e10vq
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
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þ |
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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 September 30, 2005
OR
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o |
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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
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(I.R.S. Employer |
Incorporation or Organization)
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Identification Number) |
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3400 NW John Olsen Place Hillsboro, Oregon
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97124 |
(Address of principal executive offices)
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(Zip Code) |
(503) 629-3300
(Registrants 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
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of
the Exchange Act). Yes o No þ
The number of shares of the Registrants Common Stock outstanding as of October 31, 2005 was
44,672,164 shares.
CORILLIAN CORPORATION
FORM 10-Q
TABLE OF CONTENTS
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CORILLIAN CORPORATION
Condensed Consolidated Balance Sheets
(unaudited, in thousands)
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September 30, |
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December 31, |
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2005 |
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2004 (1) |
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Assets |
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|
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Current assets: |
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|
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|
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Cash and cash equivalents |
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$ |
16,543 |
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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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7,437 |
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8,218 |
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Revenue in excess of billings |
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2,670 |
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1,363 |
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Other current assets |
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2,921 |
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1,902 |
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|
|
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Total current assets |
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40,321 |
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50,833 |
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Property and equipment, net |
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3,796 |
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3,800 |
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Intangible assets, net |
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4,279 |
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Goodwill |
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26,850 |
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Investment in joint venture |
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128 |
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Other assets |
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1,232 |
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508 |
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Total assets |
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$ |
76,478 |
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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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$ |
7,217 |
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$ |
3,447 |
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Deferred revenue |
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12,633 |
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|
16,630 |
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Current portion of long-term debt and capital lease obligations |
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5 |
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|
296 |
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Other current liabilities |
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1,152 |
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1,043 |
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Total current liabilities |
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21,007 |
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21,416 |
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Long-term debt and capital lease obligations, less current portion |
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629 |
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Other long-term liabilities |
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721 |
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622 |
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Total liabilities |
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21,728 |
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22,667 |
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Shareholders equity: |
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Common stock |
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149,425 |
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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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(94,736 |
) |
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|
(97,428 |
) |
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Total shareholders equity |
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54,750 |
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32,602 |
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Total liabilities and shareholders equity |
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$ |
76,478 |
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$ |
55,269 |
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(1) |
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Derived from Corillians audited consolidated financial statements as of
December 31, 2004. |
See accompanying notes to condensed consolidated financial statements.
3
CORILLIAN CORPORATION
Condensed Consolidated Statements of Operations
(unaudited, in thousands, except per share data)
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For the Three-Month Period Ended September 30, |
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For the Nine-Month Period Ended September 30, |
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2005 |
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2004 |
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2005 |
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2004 |
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Revenues |
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$ |
11,937 |
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$ |
13,517 |
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$ |
35,459 |
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$ |
37,643 |
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Cost of revenues |
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5,311 |
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4,499 |
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13,820 |
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14,294 |
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Gross profit |
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6,626 |
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9,018 |
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21,639 |
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23,349 |
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Operating expenses: |
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Sales and marketing |
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1,964 |
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1,846 |
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5,452 |
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|
5,358 |
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Research and development |
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2,627 |
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|
1,641 |
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|
7,856 |
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4,619 |
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General and administrative |
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2,343 |
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1,826 |
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6,199 |
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5,061 |
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Impairment charge |
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491 |
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491 |
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Total operating expenses |
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6,934 |
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5,804 |
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19,507 |
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15,529 |
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(Loss) income from operations |
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(308 |
) |
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|
3,214 |
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|
2,132 |
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|
7,820 |
|
Other income (expense), net |
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248 |
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(122 |
) |
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623 |
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(506 |
) |
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Net (loss) income before income taxes |
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(60 |
) |
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3,092 |
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2,755 |
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7,314 |
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Income taxes |
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20 |
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63 |
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110 |
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Net (loss) income |
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$ |
(60 |
) |
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$ |
3,072 |
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$ |
2,692 |
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$ |
7,204 |
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Basic net (loss) income per share |
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$ |
(0.00 |
) |
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$ |
0.08 |
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$ |
0.07 |
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$ |
0.19 |
|
Diluted net (loss) income per share |
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$ |
(0.00 |
) |
|
$ |
0.08 |
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$ |
0.07 |
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$ |
0.18 |
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Shares used in computing basic net income per share |
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41,756 |
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|
37,947 |
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39,808 |
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|
37,432 |
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Shares used in computing diluted net income per share |
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41,756 |
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|
40,429 |
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|
41,020 |
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|
40,403 |
|
See accompanying notes to condensed consolidated financial statements.
4
CORILLIAN CORPORATION
Condensed Consolidated Statements of Cash Flows
(unaudited, in thousands)
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For the Nine-Month Period Ended September 30, |
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2005 |
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2004 |
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Cash flows from operating activities: |
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Net income |
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$ |
2,692 |
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$ |
7,204 |
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Adjustments to reconcile net income to net cash (used in)
provided by operating activities: |
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Depreciation |
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1,115 |
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1,824 |
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Amortization of intangible assets |
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221 |
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Impairment of long-lived assets |
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|
491 |
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Equity in losses of joint venture |
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128 |
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|
659 |
|
Provision for bad debts |
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(41 |
) |
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|
(75 |
) |
(Loss) gain on sale of assets |
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(8 |
) |
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2 |
|
Income tax benefit of equity transactions |
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18 |
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64 |
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Changes in operating assets and liabilities: |
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Accounts receivable |
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2,252 |
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(196 |
) |
Revenue in excess of billings |
|
|
(899 |
) |
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|
(1,193 |
) |
Other current and long-term assets |
|
|
(1,107 |
) |
|
|
(927 |
) |
Accounts payable and accrued liabilities |
|
|
(3,058 |
) |
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|
227 |
|
Deferred revenue and other current and long-term liabilities |
|
|
(4,691 |
) |
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|
(772 |
) |
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|
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|
Net cash (used in) provided by operating activities |
|
|
(3,378 |
) |
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|
7,308 |
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Cash flows from investing activities: |
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|
Purchase of property and equipment |
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(917 |
) |
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|
(562 |
) |
Proceeds from the sale of property and equipment |
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|
8 |
|
|
|
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|
Purchases of available-for-sale investments |
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(2,650 |
) |
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|
(15,200 |
) |
Proceeds from the sales of available-for-sale investments |
|
|
2,050 |
|
|
|
14,400 |
|
Purchases of held-to-maturity investments |
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|
|
|
|
|
(1,201 |
) |
Proceeds from the maturities of held-to-maturity investments |
|
|
|
|
|
|
1,802 |
|
Cash paid for acquisition of InteliData, net of cash acquired |
|
|
(4,472 |
) |
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|
|
Cash paid for acquisition of qbt, net of cash acquired |
|
|
(3,138 |
) |
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|
|
|
|
|
|
|
|
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|
Net cash used in investing activities |
|
|
(9,119 |
) |
|
|
(761 |
) |
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|
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|
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Cash flows from financing activities: |
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Proceeds from the issuance of common stock |
|
|
1,070 |
|
|
|
1,946 |
|
Registration costs associated with shares issued in business combinations |
|
|
(309 |
) |
|
|
|
|
Repayments of long-term borrowings |
|
|
(911 |
) |
|
|
(1,102 |
) |
Principal payments on capital lease obligations |
|
|
(9 |
) |
|
|
(16 |
) |
|
|
|
|
|
|
|
Net cash (used in) provided by financing activities |
|
|
(159 |
) |
|
|
828 |
|
|
|
|
|
|
|
|
Effect of exchange rate fluctuations on cash and cash equivalents |
|
|
(1 |
) |
|
|
2 |
|
|
|
|
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|
|
(Decrease) increase in cash and cash equivalents |
|
|
(12,657 |
) |
|
|
7,377 |
|
Cash and cash equivalents at beginning of period |
|
|
29,200 |
|
|
|
16,943 |
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period |
|
$ |
16,543 |
|
|
$ |
24,320 |
|
|
|
|
|
|
|
|
See accompanying notes to condensed consolidated financial statements.
5
CORILLIAN CORPORATION
(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 Corillians 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. The results of operations for the three and nine-month periods
ended September 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., Corillian
South Asia Sdn Bhd, Corillian Community Banking Solutions, LLC and Corillian Payment Solutions, Inc. 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 nine-month period ended September 30, 2004 in order to conform to the nine-month period
ended September 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 nine-month period ended
September 30, 2004, related to auction rate securities, totaling $10.1 million, from cash
equivalents to short-term investments. This reclassification affected the presentation of the cash
flows statement for the nine-months ended September 30, 2004.
(4) Acquisition of InteliData Technologies Corporation
On August 18, 2005, Corillian acquired InteliData Technologies Corporation (InteliData), a
leading provider of electronic bill payment and presentment and online banking solutions to the
financial services industry. InteliDatas products provide financial institutions 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.
InteliDatas customers included banks, credit unions, brokerage firms, financial institution
processors and credit card issuers. The acquisition was an investment aimed at expanding
Corillians product offering, customer base and driving revenue growth which supports the premium
paid over the fair market value of individual assets. InteliData has subsequently been renamed
Corillian Payment Solutions, Inc.
Corillian acquired all of InteliDatas outstanding common stock for $4.3 million in cash and
4,916,430 shares of Corillian common stock issued plus merger related transaction costs of $0.2
million. The 4,916,430 shares issued were valued at $3.38 per share, or $16.6 million in the
aggregate, based on the average closing price of our stock on the announcement date and the two-day
trading period before and after the announcement of the signing of a material agreement, which was
March 31, 2005. The purchase price was allocated to the underlying assets acquired and liabilities assumed based on their
estimated fair values. Analysis supporting the purchase price allocation includes a valuation of
assets and liabilities as of the closing date, a third party valuation of intangible assets and a
detailed review of the opening balance sheet to determine other significant adjustments required to
recognize assets and liabilities at fair value. The purchase price allocation is subject to
further changes, including the finalization of the intangibles valuation.
6
The following table presents the total purchase price (in thousands):
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|
|
|
Cash paid |
|
$ |
4,301 |
|
Stock issued |
|
|
16,618 |
|
Merger related transaction costs |
|
|
205 |
|
|
|
|
|
Total purchase price |
|
$ |
21,124 |
|
|
|
|
|
The following table presents the preliminary allocation of the purchase price to the
assets acquired and liabilities assumed based on their fair values (in thousands):
|
|
|
|
|
Cash and cash equivalents |
|
$ |
34 |
|
Accounts receivable |
|
|
1,370 |
|
Unbilled accounts receivable |
|
|
335 |
|
Prepaid expense and other current assets |
|
|
229 |
|
Property plant and equipment |
|
|
173 |
|
Intangible assets |
|
|
3,200 |
|
Goodwill |
|
|
21,851 |
|
Other long-term assets |
|
|
175 |
|
Accounts
payable and accrued liabilities (1) |
|
|
(5,754 |
) |
Deferred revenue (2) |
|
|
(489 |
) |
|
|
|
|
Total purchase price |
|
$ |
21,124 |
|
|
|
|
|
(1) |
|
Includes $1.4 million of accrued employee termination
costs pursuant to EITF 95-03, Recognition of Liabilities in a
Purchase Business Combination. All amounts have been paid as of
September 30, 2005. |
(2) |
|
The fair value of deferred revenue represents an amount equivalent to the estimated
cost to fulfill the maintenance obligations assumed associated with bug fixes and phone
support plus an appropriate profit margin. |
At the acquisition date on August 18, 2005, InteliData did not have any in-process research
and development and accordingly, there is no related expense in Corillians results of operations for the three
and nine-month periods ended September 30, 2005.
The following table presents the details of the intangible assets purchased in the InteliData
acquisition as of September 30, 2005 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Useful Life |
|
Estimated Fair |
|
|
Accumulated |
|
|
|
|
|
|
(in years) |
|
Value |
|
|
Amortization |
|
|
Net |
|
Developed Technology |
|
3 |
|
$ |
2,300 |
|
|
$ |
(91 |
) |
|
$ |
2,209 |
|
Bank Customer Relationships |
|
6 |
|
|
900 |
|
|
|
(17 |
) |
|
|
883 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
3,200 |
|
|
$ |
(108 |
) |
|
$ |
3,092 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization expense for intangible assets purchased in the InteliData acquisition
was approximately $108,000 for the three and nine-month periods ended September 30, 2005.
Amortization expense for intangible assets purchased in the InteliData acquisition has been
recorded in the Condensed Consolidated Statement of Operations as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three-Month Period Ended |
|
|
For the Nine-Month Period Ended |
|
|
|
September 30, 2005 |
|
|
September 30, 2004 |
|
|
September 30, 2005 |
|
|
September 30, 2004 |
|
Cost of revenues |
|
$ |
91 |
|
|
$ |
0 |
|
|
$ |
91 |
|
|
$ |
0 |
|
Sales and marketing |
|
|
17 |
|
|
|
0 |
|
|
|
17 |
|
|
|
0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
108 |
|
|
$ |
0 |
|
|
$ |
108 |
|
|
$ |
0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7
The estimated amortization expense of intangible assets purchased in the InteliData
acquisition for the current fiscal year, including amounts amortized to date, and in future years
is as follows:
|
|
|
|
|
|
|
Amount |
|
Fiscal Year |
|
(in thousands) |
|
|
2005 |
|
$ |
338 |
|
2006 |
|
|
917 |
|
2007 |
|
|
917 |
|
2008 |
|
|
633 |
|
2009 |
|
|
150 |
|
2010 |
|
|
150 |
|
2011 |
|
|
95 |
|
|
|
|
|
Total |
|
$ |
3,200 |
|
|
|
|
|
The Condensed Consolidated Statements of Operations include the results of
operations of InteliData since August 18, 2005. The following unaudited pro forma consolidated
results of operations have been prepared as if the acquisition of InteliData had occurred at
January 1, 2004.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Quarter Ended |
|
|
For the Nine Months Ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
|
|
|
(In thousands, except per share amounts) |
|
2005 |
|
|
2004 |
|
|
2005 |
|
|
2004 |
|
|
|
|
|
|
Sales |
|
$ |
13,145 |
|
|
|
16,966 |
|
|
$ |
41,958 |
|
|
|
47,965 |
|
Net earnings |
|
|
(1,828 |
) |
|
|
1,493 |
|
|
|
(2,431 |
) |
|
|
2,086 |
|
|
Net earnings per share basic |
|
$ |
(0.04 |
) |
|
|
0.03 |
|
|
$ |
(0.05 |
) |
|
|
0.05 |
|
Net earnings per share diluted |
|
|
(0.04 |
) |
|
|
0.03 |
|
|
|
(0.05 |
) |
|
|
0.05 |
|
The pro forma information is presented for informational purposes only and is not
necessarily indicative of the results of operations that actually would have been achieved had the
acquisition been consummated as of that time, nor is it intended to be a projection of future
results.
(5) Acquisition of qbt Systems, Inc.
On August 8, 2005, Corillian acquired qbt Systems, Inc. (qbt), a leading provider of
integration solutions, electronic funds transfer networks and core data processors. qbts
MultiPoint product is a powerful integration platform that allows financial institutions to
integrate their delivery channels and account processing systems in one seamless network
environment. qbts technology provides an unprecedented combination of flexibility, reliability,
throughput and security. The acquisition was aimed at expanding Corillians product offering,
increasing revenue growth, and allows for a more seamless, real-time integration to the many
different systems in the industry today. These factors, among others, support the premium paid
over the fair market value of individual assets. qbt has subsequently been renamed Corillian Community Banking Solutions, LLC.
Corillian acquired all of qbts outstanding common stock for $3.2 million in cash and 649,785
shares of Corillian common stock, of which 6,388 shares remain issuable as of September 30, 2005,
plus of merger related transaction costs and assumed liabilities of $0.1 million. Total shares
issued and issuable of 649,785 were valued at $3.20 per share, based on Corillians closing stock
price on the consummation date, amounting to an aggregate value of $2.1 million. The purchase
price was allocated to the underlying assets acquired and liabilities assumed based on their
estimated fair values. Analysis supporting the purchase price allocation includes a valuation of
assets and liabilities as of the closing date, a third party valuation of intangible assets and a
detailed review of the opening balance sheet to determine other adjustments required to recognize
assets and liabilities at fair value. The purchase price allocation is subject to further changes,
including the finalization of the intangibles valuation.
8
The following table presents the total purchase price (in thousands):
|
|
|
|
|
Cash paid |
|
$ |
3,160 |
|
Stock consideration |
|
|
2,059 |
|
Merger related transaction costs |
|
|
119 |
|
Liabilities assumed |
|
|
38 |
|
|
|
|
|
Total purchase price |
|
$ |
5,376 |
|
|
|
|
|
The following table presents the preliminary allocation of the purchase price to the assets
acquired and liabilities assumed based on their fair values (in thousands):
|
|
|
|
|
Cash and cash equivalents |
|
$ |
141 |
|
Accounts receivable |
|
|
59 |
|
Employee receivable |
|
|
229 |
|
Unbilled accouts receivable |
|
|
73 |
|
Property, plant, and equipment |
|
|
21 |
|
Intangible assets |
|
|
1,300 |
|
Goodwill |
|
|
4,999 |
|
Other assets |
|
|
2 |
|
Accounts payable and accrued liabilities |
|
|
(1,073 |
) |
Note Payable |
|
|
(100 |
) |
Deferred
revenue (1) |
|
|
(100 |
) |
Long-term note payable |
|
|
(175 |
) |
|
|
|
|
Total purchase price |
|
$ |
5,376 |
|
|
|
|
|
|
|
|
(1) |
|
The fair value of deferred revenue represents an amount equivalent to the estimated
cost to fulfill the maintenance obligations assumed plus an appropriate profit margin. |
At the acquisition date on August 8, 2005, qbt did not have any in-process research and
development and thus, there is no expense in Corillians results of operations for the three and
nine-month periods ended September 30, 2005.
The following table presents the details of the intangible assets purchased in the qbt
acquisition as of September 30, 2005 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Useful Life |
|
|
Estimated Fair |
|
|
Accumulated |
|
|
|
|
|
|
(in years) |
|
|
Value |
|
|
Amortization |
|
|
Net |
|
Developed Technology |
|
|
2 |
|
|
$ |
900 |
|
|
$ |
(65 |
) |
|
$ |
835 |
|
Backlog |
|
|
1 |
|
|
|
300 |
|
|
|
(44 |
) |
|
|
256 |
|
Customer Relationships |
|
|
4 |
|
|
|
100 |
|
|
|
(4 |
) |
|
|
96 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
1,300 |
|
|
$ |
(113 |
) |
|
$ |
1,187 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization expense for intangible assets purchased in the qbt acquisition was approximately
$113,000 for the three and nine-month periods ended September 30, 2005. Amortization expense for
intangible assets purchased in the qbt acquisition has been recorded in the Condensed Consolidated
Statement of Operations as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three-Month Period Ended |
|
|
For the Nine-Month Period Ended |
|
|
|
September 30, 2005 |
|
|
September 30, 2004 |
|
|
September 30, 2005 |
|
|
September 30, 2004 |
|
Cost of revenues |
|
$ |
109 |
|
|
$ |
0 |
|
|
$ |
109 |
|
|
$ |
0 |
|
Sales and marketing |
|
|
4 |
|
|
|
0 |
|
|
|
4 |
|
|
|
0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
113 |
|
|
$ |
0 |
|
|
$ |
113 |
|
|
$ |
0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9
The estimated amortization expense of intangible assets purchased in the qbt acquisition for
the current fiscal year, including amounts amortized to date, and in future years is as follows:
|
|
|
|
|
|
|
Amount |
|
Fiscal Year |
|
(in thousands) |
|
|
2005 |
|
$ |
306 |
|
2006 |
|
|
657 |
|
2007 |
|
|
297 |
|
2008 |
|
|
25 |
|
2009 |
|
|
15 |
|
|
|
|
|
Total |
|
$ |
1,300 |
|
|
|
|
|
The Condensed Consolidated Statements of Operations include the results of operations of qbt
since August 8, 2005. Pro forma results of operations have not been presented because the effect
of the acquisition was not material to the Corillians results.
Prior to the acquisition, Corillian and qbt executed a Proof of Concept whereby Corillian
could sub-license and install a qbt MultiPoint adapter at any two of Corillians customers. As of
the consummation date, Corillian did install one adapter for a customer and all amounts owed
related to the implementation were paid in full in accordance with the terms of the agreement.
There was no settlement gain or loss associated with this agreement.
(6) Summary of Significant Accounting Policies
Goodwill and Intangible Assets
Goodwill and intangible assets are accounted for in accordance with SFAS No. 141, Business
Combinations, and SFAS No. 142, Goodwill and Other Intangible Assets. Corillian will perform its
annual goodwill impairment analysis during the fourth quarter of fiscal year 2005. SFAS No. 142
requires purchased intangible assets, other than goodwill, to be amortized over their estimated
useful lives, unless an asset has an indefinite life. Purchased intangible assets with definite
useful lives are carried at cost less accumulated amortization. Amortization expense is recognized
on a straight-line basis over the estimated useful lives of the intangible assets, which range from
one to six years. Amortization expense for intangible assets that are software-related developed
technology and backlog is recorded as cost of revenues on the Condensed Consolidated Statements of
Operations. The valuation of intangibles and their useful lives are subject to change as the
purchase price allocations of qbt Systems, Inc. and InteliData Technologies Corporation are still
under review, including finalization of a third party valuation of intangibles. Management reviews
Corillians long-lived assets and definite-lived intangible assets for impairment when events or
changes in circumstances indicate that the carrying amount of the assets may not be recoverable.
Recoverability of long-lived assets is determined by comparing the forecasted undiscounted net cash
flows of the asset or asset group to the carrying amount of the asset or asset group. If the
operation is determined to be unable to recover the carrying amount of its assets, the assets or
asset groups are written down to their estimated fair value. Fair value is determined based on
discounted cash flows or appraised values, depending upon the nature of the assets.
(7) 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 Corillians revenues are
generated from banks and other financial institutions. Accordingly, Corillians 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 Corillians products and services are often
subject to delays because of Corillians customers internal budgets and procedures for approving
large capital expenditures and deploying new technologies within their networks. Corillians
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 products, whether as a result of competition,
technological change, economic, or other factors, could have a material adverse result on
Corillians financial condition, results of operations or liquidity.
10
Corillian continues to experience a high degree of customer concentration. During the
three-month period ended September 30, 2005, two customers individually accounted for 15% and 10%
of consolidated revenues, as compared to two customers individually accounting for 27% and 16% for
the three-month period ended September 30, 2004. During the nine-month period ended September 30,
2005, one customer accounted for 12% of consolidated revenues, as compared to two customers
individually accounting for 25% and 12% of consolidated revenues for the nine-month period ended
September 30, 2004.
Corillian is exposed to concentration of credit risk principally from accounts receivable and
revenue in excess of billing. As of September 30, 2005, two customers individually accounted for
37% and 11% of consolidated accounts receivable and one customer individually accounted for 36% of
consolidated revenue 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 revenue 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.
(8) 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
Corillians financial position or results of operations.
(9) Supplemental Disclosures of Cash Flow Information
|
|
|
|
|
|
|
|
|
|
|
For the Nine-Month Period Ended |
|
|
|
September 30, 2005 |
|
|
September 30, 2004 |
|
|
|
(in thousands) |
|
|
|
|
|
Cash paid during the period for: |
|
|
|
|
|
|
|
|
Interest |
|
$ |
21 |
|
|
$ |
93 |
|
Taxes |
|
|
47 |
|
|
|
99 |
|
Non-cash investing and financing activities: |
|
|
|
|
|
|
|
|
Common stock issued in InteliData acquisition |
|
$ |
16,618 |
|
|
$ |
|
|
Common stock issued in qbt Systems, Inc. acquisition |
|
|
2,059 |
|
|
|
|
|
(10) Deferred Stock-Based Compensation
At September 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 stock-based compensation plans. 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.
11
The effect of applying SFAS 123 for providing these pro forma disclosures is not necessarily
representative of the effects on reported net income (loss) in future periods. In 2005, Corillian
updated assumptions surrounding the volatility and risk-free interest rates that were not properly
reflected in our pro forma expense. For the three and nine-month periods ended September 30, 2005
and 2004, we are presenting pro forma compensation expense amounts that includes updates for the
volatility and risk-free interest rate assumptions for the respective periods.
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 Nine-Month Period Ended |
|
|
|
September 30, 2005 |
|
|
September 30, 2004 |
|
|
September 30, 2005 |
|
|
September 30, 2004 |
|
|
|
|
|
|
|
(in thousands, except per share data) |
|
|
|
|
|
Net (loss) income, as reported |
|
$ |
(60 |
) |
|
$ |
3,072 |
|
|
$ |
2,692 |
|
|
$ |
7,204 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deduct: Total stock-based
employee compensation expense
determined under fair value
based method for all awards,
net of tax |
|
|
(712 |
) |
|
|
(702 |
) |
|
|
(2,204 |
) |
|
|
(2,364 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma net (loss) income |
|
$ |
(772 |
) |
|
$ |
2,370 |
|
|
$ |
488 |
|
|
$ |
4,840 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic as reported |
|
$ |
(0.00 |
) |
|
$ |
0.08 |
|
|
$ |
0.07 |
|
|
$ |
0.19 |
|
Diluted as reported |
|
$ |
(0.00 |
) |
|
$ |
0.08 |
|
|
$ |
0.07 |
|
|
$ |
0.18 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic pro forma |
|
$ |
(0.02 |
) |
|
$ |
0.06 |
|
|
$ |
0.01 |
|
|
$ |
0.13 |
|
Diluted pro forma |
|
$ |
(0.02 |
) |
|
$ |
0.06 |
|
|
$ |
0.01 |
|
|
$ |
0.12 |
|
(11) Net Income (Loss) Per Share
Corillian computes net income (loss) per share in accordance with Statement No. 128, Earnings
Per Share. Under the provisions of Statement No. 128, basic net income (loss) per share is computed
by dividing the net income (loss) for the period by the weighted-average number of shares of common
stock outstanding during the period. Diluted net income (loss) per share is computed by dividing
net income (loss) for the period by the weighted-average number of shares of common stock and
potential dilutive common shares outstanding during the period.
12
The following is a reconciliation of basic and diluted weighted-average shares:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three-Month Period Ended |
|
|
For the Nine-Month Period Ended |
|
|
|
September 30, 2005 |
|
|
September 30, 2004 |
|
|
September 30, 2005 |
|
|
September 30, 2004 |
|
|
|
|
|
|
|
(in thousands) |
Shares for basic net income (loss) per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average common
shares outstanding |
|
|
41,756 |
|
|
|
37,947 |
|
|
|
39,808 |
|
|
|
37,432 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of dilutive securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options and employee
stock purchase plan |
|
|
|
|
|
|
2,482 |
|
|
|
1,212 |
|
|
|
2,971 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares for diluted net income
(loss) per share |
|
|
41,756 |
|
|
|
40,429 |
|
|
|
41,020 |
|
|
|
40,403 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options with exercise prices less than the fair market value of the underlying
common stock totaling approximately 991,000 were excluded from the net loss per share calculation
for the three-month period ended September 30, 2005 due to their anti-dilutive impact.
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 Nine-Month Period Ended |
|
|
September 30, 2005 |
|
September 30, 2004 |
|
September 30, 2005 |
|
September 30, 2004 |
|
|
|
|
|
|
|
(in thousands) |
Shares issuable under stock options
|
|
|
2,370 |
|
|
|
1,342 |
|
|
|
2,163 |
|
|
|
1,206 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13
(12) 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. Corillians 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
Corillians international operations were insignificant for the three-month and nine-month
periods ended September 30, 2005 and 2004, respectively.
Consolidated revenues generated from Corillians international operations decreased $4,000,
or 3%, to $112,000 for the three-month period ended September 30, 2005, as compared to $116,000
for the three-month period ended September 30, 2004. Consolidated revenues generated from
Corillians international operations increased $20,000, or 4%, to $505,000 for the nine-month
period ended September 30, 2005, as compared to $485,000 for the nine-month period ended
September 30, 2004. Domestic and international revenues were 99% and 1% of total revenues for
the three and nine-month periods ended September 30, 2005 and 2004, respectively.
Geographic revenue information for the three and nine-month periods ended September 30,
2005 and 2004 is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three-Month Period Ended |
|
|
For the Nine-Month Period Ended |
|
|
|
September 30, 2005 |
|
|
September 30, 2004 |
|
|
September 30, 2005 |
|
|
September 30, 2004 |
|
|
|
|
|
|
|
(in thousands) |
|
|
|
|
|
Revenues from: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States |
|
$ |
11,825 |
|
|
$ |
13,401 |
|
|
$ |
34,954 |
|
|
$ |
37,158 |
|
All foreign countries |
|
|
112 |
|
|
|
116 |
|
|
|
505 |
|
|
|
485 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
11,937 |
|
|
$ |
13,517 |
|
|
$ |
35,459 |
|
|
$ |
37,643 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(b) Revenues
Corillians 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 Corillians licenses and services are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three-Month Period Ended |
|
|
For the Nine-Month Period Ended |
|
|
|
September 30, 2005 |
|
|
September 30, 2004 |
|
|
September 30, 2005 |
|
|
September 30, 2004 |
|
|
|
|
|
|
|
(in thousands) |
|
|
|
|
|
License and professional services |
|
$ |
7,827 |
|
|
$ |
9,544 |
|
|
$ |
23,422 |
|
|
$ |
26,663 |
|
Post-contractual support |
|
|
3,275 |
|
|
|
3,046 |
|
|
|
9,294 |
|
|
|
8,331 |
|
Hosting |
|
|
835 |
|
|
|
927 |
|
|
|
2,743 |
|
|
|
2,649 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
11,937 |
|
|
$ |
13,517 |
|
|
$ |
35,459 |
|
|
$ |
37,643 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14
(13) Commitments and Contingencies
(a) 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 September 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.
(b) Operating Leases
The acquisitions of InteliData and qbt resulted in Corillian assuming the future lease
obligations for the respective companies. The remaining terms of the agreements range from 1 to
2 years. Future minimum lease payments that related to the acquisitions of InteliData and qbt
are as follows:
|
|
|
|
|
|
|
Amount |
|
Fiscal Year |
|
(in thousands) |
|
|
2005 |
|
$ |
282 |
|
2006 |
|
|
946 |
|
2007 |
|
|
89 |
|
|
|
|
|
|
|
$ |
1,317 |
|
|
|
|
|
(c) Environmental liability
A portion of the liabilities assumed for the InteliData acquisition relate to the
environmental clean-up associated with prior tenants operations at InteliDatas former New
Milford, Connecticut property. In January 2000, InteliData sold the property and the building
located thereon. In connection with the sale, InteliData agreed to undertake limited
remediation of the property in accordance with applicable state and federal law. The property
is not a listed federal or state Superfund site and InteliData has not been named a potentially
responsible party at the property. The remediation plan agreed to with the purchaser allowed
InteliData to use engineering and institutional controls (e.g., deed restrictions) to minimize
the extent and costs of the remediation. Moreover, InteliData obtained environmental insurance,
which is now retained by Corillian, to pay for remediation costs up to $6,600,000 in excess of a
retained exposure limit of $600,000. As of September 30, 2005, the $600,000 deductible has been
exhausted. While Corillian does not believe that the remaining costs will exceed the $6,000,000
limit, it has not been able to establish a range for what total
costs will be and accordingly has not provided for future costs or
related insurance recoveries in its condensed consolidated balance
sheet as of September 30, 2005.
Corillian 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 uncertain.
Management does not believe that the resolution of this matter will likely have a material
adverse effect on the Companys financial condition or results of operations.
ITEM 2. MANAGEMENTS 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; Corillians expectations and beliefs regarding future
revenue growth and future profits; Corillians strategies, expectations and intentions regarding
acquisitions and their integration; the outcome of any litigation to which Corillian is a party;
Corillians accounting and tax policies; Corillians future strategies regarding investments,
product offerings, research and development, market share, and strategic relationships and
collaboration; Corillians dividend policies; Corillians future capital requirements; Corillians
intentions and expectations regarding credit facilities; and Corillians expectations
regarding the sufficiency of its insurance coverage. These statements relate to future events
or Corillians 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,
Corillians registration statements and reports filed with the Securities and Exchange Commission,
and contained in Corillians 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.
15
|
|
|
While Corillian has generated net income in nine out of the last ten 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. |
|
|
|
|
Corillians quarterly results fluctuate significantly and may fall short of anticipated
levels, which may cause the price of Corillians common stock to decline. |
|
|
|
|
Acquisitions by Corillian may be costly and difficult to integrate, divert
management resources or dilute shareholder value. Recently, Corillian acquired qbt
Systems, Inc. and 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 Corillians goodwill or amortizable intangible assets become impaired, we
may be required to record a significant charge to earnings. |
|
|
|
|
A small number of customers account for a substantial portion of Corillians revenues
in each period; Corillians 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 Corillians
solutions at financial service providers facilities, Corillian may not achieve anticipated
revenues or gross margins. |
|
|
|
|
Corillians 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. |
|
|
|
|
Corillians partners may be unable to fulfill their service obligations and cause
Corillian to incur penalties or other expenses with its customers. |
|
|
|
|
Corillians facility and operations may be disabled by a disaster or similar event,
which could damage Corillians reputation and require Corillian to incur financial loss. |
|
|
|
|
Competition in the market for Internet-based financial services is intense and could
reduce Corillians sales and prevent Corillian from achieving profitability. |
|
|
|
|
Consolidation in the financial services industry could reduce the number of Corillians
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. |
16
|
|
|
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 Corillians reputation and business. |
|
|
|
|
New technologies could render Corillians products obsolete. |
|
|
|
|
Defects in Corillians solutions and system errors in Corillians customers data
processing systems after installing Corillians solutions could result in loss of revenues,
delay in market acceptance and injury to Corillians reputation. |
|
|
|
|
Corillians 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 Corillians 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, credit unions, brokers,
financial portals and other financial service providers to rapidly deploy Internet-based financial
services. Corillians solutions allow consumers to conduct financial transactions, view personal
and market financial information, pay bills and access other financial services on the Internet.
Corillian provides a set of applications for Internet banking, online fraud prevention, electronic
bill presentment and payment, targeted marketing, data aggregation, alerts and online customer
relationship management. Corillians solutions integrate into existing database applications and
systems and enable its customers to monitor transactions across all systems in real time.
Corillians 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 Corillians revenues are derived from licensing Corillians 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 applications 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, Corillians 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 nine 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 and contracts with three new customers in the third quarter of 2005. However, most of
Corillians license revenues for the three and nine-month periods ended September 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 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 September 30, 2005. Corillians operating history makes it
difficult to forecast future operating results. As a result of the rapid evolution of Corillians
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.
17
On August 18, 2005, Corillian completed its acquisition of InteliData Technologies
Corporation, a leading provider of electronic bill payment and presentment and online banking
solutions to the financial services industry. InteliDatas products provide financial institutions
with the real-time financial processing infrastructure needed to provide its customers with payment
and presentment services and online banking via the Internet and other delivery channels.
InteliDatas customers included banks, credit unions, brokerage firms, financial institution
processors and credit card issuers. The acquisition was an investment aimed at expanding
Corillians product offering, customer base and revenue growth. These factors, among others,
support the premium paid over the fair market value of individual assets. The total purchase price
including merger related transaction costs was $21.1 million. The cost of the acquisition was
allocated on the basis of the estimated fair value of assets and liabilities assumed. The
preliminary purchase accounting allocations resulted in goodwill of $21.9 million and intangibles
of $3.2 million. Intangibles will be amortized to cost of revenues and sales and marketing over an
estimated 3 to 6 years. At the acquisition date on August 18, 2005, InteliData did not have any
in-process research and development and thus, there is no expense in Corillians results of
operations for the three and nine-month periods ended September 30, 2005.
On August 8, 2005, Corillian completed its acquisition of qbt Systems, Inc., a leading
provider of integration solutions to electronic funds transfer networks and core data processors.
qbts MultiPoint product is a powerful integration platform that allows financial institutions to
integrate all of their delivery channel and account processing systems in one seamless network
environment. The acquisition was an investment aimed at expanding Corillians product offering and
will allow for a more seamless, real-time integration to the many different systems in the industry
today. These factors, among others, support the premium paid over the fair market value of
individual assets. The total purchase price including merger related transaction costs was $5.4
million. The cost of the acquisition was allocated on the basis of the estimated fair value of
assets and liabilities assumed. The preliminary purchase accounting allocations resulted in
goodwill of $5.0 million and intangibles of $1.3 million. Intangibles will be amortized to cost of
revenues and sales and marketing over an estimated 1 to 4 years. At the acquisition date on August
8, 2005, qbt did not have any in-process research and development and thus, there is no expense in
Corillians results of operations for the three and nine-month periods ended September 30, 2005.
Critical Accounting Policies and Estimates
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. Corillians software arrangements generally include software licenses, implementation
and custom software engineering services, post-contractual customer support, training services and
hosting services. Corillians 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 Entitys 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 contracts 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.
18
Vendor-specific objective evidence has been established on the majority of Corillians
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. When VSOE has not been established on
post-contractual customer support, all revenues under such arrangements is recognized ratably over
the term of the post-contractual support contract. Arrangements that include transactional
services, which include application services provider (ASP) services, are recognized as
transactions are processed.
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 Corillians condensed consolidated
statements of operations.
Corillian generally licenses Corillian applications 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, Corillians 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 resellers project. If Corillian
determines that the customer or reseller can successfully install Corillians products in a
production environment without Corillians 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.
Goodwill and Intangible Assets
Goodwill and intangible assets are accounted for in accordance with SFAS No. 141, Business
Combinations, and SFAS No. 142, Goodwill and Other Intangible Assets. Corillian will perform its
annual goodwill impairment analysis during the fourth quarter of fiscal year 2005. SFAS No. 142
requires purchased intangible assets, other than goodwill, to be amortized over their estimated
useful lives, unless an asset has an indefinite life. Purchased intangible assets with definite
useful lives are carried at cost less accumulated amortization. Amortization expense is recognized
on a straight-line basis over the estimated useful lives of the intangible assets, which range from
one to six years. Amortization expense for intangible assets that are software-related developed
technology and backlog is recorded as cost of revenues on the Condensed Consolidated Statements of
Operations. The valuation of intangibles and their useful lives are subject to change as the
purchase price allocations of the qbt Systems, Inc. and InteliData
Technologies Corporation are still under review, including finalization of a third party valuation
of intangibles.
19
Results of Operations
Revenues
Corillians revenues are derived from licensing Corillians 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 $1.6 million, or 12%, to $11.9 million for the three-month
period ended September 30, 2005, as compared to $13.5 million for three-month period ended
September 30, 2004. The decrease in revenues was primarily due to a decrease in license and
professional services of approximately $1.7 million for the three-month period ended September 30,
2005, as compared to the three-month period ended September 30, 2004. The decrease in license and
professional services was primarily due to a significant license and services agreement in the
prior year that did not contribute license or professional services revenues in the three-month
period ended September 30, 2005. The decrease in license and professional services revenues was
partially offset by increases in post-contractual support totaling $229,000. Post-contractual
support increased primarily due to services related to the companies acquired in the third quarter
of 2005.
Revenues decreased approximately $2.1 million, or 6%, to $35.5 million for the nine-month
period ended September 30, 2005, as compared to $37.6 million for the nine-month period ended
September 30, 2004. The decrease in revenues was primarily due to a decrease in license and
professional services of approximately $3.2 million for the nine-month period ended September 30,
2005, as compared to the nine-month period ended September 30, 2004. The decrease in license and
professional services was primarily due to a significant license and services agreement in the
prior year that did not contribute license or professional services revenues in the nine-month
period ended September 30, 2005. The decrease in license and professional services revenues was
partially offset by increases in post-contractual support and hosting revenues of approximately
$963,000 and $94,000, respectively. Post-contractual support increased primarily due to one
significant customer receiving $770,000 of additional services combined with $180,000 of services
related to the companies acquired in the third quarter of 2005. Hosting revenues increased
primarily due to one significant customer receiving $61,000 in additional services for the nine-month period
ended September 30, 2005, as compared to the nine-month period ended September 30, 2004.
Cost of Revenues
Cost of revenues consists primarily of salaries and related expenses for professional service
personnel, outsourced professional service providers who are responsible for the implementation and
customization of Corillians software, maintenance and support personnel who are responsible for
post-contractual customer support and the amortization of Corillians developed technology and
backlog intangible assets.
Cost of revenues increased approximately $0.8 million, or 18%, to $5.3 million for the
three-month period ended September 30, 2005, as compared to $4.5 million for the three-month period
ended September 30, 2004. The increase was primarily due to approximately $0.7 million of cost of
services related to the companies acquired in the third quarter of 2005 and $200,000 of
amortization of acquisition related intangibles.
Cost of revenues decreased $0.5 million, or 3%, to $13.8 million for the nine-month period
ended September 30, 2005, as compared to $14.3 million for
the nine-month period ended September 30, 2004. The decrease in cost of revenues was primarily due to a decrease of $0.9 million related
to services. The decrease in cost of revenues associated with services was due to smaller
implementation projects for the nine-month period ended September 30, 2005, as compared to the
nine-month period ended September 30, 2004. This decrease was partially offset by an increase in the
amortization of acquisition related intangibles of $200,000 for the nine-month period ended
September 30, 2004.
The amortization of acquisition related intangibles to be recognized in cost of revenues is
estimated to be $423,000 for the three-month period ended December 31, 2005.
Gross
profit as a percentage of revenues was 56% for the three-month period
ended September 30, 2005, as compared to 67% for the three-month period ended September 30, 2004, and remained
relatively consistent at 61% for the nine-month period ended September 30, 2005, as compared to 62%
for the nine-month period ended September 30, 2004. The decrease in gross profit as a
percentage of revenue for the three-month period ended 2005 was primarily due to sales mix where
there was a decrease in license and professional services revenues of 18% for the three-month
period ended September 30, 2005 and a 12% decrease for the nine-month period ended
September 30, 2005. Corillian generally receives higher margins on license and professional
services revenues. The decrease in gross margin for the three-month period ended September 30,
2005 was also impacted by the decline in revenues. Revenues for the three-month period ended
September 30, 2005 decreased by 12% whereas revenues for the nine-month period ended September 30,
2004 decreased by 6%.
20
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, costs associated with trade shows and
other promotional activities and amortization of Corillians customer relationships intangible
assets.
Sales and marketing expenses increased approximately $200,000, or 11%, to $2.0 million for the
three-month period ended September 30, 2005, as compared to $1.8 million for the three-month period
ended September 30, 2004. Sales and marketing expense increased approximately $100,000, or 2%, to
$5.5 million for the nine-month period ended September 30, 2005, as compared to $5.4 million for
the nine-month period ended September 30, 2004. The increase for the three-month period ended
September 30, 2005 was due to an increase in payroll and payroll related costs as headcount increased
to 39 at September 30, 2005, as compared to 25 at September 30, 2004. This increase includes 11
sales and marketing employees from the companies acquired in the third quarter of 2005. The
increase for the nine-month period ended September 30, 2005 was primarily attributable to increases
in trade show expenses for the respective period.
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 Corillians products.
Research and development expenses increased approximately $1.0 million, or 63%, to $2.6
million for the three-month period ended September 30, 2005, as compared to $1.6 million for the
three-month period ended September 30, 2004. The increase was primarily due to additional payroll
and payroll related costs of $535,000 due to research and development headcount increasing to 82 at
September 30, 2005, as compared to 57 at September 30, 2004. The headcount amount at September 30,
2005 includes 11 research and development employees from companies acquired in the third quarter of
2005. Additionally, in the prior year, research and development personnel performed work to assist
in the implementation of a large project whereas in the current year, these individuals were
involved with product development. This resulted in $360,000 being allocated out of research and
development to cost of revenues for the three-month period ended September 30, 2004.
Research and development expenses increased approximately $3.3 million, or 72%, to $7.9
million for the nine-month period ended September 30, 2005, as compared to $4.6 million for the
nine-month period ended September 30, 2004. The increase was due, in part, to approximately $1.5
million in payroll and payroll related costs due to increased headcount at September 30, 2005, as
compared to September 30, 2004. Additional increases were due to research and development personnel
assisting with implementation on a large project in the prior year whereas these individuals were
involved with product development in the current year. Additionally, more professional services
employees were working on product development in the current year. The impact of product
development personnel dedicating less time to implementation and more on product development,
combined with professional services employees dedicating more time to product development,
resulted in approximately a $1.9 million increase for the nine-month period ended September 30,
2005, as compared to the nine-month period ended September 30, 2004.
Research and development expenses, to a certain extent, could fluctuate in future periods due
to the additional funding of Corillians 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 Corillians research and development personnel to provide services for Corillians
customers.
21
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 $0.5 million, or 28%, to $2.3 million for the
three-month period ended September 30, 2005, as compared to $1.8 million for the three-month period
ended September 30, 2004. The increase was primarily due to increases in payroll and payroll
related costs as administrative headcount increased to 42 at September 30, 2005, as compared to 34
at September 30, 2004.
General and administrative expenses increased approximately $1.1 million, or 22%, to $6.2
million for the nine-month period ended September 30, 2005, as compared to $5.1 million for the
nine-month period ended September 30, 2004. The increase was primarily due to an increase of
$915,000 in salaries, wages and employee related benefits as administrative headcount increased
from 34 at September 30, 2004 to 42 at September 30, 2005. Additional increases were due to
$168,000 in new software maintenance agreements related to internally used software and $86,000 in
accounting fees related to Sarbanes-Oxley compliance audit fees.
Other Income (Expense), Net
Other income (expense), net, consists primarily of interest earned on cash, cash equivalents
and short-term investments, interest expense, Corillians share of losses in equity investments,
and other miscellaneous items.
Other income (expense), net, increased $370,000 to income of $248,000 for the three-month
period ended September 30, 2005, as compared to an expense of $122,000 for the three-month period
ended September 30, 2004. The increase was partially due to $130,000 of additional interest income
as a result of more cash held in short-term investments in 2005 and also receiving higher interest
rates on the respective investments. Additionally, equity losses in the Synoran investment
decreased approximately $214,000.
Other income (expense), net, increased $1.1 million to income of $623,000 for the nine-month
period ended September 30, 2005, as compared to expense of $506,000 for the nine-month period ended
September 30, 2004. The increase was partially due to $502,000 of additional interest income as a
result of more cash held in short-term investments in 2005 and also receiving higher interest rates
on the respective investments. Additionally, equity losses in the Synoran investment decreased
approximately $531,000.
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. Due to the net
loss for the three-month period ended September 30, 2005, Corillian did not record an income tax benefit
related to estimated alternative minimum taxes for the for the respective period. However,
Corillian has recorded an income tax charge of $63,000 for the
nine-month period ended September 30, 2005. 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 either increase income, contributed capital,
or decrease goodwill in the period such determination was made.
Liquidity and Capital Resources
As of September 30, 2005, Corillian had $27.3 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.
22
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 September 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 used in operating activities was $3.4 million for the nine-months ended September 30,
2005, as compared to net cash provided by operating activities of $7.3 million for the nine-months
ended September 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 $6.0 million
for the nine-month period ended September 30, 2005, as compared to the nine-month period ended
September 30, 2004. Corillians cash provided by operating activities decreased as deferred
revenue and other current and long-term liabilities decreased $4.7 million for the nine-month
period ended September 30, 2005, as compared to a decrease of $0.8 million for the nine-month
period ended September 30, 2004. The decrease primarily related to deferred revenue, which
decreased due to an overall decline in sales volume. Additionally, the significant decrease to
deferred revenue for the nine-month period ended September 30, 2005 can be attributed to a large
project in deferred revenue at December 31, 2004 totaling $3.5 million whereas the largest project
in deferred revenue as of September 30, 2005 was $1.6 million. In addition to the decrease in
deferred revenue, accounts payable and accrued liabilities increased $3.3 million for the
nine-month period ended September 30, 2005, as compared to the
nine-month period ended September 30, 2004. The increase in accounts payable and accrued liabilities was due primarily to the
liabilities associated with InteliData, which was acquired on August 18, 2005. The decrease in
deferred revenue and the increase in accounts payable and accrued liabilities, which had a negative
impact on net cash used in operating activities, was offset by an increase of $2.4 million in net
cash provided by accounts receivable for the nine-month period ended September 30, 2005, as
compared to the nine-month period ended September 30, 2004. This is due to a decrease in accounts
receivable due to lower sales volume and smaller projects at September 30, 2005, as compared to
September 30, 2004.
Net
cash used in investing activities was $9.1 million for the nine-months ended September 30,
2005, as compared to net cash used in investing of $0.8 million
for the nine-months ended September 30, 2004. The increase in the net cash used in investing activities was primarily due to the
acquisitions of InteliData and qbt, which occurred on August 18, 2005 and August 8, 2005,
respectively. The cash used in conjunction with the InteliData
acquisition was $4.5 million and
the net cash used in conjunction with the qbt acquisition was $3.1 million.
Net
cash used in financing activities was $159,000 for the nine-month period ended
September 30, 2005. Net cash provided by financing activities was $828,000 for the nine-month
period ended September 30, 2004. During the nine-month period ended September 30, 2005, net cash
used in financing activities consisted primarily of $1.1 million in proceeds received from issuance
of common stock under Corillians stock option and employee
stock purchase plans, which was more than offset by repayments on
long-term borrowing and capital lease obligations of
$0.9 million and $0.3 million in registration costs
associated with shares issued in business combinations. Net
cash provided by financing activities during the nine-month period ended September 30, 2004
consisted primarily of $1.9 million received from the issuance of common stock under Corillians
stock option and employee stock purchase plans, which was offset, in part, by repayments on
long-term borrowings and capital lease obligations of $1.1 million.
Working
capital decreased to $19.3 million as of September 30,
2005, as compared to $29.4 million as of December 31, 2004. The decrease was primarily due to cash used in the acquisitions of
InteliData and qbt combined which also resulted in higher accounts payable and accrued liabilities
as of September 30, 2005, as compared to December, 31, 2004. In addition, the overall decrease in
sales volume resulted in decreases in the deferred revenue and accounts
receivable balances as of September 30, 2005, as compared to December 31, 2004.
Corillian had no material financial obligations as of September 30, 2005, other than its
obligations under its operating leases. Further capital requirements will depend on many factors,
including the timing of research and development efforts and the expansion of Corillians
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 Corillians
revenues are currently denominated in United States dollars, a strengthening of the United States
dollar could make Corillians products less competitive in foreign markets.
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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 September 30, 2005, Corillian had $27.3 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. Corillians 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, Corillians interest income could increase or decrease by
approximately $273,000 on an annual basis and approximately $68,000 on a quarterly basis. 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. Corillians management,
with the participation of the Chief Executive Officer and Chief Financial Officer, has evaluated
the effectiveness of the design and operations of the Companys 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. Corillians 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, Corillians 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
In August 2005 Corillian completed the acquisitions of InteliData and qbt, which Corillian
believes are material to its results of operations, financial position and cash flows. Management
continues to assess the internal controls of the acquired companies. There has been no significant
change in the Companys internal control over financial reporting during the most during the most
recent fiscal quarter that have materially affected, or are likely to materially affect, the
Companys internal control over financial reporting.
24
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.
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PART II. OTHER INFORMATION
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
(a) On August 8, 2005, Corillian issued an aggregate of 643,397 shares of common stock in
connection with the acquisition of qbt Systems, Inc. to the former
shareholders of qbt, along with an aggregate of $3.2 million in cash, in consideration for all of their outstanding shares of qbt stock. The offer and sale of the securities were
effected without registration in reliance on rule 505 of Regulation D of the Securities Act of
1933. Corillians closing share price on August 8, 2005 was $3.20 per share. Under the agreement,
6,388 shares remain issuable.
(b) None.
(c) None.
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 |
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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
November 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) |
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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 |
28