e10vq
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended June 30, 2005
OR
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934 |
Commission file number 0-29291
CORILLIAN CORPORATION
(Exact name of registrant as specified in its charter)
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| OREGON
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91-1795219 |
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(State or other Jurisdiction of
Incorporation or Organization)
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(I.R.S. Employer
Identification Number) |
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3400 NW John Olsen Place Hillsboro, Oregon
(Address of principal executive offices)
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97124
(Zip Code) |
(503) 629-3300
(Registrant’s telephone number)
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file such reports), and (2) has been
subject to the filing requirements for the past 90 days. Yes þ No o
Indicate by check mark whether the Registrant is an accelerated filer (as defined in
Exchange Act Rule 12b-2). Yes þ No o
The number of shares of the Registrant’s Common Stock outstanding as of July 31, 2005 was
39,076,591 shares.
CORILLIAN CORPORATION
FORM 10-Q
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CORILLIAN CORPORATION
Condensed Consolidated Balance Sheets
(unaudited, in thousands)
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June 30, |
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December 31, |
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2005 |
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2004 (1) |
Assets |
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Current assets: |
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Cash and cash equivalents |
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$ |
28,100 |
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$ |
29,200 |
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Short-term investments |
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10,750 |
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10,150 |
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Accounts receivable, net |
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7,891 |
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8,218 |
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Revenue in excess of billings |
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1,325 |
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1,363 |
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Other current assets |
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2,214 |
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1,902 |
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Total current assets |
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50,280 |
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50,833 |
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Property and equipment, net |
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3,520 |
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3,800 |
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Investment in joint venture |
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— |
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128 |
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Other assets |
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869 |
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508 |
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Total assets |
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$ |
54,669 |
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$ |
55,269 |
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Liabilities and Shareholders’ Equity |
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Current liabilities: |
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Accounts payable and accrued liabilities |
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$ |
4,567 |
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$ |
3,447 |
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Deferred revenue |
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12,552 |
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16,630 |
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Current portion of long-term debt and capital lease obligations |
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8 |
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296 |
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Other current liabilities |
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888 |
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1,043 |
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Total current liabilities |
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18,015 |
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21,416 |
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Long-term debt and capital lease obligations, less current portion |
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— |
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629 |
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Other long-term liabilities |
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548 |
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622 |
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Total liabilities |
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18,563 |
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22,667 |
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Shareholders’ equity: |
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Common stock |
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130,721 |
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129,969 |
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Accumulated other comprehensive income |
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61 |
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61 |
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Accumulated deficit |
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(94,676 |
) |
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(97,428 |
) |
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Total shareholders’ equity |
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36,106 |
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32,602 |
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Total liabilities and shareholders’ equity |
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$ |
54,669 |
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$ |
55,269 |
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| (1) |
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Derived from Corillian’s audited consolidated financial statements as of December 31, 2004. |
See accompanying notes to condensed consolidated financial statements.
CORILLIAN CORPORATION
Condensed Consolidated Statements of Operations
(unaudited, in thousands, except per share data)
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For the Three-Month Period |
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For the Six-Month Period |
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Ended June 30, |
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Ended June 30, |
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2005 |
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2004 |
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2005 |
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2004 |
Revenues |
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$ |
12,287 |
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$ |
12,429 |
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$ |
23,523 |
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$ |
24,126 |
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Cost of revenues |
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4,151 |
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4,785 |
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8,510 |
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9,795 |
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Gross profit |
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8,136 |
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7,644 |
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15,013 |
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14,331 |
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Operating expenses: |
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Sales and marketing |
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1,719 |
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1,825 |
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3,489 |
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3,512 |
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Research and development |
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2,607 |
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1,587 |
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5,229 |
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2,978 |
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General and administrative |
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1,942 |
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1,671 |
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3,855 |
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|
3,235 |
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Total operating expenses |
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6,268 |
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5,083 |
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12,573 |
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9,725 |
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Income from operations |
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1,868 |
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|
2,561 |
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2,440 |
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|
|
4,606 |
|
Other income (expense), net |
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|
280 |
|
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|
(212 |
) |
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|
375 |
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(384 |
) |
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Net income before income taxes |
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2,148 |
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2,349 |
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2,815 |
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4,222 |
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Income taxes |
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50 |
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50 |
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63 |
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|
90 |
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Net income |
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$ |
2,098 |
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$ |
2,299 |
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$ |
2,752 |
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$ |
4,132 |
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Basic net income per share |
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$ |
0.05 |
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$ |
0.06 |
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$ |
0.07 |
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$ |
0.11 |
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Diluted net income per share |
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$ |
0.05 |
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$ |
0.06 |
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|
$ |
0.07 |
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$ |
0.10 |
|
Shares used in computing basic net income per share |
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|
38,935 |
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|
37,499 |
|
|
|
38,827 |
|
|
|
37,327 |
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Shares used in computing diluted net income per share |
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40,051 |
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40,198 |
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40,151 |
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|
40,423 |
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See accompanying notes to condensed consolidated financial statements.
CORILLIAN CORPORATION
Condensed Consolidated Statements of Cash Flows
(unaudited, in thousands)
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For the Six-Month Period Ended June 30, |
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2005 |
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2004 |
Cash flows from operating activities: |
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Net income |
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$ |
2,752 |
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$ |
4,132 |
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Adjustments to reconcile net income to net cash provided by operating activities: |
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Depreciation and amortization |
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|
726 |
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1,335 |
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Equity in losses of joint venture |
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128 |
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|
445 |
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(Recovery of) provision for bad debts |
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(1 |
) |
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8 |
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(Gain) loss on sale of assets |
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(8 |
) |
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2 |
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Income tax benefit of equity transactions |
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15 |
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45 |
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|
|
|
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Changes in operating assets and liabilities: |
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Accounts receivable |
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329 |
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3,552 |
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Revenue in excess of billings |
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38 |
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(504 |
) |
Other current and long-term assets |
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(673 |
) |
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(967 |
) |
Accounts payable and accrued liabilities |
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|
1,120 |
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49 |
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Deferred revenue and other current and long-term liabilities |
|
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(4,307 |
) |
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|
2,706 |
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Net cash provided by operating activities |
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|
119 |
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|
10,803 |
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Cash flows from investing activities: |
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Purchase of property and equipment |
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(446 |
) |
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(430 |
) |
Proceeds from the sale of property and equipment |
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8 |
|
|
|
— |
|
Purchases of available-for-sale investments |
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(2,650 |
) |
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(11,000 |
) |
Proceeds from the sales of available-for-sale investments |
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|
2,050 |
|
|
|
13,300 |
|
Purchases of held-to-maturity investments |
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— |
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(1,201 |
) |
Proceeds from the maturities of held-to-maturity investments |
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— |
|
|
|
1,202 |
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Net cash (used in) provided by investing activities |
|
|
(1,038 |
) |
|
|
1,871 |
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Cash flows from financing activities: |
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Proceeds from the issuance of common stock |
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|
737 |
|
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|
1,076 |
|
Repayments of long-term borrowings |
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(911 |
) |
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|
(826 |
) |
Principal payments on capital lease obligations |
|
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(6 |
) |
|
|
(14 |
) |
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|
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Net cash (used in) provided by financing activities |
|
|
(180 |
) |
|
|
236 |
|
|
|
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|
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Effect of exchange rate fluctuations on cash and cash equivalents |
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(1 |
) |
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|
1 |
|
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|
|
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|
|
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(Decrease) Increase in cash and cash equivalents |
|
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(1,100 |
) |
|
|
12,911 |
|
Cash and cash equivalents at beginning of period |
|
|
29,200 |
|
|
|
16,943 |
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|
|
|
|
|
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Cash and cash equivalents at end of period |
|
$ |
28,100 |
|
|
$ |
29,854 |
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|
|
|
|
|
|
|
|
|
See accompanying notes to condensed consolidated financial statements.
CORILLIAN CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(1) Basis of Presentation
The accompanying unaudited condensed consolidated financial statements of Corillian
Corporation and subsidiaries have been prepared pursuant to Securities and Exchange Commission
rules and regulations. Certain information and footnote disclosures normally included in financial
statements prepared in accordance with U.S. generally accepted accounting principles have been
condensed or omitted pursuant to such rules and regulations. These financial statements should be
read in conjunction with the audited consolidated financial statements and notes thereto included
in Corillian’s annual report on Form 10-K for the year ended December 31, 2004, filed with the
Securities and Exchange Commission on March 16, 2005.
The condensed consolidated financial statements include all adjustments (consisting of normal
recurring adjustments) which are, in the opinion of management, necessary for a fair presentation
of the results for interim periods, except for a $0.3 million out of period adjustment related to
employee benefit costs which resulted in a decrease
in net income in the current period. The adjustment should have been recorded in a prior period,
but Corillian believes the amount to be immaterial to both the current fiscal year and prior
periods. The results of operations for the three and six-month periods ended June 30,
2005 are not necessarily indicative of the results to be expected for the full year.
The preparation of condensed consolidated financial statements requires Corillian to make
estimates and judgments that affect the reported amounts of assets, liabilities, revenues and
expenses, and related disclosure of contingent assets and liabilities. On an on-going basis,
Corillian evaluates its estimates, including those related to software revenue recognition, accrual
for contracts in a loss position, allowance for doubtful accounts and the valuation allowance for
deferred tax assets. Corillian bases its estimates on historical experience and on various other
assumptions that are believed to be reasonable under the circumstances, the results of which form
the basis for making judgments about the carrying values of assets and liabilities that are not
readily apparent from other sources. Actual results may differ from these estimates under different
assumptions or conditions.
(2) Principles of Consolidation
The unaudited condensed consolidated financial statements include the financial statements of
Corillian Corporation and its wholly-owned subsidiaries, Corillian International, Ltd. and
Corillian South Asia Sdn Bhd. All intercompany balances and transactions have been eliminated in
consolidation.
(3) Reclassification
Certain reclassifications have been made to the condensed consolidated financial statements
for the six-month period ended June 30, 2004 in order to conform to the six-month period ended June
30, 2005 presentation. Such reclassifications had no effect on previously reported net income,
liquidity or cash flows from operations.
In the current period, Corillian reclassified balances for the six-month period ended June 30,
2004, related to auction rate securities, totaling $7.0 million, from cash equivalents to
short-term investments. This reclassification affected the presentation of the cash flows statement
for the six-months ended June 30, 2004.
(4) Revenue Recognition
Corillian recognizes revenues from software licensing agreements in accordance with the
provisions of Statement of Position (SOP) No. 97-2, Software Revenue Recognition, as amended by SOP
No. 98-9, Modification of SOP No. 97-2, Software Revenue Recognition, with Respect to Certain
Transactions. Corillian’s software arrangements generally include software licenses, implementation
and custom software engineering services, post-contractual customer support, training services and
hosting services. Corillian’s software licenses are, in general, functionally dependent on
implementation, training and certain custom software engineering services; therefore, software
licenses and implementation and training services, together with custom software engineering
services that are essential to the functionality of the software, are combined and recognized using
the percentage-of-completion method of contract accounting in accordance with SOP No. 81-1,
Accounting for Performance of Construction-Type and Certain Production-Type Contracts. Corillian
has determined that post-contractual customer support and hosting services can be separated from
software licenses, implementation, training and custom software engineering services because (a)
post-contractual customer support and hosting services are not essential to the functionality of
any other element in the arrangement, and (b) sufficient vendor-specific objective evidence exists
to permit the allocation of revenue to these service elements. The hosting element can be
accounted for separately from the license element, as the customer can take possession of the
software without significant penalty, in accordance with Emerging Issues Task Force (EITF) 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.
Percentage-of-completion is measured by the percentage of contract hours incurred to date
compared to the estimated total contract hours for each contract. Corillian has the ability to make
reasonably dependable estimates relating to the extent of progress towards completion, contract
revenues and contract costs. Any estimation process, including that used in preparing contract
accounting models, involves inherent risk. Profit estimates are subject to revision as the contract
progresses towards completion. Revisions in profit estimates are charged to income in the period
that the facts giving rise to the revision become known. Corillian reduces the inherent risk
relating to revenue and cost estimates in percentage-of-completion models through various approval
and monitoring processes and policies. Risks relating to service delivery, usage, productivity and
other factors are considered in the estimation process. Cumulative revenues recognized may be less
or greater than cumulative billings at any point in time during a contract’s term. The resulting
difference is recognized as deferred revenue or revenue in excess of billings, respectively.
Provisions for estimated losses on uncompleted contracts are made in the period in which such
losses are estimated.
Vendor-specific objective evidence has been established on post-contractual customer support
and hosting services using the renewal rate. Corillian allocates revenue to these elements in
multiple element arrangements using the residual method. The difference between the total software
arrangement fee and the amount deferred for post-contractual customer support and hosting services
is allocated to software license, implementation, training and custom software engineering services
and recognized using contract accounting.
Revenues for post-contractual customer support are recognized ratably over the term of the
support services period, generally a period of one year. Services provided to customers under
customer support and maintenance agreements generally include technical support and unspecified
product upgrades deliverable on a when and if available basis. Revenues from hosting services for
transactions processed by Corillian are recognized ratably over the hosting term.
Pursuant to SOP No. 81-1, on projects where ultimate recoverability is questionable due to
inherent hazards, Corillian limits revenue recognition in the period to the amount of project costs
incurred in the same period, and postpones recognition of profits until results can be estimated
more precisely. Under this “zero profit” methodology, equal amounts of revenues and costs, measured
on the basis of performance during the period, are presented in Corillian’s condensed consolidated
statements of operations.
Corillian generally licenses Corillian Voyager on an end-user basis, with its initial license
fee
based on a fixed number of end users. As a customer increases its installed base of end users
beyond the initial fixed number of end users, Corillian’s software license agreements require
customers to pay Corillian an additional license fee to cover additional increments of end users.
Revenues from additional license seat sales, less any amounts related to maintenance included in
the arrangement, are generally recognized in the period in which the licenses are sold.
In arrangements where Corillian does not have an obligation to install its products, but may
become involved in the installation of these products, Corillian recognizes non-refundable license
fees over the estimated implementation period for the customer or reseller’s project. If Corillian
determines that the customer or reseller can successfully install Corillian’s products in a
production environment without Corillian’s involvement, Corillian will recognize non-refundable
license fees in the period in which collectibility of the license fees is probable, assuming all
other SOP No. 97-2 revenue recognition criteria are met.
In certain arrangements, Corillian may defer all revenues and related costs of revenues until
delivery is complete and customer acceptance is obtained. These arrangements have certain elements
of risk such as an obligation to deliver new products when technological feasibility has not been
obtained at the onset of the arrangement. In arrangements where Corillian is providing customized
functionality on a best efforts basis, Corillian generally recognizes revenues as services are
performed. Arrangements where customers fund expedited development of software products are
accounted for as funded research and development. In arrangements where Corillian retains and
reserves title and all ownership rights to the software products, Corillian recognizes these funds
as a reduction of research and development expense.
(5) Concentration of Business and Credit Risk
Results of operations are substantially derived from United States operations and
substantially all assets reside in the United States. A majority of Corillian’s revenues are
generated from banks and other financial institutions. Accordingly, Corillian’s near-term and
long-term prospects depend on its ability to attract the technology expenditures of these
companies. The market for Internet-based financial services is intensely competitive and rapidly
changing. Additionally, the sale and implementation of Corillian’s products and services are often
subject to delays because of Corillian’s customers’ internal budgets and procedures for approving
large capital expenditures and deploying new technologies within their networks. Corillian’s
financial condition, results of operations and liquidity could be materially affected if adverse
conditions in the industry developed, such as a reduction in technology expenditures or a delay in
the sales or implementation timeline. An inability of Corillian to generate demand for its product,
whether as a result of competition, technological change, economic, or other factors, could have a
material adverse result on Corillian’s financial condition, results of operations or liquidity.
Corillian continues to experience a high degree of customer concentration during some fiscal
periods. During the three-month period ended June 30, 2005, two customers individually accounted
for 18% and 10% of consolidated revenues, as compared to two customers individually accounting for
23% and 11% for the three-month period ended June 30, 2004. During the six-month period ended June
30, 2005, one customer accounted for 17% of consolidated revenues, as compared to two customers
individually accounting for 25% and 13% of consolidated revenues for the six-month period ended
June 30, 2004.
Corillian is exposed to concentration of credit risk principally from accounts receivable and
revenue in excess of billing. As of June 30, 2005, two customers individually accounted for 24% and
15% of consolidated accounts receivable and three customers individually accounted for 42%, 13% and
12% of consolidated revenues in excess of billings.
As of December 31, 2004, four customers individually accounted for 24%, 15%, 13% and 13% of
consolidated accounts receivable and one customer accounted for 49% of consolidated revenues in
excess of billings.
Corillian is also subject to concentrations of credit risk from its cash, cash equivalents and
short-
term investments. Corillian limits its exposure to credit risk associated with cash, cash
equivalents and short-term investments by placing its cash, cash equivalents and short-term
investments with major financial institutions and by investing in investment-grade securities.
(6) Comprehensive Income
Comprehensive income (loss) is defined as changes in shareholders’ equity exclusive of
transactions with owners. To date, only foreign currency translation adjustments have been reported
in comprehensive income (loss) for Corillian. All other amounts have not been material to
Corillian’s financial position or results of operations.
(7) Supplemental Disclosures of Cash Flow Information
| |
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|
|
|
|
|
|
| |
|
For the Six-Month Period Ended |
| |
|
June 30, 2005 |
|
June 30, 2004 |
| |
|
(in thousands) |
Cash paid during the period for: |
|
|
|
|
|
|
|
|
Interest |
|
$ |
14 |
|
|
$ |
64 |
|
Taxes |
|
|
15 |
|
|
|
66 |
|
(8) Deferred Stock-Based Compensation
At June 30, 2005, Corillian had various stock-based compensation plans, including stock option
plans and an employee stock purchase plan. Corillian applies the intrinsic-value-based method of
accounting prescribed by Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock
Issued to Employees, and related interpretations including FASB Interpretation (FIN) No. 44,
Accounting for Certain Transactions involving Stock Compensation, an interpretation of APB Opinion
No. 25, to account for its fixed-plan stock options. Under this method, compensation expense is
generally recorded on the date a stock option is granted if the current market price of the
underlying stock exceeded the exercise price. Statement No. 123, Accounting for Stock-Based
Compensation and Statement No. 148, Accounting for Stock-Based Compensation — Transition and
Disclosure, an amendment of FASB Statement No. 123, established accounting and disclosure
requirements using a fair-value-based method of accounting for stock-based employee compensation
plans. As permitted by existing accounting standards, Corillian has elected to continue to apply
the intrinsic-value-based method of accounting described above, and has adopted only the disclosure
requirements of Statement No. 123, as amended. Expense associated with stock-based compensation is
amortized on an accelerated basis over the vesting period of the individual stock option awards
consistent with the method prescribed in FIN No. 28.
In December 2004, the Financial Accounting Standards Board revised Statement of Financial
Accounting Standards No. 123 (“SFAS 123R”), “Share-Based Payment,” which requires companies to
expense the estimated fair value of employee stock options and similar awards. The accounting
provisions of SFAS 123R will be effective for annual and interim periods beginning after January 1,
2006. Management is currently evaluating the requirements of SFAS No.
123R. The adoption of SFAS No. 123R is expected to have a significant
effect on the consolidated financial statements of Corillian.
Corillian has not yet determined whether the adoption will result in
amounts that are similar to the current pro forma disclosures under
SFAS 123.
The following table illustrates the effect on net income and net income per share if the
fair-value-based method had been applied to all outstanding and unvested awards in each period:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
For the Three-Month Period Ended |
|
For the Six-Month Period Ended |
| |
|
June 30, 2005 |
|
June 30, 2004 |
|
June 30, 2005 |
|
June 30, 2004 |
| |
|
|
|
|
|
(in thousands, except per share data) |
|
|
|
|
Net income, as reported |
|
$ |
2,098 |
|
|
$ |
2,299 |
|
|
$ |
2,752 |
|
|
$ |
4,132 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deduct: Total
stock-based employee
compensation expense
determined under fair
value based method for
all awards |
|
|
(480 |
) |
|
|
(526 |
) |
|
|
(949 |
) |
|
|
(1,237 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma net income |
|
$ |
1,618 |
|
|
$ |
1,773 |
|
|
$ |
1,803 |
|
|
$ |
2,895 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic — as reported |
|
$ |
0.05 |
|
|
$ |
0.06 |
|
|
$ |
0.07 |
|
|
$ |
0.11 |
|
Diluted — as reported |
|
$ |
0.05 |
|
|
$ |
0.06 |
|
|
$ |
0.07 |
|
|
$ |
0.10 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic — pro forma |
|
$ |
0.04 |
|
|
$ |
0.05 |
|
|
$ |
0.05 |
|
|
$ |
0.08 |
|
Diluted — pro forma |
|
$ |
0.04 |
|
|
$ |
0.04 |
|
|
$ |
0.05 |
|
|
$ |
0.07 |
|
(9) Net Income Per Share
Corillian computes net income per share in accordance with Statement No. 128, Earnings Per
Share. Under the provisions of Statement No. 128, basic net income per share is computed by
dividing the net income for the period by the weighted-average number of shares of common stock
outstanding during the period. Diluted net income per share is computed by dividing net income for
the period by the weighted-average number of shares of common stock and potential dilutive common
shares outstanding during the period.
The following is a reconciliation of basic and diluted weighted-average shares:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
For the Three-Month Period Ended |
|
For the Six-Month Period Ended |
| |
|
June 30, 2005 |
|
June 30, 2004 |
|
June 30, 2005 |
|
June 30, 2004 |
| |
|
|
|
|
|
(in thousands) |
|
|
|
|
Shares for basic net income
per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average common
shares outstanding |
|
|
38,935 |
|
|
|
37,499 |
|
|
|
38,827 |
|
|
|
37,327 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of dilutive securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options and employee
stock purchase plan |
|
|
1,116 |
|
|
|
2,699 |
|
|
|
1,324 |
|
|
|
3,096 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares for diluted net income
per share |
|
|
40,051 |
|
|
|
40,198 |
|
|
|
40,151 |
|
|
|
40,423 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following shares issuable under stock options were excluded from dilutive shares
under the treasury stock method as the exercise price of the stock options exceeded the average
fair market value of the underlying common stock for the periods presented below:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
For the Three-Month Period Ended |
|
For the Six-Month Period Ended |
| |
|
June 30, 2005 |
|
June 30, 2004 |
|
June 30, 2005 |
|
June 30, 2004 |
| |
|
(in thousands) |
Shares issuable under stock options |
|
|
2,242 |
|
|
|
1,225 |
|
|
|
1,966 |
|
|
|
1,213 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(10) Segment Information
Statement No. 131, Disclosures about Segments of an Enterprise and Related Information,
establishes standards for reporting information related to operating segments in annual financial
statements and requires selected information for those segments to be presented in interim
financial reports issued to shareholders. Statement No. 131 also establishes standards for related
disclosures about products and services and geographic areas. Operating segments are defined as
components of an enterprise about which separate, discrete financial information is available for
evaluation by the chief operating decision maker, or decision-making group, in making decisions
about how to allocate resources and assess performance.
Corillian’s chief operating decision maker, as defined under
Statement No. 131, is its chief executive officer. Corillian operates in a single
segment.
(a) Geographic Information
Results of operations are substantially derived from United States operations and
substantially all assets reside in the United States. Direct operating expenses related to
Corillian’s international operations were insignificant for the three-month and six-month
periods ended June 30, 2005 and 2004, respectively.
Consolidated revenues generated from Corillian’s international operations increased
$33,000, or 17%, to $226,000 for the three-month period ended June 30, 2005, as compared to
$193,000 for the three-month period ended June 30, 2004. Consolidated revenues generated
from Corillian’s international operations increased $24,000, or 7%, to $393,000 for the
six-month period ended June 30, 2005, as compared to $369,000 for the six-month period
ended June 30, 2004. Domestic and international revenues were 98% and 2% of total revenues
for the three and six-month periods ended June 30, 2005 and
2004, respectively.
Geographic revenue information for the three and six-month periods ended June 30, 2005
and 2004 is presented below:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
For the Three-Month Period Ended |
|
For the Six-Month Period Ended |
| |
|
June 30, 2005 |
|
June 30, 2004 |
|
June 30, 2005 |
|
June 30, 2004 |
| |
|
|
|
|
|
(in thousands) |
|
|
|
|
Revenues from: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States |
|
$ |
12,061 |
|
|
$ |
12,236 |
|
|
$ |
23,130 |
|
|
$ |
23,757 |
|
All foreign countries |
|
|
226 |
|
|
|
193 |
|
|
|
393 |
|
|
|
369 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
12,287 |
|
|
$ |
12,429 |
|
|
$ |
23,523 |
|
|
$ |
24,126 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(b) Revenues
Corillian’s
chief decision-maker monitors the revenue streams of licenses and various
services. There are many shared expenses generated by the various revenue streams. Because
management believes that any allocation of the expenses to multiple revenue streams would
be impractical and arbitrary, management has not historically made such allocations
internally.
The
chief decision-maker does, however, monitor revenue streams at a more
detailed level than those depicted in the accompanying condensed consolidated statement of
operations.
Revenues derived from Corillian’s licenses and services are as follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
For the Three-Month Period Ended |
|
For the Six-Month Period Ended |
| |
|
June 30, 2005 |
|
June 30, 2004 |
|
June 30, 2005 |
|
June 30, 2004 |
| |
|
(in thousands) |
License and professional services |
|
$ |
8,137 |
|
|
$ |
8,599 |
|
|
$ |
15,457 |
|
|
$ |
17,119 |
|
Post-contractual support |
|
|
3,240 |
|
|
|
2,809 |
|
|
|
6,158 |
|
|
|
5,285 |
|
Hosting |
|
|
910 |
|
|
|
1,021 |
|
|
|
1,908 |
|
|
|
1,722 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
12,287 |
|
|
$ |
12,429 |
|
|
$ |
23,523 |
|
|
$ |
24,126 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(c) Customer Concentration
Corillian continues to experience a high degree of customer concentration during some
fiscal periods. During the three-month period ended June 30, 2005, two customers
individually accounted for 18% and 10% of consolidated revenues. During the three-month
period ended June 30, 2004, two customers individually accounted for 23% and 11% of
consolidated revenues. During the six-month period ended June 30, 2005, one customer
accounted for 17% of consolidated revenues. During the six-month period ended June 30,
2004, two customers individually accounted for 25% and 13% of consolidated revenues.
(11) Commitments and Contingencies
(a) Litigation
Corillian is not currently engaged in any material legal proceedings.
(b) Long-term debt
In
November 2000, Corillian obtained a $5.0 million equipment line of credit with a
financial institution. As of December 31, 2004, $911,000 was outstanding under this line
of credit. In February 2005 Corillian paid off the outstanding balance under this line of
credit and no further amounts are available for borrowing.
In
March 2005, Corillian entered into a new one-year revolving line of credit facility
with another financial institution that allows Corillian to borrow up to $4.0 million to
assist with working capital needs as necessary. As of June 30, 2005, Corillian did not have
an outstanding balance on this line of credit. Under this line of credit, Corillian must
comply with affirmative covenants that require it to maintain a specified tangible net
worth, quick ratio, liabilities to tangible net worth ratio and certain levels of net
income.
(12) Acquisitions
On March 31, 2005, Corillian, InteliData Technologies Corporation (Nasdaq: INTD) and Wizard
Acquisition Corporation, a newly created wholly-owned subsidiary of Corillian, entered into a
merger agreement providing for the merger of InteliData with and into Wizard Acquisition
Corporation, with Wizard Acquisition Corporation being the surviving entity as a wholly-owned
subsidiary of Corillian. The acquisition will be accounted for as a purchase under U.S. generally
accepted accounting principles. Upon completion of the merger, Corillian will issue an aggregate of
4,918,032 shares of its common stock and pay an estimated aggregate of $4.3 million in cash, in
exchange for all of the outstanding shares of InteliData common stock. The consummation of the
merger is subject to the approval of InteliData’s
shareholders and other customary closing
conditions. The Annual Meeting of Stockholders of InteliData Technologies Corporation will be held
on August 18, 2005 at which time the InteliData stockholders will be asked to adopt the Agreement
and Plan of Merger and to approve the transactions contemplated thereby. The merger is expected to
close promptly following approval by the InteliData stockholders, subject to satisfaction of the
other closing conditions.
(13) Subsequent
Events
On August 5, 2005,
Corillian and qbt Systems, Inc., a company that
provides products and services related to Corillian’s business,
entered into a merger agreement providing for the merger of qbt with
and into a wholly-owned subsidiary of Corillian’s, with qbt being the
surviving entity as a wholly-owned subsidiary of Corillian, followed
by the merger of qbt with the limited liability company being the
surviving entity as a wholly-owned subsidiary of Corillian. Pursuant
to the Agreement, on August 8, 2005, the merger was consummated
and qbt became a wholly-owned subsidiary of Corillian. In
consideration of the acquisition, the agreement provides for the
payment of 649,785 unregistered shares of Corillian’s common stock
and $3.2 million in cash to the shareholders of qbt, for an
aggregate purchase price of $5.3 million. The acquisition will be
accounted for as a purchase under U.S. generally accepted accounting
principles.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Forward-Looking Statements and Risk Factors
This Quarterly Report on Form 10-Q and the documents incorporated herein by reference contain
forward-looking statements within the meaning of the Private Securities Litigation Reform Act of
1995. All statements other than statements of historical fact made in this Quarterly Report on Form 10-Q are forward-looking including but not limited to, statements regarding industry prospects;
future results of operations or position; Corillian’s expectations and beliefs regarding future
revenue growth and future profits; Corillian’s strategies,
expectations and intentions regarding acquisitions;
the outcome of any litigation to which Corillian is a party; Corillian’s accounting and tax
policies; Corillian’s future strategies regarding investments, product offerings, research and
development, market share, and strategic relationships and collaboration; Corillian’s dividend
policies; Corillian’s future capital requirements; and Corillian’s intentions and expectations
regarding credit facilities. These statements relate to future events or Corillian’s future
financial performance. In some cases, you can identify forward-looking statements by terminology
including “intend,” “could,” “may,” “will,” “should,” “expect,” “plan,” “anticipate,” “believe,”
“estimate,” “predict,” “potential,” “future,” or “continue,” the negative of these terms or other
comparable terminology. These statements are only predictions. Actual events or results may differ
materially from those expressed or implied in such forward-looking statements. In evaluating these
statements, you should specifically consider various factors, including the risks described below
and in greater detail in Exhibit 99.1 to this Report, Corillian’s registration statements and
reports filed with the Securities and Exchange Commission, and contained in Corillian’s press
releases from time to time. You are advised to read the more detailed and thorough discussion of
the following risks Corillian faces in its business contained in Exhibit 99.1 to this Report.
| |
• |
|
While Corillian has generated net income in each of the most recent eight fiscal
quarters, Corillian has a history of losses and may incur losses in future periods if
Corillian is not able to, among other things, increase its sales to new and existing
customers. |
| |
| |
• |
|
Corillian’s quarterly results fluctuate significantly and may fall short of
anticipated levels, which may cause the price of Corillian’s common stock to decline. |
| |
| |
• |
|
A small number of customers account for a substantial portion of Corillian’s
revenues in each
period; Corillian’s results of operations and financial condition could suffer if
Corillian loses customers or fails to add additional customers to its customer base. |
| |
| |
• |
|
If Corillian, or its implementation partners, do not effectively implement
Corillian’s solutions at financial service providers’ facilities, Corillian may not
achieve anticipated revenues or gross margins. |
| |
| |
• |
|
Corillian’s products’ lengthy sales cycles may cause revenues and operating results
to be |
| |
|
|
unpredictable and to vary significantly from period to period. |
| |
| |
• |
|
Corillian may not achieve anticipated revenues if Corillian does not successfully
introduce new products or develop upgrades or enhancements to its existing products. |
| |
| |
• |
|
Corillian’s partners may be unable to fulfill their service obligations and cause
Corillian to incur penalties or other expenses with its customers. |
| |
| |
• |
|
Corillian’s facility and operations may be disabled by a disaster or similar event,
which could damage Corillian’s reputation and require Corillian to incur financial
loss. |
| |
| |
• |
|
Competition in the market for Internet-based financial services is intense and
could reduce Corillian’s sales and prevent Corillian from achieving profitability. |
| |
| |
• |
|
Consolidation in the financial services industry could reduce the number of
Corillian’s customers and potential customers. |
| |
| |
• |
|
If Corillian loses key personnel, Corillian could experience reduced sales, delayed
product development and diversion of management resources. |
| |
| |
• |
|
If Corillian does not develop international operations as expected or fails to
address international market risks, Corillian may not achieve anticipated sales
growth. |
| |
| |
• |
|
Acquisitions by Corillian may be costly and difficult to integrate, divert
management resources or dilute shareholder value. Recently, Corillian
acquired qbt Systems, Inc. and entered into
an agreement to acquire InteliData Technologies Corporation, and both of these acquisitions may be subject to these
challenges. In addition, InteliData has reported internal control deficiencies
without a clear plan to correct those deficiencies and qbt has not been
subject to the internal control standards of a public company. The failure to
successfully integrate the two companies, and timely and cost effectively
implement appropriate internal controls and procedures, could have a material
adverse effect on the results of operations and financial condition of the combined companies. |
| |
| |
• |
|
If Corillian becomes subject to intellectual property infringement claims, these
claims could be costly and time consuming to defend, divert management attention or
cause product delays. |
| |
| |
• |
|
Network or Internet security problems could damage Corillian’s reputation and business. |
| |
| |
• |
|
New technologies could render Corillian’s products obsolete. |
| |
| |
• |
|
Defects in Corillian’s solutions and system errors in Corillian’s customers’ data
processing systems after installing Corillian’s solutions could result in loss of
revenues, delay in market acceptance and injury to Corillian’s reputation. |
| |
| |
• |
|
Corillian’s products and services must interact with other vendors’ products, which
may not function properly. |
| |
| |
• |
|
If Corillian becomes subject to product liability litigation, it could be costly
and time consuming to defend. |
| |
| |
• |
|
If Corillian is unable to protect its intellectual property, Corillian may lose a
valuable competitive advantage or be forced to incur costly litigation to protect its
rights. |
| |
| |
• |
|
Increasing government regulation of the Internet and the financial services
industry would limit the market for Corillian’s products and services impose on
Corillian liability for transmission of protected data and increase its expenses. |
Corillian does not guarantee future results, levels of activity, performance or achievements.
Corillian does not plan to update any of the forward-looking statements after the date of this
document to conform them to actual results or to changes in its expectations.
Overview
Corillian is a leading provider of solutions that enable banks, brokers, financial portals and
other financial service providers to rapidly deploy Internet-based financial services. Corillian’s
solutions allow consumers to conduct financial transactions, view personal and market financial
information, pay bills and access other financial services on the Internet. Corillian Voyager is a
software platform combined with a set of applications for Internet banking, electronic bill
presentment and payment, targeted marketing, data aggregation, alerts and online customer
relationship management. Corillian’s solutions integrate into existing database applications and
systems and enable its customers to monitor transactions across all systems in real time.
Corillian’s solutions are also designed to support multiple lines of business, including small
business banking and credit card management, and to scale to support millions of users. Current
Corillian customers include J.P. Morgan Chase, Wachovia Bank, The Huntington National Bank, Capital
One and SunTrust Bank.
Substantially all of Corillian’s revenues are derived from licensing Corillian’s software and
performing professional services for its customers, both through direct sales channels and indirect
sales partners. These professional services include implementation, custom software engineering,
consulting, maintenance, training and hosting. In most cases, Corillian recognizes revenues for
licenses, implementation, training and custom engineering services using the
percentage-of-completion method. Revenues relating to maintenance and hosting services are
recognized ratably over the term of the associated maintenance or hosting contract. Revenues
derived from consulting services are recognized as the services are performed. Corillian generally
licenses Corillian Voyager on an end-user basis, with its initial license fee based on a fixed
number of end users. As a customer increases its installed base of end users beyond the initial
fixed number of end users, Corillian’s software license requires the customer to pay Corillian an
additional license fee to cover additional increments of end users. Revenues from additional seat
sales are generally recognized in the period in which the licenses are sold.
The market for new sales of Internet banking solutions continued to be challenging in 2004 and
the first six months of 2005 due to various factors, including reluctance on the part of some banks
to upgrade their Internet banking platforms or improve their Internet banking websites. Despite
these conditions, Corillian was able to sign a significant contract in the second quarter of 2005
with a major financial institution. However, the majority of the
related revenues have been deferred
and will be recognized in the second half of 2005 as implementation progresses. Most of Corillian’s license
revenues for the three and six-month periods ended June 30, 2005 and 2004 came from sales to
existing customers. Moving forward, Corillian will continue to focus on developing additional
applications to complement its market position within retail Internet banking and selling products
and services to new and existing customers.
Since incorporation, Corillian has incurred substantial costs to develop and market its
technology and to provide professional services. As a result, Corillian has an accumulated deficit
of approximately $94.7 million as of June 30, 2005. Corillian’s operating history makes it
difficult to forecast future operating results. As a result of the rapid evolution of Corillian’s
business and limited operating history, Corillian believes period-to-period comparisons of its
results of operations, including its revenues and cost of revenues and operating expenses as a
percentage of revenues are not necessarily indicative of its future performance.
On March 31, 2005, Corillian, InteliData Technologies Corporation (Nasdaq: INTD) and Wizard
Acquisition Corporation, a newly created wholly-owned subsidiary of Corillian, entered into a
merger agreement providing for the merger of InteliData with and into Wizard Acquisition
Corporation, with Wizard Acquisition Corporation being the surviving entity as a wholly-owned subsidiary of
Corillian. The acquisition will be accounted for as a purchase under U.S. generally accepted
accounting principles. Upon completion of the merger, Corillian will issue an aggregate of
4,918,032 shares of its common stock and pay an estimated aggregate of $4.3 million in cash, in
exchange for all of the outstanding shares of InteliData common stock. The consummation of the
merger is subject to the approval of InteliData’s shareholders and other customary closing
conditions. The Annual Meeting of Stockholders of InteliData Technologies Corporation will be held
on August 18, 2005 at which time the InteliData stockholders will
be asked to adopt the Agreement and Plan of Merger and to approve the transactions contemplated thereby. The merger is expected to
close promptly following approval by the InteliData stockholders, subject to satisfaction of the
other closing conditions. We believe the acquisition will allow us to significantly expand our bill
payment warehousing services.
On
August 5, 2005, Corillian and qbt Systems, Inc., a company that
provides products and services related to Corillian’s business,
entered into a merger agreement providing for the merger of qbt with
and into a wholly-owned subsidiary of Corillian’s, with qbt being the
surviving entity as a wholly-owned subsidiary of Corillian, followed
by the merger of qbt with and into a single member limited liability
company that is wholly-owned by Corillian, with the limited liability
company being the surviving entity as a wholly-owned subsidiary of
Corillian. Pursuant to the Agreement, on August 8, 2005, the
merger was consummated and qbt became a wholly-owned subsidiary
of Corillian. In consideration of the acquisition, the agreement
provides for the payment of 649,785 unregistered shares of
Corillian’s common stock and $3.2 million in cash to the
shareholders of qbt, for an aggregate purchase price of $5.3 million.
The acquisition will be accounted for as a purchase under U.S. generally
accepted accounting principles. We believe the addition of
qbt Systems will expand our expertise in delivering seamless,
realtime integration to many different systems in the industry.
Critical
Accounting Policies and Estimates
We
reaffirm the critical accounting policies and estimates as reported
in our Form 10-K for the year ended December 31, 2004,
which was filed with the Securities and Exchange Commission on
March 16, 2005.
Results of Operations
Revenues
Corillian’s revenues are derived from licensing
Corillian’s software and performing professional services for its
customers, both through direct sales channels and
indirect sales partners. These professional services include
implementation, custom software engineering, consulting, maintenance, training and hosting.
Revenues decreased approximately $100,000, or 1%, to $12.3 million for the three-month period
ended June 30, 2005, as compared to $12.4 million for three-month period ended June 30, 2004. The
slight decrease was primarily due to decreases in license and professional services and hosting
revenues of $462,000 and $111,000, respectively, for the three-month period ended June 30, 2005, as
compared to the three-month period ended June 30, 2004. The decreases in license and professional
service and hosting revenues were partially offset by an increase in post-contractual support
revenues of $431,000, which was the result of a significant new customer receiving maintenance
services beginning in mid 2004.
Revenues decreased approximately $600,000, or 2%, to $23.5 million for the six-month period
ended June 30, 2005, as compared to $24.1 million for the six-month period ended June 30, 2004.
The slight decrease in revenues was primarily due to a decrease in license and professional
services of approximately $1.7 million for the six-month period ended June 30, 2005, as compared to
the six-month period ended June 30, 2004. The decrease in license and professional services
revenues was partially offset by increases in post-contractual support and hosting revenues of
approximately $900,000 and $200,000, respectively, both of which increased as a result of two new
significant customers receiving services for the full six-month period ended June 30, 2005, as
compared to the six-month period ended June 30, 2004.
Cost of Revenues
Cost of revenues consists primarily of salaries and related expenses for professional service
personnel and outsourced professional service providers who are responsible for the implementation
and customization of Corillian’s software and for maintenance and support personnel who are
responsible for post-contractual customer support.
Cost of revenues decreased approximately $600,000, or 13%, to $4.2 million for the three-month
period ended June 30, 2005, as compared to $4.8 million for the three-month period ended June 30,
2004. Cost of revenues decreased $1.3 million, or 13%, to $8.5 million for the six-month period
ended June 30, 2005, as compared to $9.8 million for the six-month period ended June 30, 2004. The
decrease in cost of revenues during both the three and six-month periods ended June 30, 2005, as
compared to the three and six-month periods ended June 30, 2004, was primarily attributable to
approximately $500,000 and $900,000 in research and development expenses being allocated to cost of
revenues for the three and six-month periods ended June 30, 2004, respectively, as Corillian’s
research and development personnel provided services for one of Corillian’s customers.
Gross profit as a percentage of revenues was 66% for the three-month period ended June 30,
2005, as compared to 62% for the three-month period ended June 30, 2004. Gross profit as a
percentage of revenues was 64% for the six-month period ended June 30, 2005, as compared to 59% for the
six-month period ended June 30, 2004. Consistent with the decrease in cost of revenues, the
increase in gross profit as a percentage of revenues was due to Corillian’s research and
development personnel providing services for one of Corillian’s customers for the three and
six-month periods ended June 30, 2004.
Operating Expenses
Sales and Marketing Expenses
Sales and marketing expenses consist of salaries, commissions and related expenses for
personnel involved in marketing, sales and support functions, as well as costs associated with
trade shows and other promotional activities.
Sales and marketing expenses decreased approximately $100,000, or 6%, to $1.7 million for the
three-month period ended June 30, 2005, as compared to $1.8 million for the three-month period
ended June 30, 2004. Sales and marketing expenses remained constant at $3.5 million for the
six-month periods ended June 30, 2005 and 2004. The decrease for the three-month period ended June
30, 2005, as compared to the three-month period ended June 30, 2004, was primarily due to a
decrease in consulting expenses related to product development of the Corillian Consumer Banking
application.
Research and Development Expenses
Research and development expenses consist primarily of salaries and related expenses for
engineering personnel and costs of materials and equipment associated with the design, development
and testing of Corillian’s products.
Research
and development expenses increased approximately $1.0 million, or 63%, to $2.6 million for the
three-month period ended June 30, 2005, as compared to $1.6 million for the three-month period
ended June 30, 2004. The increase was due to approximately $500,000 of costs associated with
research and development employees being allocated to cost of revenues during the three-month
period ended June 30, 2004, as these employees provided services to one of Corillian’s customers
during the respective period. The remaining increase related to an increase in salaries, wages and
other employee related costs due to headcount increasing to 65 at June 30, 2005, as compared to 49
at June 30, 2004.
Research
and development expenses increased approximately $2.2 million, or 73%, to $5.2 million for the
six-month period ended June 30, 2005, as compared to $3.0 million for the six-month period ended
June 30, 2004. The increase was due to approximately $900,000 of costs associated with research
and development employees being allocated to cost of revenues during the six-month period ended
June 30, 2004, as these employees provided services to one of Corillian’s customers during the
respective period. An increase of approximately $400,000 due to cost associated with professional services
personnel being allocated to research and development expense during the six-month period ended
June 30, 2005, as these personnel worked on research and development projects during the respective
period. The remaining increase related to salaries, wages and other employee related costs due to
headcount increasing to 65 at June 30, 2005, as compared to 49 at June 30, 2004.
Research and development expenses, to a certain extent, could fluctuate in future periods due
to the additional funding of Corillian’s research and development activities by customers accounted
for under the provisions of Statement No. 68, Research and Development Arrangements, as well as
internal funding for the development of new products and enhancements to existing products and the
use of Corillian’s research and development personnel to provide services for Corillian’s
customers.
General and Administrative Expenses
General and administrative expenses consist of salaries and related expenses for executive,
finance, human resources, legal, information systems management and administration personnel, as
well as professional fees, bad debt expenses and other general corporate expenses.
General and administrative expenses increased approximately $200,000, or 12%, to $1.9 million
for the three-month period ended June 30, 2005, as compared to $1.7 million for the three-month
period ended June 30, 2004. The increase was primarily due to increases in salaries, wages and
other employee related costs due to headcount, increasing to 36 at June 30, 2005, as compared to 30
at June 30, 2004.
General and administrative expenses increased approximately $700,000, or 22%, to $3.9 million for
the
six-month period ended June 30, 2005, as compared to $3.2 million for the six-month period
ended June 30, 2004. The increase, in part, was due to additional accounting fees of $133,000
related to Sarbanes-Oxley compliance initiatives. The remaining increase was primarily due to
salaries, wages and other employee related costs due to headcount increasing to 36 at June 30,
2005, as compared to 30 at June 30, 2004.
Corillian’s net income
decreased approximately $200,000, or 9%, to $2.1 million for the three-month period
ended June 30, 2005, as compared to $2.3 million for the three-month period ended
June 30, 2004. Corillian’s net income decreased
approximately $1.3 million, or 32%,
to $2.8 million
for the six-month period ended June 30, 2005, as compared to $4.1 million for the
six-month period ended June 30, 2004. Included in net
income for the six-month period ended June 30, 2005 was a $0.3 million out of period
adjustment related to employee benefit costs which resulted in a decrease in net income in the current period.
The adjustment should have been recorded in a prior period, but Corillian believes
the amount to be immaterial to both the current fiscal year and prior periods.
Other Income (Expense), Net
Other income (expense), net, consists primarily of interest earned on cash, cash equivalents
and short-term investments, gains and losses recognized upon sale of Corillian’s assets, interest
expense, Corillian’s share of losses in equity investments, and other miscellaneous items.
Other income (expense), net, increased $492,000 to income of $280,000 for the three-month
period ended June 30, 2005, as compared to expense of $212,000 for the three-month period ended
June 30, 2004. The increase was due to a decrease of $236,000 in the amount of loss taken in
Corillian’s proportionate share of Synoran LLC’s net loss during the three-month period ended June
30, 2005, as compared to the three-month period ended June 30, 2004. The remaining increase was
primarily due to an increase of $212,000 in interest income as Corillian increased cash and
short-term investments and received higher interest rates on short-term investments for the
three-month period ended June 30, 2005, as compared to the three-month period ended June 30, 2004.
Other income (expense), net,
increased $759,000 to income of $375,000 for the six-month
period ended June 30, 2005, as compared to expense of $384,000 for the six-month period ended
June 30, 2004. The increase was due to a decrease of $318,000 in the amount of loss taken in
Corillian’s proportionate share of Synoran LLC’s net loss during the six-month period ended June 30, 2005, as compared to the six-month period ended June 30, 2004. The remaining increase was
primarily due to an increase of $372,000 in interest income as Corillian increased cash and
short-term investments and received higher interest rates on short-term investments for the
six-month period ended June 30, 2005, as compared to the six-month period ended June 30, 2004.
Income Taxes
Corillian expects to be profitable for the twelve-month period ended December 31, 2005, and,
therefore, expects to incur an alternative minimum tax liability for this period. As a result,
Corillian recorded income tax charges of $50,000 and $63,000 during the three and six-month periods
ended June 30, 2005, respectively, related to estimated alternative minimum taxes for these
periods. Corillian recorded an income tax charge of $50,000 and $90,000 during the three and
six-month periods ended June 30, 2004, respectively. Alternative minimum taxes paid are available
to be carried forward to reduce the excess of regular taxes over alternative minimum taxes in
future years. Such alternative minimum tax credit carryforwards are includable in deferred tax
assets. Corillian has recorded a full valuation allowance against such credit carryforwards in
addition to all other net deferred tax assets, as it believes it is more likely than not that these
deferred tax assets will not be realized. We consider future taxable income and ongoing prudent
and feasible tax planning strategies in assessing the need for the valuation allowance. In the
event we were to determine that we would be able to realize our deferred tax assets in the future
in excess of our net recorded amount, an adjustment to decrease the valuation allowance would
increase income in the period such determination was made.
Liquidity and Capital Resources
As of June 30, 2005, Corillian had $38.9 million in cash, cash equivalents and short-term
investments, as compared to $39.4 million as of December 31, 2004. Cash equivalents consisted
mainly of demand deposits, money market mutual funds and commercial paper with original maturities
less than 90 days. Short-term investments consisted mainly of taxable government agency bonds with
original maturities between 90 and 180 days, taxable municipal bonds and auction rate securities,
with original maturities greater than one year. Although original maturities are greater than one
year, Corillian classifies auction rate securities as short-term investments as they are bought and
sold at par every 28 to 35 days and
therefore are available for use in normal operations.
In
November 2000, Corillian obtained a $5.0 million equipment line of credit with a financial
institution. As of December 31, 2004, $911,000 was outstanding under this line of credit. In
February 2005 Corillian paid off the outstanding balance under this line of credit and no further
amounts are available for borrowing.
In
March 2005, Corillian entered into a new one-year revolving line of credit facility with
another financial institution that allows Corillian to borrow up to $4.0 million to assist with
working capital needs as necessary. As of June 30, 2005, Corillian did not have an outstanding
balance on this line of credit. Under this line of credit, Corillian must comply with affirmative
covenants that require it to maintain a specified tangible net worth, quick ratio, liabilities to
tangible net worth ratio and certain levels of net income.
Net cash provided by operating activities was $119,000 for the six-months ended June 30, 2005,
as compared to $10.8 million for the six-months ended June 30, 2004. Net income, adjusted to add
back the effects of non-cash items such as depreciation, amortization and equity losses on the
Synoran investment, decreased by $2.4 million for the six-month period ended June 30, 2005, as
compared to the six-month period ended June 30, 2004. Various other items affected Corillian’s cash
provided by operating activities, contributing to and offsetting the $10.7 million decrease in net
operating activities noted above. Corillian's cash provided by
operating activities decreased as deferred revenue decreased $4.3 million for the
six-month period ended June 30, 2005, as compared to an increase of $2.7 million for the six-month
period ended June 30, 2004. These changes were primarily due to the timing of billings on large
sales in relation to the period revenue was recognized. The decrease
in cash provided by operating activities due to deferred revenue was
partially offset by a decrease in accounts receivable of $329,000 for the six-month period ended
June 30, 2005, as compared to a decrease of $3.6 million for the six-month period ended June 30,
2004. The decrease is due to the timing of billings and receipt of payments on large sales.
Net cash used in investing activities was $1.0 million for the six-months ended June 30, 2005.
Net cash provided by investing activities was $1.9 million for the six-months ended June 30, 2004.
During the six-month period ended June 30, 2005 net cash used by investing activities consisted
primarily of net purchases of short-term investments of $600,000 and purchases of property and
equipment of $446,000. During the six-month period ended June 30, 2004, net cash provided by
investing activities consisted of net proceeds from the sales of short-term investments of $2.3
million and purchases of property and equipment of $430,000.
Net cash used in financing activities was $180,000 for the six-month period ended June 30,
2005. Net cash provided by financing activities was $236,000 for the six-month period ended June
30, 2004. During the six-month period ended June 30, 2005, net cash used in financing activities
consisted of $917,000 in repayments of long-term borrowings and capital lease obligations, which
was offset, in part, by $737,000 in proceeds received from the issuance of common stock under
Corillian’s stock option and employee stock purchase plans. Net cash provided by financing
activities during the six-month period ended June 30, 2004 consisted primarily of $1.1 million
received from the issuance of common stock under Corillian’s stock option and employee stock
purchase plans, which was offset, in part, by repayments on long-term borrowings and capital lease
obligations of $840,000.
Working capital increased to $32.3 million as of June 30, 2005, as compared to $29.4 million
as of December 31, 2004. The increase was primarily due to a decrease in the deferred revenue
balance of $4.0 million to $12.6 million at June 30, 2005, as compared to $16.6 million at December 31, 2004.
Corillian
had no material financial obligations as of June 30, 2005, other
than its obligations under its operating lease.
However, due to the acquisition of qbt Systems Inc. closing on
August 8, 2005, Corillian became obligated to pay $3.2 million in cash
to the shareholders of qbt as of such closing date. Additionally, if
the merger with InteliData is consummated, Corillian will be
obligated to pay an estimated $4.3 million in cash consideration to
the shareholders of IntliData. Further capital requirements will
depend on many factors, including the timing of research and
development efforts and the expansion of Corillian’s operations, both
domestically and internationally. Corillian believes its current
cash, cash equivalents, and short-term investments will be sufficient
to meet its working capital requirements for at least the next 12 months.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Foreign Exchange Rate Sensitivity
Corillian develops products in the United States and markets its products and services in the
United States, and to a lesser extent in Europe, Asia and Australia. As a result, its financial
results could be affected by factors such as changes in foreign currency exchange rates or weak
economic conditions in foreign markets. Because nearly all of Corillian’s revenues are currently
denominated in United States dollars, a strengthening of the United States dollar could make
Corillian’s products less competitive in foreign markets.
Corillian does not use derivative financial instruments for speculative purposes. Corillian
does not engage in exchange rate hedging or hold or issue foreign exchange contracts for trading
purposes. Corillian does have foreign-based operations where transactions are denominated in
foreign currencies and are subject to market risk with respect to fluctuations in the relative
value of currencies. Corillian has limited operations in Europe, Asia and Australia and conducts
transactions in various local currencies in these locales. To date, the impact of fluctuations in
the relative fair value of other currencies has not been material.
Interest Rate Sensitivity
As of June 30, 2005, Corillian had $38.9 million in cash, cash equivalents and short-term
investments compared to $39.4 million at December 31, 2004. Cash equivalents consist mainly of
demand deposit accounts, money market mutual funds and commercial paper with original maturities
less than 90 days. Short-term investments consist of taxable government agency bonds with original
maturities ranging between 90 and 180 days taxable municipal bonds, auction rate securities, with
original maturities ranging from greater than one year. Government agency bonds are classified as
held-to-maturity. All auction rate securities are classified as available-for-sale and reported on
the balance sheet at par value, which equals market value, as these securities are bought and sold
every 28 to 35 days. Corillian is not subject to interest rate risks on its available-for-sale
investments as these investments are bought and sold at par value. Corillian’s short-term
held-to-maturity investments are subject to interest rate risk and will decrease in value if market
interest rates increase. Corillian manages this risk by maintaining an investment portfolio with
high credit quality. Changes in the overall level of interest rates affect our interest income that
is generated from our short-term investments. If interest rates increase or decrease equally during
2005, by a total of one percent, Corillian’s interest income would increase or decrease by
approximately $150,000, respectively. In 2005, Corillian may invest in short-term investments with
original maturities greater than 180 days. These investments would be subject to higher levels of
interest rate risks.
ITEM 4. CONTROLS AND PROCEDURES
(a) Evaluation of disclosure controls and procedures.
The term “disclosure controls and procedures” (defined in SEC Rule 13a-15(e)) refers to the
controls and other procedures of a company that are designed to ensure that the information
required to be disclosed by a company in the reports that it files under the Exchange Act is recorded,
processed, summarized and reported within required time periods. Corillian’s management, with the
participation of the Chief Executive Officer and Chief Financial Officer, has evaluated the
effectiveness of the design and operations of the Company’s disclosure controls and procedures as
of the end of the period covered by this quarterly report (the Evaluation Date). In designing and
evaluating our disclosure controls and procedures, management recognized that a control system, no
matter how well conceived and operated, can provide only reasonable, not absolute, assurance that
the objectives of the system are met. Corillian’s disclosure
controls and procedures are designed to provide reasonable assurance that the objectives of the system are met. Further, the design of a
control system must reflect the fact that there are resource constraints, and the benefits of
controls must be considered relative to their costs. Because of the inherent limitations in all
control systems, no evaluation of controls can provide absolute assurance that all control issues
and instances of fraud, if any, have been detected. These inherent limitations include the
realities that judgments in decision-making can be faulty, and that breakdowns can occur because of
simple error or mistake. Additionally, controls can be circumvented by the individual acts of some
persons, by collusion of two or more people, or by management override of the control. The design
of any system of controls also is based partly on certain assumptions about the likelihood of
future events, and there can be no assurance that any design will succeed in achieving its stated
goals under all potential future conditions.
Based on that evaluation, Corillian’s management, with the participation of the Chief
Executive Officer and Chief Financial Officer have concluded that, as of the Evaluation Date, such
controls and procedures were effective.
(b) Changes in internal controls over financial reporting
There were no changes in our internal control over financial reporting (as defined in Rule
13a-15(f) under the Exchange Act) identified in connection with the evaluation required by Rule
13a-15(d) that occurred during the period covered by this quarterly report on Form 10-Q and that
have materially affected, or are reasonable likely to materially affect, our internal control over
financial reporting
We intend to regularly review and evaluate the design and effectiveness of our disclosure
controls and procedures and internal controls over financial reporting on an ongoing basis and to
improve these controls and procedures over time and to correct any significant deficiencies that we
may discover in the future. While we believe the present design of our disclosure controls and
procedures and internal controls over financial reporting are effective, future events affecting
our business may cause us to modify these controls and procedures in the future.
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS
(a) Exhibits
The exhibits listed on the accompanying index are filed as part of this Form 10-Q:
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| Exhibit No. |
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Description |
31.1
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Certification Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
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31.2
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Certification Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
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32.1
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Certification Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
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99.1
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Risk Factors |
SIGNATURES
Pursuant to the requirements 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, on
August 9, 2005.
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CORILLIAN CORPORATION |
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By:
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/s/ Paul K. Wilde |
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Paul K. Wilde |
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Chief Financial Officer |
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(Principal Financial and Accounting Officer) |
INDEX TO EXHIBITS
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| Exhibit No. |
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Description |
31.1
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Certification Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
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31.2
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Certification Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
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32.1
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Certification Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
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99.1
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Risk Factors |