. This was primarily attributable to employee-related actions, lower travel costs and a reduction in tradeshow-related expenses. Additionally, the Chief Sales and Marketing Officer was promoted to President during the third quarter of 2004. This had the effect of shifting costs from sales and marketing to general and administrative. The Company seeks to continually assess its operations to manage its expenses and infrastructures in light of anticipated business levels. Research and Development Research and development costs decreased $83,000 to $4,937,000 in 2004 from $5,020,000 in 2003. The Company's primary research and development efforts are in Payment Solutions. The development efforts for Online Banking and Card Services products will likely be focused primarily on product upgrades and product maintenance. Amortization of Intangible Asset Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets ("SFAS 142"), requires the Company to not amortize goodwill and indefinite-lived intangibles into results of operations, but instead the Company would review these assets for impairment, at least annually, that may result in future periodic write-downs. Tests for impairment between annual tests may be required if events occur or circumstances change that would more likely than not reduce the fair value of the net carrying amount. The assets would be written down and impairment losses would be charged to results of operations only in the periods in which the recorded values are determined to be more than their fair values. The amortization of certain intangibles continued at an annualized rate of $720,000. As of January 1, 2002, in accordance with SFAS 142, the Company ceased recognizing amortization expense on goodwill. During 2004, the Company performed the required annual review in accordance with SFAS 142. The Company assessed the fair value of its only reporting unit by considering its projected cash flows, comparable company valuations, and recent purchase prices paid for entities within its industry. This review utilized the same approaches (i.e., discounted cash flow model, guideline company method, and similar transactions method) and similar considerations as the initial and previous tests. Given consideration of these factors and the Company's declining market capitalization, the Company recorded a goodwill impairment charge in 2004 in the amount of $25,771,000. Other Income Other income, primarily sublease rent receipts, interest income and other expenses, including state and local taxes, decreased $16,000 to $5,000 in 2004 from $21,000 in 2003. The decrease is primarily due to the decreased interest income resulting from lower levels of average cash and cash equivalents in 2004 as compared to 2003. Income Taxes The provisions (benefit) for income taxes were $0 for the years ended December 31, 2004 and 2003. At December 31, 2004, the Company had net operating loss carryforwards for federal income tax purposes of approximately $212 million, which expire in 2008 through 2024, general business tax credits of approximately $489,000, which expire in 2005 through 2010, and an alternative minimum tax credit carryforward of approximately $60,000, which may be carried forward indefinitely and used to offset future regular taxable income. Approximately $45 million of the net operating losses were incurred by Home Account prior to its acquisition by the Company and are subject to annual limitations pursuant to Internal Revenue Code Section 382 as a result of cumulative changes in ownership of more than 50% in 2001. A valuation allowance was established for deferred tax assets as of December 31, 2004 and 2003 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. Discontinued Operations Under various disposal plans adopted in 1997, 1998, and 2000, the Company completed the divestiture of all of its telecommunications, interactive services businesses and the Caller ID adjunct leasing activities, respectively. In 2004 and 2003, the Company did not have any income statement activity in discontinued operations. As of December 31, 2004 and 2003, the net liabilities of discontinued operations of $40,000 and $134,000, respectively, relate to the telecommunications divisions. These liabilities relate to the environmental clean up associated with prior tenants' operations at InteliData's former New Milford, Connecticut property. In January 2000, InteliData sold the New Milford, Connecticut property and the building located thereon, its only remaining asset in its discontinued operations of the telecommunications division. In the context of this sale, InteliData agreed to undertake limited remediation of the site in accordance with applicable state and federal law. The subject site is not a listed federal or state Superfund site and InteliData has not been named a "potentially responsible party" at the site. The remediation plan agreed to with the purchaser allows InteliData to use engineering and institutional controls (e.g., deed restrictions) to minimize the extent and costs of the remediation. Further, at the time of the sale of the facility, InteliData established a $200,000 escrow account from the proceeds of the sale for certain investigation/remediation costs. In April 2004, the escrow balance of approximately $224,000 was released and paid to InteliData. Moreover, InteliData has obtained environmental insurance to pay for remediation costs up to $6,600,000 in excess of a retained exposure limit of $600,000. InteliData estimates its remaining liability at December 31, 2004 related to this matter and other costs to be approximately $40,000 and has recorded a liability for this amount. The Company has engaged a legal firm and an environmental specialist firm to represent it regarding this matter. The timing of the ultimate resolution of this matter is estimated to be from two to four years under the Company's proposed compliance plan, which involves a natural attenuation and periodic compliance monitoring approach. Management does not believe that the resolution of this matter will likely have a material adverse effect on the Company's financial condition or results of operations. Income (Loss) from Continuing and Discontinued Operations, Weighted-Average Common Shares Outstanding and Basic and Diluted Earnings (Loss) Per Common Share The basic and diluted weighted-average common shares outstanding for the year ended December 31, 2004 was 51,271,000, compared to a basic and diluted weighted-average common shares outstanding of 50,028,000 for the year ended December 31, 2003. The increase resulted primarily from the issuance of stock awards to employees, issuance of stock pursuant to the exercises of stock warrants and stock options, and stock purchases under the Employee Stock Purchase Plan. During July 2003, the Company issued 1,431,364 shares of its common stock pursuant to the exercise of warrants, as amended, by institutional investors who participated in the Company's private placement of common stock in November and December, 2001. Losses from continuing operations were $33,235,000 and $1,672,000 for the years ended December 31, 2004 and 2003, respectively, while there was no gain or loss from discontinued operations in either period. Net losses were $33,235,000 and $1,672,000 for 2004 and 2003, respectively. As a result of the foregoing, basic and diluted net loss per common share was $0.65 for the year ended December 31, 2004 compared to a basic and diluted net loss per common share of $0.03 for the year ended December 31, 2003. During 2004, the Company recorded a non-cash goodwill impairment charge in the amount of $25,771,000, or $0.50 per share, that contributed to the net loss. Years Ended December 31, 2003 and 2002 Revenues The Company's total revenues were $20,630,000 in 2003 compared to $21,495,000 in 2002, a decrease of $865,000. The revenues from Payment Solutions were $8,022,000 in 2003 compared to $8,124,000 in 2002, a decrease of $102,000. These revenues include items related to the Company's billpay warehouse, funds transfer and certain OFX solutions, as well as the billpay portions of the ASP offerings. Consulting services decreased $1,214,000, while use-based fees increased $1,028,000 year over year. The decrease in consulting services was primarily due to the completion of projects in 2002 that did not carryover to 2003 and limited new projects in 2003, while the increase in use-based fees was due to the growth from existing clients. The revenues from Card Services were $4,940,000 in 2003 compared to $3,948,000 in 2002, an increase of $992,000. Consulting services decreased $562,000, while use-based fees increased $1,541,000 year over year. The decrease in consulting services was primarily due to the completion of projects in 2002 and limited new projects in 2003, while the increase in use-based fees was due to the growth from existing clients. The revenues from Online Banking were $7,668,000 in 2003 compared to $9,423,000 in 2002, a decrease of $1,755,000. These revenues include items related to the Company's Interpose(R) Web Banking, Interpose(R) Transaction Engine, and certain OFX solutions, as well as the online banking portions of the ASP offerings. The decrease was primarily attributable to the $1,597,000 decrease in use-based fees. Three large customers who were operating in the ASP environment during 2002 and a part of 2003 ceased paying recurring fees during 2003. In one instance, a bank that used the Company's online banking platform based on older Home Account Canopy(TM) Banking technology, converted to a competitor's product. Two other banks paid the Company a one-time license fee in 2003 and moved the InteliData software in-house in 2003, which resulted in a decrease to the Company's monthly fees for hosting the software in an ASP arrangement. The resulting decrease was partially offset by growth in user fees from existing clients. Cost of Revenues and Gross Profit The Company's cost of revenues decreased $925,000 to $7,549,000 in 2003 from $8,474,000 in 2002. The decrease was primarily due to decreases in cost of revenues associated with decreased professional services. The cost structures to generate the revenues are bundled together and cannot be broken out in the same manner as the revenues. Costs of revenues include vendors for outsourced services and employees directly working to generate revenues. Overall gross profit margin increased to 63% for 2003 from 61% for 2002. The increase in gross profit margin was attributable to a decrease in cost of revenues as discussed above. The Company entered into multiple vendor agreements for outsourced services as part of its ASP solution offering for certain Online Banking and Payment Solutions clients. Some of these vendor agreements commit the Company to specified minimum charges during the terms of the contracts. During 2003, several of the Company's clients migrated from this ASP environment to an in-house solution utilizing InteliData's licensed software. As a result, a possibility exists for future losses due to the decrease in estimated future revenue streams when compared with the Company's current contractual cost structure for outsourced services within this ASP environment. Entering 2004, the projected costs are estimated to exceed projected revenues by approximately $79,000 on a monthly basis; this gap will fluctuate based on monthly activity. In assessing potential future losses associated with the Company's ASP business, the Company may include the possibility of new clients that would add incremental revenue to this ASP environment. Additionally, the Company may have the opportunity to restructure vendor contracts and decrease contractual charges (i.e., extend the current contract with lower minimum charges or migrate to different vendors). Management continues to assess both the potential for new business prospects and the possibility of reducing the Company's costs through renegotiation of existing agreements. In accordance with generally accepted accounting principles, the Company is accounting for these contract costs as they are incurred. General and Administrative General and administrative expenses decreased $1,580,000 to $7,204,000 in 2003 from $8,784,000 in 2002. The decrease was primarily attributable to the Company's reduction of corporate and administrative expenses that resulted from employee-related actions and aggressive expense controls. This included the reversal in the first quarter of approximately $630,000 in estimated accrued bonuses that were not paid, but were previously provided for during 2002, and the Company did not accrue for bonuses in fiscal year 2003 as none will be paid. Additionally, during the year, the Company ceased using one of its leased spaces at its Reston, Virginia facility and recorded an expense of $540,000 and corresponding liability for the estimated remaining lease payments net of estimated fair value of any sublease. This charge was offset by savings from telecommunication expenses and a one-time, favorable settlement of a matter related to tax payments made in 1996. Selling and Marketing Selling and marketing expenses decreased $1,037,000 to $1,830,000 in 2003 from $2,867,000 in 2002. This was primarily attributable to employee-related actions, lower travel costs and a reduction in tradeshow-related expenses. Research and Development Research and development costs decreased $3,787,000 to $5,020,000 in 2003 from $8,807,000 in 2002. The decrease was primarily attributable to the Company's reduction of research and development expenses that resulted from employee-related actions and reductions in consultant expenses. Amortization of Intangible Asset Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets ("SFAS 142"), requires the Company to not amortize goodwill and indefinite-lived intangibles into results of operations, but instead the Company would review these assets for impairment. The assets would be written down and impairment losses would be charged to results of operations only in the periods in which the recorded values are determined to be more than their fair values. The amortization of certain intangibles continued at an annualized rate of $720,000. As of January 1, 2002, in accordance with SFAS 142, the Company ceased recognizing amortization expense on goodwill and the assembled workforce intangible asset, and the assembled workforce intangible asset was combined with goodwill for financial accounting and reporting. In accordance with SFAS 142, the Company had six months from adoption (up until June 30, 2002) to complete the initial test for impairment as of January 1, 2002, the adoption date of SFAS 142. In accordance with the transition provisions of SFAS No. 142, the Company conducted the first step of the impairment tests. The Company assessed the fair value of its only reporting unit by considering its projected cash flows, comparable company valuations, and recent purchase prices paid for entities within our industry. Given consideration of these factors, the Company concluded that the fair value of the reporting unit exceeded the carrying amount of its net assets. The Company is required to perform reviews for impairment in future periods, at least annually, that may result in future periodic write-downs. Tests for impairment between annual tests may be required if events occur or circumstances change that would more likely than not reduce the fair value of the net carrying amount. As of June 30, 2003, the Company performed the required annual review for impairment using the same approach and similar consideration as the initial test. As a result, the Company concluded that the fair value of the reporting unit exceeds the carrying amount of its net assets. As of December 31, 2003, the Company was not aware of such events or circumstances that could indicate potential impairment. Realized Loss on Sale of Investment At December 31, 2001, the Company owned 640,000 warrant units to purchase Sybase, Inc. common stock. During June 2002, the Company exercised all of its 640,000 warrants units and sold the resulting 223,000 shares of Sybase common stock. The Company received net proceeds of approximately $1,718,000 and recognized a realized loss from sale of investment of approximately $748,000. The Company had no such liquidating events in 2003. Other Income Other income, primarily sublease rent receipts, interest income and other expenses, including state and local taxes, decreased $101,000 to $21,000 in 2003 from $122,000 in 2002. The decrease is primarily due to decreased interest income resulting from lower levels of average cash and cash equivalents in 2003 as compared to 2002. Income Taxes The provisions (benefit) for income taxes were $0 and $(137,000) for the years ended December 31, 2003 and 2002, respectively. The 2002 federal income tax benefit of $137,000 represents the recovery of alternative minimum tax paid in a prior year. Discontinued Operations Under various disposal plans adopted in 1997, 1998, and 2000, the Company completed the divestiture of all of its telecommunications, interactive services businesses and the Caller ID adjunct leasing activities, respectively. In 2003 and 2002, the Company did not have any income statement activity in discontinued operations. Income (Loss) from Continuing and Discontinued Operations, Weighted-Average Common Shares Outstanding and Basic and Diluted Earnings (Loss) Per Common Share The basic and diluted weighted-average common shares outstanding for the year ended December 31, 2003 was 50,028,000, compared to a basic and diluted weighted-average common shares outstanding of 48,869,000 for the year ended December 31, 2002. The increase resulted primarily from the issuance of stock awards to employees, issuance of stock pursuant to the exercises of stock warrants and stock options, and stock purchases under the Employee Stock Purchase Plan. During July 2003, the Company issued 1,431,364 shares of its common stock pursuant to the exercise of warrants, as amended, by institutional investors who participated in the Company's private placement of common stock in November and December, 2001. Losses from continuing operations were $1,672,000 and $8,646,000 for the years ended December 31, 2003 and 2002, respectively, while there was no gain or loss from discontinued operations in either period. Net losses were $1,672,000 and $8,646,000 for 2003 and 2002, respectively. As a result of the foregoing, basic and diluted net loss per common share was $0.03 for the year ended December 31, 2003 compared to a basic and diluted net loss per common share of $0.18 for the year ended December 31, 2002. Liquidity and Capital Resources At December 31, 2004, the Company had $3,223,000 in cash and cash equivalents, a decrease of $4,380,000 over the balance at December 31, 2003. Net cash used in operating activities was $4,385,000 in 2004, or an increase of $2,586,000 as compared to the net cash used in 2003. The primary driver of this increase in cash usage is the significant decline in revenues of $6,888,000 from $20,630,000 in 2003 to $13,742,000, which resulted in decreases in cash received from our clients. While the costs of revenues and operating expenses (excluding the goodwill impairment charge) decrease year over year, they did not decrease proportionately to the revenue decline. Net cash used in investing activities in 2004 was $51,000, which was a decline of $99,000 from the $150,000 used in 2003. The Company incurred less expenditures for the purchases of property and equipment in light of the revenue developments. Financing activities provided net cash of $56,000 in 2004 as compared to the $3,878,000 of net cash provided in 2003. In July 2003, institutional investors who participated in the Company's private placement of common stock in November and December 2001 exercised all related warrants and the Company issued 1,431,364 shares of its common stock pursuant to the exercise of warrants, as amended. This warrant exercise resulted in net proceeds of approximately $3,133,000. There was no such warrant exercised in 2004. Further, while the Company generated cash of $817,000 from stock option exercises and the employee stock purchase plan in 2003, it only generated $58,000 in 2004. Capital Resources - Our financial statements have been prepared assuming that the Company will continue as a going concern, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. There are factors that raise substantial doubt about our ability to continue as a going concern including the Company's financial position and results of operations. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. During 2004 and continuing into 2005, the Company assessed a variety of strategic alternatives, which were focused on enhancing InteliData's position in the electronic banking marketplace by exploring strategic opportunities intended to enhance stockholder value. For example, we actively pursued strategic alternatives including the possibility of selling assets, raising capital through private placements, and merging the Company with another entity. There can be no assurance that any transaction will result from these efforts. On March 31, 2005, the Company entered into a definitive agreement to be acquired by Corillian Corporation ("Corillian"), a publicly traded company (Nasdaq: CORI) based in Hillsboro, Oregon, that provides solutions that enable banks, brokers, financial portals and other financial service providers to rapidly deploy Internet-based financial services. The purchase consideration for the Company is approximately $19.5 million, subject to adjustment. Under the terms of the agreement, each outstanding share of the Company's common stock will be converted into the right to receive 0.0954 of a share of Corillian's common stock and $0.0832 in cash without interest. The closing of this transaction is subject to, among other things, the effectiveness of the registration/proxy statement on Form S-4 to be filed with the Securities and Exchange Commission and approval of the Company's stockholders. As a result, there can be no assurances that the acquisition will be completed or as to the timing thereof. In the event our merger with Corillian is not successful, we may be required to seek protection from our creditors, or we may need to sell assets and/or raise additional capital through private placements. While we continue to operate as a going concern, we have significant liquidity and capital resource issues relative to our ability to generate cash flows and to raise additional capital if needed. We may not be able to generate sufficient revenue to become profitable on a sustained basis, or at all. We have incurred significant losses and negative cash flows from operations for several years and our ability to raise or generate enough cash to survive may be questionable. We expect that the operating cash flow deficit will continue and absent further financing or significant improvement in sales, potentially result in our inability to continue operations. As a result of these and other factors, our independent registered public accounting firm has included in its report on the 2004 consolidated financial statements an explanatory paragraph expressing that there is substantial doubt about our ability to continue as a going concern. If the Corillian transaction is not successful, the Company's achievement of its operating plan remains predicated upon both existing and prospective clients' decisions to procure certain products and services in a timeframe consistent with the operating plan assumptions. Historically, these decisions have not evolved timely for varying reasons, including slower than expected market demand, budgetary constraints, and internal product development and resource initiatives. Further, based on the Company's declining financial condition, existing and prospective clients have expressed concerns regarding the risks of acquiring software and services from InteliData. While some are satisfied as long as the source code continues to be held in escrow, others are employing a wait-and-see approach to InteliData's continuation as a going concern. The Company believes the key factors to its liquidity in 2005 will be its ability to successfully execute on its plans to achieve sales levels, while operating at reduced operating expense levels. With projected sales to existing and prospective clients, management expects that the Company's cash and cash equivalents and projected funds from operations (which are principally the result of sales and collections of accounts receivable) will be sufficient to meet its anticipated cash requirements for the next several months. This expectation is based upon assumptions regarding cash flows and results of operations over the next several months and is subject to substantial uncertainty and risks that may be beyond our control. If these assumptions prove incorrect, the duration of the time period during which the Company could continue operations could be materially shorter. The occurrence of adverse developments related to these risks and uncertainties could result in the Company's incurring unforeseen expenses, being unable to generate projected sales, to collect new and outstanding accounts receivable, or to control expected expenses and overhead, and we would likely be unable to continue operations. In the event of continued future revenue delays, the Company would seek to adjust certain expense structures to mitigate the potential impact that these delays would have on its capital levels. These opportunities include additional reductions in general and administrative expenditures, managing research and development efforts consistent with existing and prospective client demands, and the potential of consolidating certain operational activities. During 2004, the Company reduced the full-time equivalent personnel by 14 to 72 as of December 31, 2004. Continuing into 2005, management reviewed the operating expenses in light of our financial condition and current plan. Further steps were taken to control costs and the full-time equivalent personnel was reduced by 15 to 57 as of March 28, 2005. Additional capital resources might be generated from activities that include the Company's selling of assets, issuing equity securities through private placements and/or merging the Company with another entity. If the Company engages in efforts to obtain additional capital, it can make no assurances that these efforts will be successful or that the terms of such funding would be beneficial to the common stockholders. If we issue additional equity securities to raise funds, the ownership percentage of our existing stockholders would be reduced. New investors may demand rights, preferences or privileges senior to those of existing holders of common stock. If we cannot raise any needed funds, we might be forced to make further substantial reductions in our operating expenses, which could adversely affect our ability to implement our current business plan and ultimately our viability as a company. On September 7, 2004, InteliData transferred the listing of its common stock from the Nasdaq National Market to the Nasdaq SmallCap Market due to our inability to comply with the minimum $1.00 bid price requirement. The initial grace period to regain compliance expired on December 13, 2004. On December 14, 2004, InteliData received a notice from Nasdaq that it had not regained compliance with the minimum $1.00 bid price per share requirement set forth in Marketplace Rule 4310(c)(4). Nasdaq also notified InteliData that, since it meets the other initial inclusion criteria for the SmallCap Market, it is being given an additional 180 calendar days, or until June 13, 2005, to regain compliance. If compliance with the criteria cannot be demonstrated by that time, InteliData's common stock would be delisted from the Nasdaq SmallCap Market. The possibility of a Nasdaq delisting could make capital-raising, selling and other activities more difficult. Off-Balance Sheet Arrangements and Contractual Obligations - The decision by the Company to divest itself of its telecommunications business segment created certain financial obligations and uncertainties for the future. The Company is required to satisfy certain obligations of the telecommunications business that will carry on beyond December 31, 2004. As of December 31, 2004, the Company had $40,000 in remaining liabilities related to the discontinued operations. During 2000, the Company sold the only remaining asset it had in the discontinued operations - the property and the building located thereon in New Milford, Connecticut. Liabilities remaining in the discontinued operations represent the Company's estimated liability related to the environmental clean up associated with prior tenants' operations at the New Milford location and other costs. The Company is working with its professional advisors and insurer to manage its exposure to liability for the potential environmental clean up. The Company has hired an environmental specialist firm to perform a study of the damages, to prepare a project plan, to work with the state and federal agencies, and to remediate the property. Additionally, the Company has acquired insurance to cap the potential costs and losses at a reasonable amount. Such amounts and insurance costs have been accrued for as of December 31, 2004. Management believes that the combination of the project plan and the insurance arrangements will cause the resolution of this matter to not have a material adverse effect on the Company's financial condition or results of operations. The Company entered into multiple vendor agreements for outsourced services as part of its ASP solution offering for certain Online Banking and Payment Solutions clients. Some of these vendor agreements commit the Company to specified minimum charges during the terms of the contracts. Management continues to assess the potential for new business prospects, the possibility of reducing the Company's costs through renegotiation of existing agreements, and/or exiting the ASP business by referring clients and prospects to a hosting vendor and providing a license solution and support services. There can be no assurance that the Company will be successful in mitigating these factors. In the event that new client revenues do not materialize, user growth rates from existing clients do not meet expected projections and/or the Company is not successful in its renegotiation efforts, the Company may experience future period losses from the Company's ASP business, which could have a material adverse impact on the Company's financial position, results of operations, and cash flows. In June 2004, the Company restructured a vendor agreement and decreased its overall prospective ASP operations costs. Entering 2005, the projected revenues are estimated to exceed projected costs by approximately $83,000 on a monthly basis based on the December 2004 results; this gap will fluctuate based on monthly activity. In accordance with generally accepted accounting principles, the Company is accounting for the committed contract costs as they are incurred. As a result of exploring available options, the Company has elected to allow its Fidelity Hosting agreement to expire in April 2005; however, InteliData will continue to participate in the Fidelity revenue-sharing agreement, which bears no anticipated direct costs. The Company leases facilities and equipment under cancelable and noncancelable operating lease agreements. Future minimum lease payments under noncancelable operating leases and future minimum payments under purchase obligations for outsourced services were as follows (in thousands) at December 31, 2004: Payment due by period ---------------------------------------------------------------------------------------------- Less than 1-3 3-5 More than Contractual Obligations Total 1 year years years 5 years ---------------------------------------------------------------------------------------------- Operating Lease Obligations $ 1,984 $ 1,145 $ 839 $ - $ - ---------------------------------------------------------------------------------------------- Purchase Obligations 640 640 - - - ---------------------------------------------------------------------------------------------- Total $ 2,624 $ 1,785 $ 839 $ - $ - ----------------------------------------------------------------------------------------------

The future minimum lease obligations do not include $223,000 of expected receipts from subleases. Litigation - The Company is not currently a party to any material litigation. From time to time, the Company may be 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. Critical Accounting Policies The following accounting policies are either ones that the Company considers to be the most important to its financial position and results of operations or ones that require the exercise of significant judgment and/or estimates. Revenue Recognition - The Company considers its revenue recognition policy critical to the understanding of our business operations and results of operations. The Company supplies online banking and bill payment software to FI's. The Company's revenues associated with integrated solutions that bundle software products with customization, installation and training services are recognized using the percentage of completion method of accounting based on cost incurred as compared to estimated costs at completion. The Company enters into contracts where the delivered software may not require significant customization. Upon delivery, the Company either recognizes revenue ratably over the contract period for contracts where vendor specific objective evidence ("VSOE") of fair value for post contract customer support ("PCS") does not exist or recognizes revenue for the delivered element where VSOE of fair value for PCS does exist (e.g., when the Company has substantive renewal rates for PCS). The Company generally utilizes the shipping terms of F.O.B. shipping point. Depending on the type of software and the terms of a particular contract, the client's receipt of the software is either based on F.O.B. shipping point or upon acceptance of the software, as defined by the applicable contract. The warranty provision is generally ninety days from either FOB shipping date or acceptance of the software. The Company enters into multiple element arrangements. Elements typically include software, consulting, implementation and PCS. PCS contracts generally require the Company to provide technical support and unspecified readily available software updates and upgrades to customers. Revenue for these multiple element arrangements is recognized when there is persuasive evidence of an arrangement and delivery to the customer has occurred, the fee is fixed and determinable, and collectibility is considered probable. Advance payments are recorded as deferred revenue until the products are shipped, services are delivered and all obligations are met. Currently, the Company does not have VSOE of fair value for some of the elements within its multiple element arrangements. Therefore, all revenue under such arrangements is being recognized ratably over the term of the PCS contract. Revenue from transactional services, which includes hosting and application services provider ("ASP") services, is recognized as transactions are processed. Emerging Issues Task Force Abstract Issue No. 00-3, Application of AICPA Statement of Position 97-2 to Arrangements that Include the Right to Use Software Stored on Another Entity's Hardware ("EITF 00-3"), provides guidance in determining whether or not the provisions of Statement of Position No. 97-2, Software Revenue Recognition ("SOP 97-2"), should be applied to hosting arrangements. The Company has some contracts where the customers operate software in an ASP environment. The customer may not take possession of the software without incurring significant transition and infrastructure costs, as well as potential payments of fees to the Company for the termination of such arrangements. In cases where the customer has not licensed software from InteliData, the customer must also purchase a license prior to having the right to use the software in its own operating environment, in addition to the aforementioned fees. In these situations, the Company applies the guidance under EITF 00-3 and the Staff Accounting Bulletin No. 101, Revenue Recognition in Financial Statements, and recognizes the revenue associated with the license and/or implementation fees ratably over the initial term of the contract. Additionally, based on the EITF 00-3 guidance, the Company concluded that SOP 97-2 should not be applied to certain of its software hosting contracts. Accordingly, the related revenues for license and professional services were recognized under the percentage of completion method. In addition to developing and delivering the solution, the Company is entitled to use fees based on the number of users and transactions. These use-based fees are earned based on the monthly user counts and as transactions are processed. Estimates at Completion - Revenues related to some of the Company's contracts are recognized using the percentage of completion method of accounting, which requires that we make estimates and judgments as to anticipated project scope, timing and costs to complete the projects. The completion of certain development efforts are critical for the Company to perform on certain contracts. Delays in product implementation or new product development at customer locations and product defects or errors could affect estimates and judgments. Additionally, we may experience delays when implementing our products at customer locations, and customers may be unable to implement our products in the time frames and with the functionalities that they expect or require. The accuracy of these estimates and judgments could affect the Company's business, operations, cash flows and financial condition. Allowance for Doubtful Accounts - Determination of our allowance for doubtful accounts requires significant estimates. Financial instruments that potentially subject the Company to credit risk consist principally of trade receivables. The Company sells its products primarily to FI's in the United States. The Company believes that the concentration of credit risk in its trade receivables is substantially mitigated by the Company's on-going credit evaluation process and the financial position of the FI's that are highly regulated. The Company does not generally require collateral from customers. The Company establishes an allowance for doubtful accounts based upon factors surrounding the credit risk of specific customers, historical trends and other information. A number of factors are considered in establishing the allowance, including historical collection experience, the macro-economic environment, estimates of forecasted write-offs, the aging of the accounts receivable portfolio, and others. If the financial condition of our accounts receivable portfolio deteriorates, additional allowances would be required. Valuation of Goodwill and Intangible Assets - On an annual basis (as of June 30th), the Company conducts a review of goodwill for impairment. The Company assesses the fair value of its only reporting unit for the purposes of testing goodwill by considering its projected cash flows, comparable company valuations, and recent purchase prices paid for entities within our industry. Given consideration of these factors, we determine whether the fair value of the reporting unit exceeds the carrying amount of our net assets. If the carrying amount of our reporting unit exceeds its fair value, we compare the implied fair value of reporting unit goodwill with the carrying amount of that goodwill. Since the carrying amount of reporting unit goodwill exceeded the implied fair value as of June 30, 2004, we recognized a $25,771,000 goodwill impairment charge in the second quarter of 2004. See below for a detailed discussion regarding the significant assumptions and estimates employed in this process and Note 12 to the Condensed Consolidated Financial Statements for additional details. We also review our amortizing intangible asset for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. Accordingly, when appropriate, the Company reviews its long-lived assets (including amortizing intangible assets) for impairment at the enterprise level initially following an undiscounted cash flow approach following the guidance in SFAS No. 144. In reviewing long-lived assets for impairment, the Company evaluates the probability of certain reasonably possible scenarios as appropriate, such as operating as a going concern and/or selling the business, so long as the scenarios were actively considered by the Company as of the end of the relevant period. If the sum of the expected future cash flows is less than the carrying amount of the asset, the Company would recognize an impairment loss equal to the difference between the fair value and the carrying value of the asset. The fair value would be calculated following a discounted cash flow approach. These reviews require the Company to make estimates of projected cash flows in order to determine if its assets are impaired. We make significant assumptions and estimates in this process regarding matters that are inherently uncertain, such as making revenue and cost projections, calculating remaining useful lives, assuming discount rates and costs of capital, among others. Reviews for impairment between annual reviews may be required if events occur or circumstances change that would more likely than not reduce the fair value of the net carrying amount. While we believe that our estimates are reasonable, different assumptions regarding such cash flows (for example, either based on varying costs of capital, changes in underlying economic assumptions, or any resulting transaction from strategic initiatives) could materially affect our valuation. Depreciation of Fixed Assets - The Company's business requires our investment in office and computer equipment to facilitate certain research and development activities and to support the operations in serving our customers. We record these assets at cost and depreciate the assets over their estimated useful lives. We periodically reassess the economic life of these elements and make adjustments to these useful lives using historical experience, capacity requirements, and assessments of new product and market demands. When these factors indicate certain elements may not be useful for as long as anticipated, we depreciate the remaining book value over the remaining useful life. Further, the timing and deployment of any new technologies could affect the estimated lives of our assets, which could have significant impacts on results of operations in the future. Recent Accounting Pronouncements - In May 2003, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity ("SFAS 150"), which requires that an issuer classify financial instruments that are within scope of SFAS 150 as a liability. Under prior guidance, these same instruments would be classified as equity. SFAS 150 is effective for all financial instruments entered into or modified after May 31, 2003. Otherwise, it is effective on July 1, 2003. The adoption of SFAS 150 did not have a material effect on our financial position, results of operations, or cash flows. In May 2003, the FASB issued SFAS No. 149, Amendment of Statement 133 on Derivative Instruments and Hedging Activities ("SFAS 149"), which amends and clarifies financial accounting and reporting for derivative instruments, including certain derivative instruments embedded in other contracts (collectively referred to as derivatives) and for hedging activities under SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities. SFAS 149 is effective for contracts entered into or modified after June 30, 2003, and for hedging relationships designated after June 30, 2003. The adoption of SFAS 149 did not have a material impact on our financial position, results of operations, or cash flows. In November 2002, the Emerging Issues Task Force issued a final consensus on Issue No. 00-21, "Revenue Arrangements with Multiple Deliverables" ("EITF 00-21"). In an arrangement with multiple deliverables, EITF 00-21 provides guidance on how the arrangement consideration should be measured, whether the arrangement should be divided into separate units of accounting and how the arrangement consideration should be allocated among the separate units of accounting. To the extent that a multiple-deliverable arrangement or a deliverable in a multiple-deliverable arrangement is within the scope of higher-level authoritative literature, EITF 00-21 does not apply. The guidance in this Issue is effective for revenue arrangements entered into in fiscal periods beginning after June 15, 2003. The adoption of EITF 00-21 did not have a significant effect on our operations, financial position, or cash flows. In June 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities (including Certain Costs Incurred in a Restructuring) ("SFAS 146"), which supersedes Emerging Issues Task Force Issue No. 94-3, Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity ("EITF 94-3"). SFAS 146 requires recognition of a liability for costs associated with an exit or disposal activity when the liability is incurred, rather than when the entity commits to an exit plan under EITF 94-3. The provisions of SFAS 146 are effective for exit or disposal activities that are initiated after September 30, 2002. As of March 31, 2003, the Company ceased using one of its leased spaces at its offices in Reston, Virginia. The fair value of the remaining obligation on this lease, net of the fair value of sublease rent, was approximately $540,000. Accordingly, the Company recorded an expense of $540,000 and a corresponding liability as of March 31, 2003. As of May 1, 2003, the Company has a subtenant for this space for the majority of the remaining lease term and the actual results of net sublease rent could differ from the above estimates. As of December 31, 2004, the estimated remaining liability was approximately $264,000. In July 2004, the Company determined that it would be more cost-effective to relocate its South Carolina operations to its headquarters in Reston, Virginia, based on the number of remaining employees and the existing operations at the time. Accordingly, the Company relocated two employees, designated three others as field employees and ceased using its leased office space in Charleston, South Carolina. The fair value of the remaining obligation on this lease, net of the fair value of sublease rent, was approximately $45,000. Accordingly, the Company recorded an expense of $45,000 and a corresponding liability in July. As of December 31, 2004, the Company had not been successful in securing a subtenant for this space and the estimated remaining liability was approximately $33,000. Cautionary Statement for Purposes of the "Safe Harbor" Provisions of the Private Securities Litigation Reform Act of 1995 This Form 10-K filing and the documents incorporated by reference herein contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the "Securities Act") and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), the realization of which may be impacted by the factors discussed below. These forward-looking statements are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 (the "Act"). The Company cautions readers that the following important factors, among others, in some cases have affected the Company's actual results, and could cause the Company's actual results to differ materially from those expressed in any forward-looking statements made by, or on behalf of, the Company. The following list of factors should not be construed as exhaustive or as any admission regarding the adequacy of disclosures made by the Company prior to the date hereof or the effectiveness of said Act. Additionally, the Company is not under any obligation (and expressly disclaims an obligation to) to update or alter its forward-looking statements, whether as a result of new information or otherwise. We wish to caution you that such risks and uncertainties include, but are not limited to: o stockholders of InteliData may fail to approve the merger with Corillian or other conditions to closing of the merger may not be satisfied; o the operating costs, customer loss and business disruption following the merger, including adverse effects on relationship with employees, may be greater than expected; o the businesses of Corillian and InteliData may not be combined successfully, or such combination may take longer to accomplish than expected; o our ability to continue funding operating losses; o the impact of declines in our stock price and our ability to maintain minimum listing standards of the NASDAQ stock markets; o different assumptions regarding cash flows (for example, either based on varying costs of capital, changes in underlying economic assumptions, or any resulting financial or strategic transactions) affecting valuation analyses; o our ability to develop, sell, deliver and implement our payment solution products and services, some of which are largely unproven in a production environment, to financial institution customers; o our ability to manage our expenses in line with anticipated business levels; o our ability to complete product implementations in required time frames; o our ability to maintain customers and increase our recurring revenues and/or reduce operating costs associated with our ASP business in order to make this operation profitable or the impact of our termination of our ASP operations; o our ability to retain key customers and to increase revenues from existing customers; o the impact of customers deconverting from use of our products and services to the use of competitive products or in-house solutions; o the effect of planned customer migrations from outsourced solutions to in-house solutions with a resulting loss of recurring revenue; o the impact of competitive products, pricing pressure, product demand and market acceptance risks; o the pace of consumer acceptance of online banking and reliance on our bank clients to increase usage of Internet banking by their customers; o the effect of general economic conditions on the financial services industry; o mergers and acquisitions; o the risks of integration of our technology; o the ability of financial institution customers to implement applications in the anticipated time frames or with the anticipated features, functionality or benefits; o our reliance on key strategic alliances and newly emerging technologies; o our ability to leverage our third-party relationships into new business opportunities; o the on-going viability of the mainframe marketplace and demand for traditional mainframe products; o our ability to attract and retain key employees; o the availability of cash for long-term growth; o product obsolescence; o our ability to reduce product costs; o fluctuations in our operating results; o delays in development of highly complex products; o the ability to comply with, and incur the costs related to, the provisions of Section 404 of the Sarbanes-Oxley Act of 2002 requiring that management perform an evaluation of its internal controls over financial reporting and have its independent auditors attest to such evaluation; and o other risks detailed from time to time in our filings with the Securities and Exchange Commission. In some cases, you can identify forward-looking statements by terms such as "may," "will," "should," "could," "would," "expects," "intends," "plans," "anticipates," "believes," "estimates," "projects," "predicts," "potential," and similar expressions intended to identify forward-looking statements. These statements reflect our current views with respect to future events and are based on assumptions and subject to risks and uncertainties. Given these uncertainties, you should not place undue reliance on these forward-looking statements. We discuss many of these risks in this prospectus in greater detail under the heading "Risk Factors." In connection with forward-looking statements that appear in these disclosures, readers hereby should carefully consider the factors set forth under "Risk Factors." RISK FACTORS Risk Factors Particular to Our Company We may require additional capital, which we may not be able to obtain, to be able to fund future operating losses, working capital needs and capital expenditures. The continuation, development, and growth of our business may require additional capital in the future to fund our operating losses, working capital needs and capital expenditures. The capital markets are very volatile and we may not be able to obtain future equity or debt financing in the future on satisfactory terms or at all. Our failure to generate sufficient cash flows from sales of products and services or to raise sufficient funds may require us to delay or abandon some or all of our development and expansion plans or otherwise forego market opportunities. Our inability to obtain additional capital on satisfactory terms may impact our ability to continue our business at current levels or expand our business in the future, which could cause our business, operating results and financial condition to suffer. We may not be successful in consummating any financial or strategic transaction. We have been exploring a variety of financial and strategic alternatives, which may include the raising of additional capital, the sale or merger of the Company or the sale of certain assets of the Company. The closing of the proposed merger with Corillian is subject to, among other things, customary closing conditions, the effectiveness of the registration/proxy statement on Form S-4 to be filed with the Securities and Exchange Commission and stockholder approval. As a result, there can be no assurances that the acquisition will be completed or as to the timing thereof. If the proposed merger with Corillian is not completed, whether due to the failure of stockholders to approve the transaction or to the failure to satisfy closing conditions, we would seek to sell some of our assets or attempt to raise capital. We cannot assure stockholders that the assets could be sold at all. There is no assurance that any financial or strategic alternatives will be available, or, if available, will be on terms acceptable to us or our stockholders. If we are unable to identify and consummate a financial or strategic transaction, we may be required to substantially reduce or cease and windup our operations. As disclosed in this annual report on Form 10-K, the Company has recurring losses from operations and is experiencing difficulty in generating cash flow. These conditions, among others, raise substantial doubt about our ability to continue as a going concern. The Company's future success is highly dependent on our ability to develop, sell, implement and deliver Payment Solutions products and services, some of which are new and unproven in a financial institution's production environment. The Company has invested heavily in its Payment Solutions products for the EBPP market and believes that the success of our offerings for this market is critical to our long-term success. Because some of the Company's products for this market are relatively new and have not been fully deployed either at a customer's site or for a customer in an ASP environment, there can be no assurance that the products will perform with the capabilities expected or that the products will be competitive without further significant development efforts. We may not be able to manage our expenses in line with anticipated business levels. We continually seek to control our general and administrative expenses and assess our operations in managing the continued development of infrastructure to handle anticipated business levels. Our inability to control expenses and manage our infrastructure could cause our business, operating results and financial condition to suffer. The Company has imposed expense controls in an attempt to conserve available cash. However, at our current revenue levels, it is unlikely that the Company will be able to achieve profitability through expense controls alone and expense controls may also impact our ability to increase revenues. We may not be able to comply with, and incur the costs related to, the provisions of Section 404 of the Sarbanes-Oxley Act of 2002 requiring that management perform an evaluation of its internal controls over financial reporting and have its independent auditors attest to such evaluation. As an issuer with a smaller market capitalization, we have limited financial staff and resources and are at an inherent compliance disadvantage. The initial cost of compliance has been significantly higher than projected. The Company may not be able to fund the on-going cost of compliance. Actual costs of Section 404 of the Sarbanes- Oxley Act are not one-time events and may be difficult to quantify and predict and we anticipate they will continue to increase in the near future. Without adequate resources, the Company may not be able to comply fully with the Sarbanes-Oxley Act. Rapidly changing technologies could make our products obsolete, which may adversely affect our business, operations and financial condition. Our business activities are concentrated in fields characterized by rapid and significant technological advances. It is possible that our products and services will not remain competitive technologically or that our products, processes or services will not continue to be reflective of such advances. The following, among other factors, may adversely affect our ability to be technologically competitive: o our competitors may develop other technologies that could render our products and services noncompetitive or obsolete; o we may be unable to locate, hire and retain management and other key personnel with the skills and abilities required to further advance and develop our software products and services and to maintain our technological competitiveness; o we may be unable to introduce new products or product enhancements that achieve timely market acceptance and meet financial institutions' or Internet banking or EBPP customers' needs; o we may encounter unanticipated technical, marketing or other problems or delays relating to new products, features or services that we recently introduced or that we may introduce in the future; o we may be unable to keep pace with our competitors' spending on research and development of new products because most of our competitors and potential competitors have significantly greater financial, technological and research and development resources than we have; o we may be unable to develop, produce and market new products as cheaply as our competitors and we may not be able to offer new products to customers at a competitive price; and o we may be unable to leverage our relationships with third parties. An inability to compete successfully in an increasingly competitive and crowded marketplace could adversely affect our business, operations and financial condition. The market for Internet banking and other interactive financial products and services is highly competitive and subject to rapid innovation and technological change, shifting consumer preferences and frequent new product introductions. A number of corporations, including S-1 Corporation, Corillian Corporation, Financial Fusion, Inc., CheckFree Corporation, Online Resources Corporation, Digital Insight Corporation, Metavante Corporation, and Incurrent Solutions, Inc., most of which have greater resources than us, offer products and services that compete directly with the products and services we offer. We expect the number of competitors in the Internet banking and EBPP products and services industry to expand greatly as a result of the popularity of the Internet and widespread ownership of personal computers. We foresee our future competitors as including: o banks that have already developed (or plan to develop) Internet banking and EBPP products for their own customers, with the possibility of offering the products to other banks and other banks' customers; o non-banks that may develop Internet banking and EBPP products to offer to banks; and o computer software and data processing companies that currently offer, or will offer Internet banking and EBPP services through the use of their broad distribution channels that may be used to bundle competing products directly to end-users or purchasers. Our operating results fluctuate, which could have an adverse effect on our business, operations and financial condition. Our quarterly operating results have varied significantly in the past, and it is likely that they will vary greatly in the future. Some of the factors that will likely cause our operating results to fluctuate are: o the size and timing of customer orders; o changes in our pricing policies or those of our competitors; o new product introductions or enhancements by our competitors or by us; o delays in the introduction of new products or product enhancements by our competitors or by us; o customer order deferrals by our customers in anticipation of upgrades and new products; o the loss of revenue from customers either converting to an in-house solution or to a competitor's solution; o the reduction in recurring revenue from a customer converting from an outsourced solution to an in-house solution using our products after paying a one-time license fee; o the possibility of future losses due to the decrease in estimated future ASP revenue streams when compared with our current contractual costs for outsourced services in our ASP operations; o market acceptance of new products; o the timing and nature of sales, marketing, and research and development expenses by our competitors or by us; and o other changes in operating expenses, personnel changes and general economic conditions. Additionally, certain banks and other financial institutions recently have combined or are proposing to combine, and we are unable to assess the future effect that those combinations and other possible consolidations in the banking industry will have upon us. Merger and acquisition activity almost always causes delays in procurement decisions by banks and also reduces the number of potential customers in our market. No assurance can be given that quarterly variations in our operating results will not occur in the future, and accordingly, the results of any one quarter may not be indicative of the operating results for future quarters. Our stock price fluctuates significantly and could adversely affect our business, operations and financial condition. It is likely that in the future our common stock will continue to experience the significant volatility it has experienced in the past. Our common stock is currently traded on the Nasdaq SmallCap Market. The stock market, particularly in recent years, has experienced volatility that has been especially acute with respect to high technology-based stocks such as ours. The volatility of technology-based and development stage stocks has often been unrelated to the operating performance of the companies represented by the stock. Factors such as announcements of the introduction of new products or services by our competitors or by us, market conditions in the banking and other emerging growth company sectors and rumors relating to our competitors or us have had a significant impact on the market price of our common stock in the past. The Company's stock could be delisted from Nasdaq SmallCap Market. Our stock has closed at less than $1.00 per share since May 2004 and was transferred to The Nasdaq SmallCap Market on September 7, 2004. The Company was provided 180 calendar days, or until December 13, 2004, to regain compliance with the $1.00 per share minimum closing bid requirements. The closing bid price of the common stock did not exceed $1.00 per share during that 180-day period, however, the Company was afforded an additional 180 calendar days, or until June 13, 2005, to regain compliance. If the Company does not regain compliance, it will not be afforded an additional compliance period beyond that date on the SmallCap Market. If compliance with the Rule cannot be demonstrated by June 13, 2005, the Company's securities will be delisted. The Company has the right to appeal Nasdaq's determination to a Listing Qualifications Panel. We possess limited patent or registered intellectual property rights with respect to our technology and any loss or infringement of those rights could cause us to lose a valuable competitive advantage or incur costly litigation expenses that adversely affect our business, operations and financial condition. We possess limited patent or registered intellectual property rights with respect to our technology. We depend, in part, upon our proprietary technology and know-how to differentiate our products from those of our competitors and work independently and from time to time with third parties with respect to the design and engineering of our own products. We also rely on a combination of contractual provisions, trademarks, and trade secret laws to protect our proprietary technology. There can be no assurance, however, that we will be able to protect our technology or successfully develop new technology or gain access to such technology, that third parties will not be able to develop similar technology independently or design around our intellectual property rights, that competitors will not obtain unauthorized access to our proprietary technology, that third parties will not misuse the technology to which we have granted them access, or that our contractual or legal remedies will be sufficient to protect our interests in our proprietary technology. Enforcing or defending our intellectual property rights could be very expensive. If we cannot preserve our intellectual property rights, we may be at a competitive disadvantage. Claims against us for infringement of another party's intellectual property rights could cause us to incur costly litigation expenses or impact our ability to offer products or services to our market. The Internet banking software and services industry has become an area of substantial litigation concerning intellectual property rights. Claims of infringement by third parties could have a significant adverse impact on our business. The expenses associated with defending claims, even if successful, are often significant. In the event that we were found to infringe a third party's rights, we would be required to enter into a royalty arrangement to continue to offer the infringing products and services. If we were unable to obtain acceptable royalty terms, we would be forced to discontinue offering the infringing products and services or modify the products and services to become non-infringing. This could result in the significant loss of revenues or considerable additional expense. Delays in the development of new products or in the implementation of new or existing products at customer locations and defects or errors in the products we sell could adversely affect our business, operations and financial condition. Software development for our market is highly complex. We may experience delays in the development of the software and computing systems underlying our products and services. Additionally, we may experience delays when implementing our products at customer locations, and customers may be unable to implement our products in the time frames and with the functionalities that they expect or require. There can be no assurance that, despite our testing, errors will not be found in the underlying software, or that we will not experience development delays, resulting in delays in the shipment of our products, the commercial release of our products or in the market acceptance of our products, each of which could have a material adverse effect on our business, operations and financial condition. We are dependent on key personnel, the loss of whom could adversely affect our business, operations and financial condition. Additionally, we will need to locate, hire and retain additional qualified personnel to continue to grow our business. Our performance is substantially dependent on the performance of our executive officers and key employees. We depend on our ability to retain and motivate high quality personnel, especially management and skilled development teams. The loss of services of any of our executive officers or other key employees could have a material adverse effect on our business, operations or financial condition. Our future success also depends on our continuing ability to identify, hire, train and retain other highly qualified technical and managerial personnel. Competition for such personnel is intense, and there can be no assurance that we will be able to attract, assimilate or retain other highly qualified technical and managerial personnel in the future. The inability to attract and retain the necessary technical and managerial personnel could have a material adverse effect upon our business, operations or financial condition. Certain provisions of Delaware law, our certificate of incorporation and bylaws make a takeover by a third-party difficult. Certain provisions of Delaware law and of our certificate of incorporation and bylaws could have the effect of making it more difficult for a third party to acquire, or of discouraging a third party from attempting to acquire, control of us. These provisions include: o a provision allowing us to issue preferred stock with rights senior to those of the common stock without any further vote or action by the holders of common stock. The issuance of preferred stock could decrease the amount of earnings and assets available for distribution to the holders of common stock or could adversely affect the rights and powers, including voting rights, of the holders of the common stock. In certain circumstances, such issuance could have the effect of decreasing the market price of the common stock; o the existence of a stock rights plan that results in the dilution of the value of common stock held by a potential acquirer; o the existence of a staggered board of directors in which there are three classes of directors serving staggered three-year terms, and thereby expanding the time required to change the composition of a majority of directors and perhaps discouraging someone from making an acquisition proposal for us; o the bylaws' requirement that stockholders provide advance notice when nominating our directors; o the inability of stockholders to convene a stockholders' meeting without the meeting first being called by the chairman of the board of directors or the secretary at the request of a majority of the directors; and o the application of Delaware law prohibiting us from entering into a business combination with the beneficial owner of 15% or more of our outstanding voting stock for a period of three years after the 15% or greater owner first reached that level of stock ownership, unless certain criteria are met. Risk Factors Associated With Our Industry Our Payment Solution products and services are targeted for the EBPP industry, which is a relatively new and developing market, and our success depends on the acceptance and growing use of electronic bill presentment and payment. EBPP continues to be a developing market. Our future financial success in the relatively new EBPP marketplace depends, in part, upon: o consumer acceptance of, and financial institutions' support for, EBPP technologies; o continued growth in personal computer sales and the number of personal computers with Internet access and continued reductions in the cost of personal computers and Internet access; o the degree of financial institutions' success in marketing EBPP products to their customers at little or no cost to the customer, and the ability of these institutions to implement applications in anticipated time frames or with anticipated features and functionalities; and o the impact of current and future regulatory controls and oversight of the Internet and electronic commerce. Even if this market experiences substantial growth, there can be no assurance that our products and services will be commercially successful or that we will benefit from such growth. Therefore, there can be no assurance as to the timing, introduction, or market acceptance of, or necessary regulatory approvals for, our products and services. Concerns related to system security and consumer protections could prevent the widespread acceptance of Internet banking and EBPP and could adversely affect our business, operations and financial condition. The willingness of consumers and financial institutions to use personal computer and Internet-based banking, bill payment and other financial services will depend, in part, upon the following factors: o our ability to protect consumer information relating to personal computer and Internet-based banking and other financial services against the risk of fraud, counterfeit and technology failure; o the frequency of interruptions, delays and cessation in service to financial institutions and individuals resulting from computer viruses, break-ins or other problems; o the increase in the cost of our services and products, as well as the cost to up-grade the services and products to keep pace with rapidly changing computer and Internet technologies, may be increased by expenditures of capital and resources to reduce security breaches, break-ins and computer viruses; o the erosion of public and consumer confidence in the security and privacy of Internet banking and EBPP; and o whether financial institutions are able to offer internal banking and EBPP service to their customers at little or no cost. The threat of increased government regulation of the Internet and the continuing legal uncertainty and potential liabilities associated with sharing personal and financial information on the Internet could adversely affect our business, operations and financial condition. Our products rely on the cost-effectiveness of, and ease of access to, the Internet. There are currently few laws or regulations directly applicable to commerce or other communications on the Internet. However, due to the increasing popularity and use of the Internet, it is possible that new laws and regulations may be adopted with respect to the Internet, covering issues such as user privacy, the collection or processing of personal information, copyright infringement and the pricing, characteristics and quality of products and services. Consumers' concerns relating to privacy, security and increasing regulation could hinder the use of the Internet and the growth of our business. The adoption of restrictive laws or regulations may increase the cost of doing business over the Internet. The application to the Internet of existing laws and regulations governing such issues as property ownership and personal privacy is subject to substantial uncertainty. Mandatory privacy and security standards and protocols still are being developed by government agencies, and we may incur significant expenses to comply with any requirements that are ultimately adopted. Our financial institution customers require that our products and services will permit them to operate in compliance with all applicable laws and regulations. We may become subject to direct regulation as the market for our products and services evolves. Additionally, current or new government laws and regulations, or the application of existing laws and regulations, may expose us to significant liabilities or otherwise impair our ability to achieve our strategic objectives through increased operating costs or reduced market acceptance. If Internet use does not grow as a result of privacy or security concerns, increasing regulation or for other reasons, the sale of Internet banking and electronic bill presentment and payment products would be hindered and our business, operations and financial condition would be adversely affected. ITEM 7a. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK ------------------------------------------------------------------------ The Company currently has no long-term debt and is not currently engaged in any transactions that involve foreign currency. The Company does not engage in hedging activities. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA ----------------------------------------------------- INDEX TO THE CONSOLIDATED FINANCIAL STATEMENTS Page ---- Consolidated Financial Statements Consolidated Balance Sheets as of December 31, 2004 and 2003, as restated...35 Consolidated Statements of Operations for the Years Ended December 31, 2004, 2003, and 2002, as restated............................36 Consolidated Statements of Changes in Stockholders' Equity for the Years Ended December 31, 2004, 2003, and 2002, as restated............................37 Consolidated Statements of Cash Flows for the Years Ended December 31, 2004, 2003, and 2002, as restated............................38 Notes to the Consolidated Financial Statements for the Years Ended December 31, 2004, 2003, and 2002, as restated............................39 Report of Independent Registered Public Accounting Firm.......................58 INTELIDATA TECHNOLOGIES CORPORATION CONSOLIDATED BALANCE SHEETS DECEMBER 31, 2004 AND 2003 (in thousands, except share data) 2004 2003 ------------ ------------ (as restated) (see Note 2(n)) ASSETS CURRENT ASSETS Cash and cash equivalents $ 3,223 $ 7,603 Accounts receivable, net 1,437 2,890 Other receivables 16 180 Prepaid expenses and other current assets 545 625 ------------ ------------ Total current assets 5,221 11,298 NONCURRENT ASSETS Property and equipment, net 833 1,529 Goodwill -- 25,771 Intangible asset, net 4,340 5,060 Other assets 211 211 ------------ ------------ TOTAL ASSETS $ 10,605 $ 43,869 ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES Accounts payable $ 1,003 $ 1,517 Accrued expenses 2,223 1,635 Deferred revenues 1,269 1,051 Liabilities of discontinued operations 40 59 ------------ ------------ TOTAL CURRENT LIABILITIES 4,535 4,262 Accrued expenses 225 342 Deferred revenues 150 300 Liabilities of discontinued operations -- 75 ------------ ------------ TOTAL LIABILITIES 4,910 4,979 ------------ ------------ COMMITMENTS AND CONTINGENCIES STOCKHOLDERS' EQUITY Preferred stock, $0.001 par value; authorized 5,000,000 shares; no shares issued and outstanding -- -- Common stock, $0.001 par value; authorized 100,000,000 shares; issued 52,169,000 shares in 2004 and 52,065,000 shares in 2003; outstanding 51,134,000 shares in 2004 and 51,231,000 shares in 2003 52 52 Additional paid-in capital 307,020 306,963 Treasury stock, at cost: 1,035,000 shares in 2004 and 834,000 shares in 2003 (2,648) (2,546) Deferred compensation (23) (108) Accumulated deficit (298,706) (265,471) ------------ ------------ TOTAL STOCKHOLDERS' EQUITY 5,695 38,890 ------------ ------------ TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 10,605 $ 43,869 ============ ============

See accompanying notes to the consolidated financial statements. INTELIDATA TECHNOLOGIES CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002 (in thousands, except per share data) 2004 2003 2002 --------- -------- --------- (as restated) (as restated) (see Note 2(n)) (see Note 2(n)) Revenues Software license $ 158 $ 1,235 $ 1,289 Consulting services 1,474 3,964 5,785 Use-based 10,057 13,874 12,902 Maintenance 2,053 1,544 1,266 Other -- 13 253 --------- -------- --------- Total revenues 13,742 20,630 21,495 --------- -------- --------- Cost of revenues Consulting services, recurring and termination fees 6,318 7,549 8,474 --------- -------- --------- Total cost of revenues 6,318 7,549 8,474 --------- -------- --------- Gross profit 7,424 13,081 13,021 Operating expenses General and administrative 8,180 7,204 8,784 Selling and marketing 1,056 1,830 2,867 Research and development 4,937 5,020 8,807 Amortization of intangible asset 720 720 720 Goodwill impairment charge 25,771 -- -- --------- -------- --------- Total operating expenses 40,664 14,774 21,178 --------- -------- --------- Operating loss (33,240) (1,693) (8,157) Realized loss on sale of investment -- -- (748) Other income (expenses), net 5 21 122 --------- -------- --------- Loss before income taxes (33,235) (1,672) (8,783) Benefit for income taxes -- -- (137) --------- -------- --------- Net loss $ (33,235) $ (1,672) $ (8,646) ========== ======== ========= Basic and diluted earnings (loss) per common share $ (0.65) $ (0.03) $ (0.18) ========== ======== ========= Basic and diluted weighted-average common shares outstanding 51,271 50,028 48,869 ========== ======== =========

See accompanying notes to the consolidated financial statements. INTELIDATA TECHNOLOGIES CORPORATION CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY YEARS ENDED DECEMBER 31, 2004, 2003, AND 2002 (in thousands) Additional Preferred Stock Common stock Paid-in Treasury Deferred Shares Amount Shares Amount Capital Stock Compensation ------ ------ ------ ------ ------- ----- ------------ Balance at January 1, 2002, (as previously reported) -- $ -- 49,725 $ 50 $ 303,141 $ (2,473) $ (1,395) Adjustment (see Note 2(n)) -- -- -- -- -- -- 280 ------ ------ ------ ------ --------- --------- ------------ Balance at January 1, 2002, (as restated; see Note 2(n)) -- $ -- 49,725 $ 50 $ 303,141 $ (2,473) $ (1,115) Issuance of common stock: Exercise of stock options -- -- 11 -- 15 -- -- Employee stock purchase plan -- -- 30 -- 30 -- -- Issuance of restricted stock -- -- 139 -- 247 -- (247) Cancellation of restricted stock -- -- (108) -- (406) -- 406 2000 Home Account Incentive Plan -- -- -- -- (194) -- 194 Realized gains on investments sold -- -- -- -- -- -- -- Amortization of deferred compensation (as restated; see Note 2(n)) -- -- -- -- -- -- 658 Net loss (as restated; see Note 2(n)) -- -- -- -- -- -- -- Comprehensive loss (as restated; see Note 2(n)) ------ ------ ------ ------ --------- --------- ------------ Balance at December 31, 2002, (as restated; see Note 2(n)) -- $ -- 49,797 $ 50 $ 302,833 $ (2,473) $ (104) ------ ------ ------ ------ --------- --------- ------------ Issuance of common stock: Exercise of stock options -- -- 669 1 802 -- -- Employee stock purchase plan -- -- 16 -- 15 -- -- Exercise of stock warrants -- -- 1,454 1 3,132 -- -- Issuance of restricted stock -- -- 155 -- 226 -- (226) Cancellation of restricted stock -- -- (26) -- (45) -- 45 Purchase of treasury stock, at cost -- -- -- -- -- (73) -- Amortization of deferred compensation (as restated; see Note 2(n)) -- -- -- -- -- -- 177 Net loss (as restated; see Note 2(n)) -- -- -- -- -- -- -- Comprehensive loss (as restated; see Note 2(n)) ------ ------ ------ ------ --------- --------- ------------ Balance at December 31, 2003, (as restated; see Note 2(n)) -- $ -- 52,065 $ 52 $ 306,963 $ (2,546) $ (108) Issuance of common stock: Exercise of stock options -- -- 56 -- 42 -- -- Employee stock purchase plan -- -- 28 -- 16 -- -- Issuance of restricted stock -- -- 95 -- 99 -- (99) Cancellation of restricted stock -- -- (75) -- (100) -- 100 Purchase or receipt of treasury stock, at cost -- -- -- -- -- (102) -- Amortization of deferred compensation -- -- -- -- -- -- 84 Net loss -- -- -- -- -- -- -- Comprehensive loss ------ ------ ------ ------ --------- --------- ------------ Balance at December 31, 2004 -- $ -- 52,169 $ 52 $ 307,020 $ (2,648) $ (23) ------ ------ ------ ------ --------- --------- ------------ Accumulated Other Comprehensive Accumulated Comprehensive Income (Loss) Deficit Loss Total ------------- ------- -------- ------- Balance at January 1, 2002, (as previously reported) $ 210 $(255,058) $ 44,475 Adjustment (see Note 2(n)) -- (95) 185 ------------- ------- -------- -------- Balance at January 1, 2002, (as restated; see Note 2(n)) $ 210 $(255,153) $ 44,660 Issuance of common stock: Exercise of stock options -- -- 15 Employee stock purchase plan -- -- 30 Issuance of restricted stock -- -- -- Cancellation of restricted stock -- -- -- 2000 Home Account Incentive Plan -- -- -- Realized gains on investments sold (210) -- $ (210) (210) Amortization of deferred compensation (as restated; see Note 2(n)) -- -- 658 Net loss (as restated; see Note 2(n)) -- (8,646) (8,646) (8,646) Comprehensive loss (as restated; see Note 2(n)) $ (8,856) ------------- ------- -------- --------- Balance at December 31, 2002, (as restated; see Note 2(n)) $ -- $(263,799) $ 36,507 ------------- ------- -------- --------- Issuance of common stock: Exercise of stock options -- -- 803 Employee stock purchase plan -- -- 15 Exercise of stock warrants -- -- 3,133 Issuance of restricted stock -- -- -- Cancellation of restricted stock -- -- -- Purchase of treasury stock, at cost -- -- (73) Amortization of deferred compensation (as restated; see Note 2(n)) -- -- 177 Net loss (as restated; see Note 2(n)) -- (1,672) $ (1,672) (1,672) Comprehensive loss (as restated; see Note 2(n)) $ (1,672) ------------- ------- -------- -------- Balance at December 31, 2003, (as restated; see Note 2(n)) $ -- $(265,471) $ 38,890 Issuance of common stock: Exercise of stock options -- -- 42 Employee stock purchase plan -- -- 16 Issuance of restricted stock -- -- -- Cancellation of restricted stock -- -- -- Purchase or receipt of treasury stock, at cost -- -- (102) Amortization of deferred compensation -- -- 84 Net loss -- (33,235) $(33,235) (33,235) Comprehensive loss $(33,235) ------------- ------- -------- -------- Balance at December 31, 2004 $ -- $ (298,706) $ 5,695 ------------- ------- -------- --------

See accompanying notes to the consolidated financial statements. INTELIDATA TECHNOLOGIES CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED DECEMBER 31, 2004, 2003, AND 2002 (in thousands) 2004 2003 2002 ----------- ------------ ----------- (as restated) (as restated) (see Note 2(n)) (see Note 2(n)) Cash flows from operating activities Net loss $ (33,235) $ (1,672) $ (8,646) Adjustments to reconcile net loss to net cash used in operating activities of continuing operations: Realized loss on sales of investments -- -- 748 Goodwill impairment charge 25,771 -- -- Amortization of intangible asset 720 720 720 Depreciation and amortization 739 1,037 1,532 Deferred compensation expense 84 177 658 Net loss on disposal of property and equipment 8 138 23 Changes in operating assets and liabilities: Accounts receivable 1,453 84 2,018 Prepaid expenses and other current assets 144 270 31 Accounts payable (514) (564) (1,215) Accrued expenses and accrued rent 471 (1,550) (2,051) Deferred revenue 68 (322) (1,491) ----------- ------------ ----------- Net cash used in operating activities of continuing operations (4,291) (1,682) (7,673) Cash released from escrow account 224 -- -- Payments of liabilities of discontinued operations (318) (117) (253) ----------- ------------ ----------- Net cash used in discontinued operations (94) (117) (253) ----------- ------------ ----------- Net cash used in operating activities (4,385) (1,799) (7,926) Cash flows from investing activities Proceeds from sales of investments -- -- 1,968 Purchases of property and equipment (51) (150) (389) Payments on acquisition related costs -- -- (50) ----------- ------------ ----------- Net cash (used in) provided by investing activities (51) (150) 1,529 ----------- ------------ ----------- Cash flows from financing activities Proceeds from the issuance of common stock 58 3,951 45 Payments to acquire treasury stock (2) (73) -- Net cash provided by financing activities 56 3,878 45 ----------- ------------ ----------- (Decrease) increase in cash and cash equivalents (4,380) 1,929 (6,352) Cash and cash equivalents, beginning of year 7,603 5,674 12,026 ----------- ------------ ----------- Cash and cash equivalents, end of year $ 3,223 $ 7,603 $ 5,674 =========== ============ ===========

See accompanying notes to the consolidated financial statements. INTELIDATA TECHNOLOGIES CORPORATION NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2004, 2003, AND 2002 (AS RESTATED) (1) ORGANIZATION InteliData Technologies Corporation and subsidiaries ("InteliData" or the "Company") provides electronic bill payment and presentment ("EBPP") and online banking solutions to the financial services industry. The Company's products provide financial institutions ("FI's") with the real-time financial processing infrastructure needed to provide their customers with payment and presentment services and online banking via the Internet and other online delivery channels. The Company markets its products and services to banks, credit unions, brokerage firms, financial institution processors and credit card issuers. InteliData's product suite consists of three complementary product offerings: Payment and Presentment ----------------------- o Payment Solutions - providing payment warehousing, payment matching, biller directory management, and least cost routing functionality for EBPP transactions; o Card Services - providing Internet-based account activation, bill presentment, balance consolidation, and e-Statement capabilities; and Online Banking -------------- o Online Banking - providing Internet-based access to real-time account information, as well as interfaces to personal financial management software such as Intuit's Quicken(R) and Microsoft Money(R). The Company has invested in developing products and capabilities designed to establish a leadership position in the online bill payment market. The Company believes this market opportunity is significant based on the billions of recurring bills that consumers and businesses pay each year, primarily via paper checks. FI's should be able to realize significant cost and efficiency benefits from initiating these payments online and processing them electronically. Migrating to online electronic payments will require significant investment in online bill payment infrastructure, which is where the Company's products are focused. On March 31, 2005, the Company entered into a definitive agreement to be acquired by Corillian Corporation ("Corillian"), a publicly traded company (Nasdaq: CORI) based in Hillsboro, Oregon, that provides solutions that enable banks, brokers, financial portals and other financial service providers to rapidly deploy Internet-based financial services. The purchase consideration for the Company is approximately $19.5 million, subject to adjustment. Under the terms of the agreement, each outstanding share of the Company's common stock will be converted into the right to receive 0.0954 of a share of Corillian's common stock and $0.0832 in cash without interest. The closing of this transaction is subject to, among other things, the effectiveness of the registration/proxy statement on Form S-4 to be filed with the Securities and Exchange Commission and approval of the Company's stockholders. As a result, there can be no assurances that the acquisition will be completed or as to the timing thereof. The Company is incorporated in the State of Delaware and has its corporate headquarters in Reston, Virginia. There are operating facilities in Omaha, Nebraska and Toledo, Ohio. (2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (a) Principles of Consolidation - The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries after elimination of all inter-company balances and transactions. Certain reclassifications have been made to the prior year financial statements to conform to the 2004 financial statement presentation. (b) Accounting Estimates- The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the period. Estimates include, but are not limited to, allowance for doubtful accounts, costs of environmental remediation for real property previously sold, depreciation of fixed assets, valuation of intangible assets which include goodwill, provision for discontinued operations, and project plans for the completion and delivery of certain solutions. These accounting estimates are based on information currently available. Actual results could differ from those estimates and in some cases the actual results could vary materially from the estimates. (c) Revenue Recognition - The Company supplies online banking and bill payment software to FI's. The Company's revenues associated with integrated solutions that bundle software products with customization, installation and training services are recognized using the percentage of completion method of accounting based on cost incurred as compared to estimated costs at completion. The Company enters into contracts where the delivered software may not require significant customization. Upon delivery, the Company either recognizes revenue ratably over the contract period for contracts where vendor specific objective evidence ("VSOE") of fair value for post contract customer support ("PCS") does not exist or recognizes revenue for the delivered element where VSOE of fair value for PCS does exist (e.g., when the Company has substantive renewal rates for PCS). The Company generally utilizes the shipping terms of F.O.B. shipping point. Depending on the type of software and the terms of a particular contract, the client's receipt of the software is either based on F.O.B. shipping point or upon acceptance of the software, as defined by the applicable contract. The warranty provision is generally ninety days from either FOB shipping date or acceptance of the software. The Company also enters into multiple element arrangements. Elements typically include software, consulting, implementation and PCS. PCS contracts generally require the Company to provide technical support and unspecified, readily available software updates and upgrades to customers. Revenue for these multiple element arrangements is recognized when there is persuasive evidence of an arrangement and delivery to the customer has occurred, the fee is fixed and determinable, and collectibility is considered probable. Advance payments are recorded as deferred revenue until the products are shipped, services are delivered and all obligations are met. Currently, the Company does not have VSOE of fair value for some of the elements within its multiple element arrangements. Therefore, all revenue under such arrangements is being recognized ratably over the term of the PCS contract. Revenue from transactional services, which includes hosting and application services provider ("ASP") services, is recognized as transactions are processed. Emerging Issues Task Force Abstract Issue No. 00-3, Application of AICPA Statement of Position 97-2 to Arrangements that Include the Right to Use Software Stored on Another Entity's Hardware ("EITF 00-3"), provides guidance in determining whether or not the provisions of Statement of Position No. 97-2, Software Revenue Recognition ("SOP 97-2"), should be applied to hosting arrangements. The Company has some contracts where the customers operate software in an ASP environment. The customer may not take possession of the software without incurring significant transition and infrastructure costs, as well as potential payments of fees to the Company for the termination of such arrangements. In cases where the customer has not licensed software from InteliData, the customer must also purchase a license prior to having the right to use the software in its own operating environment, in addition to the aforementioned fees. In these situations, the Company applies the guidance under EITF 00-3 and the Staff Accounting Bulletin No. 101, Revenue Recognition in Financial Statements, and recognizes the revenue associated with the license and/or implementation fees ratably over the initial term of the contract. Additionally, based on the EITF 00-3 guidance, the Company concluded that SOP 97-2 should not be applied to certain of its software hosting contracts. Accordingly, the related revenues for license and professional services were recognized under the percentage of completion method. In addition to developing and delivering the solution, the Company is entitled to use fees based on the number of users and transactions. These use-based fees are earned based on the monthly user counts and as transactions are processed. (d) Cash and Cash Equivalents - The Company considers all non-restricted, highly liquid investments with original maturities of three months or less to be cash equivalents. Cash and cash equivalents are stated at cost, which approximates their fair market value. (e) Investments - The Company accounted for its investments in the warrants to acquire Sybase, Inc. common stock under Statement of Financial Accounting Standard ("SFAS") No. 133, Accounting for Derivative Instruments and Hedging Activities ("SFAS 133"), which establishes accounting and reporting standards for derivative instruments and for hedging activities by requiring that all derivatives be recognized in the balance sheet and measured at fair value. SFAS No. 149, Amendment of Statement 133 on Derivative Instruments and Hedging Activities ("SFAS 149"), was issued in April 2003 to amend and clarify the financial accounting and reporting guidance for derivative instruments and hedging activities. The adoption of SFAS 149 did not have a material effect on our financial position, results of operations, or cash flows. The Company reported its investments in marketable securities as available-for-sale with any unrealized holding gains and losses, net of the related income tax effect, excluded from earnings and reported as a separate component of stockholders' equity until such gains or losses are realized. Dividends and interest income are recognized when earned. Realized gains or losses are included in earnings and are derived using the first-in, first-out method for determining cost of securities sold. (f) Property and Equipment - Property and equipment is stated at cost, net of any accumulated depreciation. Depreciation of property and equipment is calculated using the straight-line method over the estimated useful lives of the assets, which are generally in the range of two to seven years. (g) Deferred Revenues - Deferred revenues represent unearned revenues for services that have not yet been provided or where certain accounting revenue recognition criteria have not yet been met. (h) Income Taxes - Income taxes are accounted for in accordance with the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Valuation allowances are established against deferred tax assets when it is deemed, based on available evidence, that it is more likely than not that some portion or all of the deferred tax asset will not be realized. (i) Accounting for Stock-Based Compensation - The Company accounts for employee stock options in accordance with Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees ("APB 25"). Under APB 25, the Company recognizes no compensation expense related to employee stock options, as no options are granted at a price below the market price on the day of grant. The Company accounts for stock options issued to non-employees in accordance with the provisions of SFAS No. 123, Accounting for Stock-Based Compensation ("SFAS 123"). SFAS 123 prescribes the recognition of compensation expense based on the fair value of options on the grant date and allows companies to continue applying APB 25 if certain pro forma disclosures are made assuming hypothetical fair value method application. The Company has elected to continue to apply the provisions of APB 25 for options granted to employees and provide the pro forma disclosures pursuant to SFAS 123. Pro forma information regarding the Company's net loss has been determined as if the Company had accounted for its employee stock options under the fair value method of SFAS 123. Under the fair value method, compensation costs are measured at the grant date based on the fair value of the award and are recognized over the service period. The weighted-average fair values of options granted during 2004, 2003, and 2002 were $0.26, $1.70, and $0.95, per share, respectively. The fair value is determined by using the Black-Scholes option-pricing model with the following assumptions: 2004 2003 2002 ----- ----- ----- Risk free interest rate 3.43% 2.97% 3.82% Dividend yield 0% 0% 0% Volality 107% 81% 105% Expected life of options (years) 6 6 6 Had compensation cost been determined based on the fair value method of SFAS 123, the Company's results of operations would have been as follows (in thousands, except for per share data) for the years ended December 31: 2004 2003 2002 --------- -------- --------- Net loss, as reported $ (33,235) $ (1,672) $ (8,646) Stock-based employee compensation expense (271) (1,327) (3,264) --------- -------- ---------- Pro forma net loss $ (33,506) $ (2,999) $ (11,910) ========== ======= ========== Basic and diluted loss per common share $ (0.65) $ (0.06) $ (0.24) ========== ======== ========== In December 2004, the FASB published SFAS No. 123 (revised 2004), Share-Based Payment ("SFAS 123(R)"), which replaces SFAS 123 and supersedes APB 25. SFAS 123(R) requires that the compensation cost relating to share-based payment transactions be recognized in the financial statements. That cost will be measured based on the fair value of the equity or liability instruments issued. The Company will be required to apply SFAS 123(R) as of the first interim or annual reporting period that begins after June 15, 2005. The Company has not calculated the financial impact of adopting this standard. (j) Earnings (Loss) Per Common Share - Basic earnings (loss) per common share ("EPS") is computed by dividing net income (loss) by the basic weighted-average common shares outstanding during the year. Diluted EPS reflects the dilutive effect of stock options and stock awards granted to employees under stock-based compensation plans, as well as stock warrants. The effects of stock options and warrants were not included in the loss per share computations in 2004, 2003 and 2002, because they would have been anti-dilutive. (k) Fair Value of Financial Instruments - The carrying values of the Company's financial instruments such as cash and cash equivalents, accounts receivable, accounts payable and accrued expenses, approximate their fair values. (l) Concentration of Credit Risk - Financial instruments that potentially subject the Company to credit risk consist principally of trade receivables. The Company sells its products primarily to FI's in the United States. The Company believes that the concentration of credit risk in its trade receivables and cash and cash equivalents is substantially mitigated by the financial position of the FI's that are highly regulated. The Company does not generally require collateral from customers. The Company establishes an allowance for doubtful accounts based upon factors surrounding the credit risk of specific customers, historical trends and other information. As of December 31, 2004, the Company's top eight customers comprised approximately 73% of the accounts receivable balance. (m) Recent Accounting Pronouncements - In May 2003, the Financial Accounting Standards Board ("FASB") issued SFAS No. 150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity ("SFAS 150"), which requires that an issuer classify financial instruments that are within the scope of SFAS 150 as a liability. Under prior guidance, these same instruments would be classified as equity. SFAS 150 is effective for all financial instruments entered into or modified after May 31, 2003. Otherwise, it is effective on July 1, 2003. The adoption of SFAS 150 did not have a material effect on our financial position, results of operations, or cash flows. In December 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based Compensation-Transition and Disclosure-an amendment of FAS 123 ("SFAS 148"). SFAS 148 amends SFAS No. 123, Accounting for Stock-Based Compensation ("SFAS 123"), to provide alternative methods of transition for an entity that voluntarily changes to the fair value based method of accounting for stock-based employee compensation. It also amends the disclosure provisions of SFAS 123 to require prominent disclosure about the effects on reported net income of an entity's accounting policy decisions with respect to stock-based employee compensation as noted in note 2(i). SFAS 148 also amends APB Opinion No. 28, Interim Financial Reporting, to require disclosure about those effects in interim financial information. SFAS 148 is effective for annual and interim periods beginning after December 15, 2002. As the Company has elected not to change to the fair value based method of accounting for stock-based employee compensation, SFAS 148 did not have any impact on our financial position, results of operations, or cash flows. In June 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities (including Certain Costs Incurred in a Restructuring) ("SFAS 146"), which supersedes Emerging Issues Task Force Issue No. 94-3, Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity ("EITF 94-3"). SFAS 146 requires recognition of a liability for costs associated with an exit or disposal activity when the liability is incurred, rather than when the entity commits to an exit plan under EITF 94-3. The provisions of SFAS 146 are effective for exit or disposal activities that are initiated after September 30, 2002. As of March 31, 2003, the Company ceased using one of its leased spaces at its offices in Reston, Virginia. The fair value of the remaining obligation on this lease, net of the fair value of sublease rent, was approximately $540,000. Accordingly, the Company recorded an expense of $540,000 and a corresponding liability as of March 31, 2003. As of May 1, 2003, the Company has a subtenant for this space for the majority of the remaining lease term and the actual results of net sublease rent could differ from the above estimates. As of December 31, 2004, the estimated remaining liability was approximately $264,000. In July 2004, the Company determined that it would be more cost-effective to relocate its South Carolina operations to its headquarters in Reston, Virginia, based on the number of remaining employees and the existing operations at the time. Accordingly, the Company relocated two employees, designated three others as field employees and ceased using its leased office space in Charleston, South Carolina. The fair value of the remaining obligation on this lease, net of the fair value of sublease rent, was approximately $45,000. Accordingly, the Company recorded an expense of $45,000 and a corresponding liability in July 2004. As of December 31, 2004, the Company had not been successful in securing a subtenant for this space and the estimated remaining liability was approximately $33,000. (n) Restatement of Consolidated Financial Statements - Subsequent to the issuance of the consolidated financial statements for the year ended December 31, 2003, the Company determined that the previous consolidated financial statements require restatement to correct errors related to a lease restructuring, deferred rent liabilities, lease purchase accounting, warrant to issue Company stock and an income tax contingency as discussed below. Lease Restructuring - As of March 31, 2003, the Company ceased using one of ------------------- its leased spaces at its offices in Reston, Virginia. Accordingly, the Company recorded an expense and a corresponding liability of $625,000 which equaled the net of the undiscounted remaining obligation on the lease of approximately $1,080,000 through December 31, 2006, and the discounted estimated net sublease rent of $455,000. The initial estimate of sublease rent in the first quarter of 2003 did not extend through December 31, 2006 and also did not include the latest information we had available when we filed our Form 10-Q for the quarter. As the liability was not fully discounted, the recorded liability was not accreted. We have concluded that there was an error in the application of the concepts of SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities (including Certain Costs Incurred in a Restructuring) ("SFAS 146"), with respect to this lease. Under the provisions of SFAS 146, the Company should have determined the fair value of the liability at the cease-use date by taking the remaining lease obligation (adjusted for the effects of any prepaid or deferred items recognized under the lease, see Deferred Rent Liabilities section below for additional detail), reduced by estimated sublease rentals that could be reasonably obtained for the property for all periods covered by the lease, and discounting the resulting net liability using a credit-adjusted risk-free rate appropriate for the first quarter of 2003. The discounted liability should be accreted over the lease term. The impact of these changes was to decrease the lease restructuring liability by $74,000 as of December 31, 2003. Deferred Rent Liabilities - Prior to the fourth quarter of 2003, the --------------------------- Company had not previously recognized rent expense on operating leases on a straight-line basis as required by FASB Technical Bulletin 85-3, Accounting for Operating Leases with Scheduled Rent Increases ("FTB 85-3"). As of December 31, 2003, the Company recorded a current deferred rent liability of $171,000 and expensed the related cumulative additional lease expense during the fourth quarter. The entire liability was classified as short-term as of December 31, 2003, even though certain leases extended beyond twelve months. In addition, the $171,000 recorded liability included approximately $121,000 of deferred rent liability related to the operating lease that was accounted for under SFAS 146 during the first quarter of 2003 (see Lease Restructuring discussion above). We have concluded that there was an error in the application of the concepts of FTB 85-3 with respect to our operating leases. This accounting results in the recordation of a deferred rent liability for all periods presented due to scheduled rent increases in the leases. Other guidance relating to the classification of liabilities requires the non-current portion of the deferred rent liability to be presented as a long-term liability on the balance sheet. Further, as mentioned above, SFAS 146 requires consideration of the deferred rent liability when recording the fair value of the net liability otherwise the liability (and related expense) recognized in 2003 is double counted. The impact of these changes was to decrease the deferred rent liability to $50,000, decrease the current deferred rent liability by $169,000, and increase the long-term deferred rent liability by $48,000 as of December 31, 2003. Lease Purchase Accounting - The Company recorded a lease liability of --------------------------- approximately $1 million in purchase accounting when it acquired Home Account in the first quarter of 2001 as the Company met the criteria for recognition of the liability under EITF 95-3, Recognition of Liabilities in Connection with a Purchase Business Combination ("EITF 95-3"). The liability recorded represented the undiscounted amount of the remaining lease payments through early 2005 under the operating lease for the former Home Account headquarters, which was closed. As the liability was not discounted, the liability was not accreted over the lease term. At that time, the liability was appropriately not reduced for anticipated sublease income due to the significant downturn in the local real estate market. In the third quarter of 2002, the Company subleased the space to a tenant for approximately $12,000 per month or a total of approximately $363,000 from that point until the end of the lease in early 2005. As the Company received sublease rent payments in 2002, 2003, and 2004, it increased the related lease liability. The Company reversed these cumulative increases to the liability to income in the fourth quarter of 2003. We have concluded that there was an error in the application of the concepts of APB 16, Business Combinations ("APB 16"), EITF 95-3, and other relevant accounting literature with respect to this lease. APB 16 requires the lease liability recorded in purchase accounting to be recorded at a discounted amount and for such amount to be accreted over the lease term. EITF 95-3 requires that a lease liability recorded in purchase accounting be reversed against goodwill rather than as a credit in the statement of operations when the liability requires a downward adjustment. Other accounting literature requires the Company to revise the lease liability for sublease rentals when those rentals are considered to be reasonable assured. The impact of these changes was to decrease the recorded liability by $238,000 as of December 31, 2003, to increase rent accretion expense by approximately $40,000 and $29,000 for the years ended December 31, 2003 and 2002, respectively, and to decrease othere income by approximately $158,000 for the year ended December 31, 2003. Warrant - In the second quarter of 2000, InteliData granted a warrant to ------- purchase common stock to a client in exchange for the client's becoming a premier reference site for the Company. The warrant was granted in anticipation of the installation of software delivered as part of an agreement with the client signed in 1999. The warrant agreement is in effect through June 30, 2005. The warrant was fully vested, nonforfeitable, and exercisable on the date of grant. InteliData appropriately measured the fair value of the warrant on the date of grant as approximately $419,000 and recorded the amount on the balance sheet. The Company amortized the warrants to expense over the five-year term of the agreement at approximately $20,000 of expense per quarter or approximately $80,000 per year. We have concluded that there was an error in the application of the concepts of EITF 96-18, Accounting for Equity Instruments That Are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or Services. The Company should have recognized the full value of the warrant in the statement of operations on the grant date. Further, the charge to the statement of operations should have been recorded as a contra revenue item in 2000 following the guidance in EITF 01-09, Accounting for Consideration Given by a Vendor to a Customer (Including a Reseller of the Vendor's Products), to the extent there was cumulative revenue on the associated contract. Accordingly, the Company offset approximately $265,000 against revenue and recorded the balance of approximately $154,000 as costs of revenues during 2000. The impact of this change was to decrease deferred compensation (a contra-equity account) by $120,000 as of December 31, 2003. Income Tax Contingency - InteliData reversed a $288,000 tax liability and ------------------------ recorded the related tax benefit in the statement of operations in 2003. The original alternative minimum tax liability recorded in 2000 was incorrectly calculated by $288,000. We have concluded that there was an error in the application of the concepts of SFAS No. 5, Accounting for Contingencies, in 2000 with respect to this accrual. This change increased the net loss by $288,000 for the year ended December 31, 2003, however, it did not have any impact to the accumulated deficit as of December 31, 2003. The combined effect of these changes resulted in an increase to accumulated deficit of $221,000 and $147,000 as of December 31, 2003 and 2002, respectively, and an increase to accumulated deficit of $95,000 as of January 1, 2002. The following is a summary of the effects of the restatement on our consolidated balance sheet as of December 31, 2003 and consolidated statements of operations for the years ended December 31, 2003 and 2002. Further, Note 14 to the consolidated financial statements contain restated unaudited quarterly financial data for the years ended December 31, 2004 and 2003, reflecting these adjustments in the appropriate periods. Consolidated Balance Sheet as of December 31, 2003 As Previously As (in thousands) Reported Restated -------------------------------------------------------------------------------- Goodwill $ 26,238 $ 25,771 TOTAL ASSETS 44,336 43,869 Accounts payable 1,531 1,517 Accrued expenses 1,963 1,635 Deferred revenues 1,351 1,051 Net liabilities of discontinued operations 45 59 TOTAL CURRENT LIABILITIES 4,890 4,262 Accrued rent 380 342 Deferred revenues - 300 TOTAL LIABILITIES 5,345 4,979 Deferred compensation (228) (108) Accumulated deficit (265,250) (265,471) TOTAL STOCKHOLDERS' EQUITY 38,991 38,890 Consolidated Statements of Operations As Previously As (in thousands, except per share data) Reported Restated --------------------------------------------------- --------------- ---------- For the year ended December 31, 2003 Operating expenses General and administrative $ 7,496 $ 7,204 Selling and marketing 1,910 1,830 Total operating expenses 15,146 14,774 Operating Loss (2,065) (1,693) Other income (expense), net 179 21 Loss before income taxes (1,886) (1,672) Benefit for income taxes (288) - -------- --------- Net loss $ (1,598) $ (1,672) ======== ========= For the year ended December 31, 2002 Operating expenses General and administrative 8,629 8,784 Selling and marketing 2,947 2,867 Total operating expenses 21,103 21,178 Operating Loss (8,082) (8,157) Other income (expense), net 99 122 Loss before income taxes (8,731) (8,783) Benefit for income taxes (137) (137) -------- --------- Net loss $ (8,594) $ (8,646) ======== ========= (o) Going Concern Assumption - Our financial statements have been prepared assuming that the Company will continue as a going concern, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. There are factors that raise substantial doubt about our ability to continue as a going concern including the Company's financial position and results of operations. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. During 2004 and continuing into 2005, the Company assessed a variety of strategic alternatives, which were focused on enhancing InteliData's position in the electronic banking marketplace by exploring strategic opportunities intended to enhance stockholder value. For example, we actively pursued strategic alternatives including the possibility of selling assets, raising capital through private placements, and merging the Company with another entity. There can be no assurance that any transaction will result from this effort. As stated in Note 1, the Company entered into a definitive agreement to be acquired by Corillian. The closing of this transaction is subject to, among other things, the effectiveness of the registration/proxy statement on Form S-4 to be filed with the Securities and Exchange Commission and approval of the Company's stockholders. As a result, there can be no assurances that the acquisition will be completed or as to the timing thereof. In the event our merger with Corillian is not successful, we may be required to seek protection from our creditors, or we may need to sell assets and/or raise additional capital through private placements. While we continue to operate as a going concern, we have significant liquidity and capital resource issues relative to our ability to generate cash flows and to raise additional capital if needed. We may not be able to generate sufficient revenue to become profitable on a sustained basis, or at all. We have incurred significant losses and negative cash flows from operations for several years and our ability to raise or generate enough cash to survive may be questionable. We expect that the operating cash flow deficit will continue and absent further financing or significant improvement in sales, potentially result in our inability to continue operations. As a result of these and other factors, our independent registered public accounting firm has included in its report on the 2004 consolidated financial statement an explanatory paragraph expressing that there is substantial doubt about our ability to continue as a going concern. If the Corillian transaction is not successful, the Company's achievement of its operating plan remains predicated upon both existing and prospective clients' decisions to procure certain products and services in a timeframe consistent with the operating plan assumptions. Historically, these decisions have not evolved timely for varying reasons, including slower than expected market demand, budgetary constraints, and internal product development and resource initiatives. Further, based on the Company's declining financial condition, existing and prospective clients could express concerns regarding the risks of acquiring software and services from InteliData. While some may be satisfied as long as the source code continues to be held in escrow, others could employ a wait-and-see approach to InteliData's continuation as a going concern. The Company believes the key factors to its liquidity in 2005 will be its ability to successfully execute on its plans to achieve sales levels, while operating at reduced operating expense levels. With projected sales to existing and prospective clients, management expects that the Company's cash and cash equivalents and projected funds from operations (which are principally the result of sales and collections of accounts receivable) will be sufficient to meet its anticipated cash requirements for the next several months. This expectation is based upon assumptions regarding cash flows and results of operations over the next several months and is subject to substantial uncertainty and risks that may be beyond our control. If these assumptions prove incorrect, the duration of the time period during which the Company could continue operations could be materially shorter. The occurrence of adverse developments related to these risks and uncertainties could result in the Company's incurring unforeseen expenses, being unable to generate projected sales, to collect new and outstanding accounts receivable, or to control expected expenses and overhead, and we would likely be unable to continue operations. In the event of continued future revenue delays, the Company would seek to adjust certain expense structures to mitigate the potential impact that these delays would have on its capital levels. These opportunities include additional reductions in general and administrative expenditures, managing research and development efforts consistent with existing and prospective client demands, and the potential of consolidating certain operational activities. During 2004, the Company reduced the full-time equivalent personnel by 14 to 72 as of December 31, 2004. Continuing into 2005, management reviewed the operating expenses in light of our financial condition and current plan. Further steps were taken to control costs and the full-time equivalent personnel was reduced by 15 to 57 as of March 28, 2005. Additional capital resources might be generated from activities that include the Company's selling of assets, issuing equity securities through private placements and/or merging the Company with another entity. If the Company engages in efforts to obtain additional capital, it can make no assurances that these efforts will be successful or that the terms of such funding would be beneficial to the common stockholders. If we issue additional equity securities to raise funds, the ownership percentage of our existing stockholders would be reduced. New investors may demand rights, preferences or privileges senior to those of existing holders of common stock. If we cannot raise any needed funds, we might be forced to make further substantial reductions in our operating expenses, which could adversely affect our ability to implement our current business plan and ultimately our viability as a company. On September 7, 2004, InteliData transferred the listing of its common stock from the Nasdaq National Market to the Nasdaq SmallCap Market due to our inability to comply with the minimum $1.00 bid price requirement. The initial grace period to regain compliance expired on December 13, 2004. On December 14, 2004, InteliData received a notice from Nasdaq that it had not regained compliance with the minimum $1.00 bid price per share requirement set forth in Marketplace Rule 4310(c)(4). Nasdaq also notified InteliData that, since it meets the other initial inclusion criteria for the SmallCap Market, it is being given an additional 180 calendar days, or until June 13, 2005, to regain compliance. If compliance with the criteria cannot be demonstrated by that time, InteliData's common stock would be delisted from the Nasdaq SmallCap Market. The possibility of a Nasdaq delisting could make capital-raising, selling and other activities more difficult. (3) INVESTMENTS In January 2000, Home Financial Network, Inc. ("HFN"), a company in which InteliData held approximately a 25% ownership interest, merged with Sybase, Inc. ("Sybase"). As part of the merger agreement, the Company received 640,000 "warrant units" with an exercise price of $2.60 per warrant unit. Upon exercise of each warrant unit, the Company was entitled to receive $1.153448 in cash and 0.34794 share of Sybase common stock. Prior to January 1, 2001, the Company considered its investment in warrants to purchase common stock of Sybase to be available-for-sale under the provisions of SFAS 115. Effective January 1, 2001, the Company adopted SFAS 133, which establishes accounting and reporting standards for derivative instruments and for hedging activities by requiring that all derivatives be recognized in the balance sheet and measured at fair value. SFAS 133 requires that all derivative financial instruments, such as forward currency exchange contracts, interest rate swaps and the Company's warrants to purchase Sybase stock, be recognized in the financial statements and measured at fair value regardless of the purpose or intent for holding them. Changes in the fair value of derivative financial instruments are either recognized periodically in income or stockholders' equity (as a component of comprehensive income), depending on whether the derivative is being used to hedge changes in fair value or cash flows. The Company's holdings of the Sybase warrants are defined as derivatives under this guidance. The Company's adoption of SFAS 133, effective January 1, 2001, did not have a material effect on the Company's financial statements as of the adoption date and did not result in an adjustment for the cumulative effect of an accounting change, because the carrying value reflected fair value under the previous accounting guidance. During June 2002, the Company exercised all of its 640,000 warrants units to purchase Sybase common stock and sold the resulting 223,000 shares of Sybase common stock. The Company received net proceeds of approximately $1,718,000 and recognized a realized loss from sales of investments of approximately $748,000. As of January 1, 2002, the accumulated other comprehensive loss balance of $210,000 represented the changes in the fair market value of the Sybase common stock recorded as unrealized gains on investments under SFAS 115. This amount was realized with the Company's disposition of the remaining Sybase investments in June 2002. (4) PROPERTY AND EQUIPMENT Property and equipment consists of the following at December 31 (in thousands): 2004 2003 ------- ------- Building improvements $ 195 $ 194 Office equipment 4,808 4,844 Furniture and fixtures 765 765 ------- ------- 5,768 5,803 Accumulated depreciation (4,935) (4,274) ------- ------- Total $ 833 $ 1,529 ======= ======= (5) ACCRUED EXPENSES AND OTHER LIABILITIES Accrued expenses and other liabilities consist of the following at December 31 (in thousands): 2004 2003 ------- ------- Accrued compensation $ 449 $ 773 Accrued professional fees 1,242 215 Accrued insurance 205 257 Other liabilities 327 390 Total current accrued expenses and other liabilities 2,223 1,635 ----- ----- Other liabilities 225 342 Total noncurrent accrued expenses and other liabilities 225 342 ------ ---- Total accrued expenses and other liabilities $ 2,448 $ 1,977 (6) DISCONTINUED OPERATIONS Under various disposal plans adopted in 1997, 1998, and 2000, the Company completed the divestiture of all of its telecommunications, interactive services businesses and the Caller ID adjunct leasing activities, respectively. As of December 31, 2004, the liabilities of discontinued operations of $40,000 relate to the telecommunications divisions. These liabilities relate to the environmental clean up associated with prior tenants' operations at InteliData's former New Milford, Connecticut property. In January 2000, InteliData sold the New Milford, Connecticut property and the building located thereon, its only remaining asset in its discontinued operations of the telecommunications division. In the context of this sale, InteliData agreed to undertake limited remediation of the site in accordance with applicable state and federal law. The subject site is not a listed federal or state Superfund site and InteliData has not been named a "potentially responsible party" at the site. The remediation plan agreed to with the purchaser allows InteliData to use engineering and institutional controls (e.g., deed restrictions) to minimize the extent and costs of the remediation. Further, at the time of the sale of the facility, InteliData established a $200,000 escrow account from the proceeds of the sale for certain investigation/remediation costs. In April 2004, the escrow balance of approximately $224,000 was released and paid to InteliData. Moreover, InteliData has obtained environmental insurance to pay for remediation costs up to $6,600,000 in excess of a retained exposure limit of $600,000. InteliData estimates its remaining liability at December 31, 2004 related to this matter and other costs to be approximately $40,000 and has a liability recorded for this amount. The Company has engaged a legal firm and an environmental specialist firm to represent it regarding this matter. The timing of the ultimate resolution of this matter is estimated to be from two to four years under the Company's proposed compliance plan, which involves a natural attenuation and periodic compliance monitoring approach. Management does not believe that the resolution of this matter will likely have a material adverse effect on the Company's financial condition or results of operations. The liabilities of discontinued operations as of December 31, are as follows (in thousands): 2004 2003 ----- ----- Other current liabilities $ 40 $ 59 Other noncurrent liabilities - 75 ----- ----- Total $ 40 $ 134 ===== ===== (7) STOCKHOLDERS' EQUITY (a) Issuance and Subsequent Conversion of Preferred Stock and Warrants - In July 1999, the Company issued 600 shares of 4% Convertible Preferred Stock and warrants to purchase 120,000 shares of InteliData common stock. As of December 31, 1999, all of the preferred stock was converted into common stock. The fair value of these 120,000 warrants, which expire five years from the issuance date and have an exercise price of $4.53, was estimated as of the grant date using the Black-Scholes model. The following assumptions were used: no dividend yield, expected volatility of 129%, life of 5 years, and a risk free interest rate of 4.00% per annum. Accordingly, the Company allocated approximately $369,000 to these warrants and the charge was amortized over the period that the preferred stock was outstanding. As of December 31, 2003, 101,500 warrants were outstanding. These warrants expired in July 2004. (b) Stock Options and Awards - The Company sponsors several stock option and award plans that cover substantially all employees and members of the board of directors. Options and awards granted under such plans typically vest over periods ranging from one to five years and generally expire in eight and ten years, although some grants provide for vesting in annual increments or allow for accelerated vesting based upon reaching performance milestones. The Company amortizes the fair value of the stock awards (based on the fair value of common stock on the grant dates multiplied by the number of shares granted) over the respective vesting periods. In 2004, 2003, and 2002, the Company recorded $84,000, $178,000, and $841,000, respectively, of compensation expense related to these awards. Options granted under the plans allow the purchase of stock at the fair value of such common stock at the respective grant dates. Because options are issued with exercise prices equal to the fair value of the common stock on the grant dates, the Company does not record any compensation expense for these options. A summary of stock option activity for each of the Company's stock option plans is as follows: Exercise Prices ------------------------- Number Minimum Maximum Of Options ------- ------- ----------- January 1, 2002 $ 0.69 $ 19.44 3,858,127 Granted $ 0.60 $ 2.35 1,302,000 Exercised $ 1.00 $ 2.31 (11,825) Canceled $ 0.80 $ 10.31 (914,505) ----------- ----------- December 31, 2002 $ 0.60 $ 19.44 4,233,797 Granted $ 1.50 $ 3.02 111,000 Exercised $ 0.60 $ 1.83 (668,645) Canceled $ 0.60 $ 7.56 (225,423) ----------- ----------- December 31, 2003 $ 0.60 $ 19.44 3,450,729 Granted $ 0.31 $ 2.00 545,000 Exercised $ 0.60 $ 1.70 (55,613) Canceled $ 0.31 $ 12.75 (908,219) ----------- ----------- December 31, 2004 $ 0.31 $ 19.44 3,031,897 =========== 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 Life Exercise Price Number of Exercise Exercise Prices Of Options Options Price --------------- ---------- ------------ -------------- --------- -------- $ 0.00 - 0.50 406,000 7.8 years $ 0.32 -- $ 0.00 0.51 - 0.75 186,853 6.0 years 0.60 120,469 0.60 0.76 - 1.00 177,810 6.0 years 0.84 122,272 0.84 1.01 - 2.00 1,561,178 3.9 years 1.29 979,772 1.30 2.01 - 5.00 487,556 4.6 years 3.71 471,496 3.74 5.01 - 10.00 195,000 3.8 years 6.74 195,000 6.74 10.01 - 19.44 17,500 2.4 years 16.62 17,500 16.62 ---------------- --------- ---------- -------- --------- -------- 3,031,897 1,906,509 ========= =========

(c) Employee Stock Purchase Plan - Under the Employee Stock Purchase Plan (approved by the Company's stockholders in 1996), the Company is authorized to issue up to 500,000 shares of common stock to its full-time employees, nearly all of 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. During the years ended December 31, 2004, 2003, and 2002, the Company issued 28,080, 15,640, and 29,868, shares of stock under the Plan, respectively. (d) Treasury Stock - In 2004 and 2003, the Company paid $2,000 and $73,000 to acquire an additional 1,130 and 27,310 shares of its own common stock, respectively. These shares were surrendered by employees of the Company to satisfy an outstanding note receivable or tax-withholding obligations associated with the vesting of certain restricted stock awards. On December 15, 2004, the Company received 200,000 shares of its common stock priced at $0.50 per share (based on the closing price) from its Chief Executive Officer to satisfy $100,000 of a note receivable that was outstanding at the time. As of December 31, 2004 and 2003, the Company had a total of 1,035,000 and 834,000 common shares in treasury at an aggregate cost of $2,648,000 and $2,546,000, respectively. (e) Stockholder Rights Plan - In January 1998, the Company's Board of Directors adopted a Stockholder Rights Plan. This plan was amended on May 24, 2000. The rights are designed to assure that all the Company's stockholders receive fair and equal treatment in the event of any proposed takeover of the Company and to guard against partial tender offers, open market accumulations and other tactics to gain control of the Company without paying all stockholders a control premium. Terms of the Stockholder Rights Plan provide for a dividend distribution of one right for each share of common stock to holders of record at the close of business on February 6, 1998. Shareholders will be able to exercise the rights only in the event, with certain exceptions, an acquiring party accumulates 20 percent or more of the Company's voting stock, or if a party (an acquiring person) announces an offer to acquire 20 percent or more without prior approval of the Company's Board of Directors. The rights will expire on January 21, 2008. Each right initially will entitle the holder to buy one one-thousandth of a share of a new series of preferred stock at a price of $42.50. In addition, upon the occurrence of certain events, holders of the rights will be entitled to purchase either the Company's common stock or shares in an acquiring person at half of market value. Further, at any time after a person or group acquires 20 percent or more of the Company's outstanding voting stock, the board of directors may, at its option, exchange part or all of the rights (other than rights held by the acquiring person, which will become void) for shares of the Company's common stock on a one-for-one basis. The rights will therefore cause substantial dilution to a person or group that acquires 20 percent or more of the Company's common stock on terms not approved by the board. (f) Stock arrants - In 2000, the Company entered into a five-year agreement with an unrelated party, whereby the Company issued warrants to this entity in exchange for the entity's becoming a premier reference site. As a premier reference site, the entity would make its facility and personnel reasonably accessible for InteliData, InteliData's potential clients, analysts, and industry publication reporters, in order to demonstrate or answer questions regarding InteliData's solution and its capabilities. On June 30, 2000, InteliData issued five-year, fully-vested warrants to purchase 50,000 shares of InteliData common stock at an exercise price of $4.75 per share. The fair value of these warrants was recorded to the statement of operations as of the grant date using the Black-Scholes model. As of December 31, 2004, all of these warrants were still outstanding. These warrants expire on June 30, 2005. (g) Private Placement and Warrants - In November and December 2001, the Company closed private placement sales of an aggregate of 2,863,000 shares of its common stock for a price of $2.75 per share, and warrants exercisable for the purchase of 1,431,364 shares of its common stock, at an exercise price of $2.75 per share. During July 2003, the Company issued 1,431,000 shares of its common stock pursuant to the exercise of warrants, as amended. The warrant exercise resulted in gross proceeds of approximately $3,335,000. The placement agent in the transaction received approximately $200,000 in commissions, and exercised the net issuance provision within their 286,000 warrants and received 23,000 shares of the Company's common stock. All of the warrants that were issued as part of the 2001 private placement were exercised fully in 2003. (8) EMPLOYEE 401(k) PLAN The Company sponsors a defined contribution plan ("Plan") that qualifies for tax treatment under Section 401(a) of the Internal Revenue Code. Participation in the Plan is available to employees who are at least twenty-one years of age. Company contributions to the Plan are based on a percentage of employee contributions. The Company contributed $84,000, $86,000, and $118,000 in 2004, 2003, and 2002, respectively. The Company also pays for administrative expenses incurred by the Plan. (9) INCOME TAXES A reconciliation of income taxes computed at the statutory federal tax rate on loss before income taxes to actual income taxes for the years ended December 31, 2004, 2003 and 2002 is as follows (in thousands): 2004 2003 2002 -------- ------- -------- Income tax benefit computed at the statutory rate $(12,616) $ (635) $ (3,334) Write-off of goodwill 7,116 - - Other (71) (408) (1,309) Change in valuation allowance 5,571 1,043 4,506 -------- ------- -------- Income tax benefit $ -- $ -- $ (137) ======== ======= ========

The 2002 federal income tax benefit of $137,000 represents the recovery of alternative minimum tax paid in a prior year. The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and liabilities at December 31, 2004 and 2003 are as follows (in thousands): 2004 2003 --------- ---------- Net operating loss carryforwards $ 80,413 $ 77,628 Basis differences in intangibles (674) (3,515) Accounts receivable 81 42 Property and equipment (4) (12) General business credit carryforward 489 489 Other 354 456 Alternative minimum tax credit carryforward 60 60 --------- ---------- Total gross deferred tax asset 80,719 75,148 Valuation allowance (80,719) (75,148) --------- ---------- Net deferred tax assets $ -- $ -- ========= ========== The net changes in the total valuation allowance for the years ended December 31, 2004, 2003, and 2002, were an increase of $5,571,000, $1,043,000, and $4,506,000, respectively. A valuation allowance was established for deferred tax assets as of December 31, 2004 and 2003 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. As of December 31, 2004, the Company had net operating loss carryforwards for federal income tax purposes of approximately $212 million, which expire in 2008 through 2024, general business tax credits of approximately $489,000, which expire in 2005 through 2010, and an alternative minimum tax credit carryforward of approximately $60,000, which may be carried forward indefinitely and used to offset future regular taxable income. Approximately $45 million of the net operating loss were incurred by Home Account prior to its acquisition by the Company and are subject to an annual limitation pursuant to Internal Revenue Code Section 382 as a result of cumulative changes in ownership of more than 50% in 2001. (10) COMMITMENTS AND CONTINGENCIES (a) Purchase Obligations - The Company entered into multiple vendor agreements for outsourced services as part of its ASP solution offering for certain Online Banking and Payment Solutions clients. Some of these vendor agreements commit the Company to specified minimum charges during the terms of the contracts. Management continues to assess the potential for new business prospects, the possibility of reducing the Company's costs through renegotiation of existing agreements, and/or exiting the ASP business by referring clients and prospects to a hosting vendor and providing a license solution and support services. There can be no assurance that the Company will be successful in mitigating these factors. In the event that new client revenues do not materialize, user growth rates from existing clients do not meet expected projections and/or the Company is not successful in its renegotiation efforts, the Company may experience future period losses from the Company's ASP business, which could have a material adverse impact on the Company's financial position, results of operations, and cash flows. In June 2004, the Company restructured a vendor agreement and decreased its overall prospective ASP operations costs. Entering 2005, the projected revenues are estimated to exceed projected costs by approximately $83,000 on a monthly basis based on the December 2004 results; this gap will fluctuate based on monthly activity. In accordance with generally accepted accounting principles, the Company is accounting for the committed contract costs as they are incurred. Expenses were $2,205,000, $3,158,000, and $2,832,000 for the years ended December 31, 2004, 2003, and 2002, respectively. Leases - The Company leases facilities and equipment under cancelable and noncancelable operating lease agreements. The facility leases have remaining terms from two to three years. Rent expense was $903,000, $765,000, and $1,492,000 for the years ended December 31, 2004, 2003, and 2002, respectively. Future minimum lease payments under noncancelable operating leases with initial or remaining terms in excess of one year at December 31, 2004, and future minimum payments under purchase obligations for outsourced services were as follows (in thousands): Lease Purchase Years Ending December 31, Obligations Obligations Total ------------------------- ----------- ----------- --------- 2005 $ 1,145 $ 640 $ 1,785 2006 839 -- 839 2007 -- -- -- 2008 -- -- -- 2009 and thereafter -- -- -- ----------- ----------- --------- Total minimum lease payments $ 1,984 $ 640 $ 2,624 =========== =========== =========

The future minimum lease obligations do not include $223,000 of expected receipts from subleases. See Note 2(m) for additional information on the subleased space. (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 may assert infringement claims against InteliData. There can be no assurance that any such assertion will not result in costly litigation or require the Company to cease using, or obtain a license to use, intellectual property of such parties. (c) Litigation - The Company is not currently a party to any material litigation. From time to time, the Company may be a party to routine litigation incidental to its business. Management does not believe that the resolution of any or all of such routine litigation will be likely to have a material adverse effect on the Company's financial condition or results of operations. (11) VALUATION AND QUALIFYING ACCOUNTS The components of significant valuation and qualifying accounts associated with accounts receivable for the years ended December 31, 2004 and 2003 were as follows (in thousands): Balance, January 1, 2003 $ 321 Recovery (70) Write-offs (141) ------------ Balance, December 31, 2003 110 Charged to costs and expenses 147 Write-offs (43) ------------ Balance, December 31, 2004 $ 214 ============ (12) GOODWILL AND OTHER INTANGIBLES SFAS No. 141, Business Combinations ("SFAS 141") requires business combinations initiated after June 30, 2001 to be accounted for using the purchase method of accounting, and broadens the criteria for recording intangible assets separate from goodwill. SFAS No. 142, Goodwill and Other Intangible Assets ("SFAS 142") requires the use of an amortization and non-amortization approach to account for intangibles and purchased goodwill. Under a non-amortization approach, goodwill and indefinite-lived intangibles are not to be amortized into results of operations, but instead would be reviewed for impairment and written down and charged to results of operations only in the periods in which the recorded value of goodwill and these intangibles is more than its fair value. These reviews are to be performed at least annually and tests for impairment between annual tests may be required if events occur or circumstances change that would more likely than not reduce the fair value of the net carrying amount. The amortization and non-amortization provisions of SFAS 142 are to be applied to all goodwill and intangible assets acquired after June 30, 2001. The provisions of each statement that apply to goodwill and intangible assets acquired prior to June 30, 2001 were adopted by the Company on January 1, 2002. As of January 1, 2002, in accordance with SFAS 142, the Company ceased recognizing amortization expense on goodwill. The goodwill and intangible asset (which is subject to amortization) consisted of the following components as of December 31, (in thousands): 2004 2003 -------- -------- Goodwill $ - $ 25,771 -------- -------- Intangible asset, gross carrying amount $ 7,200 $ 7,200 Accumulated amortization (2,860) (2,140) -------- -------- Net intangible asset $ 4,340 $ 5,060 ======== ======== The Company's intangible asset consists of $7,200,000 related to contracts/relationships, which has an estimated useful life of ten years. Contracts/relationships was determined based on the history of low attrition, the high cost of switching, market prices, forecasted revenues, evaluation of competitors, and other factors. The estimated aggregate amortization expense related to the contracts/relationships intangible asset for each of the next five years is as follows (in thousands): Year ending December 31: Expense --------- 2005 $ 720 2006 720 2007 720 2008 720 2009 720 As the Company disclosed in the first quarter of 2004, the annual impairment testing date is as of June 30th. As of March 31, 2004, the Company was not aware of events or circumstances that could indicate impairment of goodwill and its market capitalization indicated a fair value substantially in excess of the Company's carrying amount, including goodwill. During the second quarter of 2004, the Company experienced unanticipated business challenges, as customer decisions on acquiring InteliData's products and services were not completed for a variety of reasons (e.g., merger and acquisition activities that shift priorities, merger and acquisition activities that reduce the number of prospects, and the timing of requests for proposals and decision making processes). Additionally, competition in the marketplace increased pricing pressures (e.g., a competitor lowered pricing for some customers to prevent attrition). These marketplace challenges led the Company to reevaluate the financial projections and related cash flows for the next three years and to reconsider longer-term estimates. In addition, the Company noted a sharp reduction in its market capitalization subsequent to the first quarter of 2004, which reflected its marketplace challenges and corroborated its revised financial projections discussed above. As of June 30, 2004, the Company performed the required annual impairment testing for goodwill in accordance with SFAS 142. These reviews utilized the same approaches and similar considerations as previous tests. The goodwill impairment test, performed at the reporting unit level, is a two-step analysis. First, the fair value of the reporting unit was compared to its carrying amount, including goodwill. Fair value was determined using generally accepted valuation methodologies (i.e., discounted cash flow model, guideline company method, and similar transactions method). That is, the Company assessed the fair value of its only reporting unit by considering its projected cash flows, comparable company valuations, and recent purchase prices paid for entities within its industry. As the fair value of the reporting unit was less than its carrying amount, the Company compared the implied fair value of reporting unit goodwill with the carrying amount of that goodwill to measure the amount of impairment loss. Accordingly, the Company performed a hypothetical purchase price allocation based on the reporting unit's fair value to determine the fair value of the reporting unit's goodwill in order to measure the goodwill impairment charge. This hypothetical purchase price allocation required the evaluation of the fair values of unrecorded assets, such developed technologies, customer relationships and deferred tax assets, in addition to the fair values of recorded net assets. The Company used accepted valuation methodologies to value these assets, including but not limited to, the replacement cost approach and relief from royalty approach (i.e., what the Company would have to pay for the use of its technologies in a hypothetical licensing or royalty arrangement). Consideration was given to the unrecorded net assets only for the purpose of measuring the amount of goodwill impairment loss. Accordingly, the Company did not record such net assets on the balance sheet. Given consideration of these factors and the Company's declining market capitalization, the Company recorded a goodwill impairment charge in the amount of $25,771,000 in the second quarter of 2004. The analysis discussed above clearly indicated that the goodwill balance was fully impaired. As discussed above, the analysis required the Company to make estimates of projected cash flows in order to determine if its assets are impaired. The Company made significant assumptions and estimates in this process regarding matters that are inherently uncertain, such as forecasting revenue and cost projections, calculating remaining useful lives, assuming discount rates and costs of capital, among others. Management believes that the judgments, estimates and assumptions used are reasonable and supportable. (13) HOME ACCOUNT INCENTIVE PLAN In 2000, Home Account approved the 2000 Incentive Plan to encourage the retention of certain officers of Home Account through a change of control transaction, and after such a transaction to the extent, up to one year, as desired by the acquirer. Upon acquisition of Home Account by an acquirer, the 2000 Incentive Plan provided for the granting to plan participants of an aggregate of 15% of the net amount of the merger consideration allocable to Home Account's preferred stockholders after payment of the debt preference and other expenses associated with a transaction. Under the InteliData and Home Account merger transaction, this incentive plan was payable in the form of InteliData common stock and such payments were made by the group of former Home Account preferred stockholders (who are collectively considered one "principal stockholder"). Two-thirds of the 2000 Incentive Plan allocation vested on the transaction closing date and represent a pre-acquisition expense to Home Account. The remaining one-third of the participants' allocation vested on January 11, 2002 (one year from the transaction closing date). All forfeited shares reverted to the former preferred stockholders of Home Account. In connection with the 2000 Incentive Plan allocation, the deferred compensation for the one-third portion became fixed and measurable on April 1, 2002 at $155,000 based on $1.20 (the closing price of the Company's common stock at April 1, 2002). The difference between this amount and the recognized expense in the prior periods was recorded as an $183,000 reduction of expense during 2002. (14) UNAUDITED QUARTERLY FINANCIAL DATA The unaudited quarterly financial data includes restated quarterly financial information for the years ended December 31, 2004 and 2003, which were restated to correct errors related to the accounting for certain transactions as discussed in Note 2(n) to the consolidated financial statements. The results of the Company's quarterly operations for the years ended December 31, 2004 and 2003 are set forth in the following table (in thousands, except per share data): First Second Third Fourth Year ---------- Fiscal Year 2004 (as restated) Revenues $ 3,592 $ 3,746 $ 3,604 $ 2,800 $ 13,742 Cost of revenues 1,780 1,775 1,439 1,324 6,318 Operating expenses 3,351 3,565 3,573 4,404 14,893 Goodwill impairment charge -- 25,771 (C) -- -- 25,771 Operating loss (1,539) (27,365) (1,408) (2,928) (33,240) Other income (expense), net 6 2 (12) 9 5 Provision (benefit) for income taxes - - - - - Net loss $ (1,533) $ (27,363) $ (1,420) $ (2,919) $ (33,235) Basic and diluted earnings (loss) per common share $ (0.03) $ (0.53) $ (0.03) $ (0.06) $ (0.65) Basic and diluted weighted-average common shares outstanding 51,127 51,159 51,179 51,237 51,271 Fiscal Year 2004 (as previously reported) Revenues $ 3,592 $ 3,746 $ 3,604 Cost of revenues 1,780 1,775 1,439 Operating expenses 3,352 3,614 3,578 Goodwill impairment charge -- 26,238 (C) -- Operating loss (1,540) (27,881) (1,413) Other income (expense), net 44 40 25 Provision (benefit) for income taxes - - - Net loss $ (1,496) $ (27,841) $ (1,388) Basic and diluted earnings (loss) per common share $ (0.03) $ (0.54) $ 0.03) Basic and diluted weighted-average common shares outstanding 51,127 51,159 51,179

First Second Third Fourth Year Fiscal Year 2003 (as restated) Revenues $ 5,625 $ 5,951 $ 4,692 $ 4,362 $ 20,630 Cost of revenues 1,934 1,948 1,858 1,809 7,549 Operating expenses 3,630(A) 4,010 3,397 3,737 14,774(B) Operating loss 61 (7) (563) (1,184) (1,693) Other income (expense), net (29) 12 16 22 21 Provision (benefit) for income taxes - - - - - Net income (loss) $ 32 $ 5 $ (547) $ (1,162) $ (1,672) Basic and diluted earnings (loss) per common share $ 0.00 $ 0.00 $ (0.01) $ (0.02) $ (0.03) Basic and diluted weighted-average common shares outstanding 48,853 49,002 50,864 51,078 50,028 Fiscal Year 2003 (as previously reported) Revenues $ 5,625 $ 5,951 $ 4,692 $ 4,362 $ 20,630 Cost of revenues 1,934 1,948 1,858 1,809 7,549 Operating expenses 3,809(A) 4,026 3,417 3,894 15,146(B) Operating loss (118) (23) (583) (1,341) (2,065) Other income (expense), net (29) 12 16 180 179 Provision (benefit) for income taxes - - - (288) (288) Net loss $ (147) $ (11) $ (567) $ (873) $ (1,598) Basic and diluted earnings (loss) per common share $ (0.00) $ (0.00) $ (0.01) $ (0.02) (0.03) Basic and diluted weighted-average common shares outstanding 48,853 49,002 50,864 51,078 50,028

(A) Operating expenses reflect a reversal of approximately $630,000 in estimated bonus accruals that were not paid, but were previously provided for in 2002. (B) The Company did not accrue for bonuses in fiscal year 2003 as none was paid. (C) During the fiscal year ended December 31, 2004, the Company recorded a goodwill impairment charge. See Note 2 and 12 to the consolidated financial statements for more details. * * * * * * REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Board of Directors and Stockholders of InteliData Technologies Corporation Reston, Virginia We have audited the accompanying consolidated balance sheets of InteliData Technologies Corporation and subsidiaries (the "Company") as of December 31, 2004 and 2003, and the related consolidated statements of operations, changes in stockholders' equity, and cash flows for each of the three years in the period ended December 31, 2004. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the financial statements based on our audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). 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, 2004 and 2003, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2004, in conformity with accounting principles generally accepted in the United States of America. The accompanying consolidated financial statements for the year ended December 31, 2004 have been prepared assuming that the Company will continue as a going concern. As discussed in Note 2(o) to the consolidated financial statements, the Company has recurring losses from operations and is experiencing difficulty in generating cash flow to meet its obligations and sustain its operations which raises substantial doubt about its ability to continue as a going concern. Management's plans concerning these matters are also described in Note 2(o). The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty. As discussed in Note 2(n), the accompanying 2003 and 2002 consolidated financial statements have been restated. /s/ Deloitte & Touche LLP McLean, Virginia March 31, 2005 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. ITEM 9A. CONTROLS AND PROCEDURES (a) EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES The Company maintains a set of disclosure controls and procedures, as defined under Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), that are designed to ensure that information required to be disclosed by the Company in the reports that the Company files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC's rules and forms, and that such information is accumulated and communicated to the Company's management, including the Company's Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. Pursuant to Exchange Act Rule 13a-15(b), the Company carried out an evaluation, under the supervision and with the participation of the Company's management, including the Company's Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company's disclosure controls and procedures as of December 31, 2004, the end of the period covered by this report. Based upon that evaluation, the Company's Chief Executive Officer and Chief Financial Officer concluded that the Company's disclosure controls and procedures were not effective as of December 31, 2004 for the reasons discussed below related to the material weaknesses in the Company's internal control over financial reporting. To address the control weaknesses described below, the Company performed additional analysis and other post-closing procedures to ensure that the accompanying financial statements fairly present in all material respects the financial condition and results of operations of the Company for the fiscal years presented in this Annual Report on Form 10-K. (b) MANAGEMENT'S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING Management is responsible for establishing and maintaining adequate internal control over financial reporting, as defined in Exchange Act Rule 13a-15(f). Under the supervision and with the participation of the Company's management, the Company is assessing the effectiveness of its internal control over financial reporting as of December 31, 2004, based on the framework in the "Internal Control - Integrated Framework" issued by the Committee of Sponsoring Organizations of the Treadway Commission; however, such evaluation has not yet been completed. The SEC's exemptive order, dated November 30, 2004 (SEC Release No. 34-50754) provides up to 45 additional days beyond the due date of the Annual Report on Form 10-K to complete the assessment of the effectiveness of internal control over financial reporting and to file management's report on internal control over financial reporting required by Item 308(a) of Regulation S-K and the related attestation report of the independent registered public accounting firm, as required by Item 308(b) of Regulation S-K. The Company believes that management's report on internal control over financial reporting as of December 31, 2004, will be filed in the time period permitted by the SEC's exemptive order. The Company has dedicated internal resources, engaged outside consultants and adopted a detailed work plan so that it may complete its internal control over financial reporting assessment to include this information in its Annual Report on Form 10-K within the timeframe specified by the SEC's exemptive order. As a result of the material weaknesses discussed below, however, the Company expects that such report when filed will conclude that the Company's internal control over financial reporting was not effective as of December 31, 2004. Under Public Company Accounting Oversight Board ("PCAOB") Auditing Standard No. 2, a material weakness in internal control over financial reporting is a control deficiency, or combination of control deficiencies, that results in there being more than a remote likelihood that a material misstatement of the annual or interim financial statements will not be prevented or detected. PCAOB Auditing Standard No. 2 identifies a number of circumstances that, because of their likely significant negative effect on internal control over financial reporting, are to be regarded as at least significant deficiencies as well as strong indicators that a material weakness exists; including the restatement of previously issued financial statements to reflect the correction of a misstatement. Management has concluded, based on PCAOB Auditing Standard No. 2, that the following material weaknesses exist as of December 31, 2004: o insufficient controls over the determination and application of generally accepted accounting principles with respect to the accounting for lease transactions and warrants issued to purchase the Company's common stock; o insufficient personnel resources and technical accounting expertise within the accounting function to resolve non-routine or complex accounting matters; and o insufficient controls over and review of the quarterly and year-end financial statements close and reporting process. These material weaknesses affected several financial statement accounts and resulted in a restatement of previously issued financial statements as discussed in Note 2(n) to the consolidated financial statements and Item 6 - Selected Financial Data. As noted above, the Company is currently undergoing a comprehensive effort to complete its assessment for compliance with Section 404 of the Sarbanes-Oxley Act of 2002. There can be no assurance that as a result of the ongoing evaluation of internal control over financial reporting, additional material weaknesses will not be identified or that any significant deficiencies or deficiencies identified, either alone or in combination with others, will not be considered a material weakness. Deloitte & Touche LLP, the Company's independent registered public accounting firm, has not yet completed its audit of the effectiveness of internal control over financial reporting. As a result of the material weaknesses discussed above, the Company expects that Deloitte & Touche LLP will issue an adverse opinion with respect to the effectiveness of the Company's internal control over financial reporting as of December 31, 2004. (c) CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING During the most recent fiscal quarter, except for the changes discussed above, there has been no change in the Company's internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) that has materially affected, or is reasonably likely to materially affect, its internal control over financial reporting. As described in (b) above, the Company has restated its consolidated financial statements for the years ended December 31, 2003 and 2002 and intends to address any significant deficiencies or material weaknesses identified as a result of its ongoing assessment. ITEM 9B. OTHER INFORMATION As noted in Item 9A of this Annual Report on Form 10-K, in connection with the Company's assessment of its internal controls over financial reporting, management reviewed, among other things, the Company's accounting practices for a lease restructuring, deferred rent liabilities, lease purchase accounting, warrant to issue Company stock, and an income tax contingency. Based on this assessment, the Company has restated its consolidated financial statements for the years ended December 31, 2003 and 2002 to adjust the accounting for these items. For more information regarding the restatement, see "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Restatement of Consolidated Financial Statements" and in Note 2(n) and Note 14 to the consolidated financial statements. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Directors and Executive Officers - The Company incorporates herein by reference the information concerning directors and executive officers contained in its Proxy Statement for its 2005 Stockholders' Meeting to be filed within 120 days after the end of the Company's fiscal year (the "2005 Proxy Statement"). Section 16(a) Beneficial Ownership Reporting Compliance - The Company incorporates herein by reference the information concerning Section 16(a) beneficial ownership reporting compliance contained in its 2005 Proxy Statement. Code of Ethics - The Company incorporates herein by reference the information concerning its code of ethics contained in its 2005 Proxy Statement. ITEM 11. EXECUTIVE COMPENSATION The Company incorporates herein by reference the information concerning executive officer and director compensation contained in the 2005 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 2005 Proxy Statement. SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS Number of Weighted Number of Securities to average securities be issued upon exercise remaining exercise of price of available outstanding outstanding for future options options, issuance warrants and warrants and rights rights Equity compensation plans approved by stockholders 1,882,000 $ 2.32 888,762 Equity compensation plans not approved by stockhold 1,250,000 $ 1.36 - Total 3,132,000 $ 1.93 888,762 66 The equity compensation plans not approved by stockholders consists of warrants that are described in Note 7 to the consolidated financial statements included in this Annual Report on Form 10-K and the 1998 Chief Executive Officer's Plan. The 1998 Chief Executive Officer's Plan (the "Plan") was adopted to induce Alfred S. Dominick, Jr. to become the Company's Chief Executive Officer in August 1998. The Plan provided for the grant of an option to purchase 1,200,000 shares of the Company's common stock at an exercise price of $1.22. Of the option grant, 200,000 vested in one-third increments over a three-year period from August 1998 to August 2001. Another 500,000 vested based on the achievement of specified trading prices for the Company's common stock. The remaining 500,000 will vest subject to Mr. Dominick's continued employment and upon the earlier of i) the Company's common stock trading above $25.00 per share for sixty consecutive days, or ii) April 15, 2008. Additionally, the Company has no i) individual options, rights or warrants assumed in any merger, acquisition or consolidation transaction; ii) securities available for future issuance under a compensation plan other than upon exercise of options, rights or warrants; and iii) equity compensation plan that contains a formula for calculating the number of securities available for issuance under the plan. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The Company incorporates herein by reference the information concerning certain relationships and related transactions contained in the 2005 Proxy Statement. ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES The Company incorporates herein by reference the information concerning principal accounting fees and services and the audit committee's pre-approval policies and procedures contained in the 2005 Proxy Statement. ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES (a) DOCUMENTS FILED AS PART OF THIS REPORT 1. FINANCIAL STATEMENTS - See Item 8 of this Report 2. FINANCIAL STATEMENT SCHEDULES - None 3. EXHIBITS (b) EXHIBITS Exhibit No. Description 3.1 Amended and Restated Certificate of Incorporation, dated June 14, 2002 (Incorporated herein by reference to Exhibit 3.1 to the Company's Report on Form 10-Q for the quarter ended June 30, 2002). 3.2 Bylaws of InteliData Technologies Corporation. (Incorporated herein by reference to Appendix V to the Joint Proxy Statement /Prospectus included in the Registration Statement on Form S-4 filed with the Commission on August 29, 1996, as amended, File Number 333-11081). 4.1 Rights Agreement, dated as of January 21, 1998, by and between the Company and American Stock Transfer & Trust Company, as Rights Agent. (Incorporated herein by reference to the Registration Statement on Form 8-A filed with the Commission on January 26, 1998). 4.1.1 Amendment No. 1 dated May 24, 2000 to the Rights Agreement, dated as of January 21, 1998, by and between the Company and American Stock Transfer & Trust Company, as Rights Agent. (Incorporated herein by reference to the Current Report on Form 8-A/A filed with the Commission on July 6, 2000). 10.1 Description of InteliData Technologies Corporation Merger Stock Compensation Plan. (Incorporated herein by reference to the Company's Registration Statement on Form S-8, File Number 333-76631). 10.2 InteliData Technologies Corporation 1996 Incentive Plan. (Incorporated herein by reference to the Company's Registration Statement on Form S-8, File Number 333-16115). 10.2.1 Description of Amendment to the 1996 Incentive Plan. (Incorporated herein by reference to the Company's Proxy Statement filed with the Commission on August 6, 1999). 10.2.2 Description of Amendment to the 1996 Incentive Plan. (Incorporated herein by reference to the Company's Proxy Statement filed with the Commission on April 24, 2000). 10.2.3 Description of Amendment to the 1996 Incentive Plan. (Incorporated herein by reference to the Company's Proxy Statement filed with the Commission on April 20, 2001). 10.3 InteliData Technologies Corporation Non-Employee Directors' Stock Option Plan. (Incorporated herein by reference to the Company's Registration Statement on Form S-8, File Number 333-16117). 10.4 InteliData Technologies Corporation Employee Stock Purchase Plan. (Incorporated herein by reference to the Company's Registration Statement on Form S-8, File Number 333-16121). 10.5 Employment Agreement dated April 5, 1999 between InteliData Technologies Corporation and Alfred S. Dominick, Jr. (Incorporated herein by reference to the Company's Report on Form 10-Q for the quarter ended March 31, 1999). 10.5.1 InteliData Technologies Corporation 1998 Chief Executive fficer's Plan. (Incorporated herein by reference to Exhibit 10 to the Company's Report on Form 10-K for the year ended December 31, 1999). 10.5.2 First Amendment to Employment Agreement between InteliData Technologies Corporation and Alfred S. Dominick, Jr., dated April 5, 2002 (Incorporated herein by reference to Exhibit 10.5.2 to the Company's Report on Form 10-Q for the quarter ended June 30, 2002). 10.5.3 Second Amendment to Employment Agreement between InteliData Technologies Corporation and Alfred S. Dominick, Jr., dated January 14, 2003 (Incorporated herein by reference to Exhibit 10.5.3 to the Company's Report on Form 10-K for the year ended December 31, 2002). 10.5.4 Third Amendment to Employment Agreement between InteliData Technologies Corporation and Alfred S. Dominick, Jr., dated April 2, 2003. (Incorporated herein by reference to Exhibit 10.5.4 to the Company's Report on Form 10-Q for the quarter ended March 31, 2003). 10.5.5 Amended and Restated Change In Control Severance Agreement between InteliData Technologies Corporation and Alfred S. Dominick, Jr., dated February 3, 2003. (Incorporated herein by reference to Exhibit 10.5.5 to the Company's Report on Form 10-K for the year ended December 31, 2003). 10.5.6 Fourth Amendment to Employment Agreement between InteliData Technologies Corporation and Alfred S. Dominick, Jr., dated January 5, 2004. (Incorporated herein by reference to Exhibit 10.5.5 to the Company's Report on Form 10-Q for the quarter ended March 31, 2004). * 10.5.7 Fifth Amendment to Employment Agreement between InteliData Technologies Corporation and Alfred S. Dominick, Jr., dated March 10, 2005. 10.6 Employment and Non-Competition Agreement dated December 17, 1997 between InteliData Technologies Corporation and Albert N. Wergley. (Incorporated herein by reference to Exhibit 10 to the Company's Report on Form 10-K for the year ended December 31, 1997). 10.6.1 Amendment to the Employment and Non-Competition Agreement between InteliData Technologies Corporation and Albert N. Wergley, dated June 14, 1999. (Incorporated herein by reference to Exhibit 10 to the Company's Report on Form 10-K for the year ended December 31, 1999). 10.6.2 Amended and Restated Change In Control Severance Agreement between InteliData Technologies Corporation and Albert N. Wergley, dated February 3, 2003. (Incorporated herein by reference to Exhibit 10.6.2 to the Company's Report on Form 10-K for the year ended December 31, 2003). * 10.6.3 Separation Agreement and General Release between InteliData Technologies Corporation and Albert N. Wergley, dated November 2, 2004. 10.7 Employment and Non-Competition Agreement between InteliData Technologies Corporation and Michael E. Jennings, dated June 14, 2000. (Incorporated herein by reference to Exhibit 10 to the Company's Report on Form 10-Q for the quarter ended September 30, 2000). 10.7.1 Amended and Restated Change In Control Severance Agreement between InteliData Technologies Corporation and Michael E. Jennings, dated February 3, 2003. (Incorporated herein by reference to Exhibit 10.7.1 to the Company's Report on Form 10-K for the year ended December 31, 2003). 10.7.2 Separation Agreement between InteliData Technologies Corporation and Michael E. Jennings, dated August 16, 2004. (Incorporated herein by reference to Exhibit 10.1 to the Company's Report on Form 10-Q for the quarter ended September 30, 2004). 10.7.3 Consultant Agreement between InteliData Technologies Corporation and Michael E. Jennings, dated August 16, 2004. (Incorporated herein by reference to Exhibit 10.2 to the Company's Report on Form 10-Q for the quarter ended September 30, 2004). 10.8 Employment and Non-Competition Agreement between InteliData Technologies Corporation and John R. Polchin, dated April 8, 2002. (Incorporated herein by reference to Exhibit 3.1 to the Company's Report on Form 10-Q for the quarter ended June 30, 2002). 10.8.1 Amended and Restated Change In Control Severance Agreement between InteliData Technologies Corporation and John R. Polchin, dated February 3, 2003. (Incorporated herein by reference to Exhibit 10.8.1 to the Company's Report on Form 10-K for the year ended December 31, 2003). 10.9 Employment and Non-Competition Agreement between InteliData Technologies Corporation and Karen Kracher, dated August 16, 2004. (Incorporated herein by reference to Exhibit 10.3 to the Company's Report on Form 10-Q for the quarter ended September 30, 2004). * 10.10 Letter of Employment Offer from InteliData Technologies Corporation to Monique Marcus dated September 24, 2004, as amended. *10.10.1 2004 Change of Control Agreement between InteliData Technologies Corporation and Monique L. Marcus, dated December 15, 2004. *10.10.2 2005 Change of Control Agreement between InteliData Technologies Corporation and Monique L. Marcus, dated January 3, 2005. * 10.11 Director Compensation Arrangements. * 21.1 InteliData Technologies Corporation List of Significant Subsidiaries. * 23.1 Consent of Independent Registered Public Accounting Firm. * 31 Certification of Principal Executive Officer and Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. * 32 Certification of Principal Executive Officer and Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. ------------- * Filed herewith. SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. INTELIDATA TECHNOLOGIES CORPORATION By: /s/ Alfred S. Dominick, Jr. Alfred S. Dominick, Jr. Chairman, Chief Executive Officer, and Acting Chief Financial Officer (Principal Executive Officer and Principal Financial Officer) Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. Signature Title Date /s/ Alfred S. Dominick, Jr. Chairman, Chief Executive Officer, March 31, 2005 Alfred S. Dominick, Jr. and Acting Chief Financial Officer /s/ Karen Kracher President and Chief Sales and March 31, 2005 Karen Kracher Marketing Officer /s/ Monique L. Marcus Vice President, Finance and Treasurer March 31, 2005 Monique L. Marcus (Principal Accounting Officer) /s/ Neal F. Finnegan Director March 31, 2005 Neal F. Finnegan /s/ Patrick F. Graham Director March 31, 2005 Patrick F. Graham /s/ Michael E. Jennings Director March 31, 2005 Michael E. Jennings /s/ L. William Seidman Director March 31, 2005 L. William Seidman /s/ Norman J. Tice Director March 31, 2005 Norman J. Tice

INTELIDATA TECHNOLOGIES CORP 10-K